Too, Inc. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 30, 2005
OR
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o |
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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 1-14987
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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31-1333930
(I.R.S. Employer Identification No.) |
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8323 Walton Parkway, New Albany, OH
(Address of principal executive offices)
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43054
(Zip Code) |
(614) 775-3500
(Registrants telephone number, including area code)
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.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Common Stock |
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Outstanding at August 31, 2005 |
$.01 Par Value |
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32,987,015 Shares |
TOO, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
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Thirteen |
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Twenty-Six |
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Weeks Ended |
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Weeks Ended |
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July 30, |
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July 31, |
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July 30, |
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July 31, |
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2005 |
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2004 |
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2005 |
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2004 |
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(Restated) |
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(Restated) |
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Net sales |
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$ |
154,939 |
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$ |
139,940 |
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$ |
319,348 |
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$ |
294,084 |
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Cost of goods sold, including buying
and occupancy costs |
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101,272 |
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95,641 |
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204,078 |
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199,044 |
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Gross income |
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53,667 |
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44,299 |
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115,270 |
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95,040 |
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General, administrative and store
operating expenses |
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48,203 |
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42,166 |
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98,590 |
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85,089 |
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Operating income |
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5,464 |
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2,133 |
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16,680 |
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9,951 |
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Interest income, net |
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368 |
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201 |
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827 |
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414 |
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Earnings before income taxes |
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5,832 |
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2,334 |
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17,507 |
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10,365 |
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Provision for income taxes |
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1,865 |
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758 |
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6,131 |
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3,737 |
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Net income |
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$ |
3,967 |
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$ |
1,576 |
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$ |
11,376 |
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$ |
6,628 |
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Net income per share: |
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Basic |
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$ |
0.12 |
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$ |
0.05 |
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$ |
0.33 |
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$ |
0.19 |
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Diluted |
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$ |
0.12 |
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$ |
0.05 |
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$ |
0.33 |
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$ |
0.19 |
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Weighted average common shares: |
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Basic |
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33,400 |
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34,446 |
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34,079 |
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34,425 |
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Diluted |
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33,691 |
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34,786 |
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34,389 |
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34,850 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share amounts)
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July 30, |
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January 29, |
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2005 |
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2005 |
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ASSETS |
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Current Assets: |
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Cash and equivalents |
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$ |
33,397 |
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$ |
26,212 |
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Investments |
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84,443 |
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158,630 |
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Restricted assets |
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958 |
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954 |
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Receivables |
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10,142 |
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10,476 |
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Income taxes receivable |
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368 |
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Inventories |
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81,270 |
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62,441 |
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Store supplies |
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14,683 |
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13,464 |
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Prepaids and other assets |
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10,990 |
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10,082 |
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Total current assets |
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235,883 |
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282,627 |
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Property and equipment, net |
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190,491 |
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180,449 |
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Long-term investments |
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8,554 |
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6,776 |
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Deferred income taxes |
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11,812 |
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9,046 |
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Other assets |
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14,852 |
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14,798 |
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Total assets |
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$ |
461,592 |
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$ |
493,696 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
39,249 |
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$ |
29,431 |
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Accrued expenses |
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44,216 |
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47,582 |
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Income taxes payable |
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14,503 |
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24,559 |
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Total current liabilities |
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97,968 |
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101,572 |
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Deferred tenant allowances from landlords |
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45,653 |
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44,529 |
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Other long-term liabilities |
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25,951 |
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25,071 |
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Commitments and contingencies |
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SHAREHOLDERS EQUITY |
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Preferred stock, 50 million shares authorized |
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Common stock, $.01 par value, 100 million shares authorized,
35.7 million and 34.9 million shares issued,
33.0 million and 34.7 million shares outstanding
at July 30, 2005 and January 29, 2005, respectively |
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357 |
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349 |
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Treasury stock, at cost, 2,702,709 and 165,709 shares
at July 30, 2005 and January 29, 2005, respectively |
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(60,154 |
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(4,391 |
) |
Paid in capital |
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141,593 |
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127,718 |
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Retained earnings |
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210,224 |
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198,848 |
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Total shareholders equity |
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292,020 |
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322,524 |
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Total liabilities and shareholders equity |
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$ |
461,592 |
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$ |
493,696 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Twenty-Six Weeks Ended |
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July 30, |
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July 31, |
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2005 |
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2004 |
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(Restated) |
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Cash flows from operating activities: |
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Net income |
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$ |
11,376 |
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$ |
6,628 |
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Impact of other operating activities on cash flows: |
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Depreciation expense |
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13,327 |
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13,425 |
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Amortization of tenant allowances |
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(3,853 |
) |
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(3,386 |
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Loss on disposal of fixed assets |
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|
860 |
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375 |
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Changes in assets and liabilities: |
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Inventories |
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(18,829 |
) |
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(17,403 |
) |
Accounts payable and accrued expenses |
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|
7,300 |
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3,272 |
|
Income taxes |
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(7,201 |
) |
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(4,216 |
) |
Other assets |
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(1,847 |
) |
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|
1,101 |
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Tenant allowances received |
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4,977 |
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|
3,718 |
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Other long-term liabilities |
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880 |
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|
309 |
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Net cash provided by operating activities |
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6,990 |
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3,823 |
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Investing activities: |
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Capital expenditures |
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(25,145 |
) |
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(14,904 |
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Funding of nonqualified benefit plans |
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(431 |
) |
Purchase of investments |
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(164,051 |
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(199,610 |
) |
Sale of investments |
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236,460 |
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208,130 |
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Proceeds from sale of fixed assets |
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916 |
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Increase in restricted assets |
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(4 |
) |
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(5,934 |
) |
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Net cash provided by (used for) investing activities |
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48,176 |
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(12,749 |
) |
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Financing activities: |
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Repurchase of common stock |
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(55,763 |
) |
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Change in cash overdraft |
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(210 |
) |
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|
3,059 |
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Proceeds from exercise of stock options |
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7,992 |
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|
964 |
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Net cash (used for) provided by financing activities |
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(47,981 |
) |
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4,023 |
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Net increase (decrease) in cash and equivalents |
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7,185 |
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(4,903 |
) |
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Cash and equivalents, beginning of year |
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26,212 |
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|
4,991 |
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Cash and equivalents, end of year |
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$ |
33,397 |
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$ |
88 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Too, Inc., (referred to herein as Too, the Company, we or us) is the operator of two
specialty retailing businesses, Limited Too and Justice. We were established in 1987 and, prior to
our August 1999 spin-off, were a wholly-owned subsidiary of The Limited, Inc. (The Limited or
Limited Brands). Since the spin-off, we have operated as an independent, separately traded,
public company. Limited Too sells apparel, underwear, sleepwear, swimwear, footwear, lifestyle and
personal care products for fashion-aware, trend-setting young girls ages seven to fourteen years.
