UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended July 30, 2011
OR
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission File Number: 1-12552
THE TALBOTS, INC.
(Exact name of registrant as specified in its charter)
|
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Delaware
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|
41-1111318
|
(
State or other jurisdiction of
|
|
(
I.R.S. Employer
|
incorporation or organization
)
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|
Identification No.
)
|
One Talbots Drive, Hingham, Massachusetts 02043
(
Address of principal executive offices
)
Registrants telephone number, including area code
781-749-7600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of accelerated
filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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|
(Do not check if a smaller reporting company)
|
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|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
þ
No
The number of shares outstanding of the registrants common stock as of September 1, 2011:
70,712,682 shares.
PART I FINANCIAL INFORMATION
1
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Amounts in thousands except per share data
|
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|
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Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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July 30,
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July 31,
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July 30,
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July 31,
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2011
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2010
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2011
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2010
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|
Net sales
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$
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271,092
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|
|
$
|
300,742
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$
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572,402
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|
$
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621,403
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Costs and expenses
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Cost of sales, buying and occupancy
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207,702
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195,777
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401,667
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376,622
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Selling, general and administrative
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96,411
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93,075
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196,222
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201,214
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|
Restructuring charges
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1,005
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|
112
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3,270
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5,071
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Impairment of store assets
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1,217
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6
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Merger-related costs
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3,050
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|
885
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|
26,863
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|
|
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Operating (loss) income
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|
(34,026
|
)
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8,728
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(30,859
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)
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11,627
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Interest
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Interest expense
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2,571
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6,370
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4,615
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14,805
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Interest income
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19
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21
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|
35
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42
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Interest expense, net
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|
2,552
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|
6,349
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4,580
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14,763
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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(Loss) income before taxes
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(36,578
|
)
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|
|
2,379
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|
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|
(35,439
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)
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|
|
(3,136
|
)
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|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Income tax expense
|
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|
776
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|
|
|
1,858
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1,007
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3,439
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|
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|
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(Loss) income from continuing operations
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(37,354
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)
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|
521
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(36,446
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)
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(6,575
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)
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|
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|
|
|
|
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Income (loss) from discontinued operations, net of taxes
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|
21
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|
420
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(148
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)
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3,148
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|
|
|
|
|
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Net (loss) income
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$
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(37,333
|
)
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|
$
|
941
|
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|
$
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(36,594
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)
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|
$
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(3,427
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)
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Basic (loss) earnings per share:
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|
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Continuing operations
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$
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(0.54
|
)
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|
$
|
0.01
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|
|
$
|
(0.53
|
)
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|
$
|
(0.10
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)
|
Discontinued operations
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|
|
|
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|
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0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (loss) earnings
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|
$
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(0.54
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.05
|
)
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|
|
|
|
|
|
|
|
|
|
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Diluted (loss) earnings per share:
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|
|
|
|
|
|
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|
|
|
|
|
|
|
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Continuing operations
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|
$
|
(0.54
|
)
|
|
$
|
0.01
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|
|
$
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(0.53
|
)
|
|
$
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(0.10
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)
|
Discontinued operations
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|
|
|
|
|
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|
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0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(0.54
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding:
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|
|
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|
|
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|
|
|
|
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Basic
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|
69,074
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|
|
|
68,338
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68,891
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|
|
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63,105
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
Diluted
|
|
|
69,074
|
|
|
|
69,520
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|
|
68,891
|
|
|
|
63,105
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
See notes to condensed consolidated financial statements.
2
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30,
|
|
|
January 29,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,128
|
|
|
$
|
10,181
|
|
|
$
|
4,650
|
|
Customer accounts receivable, net
|
|
|
136,732
|
|
|
|
145,472
|
|
|
|
155,606
|
|
Merchandise inventories
|
|
|
163,922
|
|
|
|
158,040
|
|
|
|
130,344
|
|
Deferred catalog costs
|
|
|
2,784
|
|
|
|
4,184
|
|
|
|
3,352
|
|
Prepaid and other current assets
|
|
|
51,937
|
|
|
|
33,235
|
|
|
|
54,122
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
362,503
|
|
|
|
351,112
|
|
|
|
348,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
180,561
|
|
|
|
186,658
|
|
|
|
195,004
|
|
Goodwill
|
|
|
35,513
|
|
|
|
35,513
|
|
|
|
35,513
|
|
Trademarks
|
|
|
75,884
|
|
|
|
75,884
|
|
|
|
75,884
|
|
Other assets
|
|
|
18,292
|
|
|
|
19,349
|
|
|
|
19,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
672,753
|
|
|
$
|
668,516
|
|
|
$
|
674,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
112,535
|
|
|
$
|
91,855
|
|
|
$
|
80,153
|
|
Accrued liabilities
|
|
|
117,388
|
|
|
|
137,824
|
|
|
|
147,487
|
|
Revolving credit facility
|
|
|
83,898
|
|
|
|
25,516
|
|
|
|
37,365
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
313,821
|
|
|
|
255,195
|
|
|
|
265,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent under lease commitments
|
|
|
84,863
|
|
|
|
93,440
|
|
|
|
103,588
|
|
Deferred income taxes
|
|
|
28,456
|
|
|
|
28,456
|
|
|
|
28,456
|
|
Other liabilities
|
|
|
94,414
|
|
|
|
107,839
|
|
|
|
112,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 shares authorized; 98,279,215
shares, 97,247,847 shares and 97,056,412 shares issued, respectively;
and 70,719,336 shares, 70,261,905 shares and 70,371,464 shares
outstanding, respectively
|
|
|
983
|
|
|
|
972
|
|
|
|
971
|
|
Additional paid-in capital
|
|
|
866,393
|
|
|
|
860,819
|
|
|
|
854,211
|
|
Retained deficit
|
|
|
(74,469
|
)
|
|
|
(37,875
|
)
|
|
|
(52,117
|
)
|
Accumulated other comprehensive loss
|
|
|
(50,327
|
)
|
|
|
(51,216
|
)
|
|
|
(51,083
|
)
|
Treasury stock, at cost; 27,559,879 shares, 26,985,942 shares and
26,684,948 shares, respectively
|
|
|
(591,381
|
)
|
|
|
(589,114
|
)
|
|
|
(587,839
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
151,199
|
|
|
|
183,586
|
|
|
|
164,143
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
672,753
|
|
|
$
|
668,516
|
|
|
$
|
674,002
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(36,594
|
)
|
|
$
|
(3,427
|
)
|
(Loss) income from discontinued operations
|
|
|
(148
|
)
|
|
|
3,148
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(36,446
|
)
|
|
|
(6,575
|
)
|
Adjustments to reconcile loss from continuing operations
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
28,021
|
|
|
|
31,490
|
|
Stock-based compensation
|
|
|
5,149
|
|
|
|
7,755
|
|
Amortization of debt issuance costs
|
|
|
1,100
|
|
|
|
1,996
|
|
Impairment of store assets
|
|
|
1,217
|
|
|
|
6
|
|
Loss on disposal of property and equipment
|
|
|
53
|
|
|
|
646
|
|
Deferred rent
|
|
|
(7,464
|
)
|
|
|
(3,844
|
)
|
Gift card breakage income
|
|
|
(295
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
8,789
|
|
|
|
8,013
|
|
Merchandise inventories
|
|
|
(5,717
|
)
|
|
|
12,442
|
|
Deferred catalog costs
|
|
|
1,400
|
|
|
|
3,333
|
|
Prepaid and other current assets
|
|
|
(19,423
|
)
|
|
|
(6,959
|
)
|
Due from related party
|
|
|
|
|
|
|
959
|
|
Income tax refundable
|
|
|
|
|
|
|
2,006
|
|
Accounts payable
|
|
|
16,755
|
|
|
|
(24,184
|
)
|
Accrued liabilities
|
|
|
(19,036
|
)
|
|
|
4,075
|
|
Other assets
|
|
|
(43
|
)
|
|
|
(66
|
)
|
Other liabilities
|
|
|
(13,123
|
)
|
|
|
(20,528
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(39,063
|
)
|
|
|
10,565
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(19,162
|
)
|
|
|
(5,935
|
)
|
Proceeds from disposal of property and equipment
|
|
|
24
|
|
|
|
15
|
|
Cash acquired in merger with BPW Acquisition Corp.
|
|
|
|
|
|
|
332,999
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(19,138
|
)
|
|
|
327,079
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
938,100
|
|
|
|
684,338
|
|
Payments on revolving credit facility
|
|
|
(879,718
|
)
|
|
|
(646,973
|
)
|
Payments on related party borrowings
|
|
|
|
|
|
|
(486,494
|
)
|
Payment of debt issuance costs
|
|
|
|
|
|
|
(5,993
|
)
|
Payment of equity issuance costs
|
|
|
|
|
|
|
(3,594
|
)
|
Proceeds from warrants exercised
|
|
|
|
|
|
|
19,042
|
|
Proceeds from options exercised
|
|
|
1
|
|
|
|
414
|
|
Purchase of treasury stock
|
|
|
(2,267
|
)
|
|
|
(1,800
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
56,116
|
|
|
|
(441,060
|
)
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
378
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS
|
|
|
(1,346
|
)
|
|
|
(5,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,053
|
)
|
|
|
(108,125
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
10,181
|
|
|
|
112,775
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
7,128
|
|
|
$
|
4,650
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
THE TALBOTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements of The Talbots, Inc. and its subsidiaries
(Talbots or the Company) included herein have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted from this report, as is permitted by such rules and regulations. Accordingly, these
condensed consolidated financial statements should be read in conjunction with the financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year
ended January 29, 2011.
The unaudited condensed consolidated financial statements include the accounts of Talbots and its
wholly-owned subsidiaries. All intercompany transactions and balances of subsidiaries have been
eliminated in consolidation. In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation
of the results for the reported interim periods. The Company considers events or transactions that
occur after the balance sheet date but before the financial statements are issued to provide
additional evidence relative to certain estimates or to identify matters that require additional
disclosure. The results of operations for interim periods are not necessarily indicative of results
to be expected for the full year or any other interim period.
2. Summary of Significant Accounting Policies and Other Information
There have been no material changes to the significant accounting policies previously disclosed in
the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2011.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2011-05,
Presentation of Comprehensive Income.
ASU 2011-05 amends Accounting Standards
Codification (ASC) 220,
Comprehensive Income,
by requiring entities to report components of
comprehensive income in either a continuous statement of comprehensive income or two separate but
consecutive statements, removing the option to present the components of other comprehensive income
as part of the statement of stockholders equity. The items that must be reported in other
comprehensive income were not changed. ASU 2011-05 will be effective for the Company for fiscal
years, and interim periods within those years, beginning after December 15, 2011 and must be
applied retrospectively. The Company is evaluating its presentation options under this ASU; however
these changes are not expected to impact the consolidated financial statements other than the
change in presentation.
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs
. ASU 2011-04 amends ASC 820,
Fair Value
Measurement
, by expanding existing disclosure requirements for fair value measurements and
modifying certain definitions in the guidance, which may change how the fair value measurement
guidance of ASC 820 is applied. ASU 2011-04 will be effective for the Company for interim and
annual periods beginning after December 15, 2011 and must be applied prospectively. The Company is
evaluating the impact that this ASU may have on its consolidated financial statements, if any.
Supplemental Cash Flow Information
Interest paid for the twenty-six weeks ended July 30, 2011 and July 31, 2010 was $5.3 million and
$15.3 million, respectively. Income taxes paid for the twenty-six weeks ended July 30, 2011 and
July 31, 2010 were $3.1 million and $4.1 million respectively.
5
3. Merger with BPW Acquisition Corp. and Related Transactions
On April 7, 2010, the Company completed a series of transactions (collectively, the BPW
Transactions) which, in the aggregate, substantially reduced its indebtedness and significantly
deleveraged its balance sheet, consisting of three related transactions: (i) an Agreement and Plan
of Merger between Talbots and BPW Acquisition Corp. (BPW) pursuant to which a wholly-owned
subsidiary of the Company merged with and into BPW in exchange for the issuance of Talbots common
stock and warrants to BPW stockholders; (ii) the repurchase and retirement of all shares of Talbots
common stock held by AEON (U.S.A.), Inc. (AEON (U.S.A.)), the Companys then majority
shareholder, totaling 29.9 million shares; the issuance of warrants to purchase one million shares
of Talbots common stock to AEON (U.S.A.) and the repayment of all of the Companys outstanding debt
with AEON Co., Ltd. (AEON) and AEON (U.S.A.) at its principal value plus accrued interest and
other costs for total consideration of $488.2 million; and (iii) the execution of a third party
senior secured revolving credit facility which provides borrowing capacity up to $200.0 million,
subject to availability and satisfaction of all borrowing conditions.
BPW was a special purpose acquisition company with approximately $350.0 million in cash held in a
trust account for the benefit of its shareholders to be used in connection with a business
combination. BPW had no significant commercial operations, and its only significant pre-combination
assets were cash and cash equivalents which were already recognized at fair value. The Company
recorded the shares of common stock and warrants issued in the merger at the fair value of BPWs
net monetary assets received on April 7, 2010. The net monetary assets received in the transaction,
consisting solely of cash and cash equivalents, were $333.0 million, after payment of all prior BPW
obligations. No goodwill or intangible assets were recorded in the transaction.
In connection with the merger, the Company issued 41.5 million shares of Talbots common stock and
warrants to purchase 17.2 million shares of Talbots common stock (the Talbots Warrants) for 100%
ownership of BPW. Approximately 3.5 million BPW warrants that did not participate in the warrant
exchange offer (the Non-Tendered Warrants) remained outstanding at the closing of the merger.
Additionally, in connection with the merger, the Company repurchased and retired the 29.9 million
shares of Talbots common stock held by AEON (U.S.A.), the former majority shareholder, in exchange
for warrants to purchase one million shares of Talbots common stock (the AEON Warrants). As a
result of the BPW Transactions, the Company became subject to annual limitations on the use of its
existing net operating losses (NOLs).
With the consummation and closing of the BPW merger, the Company repaid all outstanding AEON and
AEON (U.S.A.) indebtedness on April 7, 2010 at its principal value plus accrued interest and other
costs for total cash consideration of $488.2 million. As the AEON and AEON (U.S.A.) debt
extinguishment transaction was between related parties, the difference between the carrying value
and the repayment price was recorded as an equity transaction. Accordingly, the Company recorded no
gain or loss on the extinguishment and the difference between the repayment price and the net
carrying value, consisting of $1.7 million of unamortized deferred financing costs, was recorded to
additional paid-in capital.
