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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 April 30, 2005
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 address and 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 May 28, 2005
Common stock, $1 par value 36,123,425
Page 1 of 20
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Form 10-Q
Quarter Ended April 30, 2005
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......................... 11-17
3.Quantitative and Qualitative Disclosures About Market Risk... 18
4.Controls and Procedures...................................... 18
PART II -- OTHER INFORMATION
6.Exhibits and Reports on Form 8-K............................. 19
Signatures.................................................... 20
2
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
April 30, May 1,
2005 2004
(restated)
Net revenue................................. $122,111 $123,581
Costs and expenses:
Cost of sales, buying and store occupancy costs 95,253 93,622
Selling, general and administrative expenses 40,059 39,320
Operating loss (13,201) (9,361)
Other income (expense):
Interest income............................. 8 22
Interest expense............................ (320) --
Loss before income taxes.................... (13,513) (9,339)
Benefit for income taxes..................... (5,513) (3,596)
Net loss.................................... ($8,000) ($5,743)
Basic and diluted loss per share............. ($.22) ($.16)
Average common shares outstanding............ 35,939 35,430
The accompanying notes are an integral part of these consolidated financial statements.
3
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
April 30, January 29, May 1,
2005 2005 2004
(restated)
ASSETS
Current assets:
Cash and cash equivalents................ $ 10,386 $ 9,168 $ 14,567
Inventories.............................. 151,549 144,702 131,122
Other current assets..................... 32,783 27,022 28,072
Total current assets.................... 194,718 180,892 173,761
Property and equipment, net.............. 92,746 92,012 73,902
Goodwill, less amortization.............. 423 423 423
Other assets............................. 10,445 10,846 6,000
Total assets............................ $298,332 $284,173 $254,086
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings.......................... $ 28,361 $ -- $ --
Accounts payable and accrued expenses.... 41,527 48,997 30,851
Accrued payroll and bonuses.............. 4,202 5,660 3,821
Gift certificates redeemable............. 7,850 8,312 6,404
Accrued insurance........................ 4,029 4,081 3,699
Total current liabilities............... 85,969 67,050 44,775
Accrued rent and other long term liabilities 37,942 35,192 23,932
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 issued 38,150 38,150 38,150
Additional paid-in capital............... 79,743 79,700 79,497
Retained earnings........................ 65,737 73,737 80,199
Accumulated other comprehensive income (loss) 794 944 (261)
Common shares in treasury, at cost, 2,084,410;
2,259,261 and 2,611,544 shares, respectively (8,554) (9,268) (10,713)
Deferred compensation.................... (1,449) (1,332) (1,493)
Total stockholders' equity.............. 174,421 181,931 185,379
Total liabilities and stockholders' equity $298,332 $284,173 $254,086
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)
Three Months Ended
April 30, May 1,
2005 2004
(restated)
Cash flows from operating activities:
Net loss............................................. ($8,000) ($5,743)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization....................... 4,5811 4,441
Restricted stock compensation....................... 255 154
Deferred taxes and other............................ 683 (177)
Change in assets and liabilities:
Increase in other assets............................ (6,981) (3,257)
(Increase) decrease in inventories.................. (7,062) 7,344
Decrease in current liabilities..................... (9,389) (9,664)
Increase in noncurrent liabilities.................. 261 654
Landlord construction allowances..................... 3,149 505
Net cash used in operating activities (22,503) (5,743)
Cash flows from investing activities:
Purchases of property and equipment................. (5,011) (5,731)
Proceeds from sales of property and equipment........ -- 23
Net cash used in investing activities................ (5,011) (5,708)
Cash flows from financing activities:
Net bank borrowings................................. 28,361 --
Sale of stock to employee benefit plans............. 6 15
Proceeds from the exercise of employee stock options. 317 233
Net cash provided by financing activities............ 28,684 248
Effect of exchange rate change on cash............... 48 151
Net increase (decrease) in cash and cash equivalents. 1,218 (11,052)
Cash and cash equivalents at beginning of period..... 9,168 25,619
Cash and cash equivalents at end of period........... $10,386 $14,567
Supplemental disclosure of cash flow information:
Interest paid....................................... $274 $ --
Income taxes paid................................... 241 10
Non-cash investing and financing activities:
Distributions of restricted stock................. 372 795
Distribution of director fees..................... 52 21
Capitalization of construction period rent........ 170 297
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 April 30, 2005 and May 1, 2004, the
results of operations for the three months then ended, and cash flows for the
three months then ended in accordance with the rules of the Securities and
Exchange Commission. The results of operations for the three-month periods
ended April 30, 2005 and May 1, 2004 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 2004 Annual Report on Form 10-K.
