FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 2004
OR
[ ]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 1-7288
THE BOMBAY COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1475223
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Bailey Avenue, Fort Worth, Texas 76107
(Address of principal executive offices) (Zip Code)
(817) 347-8200
(Registrant's telephone number, including area code)
(Former name,former addressand former fiscal year,if changed since last report)
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 X No ______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Number of shares outstanding at November 27, 2004
Common stock, $1 par value 35,859,709
1
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Form 10-Q
Quarter Ended October 30, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item
Page No.
1.Financial Statements .......................................... 3-10
2.Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 11-18
3.Quantitative and Qualitative Disclosures About Market Risk .... 19
4.Controls and Procedures ....................................... 19
PART II - OTHER INFORMATION
6.Exhibits ...................................................... 20
Signatures...................................................... 21
2
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
Net revenue......................... $126,669 $135,361 $372,729 $384,871
Costs and expenses:
Costs of sales, buying and
store occupancy costs.......... 94,856 96,146 283,556 276,908
Selling, general and administrative expenses 41,805 39,087 118,674 111,344
Operating income (loss)........... (9,992) 128 (29,501) (3,381)
Other income (expense):
Interest income.................... 14 -- 45 145
Interest expense................... (332) (374) (328) (383)
Loss before income taxes............ (10,310) (246) (29,784) (3,619)
Benefit for income taxes............ (3,024) (98) (10,424) (1,430)
Net loss.................. $ (7,286) $ (148) $(19,360) $ (2,189)
Basic and diluted loss per share $(.20) $(.00) $(.54) $(.06)
Average common shares outstanding... 35,834 35,130 35,644 34,436
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
October 30, January 31, November 1,
2004 2004 2003
ASSETS
Current assets:
Cash and cash equivalents............. $ 15,053 $ 25,619 $ 10,006
Inventories........................... 171,744 138,908 189,757
Other current assets.................. 30,798 26,012 29,130
Total current assets............ 217,595 190,539 228,893
Property and equipment, net................. 82,489 68,107 62,863
Goodwill, less amortization................. 423 423 423
Other assets................................ 10,452 5,864 10,916
Total assets.................... $310,959 $264,933 $303,095
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings....................... $ 51,490 $ -- $ 55,150
Accounts payable and accrued expenses. 45,063 35,348 43,531
Income taxes payable.................. -- 1,103 --
Accrued payroll and bonuses........... 2,660 8,019 5,896
Gift certificates redeemable.......... 6,507 7,129 5,403
Accrued insurance..................... 4,150 3,730 4,116
Total current liabilities....... 109,870 55,329 114,096
Accrued rent and other liabilities.......... 26,177 18,217 13,406
Stockholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized....... -- -- --
Common stock, $1 par value, 50,000,000
shares authorized, 38,149,646 shares 38,150 38,150 38,150
issued..................................
Additional paid-in capital.............. 79,835 79,210 75,837
Retained earnings....................... 66,952 86,312 74,172
Accumulated other comprehensive income 1,182 122 229
Common shares in treasury, at cost,
2,293,300;
2,816,772 and 2,879,341 shares, (9,404) (11,555) (11,819)
respectively............................
Deferred compensation................... (1,803) (852) (976)
Total stockholders' equity........ 174,912 191,387 175,593
Total liabilities and stockholders' equity $310,959 $264,933 $303,095
The accompanying notes are an integral part of these consolidated financial statements.
4
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
October 30, November 1,
2004 2003
Cash flows from operating activities:
Net loss.......................................... $(19,360) $ (2,189)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization............... 12,442 12,822
Employee stock-based compensation expense... 724 204
Deferred taxes and other.................... (7,746) 220
Change in assets and liabilities:
Increase in inventories........................ (31,331) (84,980)
Increase in other current assets............... (2,610) (7,245)
Increase (decrease) in current liablities...... 3,467 (2,817)
Increase in noncurrent assets.................. (66) (55)
Increase in noncurrent liabilities 428 39
Net cash used in operating activities............. (44,052) (84,001)
Cash flows from investing activities:
Purchases of property equipment................ (26,815) (31,018)
Landlord construction allowances............... 8,540 7,383
Proceeds from sales of property and equipment.. 9 151
Net cash used in investing activities............. (18,266) (23,484)
Cash flows from financing activities:
Net bank borrowings........................... 51,490 55,150
Purchases of treasury stock................... -- (83)
Sale of stock to employee benefit plans....... 247 163
Proceeds from the exercise of employee stock options 610 6,155
Net cash provided by financing activities......... 52,347 61,385
Effect of exchange rate change on cash............... (595) (502)
Net decrease in cash and cash equivalents............ (10,566) (46,602)
Cash and cash equivalents at beginning of period..... 25,619 56,608
Cash and cash equivalents at end of period........... $ 15,053 $ 10,006
Supplemental disclosure of cash flow information:
Interest paid................................... $ 269 $ 276
Income taxes paid............................... 2,172 5,531
Non-cash financing activities:
Distributions of deferred director fees...... -- 179
Issuance of restricted stock................. 1,675 1,035
The accompanying notes are an integral part of these consolidated financial statements.
