SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 26, 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 [ ].
Indicate if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in the definitive proxy incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer. Yes [X]
No [ ].
As of October 15, 2003, 29,245,284 shares of common shares were outstanding. The
aggregate market value of the common shares (based upon the October 15, 2003
closing price of $14.25 on the NASDAQ Stock Market) of The Dress Barn, Inc. held
by non-affiliates was approximately $305.4 million. For the purposes of such
calculation, all outstanding shares of Common Stock have been considered held by
non-affiliates, other than the 7,813,844 shares beneficially owned by Directors
and Executive Officers of the registrant. In making such calculation, the
registrant does not determine the affiliate or non-affiliate status of any
shares for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on November 19, 2003 are incorporated into Parts I and
III of this Form 10-K.
Cover Page
THE DRESS BARN, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 26, 2003
TABLE OF CONTENTS
PART I PAGE
Item 1 Business
General 3
Company Strengths and Strategies 3
Merchandising 6
Buying and Distribution 7
Store Locations and Properties 8
Operations and Management 10
Advertising and Marketing 11
Management Information Systems 11
Trademarks 11
Employees 12
Seasonality 12
Forward-Looking Statement and Factors Affecting Future
Performance 12
Item 2 Properties 14
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 4A Executive Officers of the Registrant 16
PART II
Item 5 Market for Registrant's Common Stock and
Related Security Holders Matters 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8 Financial Statement and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 27
Item 12 Security Ownership of Certain Beneficial Owners
and Management 27
Item 13 Certain Relationships and Related Transactions 27
Item 14 Controls and Procedures 27
Item 15 Principal Accountant Fees and Services 27
PART IV
Item 16 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 28
PART I
ITEM 1. BUSINESS
General
The Dress Barn, Inc. (including The Dress Barn, Inc. and it's wholly-owned
subsidiaries (the "Company")) operates a chain of women's apparel specialty
stores. The stores, operating principally under the names "Dress Barn" and
"Dress Barn Woman", offer in-season, moderate to better quality career and
casual fashion to the working woman at value prices. The Company differentiates
itself from (i) off-price retailers by its carefully edited selection of unique,
in-season, first-quality merchandise, service-oriented salespeople and its
comfortable shopping environment, (ii) department stores by its value pricing,
customer service and convenient locations and (iii) other specialty apparel
retailers by its unique, lifestyle-oriented merchandise and its continuous focus
on Dress Barn's target customer. As part of this focus, the Company has
successfully developed its own brand, which constituted virtually all of its net
sales for the fiscal year ended July 26, 2003 ("fiscal 2003").
The Company operates primarily combination Dress Barn/Dress Barn Woman
stores ("Combo Stores"), which carry both Dress Barn and larger-sized Dress Barn
Woman merchandise, as well as freestanding Dress Barn and Dress Barn Woman
stores. As of July 26, 2003, the Company operated 772 stores in 44 states and
the District of Columbia, consisting of 521 Combo Stores, 194 Dress Barn stores
and 57 Dress Barn Woman stores. The Dress Barn and Dress Barn Woman stores
average approximately 4,500 and approximately 4,000 square feet, respectively,
and the Combo Stores average approximately 8,500 square feet.
Company Strengths and Strategies
Dress Barn strives to be the preferred career and casual women's specialty
store for the moderate customer (size 4 to 24), providing differentiated current
fashion merchandise at value prices in a comfortable easy to shop environment
with a strong focus on customer service. The Company caters to the
time-pressured working women who want their shopping trips to be efficient. To
accommodate this customer, the Company locates its stores primarily in nearby
strip shopping centers and operates most of these stores seven days and six
nights a week. The Company seeks to maintain a distinct fashion point of view,
with unique merchandise not found at other stores, editing its assortments
frequently, in accordance with its targeted customer's tastes. Merchandise is
arranged conveniently by lifestyle and category. Customers develop a high degree
of confidence that they will quickly find the styles that match their
preferences. This, along with attentive service, which Dress Barn is known for,
helps to create a loyal repeat customer.
The Company same store sales have declined in each of the past three fiscal
years, with total sales declining in fiscal 2003 versus the prior year. The
Company's strategy to reverse this trend is to increase customer traffic to its
store locations by (a) bringing into its stores more unique, fashion-forward
quality merchandise not found at its competitors while maintaining its value
prices, (b) investing in technology and training to enhance its already
well-known friendly customer service and the product knowledge of its sales
associates and (3) increasing its marketing and advertising budget as a
percentage of sales, to focus on communicating the brand, as an image and a
lifestyle, and on special promotions and rewards to current and potential
customers and its Dress Barn credit card holders.
Dress Barn is one of the largest national specialty store chains offering
in-season women's career and casual fashions at value prices. Dress Barn
attributes its success to its: (i) national brand recognition and loyal customer
base; (ii) long-standing relationships with vendors and manufacturers of quality
merchandise, both domestic and overseas; (iii) strong, consistent customer
focus; (iv) low cost operating structure; (v) experienced merchandise management
team and (vi) strong balance sheet.