(2) Restatement of Previously Issued Financial Statements
During the fourth quarter of Fiscal 2004, the Company began an evaluation
of its lease accounting practices and determined that it was appropriate to
restate previously issued financial statements. Historically, the Company has
recognized store lease expense on a straight-line basis beginning on the date
that the store opened. This generally had the effect of excluding the pre-
opening store build out, fixturing and merchandise stocking periods during
which the Company typically had no rent payments. Based upon the evaluation of
its lease accounting practices, the Company adopted an accounting policy to
capitalize rent during the construction period and recognize straight-line rent
expense upon the store becoming substantially complete and ready for its
intended use, which results in recording rent expense during the merchandise
stocking periods.
Additionally, in prior periods, proceeds from landlord construction
allowances were reflected as a component of cash flows from investing
activities in the Consolidated Statements of Cash Flows. The historical
Consolidated Statement of Cash Flows for the fiscal quarter ended May 1, 2004
has been restated to reflect such proceeds as a component of cash flows from
operating activities.
The effects of these restatements were as follows (in thousands):
Fiscal Quarter Ended May 1, 2004
Impact of
As Reported Restatement As Restated
CONSOLIDATED BALANCE SHEET
Property and equipment, net $69,222 4,680 $73,902
Other assets............. 5,779 221 6,000
Total assets............. 249,185 4,901 254,086
Accrued rent and other
long term liabilities. 18,664 5,268 23,932
Retained earnings........ 80,566 (367) 80,199
Total stockholders' equity 185,746 (367) 185,379
Total liabilities and
stockholders' equity.. 249,185 4,901 254,086
6
CONSOLIDATED STATEMENT
OF OPERATIONS
Cost of sales, buying and
store occupancy costs. $93,626 (4) $93,622
Loss before income taxes. (9,343) 4 (9,339)
Benefit for income taxes. (3,597) 1 (3,596)
Net loss................. (5,746) 3 (5,743)
Basic loss per share..... $(.16) -- $(.16)
Diluted loss per share... $(.16) -- $(.16)
CONSOLIDATED STATEMENT
OF CASH FLOWS
Net cash used in
operating activities.. $(6,248) 505 $(5,743)
Net cash used in
investing activities.. (5,203) (505) (5,708)
(3) 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" ("SFAS 123"), to stock-based compensation (in thousands, except
per share amounts):
Three Months Ended
April 30, May 1,
2005 2004
(restated)
Net loss, as reported............. ($8,000) ($5,743)
Stock-based compensation expense
determined under FAS 123, net of tax (339) (350)
Net loss, pro forma............... ($8,339) ($6,093)
Basic and diluted loss
per share, as reported......... ($.22) ($.16)
Basic and diluted loss
per share, pro forma........... ($.23) ($.17)
During the first quarter of Fiscal 2005, the Company awarded restricted stock
grants aggregating 82,500 shares to a group of key employees. The respective
shares will become vested in designated increments contingent upon continued
employment of the respective executive based upon specified vesting periods of
at least 12 months and not more than 48 months, subject to acceleration in the
event that the Company achieves an earnings threshold of $.50 per share, at
which time such restricted shares shall become 100% vested. Deferred
compensation of $372,000 was recorded in conjunction with the grants, and will
be expensed over the respective vesting periods.