Justice, launched by us in January 2004, sells value-priced sportswear and accessories for girls
ages seven to fourteen years.
The accompanying consolidated financial statements include the accounts of Too, Inc. and all
subsidiaries that are more than 50% owned and controlled. All significant intercompany balances
and transactions have been eliminated in consolidation. These statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP).
We have one reportable segment that includes all of our products.
A more complete discussion of our significant accounting policies can be found in Note 1 to the
consolidated financial statements in our Form 10-K for the fiscal year ended January 29, 2005. In
the opinion of management, the accompanying consolidated financial statements reflect all
adjustments (which are of a normal recurring nature) necessary to present fairly the financial
position and results of operations and cash flows for the interim periods, but are not necessarily
indicative of the results of operations to be anticipated for the fiscal year ending January 28,
2006 (the 2005 fiscal year).
Certain reclassifications have been made to the prior period financial statements to conform to the
current period presentation. The amounts reclassified did not have an effect on our results of
operations or shareholders equity.
2. Restatement of Prior Financial Information
In late 2004 we began a review of lease accounting and the applicable accounting literature,
Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, FASB
Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, and FASB Technical
Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases. As a result of
that review, we identified areas where our historical accounting practices required correction to
conform to GAAP.
Our historical accounting practice had been to recognize straight-line rent expense and certain
tenant allowances for operating leases beginning on the store opening date specified in the lease,
which had the effect of excluding the build-out period for our stores from the calculation of the
period over which we expensed rent. We determined that the proper accounting practice is to
include the build-out period in the amortization period for straight-line rent expense and tenant
allowances on all operating leases and we changed our lease accounting practice accordingly. In
addition, tenant allowances have been reclassified from a contra asset in property and equipment,
net, to deferred tenant allowances from landlords in the consolidated balance sheets. The
amortization of those tenant allowances has also been reclassified from a reduction of depreciation
expense to a reduction of buying and occupancy expense in the consolidated statements of operations
and from a reduction of capital expenditures to an increase in cash provided by operating
activities in the consolidated statements of cash flows.
6
The restatement includes adjustments to costs of goods sold, buying and occupancy costs, gross
income, operating income, earnings before income taxes, provision for income taxes, net income and
earnings per share. These changes increased net income and earnings per share by $0.2 million and
$0.01 per diluted share in the second fiscal quarter of 2004. Although the restatement did not
impact any net cash flows, it did have the effect of increasing operating cash flows and increasing
capital expenditures by a similar amount.
The restated amounts and line items impacted by the restatement are provided below.
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July 31, 2004 |
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As Previously |
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(In thousands, except per share data) |
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Reported |
|
As Restated |
Consolidated Balance Sheets: |
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|
|
Receivables |
|
$ |
7,116 |
|
|
$ |
8,213 |
|
Property and equipment, net |
|
|
143,880 |
|
|
|
183,195 |
|
Deferred income taxes |
|
|
6,780 |
|
|
|
10,032 |
|
Accrued expenses |
|
|
40,244 |
|
|
|
40,949 |
|
Deferred tenant allowances from landlords |
|
|
|
|
|
|
43,832 |
|
Other long-term liabilities |
|
|
14,388 |
|
|
|
25,284 |
|
Total shareholders equity |
|
$ |
289,875 |
|
|
$ |
284,680 |
|
|
|
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|
|
|
|
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|
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|
|
|
|
|
|
Thirteen Weeks Ended |
|
Twenty-Six Weeks Ended |
|
|
July 31, 2004 |
|
July 31, 2004 |
|
|
As Previously |
|
|
|
|
|
As Previously |
|
|
|
|
Reported |
|
As Restated |
|
Reported |
|
As Restated |
Consolidated Statements of Operations: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of goods
sold, including buying and occupany costs |
|
$ |
95,941 |
|
|
$ |
95,641 |
|
|
$ |
199,033 |
|
|
$ |
199,044 |
|
Gross income |
|
|
43,999 |
|
|
|
44,299 |
|
|
|
95,052 |
|
|
|
95,040 |
|
Operating income |
|
|
1,833 |
|
|
|
2,133 |
|
|
|
9,963 |
|
|
|
9,951 |
|
Earnings before income taxes |
|
|
2,034 |
|
|
|
2,334 |
|
|
|
10,377 |
|
|
|
10,365 |
|
Provision for income taxes |
|
|
642 |
|
|
|
758 |
|
|
|
3,742 |
|
|
|
3,737 |
|
Net income |
|
$ |
1,392 |
|
|
$ |
1,576 |
|
|
$ |
6,635 |
|
|
$ |
6,628 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
Diluted |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended July 31, 2004 |
|
|
As Previously |
|
|
|
|
Reported |
|
As Restated |
Consolidated Statements of Cash Flows: |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
817 |
|
|
$ |
3,823 |
|
Net cash provided by (used for) investing activities (1) |
|
|
(8,847 |
) |
|
|
(12,749 |
) |
|
|
|
(1) |
|
As previously reported, after impact of revision in the classification of certain
securities as discussed below. |
We have also revised the classification of auction-rate marketable securities held by us from
cash and cash equivalents to investments. For the twenty-six weeks ended July 31, 2004, before
this revision in classification, net cash provided by investing activities related to these
investments of $8.5 million was included in cash and cash equivalents in the Consolidated Statement
of Cash Flows.
7
All referenced amounts for prior periods in these financial statements and the notes thereto
reflect the balances and amounts on a restated basis.
3. Investments
At July 30, 2005, we held $26.8 million of investments in securities that were classified as
held-to-maturity based on our intent and ability to hold the securities to maturity. We determined
the appropriate classification at the time of purchase. All such securities held by us at July 30,
2005 were municipal debt securities issued by states of the United States or political subdivisions
of the states.