Since the Company's formation in 1962, Dress Barn has established and
reinforced its image as a source of fashion and value, focusing on its target
customer - fashion minded working women. The Company has built its brand image
as a core resource for a lifestyle-oriented, stylish, value-priced assortment of
career and casual fashions tailored to its customers' needs. The Company's over
770 store locations in 44 states provide it with a nationally recognized brand
name. The Company has developed long-standing relationships with its existing
customers, enjoying strong customer loyalty.
The Company has developed and maintains strong and lasting relationships
with its domestic and offshore vendors and manufacturers, including its buying
agents, often being one of their largest accounts. These relationships, along
with the Company's buying power and strong credit profile, enable the Company to
receive favorable purchasing terms, exclusive merchandise and expedited delivery
times.
Over the past several years, the Company has been gradually repositioning
itself to appeal to a more fashion conscious customer while maintaining the
Company's focus on its target customer. This repositioning includes enhancing
the existing Dress Barn image, building brand awareness through various
marketing and advertising campaigns, adopting a new logo and creating a
personality and a voice for the Dress Barn brand and communicating this
friendlier, more feminine spirit to customers, potential customers and
associates. To enhance the development of the Dress Barn brand, the Company
changed and updated its in-store graphics, and developed a new prototype store
design. During this period, the Company has expanded the use of its dressbarn(R)
label to virtually all its merchandise offerings, emphasizing quality, value and
fashion.
The Company engaged a national market research firm to conduct extensive
customer surveys to better understand its customers, their concerns and issues,
as well as those who have never shopped or used to shop Dress Barn. In September
2002, the Company hired Vivian Behrens as Senior Vice President, Marketing. Ms.
Behrens previously held senior marketing positions at Avon, The Limited Inc.,
and Charming Shoppes, Inc., and was formerly a member of the Company's Board of
Directors. Ms. Behrens is responsible for all of the Company's marketing,
including brand development and brand image campaigns, advertising, sales
promotion and the internet. Current plans seek to gradually change the
perception of Dress Barn and enhance the Company's branding and advertising
strategy. In fall 2003, the Company has initiated a comprehensive national brand
image campaign to strengthen brand awareness as well as bring new customers into
its stores.
The Company's merchandise offerings reflect a focused and balanced
assortment of career and casual fashions tailored to its customers' demands. The
Company believes it offers its customers unique merchandise, generally fashion
forward with constantly updated looks and colors. The merchandise mix has
evolved to a more updated contemporary style, shifting in focus from structured,
career looks to softer outfit dressings and assortments. The Company has
upgraded its fabrications, offering value, style and fashion while maintaining
its quality and price points. The Company attempts to insure its merchandise
sizes are true, with consistent sizing, easy to care for and quality
construction.
The Company's stores reflect newness and fashion, with key items in depth
accented by six floorset changes a year. Stores receive shipments daily for a
constant flow of new looks to keep the assortments fresh and exciting. Lifestyle
merchandising is key; emphasizing mix and match outfit dressing within strong
color stories. The Company has a new store design that features an easier to
shop layout, warmer colors and new wood fixtures for enhanced merchandise
presentation. During fiscal 2003, the Company updated to this new design or
remodeled approximately 100 stores; the Company plans to update or remodel
approximately 100 of its store locations during its fiscal year ending July 31,
2004 ("fiscal 2004").
Dress Barn continues to invest in technology to improve merchandising and
customer service, reduce costs and enhance productivity. The Company utilizes a
field information system for all its Regional and District Sales Managers via
laptop computers, providing sales, inventories and other operational data. The
Company recently upgraded its back-office store system software to include such
features as inventory scanning, quick credit approval for new applications,
automated new hire entry and store email. The Company utilizes a DVDi Learning
Management System (LMS), where customer service associates are able to take
tests and the Company plans to have the results tracked centrally for
consistency across all of its stores. The Company is upgrading its store
locations' cash register software and hardware to an enhanced, easy to use
system, expecting implementation in stages starting in late fiscal 2004. One of
the primary goals of the new system is to be extremely user-friendly. The
Company's distribution center systems continue to be refined to reduce per-unit
distribution costs.
All aspects of Dress Barn's stores are designed to be responsive to the
Dress Barn customer. In past customer surveys, customer service was viewed as
superior to its competition and was a competitive advantage. Since 1962, the
Company has been consistent in targeting price-conscious and fashion-minded
working women. The convenient locations of the Company's stores primarily in
strip and outlet centers, carefully edited coordinated merchandise, arranged for
ease of shopping, comfortable store environment and friendly customer service
embody Dress Barn's strong focus on its customers. Dress Barn's training program
encourages its customer service associates to assist customers in a low-key and
friendly manner. The Company has various programs to recognize and reward its
best customer service associates. The Company believes it enhances its
customers' shopping experience by avoiding aggressive sales tactics that would
result from a commission-based compensation structure.
