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 October 29, 2011
OR
|
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|
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)
|
|
|
Delaware
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|
4
1-1111318
|
(
State or other jurisdiction of
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|
(
I.R.S. Employer
|
incorporation or organization
)
|
|
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
|
|
Non-accelerated filer
o
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|
Smaller reporting company
o
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|
(Do not check if a smaller reporting company)
|
|
|
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 December 1, 2011:
70,507,286 shares.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
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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|
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Thirteen Weeks Ended
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Thirty-Nine Weeks Ended
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October 29,
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October 30,
|
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|
October 29,
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October 30,
|
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2011
|
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2010
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|
2011
|
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2010
|
|
Net sales
|
|
$
|
279,460
|
|
|
$
|
299,099
|
|
|
$
|
851,862
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|
|
$
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920,502
|
|
Costs and expenses:
|
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Cost of sales, buying and occupancy
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186,232
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171,395
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587,899
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548,017
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|
Selling, general and administrative
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105,017
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106,294
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301,239
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|
307,508
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|
Restructuring charges
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|
4,252
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|
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|
245
|
|
|
|
7,522
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|
5,316
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|
Impairment of store assets
|
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|
2,067
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|
545
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|
|
|
3,284
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|
551
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|
Merger-related costs
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787
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|
885
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27,650
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|
|
|
|
|
|
|
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|
|
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|
Operating (loss) income
|
|
|
(18,108
|
)
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|
19,833
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(48,967
|
)
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31,460
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Interest:
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Interest expense
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3,507
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|
2,371
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8,122
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17,176
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Interest income
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15
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|
22
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50
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64
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Interest expense, net
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3,492
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|
2,349
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8,072
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|
17,112
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
(Loss) income before taxes
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|
(21,600
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)
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|
17,484
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(57,039
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)
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14,348
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|
|
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|
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|
|
|
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Income tax expense
|
|
|
542
|
|
|
|
510
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1,549
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3,949
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(Loss) income from continuing operations
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(22,142
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)
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16,974
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(58,588
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)
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10,399
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Income (loss) from discontinued operations
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102
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|
74
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(46
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)
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3,222
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|
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Net (loss) income
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|
$
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(22,040
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)
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|
$
|
17,048
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|
$
|
(58,634
|
)
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|
$
|
13,621
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Basic (loss) earnings per share:
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Continuing operations
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$
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(0.32
|
)
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|
$
|
0.24
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|
$
|
(0.85
|
)
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|
$
|
0.16
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|
Discontinued operations
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|
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|
|
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0.04
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (loss) earnings
|
|
$
|
(0.32
|
)
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|
$
|
0.24
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|
$
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(0.85
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)
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|
$
|
0.20
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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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|
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|
Continuing operations
|
|
$
|
(0.32
|
)
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|
$
|
0.24
|
|
|
$
|
(0.85
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)
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|
$
|
0.15
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Discontinued operations
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|
|
|
|
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0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (loss) earnings
|
|
$
|
(0.32
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.85
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)
|
|
$
|
0.19
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|
|
|
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Weighted average shares outstanding:
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|
|
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|
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|
|
|
|
|
|
|
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|
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|
Basic
|
|
|
69,106
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|
|
|
68,424
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|
|
|
68,963
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|
|
64,878
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|
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|
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|
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Diluted
|
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|
69,106
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|
|
|
69,442
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|
|
|
68,963
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|
|
|
66,008
|
|
|
|
|
|
|
|
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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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
|
January 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
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|
|
|
|
|
|
|
|
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|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,254
|
|
|
$
|
10,181
|
|
|
$
|
2,384
|
|
Customer accounts receivable, net
|
|
|
161,364
|
|
|
|
145,472
|
|
|
|
171,059
|
|
Merchandise inventories
|
|
|
209,435
|
|
|
|
158,040
|
|
|
|
184,699
|
|
Deferred catalog costs
|
|
|
5,321
|
|
|
|
4,184
|
|
|
|
5,386
|
|
Prepaid and other current assets
|
|
|
33,426
|
|
|
|
33,235
|
|
|
|
52,085
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
428,800
|
|
|
|
351,112
|
|
|
|
415,613
|
|
Property and equipment, net
|
|
|
180,291
|
|
|
|
186,658
|
|
|
|
192,115
|
|
Goodwill
|
|
|
35,513
|
|
|
|
35,513
|
|
|
|
35,513
|
|
Trademarks
|
|
|
75,884
|
|
|
|
75,884
|
|
|
|
75,884
|
|
Other assets
|
|
|
16,611
|
|
|
|
19,349
|
|
|
|
19,523
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
737,099
|
|
|
$
|
668,516
|
|
|
$
|
738,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
113,738
|
|
|
$
|
91,855
|
|
|
$
|
96,525
|
|
Trade payables financing
|
|
|
39,411
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
130,922
|
|
|
|
137,824
|
|
|
|
151,281
|
|
Revolving credit facility
|
|
|
124,941
|
|
|
|
25,516
|
|
|
|
68,751
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
409,012
|
|
|
|
255,195
|
|
|
|
316,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent under lease commitments
|
|
|
81,329
|
|
|
|
93,440
|
|
|
|
99,278
|
|
Deferred income taxes
|
|
|
28,456
|
|
|
|
28,456
|
|
|
|
28,456
|
|
Other liabilities
|
|
|
88,201
|
|
|
|
107,839
|
|
|
|
109,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 shares authorized; 98,284,611
shares, 97,247,847 shares and 97,181,614 shares issued, respectively;
and 70,511,172 shares, 70,261,905 shares and 70,461,156 shares
outstanding, respectively
|
|
|
983
|
|
|
|
972
|
|
|
|
972
|
|
Additional paid-in capital
|
|
|
867,932
|
|
|
|
860,819
|
|
|
|
858,178
|
|
Retained deficit
|
|
|
(96,509
|
)
|
|
|
(37,875
|
)
|
|
|
(35,069
|
)
|
Accumulated other comprehensive loss
|
|
|
(50,897
|
)
|
|
|
(51,216
|
)
|
|
|
(51,130
|
)
|
Treasury stock, at cost; 27,773,439 shares, 26,985,942 shares and
26,720,458 shares, respectively
|
|
|
(591,408
|
)
|
|
|
(589,114
|
)
|
|
|
(587,879
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
130,101
|
|
|
|
183,586
|
|
|
|
185,072
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
737,099
|
|
|
$
|
668,516
|
|
|
$
|
738,648
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(58,634
|
)
|
|
$
|
13,621
|
|
(Loss) income from discontinued operations
|
|
|
(46
|
)
|
|
|
3,222
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(58,588
|
)
|
|
|
10,399
|
|
Adjustments to reconcile (loss) income from continuing operations
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
41,513
|
|
|
|
46,897
|
|
Stock-based compensation
|
|
|
6,688
|
|
|
|
11,485
|
|
Amortization of debt issuance costs
|
|
|
1,627
|
|
|
|
2,551
|
|
Impairment of store assets
|
|
|
3,284
|
|
|
|
551
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(294
|
)
|
|
|
229
|
|
Deferred rent
|
|
|
(11,776
|
)
|
|
|
(8,093
|
)
|
Gift card breakage income
|
|
|
(399
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
(15,876
|
)
|
|
|
(7,428
|
)
|
Merchandise inventories
|
|
|
(51,383
|
)
|
|
|
(41,870
|
)
|
Deferred catalog costs
|
|
|
(1,137
|
)
|
|
|
1,299
|
|
Prepaid and other current assets
|
|
|
(1,090
|
)
|
|
|
(5,402
|
)
|
Due from related party
|
|
|
|
|
|
|
959
|
|
Income tax refundable
|
|
|
|
|
|
|
2,006
|
|
Accounts payable
|
|
|
19,930
|
|
|
|
(7,621
|
)
|
Accrued liabilities
|
|
|
(5,635
|
)
|
|
|
10,634
|
|
Other assets
|
|
|
1,111
|
|
|
|
(530
|
)
|
Other liabilities
|
|
|
(18,715
|
)
|
|
|
(24,148
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(90,740
|
)
|
|
|
(8,082
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(34,843
|
)
|
|
|
(18,739
|
)
|
Proceeds from disposal of property and equipment
|
|
|
341
|
|
|
|
15
|
|
Cash acquired in merger with BPW Acquisition Corp.
|
|
|
|
|
|
|
332,999
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(34,502
|
)
|
|
|
314,275
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
1,391,400
|
|
|
|
1,185,238
|
|
Payments on revolving credit facility
|
|
|
(1,291,975
|
)
|
|
|
(1,116,487
|
)
|
Payments on related party borrowings
|
|
|
|
|
|
|
(486,494
|
)
|
Change in trade payables financing, net
|
|
|
39,411
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
|
|
|
|
(6,080
|
)
|
Payment of equity issuance costs
|
|
|
|
|
|
|
(3,594
|
)
|
Proceeds from warrants exercised
|
|
|
|
|
|
|
19,042
|
|
Proceeds from options exercised
|
|
|
1
|
|
|
|
652
|
|
Purchase of treasury stock
|
|
|
(2,294
|
)
|
|
|
(1,840
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
136,543
|
|
|
|
(409,563
|
)
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(603
|
)
|
|
|
369
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS
|
|
|
(1,625
|
)
|
|
|
(7,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
9,073
|
|
|
|
(110,391
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
10,181
|
|
|
|
112,775
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
19,254
|
|
|
$
|
2,384
|
|
|
|
|
|
|
|
|
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 September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-08,
Testing Goodwill for Impairment
. ASU 2011-08 amends Accounting
Standards Codification (ASC) 350-20,
Goodwill
, by providing entities which are testing goodwill
for impairment with the option of performing a qualitative assessment before calculating the fair
value of the reporting unit. If the entity determines, on the basis of qualitative factors, that it
is more likely than not that the fair value of the reporting unit exceeds the carrying amount,
further testing of goodwill for impairment would not need to be performed. The ASU does not change
how goodwill is calculated or assigned to reporting units, revise the requirement to test goodwill
annually for impairment or amend the requirement to test goodwill for impairment between annual
tests if events or circumstances warrant; however the ASU does revise the examples of events and
circumstances that an entity should consider in its assessment. ASU 2011-08 will be effective for
the Company for interim and annual periods beginning after December 15, 2011, with early adoption
permitted. The Company does not expect the adoption of this ASU to have any impact on its
consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income.