7
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
(4) Comprehensive Loss
Comprehensive loss for the three months ended April 30, 2005 and May 1, 2004
was as follows (in thousands):
Three Months Ended
April 30, May 1,
2005 2004
(restated)
Net loss ($8,000) ($5,743)
Foreign currency translation adjustments (150) (383)
Comprehensive loss ($8,150) ($6,126)
(5) Loss per Share
Basic earnings (loss) per share are based upon the weighted average number of
shares outstanding. Diluted earnings (loss) per share are 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 computation for basic and diluted loss per share is as follows (in
thousands, except per share amounts):
Three Months Ended
April 30, May 1,
2005 2004
(restated)
Numerator:
Net loss........................ ($8,000) ($5,743)
Denominator for basic and diluted
loss per share:
Average common shares outstanding 35,939 35,430
Basic and diluted loss per share... ($.22) ($.16)
During the three-month periods ended April 30, 2005 and May 1, 2004, 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
(in thousands):
April 30, May 1,
2005 2004
Stock options 3,295 3,159
Deferred director compensation 356 200
3,651 3,359
8
(6) Subsequent Event - Amendment to Shareholders' Rights Plan
Effective May 26, 2005, the Company amended its shareholders' rights plan
("Rights Agreement") to (i) extend the final expiration of the Rights Agreement
to June 1, 2015, (ii) change the exercise price of each Right (as defined in
the Rights Agreement) from $50.00 to $35.00, (iii) modify the definition of
"Acquiring Person" to increase from 15% to 20% the beneficial ownership level
that any person or group of persons may acquire before triggering the Rights,
(iv) add a provision establishing a three-year independent director evaluation
committee ("TIDE Committee"), and (v) clarify that the board of directors of
the Company may, in good faith, determine that a disposition of Company common
stock, by a person inadvertently exceeding the permitted threshold, has been
made as promptly as practicable and would preclude such person from being
deemed an "Acquiring Person".
The TIDE Committee will consist of independent members of the board of
directors of the Company and will review and evaluate the Rights Agreement to
consider whether it continues to be in the best interests of the Company, its
stockholders and any other relevant constituencies of the Company (i) at least
every three years and (ii) sooner if an acquisition proposal is made that the
TIDE Committee believes would make such a review and evaluation appropriate.
Following each such review, the TIDE Committee will communicate its conclusions
to the Board of Directors, including any recommendation as to whether the
Rights Agreement should be modified or the Rights should be redeemed. The
Company's Governance and Nominations Committee will serve as the TIDE Committee
as long as its members satisfy the independence requirement.
(7) Subsequent Event - Sale of Bailey Street
On May 27, 2005, the Company completed the sale of a substantial portion of
the assets of Bailey Street Trading Company ("Bailey Street"), a wholly-owned
subsidiary involved in the wholesale distribution of a proprietary line of
accent furniture, to Bailey Street Holding Company, a newly formed corporation,
independent of Bombay. Under the terms of the agreement, Bombay received $4.7
million in cash in return for $1.1 million in accounts receivable and $2.3
million in inventories as well as intellectual property, equipment and
facilities associated with the operations. Bailey Street Holding Company will
also assume certain normal operating liabilities associated with the
operations. The purchase price is subject to minor adjustments and the
agreement requires Bombay to provide certain transition services for up to one
year. Bombay expects to liquidate approximately $2 million of inventory not
included in the sale through its retail and Internet channels. From the
beginning of the fiscal year and through the ongoing liquidation of the
remaining inventory, the Company is expected to generate approximately $10
million. This transaction may result in a one-time, non-cash charge of
approximately $1.2 to $1.4 million relating to the costs of exiting the leased
distribution center utilized by Bailey Street. Exiting the business will
allow management to focus on its retail operations, help provide the liquidity
needed to continue the Company's strategy to migrate from mall to off-mall
locations and improve the overall strength of the balance sheet. During Fiscal
2004, total revenues of Bailey Street were $15.1 million.
9
(8) New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 123 (Revised 2004) ("SFAS
123R"), Share-Based Payment. SFAS 123R establishes standards for accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. The primary focus of SFAS 123R is on employee services obtained
in share-based payment transactions. SFAS 123R requires that all share-based
payments to employees be recognized in the financial statements based upon
their fair values. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. The
standard is effective for our financial statements beginning in Fiscal 2006, at
which time we will adopt its provisions. We are in the process of planning our
implementation and evaluating the impact of adoption on our consolidated
financial position and 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 actual results,
performance or achievements of The Bombay Company, Inc. and its wholly-owned
subsidiaries (the "Company" or "Bombay") 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 stores 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 duties on bedroom
furniture imports from China and 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 2004 Annual Report on Form
10-K and other SEC filings as they occur. The Company undertakes no obligation
to revise the forward-looking statements contained herein to reflect events or
circumstances after the date hereof as a result of new information, future
events or otherwise.
General
The Company designs, sources and markets a unique line of fashionable home
accessories, wall d{e'}cor and furniture through 495 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", "Bombay" and "Company" 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 55 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. On
May 27, 2005, we completed the sale of a substantial portion of the assets of
Bailey Street Trading Company ("Bailey Street"), a wholly-owned subsidiary
involved in the wholesale distribution of a proprietary line of accent
furniture, to a newly formed corporation, independent of Bombay. The sale
included the subsidiary's trade receivables, a portion of the inventory, and
the intangibles associated with the operations. The remaining inventory is
11
expected to be liquidated through the Company's other retail channels including
its Bombay retail locations, outlets, and over the Internet.