5
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements, which include the accounts of The Bombay Company, Inc.
and its wholly-owned subsidiaries (the "Company" or "Bombay"), contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position as of October 30, 2004 and November 1,
2003, the results of operations for the three and nine months then ended, and
cash flows for the nine months then ended in accordance with the rules of the
Securities and Exchange Commission. The results of operations for the three
and nine month periods ended October 30, 2004 and November 1, 2003 are not
necessarily indicative of the results to be expected for the full fiscal year.
The consolidated financial statements should be read in conjunction with the
financial statement disclosures contained in the Company's 2003 Annual Report
on Form 10-K/A.
(2) Stock-Based Compensation
The Company accounts for its stock-based compensation plans under the
intrinsic value method. Accordingly, no compensation expense related to grants
of stock options has been recognized, as all options granted under the plans
had an exercise price not less than the market price of the Company's common
stock on the date of grant. Compensation expense related to grants of
restricted stock is based upon the quoted market price of the Company's common
stock at the measurement date, amortized to expense over the vesting period.
The following table illustrates the effect on net loss and loss
per share as if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123"), to stock-based compensation (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
Net loss, as reported .... $(7,286) $(148) $(19,360) $(2,189)
Stock-based compensation expense
determined under FAS 123, net of tax (628) (320) (1,512) (868)
Net loss, pro forma............ $(7,914) $(468) $(20,872) $(3,057)
Basic and diluted loss
per share, as reported...... $(.20) $(.00) $(.54) $(.06)
Basic and diluted loss
per share, pro forma........ $(.22) $(.00) $(.59) $(.09)
6
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
During the first quarter of Fiscal 2004, the Company awarded restricted stock
grants aggregating 115,000 shares to a group of key employees other than the
Chief Executive Officer. The respective shares will become vested in
designated increments contingent upon continued employment of the respective
employee based upon specified vesting periods of at least 12 months and not
more than 36 months. Deferred compensation of $795,000 was recorded in
conjunction with the grants, and will be expensed over the respective vesting
periods.
During the second quarter of Fiscal 2004, the Company awarded 122,980 shares
of restricted stock to its Chief Executive Officer. Contingent upon his
continued employment, the shares will become fully vested after 24 months.
Deferred compensation of $723,000 was recorded in conjunction with the grant,
and will be expensed over the vesting period.
(3) Deferred Tax Assets
During the nine months ended October 30, 2004, the Company had a pretax loss
of $29.8 million, for which it recorded tax assets associated with the tax net
operating losses. The Company recorded a receivable related to the portion of
the tax net operating loss which can be carried back , subject to certain
limitations. The Company expects the receivable to be fully
realizable. The remaining benefit was recorded as a deferred tax asset.
At October 30, 2004, the Company has net deferred tax assets of $11.6
million, representing the difference between the timing of deductions taken for
financial statement and tax purposes as well as the net operating
loss carryforwards generated in the current period. The future realization of
these deferred tax assets is dependent upon the Company's ability to
generate taxable income during the periods in which these items become
deductible and prior to the expiration of tax operating loss carryforwards.
The Company has evaluated the recoverability of these assets based upon
historical results and projections of future taxable income. Based upon this
analysis, the Company believes that it is more likely than not that it will be
able to generate adequate future taxable income to realize the benefit of these
assets. Accordingly, no valuation allowance has been established during this
period. The Company will continue to evaluate the deferred tax assets for
recoverability. If future conditions indicate that the benefit of the deferred
tax assets will not be fully realized, a valuation allowance will be recorded
to reduce the assets to their estimated realizable value.
7
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
(4) Comprehensive Income/Loss
Comprehensive loss for the three and nine months ended October 30, 2004 and
November 1, 2003 was as follows (in thousands):
Three Months Ended Nine Months Ended
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
Net loss......................... $(7,286) $(148) $(19,360) $(2,189)
Foreign currency translation
adjustments................... 1,040 776 1,060 1,623
Comprehensive income (loss)...... $(6,246) $ 628 $(18,300) $ (566)
Loss per Share
Basic loss per share is based upon the weighted average number
of shares outstanding. Diluted loss per share is based upon the
weighted average number of shares outstanding plus the shares that would be
outstanding assuming exercise of dilutive stock options and distribution of
deferred director compensation.