Further in connection with the consummation and closing of the BPW merger, the Company executed a
senior secured revolving credit agreement with third party lenders which provides borrowing
capacity up to $200.0 million, subject to availability and satisfaction of all borrowing
conditions. See Note 12,
Debt
, for further information including key terms of this credit
agreement.
Merger-related costs are those expenses incurred in order to effect the merger, including advisory,
legal, accounting, valuation and other professional or consulting fees as well as certain general
and administrative costs incurred by the Company as a direct result of the closing of the BPW
Transactions, including an incentive award given to certain executives and members of management,
contingent upon the successful closing of the BPW Transactions. The incentive portion of
merger-related costs was awarded in restricted stock units and cash for efforts related to the
closing of the BPW Transactions. The cash bonus awarded was paid in the first quarter of 2010 in
connection with the consummation of the BPW Transactions. The restricted stock units awarded cliff
vested 12 months from the completion of the BPW Transactions. Legal expenses classified as
merger-related costs include both those costs incurred to execute the merger as well as those costs
incurred related to subsequent merger-related legal proceedings. Other costs primarily include
printing and mailing expenses related to proxy solicitation and incremental insurance expenses
related to the transactions. The Company has recorded total merger-related expenses of $35.0
million. Approximately $7.7 million of costs incurred in connection with the execution of the
senior secured revolving credit facility were recorded as deferred financing costs and included in
other assets in the condensed consolidated balance sheet. These costs are being amortized to
interest expense over the three and one-half year life of the facility. Approximately $3.6
6
million of costs incurred in connection with the registration and issuance of the common stock and
warrants were charged to additional paid-in capital.
Details of the merger-related costs recorded in the thirteen and twenty-six weeks ended July 30,
2011 and July 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
July 30,
|
|
July 31,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
Investment banking
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,255
|
|
Accounting and legal
|
|
|
|
|
|
|
1,669
|
|
|
|
|
|
|
|
6,650
|
|
Financing incentive compensation
|
|
|
|
|
|
|
1,210
|
|
|
|
885
|
|
|
|
4,428
|
|
Other costs
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
1,530
|
|
|
|
|
|
|
Merger-related costs
|
|
$
|
|
|
|
$
|
3,050
|
|
|
$
|
885
|
|
|
$
|
26,863
|
|
|
|
|
|
|
The following pro forma summary financial information presents the operating results of the
combined company assuming the merger and related events, including the repurchase of common stock
held by AEON (U.S.A.) and repayment of all outstanding indebtedness owed to AEON and AEON (U.S.A.)
and the execution of the senior secured revolving credit agreement, had been completed on January
31, 2010, the beginning of Talbots fiscal year ended January 29, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 31, 2010
|
|
July 31, 2010
|
|
|
Actual
|
|
Pro Forma
|
|
Actual
|
|
Pro Forma
|
|
|
(In thousands, except per share data)
|
Net sales
|
|
$
|
300,742
|
|
|
$
|
300,742
|
|
|
$
|
621,403
|
|
|
$
|
621,403
|
|
Operating income
|
|
|
8,728
|
|
|
|
8,728
|
|
|
|
11,627
|
|
|
|
4,755
|
|
Income (loss) from continuing operations
|
|
|
521
|
|
|
|
521
|
|
|
|
(6,575
|
)
|
|
|
(8,187
|
)
|
Earnings (loss) per share continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.12
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
68,338
|
|
|
|
68,388
|
|
|
|
63,105
|
|
|
|
67,293
|
|
Diluted
|
|
|
69,520
|
|
|
|
69,520
|
|
|
|
63,105
|
|
|
|
67,293
|
|
Based on the nature of the BPW entity, there was no revenue or earnings associated with BPW
included in the consolidated statements of operations.
4. Restructuring
In March 2011, the Company announced the acceleration of its store rationalization plan, a program
designed to increase the productivity of the Companys store square footage by evaluating the
Companys store portfolio on a market-by-market basis and closing, consolidating or downsizing
certain selected locations. This evaluation includes consideration of factors such as overall size
of each market, current performance and growth potential of each store and available lease
expirations, lease renewals and other lease termination opportunities. As a result of this
evaluation, the Company identified approximately 110 locations, including full stores and attached
store concepts, for closure, including 15 to 20 locations as consolidation or downsizing
opportunities. The Company has adopted a staged approach to closing, consolidating and downsizing
these locations to best match its existing lease opportunities with approximately 83 locations
expected to close in fiscal 2011, 25 locations expected to close in fiscal 2012 and two locations
expected to close in fiscal 2013 under this plan. The scope and timing of closures, consolidations
and downsizings under this plan remains dynamic as the Company continues to perform ongoing
evaluations of its portfolio and continues the process of negotiating acceptable termination
arrangements with related third parties. The Company expects to record total non-recurring
restructuring charges of approximately $14.0 million related to this plan. In the thirteen and
twenty-six weeks ended July 30, 2011, the Company incurred restructuring
7
charges of $1.0 million and $3.3 million, respectively, primarily comprised of lease exit,
severance and related costs for certain locations closed or to be closed under this plan and,
through July 30, 2011, closed 17 locations, including 15 full stores, under this plan.
In the twenty-six weeks ended July 31, 2010, the Company recorded $5.1 million of restructuring
charges primarily related to the consolidation of the Companys Madison Avenue, New York flagship
location in which the Company reduced active leased floor space and wrote down certain assets and
leasehold improvements no longer used in the redesigned lay-out.
The following is a summary of the activity and liability balances related to restructuring for the
twenty-six weeks ended
July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
Lease -
|
|
|
|
|
|
|
Severance
|
|
|
Related
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at January 29, 2011
|
|
$
|
215
|
|
|
$
|
3,781
|
|
|
$
|
3,996
|
|
Charges
|
|
|
2,139
|
|
|
|
1,131
|
|
|
|
3,270
|
|
Cash payments
|
|
|
(639
|
)
|
|
|
(1,055
|
)
|
|
|
(1,694
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at July 30, 2011
|
|
$
|
1,715
|
|
|
$
|
3,857
|
|
|
$
|
5,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
Lease -
|
|
|
|
|
|
|
Severance
|
|
|
Related
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at January 30, 2010
|
|
$
|
3,089
|
|
|
$
|
784
|
|
|
$
|
3,873
|
|
Charges
|
|
|
1,041
|
|
|
|
4,030
|
|
|
|
5,071
|
|
Cash payments
|
|
|
(2,960
|
)
|
|
|
(579
|
)
|
|
|
(3,539
|
)
|
Non-cash items
|
|
|
|
|
|
|
(48
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2010
|
|
$
|
1,170
|
|
|
$
|
4,187
|
|
|
$
|
5,357
|
|
|
|
|
|
|
|
|
|
|
|
The non-cash items primarily consisted of the write-off of certain leasehold improvements and
lease liability adjustments. Of the $5.6 million in restructuring liabilities at July 30, 2011,
$3.7 million, expected to be paid within the next twelve months, is included in accrued liabilities
and accounts payable and the remaining $1.9 million, expected to be paid thereafter through 2014,
is included in deferred rent under lease commitments.
5. Stock-Based Compensation
Total stock-based compensation expense related to stock options, nonvested stock awards and
restricted stock units (RSUs) was $2.2 million and $3.6 million for the thirteen weeks ended July
30, 2011 and July 31, 2010, respectively, and $5.1 million and $7.8 million for the twenty-six
weeks ended July 30, 2011 and July 31, 2010, respectively.
Stock-based compensation expense is classified in the consolidated statements of operations as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Cost of sales, buying and occupancy
|
|
$
|
293
|
|
|
$
|
245
|
|
|
$
|
566
|
|
|
$
|
384
|
|
Selling, general and administrative
|
|
|
1,962
|
|
|
|
2,148
|
|
|
|
3,698
|
|
|
|
5,283
|
|
Merger-related costs
|
|
|
|
|
|
|
1,210
|
|
|
|
885
|
|
|
|
2,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,255
|
|
|
$
|
3,603
|
|
|
$
|
5,149
|
|
|
$
|
7,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Stock Options
The weighted-average fair value of options granted during the twenty-six weeks ended July 30, 2011
and July 31, 2010, estimated as of the grant date using the Black-Scholes option pricing model, was
$4.20 and $10.40 per option, respectively. Key assumptions used to apply this pricing model were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
2011
|
|
2010
|
Risk-free interest rate
|
|
|
2.8
|
%
|
|
|
3.1
|
%
|
Expected life of options
|
|
6.9 years
|
|
6.8 years
|
Expected volatility of underlying stock
|
|
|
81.4
|
%
|
|
|
79.7
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The following is a summary of stock option activity for the twenty-six weeks ended July 30,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Outstanding at January 29, 2011
|
|
|
7,115,641
|
|
|
$
|
25.17
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,403,857
|
|
|
|
5.66
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(400
|
)
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(2,695,653
|
)
|
|
|
33.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 30, 2011
|
|
|
5,823,445
|
|
|
$
|
16.52
|
|
|
|
5.4
|
|
|
$
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 30, 2011
|
|
|
3,841,237
|
|
|
$
|
22.21
|
|
|
|
3.6
|
|
|
$
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 30, 2011, there was $5.2 million of unrecognized compensation cost related to stock
options that are expected to vest. These costs are expected to be recognized over a weighted
average period of 2.4 years.
9
Nonvested Stock Awards and RSUs
The following is a summary of nonvested stock awards and RSU activity for the twenty-six weeks
ended July 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
Nonvested at January 29, 2011
|
|
|
2,367,214
|
|
|
$
|
11.34
|
|
Granted
|
|
|
676,051
|
|
|
|
5.66
|
|
Vested
|
|
|
(1,073,334
|
)
|
|
|
12.26
|
|
Forfeited
|
|
|
(194,180
|
)
|
|
|
6.42
|
|
|
|
|
|
|
|
|
Nonvested at July 30, 2011
|
|
|
1,775,751
|
|
|
$
|
9.04
|
|
|
|
|
|
|
|
|
As of July 30, 2011, there was $10.1 million of unrecognized compensation cost related to
nonvested stock awards and RSUs that are expected to vest. These costs are expected to be
recognized over a weighted average period of 1.8 years.
6. Income Taxes
The Companys effective income tax rate, including discrete items, was (2.8%) and (109.7%) for the
twenty-six weeks ended July 30, 2011 and July 31, 2010, respectively. The effective income tax rate
is based upon the estimated income or loss for the year, the estimated composition of the income or
loss in different jurisdictions and discrete adjustments for settlements of tax audits or
assessments, the resolution or identification of tax position uncertainties and non-deductible
costs associated with the merger. Income tax expense for the twenty-six weeks ended July 30, 2011
and July 31, 2010 was impacted primarily by changes in estimates related to previously existing
uncertain tax positions based on new information.
The Company continues to provide a full valuation allowance against its net deferred tax assets,
excluding deferred tax liabilities for non-amortizing intangibles, due to insufficient positive
evidence that the deferred tax assets will be realized in the future.
In fiscal 2010, as a result of the BPW Transactions, the Company recorded an increase in its
unrecognized tax benefits of approximately $20.0 million that reduced a portion of the Companys
net deferred tax assets before consideration of any valuation allowance. The Company submitted a
Private Letter Ruling request related to this tax position during fiscal 2010 which was granted in
the first quarter of 2011. As a result of this favorable outcome, the Company recorded a decrease
in its unrecognized tax benefits of approximately $20.0 million in the first quarter of 2011 which
increased the Companys net deferred tax assets before consideration of any valuation allowance.
7. Discontinued Operations
The Companys discontinued operations include the Talbots Kids, Mens and U.K. businesses, all of
which ceased operations in 2008, and the J. Jill business which was sold to Jill Acquisition LLC
(the Purchaser) on July 2, 2009. The operating results of these businesses have been classified
as discontinued operations for all periods presented, and the cash flows from discontinued
operations have been separately presented in the condensed consolidated statements of cash flows.
The income (loss) from discontinued operations for the thirteen and twenty-six weeks ended July 30,
2011 include on-going lease and other liability adjustments related to the J. Jill, Talbots Kids
and Mens businesses, offset by favorable adjustments to other assets and lease liabilities
including the first quarter 2011 settlement of one of the two remaining J. Jill store leases not
assumed by the Purchaser in the sale of J. Jill. The income from discontinued operations for the
thirteen and twenty-six weeks ended July 31, 2010 is primarily comprised of favorable adjustments
to estimated lease liabilities including the second quarter 2010 settlement of a portion of the
vacant Quincy, Massachusetts office space previously used for the J. Jill business and the first
quarter of 2010 settlement of four J. Jill store leases not assumed by the Purchaser in the sale of
J. Jill. The results for the
thirteen and twenty-six weeks ended July 31, 2010 also include favorable adjustments to other
assets, partially offset by on-going lease and other liability adjustments related to the J. Jill,
Talbots Kids and Mens businesses. While the income from discontinued operations for the thirteen
weeks ended July 31, 2010 reflects income tax expense of $0.2 million, recorded to
10
reverse a first
quarter of 2010 estimated income tax benefit, the income (loss) from discontinued operations for
the thirteen weeks ended July 30, 2011 and twenty-six weeks ended July 30, 2011 and July 31, 2010
reflect no net income tax expense (benefit).
At January 29, 2011, the Company had remaining recorded lease-related liabilities from discontinued
operations of $6.3 million. During the twenty-six weeks ended July 30, 2011, the Company made cash
payments of approximately $1.4 million, and recorded additional net expense related to lease
liability adjustments of $0.2 million, resulting in a total estimated remaining recorded liability
of $5.1 million as of July 30, 2011. Of this $5.1 million liability, $3.0 million, expected to be
paid within the next twelve months, is included in accrued liabilities, and the remaining $2.1
million, expected to be paid thereafter through 2019, is included in deferred rent under lease
commitments.
8. (Loss) Earnings Per Share
Basic (loss) earnings per share is computed by dividing (loss) income available for common
stockholders by the weighted average number of common shares outstanding. During periods of income,
participating securities are allocated a proportional share of income determined by dividing total
weighted average participating securities by the sum of the total weighted average common shares
and participating securities (the two-class method). The Companys nonvested stock and director
restricted stock units (RSUs) participate in any dividends declared by the Company and are
therefore considered participating securities. Participating securities have the effect of diluting
both basic and diluted earnings per share during periods of income. During periods of loss, no loss
is allocated to participating securities since they have no contractual obligation to share in the
losses of the Company. Diluted earnings per share is computed after giving consideration to the
dilutive effect of warrants, stock options and management RSUs that are outstanding during the
period, except where such non-participating securities would be anti-dilutive.