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
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, net of benefit recognized from landlord construction
allowances.
Restatement of Previously Issued Financial Statements
During the fourth quarter of Fiscal 2004, we began an evaluation of our lease
accounting practices and determined that it was appropriate to restate
previously issued financial statements. Historically, we have recognized store
lease expense on a straight-line basis beginning on the date that the store
opened. This generally had the effect of excluding the pre-opening store build
out, fixturing and merchandise stocking periods during which the Company
typically had no rent payments. Based upon our evaluation of our lease
accounting practices, we have adopted an accounting policy to capitalize rent
during the construction period and recognize straight-line rent expense upon
the store becoming substantially complete and ready for its intended use, which
results in us recording rent expense during the merchandise stocking periods.
Additionally, in prior periods, we reflected proceeds from landlord
construction allowances as a separately identified component of cash flows from
investing activities in the Consolidated Statements of Cash Flows. We have
restated our historical Consolidated Statement of Cash Flows for the fiscal
quarter ended May 1, 2004 to reflect such proceeds as a component of cash flows
from operating activities.
The restatement includes adjustments to cost of sales, buying and store
occupancy costs, income (loss) before income taxes, provision (benefit) for
income taxes, net income (loss) and earnings (loss) per share. These changes
decreased net loss and loss per share by $3,000 and $.00 per diluted share in
the first quarter of Fiscal 2004. The restatement relating to the reflection
of proceeds from landlord construction allowances as a component of cash flows
from operating activities decreased our net cash used in operating activities
and increased our net cash used in investing activities in the first quarter of
Fiscal 2004 by $.5 million. For information with respect to the restatement
adjustments, see Note 2 to the accompanying consolidated financial statements.
This Management's Discussion and Analysis gives effect to these restatements.
12
Executive Summary
We focus on several key metrics in managing and evaluating our operating
performance and financial condition including the following: same store sales,
sales and gross margins by merchandise categories, operating margins as a
percentage of revenues, earnings per share, cash flow, return on assets and
inventory turn. We are currently executing a multiphase turnaround, as
previously discussed in our Annual Report on Form 10-K, intended to improve our
operating performance and generate competitive operating results in-line with
current market leaders in the sector.
During the first quarter of Fiscal 2005, we executed to four key
corporate initiatives that we have identified for the current year:
{circle}Return to positive same store sales - Although sales were
disappointing through much of the quarter resulting in a 5% decline in
same store sales, we were encouraged by our positive same store sales
trends in April with traffic, conversion and average transaction
improving for the month. We expect that sales trends for the second
quarter should improve not just because of the easier comparison but also
as a result of the improved assortment. Similarly, we believe that the
trend for the third quarter should improve over the second quarter as we
introduce our new fall assortment and update our merchandise presentation
in the store to showcase our new "rooms" concept which features lifestyle
presentation intended to inspire the customer with complete room
settings. The improved quality and freshness of the inventory, our new
in-store presentation and the increased marketing support are designed to
drive positive same store sales during the second quarter and second half
of the year.
{circle}Develop sustainable growth in margin rate - A sustainable growth in
margin rate requires effective coordination and execution of multiple
initiatives across almost every area of the company. Sustainable margin
improvement requires great product design and assortment planning,
competitive sourcing, efficient logistics and merchandise allocation and
a compelling marketing message with an integrated sales promotion
strategy, merchandise presentation and selling skills. We have invested
in each of these areas for 2005. In addition to improving our mark-up,
we believe a significant amount of improvement potential can be realized
by better planning, allocating and transitioning of our assortments. Our
merchandising, planning and allocation teams are more focused on making
sure that we transition out of items in our assortment with lower
markdown costs and that we're replacing those items with improved
product. Most of the benefit of these efforts is expected during the
second half of the year.
{circle}Ensure profitability - We have developed a two-pronged strategy for
this area. Our first strategy is to keep our corporate and store four-
wall selling, general and administrative expenses controlled at levels
compatible with sales levels. Our focus was on efficiency and right-
sizing the organization for our new real-estate and operating strategies.