The c omputation for basic and diluted loss per share is as
follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
Numerator:
Net loss......................... $(7,286) $ (148) $(19,360) $(2,189)
Denominator for basic and diluted
loss per share:
Average common shares outstanding.. 35,834 35,130 35,644 34,436
Basic and diluted loss per share... $ (.20) $ (.00) $ (.54) $ (.06)
8
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
During the three and nine month periods ended October 30, 2004 and November
1, 2003, the Company reported a net loss. Accordingly, common stock
equivalents would be anti-dilutive during these periods and, thus, are not
included in the computation of diluted loss per share. The
following table presents the potentially dilutive securities outstanding at
each of the periods then ended, which are excluded from the computation of
diluted loss per share because their inclusion would be
antidilutive (in thousands):
October 30, November 1,
2004 2003
Stock options.................. 3,424 2,768
Deferred director compensation. 43 10
Total potentially dilutive securities 3,467 2,778
(6) Credit Facility and Debt
Effective September 29, 2004, the Company entered into a new secured credit
facility, with an aggregate commitment of up to $125 million, pursuant to a
credit agreement with Wells Fargo Retail Finance, LLC, as Arranger and
Administrative Agent. The facility replaced the Company's previous $75 million
facility, all indebtedness under which was repaid coincident with the closing
of the new facility. The new credit facility is comprised of separate lines of
credit in the United States and in Canada, with separate availability bases.
The United States and Canadian lines are secured by inventory, receivables and
certain other assets of the Company and its United States subsidiaries. The
Canadian line is also secured by certain assets of the Company's Canadian
subsidiary, which can borrow up to US$18 million under the line in certain
circumstances. Aggregate borrowings under the United States and Canadian lines
cannot exceed $125 million, except as noted below.
The new facility may be used for working capital, inventory
financing, and letter of credit needs. Borrowings under the facility
may be made, at the Company's option and, subject to certain
limitations, in the form of loans or by the issuance of bankers' acceptances
with respect to inventory purchases. Loans under the facility bear interest,
at the Company's option, at either the prime lending rate of Wells Fargo Bank,
National Association, or the LIBOR rate plus a margin of 1.00% to 1.75%, with
such margin depending on the amount by which the average available commitment
exceeds usage under the line. The available commitment under the facility is
limited to a borrowing base generally comprised of 75% of eligible inventory
and 85% of receivables, as defined in the credit agreement and with
seasonal and reserve adjustments. The aggregate commitment under the facility
can be increased to $175 million prior to September 15, 2007, at the request of
the Company. Subsequent to the closing date of the agreement, the agent
syndicated a portion of the facility to a group of banks. The facility expires
September 15, 2009.
At October 30, 2004, total availability under the facility
was $102,488,000. Borrowings of $51,490,000 and letters of credit totaling
$14,028,000, primarily to support inventory purchases, were outstanding,
and $36,970,000 was available for additional borrowings or letters of credit.
9
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
(7) Subsequent Event - Divestiture of Bailey Street Trading Company
On November 17, 2004, the Board of Directors of the Company approved the
divestiture of its Bailey Street Trading Company wholesale operations. This
action was taken to allow management to focus on improving the performance
of the core businesses as well as to free up capital to support the
continued expansion of those businesses. The Company
intends to pursue various options with respect to the method of disposition and
expects to complete the transaction by the end of the fiscal year.
As a result of the decision, the Company expects to take a non-cash charge
of approximately $2 to $3 million primarily in connection with vacating
its 199,000 square foot leased distribution center in Gilbertsville, PA. Other
charges in connection with the divesture are not expected to be material.
(8) New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51" ("FIN 46"). FIN 46 is intended to clarify the
application of ARB No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. For those entities, a controlling financial interest cannot be
identified based on an evaluation of voting interests and may be achieved
through arrangements that do not involve voting interests. The consolidation
requirement of FIN 46 was effective immediately to variable interests in
variable interest entities ("VIEs") created or obtained after January 31, 2003.
FIN 46 also sets forth certain disclosures regarding interests in VIEs that are
deemed significant, even if consolidation is not required. In December 2003,
the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46R"), which delayed the effective date of the
application to us of FIN 46 to non-special purpose VIEs acquired or created
before February 1, 2003, to the interim period ended on May 1, 2004, and
provided additional technical clarifications to implementation issues. The
Company does not have any VIEs and, therefore, the adoption of FIN 46R had no
impact on its consolidated financial position or results of operations.
10
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-Q under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the Company's
actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and financial market conditions which
affect consumer confidence in the spending environment for home-related
purchases; competition; seasonality; success of operating initiatives; new
product development and introduction schedules; uninterrupted flow of product;
acceptance of new product offerings; inherent safety of product offerings;
advertising and promotional efforts; adverse publicity; expansion of the store
chain; availability, locations and terms of sites for store development;
ability to renew leases on an economic basis; changes in business strategy or
development plans including risks associated with the strategy to move off-
mall; availability and terms of borrowings or capital for operating purposes;
labor and employee benefit costs; ability to obtain insurance at a reasonable
cost; rising fuel and energy costs and their impact on the operations of the
business; reliance on technology; security of the technological infrastructure;
changes in government or trade regulations including provisional duties on
bedroom furniture imports from China including the possibility that the scope
of such duties will be expanded to encompass additional countries or product
categories; risks associated with international business; fluctuations in
foreign currency exchange rates; terrorism; war or threat of war; potential
travel or import/export restrictions due to communicable diseases; regional
weather conditions; hiring and retention of adequate and qualified personnel
and other risks and uncertainties contained in the Company's 2003 Annual Report
on Form 10-K/A and other SEC filings as they occur.