The table below details the investments classified as held-to-maturity owned by us at July 30, 2005
and January 29, 2005, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
January 29, 2005 |
|
|
|
Maturity of |
|
|
Maturity of |
|
|
|
Less than 1 |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
Year |
|
|
1 to 5 Years |
|
|
Year |
|
|
1 to 5 Years |
|
Aggregate fair value |
|
$ |
18,163 |
|
|
$ |
8,454 |
|
|
$ |
19,521 |
|
|
$ |
6,726 |
|
Gross unrealized holding gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized holding losses |
|
|
33 |
|
|
|
100 |
|
|
|
44 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
18,196 |
|
|
$ |
8,554 |
|
|
$ |
19,565 |
|
|
$ |
6,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At July 30, 2005 we held $66.2 million of investments, which include auction rate municipal
bonds, variable rate municipal demand notes, and preferred shares of tax-exempt closed-end mutual
funds that were classified as available-for-sale securities. Our investments in these securities
are recorded at cost, which approximates fair value due to their variable interest rates, which
typically reset every 7 to 35 days. Despite the long-term nature of their stated contractual
maturities, we have the ability to quickly liquidate these securities to support current
operations. As a result, we had no cumulative gross unrealized holding gains (losses) or gross
realized gain (losses) from these available-for-sale investments. All income generated from these
current investments was recorded as interest income.
The table below details the marketable securities classified as available-for-sale owned by us at
July 30, 2005 and January 29, 2005, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, 2005 |
|
|
January 29, 2005 |
|
|
|
Maturity of |
|
|
Maturity of |
|
|
|
Less than 1 Year |
|
|
Less than 1 Year |
|
Aggregate fair value |
|
$ |
66,247 |
|
|
$ |
139,065 |
|
Gross unrealized holding gains |
|
|
|
|
|
|
|
|
Gross unrealized holding losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
66,247 |
|
|
$ |
139,065 |
|
|
|
|
|
|
|
|
8
4. Inventories
Inventories are principally valued at the lower of average cost or market, on a first-in-first-out
basis, utilizing the retail method. An initial markup is applied to inventory at cost in order to
establish a cost-to-retail ratio. Permanent markdowns, when taken, reduce both the retail and cost
components of inventory on hand so as to maintain the already established cost-to-retail
relationship.
Our fiscal year is comprised of two principal selling seasons: Spring (the first and second
quarters) and Fall (the third and fourth quarters). At fiscal quarter end, we reduce our inventory
value by recording a markdown reserve that represents the estimated future anticipated selling
price decreases necessary to sell-through the current season inventory. In addition, the inventory
value is further reduced for estimates of lost or stolen items based on historical trends.
5. Property and Equipment
Property and equipment at July 30, 2005 and January 29, 2005 consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, |
|
|
January 29, |
|
|
|
2005 |
|
|
2005 |
|
|
Land and land improvements |
|
$ |
8,121 |
|
|
$ |
8,105 |
|
Buildings |
|
|
43,836 |
|
|
|
42,049 |
|
Furniture, fixtures and equipment |
|
|
181,495 |
|
|
|
176,973 |
|
Leasehold improvements |
|
|
110,225 |
|
|
|
108,136 |
|
Construction-in-progress |
|
|
9,336 |
|
|
|
2,058 |
|
|
|
|
|
|
|
|
Total |
|
|
353,013 |
|
|
|
337,321 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
(162,522 |
) |
|
|
(156,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
190,491 |
|
|
$ |
180,449 |
|
|
|
|
|
|
|
|
Our software, whether purchased and modified or internally developed, is capitalized and
amortized using the straight-line method over the estimated useful life, usually 3 to 5 years. In
accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, we capitalize certain costs associated with internally
developed or modified software. These costs include, but are not limited to, employee payroll
costs for time devoted to developing the projects as well as external direct costs for materials
and services. These costs are expensed until the software project reaches the development stage.
Subsequent additions or upgrades to existing software are capitalized only to the extent that they
add value and additional performance functionality. Software maintenance and training costs are
expensed in the period in which they are incurred. The capitalization of software requires
management judgment in determining when a project has reached the development stage.
6. Stock Based Compensation
We account for stock-based compensation under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No compensation expense for stock options has been recognized as all
options granted had an exercise price equal to the market value of the underlying common stock on
the date of the grant. We recognize compensation expense related to restricted stock awards on the
basis of the fair value of the stock, amortized over the vesting period.
9
The following table illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure,
to stock-based employee compensation (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen |
|
|
Twenty-Six |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
Net income as reported |
|
$ |
3,967 |
|
|
$ |
1,576 |
|
|
$ |
11,376 |
|
|
$ |
6,628 |
|
Stock-based compensation expense
recorded under APB Opinion No. 25,
net of tax |
|
|
777 |
|
|
|
179 |
|
|
|
1,396 |
|
|
|
448 |
|
Stock-based compensation expense
determined under fair value based
method, net of tax |
|
|
(1,451 |
) |
|
|
(1,064 |
) |
|
|
(3,307 |
) |
|
|
(2,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
3,293 |
|
|
$ |
691 |
|
|
$ |
9,465 |
|
|
$ |
4,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
0.33 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.28 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
0.33 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.28 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted is estimated using the
Black-Scholes option-pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen |
|
Twenty-Six |
|
|
Weeks Ended |
|
Weeks Ended |
|
|
July 30, |
|
July 31, |
|
July 30, |
|
July 31, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Expected life (in years) |
|
|
5.3 |
|
|
|
5.0 |
|
|
|
5.3 |
|
|
|
5.0 |
|
Forfeiture rate |
|
|
11 |
% |
|
|
20 |
% |
|
|
11 |
% |
|
|
20 |
% |
Dividend rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price volatility |
|
|
48 |
% |
|
|
49 |
% |
|
|
48 |
% |
|
|
50 |
% |
Risk-free interest rate |
|
|
3.9 |
% |
|
|
3.6 |
% |
|
|
4.0 |
% |
|
|
3.5 |
% |
The weighted average fair value of options granted during the thirteen and twenty-six weeks
ended July 30, 2005 was $10.98 and $12.42, respectively. The weighted average fair value of
options granted during the thirteen and twenty-six weeks ended July 31, 2004 was $7.18 and $7.88,
respectively.
7. Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if stock options or restricted stock were converted to common stock using
the treasury stock method.