For the first quarter, despite a million dollar increase in professional
fees relating to the merchandise strategy study discussed below and
higher audit related fees, our corporate office selling, general and
administrative expenses were below last year. We intend to maintain this
running rate on corporate expense while continuing our track record of
aggressively managing our store four-wall expenses.
Our second strategy to ensure profitability is to slow our new store
growth in Fiscal 2005 to allow management to focus on existing stores.
We will continue to strategically migrate stores from mall to off-mall
and continue to close unprofitable stores as the opportunities arise.
Currently we project to end the year between 500 and 505 stores versus
our previously planned range of 505 to 510 stores.
13
{circle}Continue to invest wisely for the future - We have spent much of the
past two years investing in our infrastructure in order to address the
structural issues of our business. In order to reduce store occupancy
costs, we have been migrating of mall based stores to off-mall locations
as leases expire and suitable locations become available. During the
first quarter of Fiscal 2005, we opened 12 core Bombay stores in off-mall
locations and closed 24 mall-based stores, bringing the total off mall
count to 150 stores or 38% of the total Bombay locations. During the
first quarter, the contribution to overhead of the 150 core Bombay off-
mall locations was over 4 times the profit of the 243 core Bombay mall
locations.
We continue to invest in our systems and the tools with which we operate.
During the first quarter, we completed the installation of store traffic
counters and conversion measurement tools, for all stores, which we will
use to measure store productivity as well as to track the effectiveness
of various promotions and media spend. We also modified our merchandise
planning and allocation tools to be able to support the new "rooms"
merchandising concept.
We have undertaken a merchandise strategy project through which, we
expect to identify near and mid-term improvement opportunities for the
current core and BombayKIDS formats, which may include changes to our
category mix and changes to the allocation of store space between
categories. The project commenced during the first quarter and is
expected to be completed by the end of the second quarter of this year.
We are encouraged about the findings to date and are in the process of
integrating the preliminary results into our assortment plans for the
upcoming Fiscal 2006 spring merchandise season. While this study was
intended to drive long-term profitability, we expect to be able to begin
impacting sales and profits as early as January 2006.
Preparations are being made to occupy a new distribution center in
Canada, replacing the current undersized facility. The new facility will
begin operations in the second quarter of Fiscal 2005.
Last, we consider taking our BombayKIDS business to the next level a
critical investment for our future. During the first quarter of Fiscal
2005, we added four BombayKIDS stores, bringing the total to 55 at April
30, 2005. We expect to add 11 to 13 BombayKIDS stores this year, taking
our total store count to 61 to 63 stores by the end of the year, with the
belief that this business will be a profit contributor in years to come.
Results of Operations
Quarters Ended April 30, 2005 and May 1, 2004
Net revenue decreased 1% to $122.1 million for the quarter ended April
30, 2005 from $123.6 million for the quarter ended May 1, 2004. Same store
sales declines of 5% for the quarter were partially offset by sales from new
stores, which contributed approximately $17.0 million in net sales, more than
offsetting sales from stores closed during the past 12 months, which
contributed $10.0 million during the first quarter of last year. Overall sales
declines were a carryover from the prior year due to a lack of freshness in the
merchandise mix and voids created by interruptions in the supply chain caused
by the imposition of antidumping duties. Revenues from non-store activity,
including Bailey Street, Internet, mail order and International, accounted for
7% of total revenue for the quarter compared to 10% last year due primarily to
softness in Internet and mail order resulting from the decision to eliminate
certain promotional events that drove Internet sales in the prior year. Sales
began to improve in April with same store sales increases of 7% for the month
due, in part, to the shift in Easter from April to March, and to improved
merchandise selection and assortment.
14
On a geographical basis, Canada showed the strongest results with low
single-digit same store sales gains, with the various regions of the United
States reporting mid to high single-digit same store sales declines. While
large furniture and accessories each continued to represent approximately a
third of the business, there was a slight shift toward more wall d{e'}cor and
occasional furniture sales. For the first quarter of Fiscal 2005, both large
furniture and accessories represented 32% of the business, occasional furniture
was 20% and wall d{e'}cor was 16%. In the same quarter last year, large
furniture represented 34% of the business, occasional furniture was 19%, wall
d{e'}cor was 14% and accessories were 33%. The strong promotional cadence in
wall d{e'}cor, coupled with customer acceptance of some of the new
introductions in that category, drove much of the increase in that area. The
increase in occasional furniture was the result of the improved assortment.
