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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 25, 2003 Commission file number 0-11736
THE DRESS BARN, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-0812960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Dunnigan Drive, Suffern, New York 10901
(Address of principal executive offices) (Zip Code)
(845) 369-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock $.05 par value
Indicate 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 [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
.05 par value 29,135,354 shares on March 2, 2003
Page 1 of 20
THE DRESS BARN, INC.
FORM 10-Q
QUARTER ENDED JANUARY 25, 2003
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
January 25, 2003 (unaudited)
and July 27, 2002 I-3
Condensed Consolidated Statements of Earnings
(unaudited) for the Thirteen weeks ended
January 25, 2003 and January 26, 2002 I-4
Condensed Consolidated Statements of Earnings
(unaudited) for the Twenty-six weeks ended
January 25, 2003 and January 26, 2002 I-5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Twenty-six weeks ended
January 25, 2003 and January 26, 2002 I-6
Notes to Unaudited Condensed Consolidated
Financial Statements (unaudited) I-7 through I-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations I-11 through I-16
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-17
Item 4 Controls and Procedures I-17
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submissions of Matters to a Vote
of Security Holders I-18
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K I-18
Signatures I-19
Certifications I-20
* Not applicable in this filing.
Item 1 - FINANCIAL INFORMATION
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Dollars in thousands except share data
January 25, 2003 July 27, 2002
-------------------- --------------
ASSETS
Current Assets: (unaudited)
Cash & cash equivalents $18,344 $75,926
Marketable securities and investments 118,648 163,474
Merchandise inventories 100,098 113,371
Prepaid expenses and other 3,716 2,182
-------------------- --------------
Total Current Assets 240,806 354,953
-------------------- --------------
Property and Equipment:
Leasehold improvements 63,251 61,414
Fixtures and equipment 160,399 154,139
Computer software 18,501 17,344
Automotive equipment 668 554
-------------------- --------------
242,819 233,451
Less: accumulated depreciation and amortization 153,502 140,025
-------------------- --------------
89,317 93,426
-------------------- --------------
Deferred Taxes 5,816 5,869
Other Assets 9,305 3,999
-------------------- --------------
Total Assets $345,244 $458,247
==================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable- trade $55,648 $62,802
Accrued salaries, wages and related expenses 18,674 18,089
Other accrued expenses 25,181 27,798
Customer credits 8,789 6,650
Income taxes payable 6,345 8,655
-------------------- --------------
Total Current Liabilities 114,637 123,994
-------------------- --------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, par value $.05 per share:
Authorized- 100,000 shares
Issued and outstanding- none -- --
Common stock, par value $.05 per share:
Authorized- 50,000,000 shares
Issued and outstanding- - 29,117,704 and
36,507,919 shares, respectively 1,456 1,825
Additional paid-in capital 56,280 52,210
Retained earnings 172,682 279,671
Accumulated other comprehensive income 189 547
-------------------- --------------
Total Shareholders' Equity 230,607 334,253
-------------------- --------------
Total Liabilities and Shareholders' Equity $345,244 $458,247
==================== ==============
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - Second Quarter (unaudited)
Amounts in thousands except per share data
Thirteen Weeks Ended
---------------------------------------
January 25, January 26,
2003 2002
------------------ -----------------
Net sales $167,372 $171,241
Cost of sales, including
occupancy and buying costs 107,265 109,488
------------------ -----------------
Gross profit 60,107 61,753
Selling, general and
administrative expenses 48,080 46,068
Depreciation and amortization 5,564 6,060
------------------ -----------------
Operating income 6,463 9,625
Interest income- net 832 1,483
------------------ -----------------
Earnings before
income taxes 7,295 11,108
Income taxes 2,627 3,999
------------------ -----------------
Net earnings $4,668 $7,109
================== =================
Earnings per share
Basic $0.16 $0.19
================== =================
Diluted $0.15 $0.19
================== =================
Weighted average shares outstanding:
Basic 29,902 36,524
------------------ -----------------
Diluted 30,687 37,439
------------------ -----------------
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - Six Months (unaudited)
Amounts in thousands except per share data
Twenty-Six Weeks Ended
---------------------------------------
January 25, January 26,
2003 2002