ASU 2011-05
amends 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
5
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 thirty-nine weeks ended October 29, 2011 and October 30, 2010 was $7.6
million and $17.7 million, respectively. Income taxes paid for the thirty-nine weeks ended October
29, 2011 and October 30, 2010 were $3.8 million and
$5.1 million respectively. In the thirty-nine weeks ended
October 29, 2011, the Company made additions to property and
equipment of $8.2 million which remained unpaid and recorded in
accounts payable and accrued liabilities as of October 29, 2011.
3. Recent Events and Managements Plans
The Companys results for the thirty-nine weeks ended October 29, 2011 reflect difficulties in
improving net sales and the impact of aggressive promotional activity on gross profit margins.
These difficulties have challenged the Companys profitability and capital resources; and as a result, the
Company has begun to implement certain additional measures, aimed at improving profitability and
maintaining flexibility in capital resources.
Management expects to operate the business and execute its strategic initiatives principally with funds generated
from operations and the Companys external sources of credit under its revolving credit facility and credit extended
from its vendors and sourcing agent. See Note 13,
Debt
, and
Trade Payables Arrangement
. While management
expects to see a continuation of challenging net sales and gross profit margin trends throughout the remainder of the
fiscal year, the Companys operating plan for fiscal 2012 contemplates improvements in its net sales, operating
results and cash flows from operations, when compared to the results for fiscal 2011, as management progresses
with the implementation of its cost reduction and other strategic initiatives. The ability to achieve the Companys
operating plan is based on a number of assumptions which involve significant judgment and estimate of future
performance. While the Companys strategic initiatives are designed to improve sales and operating results, they are
still in their early stages, and the Companys overall operating results have fluctuated significantly. As a result, the Companys cash flows and other
sources of liquidity may not at all times be sufficient for the Companys cash requirements. Management will
continue to monitor the Companys performance and liquidity, and if management believes operating results will be
below its expectations or if management determines at any time that it is appropriate or necessary to obtain
additional liquidity, management will take further steps intended to improve the Companys financial position, such
as by modifying the operating plan, seeking to further reduce costs and adjust cash spend or evaluating alternatives
and opportunities to obtain additional sources of liquidity. Management cannot assure that any of these actions
would be sufficient or available or, if available, available on favorable terms.
Cost Reduction Initiative
In December 2011, the Company announced a cost reduction initiative with a goal of reducing annual
costs and expenses by approximately $50.0 million across all areas of the business by the end of fiscal 2012. With this initiative, the Company will seek to
continue to improve its financial and capital flexibility, while focusing strategic reinvestment in
those areas of the business that are expected to generate meaningful returns. Key components of this initiative
include:
|
|
|
Lowering levels of marketing spend, including the suspension of national advertising and
television campaigns in the near-term;
|
|
|
|
Exploring and implementing process efficiencies and structural streamlining across all
areas of the business, including reducing corporate headcount by approximately 9.0% in
December 2011 and
|
|
|
|
Implementing a store payroll rationalization program whereby the Company will seek to
adjust the composition of its store workforce and reduce store payroll hours by managing to
improved productivity standards, aided by the implementation of a workforce management
system.
|
In conjunction with these direct cost reductions, the Company announced a decrease in the level of
planned capital expenditures for fiscal 2012 and is planning reductions in the level of merchandise
inventory commitments in fiscal 2012 which should also contribute to lower levels of logistics,
handling and shipping costs.
The Company expects to incur approximately $3.5 million in restructuring charges related to the
corporate headcount reduction component of its cost reduction initiative and is still evaluating
the expected costs of any additional components of this initiative, if any. The Company anticipates
that it will realize savings related to actions taken under this initiative beginning in the next
fiscal year.
In addition to the components of the cost reduction initiative, in fiscal 2011 the Company began
executing on 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. See Note 5,
Restructuring
, for further information including key components of this plan and progress to-date.
Trade Payables Arrangement
On September 1, 2011, the Company entered into an arrangement with its exclusive global apparel
sourcing agent, whereby the Company is able to extend payment terms for merchandise purchases
sourced by its exclusive agent. Under this arrangement, the Companys sourcing agent settles the
Companys merchandise accounts payable with the vendors organized under the buying agency agreement
as they become due and extends the Companys payment obligation up to an additional 30 days, at
which time the Company is obligated to reimburse its sourcing agent the full amount of merchandise
accounts payable due plus pay accrued fees and interest. The amount of payables due under this
arrangement is not to exceed $50.0 million at any time.
6
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 became effective for amounts that
are or became due beginning on September 1, 2011 and continues 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 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
merchandise purchases, which may be suspended at the discretion of the sourcing agent. As of
October 29, 2011, $39.4 million of the Companys accounts payable were extended under this
arrangement, included as trade payables financing in the Companys condensed consolidated balance
sheet, and the Company had outstanding letters of credit issued by its sourcing agent of $3.8
million. During the thirteen and thirty-nine weeks ended October 29, 2011, the Company recorded
$0.6 million of fees and interest under these arrangements included in interest expense in the
statement of operations. No amounts were overdue under this arrangement during the quarter.
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 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.
Until the Rights become exercisable, they will not have any impact on the Companys outstanding
shares.
7
4. 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 13,
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. In the thirteen weeks ended October 30, 2010, the Company updated its estimate of legal
expenses incurred related to these proceedings under its indemnification obligations with the other
parties to this matter, resulting in a credit to merger-related accounting and legal expenses in
the third quarter of 2010. 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
8
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 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 thirty-nine weeks ended October
29, 2011 and October 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
October 29,
|
|
October 30,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
(In thousands)
|
Investment banking
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,255
|
|
Accounting and legal
|
|
|
|
|
|
|
(431
|
)
|
|
|
|
|
|
|
6,219
|
|
Financing incentive compensation
|
|
|
|
|
|
|
1,210
|
|
|
|
885
|
|
|
|
5,638
|
|
Other costs
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related costs
|
|
$
|
|
|
|
$
|
787
|
|
|
$
|
885
|
|
|
$
|
27,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Thirty-Nine Weeks Ended
|
|
|
October 30, 2010
|
|
October 30, 2010
|
|
|
Actual
|
|
Pro Forma
|
|
Actual
|
|
Pro Forma
|
|
|
(In thousands, except per share data)
|
Net sales
|
|
$
|
299,099
|
|
|
$
|
299,099
|
|
|
$
|
920,502
|
|
|
$
|
920,502
|
|
Operating income
|
|
|
19,833
|
|
|
|
19,833
|
|
|
|
31,460
|
|
|
|
24,588
|
|
Income from continuing operations
|
|
|
16,974
|
|
|
|
16,974
|
|
|
|
10,399
|
|
|
|
8,787
|
|
Earnings per share continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
68,424
|
|
|
|
68,424
|
|
|
|
64,878
|
|
|
|
67,670
|
|
Diluted
|
|
|
69,442
|
|
|
|
69,442
|
|
|
|
66,008
|
|
|
|
68,800
|
|
Based on the nature of the BPW entity, there was no revenue or earnings associated with BPW
included in the consolidated statements of operations.
5. 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 the majority of the locations
expected to close in fiscal 2011 and the remaining locations expected to close throughout fiscal
2012 and into fiscal 2013. 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 associated third
parties. The Company expects to record total non-recurring restructuring charges of approximately
$14.0 million related to this plan. In the
9
thirteen and thirty-nine weeks ended October 29, 2011, the Company incurred restructuring charges
of $4.3 million and $7.5 million, respectively, primarily comprised of lease exit, severance and
related costs for certain locations closed or to be closed under this plan and, through October 29,
2011, closed 35 locations, including 31 full stores.