General
The Company designs, sources and markets a unique line of fashionable home
accessories, wall d{e'}cor and furniture through 493 retail locations in 42
states in the United States and nine Canadian provinces, specialty catalogs,
the Internet and international licensing arrangements. Throughout this report,
the terms "our", "we", "us" and "Bombay" refer to The Bombay Company, Inc.
including its subsidiaries.
In addition to our primary retail Bombay operations, during 2001 we expanded
our product offering to include BombayKIDS, a line of children's furniture,
textile and accessories, which is currently being offered in 47 BombayKIDS
store locations as well as through catalog and Internet channels.
Bombay also has international licensing agreements under which a total of 15
licensed international stores are operating in the Middle East and the
Caribbean. The Company's Board of Directors recently approved the
divestiture of our wholesale operation, Bailey Street Trading Company ("Bailey
Street"), which markets a limited number of furniture and accessory stock
keeping units under a separate brand to specialty gift stores, furniture
stores, department stores, catalogers and mass merchants.
The largest percentage of Bombay's sales and operating income is realized in
the fiscal quarter that includes December (Christmas season). Merchandise is
manufactured to our specifications through a worldwide network of contract
manufacturers. The impact of inflation on operating results is typically not
11
significant because the majority of our products are proprietary. We attempt
to alleviate inflationary pressures by adjusting selling prices (subject to
competitive conditions), improving designs and finding alternative production
sources in lower cost countries.
Same store sales comparisons are calculated based upon revenue from stores
opened for more than 12 months. Stores converted from the regular format to
the large format and stores relocated from mall to off-mall locations are
classified as new and are excluded from same store sales until they have been
opened for 12 months. Stores relocated within a mall and whose size is
significantly changed are treated as new stores and are excluded from the same
store sales calculation until opened for a full year. Remodeled stores remain
in the computation of same store sales.
Cost of sales includes all costs associated with the purchase of product
including, but not limited to, vendor cost, inbound transportation costs,
duties, commission, inspections, quality control, warehousing and outbound
transportation costs. Buying costs include costs associated with our buying
department, consisting primarily of salaries, travel, product development and
product sample costs. Store occupancy costs include costs such as rent, real
estate taxes, common area maintenance charges, utilities and depreciation and
amortization of leasehold improvements and other fixed assets relating to our
retail locations.
Executive Summary
We focus on several key metrics in managing and evaluating our operating
performance and financial condition including, but not limited to, the
following: same store sales, sales and gross margins by merchandise
categories, operating margins as a percentage of revenues, earnings (loss) per
share, cash flow, return on assets, inventory turn, number of transactions and
average sales per transaction. We are currently executing a multiphase
turnaround, as previously discussed in our 2003 Annual Report on Form 10-K/A.
Our goal is to improve our operating performance and generate competitive
operating results in line with current market leaders in the sector.
During Fiscal 2004 and beyond, we are focused on six critical success
factors.
DRIVE SAME STORE SALES AT A COMPETITIVE RATE - We have now
annualized a rolling 12 months of same store sales increases averaging
20% with a 10% decline, while increasing our core Bombay store count by
4%. We estimate that our sector of home furnishing and
accessories category has grown at a low single-digit rate in total. The
modest sector growth coupled with a number of other internal and
external factors have resulted in a disappointing performance. During
the first half of the year, a lack of newness and flow in our merchandise
assortment were major factors in the disappointing same store sales
results.
12
In addition to internal issues, there have been a number of external
factors that we believe have impacted performance to date. The
imposition of anti-dumping tariffs on bedroom furniture from China, which
is still being challenged through appropriate governmental channels, has
impacted the Company both from a financial and an operational standpoint.
Delays in production from new,
alternative Vietnamese manufacturing sources have adversely
affected our stock levels. Longer transit times from
Vietnam, along with delays through West Coast ports of entry and
related domestic transportation issues, have exacerbated the issue. We
believe that the middle income household spending remains very value
driven and the uncertainty surrounding the Presidential election created
distraction for customers and adversely impacted this fall's sales
results.
SUCCESSFULLY CONTINUE THE MIGRATION OF OUR STORES FROM MALL TO OFF-
MALL LOCATIONS - We continue to pursue this strategy as our leases expire,
and expect the move to off-mall locations to positively impact our store
occupancy costs. Key to our success is the ability to transfer sales from
stores that we close in a mall location to the new off-mall location.