------------------ -----------------
Net sales $353,298 $353,320
Cost of sales, including
occupancy and buying costs 226,971 229,193
------------------ -----------------
Gross profit 126,327 124,127
Selling, general and
administrative expenses 95,698 91,927
Depreciation and amortization 12,032 11,820
------------------ -----------------
Operating income 18,597 20,380
Interest income- net 2,384 3,053
------------------ -----------------
Earnings before
income taxes 20,981 23,433
Income taxes 7,554 8,436
------------------ -----------------
Net earnings $13,427 $14,997
================== =================
Earnings per share:
Basic $0.40 $0.41
================== =================
Diluted $0.39 $0.40
================== =================
Weighted average shares outstanding:
Basic 33,292 36,591
------------------ -----------------
Diluted 34,219 37,421
------------------ -----------------
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Twenty Six Weeks Ended
-----------------------------------
January 25, January 26,
2003 2002
----------------- ----------------
Operating Activities:
Net earnings $13,427 $14,997
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 12,032 11,820
Change in deferred income taxes 53 966
Changes in assets and liabilities:
Decrease in merchandise inventories 13,273 18,052
(Increase) in prepaid expenses and other (1,534) (727)
(Increase) in other assets (5,306) (1,683)
(Decrease) in accounts payable- trade (7,154) (6,785)
Increase in accrued salaries, wages and related expenses 585 326
(Decrease) in other accrued expenses (2,617) (2,031)
Increase in customer credits 2,139 2,084
(Decrease) increase in income taxes payable (2,310) 2,588
----------------- ----------------
Total adjustments 9,161 24,610
----------------- ----------------
Net cash provided by operating activities 22,588 39,607
----------------- ----------------
Investing Activities:
Purchases of property and equipment - net (7,923) (13,018)
Sales and maturities of marketable securities and investments 106,186 45,038
Purchases of marketable securities and investments (61,718) (64,007)
----------------- ----------------
Net cash provided by (used in) investing activities 36,545 (31,987)
----------------- ----------------
Financing Activities:
Proceeds from Employee Stock Purchase Plan 45 46
Purchase of treasury stock (120,818) (7,661)
Proceeds from stock options exercised 4,058 2,971
----------------- ----------------
Net cash used in financing activities (116,715) (4,644)
----------------- ----------------
Net (decrease) increase in cash and cash equivalents (57,582) 2,976
Cash and cash equivalents- beginning of period 75,926 16,834
----------------- ----------------
Cash and cash equivalents- end of period $18,344 $19,810
================= ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $9,712 $4,827
================= ================
See notes to unaudited condensed consolidated financial statements
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) which management considers necessary to present fairly the
consolidated financial position of The Dress Barn, Inc. and its wholly owned
subsidiaries (the "Company") as of January 25, 2003 and July 27, 2002, the
consolidated results of its operations and its cash flows for the thirteen weeks
ended January 25, 2003 and January 26, 2002. The results of operations for a
thirteen-week period may not be indicative of the results for the entire year.
The Company's Board of Directors approved a 2-for-1 stock split in the form
of a 100% stock dividend on the Company's issued and outstanding common stock in
May 2002. The stock dividend was distributed on May 31, 2002 to shareholders of
record on May 17, 2002. All historic share and per share information contained
in this report have been adjusted to reflect the impact of the stock split.
Significant accounting policies and other disclosures necessary for
complete financial statements in conformity with generally accepted accounting
principles have been omitted since such items are reflected in the Company's
audited financial statements and related notes thereto. Accordingly, these
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
July 27, 2002 Annual Report to Shareholders. The condensed balance sheet as of
July 27, 2002 was derived from the audited balance sheet included in the Form
10-K for the fiscal year ended July 27, 2002. Certain reclassifications have
been made to the condensed consolidated financial statements of prior periods to
conform to the current period presentation.
2. Stock Repurchase Program and Dutch Auction Tender Offer
On March 30, 2000, the Board of Directors authorized a $50 million stock
repurchase program, which was increased to $75 million on April 5, 2001. As of
the date of this filing, the Company had repurchased 2,323,000 shares at an
aggregate purchase price of approximately $24.8 million. During the six months
ended January 25, 2003 no shares were repurchased under this authorization.