The average ticket increased 2% during the first quarter while the number of
total transactions, including those from new stores, declined 2%.
Cost of sales, including buying and occupancy costs, was $95.3 million for
the first fiscal quarter compared to $93.6 million for the same period last
year. As a percentage of revenue, cost of sales increased to 78.0% for the
quarter compared to 75.8% for the prior year period. Declines in gross margin
were due primarily to the negative impact of the increase in fixed costs while
experiencing a decline in same store sales. Buying and occupancy costs
increased $1.4 million, to $28.7 million in the current quarter from $27.3
million in the first quarter of Fiscal 2004, due to the higher store count. As
a percentage of revenue, costs increased 140 basis points, to 23.5% of revenue
compared to 22.1% in the first quarter of Fiscal 2004 due to the loss of
operating leverage due to the decline in same store sales compared to last
year. While costs increased 5%, retail square footage increased 9%. Product
margins declined 80 basis points during the quarter due primarily to higher
logistics costs which were deleveraged by the lower sales base.
Selling, general and administrative expenses increased $.7 million to $40.1
million, or 32.8% of revenue, compared to $39.3 million, or 31.8% of revenue,
for the comparable period of the prior year. Store four-wall costs increased
$1.7 million related primarily to higher store payroll, which increased $1.4
million, due in part to the increase in the number of stores. As a percentage
of revenues, store four-wall costs increased 160 basis points as same store
sales declines resulted in deleveraging fixed costs at the store level.
Marketing and visual merchandising costs decreased $.5 million, or 30 basis
points, primarily due to the elimination of monthly Sunday newspaper inserts
for the Bombay operations. Corporate general and administrative expenses
decreased 10 basis points during the quarter compared to last year. Current
year expenses included an increase in professional fees of $1.1 million
incurred in connection with a merchandise strategy study and higher audit fees
resulting from the restatement. These additional costs were substantially
offset by savings in home office payroll and lower insurance costs as the
Company continues to focus on expense control.
For the quarter ended April 30, 2005, interest expense was $320,000 and
interest income was $8,000, compared to solely interest income of $22,000 in
the first quarter of Fiscal 2004. Interest income during the quarter was lower
than in the previous year related to lower average cash balances, resulting
from investments in inventory and capital expenditures during Fiscal 2004, as
well as the losses in the same period. The shift to interest expense is the
result of lower cash balances and earlier borrowings related to higher
inventory levels and a higher first quarter loss than in the prior year.
15
Liquidity and Capital Resources
The primary sources of liquidity and capital resources are cash flows
from operations and a line of credit. We have a secured, revolving credit
agreement with a group of banks, with an aggregate commitment of up to $125
million for working capital, inventory financing and letter of credit purposes.
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. At April 30, 2005, the
bank commitment was $80.4 million, and $43.0 million was available for
borrowings or additional letters of credit. The credit facility expires
September 15, 2009.
At April 30, 2005, inventory levels were $151.5 million compared to $131.1
million at May 1, 2004. Inventory levels have been intentionally increased in
preparation for introductions of new merchandise in July. These increases are
temporary and represent a shift in timing rather than a permanent inventory
build up. We expect to end the year with inventory levels at or below the
Fiscal 2004 year-end levels.
During the first quarter of Fiscal 2005, we opened 13 large format Bombay
stores and four BombayKIDS stores. Twenty-four stores were closed during the
period. As of the end of the first quarter, we had 376 large format stores, 17
regular stores, 47 outlets and 55 BombayKIDS stores for a total of 495 stores.
During the remainder of Fiscal 2005, we plan to open approximately 28 to 30
stores, including seven to nine BombayKIDS locations, and close approximately
21 to 24 core Bombay stores. We anticipate that we will end the year with 500
to 505 stores compared to 495 stores at April 30, 2005.
Our capital expenditures plan for Fiscal 2005 is expected to total $25 to $27
million for the year, excluding approximately $7 to $8 million of landlord
construction allowances, and includes the cost of opening 45 to 47 stores. The
capital expenditures plan also includes relocation to a new distribution center
which replaces an existing undersized leased facility in Canada, and continued
investment in information systems.
From a liquidity and capital expenditures standpoint, our strategy is to
utilize our credit facility to finance seasonal borrowings and working capital
required by store growth while we utilize cash flow from operations and our
balance sheet to finance our long-term capital programs. The operating loss
for Fiscal 2004, the first quarter of Fiscal 2005 and the resulting decline in
the cash balance caused us, in late Fiscal 2004, to reassess our liquidity and
capital program and investigate alternatives to fund the continued migration of
store from mall to off-mall and the growth of the BombayKIDS stores.