Basic and diluted (loss) earnings per share from continuing operations were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Basic (loss) earnings per share:
|
|
(In thousands, except per share data)
|
|
(Loss) income from continuing operations
|
|
$
|
(37,354
|
)
|
|
$
|
521
|
|
|
$
|
(36,446
|
)
|
|
$
|
(6,575
|
)
|
Less: income associated with participating securities
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income (loss) available for common stockholders
|
|
$
|
(37,354
|
)
|
|
$
|
506
|
|
|
$
|
(36,446
|
)
|
|
$
|
(6,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
69,074
|
|
|
|
68,338
|
|
|
|
68,891
|
|
|
|
63,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share continuing operations
|
|
$
|
(0.54
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Diluted (loss) earnings per share:
|
|
(In thousands, except per share data)
|
|
(Loss) income from continuing operations
|
|
$
|
(37,354
|
)
|
|
$
|
521
|
|
|
$
|
(36,446
|
)
|
|
$
|
(6,575
|
)
|
Less: income associated with participating securities
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available for common stockholders
|
|
$
|
(37,354
|
)
|
|
$
|
506
|
|
|
$
|
(36,446
|
)
|
|
$
|
(6,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
69,074
|
|
|
|
68,338
|
|
|
|
68,891
|
|
|
|
63,105
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
69,074
|
|
|
|
69,520
|
|
|
|
68,891
|
|
|
|
63,105
|
|
Diluted (loss) earnings per share - continuing operations
|
|
$
|
(0.54
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following common stock equivalents were excluded from the calculation of (loss) earnings
per share because their inclusion would have been anti-dilutive for the thirteen and twenty-six
week periods ended July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
July 30,
|
|
July 31,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
(In thousands)
|
Nonvested stock
|
|
|
1,678
|
|
|
|
2,013
|
|
|
|
1,678
|
|
|
|
2,013
|
|
Nonvested director RSUs
|
|
|
42
|
|
|
|
18
|
|
|
|
42
|
|
|
|
18
|
|
Nonvested management RSUs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
Stock options
|
|
|
5,824
|
|
|
|
6,435
|
|
|
|
5,824
|
|
|
|
8,207
|
|
Warrants
|
|
|
19,152
|
|
|
|
18,243
|
|
|
|
19,152
|
|
|
|
19,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,696
|
|
|
|
26,709
|
|
|
|
26,696
|
|
|
|
29,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Comprehensive (Loss) Income
The following illustrates the Companys total comprehensive (loss) income for the thirteen and
twenty-six weeks ended July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Net (loss) income
|
|
$
|
(37,333
|
)
|
|
$
|
941
|
|
|
$
|
(36,594
|
)
|
|
$
|
(3,427
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
(26
|
)
|
|
|
(231
|
)
|
|
|
419
|
|
|
|
361
|
|
Change in pension and postretirement liabilities
|
|
|
235
|
|
|
|
(97
|
)
|
|
|
470
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(37,124
|
)
|
|
$
|
613
|
|
|
$
|
(35,705
|
)
|
|
$
|
(3,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other components of comprehensive (loss) income reflect no income tax expense (benefit)
for the periods presented as the Company continues to maintain a valuation allowance for
substantially all of its net deferred tax assets due to insufficient positive evidence that the
deferred tax assets would be realized in the future.
12
10. Fair Value Measurements
The Company classifies fair value based measurements on a three-level hierarchy that prioritizes
the inputs used to measure fair value. This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to
measure fair value are as follows: Level 1, quoted market prices in active markets for identical
assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level
1 such as quoted market prices for markets that are not active or other inputs that are observable
or can be corroborated by observable market data; and Level 3, unobservable inputs that are
supported by little or no market activity and that are significant to the fair value of the assets
or liabilities, including certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
The Companys financial instruments at July 30, 2011 and January 29, 2011 consisted primarily of
cash and cash equivalents, customer accounts receivable, investments in the Companys irrevocable
grantors trust (Rabbi Trust) that holds assets intended to fund benefit obligations under the
Companys Supplemental Retirement Savings Plan and Deferred Compensation Plan, accounts payable and
its revolving credit facility. The Company believes the carrying value of cash and cash
equivalents, customer accounts receivable and accounts payable approximates their fair value due to
their short-term nature. The money market investments in the Rabbi Trust are recorded at fair value
based on quoted market prices in active markets for identical assets (Level 1 measurements) and are
not significant to the total value of the Rabbi Trust. The investments in life insurance policies
held in the Rabbi Trust are recorded at their cash surrender values, which is consistent with
settlement value and is not a fair value measurement. The Company believes that the carrying value
of its revolving credit facility approximates fair value at July 30, 2011 and January 29, 2011 as
the interest rates are market-based variable rates and were re-set with the third party lenders
during the third quarter of 2010.
The Company monitors the performance and productivity of its store portfolio and closes stores when
appropriate. When it is determined that a store is underperforming or is to be closed, the Company
reassesses the recoverability of the stores long-lived assets, which in some cases results in an
impairment charge. In the twenty-six weeks ended July 30, 2011, the Company performed impairment
analyses on the assets of certain stores, triggered by the Companys store rationalization plan.
The following table summarizes the non-financial assets that were measured at fair value on a
non-recurring basis in performing these analyses for the twenty-six weeks ended July 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
Active
|
|
|
Observable
|
|
|
|
|
|
|
of Store
|
|
|
|
Net
|
|
|
Markets
|
|
|
Inputs Other
|
|
|
|
|
|
|
Assets
|
|
|
|
Carrying
|
|
|
for
|
|
|
than Quoted
|
|
|
Significant
|
|
|
Twenty-Six
|
|
|
|
Value at
|
|
|
Identical
|
|
|
Market
|
|
|
Unobservable
|
|
|
Weeks
|
|
|
|
July 30,
|
|
|
Assets
|
|
|
Prices
|
|
|
Inputs
|
|
|
Ended
|
|
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
July 30, 011
|
|
|
|
(In thousands)
|
|
Long-lived assets held and used
|
|
$
|
495
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
495
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
495
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
495
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimates the fair value of these store assets using an income approach which is
based on estimates of future operating cash flows at the store level. These estimates, which
include estimates of future net store sales, direct store expenses and non-cash store adjustments,
are based on the experience of management, including historical store operating results and
managements knowledge and expectations. These estimates are affected by factors that can be
difficult to predict, such as future operating results, customer activity and future economic
conditions. No impairment of store assets was recorded in the thirteen weeks ended July 30, 2011 or
July 31, 2010. Insignificant store impairments were recorded in the twenty-six weeks ended July 31,
2010.
13
11. Customer Accounts Receivable, net
Customer accounts receivable, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 30,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Customer accounts receivable
|
|
$
|
140,232
|
|
|
$
|
149,872
|
|
Less: allowance for doubtful accounts
|
|
|
(3,500
|
)
|
|
|
(4,400
|
)
|
|
|
|
|
|
|
|
Customer accounts receivable, net
|
|
$
|
136,732
|
|
|
$
|
145,472
|
|
|
|
|
|
|
|
|
The allowance for doubtful accounts is based on a calculation that includes a number of
factors such as historical collection rates, a percentage of outstanding customer account balances,
historical write-offs and write-off forecasts.
In determining the appropriate allowance balance, the Company considers, among other factors, both
the aging of the past-due outstanding customer accounts receivable as well as the credit quality of
the outstanding customer accounts receivable.
As of July 30, 2011 and January 29, 2011, customer accounts receivable were aged as follows:
|
|
|
|
|
|
|
|
|
|
|
July 30,
|
|
January 29,
|
|
|
2011
|
|
2011
|
|
|
(Percentage of gross customer accounts receivable)
|
Current
|
|
|
90.7
|
%
|
|
|
90.4
|
%
|
Up to 60 days past due
|
|
|
7.7
|
%
|
|
|
8.1
|
%
|
61-120 days past due
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
121-180 days past due
|
|
|
0.6
|
%
|
|
|
0.5
|
%
|
Customer accounts receivable are deemed to be uncollectible either when they are contractually
180 days past due or when events or circumstances, such as customer bankruptcy, fraud or death,
suggest that collection of the amounts due under the account is unlikely. Once an account is deemed
to be uncollectible, the Company ceases to accrue interest on the balance and the balance is
written off at the next cycle billing date. The Company ceases to accrue late fees on a balance
once the balance reaches 120 days past due or in certain other financial circumstances. At July 30,
2011 and January 29, 2011, the Company had recorded gross customer accounts receivable of $0.3
million and $0.4 million, respectively, which have been deemed uncollectible and have ceased to
accrue finance charge income and $1.2 million of gross customer accounts receivable which are 90
days or more past due and upon which finance charge income continued to be accrued.
The Company performs an on-going evaluation of the credit quality of its outstanding customer
accounts receivable, based on the Talbots credit cardholders respective credit risk scores. The
Company utilizes an industry standard credit risk score model as its credit quality indicator. As
of July 30, 2011 and January 29, 2011, customer accounts receivable were allocated by credit
quality indicator (credit risk score) as follows:
|
|
|
|
|
|
|
|
|
|
|
July 30,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Greater than or equal to 700
|
|
$
|
86,234
|
|
|
$
|
93,011
|
|
600 - 699
|
|
|
37,464
|
|
|
|
38,832
|
|
Less than or equal to 599
|
|
|
14,812
|
|
|
|
15,135
|
|
Other
|
|
|
1,722
|
|
|
|
2,894
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
$
|
140,232
|
|
|
$
|
149,872
|
|
|
|
|
|
|
|
|
The other customer accounts receivable in the table above include reconciling amounts of the
most recent days net sales not yet posted to customer accounts, unapplied payments and the balance
of Canadian customer accounts receivable for which the Company does not maintain credit risk score
information.
14
Changes in the balance of the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
Allowance for
|
|
|
|
Doubtful Accounts
|
|
|
|
(In thousands)
|
|
Balance at January 29, 2011
|
|
$
|
4,400
|
|
Provision
|
|
|
370
|
|
Write-offs
|
|
|
(1,063
|
)
|
Recoveries, net
|
|
|
293
|
|
|
|
|
|
Balance at April 30, 2011
|
|
$
|
4,000
|
|
|
|
|
|
Provision
|
|
|
172
|
|
Write-offs
|
|
|
(957
|
)
|
Recoveries, net
|
|
|
285
|
|
|
|
|
|
Balance at July 30, 2011
|
|
$
|
3,500
|
|
|
|
|
|
12. Debt
On April 7, 2010, in connection with the consummation and closing of the merger with BPW, the
Company executed a senior secured revolving credit facility with third party lenders (the Credit
Facility). The Credit Facility is an asset-based revolving credit facility, including a $25.0
million letter of credit sub-facility, that permits the Company to borrow up to the lesser of (a)
$200.0 million or (b) the borrowing base, calculated as a percentage of the value of eligible
credit card receivables and the net orderly liquidation value of eligible private label credit card
receivables, the net orderly liquidation value of eligible inventory in the United States and the
net orderly liquidation value of eligible in-transit inventory from international vendors (subject
to certain caps and limitations), net of all reserves as specifically set forth in the agreement,
minus the lesser of (x) $20.0 million and (y) 10% of the borrowing base. In addition, under and
subject to the terms of the facility, the lenders also have the right to establish certain
additional reserves against borrowing availability if the lenders determine, in good faith and in
the exercise of reasonable business judgment from the perspective of a secured asset-based lender,
that additional reserves are necessary. Loans made pursuant to this agreement carried interest, at
the Companys election, at either (a) the three-month LIBOR plus 4.0% to 4.5% depending on certain
availability thresholds or (b) the base rate plus 3.0% to 3.5% depending on certain availability
thresholds, with the base rate established at a prime rate pursuant to the terms of the agreement.
On August 31, 2010, the Company entered into a First Amendment to the Credit Agreement with the
lenders (the First Amendment), which modified the following terms under the Credit Facility: (i)
reduced the interest rates by one hundred basis points on loan amounts under the Credit Facility
for loans provided by the lenders to either (a) three-month LIBOR plus 3.0% to 3.5% or (b) the base
rate plus 2.0% to 2.5%, in each case depending on certain availability thresholds; (ii) adjusted
the fee structure on the unused portion of the commitment and reduced by one-half the rates
applicable to documentary letters of credit; and (iii) extended the time period during which a
prepayment premium will be assessed upon the reduction or termination of the revolving loan
commitments from April 7, 2011 to April 7, 2012. Interest on borrowings is payable monthly in
arrears. The Company pays a fee of 50 to 75 basis points on the unused portion of the commitment
and outstanding letters of credit, if any, monthly in arrears in accordance with the formulas set
forth in the First Amendment. As of July 30, 2011, the Companys effective interest rate under the
Credit Facility was 3.8%, and the Company had additional borrowing availability of up to $60.6
million.
Under the Credit Facility, amounts are borrowed and repaid on a daily basis through a control
account arrangement. Cash received from customers is swept on a daily basis into a control account
in the name of the agent for the lenders. Subject to the terms of the agreement, the Company is
permitted to maintain a certain amount of cash in disbursement accounts, including certain amounts
to satisfy current liabilities incurred in the ordinary course of business. Amounts may be borrowed
and re-borrowed, subject to the satisfaction or waiver of all borrowing conditions, including,
without limitation, perfected liens on
collateral, accuracy of all representations and warranties, the absence of a default or an event of
default and other borrowing conditions, all subject to certain exclusions as set forth in the
agreement.
The agreement matures on October 7, 2013, subject to earlier termination as set forth in the
agreement. The entire principal amount of loans under the facility and any outstanding letters of
credit will be due on the maturity date. Loans may be voluntarily prepaid at any time at the
Companys option, in whole or in part, at par plus accrued and unpaid interest and any break
funding loss incurred. The Company is required to make mandatory repayments in the event of receipt
of net proceeds
15
from asset dispositions, receipt of net proceeds from the issuance of securities
and to the extent that its outstanding indebtedness under the Credit Facility exceeds its maximum
borrowing availability at any time. Upon any voluntary or mandatory prepayment of borrowings
outstanding at the LIBOR rate on a day that is not the last day of the respective interest period,
the Company will reimburse the lenders for any resulting loss or expense that the lenders may
incur. Amounts voluntarily repaid prior to the maturity date may be re-borrowed.