On October 30, 2002 the Company completed a "Dutch Auction" Tender Offer
(the "Tender Offer"), resulting in the Company's purchase of 8 million shares of
its common stock at $15 per share for a total cost of approximately $121 million
including transaction costs.
Reacquired shares are retired and treated as authorized but unissued
shares, with the cost of the reacquired shares (less the par value) debited to
retained earnings and the par value debited to common stock.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share
Basic EPS is based upon the weighted average number of common shares
outstanding and diluted EPS is based upon the weighted average number of common
shares outstanding plus the dilutive effect of stock options outstanding during
the period. Antidilutive options are excluded from the earnings per share
calculations when the option price exceeds the average market price of the
common shares for the period. The following is a reconciliation of the
denominators of the basic and diluted EPS computations shown on the face of the
accompanying consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended
January 25, January 26, January 25, January 26,
Shares in thousands 2003 2002 2003 2002
--------------- -------------- -------------- ---------------
Basic weighted average outstanding shares 29,902 36,524 33,292 36,591
Dilutive effect of options outstanding 785 915 927 830
--------------- -------------- -------------- ---------------
Diluted weighted average shares outstanding 30,687 37,439 34,219 37,421
--------------- -------------- -------------- ---------------
Anti-dilutive options excluded from calculations 150 -- -- --
--------------- -------------- -------------- ---------------
4. Comprehensive Income
The Company's short-term investments are classified as available for sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses reported as a component of other comprehensive income. Total
comprehensive income is composed of net earnings and net unrealized gains or
losses on available for sale securities. The following is a reconciliation of
comprehensive income and net earnings as shown on the face of the accompanying
consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended
January 25, January 26, January 25, January 26,
Dollars in thousands 2003 2002 2003 2002
--------------- -------------- -------------- ---------------
Net earnings $4,668 $7,109 $13,427 $14,997
Net unrealized gain (loss) on available for sale
securities 59 45 (358) 160
--------------- -------------- -------------- ---------------
Comprehensive income $4,727 $7,154 $13,069 $15,157
--------------- -------------- -------------- ---------------
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method of accounting and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
will not be amortized, but will rather be tested at least annually for
impairment. The Company adopted SFAS No. 142 at the beginning of its fiscal year
ending July 26, 2003 ("fiscal 2003") with no impact on its financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses the financial accounting and
reporting for obligations and retirement costs related to the retirement of
tangible long-lived assets, requiring the recognition of a liability for an
asset retirement obligation in the period in which it is incurred. The Company
adopted SFAS No. 143 at the beginning of fiscal 2003 with no impact on its
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions relating
to the disposal of a segment of a business of Accounting Principals Board No.
30. The Company adopted SFAS No. 144 at the beginning of fiscal 2003 with no
impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue (the "Issue") No. 94-3.
The Company will adopt the provisions of SFAS No. 146 for any restructuring
activities initiated after December 31, 2002. Prior to December 31, 2002, the
Company has not had any restructuring activities. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
was recognized at the date of a company's commitment to an exit plan. SFAS No.
146 also establishes that the liability should initially be measured and
recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of
recognizing any future restructuring costs as well as the amounts recognized.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others- an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. However, the disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company is not a party to any agreement in which it is a
guarantor of indebtedness of others. Accordingly, this pronouncement is
currently not applicable to the Company.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods of transition for companies that voluntarily change
to a fair value-based method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 for
both interim and annual financial statements. The disclosure provisions of SFAS
148 are effective for annual reports for fiscal years ending after December 15,
2002, and for interim financials for periods beginning after December 15, 2002.
As such, the Company will adopt the interim reporting provisions of SFAS 148 for
its third quarter ending April 26, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable
interest entities (formerly special purpose entities or SPEs). In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. The
objective of FIN 46 is not to restrict the use of variable interest entities but
to improve financial reporting by companies involved with variable interest
entities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. However, certain of the disclosure
requirements apply to financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company
currently does not have any variable interest entities as defined in FIN 46.
Accordingly, this pronouncement is currently not applicable to the Company.