Management developed a plan that reduced the store growth in Fiscal 2005 from
previously announced levels and called for the disposal of certain assets that
are either non-operating assets or are not an integral component of our core
operations. On May 27, 2005, the sale of a portion of the assets of Bailey
Street was completed, generating funds of $4.7 million. The Company has
approximately $2 million of Bailey Street inventory that it expects to
liquidate at a profit through its Bombay retail locations, its outlets and over
the Internet by the end of the fiscal year. We also plan to sell non-operating
assets, including a Company-owned building occupied by a third party and a
parcel of land adjacent to our Company headquarters, in order to supplement our
available capital. We expect that the proceeds from the sale of assets of our
Bailey Street operation, along with the sale of land and building, should be
adequate, when added to expected cash flow from operations, to fund our capital
expenditure program and result in a higher cash balance at the end of Fiscal
2005.
16
New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 123 (Revised 2004) ("SFAS 123R"), Share-
Based Payment. SFAS 123R establishes standards for accounting for transactions
in which an entity exchanges its equity instruments for goods or services. The
primary focus of SFAS 123R is on employee services obtained in share-based
payment transactions. SFAS 123R requires that all share-based payments to
employees be recognized in the financial statements based upon their fair
values. The cost will be recognized over the period during which an employee
is required to provide services in exchange for the award. The standard is
effective for our financial statements beginning in Fiscal 2006, at which time
we will adopt its provisions. We are in the process of planning our
implementation and evaluating the impact of adoption on our consolidated
financial position and results of operations.
17
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of April 30, 2005, the Company does not have any market risk sensitive
instruments.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended, 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. In performing this evaluation, the
Company's management considered the Company's controls over the selection and
application of our lease accounting policies relating to the classification of
landlord allowances within the consolidated statements of cash flows and
related remediation efforts implemented in the first quarter of Fiscal 2005
described below. 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 as of April 30,
2005 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.
Changes in Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act). Management's prior assessment of internal control over financial
reporting as of January 29, 2005 had previously concluded that controls over
the selection and application of the Company's lease accounting policies
relating to the classification of landlord allowances within the consolidated
statements of cash flows were ineffective to ensure that such leasing
transactions were properly reported in the consolidated statements of cash
flows. Specifically, landlord allowances, although clearly separately
identified, were improperly included as a component of cash flows from
investing activities instead of cash flows from operating activities, which
resulted in the restatement of our Fiscal 2003 and Fiscal 2002 annual
consolidated financial statements. Management further concluded that as of
January 29, 2005, this control deficiency represented a material weakness in
the Company's internal control over financial reporting based on the criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
In the first quarter of Fiscal 2005, the Company conducted a review of its
lease accounting practices and performed additional analysis and other
procedures to ensure that its consolidated financial statements were prepared
in accordance with generally accepted accounting principles. The Company has
also enhanced its monitoring of developments surrounding the accounting for
leases and revised its accounting policies with respect to classification of
landlord allowances in the Consolidated Statements of Cash Flows.
Other than as described above, there have been no significant changes in the
Company's internal control over financial reporting during the period covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
18
THE BOMBAY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits filed as a part of this report are listed below.
Exhibit No. Description
10(a) Revised Form of Option Award Agreement
under the 1996 Long-Term Incentive Stock
Plan
10(b) Revised Form of Restricted Stock Award
Agreement under the 1996 Long-Term
Incentive Stock Plan
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
(b) On March 23, 2005, the Company filed a Form 8-K reporting the results of
its earnings for the fourth quarter and fiscal year ended January 29, 2005,
which were subsequently revoked following a decision to restate previous
periods for the effects of lease accounting.
On April 2005, the Company filed a Form 8-K reporting certain equity
awards granted to executive officers, and announcing the resignation of a
Director of the Company.
19
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.
THE BOMBAY COMPANY, INC.
(Registrant)
/S/ JAMES D. CARREKER
Date: June 9, 2005 James D. Carreker
Chairman of the Board and
Chief Executive Officer
/S/ ELAINE D. CROWLEY
Date: June 9, 2005 Elaine D. Crowley
Senior Vice President, Chief
Financial Officer and Treasurer
20