Through the end of the third quarter, 27 of the 36 locations that
we have moved have been able to maintain or exceed their sales volume
during the first year of operations. We believe that sales from newly
relocated stores have been affected by the same factors that
impacted the rest of the chain, including a weakness in demand and issues
relating to our merchandise assortment. Through the end of the third
quarter, in the aggregate, on a four-wall basis, the contribution to
overhead of the Company's 123 core off-mall locations was 90% of the total
dollar contribution made by its 273 mall-based locations. We continue to
be encouraged by the results and believe that it validates our overall
strategy.
GROW STORE COUNT - Our strategy has been to focus on opening stores
in our top 25 markets, thereby increasing market density and allowing us
to create operating efficiencies, particularly in the areas of
advertising, logistics and field supervision. We continue to closely
monitor the impact of new stores on same store sales as we assess market
density opportunities and identify new store locations. This information
will be key to helping define our future real estate strategy. Currently,
62% of our stores are concentrated in our top 25 markets. During the
first three quarters, we opened 47 stores, including 12 BombayKIDS stores,
and closed 25 stores which had expiring leases or were
underperforming. During the remainder of the year, we expect to open
approximately 16 stores, including three BombayKIDS stores, and to close
nine stores, ending the year with approximately 500 stores.
While we continue to be committed to our goal of migrating from mall to
off-mall, the Company recently announced that we would slow our
net, new core Bombay store openings until we can achieve
competitive same store sales increases. Previously, we indicated that
our plan was to increase Bombay core store count by approximately 5%
annually. For Fiscal 2004, we expect the core store count to grow by
almost 4%. For Fiscal 2005, we plan to hold our Bombay core store count
virtually flat with Fiscal 2004. Slowing store growth will allow us to
focus on execution of our core Bombay operations and improve
profitability.
DEVELOP BOMBAYKIDS - We continue to be optimistic
regarding our BombayKIDS stores and the opportunities that it
represents. This concept allows us to leverage the Bombay brand and reach
a new, younger customer. Particularly encouraging is the impact
that our BombayKIDS stores have on the adjacent Bombay stores, which have
performed at a higher sales level due to the synergies created and the
introduction of a new customer to the Bombay brand. BombayKIDS stores
currently total 47 and we plan to have approximately 50 open by the end of
the fiscal year. For Fiscal 2005, the Company expects to continue to
evaluate the pace of BombayKIDS growth.
BUILD THE PROPER INFRASTRUCTURE TO SUPPORT FUTURE GROWTH -
Significant investments in infrastructure have been made in Fiscal 2004,
including the addition of a distribution center near Allentown,
Pennsylvania, rollout of our new point-of-sale system with broadband
communications to our Canadian store locations, and acquisition of key
leadership, including a General Merchandise Manager and Vice President of
Financial Planning and Analysis. Although the costs of these and other
investments have been difficult to leverage with the recent revenue
declines, we continue to believe that they are critical to our future
profitability and growth.
13
GENERATE PROFIT MARGIN EXPANSION - Our ability to execute the first
five critical success factors should lead us to better profit flow
through. While our progress to date has been disappointing, we believe
that the opportunity exists for us, in the long-term, to improve our
operating results to approach those of industry leaders in our sector.
We believe that there are significant opportunities for Bombay to increase
profit margins through improvements in gross margins and leveraging
overhead expense and aggressive control of our corporate spending, in
addition to the improvement that comes from sales growth and pursing the
off-mall strategy as discussed above.
Given the results thus far for the year, we have identified a number of
undertakings for the fourth quarter. We need to reconnect with the customer
and, to that end, have increased the planned marketing expenditures for
the fourth quarter. We plan to enter Fiscal 2005 with the proper inventory
levels and a desirable inventory mix to support our new spring merchandise
assortment. We plan to aggressively and selectively clear
merchandise while maintaining our long-term pricing
integrity. We will make structural changes that are necessary to simplify
the business and provide proper capitalization. To that end, a number of steps
have been or will be taken including:
expanding our credit facility used for working capital needs;
reducing planned capital expenditures for Fiscal 2005, focusing on
store migration and growth of the BombayKIDS concept;
exiting the Company's wholesale operations, Bailey Street Trading
Company, to provide capital to support core store migration and
BombayKIDS growth;
controlling corporate expenses ; and ,
improving the assortment and flow of our merchandise.
We believe that these actions are critical to our turnaround and to ensuring
that we meet our long-term objectives.
Results of Operations
Quarters Ended October 30, 2004 and November 1, 2003
Net revenue for the quarter ended October 30, 2004 declined 6% to $126.7
million compared to $135.4 million for the quarter ended November 1, 2003.
Same store sales declined 18% for the quarter as we anniversaried same store
sales gains of 13% in the third quarter of the prior year. The softness
occurred across all merchandise categories and was similar on a regional basis.