The Company and certain of its subsidiaries have executed a guaranty and security agreement
pursuant to which all obligations under the Credit Facility are fully and unconditionally
guaranteed on a joint and several basis. Additionally, pursuant to the security agreement, all
obligations are secured by (i) a first priority perfected lien and security interest in
substantially all assets of the Company and any guarantor from time to time and (ii) a first lien
mortgage on the Companys Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts
distribution facility. In connection with the lenders security interest in the proprietary Talbots
credit card program, Talbots and certain of its subsidiaries have also executed an access and
monitoring agreement that requires the Company to comply with certain monitoring and reporting
obligations to the agent with respect to such program, subject to applicable law.
The Company may not create, assume or suffer to exist any lien securing indebtedness incurred after
the closing date of the Credit Facility subject to certain limited exceptions set forth in the
agreement. The Credit Facility contains negative covenants prohibiting the Company, with certain
exceptions, from among other things, incurring indebtedness and contingent obligations, making
loans and investments, intercompany loans and capital contributions, declaring or making any
dividend payment except for dividend payments or distributions payable solely in stock or stock
equivalents, and disposing of property or assets. The Company has agreed to keep the mortgaged
properties in good repair, reasonable wear and tear excepted. The agreement also provides for
events of default, including failure to repay principal and interest when due and failure to
perform or comply with the provisions or covenants of the agreement, an event of default on other
third party obligations and any change in control of the Company (as defined in the agreement to
include, among other things, any person or group acquiring 50.0% or more of the total voting power
of the Companys securities, the replacement of a majority of the Companys Board of Directors
under certain circumstances and certain mergers or other extraordinary transactions). Should the
Company default in its obligations under the Credit Facility, the lenders could declare an event of
default, terminate borrowing under the facility and declare all indebtedness under the facility
immediately due and payable, and if outstanding indebtedness is not immediately satisfied from cash
resources, realize on all collateral pledged to secure such indebtedness. The agreement does not
contain any financial covenant tests.
Concurrent with the execution of the First Amendment, the Company and the lenders entered into (a)
a Master Agreement for Documentary Letters of Credit and (b) a Master Agreement for Standby Letters
of Credit (each a Master Agreement), pursuant to which the lenders will provide either
documentary or standby letters of credit at the request of the Company to various beneficiaries on
the terms set forth in the applicable Master Agreement, subject to any applicable limitations set
forth in the Credit Facility.
The Credit Facility, under which approximately $83.9 million and $25.5 million was outstanding at
July 30, 2011 and January 29, 2011, respectively, was the Companys only outstanding debt agreement
during these periods. Borrowings under this Credit Facility are classified as a current liability
as the Credit Facility requires repayment of outstanding borrowings with substantially all cash
collected by the Company and contains a subjective acceleration clause. Such provisions do not
affect the final maturity date of the Credit Facility.
The Company incurred approximately $7.7 million of costs in connection with the execution of the
Credit Facility which were recorded as deferred financing costs in other assets in the condensed
consolidated balance sheet. These costs are being amortized to interest expense over the three and
one-half year life of the facility. At July 30, 2011, $4.7 million of deferred financing costs
remained in other assets in the condensed consolidated balance sheet.
At July 30, 2011 and January 29, 2011, the Company had $12.0 million and $9.1 million,
respectively, in outstanding letters of credit related to merchandise purchases and, at July 30, 2011, letter of credit availability
of up to $13.0 million under the Master Agreements, included as part of its total additional
borrowing availability under the Credit Facility, subject to all borrowing capacity restrictions
included under the facility.
16
13. Benefit Plans
In February 2009, the Company announced its decision to discontinue future benefits being earned
under its non-contributory defined benefit pension plan (Pension Plan) and Supplemental Executive
Retirement Plan (SERP) effective May 1, 2009. Additionally, as of January 2011, the Companys
postretirement medical plan is completely self-funded. The Company continues to sponsor a separate
executive postretirement medical plan.
The components of net pension expense for the Pension Plan for the thirteen and twenty-six weeks
ended July 30, 2011 and July 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Interest expense on projected benefit obligation
|
|
$
|
2,478
|
|
|
$
|
2,371
|
|
|
$
|
4,941
|
|
|
$
|
4,678
|
|
Expected return on plan assets
|
|
|
(2,441
|
)
|
|
|
(2,394
|
)
|
|
|
(4,884
|
)
|
|
|
(4,800
|
)
|
Net amortization and deferral
|
|
|
208
|
|
|
|
139
|
|
|
|
417
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
245
|
|
|
$
|
116
|
|
|
$
|
474
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net SERP expense for the thirteen and twenty-six weeks ended July 30, 2011
and July 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Interest expense on projected benefit obligation
|
|
$
|
279
|
|
|
$
|
288
|
|
|
$
|
556
|
|
|
$
|
554
|
|
Net amortization and deferral
|
|
|
27
|
|
|
|
20
|
|
|
|
53
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net SERP expense
|
|
$
|
306
|
|
|
$
|
308
|
|
|
$
|
609
|
|
|
$
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net postretirement medical expense (credit) for the thirteen and twenty-six
weeks ended July 30, 2011 and July 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Interest expense on accumulated postretirement benefit obligation
|
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
30
|
|
|
$
|
35
|
|
Prior service cost amortization
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
|
|
(760
|
)
|
Net amortization and deferral
|
|
|
51
|
|
|
|
130
|
|
|
|
102
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement medical expense (credit)
|
|
$
|
66
|
|
|
$
|
(233
|
)
|
|
$
|
132
|
|
|
$
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company was required to make contributions to the Pension Plan of $1.9 million and $1.0
million during the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively, and $3.8
million and $2.0 million during the twenty-six weeks ended July 30, 2011 and July 31, 2010,
respectively. The Company expects to make required contributions of $7.9 million to the Pension
Plan during the remainder of 2011. The Company did not make any voluntary contributions to the
Pension Plan during the thirteen or twenty-six weeks ended July 30, 2011 and July 31, 2010.
14. Legal Proceedings
On February 3, 2011, a purported Talbots shareholder filed a putative class action captioned
Washtenaw County Employees Retirement System v. The Talbots, Inc. et al.
, Case No.
1:11-cv-10186-NMG, in the United States District Court for the District
17
of Massachusetts against
Talbots and certain of its officers. The complaint, purportedly brought on behalf of all purchasers
of Talbots common stock from December 8, 2009 through and including January 11, 2011, asserted
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and sought, among other things, damages and costs and expenses. On July 27,
2011, the lead plaintiff filed an amended complaint which continues to assert claims under Sections
10(b) and 20(a) alleging certain false and misleading statements and alleged omissions related to
Talbots financial condition, inventory management and business prospects. The amended complaint
alleges that these actions artificially inflated the market price of Talbots common stock during
the class period, thus purportedly harming investors. The Company believes that these claims are
without merit and intends to defend against them vigorously. At this time, the Company cannot
reasonably predict the outcome of these proceedings or an estimate of damages, if any.
On February 24, 2011, a putative Talbots shareholder filed a derivative action in Massachusetts
Superior Court, captioned
Greco v. Sullivan, et al.
, Case No. 11-0728 BLS, against certain of
Talbots officers and directors. The complaint, which purports to be brought on behalf of Talbots,
asserts claims for breach of fiduciary duties, insider trading, abuse of control, waste of
corporate assets and unjust enrichment, and seeks, among other things, damages, equitable relief
and costs and expenses. The complaint alleges that the defendants either caused or neglected to
prevent, through mismanagement or failure to provide effective oversight, the issuance of false and
misleading statements and omissions regarding the Companys financial condition. The complaint
alleges that the defendants actions injured the Company insofar as they (a) caused Talbots to
waste corporate assets through incentive-based bonuses for senior management, (b) subjected the
Company to significant potential civil liability and legal costs and (c) damaged the Company
through a loss of market capitalization as well as goodwill and other intangible benefits. The
Company believes that these claims are without merit and, with the other defendants, intends to
defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of
these proceedings.
15. Segment Information
The Company has two separately managed and reported business segments stores and direct
marketing.
The following is certain segment information for the thirteen and twenty-six weeks ended July 30,
2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
July 30, 2011
|
|
July 31, 2010
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
|
|
(In thousands)
|
Net sales
|
|
$
|
227,980
|
|
|
$
|
43,112
|
|
|
$
|
271,092
|
|
|
$
|
250,870
|
|
|
$
|
49,872
|
|
|
$
|
300,742
|
|
Direct (loss) profit
|
|
|
(2,576
|
)
|
|
|
(1,874
|
)
|
|
$
|
(4,450
|
)
|
|
|
31,010
|
|
|
|
10,784
|
|
|
$
|
41,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
July 30, 2011
|
|
July 31, 2010
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
|
|
(In thousands)
|
Net sales
|
|
$
|
468,735
|
|
|
$
|
103,667
|
|
|
$
|
572,402
|
|
|
$
|
508,443
|
|
|
$
|
112,960
|
|
|
$
|
621,403
|
|
Direct profit
|
|
|
13,784
|
|
|
|
14,323
|
|
|
$
|
28,107
|
|
|
|
82,473
|
|
|
|
30,592
|
|
|
$
|
113,065
|
|
18
Direct (loss) profit is calculated as net sales less cost of goods sold and direct expenses such as
certain payroll, occupancy and other direct costs. The following reconciles direct (loss) profit to
(loss) income from continuing operations for the thirteen and twenty-six weeks ended July 30, 2011
and July 31, 2010. Indirect expenses include unallocated corporate overhead and related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Direct (loss) profit
|
|
$
|
(4,450
|
)
|
|
$
|
41,794
|
|
|
$
|
28,107
|
|
|
$
|
113,065
|
|
Less: Indirect expenses
|
|
|
28,571
|
|
|
|
29,904
|
|
|
|
54,811
|
|
|
|
69,504
|
|
Restructuring charges
|
|
|
1,005
|
|
|
|
112
|
|
|
|
3,270
|
|
|
|
5,071
|
|
Merger-related costs
|
|
|
|
|
|
|
3,050
|
|
|
|
885
|
|
|
|
26,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(34,026
|
)
|
|
|
8,728
|
|
|
|
(30,859
|
)
|
|
|
11,627
|
|
Interest expense, net
|
|
|
2,552
|
|
|
|
6,349
|
|
|
|
4,580
|
|
|
|
14,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(36,578
|
)
|
|
|
2,379
|
|
|
|
(35,439
|
)
|
|
|
(3,136
|
)
|
Income tax expense
|
|
|
776
|
|
|
|
1,858
|
|
|
|
1,007
|
|
|
|
3,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(37,354
|
)
|
|
$
|
521
|
|
|
$
|
(36,446
|
)
|
|
$
|
(6,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Subsequent Events
Stockholder Rights Plan
Effective August 1, 2011, the Companys Board of Directors unanimously voted to adopt a stockholder
rights plan, dated August 1, 2011, between the Company and Computershare Trust Company, N.A., as
rights agent, (the Rights Plan) and directed the issuance, and declared a dividend of one common
share purchase right (a Right and collectively, the Rights) for each outstanding share of
common stock, par value of $0.01 per share, of the Company outstanding as of the close of business
on August 12, 2011. Initially, no separate certificate representing the Rights will be issued.
Under the Rights Plan, the Rights would be distributed upon the earlier to occur of (i) the tenth
business day following a public announcement indicating that a person or group of affiliated or
associated persons (an Acquiring Person) has acquired beneficial ownership of 10.0% or more of
the Companys outstanding common stock or such earlier date as a majority of the Board of Directors
becomes aware of such acquisition or (ii) the tenth business day (or such later date as the Board
of Directors may determine prior to such time as any person or group becomes an Acquiring Person)
following the commencement of, or first public announcement of an intention to commence, a tender
or exchange offer the consummation of which would result in a person or group becoming the
beneficial owner of 10.0% or more of the then outstanding common stock (the Distribution Date).
The Rights are not exercisable until the Distribution Date. After the Distribution Date, each Right will entitle the holder to purchase
from the Company one share of common stock at a purchase price of $24.00 per common share (the
Purchase Price), subject to adjustment. Following the existence of an Acquiring Person, all
Rights that are, or were beneficially owned by any Acquiring Person will be null and void.
If a person or group becomes an Acquiring Person (with certain limited exceptions), each holder of
a Right will thereafter have the right to receive, upon exercise, common stock (or, in certain
circumstances, other securities of the Company, cash or assets of the Company) having a value equal
to two times the Purchase Price. Also, in the event at any time after a person becomes an Acquiring
Person, if the Company consolidates or merges with any other person or engages in other specified
transactions, proper provision will be made so that each holder of a Right will thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a value equal to two
times the Purchase Price. At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50.0% or more of the outstanding common stock,
the Board of Directors may exchange the Rights (other than Rights owned by such person or group
which have become void), in whole or in part, at an exchange ratio of one share of common stock per
Right (subject to adjustment).
On August 1, 2021, the Rights Plan will terminate automatically and the Rights will expire, unless
this date is amended or unless the Rights are earlier redeemed or exchanged by the Company, in each
case, as described in the agreement. The
19
foregoing is a general summary and is qualified in its entirety by reference to the detailed terms
and conditions set forth in the Rights Plan.