In the thirty-nine weeks ended October 30, 2010, the Company recorded $5.3 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
thirty-nine weeks ended
October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
Lease -
|
|
|
|
|
|
|
Severance
|
|
|
Related
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at January 29, 2011
|
|
$
|
215
|
|
|
$
|
3,781
|
|
|
$
|
3,996
|
|
Charges
|
|
|
2,545
|
|
|
|
4,977
|
|
|
|
7,522
|
|
Cash payments
|
|
|
(1,091
|
)
|
|
|
(2,624
|
)
|
|
|
(3,715
|
)
|
Non-cash items
|
|
|
62
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 29, 2011
|
|
$
|
1,731
|
|
|
$
|
6,134
|
|
|
$
|
7,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
Lease -
|
|
|
|
|
|
|
Severance
|
|
|
Related
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at January 30, 2010
|
|
$
|
3,089
|
|
|
$
|
784
|
|
|
$
|
3,873
|
|
Charges
|
|
|
1,164
|
|
|
|
4,152
|
|
|
|
5,316
|
|
Cash payments
|
|
|
(3,605
|
)
|
|
|
(846
|
)
|
|
|
(4,451
|
)
|
Non-cash items
|
|
|
26
|
|
|
|
(44
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2010
|
|
$
|
674
|
|
|
$
|
4,046
|
|
|
$
|
4,720
|
|
|
|
|
|
|
|
|
|
|
|
The non-cash items primarily consist of changes to stock-based compensation expense related to
terminated employees and the write-off of certain leasehold improvements and lease liability
adjustments. Of the $7.9 million in restructuring liabilities at October 29, 2011, $5.5 million,
expected to be paid within the next twelve months, is included in accrued liabilities and accounts
payable and the remaining $2.4 million, expected to be paid thereafter through 2014, is included in
deferred rent under lease commitments.
6. Stock-Based Compensation
Total stock-based compensation expense related to stock options, nonvested stock awards and
restricted stock units (RSUs) was $1.5 million and $3.7 million for the thirteen weeks ended
October 29, 2011 and October 30, 2010, respectively, and $6.7 million and $11.5 million for the
thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively.
10
Stock-based compensation expense is classified in the consolidated statements of operations as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of sales, buying and occupancy
|
|
$
|
328
|
|
|
$
|
283
|
|
|
$
|
894
|
|
|
$
|
667
|
|
Selling, general and administrative
|
|
|
1,273
|
|
|
|
2,263
|
|
|
|
4,971
|
|
|
|
7,546
|
|
Restructuring charges
|
|
|
(62
|
)
|
|
|
(26
|
)
|
|
|
(62
|
)
|
|
|
(26
|
)
|
Merger-related costs
|
|
|
|
|
|
|
1,210
|
|
|
|
885
|
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,539
|
|
|
$
|
3,730
|
|
|
$
|
6,688
|
|
|
$
|
11,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The weighted-average fair value of options granted during the thirty-nine weeks ended October 29,
2011 and October 30, 2010, estimated as of the grant date using the Black-Scholes option pricing
model, was $4.18 and $10.40 per option, respectively. Key assumptions used to apply this pricing
model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
|
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
|
|
|
81.5
|
%
|
|
|
79.7
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The following is a summary of stock option activity for the thirty-nine weeks ended October 29,
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
|
|
|
1,415,422
|
|
|
|
5.64
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(400
|
)
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(3,175,893
|
)
|
|
|
31.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 29, 2011
|
|
|
5,354,770
|
|
|
$
|
16.47
|
|
|
|
5.1
|
|
|
$
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 29, 2011
|
|
|
3,628,559
|
|
|
$
|
21.66
|
|
|
|
3.3
|
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 29, 2011, there was $4.2 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 1.9 years.
11
Nonvested Stock Awards and RSUs
The following is a summary of nonvested stock awards and RSU activity for the thirty-nine weeks
ended October 29, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
Nonvested at January 29, 2011
|
|
|
2,367,214
|
|
|
$
|
11.34
|
|
Granted
|
|
|
681,447
|
|
|
|
5.64
|
|
Vested
|
|
|
(1,098,089
|
)
|
|
|
12.23
|
|
Forfeited
|
|
|
(398,835
|
)
|
|
|
7.81
|
|
|
|
|
|
|
|
|
Nonvested at October 29, 2011
|
|
|
1,551,737
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
As of October 29, 2011, there was $7.6 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 1.4 years.
7. Income Taxes
The Companys effective income tax rate, including discrete items, was (2.7%) and 27.5% for the
thirty-nine weeks ended October 29, 2011 and October 30, 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 thirty-nine weeks ended October 29,
2011 and October 30, 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.
8. 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 thirty-nine weeks ended October
29, 2011 includes 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 of 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 thirty-nine weeks ended October 30, 2010 includes favorable adjustments to other
assets, sales tax liabilities and estimated lease liabilities including the second quarter of 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, partially offset by on-going lease and other liability
adjustments related to the J. Jill, Talbots Kids and Mens businesses. The income (loss) from discontinued operations for the thirteen and
thirty-nine weeks ended October 29, 2011 and October 30, 2010 reflects no net income tax expense
(benefit).
12
At January 29, 2011, the Company had remaining recorded lease-related liabilities from discontinued
operations of $6.3 million. During the thirty-nine weeks ended October 29, 2011, the Company made
cash payments of approximately $2.1 million and recorded additional net expense related to lease
liability adjustments of $1.4 million, resulting in a total estimated remaining recorded liability
of $5.6 million as of October 29, 2011. Of this $5.6 million liability, $2.4 million, expected to
be paid within the next twelve months, is included in accrued liabilities, and the remaining $3.2
million, expected to be paid thereafter through 2019, is included in deferred rent under lease
commitments.
9. (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
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(22,142
|
)
|
|
$
|
16,974
|
|
|
$
|
(58,588
|
)
|
|
$
|
10,399
|
|
Less: income associated with participating securities
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available for common stockholders
|
|
$
|
(22,142
|
)
|
|
$
|
16,485
|
|
|
$
|
(58,588
|
)
|
|
$
|
10,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
69,106
|
|
|
|
68,424
|
|
|
|
68,963
|
|
|
|
64,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share continuing operations
|
|
$
|
(0.32
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.85
|
)
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(22,142
|
)
|
|
$
|
16,974
|
|
|
$
|
(58,588
|
)
|
|
$
|
10,399
|
|
Less: income associated with participating securities
|
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available for common stockholders
|
|
$
|
(22,142
|
)
|
|
$
|
16,492
|
|
|
$
|
(58,588
|
)
|
|
$
|
10,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
69,106
|
|
|
|
68,424
|
|
|
|
68,963
|
|
|
|
64,878
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
1,018
|
|
|
|
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
69,106
|
|
|
|
69,442
|
|
|
|
68,963
|
|
|
|
66,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share continuing operations
|
|
$
|
(0.32
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.85
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
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 thirty-nine week
periods ended October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Nonvested stock
|
|
|
1,454
|
|
|
|
|
|
|
|
1,454
|
|
|
|
|
|
Nonvested director RSUs
|
|
|
42
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Stock options
|
|
|
5,355
|
|
|
|
5,681
|
|
|
|
5,355
|
|
|
|
5,681
|
|
Warrants
|
|
|
19,152
|
|
|
|
18,243
|
|
|
|
19,152
|
|
|
|
18,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,003
|
|
|
|
23,924
|
|
|
|
26,003
|
|
|
|
23,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Comprehensive (Loss) Income
The following illustrates the Companys total comprehensive (loss) income for the thirteen and
thirty-nine weeks ended October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(22,040
|
)
|
|
$
|
17,048
|
|
|
$
|
(58,634
|
)
|
|
$
|
13,621
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
(805
|
)
|
|
|
85
|
|
|
|
(386
|
)
|
|
|
446
|
|
Change in pension and postretirement liabilities
|
|
|
235
|
|
|
|
(132
|
)
|
|
|
705
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(22,610
|
)
|
|
$
|
17,001
|
|
|
$
|
(58,315
|
)
|
|
$
|
13,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other components of comprehensive (loss) income reflect no income tax (benefit) expense 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.
11. 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 October 29, 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 the 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
14
and is not a fair value measurement. The Company believes that the carrying value of its revolving
credit facility approximates fair value at October 29, 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 thirty-nine weeks ended October 29, 2011, the Company performed
impairment analyses on the assets of certain stores, triggered by both actions under the Companys
store rationalization plan and reviews of the stores operating results. In the thirteen weeks
ended October 30, 2010, the Company performed impairment analyses on the assets of certain stores,
triggered by the Companys expectation to close certain store locations.