Same store sales declines in the current period were partially offset by sales
from new stores, net of closings, and growth from the Internet and
International operations. Sales attributable to stores opened
less than 12 months totaled $21.8 million for the quarter, which
more than offset the $11.3 million in sales during the same quarter of the
prior year relating to stores that were closed within that past 12
months. Revenues from non-store activity, including Internet, mail
order, International and Bailey Street, accounted for 10% of sales for the
quarter compared to 9% last year.
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The following table outlines the sales mix by product category for the
quarters ended October 30, 2004 and November 1, 2003:
Three Months Ended
October 30, November 1,
2004 2003
Sales mix:
Large furniture....... 36% 34%
Occasional furniture.. 21 19
Wall d{e'}cor......... 12 13
Accessories}.......... 31 34
100% 100%
Growth in BombayKIDS helped drive the increased penetration of large
furniture sales during the quarter. The average ticket declined 3% to
$86 in the third quarter compared to $89 last year, while the number of total
transactions decreased just over 3%. On a geographical basis, all regions of
the United States reported same store sales declines in the high double-digit
range, compared to last year's strong same store sales increases in the high
single to mid double-digit range. Canada's same store sales performance was
slightly stronger, in the mid single-digit declines.
Cost of sales, including buying and occupancy costs, was $94.9 million
for the third fiscal quarter compared to $96.1 million for the same period last
year. As a percentage of revenue, cost of sales increased to 74.9% for the
quarter compared to 71.0% for the prior year period due primarily to the
negative impact of the increase in fixed costs while experiencing a decline in
same store sales. Buying and occupancy costs were 330 basis points higher than
last year, at 21.8% of revenue, compared to 18.5% in the third quarter of
Fiscal 2003. Store occupancy costs increased 10% over the prior year
comparable quarter while retail square footage increased 14% since November 1,
2003. Buying costs increased 20 basis points, and product margins declined 50
basis points primarily due to the loss of leverage on fixed logistics costs.
Selling, general and administrative expenses were $41.8 million, or 33.0% of
revenue, compared to $39.1 million, or 28.9% of revenue, for the comparable
period of the prior year. Store four-wall costs increased $.5 million due to a
$.6 million increase in store payroll and payroll related cost due to the
10% growth in the number of stores, and $.2 million increase in
telecommunication costs, primarily related to the costs of the broadband
network installed in the U.S. stores last fall and in Canadian stores during
the third quarter. These costs were offset by declines in volume related
expenses including credit card expenses and supplies. As a percentage of
revenue, store four-wall costs increased 140 basis points as same store sales
declines resulted in deleveraging fixed costs at the store level. Direct-to-
customer expenses increased by $.3 million due to higher Internet
hosting costs under the Company's new hosting agreement. Marketing and
visual merchandising costs increased $.8 million, or 110 basis points,
principally as a result of the decision to shift a catalog from the November
time period to mid October in order to drive earlier sales of gifts for the
holiday. Corporate general and administrative expenses increased $1.0 million,
or 130 basis points, due to a $.7 million increase in insurance costs, driven
primarily by higher medical insurance costs, and a $.4 million increase in
payroll costs, due in part to costs resulting from infrastructure requirements
relating to Sarbanes-Oxley compliance efforts.
Additionally, foreign exchange gains relating to our Canadian operations were
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$.2 million less than the same quarter last year. These increases were
partially offset by a $.2 million reduction in bonuses because no
provision was made during the current quarter for incentive bonuses to
corporate executives, and a $.2 million reduction in depreciation and
amortization expense related to corporate systems.
For the quarter ended October 30, 2004, interest income was $14,000 and
interest expense was $332,000, compared to expense only of $374,000 in the
third quarter of Fiscal 2003. Improvement is a result of higher average cash
balances during the quarter coupled with lower seasonal borrowings, which also
began later than in the previous year. These changes in cash and borrowings
are related to lower inventory levels as compared to the prior year.
Nine Months Ended October 30, 2004 and November 1, 2003
Net revenue was $372.7 million for the nine months ended October 30, 2004
compared to $384.9 million for the nine months ended November 1, 2003, a
decrease of 3%. Same store sales declined 15% for the year-to-date as we
anniversaried same store sales gains of 21% in the first three quarters of the
prior year. Sales declines were largely the result of a lack of freshness in
merchandise mix due to decisions made in the fall of Fiscal 2003 that led to
excess inventory on hand as of the end of Fiscal 2003. Same store sales
declines in the current period were partially offset by sales from new stores,
net of closings, Internet growth and to a lesser extent, growth from Bailey
Street and International. Stores opened for less than 12 months generated
sales of $64.8 million through the third quarter, offsetting
$33.1 million in sales during the prior year-to-date period from stores closed
during the past 12 months. Revenues from non-store activity,
including Internet, mail order, International and Bailey Street, accounted for
10% of sales for the year-to-date period compared to 9% last year.