Trade Payables Arrangement
On September 1, 2011, the Company entered into an arrangement with its exclusive global apparel sourcing agent,
whereby the Company will be able to extend payment terms for merchandise purchases sourced by its exclusive agent. Under
this arrangement, the Companys sourcing agent will settle the Companys merchandise accounts payable with the vendors
organized under the buying agency agreement as they become due and extend the Companys payment obligation an additional
30 days, at which time the Company will be obligated to reimburse its sourcing agent the full amount of merchandise
accounts payable due and pay accrued fees. The amount of payables due under this arrangement is not to exceed $50.0
million at any time. Fees are calculated and payable monthly on amounts outstanding under this arrangement at a rate
of 1.0% per month. Additional fees may be charged on amounts overdue under this arrangement at a rate of 2.0% per month,
calculated on a daily basis. This arrangement will become effective for amounts that are or become due beginning on
September 1, 2011 and continue until February 29, 2012, with an option to renew for an additional six month period upon
the mutual agreement of the Company and its sourcing agent. This arrangement is subject to suspension or earlier
termination as provided in the arrangement, including any termination by the Companys sourcing agent upon 28 days
notice at any time. In addition, the Companys sourcing agent has agreed to extend letters of credit, on behalf and at
the request of the Company, to vendors organized under the buying agency agreement for certain future merchandise
purchases, which may be suspended at the discretion of the sourcing agent.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Talbots, Inc. (we, us, our, Talbots or the Company) is a specialty retailer and
direct marketer of womens apparel, accessories and shoes sold almost exclusively under the Talbots
brand. The Talbots brand vision is tradition transformed and focuses on honoring the classic
heritage of our brand while emphasizing a relevant and innovative approach to style that is both
modern and timeless. We have two primary sales channels: stores and direct marketing, which
consists of our Internet business, at www.talbots.com, our catalog business and our in-store
red-line phones. As of July 30, 2011, we operated 549 stores in the United States and 17 stores in
Canada. We conform to the National Retail Federations fiscal calendar. The thirteen weeks ended
July 30, 2011 and July 31, 2010 are referred to as the second quarter of 2011 and 2010,
respectively. Unless the context indicates otherwise, all references herein to the Company, we, us
and our, include the Company and its wholly-owned subsidiaries.
Our managements discussion and analysis of our financial condition and results of operations are
based upon our unaudited condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q, which have been prepared by us in accordance with accounting principles
generally accepted in the United States of America, or GAAP, for interim periods and with
Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion
and analysis should be read in conjunction with these unaudited condensed consolidated financial
statements as well as in conjunction with our Annual Report on Form 10-K for the fiscal year ended
January 29, 2011.
Management Overview
This year continues a transition period for the Company as we proceed with the implementation of
our key strategic initiatives. In the twenty-six weeks ended July 30, 2011, we marked the following
progress in the execution of these initiatives:
|
|
|
We approved the acceleration of our store rationalization plan, identifying
approximately 110 locations, including full stores and attached store concepts, for
closure, including 15 to 20 locations as consolidation or downsizing opportunities. Through
July 30, 2011, we closed 17 locations, including 15 full stores, under this plan and expect
to close an additional 66 locations over the remainder of fiscal 2011. As a result of the
acceleration of this plan, we reassessed the recoverability of the assets of the stores
included in this plan, recording an associated impairment of store assets of $1.2 million.
We expect to incur approximately $14.0 million in related restructuring charges over the
two year term of this plan. Through July 30, 2011, we recorded $3.3 million in
restructuring charges, primarily consisting of lease exit, severance and related costs
incurred under this plan.
|
|
|
|
|
We completed the full rebuild of two additional stores under our store re-image
initiative and progressed with renovations of an additional 32 locations, completing
interior paint and fixture refreshes in the second quarter of 2011 and expecting to
complete exterior renovations of these locations in the third quarter of 2011. Further, in
the second half of the year, we expect to complete renovations of an additional 15
locations selected through review of our real estate portfolio, including renovations and
updates required by our store lease agreements. By the end of fiscal 2011, we expect to
have completed re-image renovations and updates at approximately 70 locations, representing
approximately 0.5 million selling square feet or 15.0% of our remaining store base.
Although we have renovated only a limited number of stores to-date, these locations,
particularly our renovated premium stores, have, on average, outperformed the comparable
store base to-date in terms of customer traffic and sales statistics. This initiative
accounted for $7.0 million in capital expenditures year-to-date. Going forward, we will
continue to evaluate the results achieved by our renovated stores as well as the scope and
execution of any future phases of our store re-image initiative.
|
|
|
|
|
We continued the process of upgrading our information technology systems under our
three-year information technology systems strategic plan, advancing the development of our
merchandise financial planning, assortment planning and allocation and accounting and
financial systems, with our JDA allocation tool and Oracle store clustering tool launching
in the second quarter of 2011 and two key systems targeted to launch in the second half of
the year. This strategic plan accounted for $3.3 million in capital expenditures
year-to-date.
|
|
|
|
|
Our enhanced, coordinated marketing campaign progressed with the launch of our spring
2011 national advertising campaign, representing an incremental $2.7 million in marketing
expenses year-over-year; however, in the twenty-six weeks ended July 30, 2011, we
experienced a slight decrease in our customer database. We expect that these brand
|
21
|
|
|
building efforts will take time to gain traction and translate into increased customer base,
customer traffic and net sales. In the second half of fiscal 2011, we expect to continue to
invest in our national campaigns, while allocating a portion of our planned marketing spend
to targeted customer transfer and retention efforts in key markets impacted by our store
rationalization plan and brand building advertising through additional media.
|
|
|
|
|
Allocation of product to our stores continued along our segmentation strategy, as we
continued to refine the mix and assortment of merchandise across the store categories and
adjusted the store category classification of certain store locations, where appropriate,
increasing the allocation of premium fashion product across our store base. The refinement
of this allocation and these classifications will continue, with the largest increase in
the allocation of premium fashion product targeted for the second half of the year, as we
evaluate the results of this strategy and as we progress through our store rationalization
plan.
|
|
|
|
|
We continued the expansion of our upscale outlets, opening 13 new locations year-to-date
and ending the period with 39 upscale outlets compared to 22 upscale outlets at July 31,
2010. We continue to be encouraged by our customers response to these locations, which
have generated positive comparable sales results quarter and year-to-date in 2011, and
expect to open approximately five additional upscale outlets over the remainder of fiscal
2011. This expansion accounted for $4.3 million in capital expenditures year-to-date.
|
Our first half of fiscal 2011 was difficult as we sought to clear slow-moving spring and summer
merchandise that did not resonate with our customer through aggressive promotional activity across
all sales channels. Accordingly, our year-to-date net sales were down 7.9% year-over-year, and our
gross profit margins were down 960 basis points year-over-year. These challenges were faced across
both segments, with stores and direct marketing reporting declines in net sales and, for the second
quarter of 2011, direct losses from operations. We ended the quarter with merchandise inventories
of $163.9 million, an increase of 25.8% compared to the same period of the prior year, due
primarily to changes in the composition of merchandise inventories on-hand, which include higher
levels of second quarter deliveries at July 30, 2011 compared to the same period of the prior year,
and increased product costs, with merchandise inventory units approximately flat year-over-year.
Going forward, we have made adjustments to our fall and winter merchandise to include a more
balanced assortment of classic styles. Further, we are expanding the range of our marketing to
include additional media in the second half of the year, while continuing our national print
campaign and targeted direct marketing. Despite these changes, we expect that we may continue to
face challenges as we continue to work to evolve our merchandise assortment, strengthen our
customer retention and customer acquisition focused marketing initiatives and manage rising product
costs, in what we expect may be a difficult period of U.S. consumer confidence.
The following table sets forth the percentage relationship to net sales of certain items in our
consolidated statements of operations for the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
July 30,
|
|
July 31,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy
|
|
|
76.6
|
%
|
|
|
65.1
|
%
|
|
|
70.2
|
%
|
|
|
60.6
|
%
|
Selling, general and administrative
|
|
|
35.6
|
%
|
|
|
31.0
|
%
|
|
|
34.3
|
%
|
|
|
32.4
|
%
|
Restructuring charges
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
Impairment of store assets
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
Merger-related costs
|
|
|
0.0
|
%
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
|
|
4.3
|
%
|
Operating (loss) income
|
|
|
(12.6)
|
%
|
|
|
2.9
|
%
|
|
|
(5.4)
|
%
|
|
|
1.9
|
%
|
Interest expense, net
|
|
|
0.9
|
%
|
|
|
2.1
|
%
|
|
|
0.8
|
%
|
|
|
2.4
|
%
|
(Loss) income before taxes
|
|
|
(13.5)
|
%
|
|
|
0.8
|
%
|
|
|
(6.2)
|
%
|
|
|
(0.5
|
)%
|
Income tax expense (benefit)
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
|
|
0.2
|
%
|
|
|
0.6
|
%
|
(Loss) income from continuing operations
|
|
|
(13.8)
|
%
|
|
|
0.2
|
%
|
|
|
(6.4)
|
%
|
|
|
(1.1
|
)%
|
22
Net Sales
The following is a comparison of net sales for the thirteen and twenty-six weeks ended July 30,
2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
|
|
|
July 30,
|
|
|
July 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Decrease
|
|
|
2011
|
|
|
2010
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
Net store sales
|
|
$
|
228.0
|
|
|
$
|
250.8
|
|
|
$
|
(22.8
|
)
|
|
$
|
468.8
|
|
|
$
|
508.4
|
|
|
$
|
(39.6
|
)
|
Net direct marketing sales
|
|
|
43.1
|
|
|
|
49.9
|
|
|
|
(6.8
|
)
|
|
|
103.6
|
|
|
|
113.0
|
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
271.1
|
|
|
$
|
300.7
|
|
|
$
|
(29.6
|
)
|
|
$
|
572.4
|
|
|
$
|
621.4
|
|
|
$
|
(49.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net sales results for the thirteen and twenty-six weeks ended July 30, 2011 reflect a
$24.0 million, or 10.4%, decrease and a $45.3 million, or 8.9%, decrease in consolidated comparable
sales compared to the same periods of the prior year, respectively.
We refined our approach to evaluating comparable sales in the first quarter of 2011 to reflect
changing industry trends as well as the impact of our strategic initiatives. We introduced the
metric of consolidated comparable sales, in addition to comparable store sales, and updated the
calculation of comparable store metrics to exclude those stores expected to be closed under our
store rationalization plan.
Comparable stores are those stores, excluding surplus outlets and stores designated for closure,
consolidation or downsizing under our store rationalization plan, which are open for at least 13
full months. When the square footage of a store is increased or decreased by at least 15.0%, the
store is excluded from the computation of comparable store metrics for a period of 13 full months.
Consolidated comparable sales include sales of comparable stores as well as direct marketing sales.
Store Sales
Net store sales for the thirteen and twenty-six weeks ended July 30, 2011 reflect a $21.0 million,
or 11.1%, decrease and a $38.2 million, or 9.6%, decrease in comparable store sales compared to the
same periods of the prior year, respectively. These decreases are primarily due to weaker than
anticipated customer response to our spring and summer merchandise assortment, which was subject to
significant promotional activity in the period in order to clear these slower-moving goods, with
second quarter of 2011 average unit retail and dollars per transaction significantly reduced
year-over-year. While store traffic continued to trend down, this promotional activity drove
improved conversion rates, resulting in only slight declines in the number of transactions, units
per transaction and units sold year-over-year.
Sales metrics for comparable stores for the second quarter of 2011 were as follows: customer
traffic decreased 5.3% year-over-year, yet the rate of converting traffic increased 3.9%,
contributing to a 1.6% decrease in the number of transactions per store. Units per transaction were
down 1.2% which, combined with a 9.4% decrease in average unit retail, contributed to a 10.4%
decrease in dollars per transaction over the comparable fiscal 2010 period.
Sales metrics for comparable stores for the twenty-six weeks ended July 30, 2011 were as follows:
customer traffic decreased 5.7% year-over-year, yet the rate of converting traffic to transactions
increased 0.4%, contributing to a 5.3% decrease in the number of transactions per store. Units per
transaction were down 1.3% which, combined with a 3.9% decrease in average unit retail, contributed
to a 5.1% decrease in dollars per transaction over the comparable fiscal 2010 period.
Direct Marketing Sales
Direct marketing sales in the second quarter of 2011 decreased 13.6% compared to the second quarter
of 2010 while the percentage of our net sales derived from direct marketing decreased slightly from
16.6% in the second quarter of 2010 to 15.9% in the second quarter of 2011. Our direct marketing
sales decrease, in Internet, catalog and red-line phone, is primarily due to weaker than
anticipated customer response to our spring and summer merchandise assortment, which was subject to
significant promotional activity in the period in order to clear these slower-moving goods, with
Internet average order values down 10.4% compared to the second quarter of 2010. Internet sales as
a percentage of total direct marketing sales increased to 82.4% in the second quarter of 2011 from 77.6% in the second quarter of 2010 driven by increases in
traffic and transaction counts.
23
Year-to-date direct marketing sales decreased 8.2% compared to the same period of the prior year,
driven by weaker than anticipated customer response to our spring and summer merchandise
assortment, while the percentage of our net sales derived from direct marketing was flat.
Year-to-date Internet sales were flat, while Internet sales as a percentage of total direct
marketing sales increased to 78.4% in the twenty-six weeks ended July 30, 2011 from 71.5% in the
twenty-six weeks ended July 31, 2010, reflecting continued changing trends in consumer purchasing
behavior.
Cost of Sales, Buying and Occupancy
The following is a comparison of cost of sales, buying and occupancy for the thirteen and
twenty-six weeks ended July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Increase
|
|
|
(In millions)
|
|
(In millions)
|
Cost of sales, buying and occupancy
|
|
$
|
207.7
|
|
|
$
|
195.8
|
|
|
$
|
11.9
|
|
|
$
|
401.7
|
|
|
$
|
376.6
|
|
|
$
|
25.1
|
|
Percentage of net sales
|
|
|
76.6
|
%
|
|
|
65.1
|
%
|
|
|
11.5
|
%
|
|
|
70.2
|
%
|
|
|
60.6
|
%
|
|
|
9.6
|
%
|
In the second quarter of 2011, net sales declines of $29.6 million combined with cost of
sales, buying and occupancy increases of $11.9 million, resulting in an 1150 basis point decline in
gross profit margin to 23.4% from 34.9% in the second quarter of 2010. This decline in gross profit
margin was driven by deterioration in our merchandise margin, which was down 950 basis points, due
to aggressive markdown and promotional pressure on our sales as we sought to clear slower-moving
merchandise and better align our inventory levels with sales trends, ending the quarter with
merchandise inventory units approximately flat year-over-year. Occupancy expenses, though reduced
year-over-year through declines in depreciation expense, increased 100 basis points as a percentage
of net sales due to negative leverage from the decline in net sales. Buying expenses as a
percentage of net sales increased 100 basis points.
Year-to-date in 2011, net sales declines of $49.0 million combined with cost of sales, buying and
occupancy increases of $25.1 million, resulting in a 960 basis point decline in gross profit margin
to 29.8% from 39.4% in the same period of the prior year. Year-to-date declines in gross profit
margin are consistent with second quarter of 2011 trends in gross profit margin, with aggressive
markdown and promotional pressure on our sales having the greatest impact. The decline was driven
by deterioration in merchandise margin, which was down 900 basis points. Occupancy and buying
expenses, though reduced year-over-year, increased 40 basis points and 20 basis points as a
percentage of net sales, respectively, due to negative leverage from the decline in net sales.