6. Subsequent Event - Purchase of Real Estate
On January 28, 2003, the Company, through a wholly owned subsidiary,
completed the purchase of real estate which includes its current corporate
headquarters and distribution facility in Suffern, New York (the "Suffern
facility") for a total cost, including purchase price and transaction costs, of
approximately $45.5 million. The Company intends to utilize fixed rate long-term
mortgage financing for the major portion of the acquisition cost, with the
remainder financed through the Company's existing cash.
The Suffern facility consists of approximately 65 acres of land, with a
current total of approximately 900,000 square feet of rentable distribution and
office space, the majority of which is occupied by the Company. The remainder of
the rentable square footage is 100% leased through 2012. In order to obtain
mortgage financing for the facility, the Company is expected to be required to
sign a long-term lease at current rents, with its wholly-owned subsidiary, for
the office and distribution space it currently occupies corresponding to the
term of the related fixed-rate mortgage.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth the percentage change in dollars from last
year for the thirteen and twenty-six week periods ended January 25, 2003, and
the percentage of net sales for each component of the Consolidated Statements of
Earnings for each of the periods presented:
Second Quarter Six Months
% Change % of Sales % Change % of Sales
from L/Y T/Y L/Y from L/Y T/Y L/Y
Net Sales -2.3% 0.0%
Cost of Sales, including
Occupancy & Buying -2.0% 64.1% 63.9% -1.0% 64.2% 64.9%
Gross Profit -2.7% 35.9% 36.1% 1.8% 35.8% 35.1%
Selling, General and
Admin. Expenses 4.4% 28.7% 26.9% 4.1% 27.1% 26.0%
Depreciation and Amortization -8.2% 3.3% 3.6% 1.8% 3.4% 3.3%
Operating Income -32.9% 3.9% 5.6% -8.7% 5.3% 5.8%
Interest Income - Net -43.9% 0.5% 0.9% -21.9% 0.6% 0.8%
Earnings Before Income Taxes -34.3% 4.4% 6.5% -10.5% 5.9% 6.6%
Net Earnings -34.3% 2.8% 4.2% -10.5% 3.8% 4.2%
Net sales for the thirteen weeks ended January 25, 2003 (the "second
quarter") decreased by 2.3% to $167.4 million from $171.2 million for the
thirteen weeks ended January 26, 2002 (the "prior period"). The sales decrease
can be attributed to the 4% decrease in comparable store sales, which was offset
in part by an approximate 2% increase in average selling square footage. Net
sales for the twenty-six weeks ended January 25, 2003 (the "six months")
remained flat at $353.3 million versus the twenty-six weeks ended January 26,
2002 ("last year"). The 4% decrease in comparable store sales was offset by an
approximate 3% increase in average selling square footage.
The Company believes the continuing weakness in its comparable store sales
reflects the current geopolitical uncertainties and the unsettled economy,
resulting in reduced levels of consumer confidence. Additionally, the
unseasonably warm weather through early October impacted selling of its
traditional fall merchandise categories and the unusually cold winter negatively
impacted customer traffic during the second quarter. The Company's sales
weakness has continued through February 2003, exacerbated by the blizzard in the
Northeast on President's Day, with the Company's February comparable store sales
decreasing 13% versus the prior year. Accordingly, the Company continues to
exercise caution by operating conservatively and maintaining inventory levels in
line with sales trends.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the six months, the Company's total selling square footage increased
approximately 2%. The increase in store square footage was primarily due to the
opening of new combination Dress Barn/Dress Barn Woman stores ("combo stores"),
which carry both Dress Barn and Dress Barn Woman merchandise, as well as the
conversion of single-format stores into combo stores. During the six months the
Company opened 30 new stores, including 4 in Southern California. These store
openings offset the square footage reduction from the closing of 23
underperforming stores during the six months (20 of which were closed during the
second quarter). During the second quarter the Company opened 2 new stores.
As of January 25, 2003, the Company had 761 stores in operation, (199 Dress
Barn stores, 57 Dress Barn Woman stores and 505 combo stores), versus 741 stores
in operation at January 26, 2002, (213 Dress Barn stores, 58 Dress Barn Woman
stores and 470 combo stores). The Company's real estate strategy for the
remainder of fiscal 2003 is to continue opening primarily combo stores and
converting its existing single-format stores into combo stores, while closing
its underperforming locations. The Company anticipates opening approximately
15-20 stores and closing approximately 15-20 stores during the remainder of the
fiscal year. The Company seeks new locations in both its existing trading
markets, and developing and expanding into new markets.