The following table outlines the sales mix by product category for the nine
month periods ended October 30, 2004 and November 1, 2003:
Nine Months Ended
October 30, November 1,
2004 2003
Sales mix:
Large furniture....... 37% 33%
Occasional furniture.. 20 21
Wall d{e'}cor......... 12 13
Accessories........... 31 33
100% 100%
Growth in BombayKIDS helped drive the increased penetration of large
furniture during the period. The average ticket declined 5% to $85 from $89 in
the prior year, while the number of total transactions increased almost 2%. On
a geographical basis, all regions of the United States reported same store
sales declines within a relatively tight range in the mid double-digits,
compared to last year's strong double-digit same store sales increases.
Canada's same store sales performance was slightly better
with mid single-digit same store sales declines.
Cost of sales, including buying and occupancy costs, was $283.6 million, or
76.1% of revenue, for the nine months compared to $276.9 million, or 71.9%, for
the same period last year. The higher costs as a percentage of revenue were
due primarily to the negative impact of the increase in fixed costs in
conjunction with same store sales declines. Buying and occupancy costs were
310 basis points higher than last year, at 22.1% of revenue, compared to 19.0%
in the first nine months of Fiscal 2003. Store occupancy costs increased 12%
while retail square footage increased 14% due to new store openings in larger,
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off-mall locations. Buying costs increased 30 basis
points and product margins declined 100 basis points for the year-to-
date due primarily to higher logistics costs measured against a lower sales
volume.
Selling, general and administrative expenses increased $7.3 million to $118.7
million compared to $111.3 million for the comparable period of the prior year.
As a percentage of revenue, selling, general and administrative expenses were
31.8% for the nine months ended October 30, 2004 and 28.9% for the nine months
ended November 1, 2003. Store four-wall costs increased $3.8 million related
primarily to a $2.6 million increase in store payroll, resulting from the
10% increase in store count, and a $1.2 million increase in
telecommunication costs, primarily related to the costs of the broadband
network installed last fall in U.S. stores and this fall in the Canadian
stores. As a percentage of revenue, store four-wall costs increased 150 basis
points as same store sales declines resulted in deleveraging fixed costs at the
store level. Direct-to-customer SG&A expenses increased $.8 million. The
primary contributors to the increase were higher payroll costs, resulting from
growth in the business, as well as higher hosting costs caused by the
termination of one agreement and entering into a new hosting agreement, which
is based upon a percentage of Internet volume. Marketing and visual
merchandising costs increased $1.9 million, or 70 basis points, primarily as a
result of an increase in the number of markets receiving the monthly Sunday
newspaper inserts for both the Bombay and BombayKIDS operations during the
first half of the year as well as a shift in timing of a catalog
compared with last year from the fourth into the third quarter.
Corporate general and administrative expenses increased $.8 million, or 50
basis points. Insurance and taxes were $2.4 million higher, principally
related to higher self-insured medical costs. Payroll costs increased $1.1
million as a result of additional infrastructure investments and severance
costs associated with vice president level changes made to reflect the current
needs of the business. Additionally, foreign exchange gains related to the
Canadian operations were $.4 million less than the same period last year. These
increases were partially offset by a decline in depreciation and amortization
resulting primarily from accelerated amortization taken in Fiscal 2003
associated with the retirement of the old point-of-sale system and the lack of
accrual for performance-based incentive compensation for senior management.
For the year-to-date period, interest income was $45,000 and
interest expense was $328,000, compared to income of $145,000 and expense of
$383,000 through the third quarter of Fiscal 2003. The decrease in interest
income is the result of lower average cash balances in the current year,
particularly in the first quarter, related to higher average inventory levels
in the earlier part of the period. Lower expense is a result of beginning
seasonal borrowings later in the current period than during last year, as a
result of lowering inventory levels and later timing of seasonal inventory
build-up in the current year.
Liquidity and Capital Resources
The primary sources of liquidity and capital resources are cash flows from
operations and a line of credit. Effective September 29, 2004, the Company
entered into a new secured credit facility, with an aggregate commitment of up
to $125 million, pursuant to a credit agreement with Wells Fargo Retail
Finance, LLC, as Arranger and Administrative Agent. The facility replaced the
Company's previous $75 million facility, all indebtedness under which was
repaid coincident with the closing of the new facility. The new credit
facility is comprised of separate lines of credit in the United States and in
Canada, with separate availability bases. The United States and Canadian lines
are secured by inventory, receivables and certain other assets of the Company
and its United States subsidiaries. The Canadian line is also secured by
certain assets of the Company's Canadian subsidiary, which can borrow up to
US$18 million under the line in certain circumstances. Aggregate borrowings
under the United States and Canadian lines cannot exceed $125 million except as
noted below.