The following tables summarize the non-financial assets that were measured at fair value on a
non-recurring basis in performing these analyses for the thirteen weeks ended October 29, 2011 and
October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Observable
|
|
|
|
|
|
|
Impairment of
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Inputs Other
|
|
|
|
|
|
|
Store Assets
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
than Quoted
|
|
|
Significant
|
|
|
Thirteen
|
|
|
|
|
|
|
|
Markets for
|
|
|
Market
|
|
|
Unobservable
|
|
|
Weeks Ended
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Prices
|
|
|
Inputs
|
|
|
October 29,
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Long-lived assets held and used
|
|
$
|
1,076
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,076
|
|
|
$
|
2,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,076
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,076
|
|
|
$
|
2,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Observable
|
|
|
|
|
|
|
Impairment of
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Inputs Other
|
|
|
|
|
|
|
Store Assets
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
than Quoted
|
|
|
Significant
|
|
|
Thirteen
|
|
|
|
|
|
|
|
Markets for
|
|
|
Market
|
|
|
Unobservable
|
|
|
Weeks Ended
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Prices
|
|
|
Inputs
|
|
|
October 30,
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Long-lived assets held and used
|
|
$
|
1,371
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,371
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,371
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,371
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 thirty-nine weeks ended October 29, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Observable
|
|
|
|
|
|
|
Impairment of
|
|
|
|
|
|
|
|
Quoted Market
|
|
|
Inputs Other
|
|
|
|
|
|
|
Store Assets
|
|
|
|
|
|
|
|
Prices in Active
|
|
|
than Quoted
|
|
|
Significant
|
|
|
Thirty-Nine
|
|
|
|
|
|
|
|
Markets for
|
|
|
Market
|
|
|
Unobservable
|
|
|
Weeks Ended
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Prices
|
|
|
Inputs
|
|
|
October 29,
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Long-lived assets held and used
|
|
$
|
2,175
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,175
|
|
|
$
|
3,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,175
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,175
|
|
|
$
|
3,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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. Additional insignificant store impairments were recorded in the prior quarters of 2010
and reported in the thirty-nine weeks ended October 30, 2010.
12. Customer Accounts Receivable, net
Customer accounts receivable, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Customer accounts receivable
|
|
$
|
163,364
|
|
|
$
|
149,872
|
|
Less: allowance for doubtful accounts
|
|
|
(2,000
|
)
|
|
|
(4,400
|
)
|
|
|
|
|
|
|
|
Customer accounts receivable, net
|
|
$
|
161,364
|
|
|
$
|
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 the third quarter of 2011, the Company refined
its approach to estimating its allowance for doubtful accounts by giving more weight to recent
write-off and recovery trends. This adjustment, which management believes more closely aligns the
balance of the allowance for doubtful accounts with its best estimate of customer accounts
receivable likely to result in a write-off, resulted in a reduction of the allowance for doubtful
accounts of approximately $1.3 million in the third quarter of 2011, with improvements in the aging
of the Companys customer accounts receivable further contributing to reductions in the allowance
for doubtful accounts in the period.
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 October 29, 2011 and January 29, 2011, customer accounts receivable were aged as follows:
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
January 29,
|
|
|
2011
|
|
2011
|
|
|
(Percentage of gross customer accounts receivable)
|
Current
|
|
|
92.1
|
%
|
|
|
90.4
|
%
|
Up to 60 days past due
|
|
|
6.6
|
%
|
|
|
8.1
|
%
|
61-120 days past due
|
|
|
0.8
|
%
|
|
|
1.0
|
%
|
121-180 days past due
|
|
|
0.5
|
%
|
|
|
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 October 29, 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.
16
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 October 29, 2011 and January 29, 2011, customer accounts receivable were allocated by credit
quality indicator (credit risk score) as follows:
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Greater than or equal to 700
|
|
$
|
107,793
|
|
|
$
|
93,011
|
|
600 - 699
|
|
|
38,019
|
|
|
|
38,832
|
|
Less than or equal to 599
|
|
|
14,802
|
|
|
|
15,135
|
|
Other
|
|
|
2,750
|
|
|
|
2,894
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
$
|
163,364
|
|
|
$
|
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.
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
|
|
|
542
|
|
Write-offs
|
|
|
(2,020
|
)
|
Recoveries, net
|
|
|
578
|
|
|
|
|
|
Balance at July 30, 2011
|
|
$
|
3,500
|
|
|
|
|
|
Provision
|
|
|
(311
|
)
|
Write-offs
|
|
|
(1,483
|
)
|
Recoveries, net
|
|
|
294
|
|
|
|
|
|
Balance at October 29, 2011
|
|
$
|
2,000
|
|
|
|
|
|
Write-offs include the principal amount of losses, including accrued and unpaid finance charges,
and recoveries, net include current period collections on previously written-off balances. These
amounts combined represent net write-offs.
13. 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)
17
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 October 29, 2011, the Companys effective interest rate under
the Credit Facility was 3.9%, and the Company had additional borrowing availability of up to $69.3
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 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, as defined,
making loans, 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
18
various beneficiaries on the terms set forth in the applicable Master Agreement, subject to any
applicable limitations set forth in the Credit Facility.
The Company had borrowings of $124.9 million and $25.5 million outstanding under the Credit
Facility as of October 29, 2011 and January 29, 2011, respectively. Borrowings under the 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. As of October 29, 2011, $4.1 million of deferred financing
costs remained in other assets in the condensed consolidated balance sheet.
As of October 29, 2011 and January 29, 2011, the Company had $0.6 million and $9.1 million,
respectively, in outstanding letters of credit related to merchandise purchases and, as of October
29, 2011, letter of credit availability of up to $24.4 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.
14. 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 thirteen and thirty-nine weeks ended October 29, 2011
and October 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Interest expense on projected benefit obligation
|
|
$
|
2,513
|
|
|
$
|
2,371
|
|
|
$
|
7,454
|
|
|
$
|
7,049
|
|
Expected return on plan assets
|
|
|
(2,435
|
)
|
|
|
(2,394
|
)
|
|
|
(7,319
|
)
|
|
|
(7,194
|
)
|
Net amortization and deferral
|
|
|
206
|
|
|
|
139
|
|
|
|
623
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
284
|
|
|
$
|
116
|
|
|
$
|
758
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net SERP expense for the thirteen and thirty-nine weeks ended October 29, 2011
and October 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Interest expense on projected benefit obligation
|
|
$
|
285
|
|
|
$
|
288
|
|
|
$
|
841
|
|
|
$
|
842
|
|
Net amortization and deferral
|
|
|
29
|
|
|
|
20
|
|
|
|
82
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net SERP expense
|
|
$
|
314
|
|
|
$
|
308
|
|
|
$
|
923
|
|
|
$
|
889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The components of net postretirement medical expense (credit) for the thirteen and thirty-nine
weeks ended October 29, 2011 and October 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Interest expense on accumulated postretirement benefit obligation
|
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
46
|
|
|
$
|
52
|
|
Prior service cost amortization
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
|
|
(1,140
|
)
|
Net amortization and deferral
|
|
|
50
|
|
|
|
130
|
|
|
|
152
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement medical expense (credit)
|
|
$
|
66
|
|
|
$
|
(233
|
)
|
|
$
|
198
|
|
|
$
|
(697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company was required to make contributions to the Pension Plan of $5.6 million and $1.6
million during the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively, and
$9.3 million and $3.6 million during the thirty-nine weeks ended October 29, 2011 and October 30,
2010, respectively. The Company expects to make required contributions of $1.8 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 thirty-nine weeks ended October 29, 2011 and October 30,
2010.
15. 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 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. On October 17, 2011, the Company and the
remaining defendants filed a motion to dismiss all of the claims asserted in the amended complaint
pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private
Securities Litigation Reform Act of 1995. 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.
16. Segment Information
The Company has two separately managed and reported business segments stores and direct
marketing.
20
The following is certain segment information for the thirteen and thirty-nine weeks ended October
29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
October 29, 2011
|
|
October 30, 2010
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
229,819
|
|
|
$
|
49,641
|
|
|
$
|
279,460
|
|
|
$
|
242,136
|
|
|
$
|
56,963
|
|
|
$
|
299,099
|
|
Direct profit
|
|
|
4,146
|
|
|
|
8,290
|
|
|
$
|
12,436
|
|
|
|
34,700
|
|
|
|
16,853
|
|
|
$
|
51,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29, 2011
|
|
October 30, 2010
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
698,554
|
|
|
$
|
153,308
|
|
|
$
|
851,862
|
|
|
$
|
750,579
|
|
|
$
|
169,923
|
|
|
$
|
920,502
|
|
Direct profit
|
|
|
17,930
|
|
|
|
22,613
|
|
|
$
|
40,543
|
|
|
|
117,173
|
|
|
|
47,445
|
|
|
$
|
164,618
|
|
Direct 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 profit to (loss)
income from continuing operations for the thirteen and thirty-nine weeks ended October 29, 2011 and
October 30, 2010. Indirect expenses include unallocated corporate overhead and related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Direct profit
|
|
$
|
12,436
|
|
|
$
|
51,553
|
|
|
$
|
40,543
|
|
|
$
|
164,618
|
|
Less: Indirect expenses
|
|
|
26,292
|
|
|
|
30,688
|
|
|
|
81,103
|
|
|
|
100,192
|
|
Restructuring charges
|
|
|
4,252
|
|
|
|
245
|
|
|
|
7,522
|
|
|
|
5,316
|
|
Merger-related costs
|
|
|
|
|
|
|
787
|
|
|
|
885
|
|
|
|
27,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(18,108
|
)
|
|
|
19,833
|
|
|
|
(48,967
|
)
|
|
|
31,460
|
|
Interest expense, net
|
|
|
3,492
|
|
|
|
2,349
|
|
|
|
8,072
|
|
|
|
17,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(21,600
|
)
|
|
|
17,484
|
|
|
|
(57,039
|
)
|
|
|
14,348
|
|
Income tax expense
|
|
|
542
|
|
|
|
510
|
|
|
|
1,549
|
|
|
|
3,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(22,142
|
)
|
|
$
|
16,974
|
|
|
$
|
(58,588
|
)
|
|
$
|
10,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Subsequent Events
On December 5, 2011, the Company announced that its President and Chief Executive Officer, Trudy Sullivan, will
retire from the Company on the date that the Companys Board of Directors appoints a successor President and
Chief Executive Officer or such earlier date as the Board of Directors determines, which in either case will be no
later than June 30, 2012 (the Retirement Date). As previously reported the Company and Ms. Sullivan entered into a separation agreement dated December 4, 2011.