The Company has continued to test and reevaluate its direct selling
strategy. The Company briefly sold a limited assortment of merchandise via its
web site (www.dressbarn.com) and via telephone during the second quarter, but
the results were below expectations. As such, the Company has decided to only
sell merchandise in its retail stores, utilizing its web site as a marketing and
informational vehicle to communicate with its customers and help drive store
traffic. The Company's second quarter and six month's earnings per share-diluted
were minimally impacted by its direct selling operations versus approximately
$0.04 and $0.10 in last year's three and six month periods, respectively, on a
post-split basis.
Gross profit (net sales less cost of goods sold, including occupancy and
buying costs) for the second quarter decreased by 2.7% to $60.1 million, or
35.9% of net sales, from $61.8 million, or 36.1% of net sales, for the prior
period. For the six months, gross profit increased 1.8%, to $126.3 million, or
35.8% of net sales, from $124.1 million, or 35.1% of net sales, for the prior
six-month period. For both the second quarter and six months, store occupancy
costs were higher as a percentage of sales as a result of the decreases in
comparable store sales and higher rents for new stores, store expansions and
lease renewals. In the second quarter, higher markdowns led to a slight decrease
in merchandise margins as a percent of sales, while lower markdowns in the first
quarter and higher initial margins contributed to increased merchandise margins
versus the prior year that more than offset the increase in store occupancy
costs as a percentage of sales.
Selling, general and administrative (SG&A) expenses increased by 4.4% to
$48.1 million, or 28.7% of net sales, in the second quarter as compared to $46.1
million, or 26.9% of net sales, in the prior period. For the six months, SG&A
expenses increased by 4.1% to $95.7 million, or 27.1% of net sales, versus $91.9
million, or 26.0% of net sales, in the prior six-month period. The increase in
SG&A as a percentage of net sales for both the second quarter and the six months
were primarily due to negative comparable store sales leverage on SG&A expenses.
SG&A expenses increased in both periods primarily due to increased store
operating costs, primarily selling, benefits and supply costs resulting from the
increase in the Company's store base. In addition, the colder than normal winter
in most parts of the country put added pressure on utility costs in the second
quarter. The Company continues to control its costs and enhance productivity,
partially offsetting the increase in store operating costs.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation decreased to $5.6 million in the second quarter from $6.0
million in the prior period. For the six months, depreciation expense increased
to $12.0 million from $11.8 million last year. The increase in depreciation
expense reflected higher fixed asset purchases during the last twelve months
primarily due to the upgrade of the Company's store operating system and
hardware completed during the prior fiscal year. In the second quarter, this
increase was offset by writeoffs of obsolete computer equipment and software in
the prior period. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 10 years.
Interest income decreased 43.9% to $0.8 million in the second quarter and
decreased 21.9% to $2.4 million in the six months versus last year's $1.5
million and $3.1 million, respectively. These decreases were due to the steep
reduction in investment rates versus last year coupled with the decrease in
funds available for investment resulting from the Tender Offer. The Tender Offer
was successfully completed October 30, 2002, resulting in the Company's purchase
of 8 million shares of its common stock at $15 per share for a total cost of
approximately $121 million including transaction costs.
Principally as a result of the above factors, net income for the second
quarter was $4.7 million, or 2.8% of net sales, a decrease of 34.3% from $7.1
million, or 4.2% of net sales, in the prior period. Net income for the six
months decreased 10.5% to $13.4 million, or 3.8% of net sales, versus $15.0
million, or 4.2% of net sales, for the prior six-month period.
The Company's earnings per share for the second quarter were positively
impacted by approximately $.03 per share as a result of the Tender Offer which
was completed October 30, 2002. The Company purchased 8 million shares of its
common stock, approximately 21% of the outstanding shares, at $15 per share.