Going forward, we expect gross profit margins to continue to be impacted by markdown and
promotional activity, changes to our mix of product and higher raw material and labor costs.
Selling, General and Administrative
The following is a comparison of selling, general and administrative for the thirteen and
twenty-six weeks ended July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
|
July 30,
|
|
July 31,
|
|
(Decrease)
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Increase
|
|
|
(In millions)
|
|
(In millions)
|
Selling, general and administrative
|
|
$
|
96.4
|
|
|
$
|
93.1
|
|
|
$
|
3.3
|
|
|
$
|
196.2
|
|
|
$
|
201.2
|
|
|
$
|
(5.0
|
)
|
Percentage of net sales
|
|
|
35.6
|
%
|
|
|
31.0
|
%
|
|
|
4.6
|
%
|
|
|
34.3
|
%
|
|
|
32.4
|
%
|
|
|
1.9
|
%
|
Selling, general and administrative in the second quarter of 2011 increased 3.6% when compared
to the second quarter of 2010, primarily due to incremental marketing expenses and year-over-year
decreases in finance charge income from our Talbots credit card. Incremental marketing expenses
primarily include costs associated with the production and circulation of an
additional sale catalog, when compared to the prior year period, as well as increased web
photography. Decreases in finance charge income are attributable to both regulatory changes in the
administration of credit card charges to customers as well as
24
declines in the level of Talbots credit card sales, correlated to our overall sales decline. Year-to-date in 2011, these incremental
costs and loss of income have been offset by reductions in certain components of performance-based
management incentive compensation.
We expect selling, general and administrative expenses in the second half of the year to increase
year-over-year as we increase our investment in our marketing initiatives and anniversary a $6.3
million adjustment related to gift card breakage income recorded in the prior year.
Restructuring Charges
The following is a comparison of restructuring charges for the thirteen and twenty-six weeks ended
July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Decrease
|
|
|
(In millions)
|
|
(In millions)
|
Restructuring charges
|
|
$
|
1.0
|
|
|
$
|
0.1
|
|
|
$
|
0.9
|
|
|
$
|
3.3
|
|
|
$
|
5.1
|
|
|
$
|
(1.8
|
)
|
Percentage of net sales
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
|
|
0.4
|
%
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
|
|
(0.2
|
)%
|
Restructuring charges incurred year-to-date in 2011 primarily include lease exit, severance
and related costs incurred under our store rationalization plan, whereas restructuring charges
incurred year-to-date in 2010 primarily relate to the consolidation of our Madison Avenue, New York
flagship location. We expect to record total restructuring charges of
approximately $14.0
million, comprised of lease exit and related costs, through fiscal 2013 related to our announced
store rationalization plan.
Impairment of Store Assets
We regularly monitor the performance and productivity of our store portfolio. When we determine
that a store is underperforming or is to be closed, we reassess the recoverability of the stores
long-lived assets, which in some cases can result in an impairment charge. When a store is
identified for impairment analysis, we estimate the fair value of the store assets using an income
approach which is based on estimates of future operating cash flows at the store level. These
estimates, which include estimates of future net store sales, direct store expenses and non-cash
store adjustments, are based on the experience of management, including historical store operating
results and managements knowledge and expectations. These estimates are affected by factors that
can be difficult to predict, such as future operating results, customer activity and future
economic conditions. In the twenty-six weeks ended July 30, 2011, we recorded an impairment of
store assets of $1.2 million, triggered by our store rationalization plan. No impairment of store
assets was recorded in the thirteen weeks ended July 30, 2011 or July 31, 2010. Insignificant store
impairments were recorded in the twenty-six weeks ended July 31, 2010.
Merger-Related Costs
In the twenty-six weeks ended July 30, 2011 and July 31, 2010, we incurred $0.9 million and $26.9
million, respectively, of merger-related costs in connection with our acquisition of BPW. These
costs primarily consist of investment banking, professional services fees and an incentive award
given to certain executives and members of senior management as a result of the closing of this
transaction.
Goodwill and Other Intangible Assets
We evaluate goodwill and trademarks for impairment on an annual basis at the reporting unit level
on the first day of each fiscal year, and more frequently if events occur or circumstances change
which suggest that the goodwill or trademarks should be evaluated. We performed our annual
impairment tests for fiscal 2011 and fiscal 2010 as of January 30, 2011 and January 31, 2010,
respectively, using a combination of an income approach and market value approach. These tests
contemplate our market value, operating results and financial position, forecasted operating
results, industry trends, market uncertainty and comparable industry multiples. As a result of these analyses, we determined that no impairment of our goodwill
or trademarks existed. We did not identify any events or circumstances through the second quarter
of 2011 which suggested that the goodwill or
25
trademarks should be re-evaluated. We continue to
monitor events and circumstances that may require goodwill and trademarks to be evaluated including
the recent volatility in our market capitalization.
Interest Expense, net
The following is a comparison of net interest expense for the thirteen and twenty-six weeks ended
July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
2011
|
|
2010
|
|
Decrease
|
|
2011
|
|
2010
|
|
Decrease
|
|
|
(In millions)
|
|
(In millions)
|
Interest expense, net
|
|
$
|
2.6
|
|
|
$
|
6.3
|
|
|
$
|
(3.7
|
)
|
|
$
|
4.6
|
|
|
$
|
14.8
|
|
|
$
|
(10.2
|
)
|
Net interest expense for the thirteen weeks ended July 30, 2011 decreased from the same period
in 2010 primarily due to reductions in the amount of tax-related interest expense recorded in the
respective periods. In the thirteen weeks ended July 31, 2010, tax-related interest expense
recorded in connection with discrete tax items in the quarter contributed more than half of total
net interest expense in the period whereas no similar discrete tax adjustments were recorded in the
second quarter of 2011. Year-over-year, second quarter debt-related interest expense was flat as
comparative increases in our weighted average debt outstanding, from $80.8 million in the second
quarter of 2010 to $100.4 million in the second quarter of 2011, were largely offset by comparative
declines in our effective interest rate, from 5.0% in the second quarter of 2010 to 3.6% in the
second quarter of 2011. Reductions in our effective interest rate, year-over-year, are primarily
due to negotiated interest rate reductions, as described in
Liquidity and Capital Resources
.
Net interest expense for the twenty-six weeks ended July 30, 2011 decreased from the same period of
the prior year due to reductions in tax-related interest expense as well as debt-related interest
expense with the weighted average debt outstanding decreasing from $233.8 in the twenty-six weeks
ended July 31, 2010 to $89.8 million in the twenty-six weeks ended July 30, 2011 and effective
interest rates decreasing from 5.9% year-to-date in 2010 to 3.6% year-to-date in 2011.
Income Tax Expense
The following is a comparison of income tax expense for the thirteen and twenty-six weeks ended
July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
|
July 30,
|
|
July 31,
|
|
|
|
|
2011
|
|
2010
|
|
Decrease
|
|
2011
|
|
2010
|
|
Decrease
|
|
|
(In millions)
|
|
(In millions)
|
Income tax expense
|
|
$
|
0.8
|
|
|
$
|
1.9
|
|
|
$
|
(1.1
|
)
|
|
$
|
1.0
|
|
|
$
|
3.4
|
|
|
$
|
(2.4
|
)
|
For the twenty-six weeks ended July 30, 2011 and July 31, 2010, our effective income tax rate,
including discrete items, was (2.8%) and (109.7%), respectively. The effective income tax rate is
based upon the estimated income or loss for the year, the estimated composition of the income or
loss in different jurisdictions and discrete adjustments for settlements of tax audits or
assessments, the resolution or identification of tax position uncertainties and non-deductible
costs associated with the merger. Income tax expense for the thirteen and twenty-six weeks ended
July 30, 2011 and July 31, 2010 was impacted primarily by changes in estimates related to
previously existing uncertain tax positions based on new information.
We continue to provide a full valuation allowance against our net deferred tax assets, excluding
deferred tax liabilities for non-amortizing intangibles, due to insufficient positive evidence that
the deferred tax assets will be realized in the future.
Discontinued Operations
Our discontinued operations include the Talbots Kids, Mens and U.K. businesses, all of which ceased
operations in 2008, and the J. Jill business, which was sold on July 2, 2009. The operating results
of these businesses have been classified as discontinued operations for all periods presented, and
the cash flows from discontinued operations have been separately presented in the condensed
consolidated statements of cash flows.
26
The income (loss) from discontinued operations for the thirteen and twenty-six weeks ended July 30,
2011 include on-going lease and other liability adjustments related to the J. Jill, Talbots Kids
and Mens businesses, offset by favorable adjustments to other assets and lease liabilities
including the first quarter 2011 settlement of one of the two remaining J. Jill store leases. The
income from discontinued operations for the thirteen and twenty-six weeks ended July 31, 2010 is
primarily comprised of favorable adjustments to estimated lease liabilities including the second
quarter 2010 settlement of a portion of the vacant Quincy, Massachusetts office space previously
used for the J. Jill business and the first quarter 2010 settlement of four leases of the retained
and closed J. Jill retail locations. The results for the thirteen and twenty-six weeks ended July
31, 2010 also include favorable adjustments to other assets, partially offset by on-going lease and
other liability adjustments related to the J. Jill, Talbots Kids and Mens businesses.
Liquidity and Capital Resources
This year continues a transition period for the Company as we continue to implement our
transformation and turnaround strategy. The success of our strategy and, accordingly, our ability
to generate improved results and cash from operations depend upon our ability to consistently
deliver merchandise that is appealing to our customer on a competitive and profitable basis,
effectively manage our costs, regularly access adequate sources of liquidity to satisfy our working
capital and other operating cash requirements at all times and successfully fund and execute our
operating and strategic initiatives.
We primarily finance our working capital needs, operating costs, capital expenditures, strategic
initiatives, restructurings and debt, interest and other payment requirements through cash
generated by operations, our existing credit facility and credit from vendors. We seek to manage
borrowing and availability under our Credit Facility by monitoring the timing of inventory
commitments, inventory receipts and vendor payments. Our Credit Facility extends through October 7,
2013, subject to earlier termination as set forth in the agreement.
Our first half of fiscal 2011 was difficult with net sales, gross margins and operating loss
significantly impacted by lackluster response to our merchandise which we aggressively promoted and
marked down in order to realign our inventory position for the second half of the year.
Accordingly, our cash flows from operations were negatively affected by these operating results,
with net cash used in operating activities of $39.1 million in the twenty-six weeks ended July 30,
2011, compared to cash provided by operating activities of $10.6 million in the same period of the
prior year.
Merger with BPW and Related Financing Transactions
On April 7, 2010, we completed a series of transactions (collectively, the BPW Transactions)
which, in the aggregate, substantially reduced our indebtedness and significantly deleveraged our
balance sheet, consisting of three related transactions: (i) an Agreement and Plan of Merger
between Talbots and BPW Acquisition Corp. (BPW) pursuant to which a wholly-owned subsidiary of
the Company merged with and into BPW in exchange for the issuance of Talbots common stock and
warrants to BPW stockholders; (ii) the repurchase and retirement of all shares of Talbots common
stock held by AEON (U.S.A.), Inc. (AEON (U.S.A.)), our then majority shareholder; the issuance of
warrants to purchase one million shares of Talbots common stock to AEON (U.S.A.) and the repayment
of all of our outstanding debt with AEON Co., Ltd. (AEON) and AEON (U.S.A.) at its principal
value plus accrued interest and other costs for total cash consideration of $488.2 million; and
(iii) the execution of a third party senior secured revolving credit facility which provides
borrowing capacity up to $200.0 million, subject to availability and satisfaction of all borrowing
conditions.
In connection with the merger, we issued 41.5 million shares of Talbots common stock and warrants
to purchase 17.2 million shares of Talbots common stock (the Talbots Warrants) for 100% ownership
of BPW. Approximately 3.5 million BPW warrants that did not participate in the warrant exchange
offer (the Non-Tendered Warrants) remained outstanding at the closing of the merger.
Additionally, in connection with the merger, we repurchased and retired the 29.9 million shares of
Talbots common stock held by AEON (U.S.A.), our former majority shareholder, in exchange for
warrants to purchase one million shares of Talbots common stock (the AEON Warrants).
Further in connection with the consummation and closing of the BPW merger, we executed a senior
secured revolving credit agreement with third party lenders (the Credit Facility). The Credit
Facility is an asset-based revolving credit facility (including a $25.0 million letter of credit
sub-facility) that permits us to borrow up to the lesser of (a) $200.0 million and (b) the
borrowing base, calculated as a percentage of the value of eligible credit card receivables and the
net orderly liquidation value of eligible private label credit card receivables, the net orderly
liquidation value of eligible inventory in the United States and the net orderly liquidation value
of eligible in-transit inventory from international vendors (subject to certain caps and
27
limitations), net of all reserves as specifically set forth in the agreement, minus the lesser of
(x) $20.0 million and (y) 10% of the borrowing base. In addition, under and subject to the terms of
the facility, the lenders also have the right to establish certain additional reserves against
borrowing availability if the lenders determine, in good faith and in the exercise of reasonable
business judgment from the perspective of a secured asset-based lender, that additional reserves
are necessary. Loans made pursuant to this agreement carry interest, at our election, at either (a)
the three-month LIBOR plus 3.0% to 3.5%, depending on certain availability thresholds or (b) the
base rate plus 2.0% to 2.5%, depending on certain availability thresholds, with the base rate
established at a prime rate pursuant to the terms of the agreement. Interest on borrowings is
payable monthly in arrears. We pay a fee of 50 to 75 basis points on the unused portion of the
commitment and outstanding letters of credit, if any, monthly in arrears in accordance with
formulas set forth in the agreement, as amended. As of July 30, 2011, our effective interest rate
was 3.8%, and we had additional borrowing availability of up to $60.6 million.