Ms. Sullivan will continue to serve as President, Chief Executive
Officer and a member of the Board of Directors until the Retirement
Date.
21
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 October 29, 2011, we operated 534 stores in the United States and 17 stores
in Canada. We conform to the National Retail Federations fiscal calendar. The thirteen weeks ended
October 29, 2011 and October 30, 2010 are referred to as the third 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
The thirty-nine weeks ended October 29, 2011 were challenging as we primarily worked to clear
slow-moving merchandise and re-engage with our customer through aggressive promotional activity
across all sales channels. Accordingly, our year-to-date net sales were down 7.5% year-over-year,
and our gross profit margins were down 950 basis points year-over-year. These challenges were faced
across both segments, with stores and direct marketing reporting declines in net sales and
significant declines in direct profit from operations year-over-year. We ended the quarter with
merchandise inventories of $209.4 million, an increase of 13.4% compared to the same period of the
prior year, with comparatively more inventory units on-hand due to lower than anticipated sales
volume and earlier timing of holiday receipts.
Throughout the third quarter of 2011, we saw increasingly positive momentum in our customers
response to our merchandise assortment; and, in the last month of the third quarter of 2011, we
applied an effective combination of promotional strategies to a merchandise assortment that better
resonated with our customer, due to adjustments made to targeted merchandise categories, driving an
increase of 8.2% in comparable store sales on improved customer traffic, conversion rates and
transaction counts year-over-year. In the remainder of the fiscal year, we will seek to replicate
this combination with our holiday assortments and planned promotions while working to improve
profitability. Additionally, we will continue to seek to drive net sales improvements through
targeted merchandise improvements, continued training and development of associate selling skills
and the implementation of an incentive compensation program within our stores. Despite the sales improvement seen in the last month of the third
quarter, we expect that we may continue to face challenges as we continue to work to evolve our
merchandise assortment and strengthen our customer retention and customer acquisition focused
marketing initiatives, in what we expect may be a difficult period of U.S. consumer confidence.
Further, as we are planning to continue to employ an aggressive promotional strategy for the
remainder of the year, in an on-going effort to re-engage with our core customer in a highly
competitive promotional environment, and continue to seek to re-align our merchandise inventory
position, we expect that our gross profit margins will continue to be adversely affected.
The difficulties that we have faced in improving our net sales and the impact that promotional
activities have had on our gross profit margins have challenged our profitability and capital
resources. In the third quarter, and into the fourth quarter, of fiscal 2011, we have begun to
implement certain measures aimed at improving our profitability and maintaining flexibility in our
capital resources. These measures are expected to supplement our previously disclosed strategic
initiatives which we believe will ultimately deliver productivity and profitability improvements to
our business. In the thirty-nine weeks ended October 29, 2011, we marked the following progress in
the execution and implementation 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
October 29, 2011, we closed 35 locations, including 31 full stores, under this plan and
expect to close an additional approximately 50 locations over the remainder of fiscal 2011.
With the implementation of this
|
22
|
|
|
accelerated plan, we reassessed the recoverability of the assets of the stores included in
this plan, recording associated impairments of store assets of $1.3 million. We expect to
incur approximately $14.0 million in related restructuring charges over the two year term of
this plan. Through October 29, 2011, we recorded $7.5 million in restructuring charges,
primarily consisting of lease exit, severance and related costs incurred under this plan. We
expect to continue to execute store closures under the store rationalization plan as
announced and will continue to evaluate our store portfolio.
|
|
|
|
|
We completed the full rebuild of two additional stores under our store re-image
initiative and progressed with renovations of 47 additional locations. 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 15.9% of our
remaining store base. Although we have renovated only a limited number of stores to-date,
net sales at these locations, particularly our renovated premium stores, have, on average,
outperformed the comparable store base to-date. This initiative accounted for $15.4 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, execution and capital
requirements 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, Oracle store clustering tool and upgraded
Oracle financial systems launching to-date. The systems that we have implemented
year-to-date have contributed to the successful launch of certain business development
strategies, including our direct fulfill channel, whereby improved, system inventory
transparency allows customer Internet orders to be fulfilled from store locations when the
requested items are no longer available in the direct marketing inventory. This new
channel, which launched in September 2011, contributed approximately $2.8 million in net
sales through October 29, 2011. Our information technology strategic plan accounted for
$4.9 million in capital expenditures year-to-date. While we expect to progress with the
upgrade and implementation of certain other key systems over the course of the next year,
certain systems upgrades and other projects are expected to be delayed into future periods.
|
|
|
|
|
Our enhanced, coordinated marketing campaign progressed with the launch of our spring
2011 national advertising campaign and our fall 2011 television advertising campaign,
representing an incremental $4.3 million in marketing expenses year-over-year; however,
over the past year, we experienced a slight decrease in our customer database. We expect
that our brand building efforts will take time to gain traction and translate into
increased customer base, customer traffic and net sales. In the remainder of the fiscal
year, 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 increased catalog circulation. In
the next fiscal year, as we seek to reduce our overall costs and expenses, we expect to
lower our marketing spend and focus our marketing efforts on our core, direct-to-customer
campaigns, suspending investment in national advertising and television campaigns in the
near-term.
|
|
|
|
|
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 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 14 new locations year-to-date
and ending the period with 39 upscale outlets compared to 27 upscale outlets at October 30,
2010. We continue to be encouraged by our customers response to these locations, which
have generated positive comparable sales results year-to-date in 2011, and expect to open
four additional upscale outlets over the remainder of fiscal 2011. This expansion accounted
for $6.4 million in capital expenditures year-to-date. We expect to continue this expansion
in the coming year.
|
|
|
|
|
In September 2011, we entered into an arrangement with our exclusive global apparel
sourcing agent, whereby we are able to extend payment terms for merchandise purchases
sourced by our exclusive agent. In addition our sourcing agent agreed to extend letters of
credit, on behalf and at the request of the Company, to vendors organized under our
|
23
|
|
|
buying agency agreement for certain merchandise purchases. This arrangement has provided us
with greater flexibility in planning and managing our capital resources. See
Liquidity and
Capital Resources
Trade Payables Arrangement
for additional information regarding this
arrangement.
|
|
|
|
|
Subsequent to the third quarter of 2011, in December 2011, we announced a cost reduction
initiative with a goal of reducing annual costs and expenses by approximately $50.0 million
across all areas of the business by the end of fiscal 2012. With this initiative, we will seek to continue to improve our financial and capital
flexibility, while focusing our strategic reinvestment in those areas of the business that
are expected to generate meaningful returns. Key components of this initiative include:
|
|
o
|
|
Lower levels of marketing spend, including the suspension of national
advertising and television campaigns in the near-term;
|
|
|
o
|
|
Exploring and implementing process efficiencies and structural
streamlining across all areas of the business, including reducing corporate
headcount by approximately 9.0% in December 2011 and
|
|
|
o
|
|
Implementing a store payroll rationalization program whereby we will seek
to adjust the composition of our store workforce and reduce store payroll hours by
managing to improved productivity standards, aided by the implementation of a
workforce management system.
|
|
|
|
In conjunction with these direct cost reductions, we announced a decrease in the level of
planned capital expenditures for fiscal 2012 and are planning reductions in our level of
merchandise inventory commitments in fiscal 2012 which should also contribute to lower
levels of logistics, handling and shipping costs.
|
|
|
|
|
We expect to incur approximately $3.5 million in restructuring charges related to the
corporate headcount reduction component of our cost reduction initiative and are still
evaluating the expected costs of any additional components of this initiative, if any. We
anticipate that we will realize savings related to actions taken under this initiative
beginning in the next fiscal year.