Liquidity and Capital Resources
The Company believes that its cash, cash equivalents and short-term
investments, together with cash flow from operations, will be adequate to fund
the Company's fiscal 2003 planned capital expenditures and all other operating
requirements and other proposed or contemplated expenditures. The Suffern
facility was purchased on January 28, 2003, subsequent to the end of the second
quarter, for approximately $45.5 million. The Company utilized its existing cash
as bridge financing until the contemplated fixed rate long-term mortgage
financing is completed. Immediately after funding the purchase of the Suffern
facility the Company had approximately $100 million of cash and investments on
hand. Inventories were current and in line with sales projections.
The Company does not have any off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities, other than operating
leases entered into in the normal course of business and letters of credit.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in Note 1 of the
Notes to Consolidated Financial Statements in the Company's Annual Report to
Shareholders. Management's discussion and analysis of the Company's financial
condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, income taxes and related disclosures of contingent assets and
liabilities. On an ongoing basis, the Company evaluates estimates, including
those related primarily to inventories, investments, long-lived assets, income
taxes and claims and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following accounting principles are the most critical because they involve the
most significant judgments, assumptions and estimates used in preparation of the
Company's financial statements.
Revenue Recognition
While the Company's recognition of revenue does not involve significant
judgment, revenue recognition represents an important accounting policy of the
Company. The Company recognizes sales at the point of purchase when the customer
takes possession of the merchandise and pays for the purchase, generally with
cash or credit card. Sales from purchases made with gift certificates and
layaway sales are also recorded when the customer takes possession of the
merchandise. Gift certificates and merchandise credits issued by the Company are
recorded as a liability until they are redeemed.
Merchandise Inventories
The Company's inventory is valued using the retail method of accounting and
is stated at the lower of cost or market. Under the retail inventory method, the
valuation of inventory at cost and resulting gross margin are calculated by
applying a calculated cost to retail ratio to the retail value of inventory. The
retail inventory method is an averaging method that has been widely used in the
retail industry due to its practicality. Inherent in the retail method are
certain significant management judgments and estimates including, among others,
initial merchandise markup, markdowns and shrinkage, which significantly impact
the ending inventory valuation at cost as well as the resulting gross margins.
Estimates are used to charge inventory shrinkage for the first and third fiscal
quarters of the fiscal year. Physical inventories are conducted at the end of
the second fiscal quarter and at the end of the fiscal year to calculate actual
shrinkage and inventory on hand. The Company continuously reviews its inventory
levels to identify slow-moving merchandise and broken assortments, using
markdowns to clear merchandise. A provision is recorded to reduce the cost of
inventories to its estimated net realizable value. Consideration is given to a
number of quantitative factors, including anticipated subsequent markdowns and
aging of inventories. To the extent that actual markdowns are higher or lower
than estimated, the Company's gross margins could increase or decrease and,
accordingly, affect its financial position and results of operations. A
significant variation between the estimated provision and actual results could
have a substantial impact on the Company's results of operations.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Long-lived assets
The Company primarily invests in property and equipment in connection with
the opening and remodeling of stores and in computer software and hardware. Most
of the Company's store leases give the Company the option to terminate the lease
if certain specified sales volumes are not achieved generally during the first
two years of the lease. The Company periodically reviews its store locations and
estimates the recoverability of its assets, recording an impairment charge when
the Company expects to exercise its right to terminate the store's lease early
using this option. This determination is based on a number of factors, including
the store's historical operating results and cash flows, estimated future sales
growth, real estate development in the area and perceived local market
conditions that can be difficult to predict and may be subject to change. In
addition, the Company regularly evaluates its computer-related and other assets
and may accelerate depreciation over the revised useful life if the asset is no
longer in use or has limited future value. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is reflected in income
for that period.
Claims and Contingencies
The Company is subject to various claims and contingencies related to
insurance, taxes, lawsuits and other matters arising out of the normal course of
business. The Company has risk participation agreements with insurance carriers
with respect to workers' compensation and medical insurance. Pursuant to these
arrangements, the Company is responsible for paying claims up to designated
dollar limits. The Company accrues its estimate of the eventual costs related to
these claims, which can vary based on changes in assumptions or claims
experience. The Company accrues its estimate of probable settlements of domestic
and foreign tax audits. At any one time, many tax years are subject to audit by
various taxing jurisdictions. The results of these audits and negotiations with
taxing authorities may affect the ultimate settlement of these issues. If the
Company believes the likelihood of an adverse legal outcome is probable and the
amount is estimable it accrues a liability. The Company consults with legal
counsel on matters related to litigation and seeks input from other experts both
within and outside the Company with respect to matters in the ordinary course of
business. The Company believes its accruals for claims and contingencies are
adequate.