Amounts are borrowed and repaid on a daily basis through a control account arrangement. Cash
received from customers is swept on a daily basis into a control account in the name of the agent
for the lenders. Subject to the terms of the agreement, we are permitted to maintain a certain
amount of cash in disbursement accounts, including certain amounts to satisfy our current
liabilities incurred in the ordinary course of our business. Amounts may be borrowed and
re-borrowed, subject to the satisfaction or waiver of all borrowing conditions, including, without
limitation, perfected liens on collateral, accuracy of all representations and warranties, the
absence of a default or an event of default and other borrowing conditions, all subject to certain
exclusions as set forth in the agreement. We require sufficient borrowing capacity under our Credit
Facility for our working capital and other cash needs. Our borrowing availability under the Credit
Facility will fluctuate during the course of the year, due to,
among other reasons, seasonal changes in our levels of inventory and accounts receivable as well as changes in third party appraisal values of our inventory and accounts
receivable.
The agreement matures on October 7, 2013, subject to earlier termination as set forth in the
agreement. The entire principal amount of loans under the facility and any outstanding letters of
credit will be due on the maturity date. Loans may be voluntarily prepaid at any time at our
option, in whole or in part, at par plus accrued and unpaid interest and any break funding loss
incurred. We are required to make mandatory repayments in the event of receipt of net proceeds from
asset dispositions, receipt of net proceeds from the issuance of securities and to the extent that
our outstanding indebtedness under the Credit Facility exceeds our maximum borrowing availability
at any time. Upon any voluntary or mandatory prepayment of borrowings outstanding at the LIBOR rate
on a day that is not the last day of the respective interest period, we will reimburse the lenders
for any resulting loss or expense that the lenders may incur. Amounts voluntarily repaid prior to
the maturity date may be re-borrowed.
The Company and certain of our subsidiaries have executed a guaranty and security agreement
pursuant to which all obligations under the Credit Facility are fully and unconditionally
guaranteed on a joint and several basis. Additionally, pursuant to the security agreement, all
obligations are secured by (i) a first priority perfected lien and security interest in
substantially all assets of the Company and any guarantor from time to time and (ii) a first lien
mortgage on our Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts
distribution facility. In connection with the lenders security interest in our proprietary Talbots
credit card program, Talbots and certain of our subsidiaries have also executed an access and
monitoring agreement that requires us to comply with certain monitoring and reporting obligations
to the agent with respect to such program, subject to applicable law.
We may not create, assume or suffer to exist any lien securing indebtedness incurred after the
closing date of the Credit Facility subject to certain limited exceptions set forth in the
agreement. The Credit Facility contains negative covenants prohibiting us, with certain exceptions,
from among other things, incurring indebtedness and contingent obligations, making loans and
investments, intercompany loans and capital contributions, declaring or making any dividend payment
except for dividend payments or distributions payable solely in stock or stock equivalents, and
disposing of property or assets. We have agreed to keep the mortgaged properties in good repair,
reasonable wear and tear excepted. The agreement also provides for events of default, including
failure to repay principal and interest when due, failure to perform or comply with the provisions
or covenants of the agreement, an event of default on other third party obligations and any change
in control of the Company (as defined in the agreement to include, among other things, any person
or group acquiring 50.0% or more of the total voting power of our securities, the replacement of a majority of our Board of Directors under certain
circumstances and certain mergers or other extraordinary transactions). Should we default in our
obligations under the Credit Facility, the lender could declare an event of default, terminate
borrowing under the facility and declare all indebtedness under the facility immediately due and
payable, and if outstanding indebtedness is not immediately satisfied from cash resources, realize
on all collateral pledged to secure such indebtedness. The agreement does not contain any financial
covenant tests.
28
We and the lenders have entered into a letter of credit sub-facility under our Credit Facility
pursuant to which the lenders will provide either documentary or standby letters of credit, at our
request, to various beneficiaries on the terms set forth in the applicable agreement, subject to
any applicable limitations set forth in the Credit Facility.
The Credit Facility, under which $83.9 million was outstanding at July 30, 2011, was our only
outstanding debt agreement at July 30, 2011. Further at July 30, 2011, we had $12.0 million in
outstanding letters of credit related to merchandise purchases and additional letter of credit
availability of up to $13.0 million under the letter of credit sub-facility which is included as
part of our total additional borrowing availability under the Credit Facility, subject to all
borrowing capacity restrictions included under the facility.
Subject to all conditions as set forth in the Credit Facility including the Credit Facility
lenders satisfaction with the terms of any proposed term loan and with an inter-creditor agreement
with the term loan lender, we have the ability to obtain a term loan agreement in an aggregate
principal amount not to exceed $50.0 million, subject to certain limitations, which may be secured
by certain of our intellectual property and real estate.
Outlook
We expect that our primary uses of cash in the next twelve months will be concentrated in funding
operations, strategic initiatives and working capital needs. Additionally, we may be required to
make payments over the next twelve months regarding certain tax matters which have been subject to
appeal and are pending final resolution and the outcome of potential negotiations.
We primarily finance our working capital needs, operating costs, capital expenditures, strategic
initiatives, restructurings and debt, interest and other payment requirements through cash
generated by operations, our existing credit facility and credit from vendors.
In light of our operating performance in the first half of fiscal 2011 and in order to increase the level and flexibility of cash available for funding operations and working capital needs, we have planned reductions in our capital expenditures for the remainder of the fiscal year and will continue to seek opportunities to reduce spending and improve upon our overall cost structure.
We are working to improve our net sales and productivity with certain of our strategic initiatives. These initiatives are
all in their early stages, and the benefits anticipated from these strategic initiatives may take longer than expected to
be realized. Going forward, we remain committed to taking actions intended to improve our liquidity and operating results.
In addition, as part of our operating plan and in order to seek to increase the level and flexibility of cash available
for funding operations and working capital needs, we have negotiated an arrangement with our exclusive global apparel
sourcing agent, whereby we will be able to extend our payment terms for merchandise purchases sourced by our exclusive
agent. Under this arrangement, our sourcing agent will settle our merchandise accounts payable with the vendors organized
under our buying agency agreement as they become due and extend our payment obligation an additional 30 days, at which time
we will be obligated to reimburse our sourcing agent the full amount of merchandise accounts payable due and pay accrued
fees. The amount of payables due under this arrangement is not to exceed $50.0 million at any time. Fees are calculated and
payable monthly on amounts outstanding under this arrangement at a rate of 1.0% per month. Additional fees may be charged
on amounts overdue under this arrangement at a rate of 2.0% per month, calculated on a daily basis. This arrangement will
become effective on September 1, 2011 and continue until February 29, 2012, with an option to renew for an additional six
month period upon the mutual agreement of Talbots and its sourcing agent. This arrangement is subject to suspension or
earlier termination as provided in the arrangement, including any termination by the sourcing agent upon 28 days notice
at any time. In addition, our sourcing agent has agreed to extend letters of credit, on our behalf and at our request, to
vendors organized under our buying agency agreement for certain future merchandise purchases, which may be suspended at the
discretion of the sourcing agent.
Our cash and cash equivalents were $7.1 million and working capital was $48.7 million as of July
30, 2011. Based on our assumptions, including achieving our internal forecast and operating plan
for improved net sales, operating results and cash flows for the next twelve months, our
anticipated borrowing availability under the Credit Facility, our anticipated credit from vendors and
our sourcing agent and the improvements to the Companys capital composition as a result of the BPW
Transactions, we anticipate that the Company will have sufficient internal and external sources of
liquidity to fund operations and anticipated working capital and other expected cash needs for at
least the next twelve months. This expectation depends upon our future operating performance, the
achievement of our operating plan and internal forecast, including the absence of any
unforeseen cash requirements, our expected borrowing availability, the continued support of our
vendors and sourcing agent at existing levels and the absence of any significant deterioration in economic conditions.
29
Our operating plan for the second half of fiscal 2011 and thereafter contemplates
significant improvements in our net sales, operating results and cash flows from operations when
compared to our results of the first half of fiscal 2011. Our ability to achieve our
operating plan is based on a number of assumptions which involve significant judgment
and estimate of future performance which we cannot assure. As a result, we cannot assure that cash
flows and other sources of liquidity will at all times be sufficient for our cash requirements. We
will continue to monitor our performance and liquidity, and if we believe operating results will be
below our expectations or we determine at any time that it is appropriate or necessary to
obtain additional liquidity, we will take further steps intended to improve our financial position,
such as by modifying our operating plan, further reducing costs and adjusting cash
spend or evaluating alternatives and opportunities to obtain additional sources of liquidity. We
cannot assure that these actions would be sufficient or available or, if available, available on
favorable terms.
Cash Flows
The following is a summary of cash flows from continuing operations for the twenty-six weeks ended
July 30, 2011 and July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
July 30,
|
|
July 31,
|
|
|
2011
|
|
2010
|
|
|
(In millions)
|
Net cash (used in) provided by operating activities
|
|
$
|
(39.1
|
)
|
|
$
|
10.6
|
|
Net cash (used in) provided by investing activities
|
|
|
(19.1
|
)
|
|
|
327.1
|
|
Net cash provided by (used in) financing activities
|
|
|
56.1
|
|
|
|
(441.1
|
)
|
Cash (used in) provided by operating activities
Cash used in operating activities was $39.1 million during the twenty-six weeks ended July 30, 2011
compared to net cash provided by operating activities of $10.6 million during the twenty-six weeks
ended July 31, 2010. Cash used in operating activities in the twenty-six weeks ended July 30, 2011
is the result of a loss in the year-to-date period excluding non-cash items, combined with cash
used in working capital changes, whereas cash provided by operating activities in the twenty-six
weeks ended July 31, 2010 is the result of earnings excluding non-cash items in the period-to-date,
partially offset by cash used in working capital changes. The $49.6 million comparative decrease in
cash from operating activities is largely due to a $40.1 million reduction in earnings (loss)
excluding non-cash items and is combined with a $9.5 million increase in cash used in working
capital changes, principally, increases in merchandise inventories, largely due to changes in our
mix of merchandise inventories on-hand and increased costs associated with our future season
merchandise, and increases in prepaid and other current assets, due to the timing of our
quarter-end date in relation to monthly prepaid rent.
Cash (used in) provided by investing activities
Cash used in investing activities relates solely to purchases of property and equipment in both
periods presented. Cash used for additions to property and equipment during the twenty-six weeks
ended July 30, 2011 was $19.2 million compared to $5.9 million during the twenty-six weeks ended
July 31, 2010. This increased level of capital expenditures in 2011 reflects our progress in the
roll-out of our store re-image initiative, investments in our information technology systems and
the expansion of our upscale outlets, with 13 new locations opening in the twenty-six weeks ended
July 30, 2011.
Cash provided by investing activities of $333.0 million during the twenty-six weeks ended July 31,
2010 represents cash and cash equivalents acquired in the merger with BPW on April 7, 2010. See
Merger with BPW and Related Financing Transactions
for further information regarding this
transaction.
Cash provided by (used in) financing activities
Cash provided by financing activities was $56.1 million during the twenty-six weeks ended July 30,
2011 compared to cash used in financing activities of $441.1 million during the twenty-six weeks
ended July 31, 2010. This change is primarily correlated to an outstanding debt increase in the
twenty-six weeks ended July 30, 2011 compared to an outstanding debt reduction in the twenty-six
weeks ended July 31, 2010, which reflects the full repayment of $486.5 million in related party
debt
30
under the BPW Transactions. Net borrowings in both periods presented were made under our
Credit Facility. The increase in the amount outstanding under the Credit Facility at July 30, 2011,
compared to the same period of the prior year, corresponds to the reduction in cash flows from
operations in the comparative periods. Refer to
Merger with BPW and Related Financing Transactions
for additional information regarding this facility.
Critical Accounting Policies
Our critical accounting policies are those policies which require the most significant judgments
and estimates in the preparation of our condensed consolidated financial statements. Management has
determined that our most critical accounting policies are those relating to the inventory markdown
reserve, gift card breakage, sales return reserve, customer loyalty program, retirement plans,
long-lived assets, goodwill and other intangible assets, income taxes and stock-based compensation.
There have been no significant changes to our critical accounting policies discussed in our Annual
Report on Form 10-K for the fiscal year ended January 29, 2011.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2011-05,
Presentation of Comprehensive Income.
ASU 2011-05 amends Accounting Standards
Codification (ASC) 220,
Comprehensive Income,
by requiring entities to report components of
comprehensive income in either a continuous statement of comprehensive income or two separate but
consecutive statements, removing the option to present the components of other comprehensive income
as part of the statement of stockholders equity. The items that must be reported in other
comprehensive income were not changed. ASU 2011-05 will be effective for us for fiscal years, and
interim periods within those years, beginning after December 15, 2011 and must be applied
retrospectively. We are evaluating our presentation options under this ASU; however these changes
are not expected to impact the consolidated financial statements other than the change in
presentation.
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs
. ASU 2011-04 amends ASC 820,
Fair Value
Measurement
, by expanding existing disclosure requirements for fair value measurements and
modifying certain definitions in the guidance, which may change how the fair value measurement
guidance of ASC 820 is applied. ASU 2011-04 will be effective for us for interim and annual periods
beginning after December 15, 2011 and must be applied prospectively. We are evaluating the impact
that this ASU may have on our consolidated financial statements, if any.
Recent Regulatory Changes
In May 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit
CARD Act) was signed into law which resulted in new restrictions on credit card pricing, finance
charges and fees, customer billing practices, payment allocation and also imposed additional
disclosure requirements. Certain provisions of this legislation became effective in August 2010
and, as a result, we implemented new procedures to our credit card business practices and systems
to ensure compliance with these rules. Income from our credit operations could be adversely
affected as we adjust our practices to current and future regulations related to the Credit CARD
Act.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act) was
enacted, which is intended to govern the practices and increase oversight of financial institutions
and other participants in the financial markets. The Reform Act also creates a new federal agency,
the Consumer Financial Protection Bureau, to supervise and enforce consumer lending laws and
expands state authority over consumer lending. We expect numerous rules to be adopted in order to
implement the provisions of the Reform Act. The potential impacts to our business and results of
operations are uncertain at this time.
Contractual Obligations
There were no material changes to our contractual obligations during the twenty-six weeks ended
July 30, 2011. For a complete discussion of our contractual obligations, please refer to Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations
in our 2010
Annual Report on Form 10-K.