10
The following table shows the amounts used in the computation of basic and diluted earnings per
share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen |
|
|
Twenty-Six |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
Net income |
|
$ |
3,967 |
|
|
$ |
1,576 |
|
|
$ |
11,376 |
|
|
$ |
6,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic |
|
|
33,400 |
|
|
|
34,446 |
|
|
|
34,079 |
|
|
|
34,425 |
|
Dilutive effect of stock options and
restricted stock |
|
|
291 |
|
|
|
340 |
|
|
|
310 |
|
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted |
|
|
33,691 |
|
|
|
34,786 |
|
|
|
34,389 |
|
|
|
34,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the options strike price exceeding the average market price of the common shares for
the reporting periods, certain options were excluded from the calculation of net income per diluted
share. For the thirteen and twenty-six weeks ended July 30, 2005, options to purchase 1.2 million
and 1.1 million common shares, respectively, were not included in the computation. For the
thirteen and twenty-six weeks ended July 31, 2004, options to purchase 1.1 million and 1.0 million
common shares, respectively, were not included in the computation.
8. Recently Issued Accounting Standards
In June 2005, the FASB Emerging Issues Task Force (EITF) issued EITF No. 05-6, Determining the
Amortization Period for Leasehold Improvements. This EITF clarifies the determination of the
amortization period for leasehold improvements in operating leases that are either (a) purchased
subsequent to the inception of the lease or (b) acquired in a business combination. The EITF
concluded that the amortization period should be consistent with the period for which straight-line
rents are calculated, including anticipated lease agreement renewals. The guidance is effective
for periods beginning after June 29, 2005. As this is consistent with our current accounting
policy, we do not believe the adoption of EITF No. 05-6 will have a material impact on our
consolidated financial statements.
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and SFAS
No. 3 (SFAS 3), Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
requires retrospective application to prior periods financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. This statement requires that retrospective application of a change
in accounting principle be limited to the direct effects of a change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations, an interpretation of SFAS No. 143, Accounting for Asset Retirement
Obligations. FIN 47 clarifies that the term conditional asset retirement obligation, as used in
SFAS No. 143, refers to a legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method of settlement. FIN
47 also clarifies when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. Retrospective application
11
for interim financial information is permitted but not required. We believe the adoption of FIN 47
will not have a material impact on our financial position.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS No.
123(R)). This Statement requires companies to expense the estimated fair value of stock options
and similar equity instruments issued to employees. Currently, under the provisions of SFAS No.
123, companies are required to calculate the estimated fair value of these share-based payments and
can elect to either include the estimated cost in earnings or disclose the pro forma effect in the
footnotes to their financial statements. We have chosen to disclose the pro forma effect. The
fair value concepts were not changed significantly in SFAS No. 123(R); however, in adopting this
standard, companies must choose among alternative valuation models and amortization assumptions.
Although we have not quantified the valuation and transition method, the adoption of the provisions
of SFAS No. 123(R) could have a significant impact on reported net income and earnings per share.
As such, the adoption may result in amounts that differ from the current pro forma disclosures
under SFAS No. 123. We are in the process of evaluating the adoption of SFAS No. 123(R) and have
not yet determined the impact on our financial position or results of operations.
On April 14, 2005, the U.S. Securities and Exchange Commission announced a deferral of the
effective date of SFAS No. 123(R) for companies until the beginning of their next fiscal year that
begins after June 15, 2005. We will be required to adopt SFAS No. 123(R) in the first quarter of
fiscal 2006.
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Company Overview
We operate two brands: Limited Too, which sells apparel, accessories, footwear, lifestyle and
personal care products for fashion-aware, trend-setting young girls ages seven to fourteen years;
and Justice, which sells value-priced fashion apparel and accessories for young girls ages seven to
fourteen years. Limited Too operates primarily from mall-based locations while Justice operates
primarily from off-mall power strip centers. Limited Too also offers a website where products
comparable to those carried in its stores can be purchased. Our fiscal year is comprised of two
principal selling seasons: spring (the first and second quarters) and fall (the third and fourth
quarters).
Restatement of Prior Financial Information
We have restated the consolidated statements of operations and cash flows for the thirteen and
twenty-six week periods ended July 31, 2004 in this Quarterly Report on Form 10-Q. The restatement
corrects our historical accounting for operating leases and, while the adjustments associated with
the restatement did not impact net sales or net cash flows, the restatement did have an impact on
other financial statement areas.
We have also revised the classification of auction-rate marketable securities held by us from cash
and cash equivalents to current investments. For information with respect to the restatement and
the revised classification of marketable securities see Note 2 to the consolidated financial
statements. Throughout Item 2 of this Quarterly Report on Form 10-Q, all referenced amounts for
affected prior periods and prior period comparisons reflect the balances and amounts on a restated
basis.
Performance Overview
We are very pleased with our results for the second quarter of 2005, which achieved a 140% earnings
per share increase on 5% comparative store sales growth. Additionally, we achieved a 290 basis
point improvement as a percentage of net sales in our gross margin rate for the quarter through
improved initial markup (IMU), lower merchandise markdowns and reduced buying and occupancy
costs.
Net sales for second quarter 2005 improved 11% to $154.9 million, compared to $139.9 million for
the quarter ended July 31, 2004. The sales increase was the result of a 5% comparable store sales
growth and increased store count in our Limited Too and Justice stores. Our analysis of
transaction activity indicates the average number of units per sales transaction (UPT) remained
constant at 3.9 while our average dollar sale (ADS) increased 13% versus the second quarter of
last year. Additionally, while overall average store transactions were down, transactions above
$50 were up 6% when compared to the second quarter of 2004. These transactions above $50 accounted
for over 71% of total sales dollars and 31% of all transactions for second quarter 2005, a
significant increase when compared with 67% and 27%, respectively, for second quarter 2004. Net
income for the quarter was $4.0 million, up 152% from the second quarter 2004 net income of $1.6
million.
For the spring season 2005, net sales improved 9% to $319.3 million, compared to $294.1 million for
spring season 2004. The sales increase was primarily a result of 3% comparable store sales growth
and increased store count in our Limited Too and Justice brands. Our UPT for the spring season
increased 8% to 4.2 units sold per sales transaction, while our ADS increased 12% from spring 2004.
Spring season 2005 transactions above $50 were up 3% from spring season 2004. These transactions
accounted for 74% of total sales dollars and 35% of all transactions, up from 71% and 31%,
respectively, from spring season
13
2004. Net income for the year-to-date period ended July 30, 2005 was $11.4 million, up 72% from
the year-to-date period ended July 31, 2004.
In spring season 2005, we made several changes to our marketing efforts. We removed one spring
catazine and moved the mailing date of our second back-to-school catazine from the second quarter
to the third quarter to better align the drop of the catazine with the timing of back-to-school
dates. We used the savings from our catazine reductions to air two spring television advertising
campaigns. We did not run any television campaigns in spring season 2004.