Income taxes.
The Company does business in various jurisdictions that impose income
taxes. Management determines the aggregate amount of income tax expense to
accrue and the amount currently payable based upon the tax statutes of each
jurisdiction. This process involves adjusting income determined using generally
accepted accounting principles for items that are treated differently by the
applicable taxing authorities. Deferred tax assets and liabilities are reflected
on the Company's balance sheet for temporary differences that will reverse in
subsequent years. If different judgments had been made, the Company's tax
expense, assets and liabilities could have been different.
Seasonality
The Company has historically experienced substantially lower earnings in
its second fiscal quarter ending in January than during its other three fiscal
quarters, reflecting the intense promotional atmosphere that has characterized
the Christmas shopping season in recent years. In addition, the Company's
quarterly results of operations may fluctuate materially depending on, among
other things, increases or decreases in comparable store sales, adverse weather
conditions, shifts in timing of certain holidays, the timing of new store
openings, the promotional activities of other retailers, net sales contributed
by new stores and changes in the Company's merchandise mix.
Forward-Looking Statements and Factors Affecting Future Performance
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
reflect the Company's current views with respect to future events and financial
performance. The Company's actual results of operations and future financial
condition may differ materially from those expressed or implied in any such
forward looking statements as a result of certain factors set forth in the
Company's Annual Report on Form 10-K for its fiscal year ended July 27, 2002.
Item 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's portfolio of investments consisting of cash, cash equivalents
and marketable securities can be affected by changes in market interest rates.
The portfolio consists primarily of municipal bonds that can readily be
converted to cash. Financial instruments, which potentially subject the Company
to concentrations of credit risk, are principally bank deposits and short-term
investments. Cash and cash equivalents are deposited with high credit quality
financial institutions. Short-term investments principally consist of triple A
or double A rated instruments. The carrying amounts of cash, cash equivalents,
short-term investments and accounts payable approximate fair value because of
the short-term nature and maturity of such instruments. The Company holds no
options or other derivative instruments.
A discussion of the Company's accounting policies for financial instruments
and further disclosures relating to financial instruments is included in the
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended July 27,
2002. In addition, also refer to Note 2 of the Notes to the Unaudited Condensed
Consolidated Financial Statements, "Stock Repurchase Program and Dutch Auction
Tender Offer".
Item 4 -- CONTROLS AND PROCEDURES
In the 90-day period before the filing of this report, the Chief Executive
Officer and Chief Financial Officer of the Company (collectively, the
"certifying officers") have evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities and Exchange Act of 1934, as amended). These
disclosure controls and procedures are designed to ensure that the information
required to be disclosed by the Company in its periodic reports filed with the
Securities and Exchange Commission (the "Commission") is recorded, processed,
summarized and reported within the time periods specified by the Commission's
rules and forms, and that the information is communicated to the certifying
officers on a timely basis.
The certifying officers concluded, based on their evaluation, that the
Company's disclosure controls and procedures are effective for the Company,
taking into consideration the size and nature of the Company's business and
operations.
No significant changes in the Company's internal controls or in other
factors were detected that could significantly affect the Company's internal
controls subsequent to the date when the internal controls were evaluated.
Part II - OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
99.1 Certification of David R. Jaffe pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Certification of Armand Correia pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company did not file any reports on Form 8-K during the quarter
ended January 25, 2003.
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.
Date: March 11, 2003
BY: /s/ DAVID R. JAFFE
David R. Jaffe
President, Chief Executive Officer and Director
(Principal Executive Officer)
BY: /s/ ARMAND CORREIA
Armand Correia
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATIONS
I, David R. Jaffe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Dress Barn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 11, 2003
/s/ David R. Jaffe
David R. Jaffe
President, Chief Executive Officer and Director
I, Armand Correia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Dress Barn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 11, 2003
/s/ Armand Correia
Armand Correia
Senior Vice President and Chief Financial Officer