|
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
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
October 29,
|
|
October 30,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy
|
|
|
66.6
|
%
|
|
|
57.3
|
%
|
|
|
69.0
|
%
|
|
|
59.5
|
%
|
Selling, general and administrative
|
|
|
37.6
|
%
|
|
|
35.5
|
%
|
|
|
35.4
|
%
|
|
|
33.4
|
%
|
Restructuring charges
|
|
|
1.5
|
%
|
|
|
0.1
|
%
|
|
|
0.9
|
%
|
|
|
0.6
|
%
|
Impairment of store assets
|
|
|
0.8
|
%
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
Merger-related costs
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
3.0
|
%
|
Operating (loss) income
|
|
|
(6.5)
|
%
|
|
|
6.6
|
%
|
|
|
(5.8)
|
%
|
|
|
3.4
|
%
|
Interest expense, net
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
|
|
0.9
|
%
|
|
|
1.9
|
%
|
(Loss) income before taxes
|
|
|
(7.7)
|
%
|
|
|
5.8
|
%
|
|
|
(6.7)
|
%
|
|
|
1.5
|
%
|
Income tax expense
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
(Loss) income from continuing operations
|
|
|
(7.9)
|
%
|
|
|
5.7
|
%
|
|
|
(6.9)
|
%
|
|
|
1.1
|
%
|
24
Net Sales
The following is a comparison of net sales for the thirteen and thirty-nine weeks ended October 29,
2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
|
|
|
October 29,
|
|
|
October 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Decrease
|
|
|
2011
|
|
|
2010
|
|
|
Decrease
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Net store sales
|
|
$
|
229.8
|
|
|
$
|
242.1
|
|
|
$
|
(12.3
|
)
|
|
$
|
698.6
|
|
|
$
|
750.6
|
|
|
$
|
(52.0
|
)
|
Net direct marketing sales
|
|
|
49.7
|
|
|
|
57.0
|
|
|
|
(7.3
|
)
|
|
|
153.3
|
|
|
|
169.9
|
|
|
|
(16.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
279.5
|
|
|
$
|
299.1
|
|
|
$
|
(19.6
|
)
|
|
$
|
851.9
|
|
|
$
|
920.5
|
|
|
$
|
(68.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net sales results for the thirteen and thirty-nine weeks ended October 29, 2011 reflect a $9.9
million, or 4.0%, decrease and a $55.1 million, or 7.3%, 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.
In September 2011, we launched our direct fulfill channel, whereby
improved, system inventory transparency allows customer Internet orders to be fulfilled from store
locations when the requested items are no longer available in the direct marketing inventory. This
new channel contributed approximately $2.8 million in net sales
through October 29, 2011 and is reflected in comparable store sales when the order is fulfilled by
a comparable store.
Store Sales
Net store sales for the thirteen and thirty-nine weeks ended October 29, 2011 reflect a $4.4
million, or 2.4%, decrease and a $42.7 million, or 7.3%, 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, summer and early fall merchandise
assortments, with units sold, units per transaction and dollars per transaction trending down
year-over-year. Accordingly, these merchandise assortments have been subject to significant
promotional activity in order to clear these slower-moving goods. In the third quarter of 2011, we
employed a better coordinated approach to our fall promotional activity which drove year-over-year
improved conversion rates, resulting in increases in the number of transactions, while increasing
our year-over-year average unit retail. These third quarter improvements served to partially
mitigate year-over-year deterioration in the number of transactions and average unit retail
realized in the thirty-nine weeks ended October 29, 2011.
Sales metrics for comparable stores for the third quarter of 2011 were as follows: customer traffic
decreased 3.6% year-over-year, yet the rate of converting traffic to transactions increased 7.7%,
contributing to a 3.8% increase in the number of transactions per store. Units per transaction were
down 8.2% which, combined with a 2.4% increase in average unit retail, contributed to a 6.1%
decrease in dollars per transaction over the comparable fiscal 2010 period.
Sales metrics for comparable stores for the thirty-nine weeks ended October 29, 2011 were as
follows: customer traffic decreased 5.1% year-over-year, yet the rate of converting traffic to
transactions increased 2.5%, contributing to a 2.7% decrease in the number of transactions per
store. Units per transaction were down 3.4% which, combined with a 1.8% decrease in average unit
retail, contributed to a 5.2% decrease in dollars per transaction over the comparable fiscal 2010
period.
25
Direct Marketing Sales
Direct marketing sales in the third quarter of 2011 decreased 12.9% compared to the third quarter
of 2010, and the percentage of our net sales derived from direct marketing decreased slightly from
19.1% in the third quarter of 2010 to 17.8% in the third quarter of 2011. Our direct marketing
sales decrease is primarily due to reductions in red-line phone sales year-over-year, with higher
levels and a better allocation of merchandise inventories in our store locations reducing red-line
phone demand. Internet sales also decreased slightly with promotional activity successfully driving
increased orders but lower units per order, with Internet average order values down 9.1% compared
to the third quarter of 2010. Internet sales as a percentage of total direct marketing sales
increased to 74.5% in the third quarter of 2011 from 67.2% in the third quarter of 2010, driven by
increases in traffic and transaction counts, reflecting continued changing trends in consumer
purchasing behavior.
Year-to-date direct marketing sales decreased 9.8% compared to the same period of the prior year,
driven by weaker than anticipated customer response to our spring, summer and early fall
merchandise assortments with comparative decreases in red-line phone sales year-over-year having
the most significant impact, 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 77.2% in the thirty-nine weeks ended October 29, 2011 from
70.0% in the thirty-nine weeks ended October 30, 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
thirty-nine weeks ended October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Increase
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
Cost of sales, buying and occupancy
|
|
$
|
186.2
|
|
|
$
|
171.4
|
|
|
$
|
14.8
|
|
|
$
|
587.9
|
|
|
$
|
548.0
|
|
|
$
|
39.9
|
|
Percentage of net sales
|
|
|
66.6
|
%
|
|
|
57.3
|
%
|
|
|
9.3
|
%
|
|
|
69.0
|
%
|
|
|
59.5
|
%
|
|
|
9.5
|
%
|
In the third quarter of 2011, net sales declines of $19.6 million combined with cost of sales,
buying and occupancy increases of $14.8 million, resulting in a 930 basis point decline in gross
profit margin to 33.4% from 42.7% in the third quarter of 2010. This decline in gross profit margin
was driven by deterioration in our merchandise margin, which was down 890 basis points, due to
aggressive and accelerated markdown and promotional pressure on our sales as we sought to increase
traffic, re-engage with our core customer, drive sales and clear slower-moving merchandise to
better align our inventory levels with sales trends. Occupancy and buying expenses, though reduced
year-over-year, primarily due to lower rent expense on a smaller store base, increased 30 basis
points and 10 basis points, respectively, as a percentage of net sales due to negative leverage
from the decline in net sales.
Year-to-date in 2011, net sales declines of $68.6 million combined with cost of sales, buying and
occupancy increases of $39.9 million, resulting in a 950 basis point decline in gross profit margin
to 31.0% from 40.5% in the same period of the prior year. Year-to-date declines in gross profit
margin are consistent with third 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, primarily due to lower rent and depreciation expense,
increased 30 basis points and 20 basis points as a percentage of net sales, respectively, due to
negative leverage from the decline in net sales.
In the remainder of the year, 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.
26
Selling, General and Administrative
The following is a comparison of selling, general and administrative for the thirteen and
thirty-nine weeks ended October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
(Decrease)
|
|
October 29,
|
|
October 30,
|
|
(Decrease)
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Increase
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Selling, general and administrative
|
|
$
|
105.0
|
|
|
$
|
106.3
|
|
|
$
|
(1.3
|
)
|
|
$
|
301.2
|
|
|
$
|
307.5
|
|
|
$
|
(6.3
|
)
|
Percentage of net sales
|
|
|
37.6
|
%
|
|
|
35.5
|
%
|
|
|
2.1
|
%
|
|
|
35.4
|
%
|
|
|
33.4
|
%
|
|
|
2.0
|
%
|
Selling, general and administrative in the third quarter of 2011 was flat compared to the
third quarter of 2010. Year-to-date in 2011, selling, general and administrative results primarily
reflect reductions in certain components of performance-based management incentive compensation,
offset by incremental marketing expenses primarily associated with our national advertising and
television campaigns.
We expect selling, general and administrative expenses for the fourth quarter of 2011 to be impacted by the recording of certain severance and related expense
obligations in connection with the planned retirement of our President and Chief Executive Officer, as announced on December 5, 2011.
Restructuring Charges
The following is a comparison of restructuring charges for the thirteen and thirty-nine weeks ended
October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Increase
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Restructuring charges
|
|
$
|
4.2
|
|
|
$
|
0.2
|
|
|
$
|
4.0
|
|
|
$
|
7.5
|
|
|
$
|
5.3
|
|
|
$
|
2.2
|
|
Percentage of net sales
|
|
|
1.5
|
%
|
|
|
0.1
|
%
|
|
|
1.4
|
%
|
|
|
0.9
|
%
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
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, severance and related costs, through fiscal 2013 related to our announced
store rationalization plan.
In December 2011, we announced a cost reduction initiative with a goal of reducing annual costs and
expenses by approximately $50.0 million across all areas of the business. This initiative includes
a corporate headcount reduction of approximately 9.0% effected in December 2011. We expect
to incur approximately $3.5 million in restructuring charges in the fourth quarter of 2011 related
to this action.
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 third quarters of 2011 and 2010, we recorded impairment of store assets of $2.1 million and
$0.5 million, respectively, with impairment analyses in the third quarter of 2011 triggered by
reviews of our stores operating results as well as actions
27
under our store rationalization plan and impairment analyses in the third quarter of 2010 triggered
by our expectation to close certain store locations. In the thirty-nine weeks ended October 29,
2011, we recorded impairment of store assets of $3.3 million, including a first quarter of 2011
impairment of store assets of $1.2 million, triggered by our store rationalization plan, in
addition to the $2.1 million impairment of store assets recorded in the third quarter of 2011.