From a merchandising standpoint, our casual skirts and skorts continue to perform well as do our
casual cut and sewn tops, woven shirts, denim jeanswear, and activity shorts. Additionally, of our
non-hanging merchandise, our footwear, sleepwear and jewelry have all done well, posting
double-digit average store sales increases for the quarter. Overall, we feel that our success
during the quarter can be attributed to having the right products in our stores at the right time
for our girl. We hope to keep this momentum alive as we head into our back-to-school season with a
balanced fashion assortment for our girly girl as well as our sporty girl.
The table below shows line items as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen |
|
|
Twenty-Six |
|
|
|
Weeks Ended |
|
|
Weeks Ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold, including buying
and occupancy costs |
|
|
65.4 |
% |
|
|
68.3 |
% |
|
|
63.9 |
% |
|
|
67.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross income |
|
|
34.6 |
% |
|
|
31.7 |
% |
|
|
36.1 |
% |
|
|
32.3 |
% |
General, administrative and store
operating expenses |
|
|
31.1 |
% |
|
|
30.2 |
% |
|
|
30.9 |
% |
|
|
28.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3.5 |
% |
|
|
1.5 |
% |
|
|
5.2 |
% |
|
|
3.4 |
% |
Interest income, net |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
0.3 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
3.7 |
% |
|
|
1.6 |
% |
|
|
5.5 |
% |
|
|
3.5 |
% |
Provision for income taxes |
|
|
1.1 |
% |
|
|
0.5 |
% |
|
|
1.9 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2.6 |
% |
|
|
1.1 |
% |
|
|
3.6 |
% |
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Operational Summary
Summarized operational data for the thirteen and twenty-six week periods ended July 30, 2005 and
July 31, 2004 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
Twenty-Six Weeks Ended |
|
|
|
July 30, |
|
|
July 31, |
|
|
Percent |
|
|
July 30, |
|
|
July 31, |
|
|
Percent |
|
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Net sales (millions) |
|
$ |
154.9 |
|
|
$ |
139.9 |
|
|
|
11 |
% |
|
$ |
319.3 |
|
|
$ |
294.1 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Too and Justice: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales (1) |
|
|
5 |
% |
|
|
-3 |
% |
|
|
|
|
|
|
3 |
% |
|
|
-1 |
% |
|
|
|
|
Sales per average gross square foot (2) |
|
$ |
59 |
|
|
$ |
57 |
|
|
|
3 |
% |
|
$ |
122 |
|
|
$ |
121 |
|
|
|
1 |
% |
Sales per average store (thousands) (3) |
|
$ |
247 |
|
|
$ |
235 |
|
|
|
5 |
% |
|
$ |
516 |
|
|
$ |
504 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average dollar sales value per transaction
(ADS) (4) |
|
$ |
45 |
|
|
$ |
40 |
|
|
|
13 |
% |
|
$ |
47 |
|
|
$ |
42 |
|
|
|
12 |
% |
Average number of units per transaction (UPT) |
|
|
3.9 |
|
|
|
3.9 |
|
|
|
0 |
% |
|
|
4.2 |
|
|
|
3.9 |
|
|
|
8 |
% |
Number of transactions per average store (thousands) |
|
|
5.5 |
|
|
|
6.0 |
|
|
|
-8 |
% |
|
|
10.8 |
|
|
|
11.8 |
|
|
|
-8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average store size at period end (gross square feet) |
|
|
4,154 |
|
|
|
4,136 |
|
|
|
0 |
% |
|
|
4,154 |
|
|
|
4,136 |
|
|
|
0 |
% |
Total gross square feet at period end (thousands) |
|
|
2,613 |
|
|
|
2,440 |
|
|
|
7 |
% |
|
|
2,613 |
|
|
|
2,440 |
|
|
|
7 |
% |
Inventory per gross square foot at period end |
|
|
31 |
|
|
|
31 |
|
|
|
0 |
% |
|
|
31 |
|
|
|
31 |
|
|
|
0 |
% |
Inventory per store at period end (thousands) |
|
|
129 |
|
|
|
128 |
|
|
|
1 |
% |
|
|
129 |
|
|
|
128 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
614 |
|
|
|
580 |
|
|
|
|
|
|
|
603 |
|
|
|
558 |
|
|
|
|
|
Opened |
|
|
18 |
|
|
|
10 |
|
|
|
|
|
|
|
31 |
|
|
|
34 |
|
|
|
|
|
Closed |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
629 |
|
|
|
590 |
|
|
|
|
|
|
|
629 |
|
|
|
590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Too stores remodeled |
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
12 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Limited Too stores |
|
|
567 |
|
|
|
560 |
|
|
|
|
|
|
|
567 |
|
|
|
560 |
|
|
|
|
|
Number of Justice stores |
|
|
62 |
|
|
|
30 |
|
|
|
|
|
|
|
62 |
|
|
|
30 |
|
|
|
|
|
|
|
|
(1) |
|
A store is included in our comparable store sales calculation once it has completed
52 weeks of operation. Further, stores that have changed more than 20% in gross square feet
are treated as new stores for purposes of this calculation. |
|
(2) |
|
Sales per average gross square foot is the result of dividing net sales for the
fiscal quarter by average gross square feet, which reflects the impact of opening and closing
stores throughout the quarter. |
|
(3) |
|
Sales per average store is the result of dividing net sales for the fiscal quarter
by average store count, which reflects the impact of opening and closing stores throughout the
quarter. |
|
(4) |
|
Average dollar sales value per transaction is the result of dividing gross store
sales dollars for the period by the number of transactions. |
Gross Income
Gross income for the second quarter 2005 improved 290 basis points as a percentage of net sales
(bps) over the second quarter 2004. This was due primarily to improved merchandise margin and
leveraged buying and occupancy expenses. Our merchandise margin benefited from a 70 bps improvement
in IMU and tight inventory controls, which drove quarterly markdown expense down 110 bps from the
same period in 2004. Buying and occupancy costs and other margin items improved 110 bps versus
2004 primarily due to a reduction in catazine expense that arose from shifting the mailing of our
back-to-school catazine from the second quarter into the third quarter as well as the elimination
of a spring sale catazine.
15
Gross income for the spring season 2005 increased 380 bps over the spring season 2004. This
improvement was the result of increased IMU, decreased markdowns and leveraged buying and occupancy
expenses. Our IMU improved 60 bps, while our markdown expenses for spring season 2005 decreased 100
bps when compared to the same period in 2004. Buying and occupancy costs decreased 190 bps
primarily due to our reduced catazine production costs. Freight expenses and other miscellaneous
margin items account for the remaining 30 bps improvement.