31
Forward-looking Information
This Quarterly Report on Form 10-Q contains forward-looking information within the meaning of The
Private Securities Litigation Reform Act of 1995. These statements may be identified by such
forward-looking terminology as expect, achieve, plan, look, projected, believe,
anticipate, outlook, will, would, should, intend, potential or similar statements or
variations of such terms. All of the information concerning our future liquidity, future net sales,
margins and other future financial performance and results, achievement of operating
plan or forecasts for future periods, sources and availability of credit and liquidity, future cash
flows and cash needs, success and results of strategic initiatives and other future financial
performance or financial position, as well as our assumptions underlying such information,
constitute forward-looking information. Our forward-looking statements are based on a series of
expectations, assumptions, estimates and projections about the Company, are not guarantees of
future results or performance and involve substantial risks and uncertainty, including assumptions
and projections concerning our internal operating plan, regular-price, promotional and
markdown selling, operating cash flows, liquidity and sources and availability of credit for all
forward periods. Our business and our forward-looking statements involve substantial known and
unknown risks and uncertainties, including the following risks and uncertainties:
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the ability to successfully increase our customer traffic and the success and customer
acceptance of our merchandise offerings in our stores, on our website and in our catalogs;
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the risks associated with our efforts to successfully implement, adjust as appropriate and
achieve the benefits of our current strategic initiatives including store segmentation, store
re-imaging, store rationalization, enhanced marketing, information technology reinvestments,
upscale outlet expansion and any other future initiatives that we may undertake;
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the ability to achieve our operating and strategic plans for operating
results, working capital and cash flows;
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the ability to access on satisfactory terms, or at all, adequate financing and other
sources of liquidity, as and when necessary, to fund our continuing operations, working
capital needs, strategic initiatives and other cash needs, and to obtain further increases in
our Credit Facility or obtain other or additional credit facilities or other internal or
external liquidity sources if cash flows from operations or other capital resources are not
sufficient for our cash requirements at any time or times;
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the satisfaction of all borrowing conditions under our Credit Facility including accuracy
of all representations and warranties, no defaults or events of default, absence of material
adverse effect or change and all other borrowing conditions;
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the risks associated with our efforts to maintain our traditional customer and expand to
attract new customers;
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the risks associated with competitive pricing pressures and the current increased
promotional environment;
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the risks associated with our on-going efforts to adequately manage the increase in various
input costs, including increases in the price of raw materials, higher labor costs in
countries of manufacture and any significant increases in the price of fuel, which impacts our
freight costs;
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the continuing material impact of the U.S. economic environment on our business, continuing
operations, liquidity and financial results, including any negative impact on consumer
discretionary spending, substantial loss of household wealth and savings and continued high
unemployment levels;
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the ability to continue to purchase merchandise on open account purchase terms at existing
or future expected levels and with acceptable payment terms and the risk that suppliers could
require earlier or immediate payment or other security due to any payment concerns;
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the ability to attract and retain talented and experienced executives that are necessary to
execute our strategic initiatives;
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the ability to accurately estimate and forecast future regular-price, promotional and
markdown selling and other future financial results and financial position;
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the risks associated with our appointment of an exclusive global merchandise buying agent,
including that the anticipated benefits and cost savings from this arrangement may not be
realized or may take longer to realize than expected and the
risk that upon any cessation of the relationship, for any reason, we would be unable to
successfully transition to an internal or other external sourcing function;
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32
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the risks and uncertainties in connection with any need to source merchandise from
alternate vendors;
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any impact to or disruption in our supply of merchandise;
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the ability to successfully execute, fund and achieve the expected benefits of our supply
chain initiatives;
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any significant interruption or disruption in the operation of our distribution facility or
the domestic and international transportation infrastructure;
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the risk that estimated or anticipated costs, charges and liabilities to settle and
complete the transition and exit from and disposal of the J. Jill business, including both
retained obligations and contingent risk for assigned obligations, may materially differ from
or be materially greater than anticipated;
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any future store closings and the success of and necessary funding for closing
underperforming stores;
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the ability to reduce spending as needed;
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any negative publicity concerning the specialty retail business in general or our business
in particular;
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the risk of impairment of goodwill and other intangible or long-lived assets;
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the risk associated with our efforts in transforming our information technology systems to
meet our changing business systems and operations;
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the risks associated with any further decline in our stock price, including satisfaction of
NYSE continued listing criteria which requires the average closing price of our common stock
to be greater than $1.00 over 30 consecutive trading days and minimum levels of market
capitalization; and
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the risks and uncertainties associated with the outcome of current and future litigation,
claims, tax audits and tax and other proceedings and the risk that actual liabilities,
assessments or other financial impact will exceed any estimated, accrued or expected amounts
or outcomes.
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All of our forward-looking statements are as of the date of this Quarterly Report only. In each
case, actual results may differ materially from such forward-looking information. We can give no
assurance that such expectations or forward-looking statements will prove to be correct. An
occurrence of or any material adverse change in one or more of the risk factors or risks and
uncertainties referred to in this Quarterly Report or included in our other public disclosures or
our other periodic reports or other documents or filings filed with or furnished to the SEC could
materially and adversely affect our continuing operations and our future financial results, cash
flows, available credit, prospects and liquidity. Except as required by law, we do not undertake or
plan to update or revise any such forward-looking statements to reflect actual results, changes in
plans, assumptions, estimates or projections or other circumstances affecting such forward-looking
statements occurring after the date of this Quarterly Report, even if such results, changes or
circumstances make it clear that any forward-looking information will not be realized. Any public
statements or disclosures by us following this Quarterly Report which modify or impact any of the
forward-looking statements contained in this Quarterly Report will be deemed to modify or supersede
such statements in this Quarterly Report.
In addition to the information set forth in this Quarterly Report, you should carefully consider
the risk factors and risks and uncertainties included in our Annual Report on Form 10-K for the
fiscal year ended January 29, 2011 and other periodic reports filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments and in our financial position represents the
potential loss arising from adverse changes in interest rates. We do not enter into financial
instruments for trading purposes.
At July 30, 2011, we had outstanding variable rate borrowings of $83.9 million under our Credit
Facility. The impact of a hypothetical 10% adverse change in interest rates for this variable rate
debt would have resulted in additional expense of approximately $0.1 million for the quarter ended
July 30, 2011. Our Pension Plan assets are generally invested in readily-liquid investments,
primarily equity and debt securities. Generally, any deterioration in the financial markets or
changes in discount rates may require us to make a contribution to our Pension Plan.
33
We enter into certain purchase obligations outside the United States which are predominately
settled in U.S. dollars and, therefore, we have only minimal exposure to foreign currency exchange
risks. We do not hedge against foreign currency risks and believe that the foreign currency
exchange risk is not material. In addition, we operated 17 stores in Canada as of July 30, 2011. We
believe that our foreign currency translation risk is immaterial, as a hypothetical 10%
strengthening or weakening of the U.S. dollar relative to the applicable foreign currency would not
materially affect our results of operations or cash flow.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company has established disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and is accumulated and
communicated to management, including the principal executive officer (our Chief Executive Officer)
and principal financial officer (our Chief Financial Officer), to allow timely decisions regarding
required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Management recognizes that any disclosure controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives. Our disclosure controls and procedures have been designed to provide
reasonable assurance of achieving their objectives. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level as of July 30, 2011.
Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, on February 3, 2011, a purported Talbots shareholder filed a putative
class action captioned
Washtenaw County Employees Retirement System v. The Talbots, Inc. et al.
,
Case No. 1:11-cv-10186-NMG, in the United States District Court for the District of Massachusetts
against Talbots and certain of its officers. The complaint, purportedly brought on behalf of all
purchasers of Talbots common stock from December 8, 2009 through and including January 11, 2011,
asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder and sought, among other things, damages and costs and expenses. On
July 27, 2011, the lead plaintiff filed an amended complaint which continues to assert claims under
Sections 10(b) and 20(a) alleging certain false and misleading statements and alleged omissions
related to Talbots financial condition, inventory management and business prospects. The amended
complaint alleges that these actions artificially inflated the market price of Talbots common stock
during the class period, thus purportedly harming investors. We believe that these claims are
without merit and intend to defend against them vigorously. At this time, we cannot reasonably
predict the outcome of these proceedings or an estimate of damages, if any.
On February 24, 2011, a putative Talbots shareholder filed a derivative action in Massachusetts
Superior Court, captioned
Greco v. Sullivan, et al.
, Case No. 11-0728 BLS, against certain of
Talbots officers and directors. The complaint, which purports to be brought on behalf of Talbots, asserts claims for breach of fiduciary duties, insider
trading, abuse of control, waste of corporate assets and unjust enrichment, and seeks, among other
things, damages, equitable relief and costs and expenses. The complaint alleges that the defendants
either caused or neglected to prevent, due to mismanagement or failure to provide effective
oversight, the issuance of false and misleading statements and omissions regarding the Companys
financial condition. The complaint alleges that the defendants actions injured the Company insofar
as they (a) caused Talbots to waste
34
corporate assets through incentive-based bonuses for senior management, (b) subjected the Company to significant potential civil liability and legal costs and
(c) damaged the Company through a loss of market capitalization as well as goodwill and other
intangible benefits. We believe that these claims are without merit and, with the other defendants,
intend to defend against them vigorously. At this time, we cannot reasonably predict the outcome of
these proceedings.
We are periodically named as a defendant in various lawsuits, claims and pending actions and are
exposed to tax risks. If a potential loss arising from these lawsuits, claims and pending actions
is probable and reasonably estimable, we record the estimated liability based on circumstances and
assumptions existing at the time. While we believe any recorded liabilities are adequate, there are
inherent limitations in projecting the outcome of these matters and in the estimation process
whereby future actual liabilities may exceed projected liabilities, which could have a material
adverse effect on our financial condition and results of operations.
We are subject to tax in various domestic and international jurisdictions and, as a matter of
course, are regularly audited by federal, state and foreign tax authorities. During the third
quarter of 2009, the Massachusetts Appellate Tax Board (the ATB) rendered an adverse decision on
certain tax matters of Talbots, which was then affirmed by the Massachusetts Appeals Court on March
29, 2011. On June 8, 2011, the Supreme Judicial Court of Massachusetts denied our request for
further appellate review of this case. In order to pursue the original appeal, we were required to
make payments to the Massachusetts Department of Revenue on the assessment rendered on those tax
matters. As of July 30, 2011, approximately $1.5 million related to this assessment remains to be
paid. An additional assessment, relating to a subsequent period, has also been appealed to the ATB
covering similar issues. Payment of this assessment has been stayed until our appeals are resolved.
These assessments have been adequately reserved in our condensed consolidated financial statements.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, careful consideration
should be given to the following risk factors as well as the risk factors discussed in Part I, Item
1A,
Risk Factors,
of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011, any
of which could materially affect our business, operations, financial position or future results.
The risks described herein and in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011
are important to an understanding of the statements made in this Quarterly Report, in our other
filings with the SEC and in any other discussion of our business. These risk factors, which contain
forward-looking information, should be read in conjunction with Item 2,
Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and the condensed consolidated financial
statements and related notes included in this Quarterly Report.
Our stockholder rights plan could make it more difficult for a third party to acquire control of
our company which could have a negative effect on the price of our common stock.
We adopted a stockholder rights plan which could discourage potential acquisition proposals and
could delay or prevent a change in control of our company. These deterrents could also adversely
affect the price of our common stock.
35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A summary of our repurchase activity under certain equity programs for the thirteen weeks ended
July 30, 2011 is set forth below:
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Approximate Dollar Value
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Total Number of
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Average Price
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of Shares that May Yet Be
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Shares
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Paid per
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Reacquired Under the
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Period
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Reacquired (1)
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Share
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Equity Award Programs (2)
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May 1, 2011 through May 28, 2011
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13,606
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$
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1.83
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$
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17,030
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May 29, 2011 through July 2, 2011
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26,364
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2.46
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16,828
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July 3, 2011 through July 30, 2011
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9,592
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0.30
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16,779
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Total
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49,562
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$
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1.87
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$
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16,779
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(1)
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We reacquired 23,504 shares in connection with stock forfeited by employees prior to
vesting under our equity compensation plan at an acquisition price of $0.01 per share.
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Our equity program generally requires employees to tender shares in order to satisfy the
employees tax withholding obligations from the vesting of their restricted stock. During
the period, we repurchased 26,058 shares of common stock from certain employees to cover tax
withholding obligations from the vesting of stock at a weighted average acquisition price of
$3.54 per share.
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(2)
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As of July 30, 2011, there were 1,677,946 shares of nonvested stock that were subject to
buyback at $0.01 per share, or $16,779.46 in the aggregate, that we have the option to
reacquire if the holders employment is terminated prior to vesting.
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Item 6. Exhibits
3.1
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Amended and Restated By-laws of The Talbots, Inc., effective as of May 19, 2011. (1)
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4.1
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Rights Agreement, dated as of August 1, 2011, between The Talbots, Inc. and Computershare
Trust Company, N.A., as Rights Agent. (2)
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10.1
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Offer Letter between The Talbots, Inc. and Lesli Gilbert, effective as of June 7, 2011. (3)
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10.2
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Change in Control Agreement between The Talbots, Inc. and Lesli Gilbert, effective as of June 7, 2011. (3)
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10.3
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Severance Agreement between The Talbots, Inc. and Lesli Gilbert, effective as of June 7, 2011. (3)
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31.1
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Certification of Trudy F. Sullivan, President and Chief Executive Officer of the Company,
pursuant to Securities Exchange Act Rule 13a-14(a). (3)
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31.2
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Certification of Michael Scarpa, Chief Operating Officer, Chief Financial Officer and
Treasurer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a). (3)
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32.1
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Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002, by Trudy F. Sullivan, President and Chief Executive Officer of the
Company, and Michael Scarpa, Chief Operating Officer, Chief Financial Officer and Treasurer of
the Company. (3)
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101.INS
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XBRL Instance Document. (4)
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36
101.SCH
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XBRL Schema Document. (4)
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101.CAL;
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XBRL Calculation Linkbase Document. (4)
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101.LAB
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XBRL Labels Linkbase Document. (4)
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101.PRE
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XBRL Presentation Linkbase Document. (4)
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101.DEF
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XBRL Definition Linkbase Document. (4)
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(1)
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Incorporated by reference to the Current Report on Form 8-K filed on May 25, 2011.
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(2)
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Incorporated by reference to the Current Report on Form 8-K filed on August 2, 2011.
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(3)
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Filed with this Form 10-Q.
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(4)
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Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or
part of a registration statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are
not subject to liability under these sections.
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37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 8, 2011
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THE TALBOTS, INC.
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By : /s/ Michael Scarpa
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Michael Scarpa
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Chief Operating Officer,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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38
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