Additional insignificant store impairments were recorded in the prior quarters of 2010 and reported
in the thirty-nine weeks ended October 30, 2010.
Merger-Related Costs
In the thirty-nine weeks ended October 29, 2011 and October 30, 2010, we incurred $0.9 million and
$27.7 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 indicate 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
evaluated events and circumstances through the third quarter of 2011
and did not identify any conditions which indicated that the
goodwill or trademarks should be re-evaluated. We continue to monitor events and circumstances that
may require goodwill and trademarks to be evaluated including any volatility in our market
capitalization.
Interest Expense, net
The following is a comparison of net interest expense for the thirteen and thirty-nine weeks ended
October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
2011
|
|
2010
|
|
Increase
|
|
2011
|
|
2010
|
|
Decrease
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Interest expense, net
|
|
$
|
3.5
|
|
|
$
|
2.3
|
|
|
$
|
1.2
|
|
|
$
|
8.1
|
|
|
$
|
17.1
|
|
|
$
|
(9.0
|
)
|
Net interest expense in the thirteen weeks ended October 29, 2011 increased from the same
period in 2010 due to a combination of increased tax-related interest expense, increased
debt-related interest expense and the addition of $0.6 million in interest expense related to our
trade payables arrangement. Year-over-year, third quarter tax-related interest expense increased
primarily due to interest expense on a discrete tax adjustment recorded in the third quarter of
2011. Third quarter debt-related interest expense increased as our weighted average debt
outstanding increased from $70.9 million in the third quarter of 2010 to $121.5 million in the
third quarter of 2011, with reductions in our effective interest rate, from 4.4% in the third
quarter of 2010 to 3.8% in the third quarter of 2011, partially off-setting this increase. See
Liquidity and Capital Resources Trade Payables Arrangement
for further information regarding the
trade payables arrangement.
Net interest expense for the thirty-nine weeks ended October 29, 2011 decreased from the same
period of the prior year due to reductions in debt-related interest expense and tax-related
interest expense. Year-over-year, debt-related interest expense decreased as the weighted average
debt outstanding decreased from $179.5 in the thirty-nine weeks ended October 30, 2010 to $100.4
million in the thirty-nine weeks ended October 29, 2011 and effective interest rates decreased from
5.7% year-to-date in 2010 to 3.7% year-to-date in 2011. Reductions in tax-related interest expense
are correlated to the recording of significant discrete tax adjustments in the second quarter of
2010, for which no similar discrete adjustments have been recorded year-to-date in fiscal 2011.
28
Income Tax Expense
The following is a comparison of income tax expense for the thirteen and thirty-nine weeks ended
October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
|
|
2011
|
|
2010
|
|
Decrease
|
|
2011
|
|
2010
|
|
Decrease
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Income tax expense
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
|
|
|
$
|
1.5
|
|
|
$
|
3.9
|
|
|
$
|
(2.4
|
)
|
For the thirty-nine weeks ended October 29, 2011 and October 30, 2010, our effective income
tax rate, including discrete items, was (2.7%) and 27.5%, 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 thirty-nine weeks ended
October 29, 2011 and October 30, 2010 was impacted primarily by changes in estimates related to
previously existing uncertain tax positions based on new information and the recording of an
additional uncertain tax position.
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.
The income (loss) from discontinued operations for the thirteen and thirty-nine weeks ended October
29, 2011 includes 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 of 2011 settlement of one of the two remaining J. Jill store leases.
The income from discontinued operations for the thirteen and thirty-nine weeks ended October 30,
2010 includes favorable adjustments to other assets, sales tax liabilities and estimated lease
liabilities including the second quarter of 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 leases of the retained and closed J. Jill retail locations, partially offset by
on-going lease and other liability adjustments related to the J. Jill, Talbots Kids and Mens
businesses.
Liquidity and Capital Resources
Our operating losses year-to-date have challenged our capital resources, with net cash used in
operating activities for the thirty-nine weeks ended October 29, 2011 increasing $82.6 million over
the comparable period of the prior year and the amount outstanding under our revolving credit facility
increasing $56.2 million over the same period of the prior year.
We primarily finance our working capital needs, operating costs, capital expenditures, strategic
initiatives, restructurings, debt, interest and other payment requirements through cash generated
by operations, our existing credit facility and credit from vendors and our sourcing agent. 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.
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 sufficient 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
29
other operating cash requirements at all times and successfully fund and execute our operating,
cost reduction and strategic initiatives.
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
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 October 29, 2011, our effective interest
rate was 3.9%, and we had additional borrowing availability of up to $69.3 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
30
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, as defined, making
loans, 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.
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.
As of October 29, 2011, we had borrowings of $124.9 million outstanding under the Credit Facility,
outstanding letters of credit related to merchandise purchases of $0.6 million under the letter of
credit sub-facility and additional letter of credit availability of up to $24.4 million under the
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.
Trade Payables Arrangement
On September 1, 2011, 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 entered into an
arrangement with our exclusive global apparel sourcing agent, whereby we are able to extend payment
terms for merchandise purchases sourced by our exclusive agent. Under this arrangement, our
sourcing agent settles our merchandise accounts payable with the vendors organized under the buying
agency agreement as they become due and extends our payment obligation up to an additional 30 days,
at which time we are obligated to reimburse our sourcing agent the full amount of merchandise
accounts payable due plus pay accrued fees and interest. 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 became effective for amounts that are or
became due beginning on September 1, 2011 and continues until February 29, 2012, with an option to
renew for an additional six month period upon the mutual agreement of the Company and our sourcing
agent, which
31
we cannot assure. This arrangement is subject to suspension or earlier termination as provided in
the arrangement, including any termination by our sourcing agent upon 28 days notice at any time.
In addition, our sourcing agent 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 merchandise
purchases, which may be suspended at the discretion of the sourcing agent. As of October 29, 2011,
$39.4 million of our accounts payable were extended under this arrangement, and we had outstanding
letters of credit issued by our sourcing agent of $3.8 million. During the thirteen and thirty-nine
weeks ended October 29, 2011, we recorded $0.6 million of fees and interest under these
arrangements. No amounts were overdue under this arrangement during the quarter.
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 and our sourcing agent.
In light of our operating performance in the thirty-nine weeks ended October 29, 2011, we are in
the process of implementing measures which will seek to improve our profitability and increase the
level and flexibility of cash available for funding operations and working capital needs.
|
|
|
In December 2011, we announced a cost reduction initiative with a goal of reducing
annual costs and expenses by approximately $50.0 million across all areas of the business
by the end of fiscal 2012. With this initiative, we will seek to continue to improve our financial and capital flexibility, while focusing our
strategic reinvestment in those areas of the business that are expected to generate
meaningful returns. Key components of this initiative include:
|
|
o
|
|
Lower levels of marketing spend, including the suspension of national
advertising and television campaigns in the near-term;
|
|
|
o
|
|
Exploring and implementing process efficiencies and structural
streamlining across all areas of the business, including reducing corporate
headcount by approximately 9.0% in December 2011 and
|
|
|
o
|
|
Implementing a store payroll rationalization program whereby we will seek
to adjust the composition of our store workforce and reduce store payroll hours by
managing to improved productivity standards, aided by the implementation of a
workforce management system.
|
|
|
|
In conjunction with these direct cost reductions, we announced a decrease in the level of
planned capital expenditures for fiscal 2012 and are planning reductions in our level of
merchandise inventory commitments in fiscal 2012 which should also contribute to lower
levels of logistics, handling and shipping costs.
|
|
|
|
|
We expect to incur approximately $3.5 million in restructuring charges related to the
corporate headcount reduction component of our cost reduction initiative and are still
evaluating the expected costs of any additional components of this initiative, if any. We
anticipate that we will realize savings related to actions taken under this initiative
beginning in the next fiscal year.
|
|
|
|
|
Additionally, we are working to improve our net sales and productivity with certain of
our strategic initiatives, including our store rationalization plan, store re-image
initiative, information technology systems upgrades, segmentation strategy and upscale
outlet expansion. We will continue to closely evaluate the results of the phases of these
initiatives implemented to-date and adjust our execution of these initiatives as needed. We
remain committed to these strategic initiatives and the productivity and profitability
improvements that we expect these initiatives will
ultimately deliver and expect to continue to allocate our capital resources to the
continuing implementation of these initiatives as practicable, focusing our investment on
the areas which are expected to generate meaningful returns. These initiatives are all in
their early stages, and the benefits anticipated from these strategic initiatives may take
longer than expected to be realized.
|
32
|
|
|
We continue to work to evolve our merchandise assortment; and throughout the third
quarter of 2011, we saw increasingly positive momentum in our customers response to our
product offering, particularly in merchandise categories targeted for adjustment in the
second half of fiscal 2011, which helped to drive net sales improvements in the last month
of the quarter. The evolution and refinement of our merchandise assortment is an on-going
process that will continue to be a key focus area.
|
|
|
|
|
In September 2011, we entered into an arrangement with our exclusive global apparel
sourcing agent, whereby we have the option to extend payment terms for merchandise
purchases sourced by our exclusive agent. In addition our sourcing agent agreed to extend
letters of credit, on behalf and at the request of the Company, to vendors organized under
our buying agency agreement for certain merchandise purchases. This arrangement has
provided us with greater flexibility in planning and managing our capital resources. See
Trade Payables Arrangement
for additional information regarding this arrangement.
|
Our cash and cash equivalents were $19.3 million and working capital was $19.8 million as of
October 29, 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.