Our gross income may not be comparable to that of other retailers since all significant costs
related to our distribution network, with the exception of freight costs, are included in general,
administrative and store operating expenses (see General, Administrative and Store Operating
Expenses section below).
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses increased by $6.0 million and 90 bps for the
second quarter of 2005 over the second quarter of 2004 as outlined in the table below (in
thousands, except basis point amounts):
|
|
|
|
|
|
|
|
|
|
|
Q2 2005 |
|
|
Q2 2005 |
|
|
|
vs. Q2 2004 |
|
|
vs. Q2 2004 |
|
|
|
Dollar change |
|
|
Change in bps |
|
Changes in: |
|
|
|
|
|
|
|
|
Marketing |
|
$ |
3,300 |
|
|
|
210 |
|
Home office |
|
|
2,333 |
|
|
|
90 |
|
Stores |
|
|
1,486 |
|
|
|
(110 |
) |
DC & other |
|
|
(1,082 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
Total Change |
|
$ |
6,037 |
|
|
|
90 |
|
|
|
|
|
|
|
|
Marketing expenses increased primarily due to the airing of our summer sale television
advertising campaign during second quarter 2005, a marketing medium not used in second quarter
2004. Home office expenses increased due to higher incentive compensation and restricted stock
expenses, as well as increases in information technology payroll and consulting expenses related to
the five-year information technology initiative approved by our Board of Directors this year. The
increase in home office expenses was partially offset by a reduction in severance costs related to
the departure of two key executives in 2004. While store payroll and operating expenses were up 5%
in dollars from second quarter 2004, the dollar increase was leveraged by an 11% increase in net
sales, and therefore, we saw a 110 bps reduction compared with second quarter 2004. While we
serviced 36 more stores on average, distribution center expenses decreased 6% from second quarter
2004 leading to a 20 bps improvement from second quarter 2004. Other miscellaneous general and
administrative expenses decreased by 80 bps in second quarter 2005 when compared with second
quarter 2004.
For the twenty-six weeks ended July 30, 2005 general, administrative and store operating expenses
increased by $13.5 million and 200 bps over the similar period of 2004 as outlined in the table
below (in thousands, except basis point amounts):
|
|
|
|
|
|
|
|
|
|
|
Q2 2005 |
|
|
Q2 2005 |
|
|
|
vs. Q2 2004 |
|
|
vs. Q2 2004 |
|
|
|
Dollar change |
|
|
Change in bps |
|
Changes in: |
|
|
|
|
|
|
|
|
Marketing |
|
$ |
6,239 |
|
|
|
190 |
|
Home office |
|
|
3,997 |
|
|
|
70 |
|
Stores |
|
|
4,042 |
|
|
|
(30 |
) |
DC & other |
|
|
(777 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Total Change |
|
$ |
13,501 |
|
|
|
200 |
|
|
|
|
|
|
|
|
16
Marketing expenses increased primarily due to the airing of two television advertising
campaigns in our spring season, where we had no such campaigns in spring season 2004. Home office
expenses for the season increased due to higher incentive compensation and restricted stock expense
as well as increases in information technology payroll and consulting expenses related to the
five-year information technology initiative. Similar to our second quarter, this was partially
offset by a reduction in severance costs related to the departure of two key executives in 2004.
While store payroll and operating expenses were up 7% on a dollar basis from spring season 2004,
the dollar increase was leveraged by a 9% increase in net sales. While we serviced 36 more stores
on average, distribution center expenses decreased 4% from spring season 2004, leading to a 20 bps
improvement. Other miscellaneous general and administrative expenses decreased by 10 bps in spring
2005 when compared with spring 2004.
Financial Condition
Our balance sheet remains strong due primarily to our positive cash flows from operations. We were
able to finance all capital expenditures with existing working capital combined with cash generated
from operations. We ended the quarter with $117.8 million in cash and short-term investments. In
assessing the financial position of the business, management considers factors such as cash flow
from operations, capital expenditures and investment activities to be key indicators of financial
health.
Liquidity and Capital Resources
Cash generated from operations remains the primary source to support ongoing operations, projected
business growth, seasonal working capital requirements, and capital expenditures. In an effort to
increase shareholder value, we have also used and may continue to use our capital to repurchase
common stock. Despite using nearly $60.0 million of cash to repurchase common stock, working
capital increased from $119.3 million at July 31, 2004 to $137.0 million at July 30, 2005.
Although we expect continued improvement in our overall liquidity, we recognize that the specialty
retail industry can be highly volatile, where fashion missteps can quickly impact the ability to
generate operating cash.
The table below summarizes our working capital position and capitalization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 30, |
|
|
January 29, |
|
|
|
2005 |
|
|
2005 |
|
|
Working capital, excluding restricted assets of
$1.0 million and $1.0 million at July 30, 2005
and January 29, 2005, respectively |
|
$ |
136,957 |
|
|
$ |
180,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization: |
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
292,020 |
|
|
$ |
322,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional amounts available under
the Credit Facility |
|
$ |
82,048 |
|
|
$ |
78,566 |
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
Net cash provided by operating activities amounted to $7.0 million for the year-to-date period
ended July 30, 2005, up $3.2 million when compared to $3.8 million for the same period of 2004.
The increase was due primarily to a 27% increase in net income, exclusive of depreciation,
amortization and loss on disposal, increased income tax payments and the change in our inventory
levels. This was offset by
17
decreases in other asset balances. The table below outlines the
changes in cash flow from operating activities during the quarter:
|
|
|
|
|
|
|
Q2 2005 vs |
|
|
|
Q2 2004 |
|
|
|
(Restated) |
|
|
|
(in millions) |
|
Changes in: |
|
|
|
|
Net income, depreciation, amortization and loss on disposal |
|
$ |
4.7 |
|
Income taxes |
|
|
(3.0 |
) |
Inventory |
|
|
(1.4 |
) |
Tenant allowances received |
|
|
1.2 |
|
Other |
|
|
1.7 |
|
|
|
|
|
Total change in cash flows from operating activities |
|
$ |
3.2 |
|
|
|
|
|
The increase in the use of cash for income taxes is due primarily to an income tax receivable
settled in first quarter 2004, partially offset by the tax benefit received on increased stock
option activity in 2005 versus 2004. Cash used to purchase inventory was higher in the first two
quarters of 2005 versus 2004 due to increased inventory levels on hand in preparation for
back-to-school season and increased overall store count. Additional tenant allowances were
received during the current year based on increases in store count in our Justice brand. Other
fluctuations in operating activities are driven by fluctuations in accounts payable.