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The new facility may be used for working capital, inventory
financing and letter of credit needs. Borrowings under the facility
may be made, at the Company's option and subject to certain
limitations, in the form of loans or by the issuance of bankers' acceptances
with respect to inventory purchases. Loans under the facility bear interest,
at the Company's option, at either the prime lending rate of Wells Fargo Bank,
National Association, or the LIBOR rate plus a margin of 1.00% to 1.75%, with
such margin depending on the amount by which the average available commitment
exceeds usage under the line. The available commitment under the facility is
limited to a borrowing base generally comprised of 75% of eligible inventory
and 85% of receivables, as defined in the credit agreement, and with seasonal
and reserve adjustments. The aggregate commitment under the facility can be
increased to $175 million prior to September 15, 2007, at the request of the
Company. Subsequent to the closing date of the agreement, the agent syndicated
a portion of the facility to a group of banks. The facility expires September
15, 2009.
At October 30, 2004, total availability under the bank facility
was $102,488,000. Borrowings of $51,490,000 and letters of credit totaling
$14,028,000, primarily to support inventory purchases, were outstanding,
and $36,970,000 was available for additional borrowings or letters of credit.
Our long-term strategy is to utilize our credit facility to finance seasonal
borrowings and utilize cash flow from operations and our balance sheet
to finance our capital programs.
At October 30, 2004, inventory levels were $171.7 million compared to $189.8
million at November 1, 2003. On a per store basis, inventory declined 18% to
$348,000 from $423,000 at November 1, 2003. Inventory levels last year were
higher than required as a result of our focus on being in-stock for the
duration of each promotional event, and supporting forecasted
double-digit same store sales increases. The decrease in inventory level on a
per store basis this year is consistent with our plans to improve inventory
turns from 2.2 times in Fiscal 2003 to 2.4 times during Fiscal 2004, and with
more conservative sales forecasts in the current year.
During the first nine months of Fiscal 2004, we opened 35 large format Bombay
stores and 12 BombayKIDS stores. Twenty-five stores were closed during the
period. As of the end of the third quarter, we had 378 large format stores, 21
regular stores, 47 outlets and 47 BombayKIDS stores for a total of 493 stores.
During the remainder of Fiscal 2004, we plan to open approximately 16 stores,
including three BombayKIDS locations, and to close nine stores.
Our capital expenditures plan, net of landlord construction allowances, for
Fiscal 2004 is expected to total approximately $30 million for the year and
includes the cost of opening new stores, migrating stores from mall to off-
mall, expanding our distribution facilities in the northeast and rolling out
our new point-of-sales system and broadband communications to our Canadian
operations. We believe that our current cash position, cash flow from
operations and the new credit facility will be sufficient to fund our
operations and capital expenditure programs during the current year.
Going forward, in light of the performance to date, the Company has executed
or plans to execute structural changes to ensure that it has adequate capital
resources to fulfill its future plans. In addition to obtaining the new credit
facility, the Company has recently announced its intention to exit its
wholesale operations, Bailey Street, either through sale or liquidation, in
order to generate capital to support its continued migration of stores from
mall to off-mall and to expand its BombayKIDS concept. Plans are to reduce
capital expenditures for Fiscal 2005 from the $30 to $35 million previously
anticipated to approximately $20 to >$25 million, subject to
continuing evaluation based upon operating performance.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of October 30, 2004, the Company does not have any market risk
sensitive instruments.
Item 4. Controls and Procedures
Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, an
evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective in
alerting them in a timely fashion to material information relating to the
Company that is required to be included in periodic filings with the Securities
and Exchange Commission. In conjunction with its preparation toward compliance
with Section 404 of the Sarbanes-Oxley Act of 2002, the Company previously
identified the need for certain enhancements with respect to its internal
control over financial reporting. Specifically, the Company believed it needed
to enhance segregation of duties within its information technology systems and
further restrict system access. During the third quarter, the Company
satisfactorily remediated these issues. These matters have been discussed with
the Company's independent accountants, with the Audit and Finance Committee and
with the Board of Directors of the Company.
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THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits
The Exhibits filed as a part of this report are listed below.
Exhibit No. Description
31(a) Certification by Chief Executive
Officer Pursuant to Rule 13a-15 and
Rule 15d-15 of The Securities Exchange
Act of 1934, as amended
31(b) Certification by Chief Financial
Officer Pursuant to Rule 13a-15 and
Rule 15d-15 of The Securities Exchange
Act of 1934, as amended
32 Certifications of Registrant Pursuant
to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
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 as both an officer of the registrant and
as the principal financial officer.
THE BOMBAY COMPANY, INC.
(Registrant)
/S/ JAMES D. CARREKER
Date: December 9, 2004 James D. Carreker
Chairman of the Board and
Chief Executive Officer
/S/ ELAINE D. CROWLEY
Date: December 9, 2004 Elaine D. Crowley
Senior Vice President, Chief
Financial Officer and Treasurer
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