While we expect to see a continuation of challenging net sales and gross profit margin trends
throughout the remainder of the fiscal year, our operating plan for fiscal 2012 contemplates
improvements in our net sales, operating results and cash flows from operations, when compared to
our results for fiscal 2011, as we progress with the implementation of our cost reduction and other
strategic initiatives. 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 will occur. 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, seeking to further reduce costs and adjust cash spend or evaluating alternatives and
opportunities to obtain additional sources of liquidity. We cannot assure that any of 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 thirty-nine weeks ended
October 29, 2011 and October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
October 30,
|
|
|
2011
|
|
2010
|
|
|
(In millions)
|
Net cash used in operating activities
|
|
$
|
(90.7
|
)
|
|
$
|
(8.1
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(34.5
|
)
|
|
|
314.3
|
|
Net cash provided by (used in) financing activities
|
|
|
136.5
|
|
|
|
(409.6
|
)
|
Cash used in operating activities
Cash used in operating activities was $90.7 million during the thirty-nine weeks ended October 29,
2011 compared to $8.1 million during the thirty-nine weeks ended October 30, 2010. Cash used in
operating activities in the thirty-nine weeks ended October 29, 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 used in operating activities in the thirty-nine weeks ended October 30, 2010 is the
result of cash used in working capital changes, partially offset by earnings excluding non-cash
items in the period-to-date. The $82.6
33
million comparative decrease in cash from operating activities is due to an $82.0 million reduction
in earnings (loss) excluding non-cash items, with cash used in working capital changes flat
year-over-year.
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 thirty-nine weeks
ended October 29, 2011 was $34.8 million compared to $18.7 million during the thirty-nine weeks
ended October 30, 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 expansion of our upscale outlets, with 14 new locations opening in the thirty-nine weeks ended
October 29, 2011.
Cash provided by investing activities of $333.0 million during the thirty-nine weeks ended October
30, 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 $136.5 million during the thirty-nine weeks ended October
29, 2011 compared to cash used in financing activities of $409.6 million during the thirty-nine
weeks ended October 30, 2010. This change is primarily correlated to an outstanding debt increase
in the thirty-nine weeks ended October 29, 2011 compared to an outstanding debt reduction in the
thirty-nine weeks ended October 30, 2010, which reflects the full repayment of $486.5 million in
related party debt under the BPW Transactions. Further, in the thirty-nine weeks ended October 29,
2011, we extended $39.4 million of accounts payable under our trade payables arrangement. See
Trade
Payables Arrangement
for further information. Net cash borrowings in both periods presented were
made under our Credit Facility. The increase in the net amount borrowed under the Credit Facility
during the thirty-nine weeks ended October 29, 2011, compared to the same period of the prior year,
corresponds to the reduction in cash flows from operations in the comparative periods. See
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 September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-08,
Testing Goodwill for Impairment
. ASU 2011-08 amends Accounting
Standards Codification (ASC) 350-20,
Goodwill
, by providing entities which are testing goodwill
for impairment with the option of performing a qualitative assessment before calculating the fair
value of the reporting unit. If the entity determines, on the basis of qualitative factors, that it
is more likely than not that the fair value of the reporting unit exceeds the carrying amount,
further testing of goodwill for impairment would not need to be performed. The ASU does not change
how goodwill is calculated or assigned to reporting units, revise the requirement to test goodwill
annually for impairment or amend the requirement to test goodwill for impairment between annual
tests if events or circumstances warrant; however the ASU does revise the examples of events and
circumstances that an entity should consider in its assessment. ASU 2011-08 will be effective for
us for interim and annual periods beginning after December 15, 2011, with early adoption permitted. We do not expect the
adoption of this ASU to have any impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income.
ASU 2011-05
amends 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,
34
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 our
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 thirty-nine weeks ended
October 29, 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.
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, anticipated cost savings and other
reduced spending 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:
|
|
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;
|
35
|
|
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 and cost reduction initiatives and other cash needs, and to obtain
further increases in our Credit Facility, extend and continue our trade payables arrangement
with our sourcing agent and 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 ability to reduce spending as needed;
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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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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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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, including the ability to maintain adequate
system security controls;
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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 October 29, 2011, we had outstanding variable rate borrowings of $124.9 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
October 29, 2011. Our Pension Plan assets are commonly 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.
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 October 29, 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
37
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 October 29, 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. On October 17, 2011, Talbots and the
remaining defendants filed a motion to dismiss all of the claims asserted in the amended complaint
pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private
Securities Litigation Reform Act of 1995. 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 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 October 29, 2011, approximately $0.4 million related to this assessment remains to
be paid. An additional assessment, relating to a subsequent period, has also been appealed
38
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.
The unsolicited offer we recently received to acquire the Company may create uncertainty that
could adversely impact our business.
On December 6, 2011 we received an unsolicited offer from Sycamore Partners to acquire the Company.
This unsolicited proposal could potentially expose us to a number of risks, including fluctuations
in our stock price; potential limitations on our ability to execute our business plans and
strategic initiatives; difficulties in hiring, retaining and motivating key personnel; any negative
reaction of our suppliers, sourcing agent or landlords during this process and any attendant
difficulties in maintaining or extending relationships or arrangements in response to such
unsolicited proposal including our financing or other arrangements with our sourcing agent, leases,
and other ongoing relationships; incurrence of increased costs associated with this proposal
including outside consultant, advisor and legal fees; and the impact of any distraction caused by
this proposal on our employees. The occurrence of any one or more of the above could have an
adverse impact on our business, financial results, liquidity and financial condition.
If
for any reason we do not meet the NYSE continued listing requirements, our common stock could be delisted.
The continued listing requirements of the New York Stock Exchange (NYSE) require, among other things, that
the average closing price of our common stock be above $1.00 for over 30 consecutive trading days as well as that
our market capitalization meet certain minimum levels. We generally would have a specified period of time to cure
any non-compliance, and we would intend to take steps to cure any such non-compliance should we fall below the
NYSEs requirements. However if at the end of any cure period, we were unable to satisfy the NYSE criteria for
continued listing, our common stock would be subject to delisting,
which may reduce the liquidity and market price
of our common stock and reduce the number of investors willing to hold or acquire our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A summary of our repurchase activity under certain equity programs for the thirteen weeks ended
October 29, 2011 is set forth below:
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Approximate Dollar Value
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Total Number of
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Average
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of Shares that May Yet Be
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Shares
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Price Paid
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Reacquired Under the
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Period
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Reacquired (1)
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per Share
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Equity Award Programs (2)
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July 31, 2011 through August 27, 2011
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7,754
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$
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1.58
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$
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16,644
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August 28, 2011 through October 1, 2011
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9,695
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0.43
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16,561
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October 2, 2011 through October 29, 2011
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196,111
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0.06
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14,539
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Total
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213,560
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$
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0.13
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$
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14,539
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(1)
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We reacquired 204,655 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 8,905 shares of common stock from certain employees to cover tax
withholding obligations from the vesting of stock at a weighted average acquisition price of
$2.85 per share.
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(2)
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As of October 29, 2011, there were 1,453,932 shares of nonvested stock that were subject to
buyback at $0.01 per share, or $14,539.32 in the aggregate, that we have the option to
reacquire if the holders employment is terminated prior to vesting.
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Item 5. Other Information
As previously reported, the Companys Board of Directors approved amended and restated by-laws of
the Company (By-laws) on May 19, 2011, which among other items, clarify and add procedural and
informational requirements for advance notice of director nominations in Sections 1.13 and 1.14,
and accordingly, made corresponding changes to the By-law references in its Policy Regarding the
Selection of New Director Candidates and Shareholder Nomination of Director Candidates (Policy)
to incorporate such applicable By-law changes into the Policy.
Item 6. Exhibits
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. (1)
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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). (2)
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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). (2)
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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. (2)
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101.INS
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XBRL Instance Document. (3)
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101.SCH
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XBRL Schema Document. (3)
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101.CAL
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XBRL Calculation Linkbase Document. (3)
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101.LAB
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XBRL Labels Linkbase Document. (3)
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101.PRE
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XBRL Presentation Linkbase Document. (3)
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101.DEF
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XBRL Definition Linkbase Document. (3)
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(1)
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Incorporated by reference to the Current Report on Form 8-K filed on August 2, 2011.
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(2)
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Filed with this Form 10-Q.
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(3)
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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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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:
December 8, 2011
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THE TALBOTS, INC.
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By:
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/s/ Michael Scarpa
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Michael Scarpa
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Chief Operating Officer,
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Chief Financial Officer and Treasurer
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(Principal Financial and Accounting Officer)
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