Cash Flows from Investing Activities
Net cash provided by investing activities amounted to $48.2 million for the year-to-date period
ended July 30, 2005. The table below outlines the changes in cash flow from investing activities
during the quarter:
|
|
|
|
|
|
|
Q2 2005 vs |
|
|
|
Q2 2004 |
|
|
|
(Restated) |
|
|
|
(in millions) |
|
Changes in: |
|
|
|
|
Investments |
|
$ |
63.9 |
|
Capital expenditures |
|
|
(10.2 |
) |
Increase in restricted assets |
|
|
5.9 |
|
Other |
|
|
1.3 |
|
|
|
|
|
Total change in cash flows from investing activities |
|
$ |
60.9 |
|
|
|
|
|
We generated $72.4 million of cash in spring season 2005 by liquidating our marketable
securities versus $8.5 million in 2004. We used this cash primarily to fund our common stock
repurchases during the first two quarters of the year. Capital expenditures increased $10.2
million from increased store construction related to our Justice concept, the purchase of office
space in Hong Kong for our international sourcing operations, and technology related investments.
Additionally, due to the amendments made to our credit facility during October 2004, our restricted
asset requirement, regarding our collateralized letters of credit, was eliminated, enabling us to
release previously restricted asset balances.
Cash Flows from Financing Activities
Financing activities used approximately $48.0 million of cash in the spring season 2005 versus
providing $4.0 million of cash in spring season 2004. The increase in cash usage is primarily
related to the repurchase of common stock during the spring season. During the first two quarters
of 2005, approximately 2.5 million shares were repurchased for an aggregate repurchase price of
$55.8 million as
18
authorized by our Board of Directors in 2004. We intend to continue our share
repurchase program. However, as of the date of this filing, no additional repurchase transactions
have occurred. Refer to Item 2 of PART II of this Form 10-Q for further information. The remaining
fluctuation in cash flows from financing activities was primarily related to stock option activity
and a decrease in our cash overdraft position at the end of the second quarter 2005.
Capital Expenditures
We expect 2005 capital expenditures to be in the $50 to $54 million range, mainly allocated to new
store construction, improvements to existing stores and information technology initiatives. We
expect cash on hand and cash generated from operating activities will fund substantially all
capital expenditures for 2005.
We have embarked upon a multi-year IT modernization strategy to ensure our systems infrastructure
can fully support our expected growth. Central to our strategy is the creation of a data warehouse
that will give key decision makers more timely information to both monitor the business and make
sound business decisions. Our data warehouse will be presented to end-users through a fully
customizable employee portal and enabled with a suite of business intelligence and business
analysis tools. In addition, starting in FY 2006, we will upgrade our core planning and allocation
capability with a new suite of fully integrated financial planning, assortment planning,
forecasting and open-to-buy tools. Furthermore, we intend to implement a new enterprise resource
planning suite to replace the current financial, merchandising and real estate planning suites.
The total costs for our initiative are anticipated to range between $26.0 and $31.0 million and
should be completed by 2010. These costs and the related project timing are estimates, and
therefore are subject to variation.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates can be found in the Managements Discussion and
Analysis of Financial Condition and Results of Operation section of our Form 10-K for the fiscal
year ended January 29, 2005.
19
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We desire to take advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the PSLRA). This Quarterly Report on Form 10-Q contains various
forward-looking statements within the meaning of the PSLRA and other applicable securities laws.
Such statements can be identified by the use of the forward-looking words anticipate, estimate,
project, believe, intend, expect, hope, risk, intend, could, pro forma
potential or similar words. These statements discuss future expectations, contain projections
regarding future developments, operations or financial conditions, or state other forward-looking
information. These forward-looking statements involve various important risks, uncertainties and
other factors that could cause our actual results for 2005 and beyond to differ materially from
those expressed in the forward-looking statements. The following factors, among others, could
affect our future financial performance and cause actual future results to differ materially from
those expressed or implied in any forward-looking statements included in this Form 10-Q:
|
|
|
Changes in consumer spending patterns, consumer
preferences and overall economic conditions; |
|
|
|
|
Decline in the demand for our merchandise; |
|
|
|
|
The impact of competition and pricing; |
|
|
|
|
Effectiveness of our brand awareness and marketing programs; |
|
|
|
|
A significant change in the regulatory environment applicable to our business; |
|
|
|
|
Risks associated with our sourcing and logistics functions; |
|
|
|
|
Changes in existing or potential trade restrictions, duties, tariffs or quotas; |
|
|
|
|
Currency and exchange risks; |
|
|
|
|
Availability of suitable store locations at appropriate terms; |
|
|
|
|
Ability to develop new merchandise; |
|
|
|
|
Ability to hire and train associates; |
|
|
|
|
The potential impact of health concerns relating to severe infectious
diseases, particularly on manufacturing operations of our vendors in
Asia and elsewhere; |
|
|
|
|
Acts of terrorism in the U.S. or worldwide; and |
|
|
|
|
Other risks that may be described in other reports and filings we make
with the Securities and Exchange Commission. |
Future economic and industry trends that could potentially impact revenue and profitability are
difficult to predict. Therefore, there can be no assurance that the forward-looking statements
included in the 10-Q will prove to be accurate. The inclusion of forward-looking statements should
not be regarded a representation by us, or any other person, that our objectives will be achieved.
The forward-looking statements made herein are based on information presently available to us, as
the management of the company. We assume no obligation to publicly update or revise our
forward-looking statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
20
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
To the extent we borrow under our Credit Facility, we will be exposed to market risk related to
changes in interest rates. At July 30, 2005, no borrowings were outstanding under the Credit
Facility. Additionally, we purchase investments with original maturities of 90 days or less. We
also hold investments with original maturities between 91 days but less than two years. These
financial instruments bear interest at fixed rates and are subject to interest rate risk should
interest rates fluctuate. We do not enter into financial instruments for trading purposes.
Item 4. Controls And Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act)) designed to provide reasonable
assurance that the information required to be reported in our Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified and pursuant to Securities and
Exchange Commission rules and forms, including controls and procedures designed to ensure that this
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer (our Principal Financial Officer), as appropriate, to allow
timely decisions regarding required disclosure. It should be noted that, because of inherent
limitations, our disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls
and procedures are met.
As described in Item 9A of our Annual Report on Form 10-K as filed on April 13, 2005, our testing
of internal control over financial reporting indicated a material weakness in our application of
lease accounting principles generally accepted in the United States of America as of January 29,
2005. We began a review of our accounting policies and practices with respect to leases in late
2004 based on an emerging retail industry focus on the application of FASB Technical Bulletin No.
88-1, Issues Related to Accounting for Leases. As a result of this review, we identified errors
in our accounting for tenant allowances and our practice of recording rent expense on a
straight-line basis beginning with the store opening date as opposed to an earlier possession date.
Accordingly, we have restated our quarterly consolidated financial statements for the thirteen and
twenty-six week periods ended July 31, 2004.
We have modified our practice and procedures over the accounting for leases as follows: a) our
accounting policies have been revised to record rent expense coincident with the commencement of
store construction and to record tenant allowances as a deferred tenant allowances from landlords;
b) controls have been established to ensure the accuracy of straight-line rent calculations,
capitalization of leasehold improvements and recognition and amortization of tenant allowances in
accordance with revised accounting policies; and c) we have provided additional training to
accounting personnel on lease topics. Other than these changes, no other changes in our internal
control over financial reporting occurred during the period ending July 30, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Subsequent to the implementation of these changes we performed an
evaluation of our disclosure controls and procedures as of July 30, 2005 and as a result this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the
material weakness had been remediated and our disclosure controls and procedures were effective at
a reasonable level of assurance as of the period covered by this Form 10-Q.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are various claims, lawsuits and other legal actions pending for and against Too, Inc.
incident to the operations of our business. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on our results of operations,
cash flows or financial position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) |
|
We recently became aware that the continuous offering of certain units in our Stock Fund (the
Stock Fund) of our Savings and Retirement Plan (the Retirement Plan) representing 101,157
shares of our common stock purchased by the trustee of the Retirement Plan on the open market
from time to time had not been registered under the Securities Act of 1933, as amended (the
Act). In addition, the continuous offering of 23,026 shares of our common stock purchased
by the custodian of our 1999 Associate Stock Purchase Plan (the Purchase Plan) on behalf of
our associates on the open market from time to time had not been registered under the Act.
Participants in the Retirement Plan had the option to invest defined contributions into the
Stock Fund. We received no consideration for units purchased by participants in the Stock
Fund of the Retirement Plan or shares purchased under the Purchase Plan. While we cannot
predict the possible effect of federal or state regulatory action, we do not believe that the
failure to register the offering and sale of these units and shares will have a material
adverse effect on our financial position or results of operations. |
|
(b) |
|
Not applicable. |
|
(c) |
|
In November 2004, our Board of Directors authorized the repurchase of up to $125 million of
our common stock as a means of further enhancing shareholder value. The purchases may occur
from time to time over the two year period beginning November 18, 2004, subject to market
conditions, in open market or in privately negotiated transactions, and in accordance with
Securities and Exchange Commission requirements. The following table illustrates our
purchases of equity securities during the second quarter 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
Total Number of |
|
|
Maximum Dollar Value |
|
|
|
of |
|
|
Average |
|
|
Shares Purchased as |
|
|
of Shares that may |
|
|
|
Shares |
|
|
Price Paid |
|
|
Part of Publicly Announced |
|
|
yet be purchased under |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Plans or Programs |
|
|
the Plans or Programs |
|
|
|
|
May (May 1, 2005
through May 28, 2005) |
|
|
413,200 |
|
|
$ |
19.77 |
|
|
|
413,200 |
|
|
$ |
86,107,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June (May 29, 2005
through July 2, 2005) |
|
|
1,009,300 |
|
|
$ |
20.08 |
|
|
|
1,009,300 |
|
|
$ |
65,844,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July (July 3, 2005
through July 30, 2005) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,844,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,422,500 |
|
|
$ |
19.99 |
|
|
|
1,422,500 |
|
|
$ |
65,844,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Item 4. Submission of Matters to a Vote of Security Holders
(a) On May 19, 2005, we held our Annual Meeting of Stockholders.
(b) See paragraph (c) below.
(c) At the Annual Meeting, our stockholders elected two Class C Directors to the Board of Directors
by the following vote:
|
|
|
|
|
|
|
|
|
Director Nominees |
|
Shares Voted For |
|
|
Shares Withheld |
|
Philip E. Mallott |
|
|
29,771,623 |
|
|
|
2,374,947 |
|
Michael W. Rayden |
|
|
30,298,003 |
|
|
|
1,848,567 |
|
The term of office of the Companys Directors, Elizabeth M. Eveillard, Nancy J. Kramer, David
A. Krinsky, Fredric M. Roberts and Kenneth J. Strottman continued after the Annual Meeting.
At the Annual Meeting, our stockholders also were asked to approve and adopt our 2005 Stock Plan
for Non-Associate Directors. Of the 32,146,570 shares present in person of represented by proxy at
the meeting, 23,656,077 shares were voted for the plan, 4,238,441 shares were voted against the
plan, and 194,836 shares abstained from voting with respect to the plan.
(d) Not applicable.
Item 6. Exhibits.
Exhibits
|
10.3 |
|
Third Amendment to Credit Agreement, dated as of November 16, 2004,
among the Company, as Borrower, each of the Guarantors (as defined in
the Credit Agreement), the Lenders (as defined in the Credit
Agreement), National City Bank, as Agent, Fifth Third Bank, as
co-syndication agent, LaSalle Bank National Association, as
co-syndication agent, Bank of America, N.A., as co-documentation
agent, and The Huntington National Bank, as co-documentation agent. |
|
|
10.4 |
|
Fourth Amendment to Credit Agreement, dated as of May 13, 2005,
effective January 29, 2005, among the Company, as Borrower, each of
the Guarantors (as defined in the Credit Agreement), the Lenders (as
defined in the Credit Agreement), National City Bank, as Agent, Fifth
Third Bank, as co-syndication agent, LaSalle Bank National
Association, as co-syndication agent, Bank of America, N.A., as
co-documentation agent, and The Huntington National Bank, as
co-documentation agent. |
|
|
31.1 |
|
Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
|
Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
23
SIGNATURE
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.
|
|
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|
|
|
|
|
|
TOO, INC.
(Registrant) |
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Poe A. Timmons |
|
|
|
|
|
|
|
|
|
|
|
Poe A. Timmons |
|
|
Senior Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
Date: September 2, 2005
24