The Company continually seeks to reduce costs in all aspects of its
operations and to create cost-consciousness at all levels. The Company believes
that its highly liquid cash and investments and its internally generated funds
provide a competitive advantage that enables the Company to pursue its long-term
strategies regarding new stores, capital expenditures and potential
acquisitions. The Company believes the repurchase of its common shares is
consistent with its goal of maximizing shareholder value. During the past three
years the Company has repurchased a total of 9.4 million shares, utilizing over
$137 million of its internally generated funds.
In January 2003, the Company, through a wholly owned subsidiary, purchased
for approximately $45.3 million a distribution/office facility in Suffern, New
York (the "Suffern facility"), of which the major portion is the Company's
corporate offices and distribution center. The acquisition of the Suffern
Facility provides flexibility for future expansion and is expected to result in
significant savings in its home office and distribution center occupancy costs.
Based on the economic success of its larger size Combo Stores, most fiscal
2004 store openings will be Combo Stores between 7,000 and 9,000 square feet.
Combo Stores provide the Company with greater presence in shopping centers, give
the Company more leverage in negotiating lease terms, enable the Company to
achieve lower operating cost ratios and offer increased flexibility in
merchandise presentation. The Company has in the past also purchased locations
from bankrupt retailers, some of which were too small for a Combo and were
opened as freestanding locations. Of the 46 stores the Company opened during
fiscal 2003, 39 were Combo locations and 7 were freestanding locations. The
Company has an ongoing program of converting its older freestanding stores to
Combo Stores. Six stores were converted to Combo stores during fiscal 2003. The
Company expects to continue to open stores primarily in strip centers, as well
as in downtown and outlet locations. In fiscal 2004, the Company plans to open
approximately 60 new stores and convert 5 to 10 existing stores to Combo Stores,
including expanding into new markets.
In conjunction with its strategy of adding mostly Combo Stores, the Company
continues to close or relocate its underperforming locations and closed 28 such
locations during fiscal 2003, compared to 32 closed in fiscal 2002. The Company
also plans to close approximately 30 more such locations in fiscal 2004. The
Company has the option under a substantial number of its store leases to
terminate the lease at little cost if specified sales volumes are not achieved,
affording the Company greater flexibility to close certain underperforming
stores. The Company's continued opening of new stores, net of store closings,
resulted in an aggregate store square footage increase of approximately 4.5% in
fiscal 2003, after a 6% increase in fiscal 2002. Net of store closings, the
Company currently plans to increase its aggregate store square footage by
approximately 5% in fiscal 2004.
The Company's marketing programs focus on developing stronger relationships
with its existing customers, increasing their loyalty by making them feel better
about Dress Barn. Concurrently, the programs try to create awareness among those
who are not already customers and inspire them to visit its stores and see what
Dress Barn has to offer. One major asset is the Dress Barn credit card; with
almost 2.3 million cardholders, giving the Company the ability to communicate
with and reward its best customers. The credit card purchasing information,
combined with transactional data from the stores, has created a customer
database for our customer relationship management ("CRM") system. The CRM
database tracks customer transactions, with the ability to target customers with
specific offers and promotions, including coupons, pre-sale announcements, and
special events. The CRM database is used for the Company's direct mail program,
providing more productive direct mail lists as well as targeting potential
customers within each store's trading area and for new stores. The Company
believes these efforts can lead to new customers as well as a more loyal
customer base. The Company believes it complies with current consumer privacy
rules and regulations for the protection of its customers.
Due to the continued operating losses of its catalog and e-commerce
operations and significant weaknesses in its new fulfillment and order
processing software, the Company suspended all mailing of catalogs and
e-commerce sales in November 2001. The Company briefly resumed selling a limited
assortment of merchandise via its web site (www.dressbarn.com) and via telephone
during fiscal 2003 with little success. Accordingly, the Company suspended all
e-commerce activity except the selling of gift certificates and has chosen
instead to focus its internet site on reinforcing store promotions and providing
store and product information, helping to drive store traffic and communicate
with its retail customers.
Merchandising
Virtually all merchandising decisions affecting the Company's stores are
made centrally. Day to day store merchandising is under the direction of Keith
Fulsher, the General Merchandise Manager, and six additional merchandise
managers. The Company utilizes a Visual Merchandising Department to communicate
various floorsets and presentations to the stores. The Company generally has six
complete floorset changes per year to keep its merchandise presentation fresh
and exciting. There is a constant flow of new merchandise to the stores to
maintain newness. Store prices and markdowns are determined centrally but may be
adjusted locally in response to competitive situations. Generally, the majority
of the merchandise sold by the Company is uniformly carried by all stores, with
a percentage varied by management according to regional or consumer tastes or
the volume of a particular stores. To keep merchandise seasonal and in current
fashion, inventory is reviewed weekly and markdowns are taken as appropriate to
expedite selling. The Company offers first-quality, in-season merchandise, with
approximately 65% of the Company's sales volume derived from sportswear,
including sweaters, knit and woven tops, pants and skirts. The remainder of the
Company's sales volume consists of dresses, suits, blazers, outerwear and
accessories. Dress Barn Woman merchandise features larger sizes of styles
similar to Dress Barn merchandise. The Company's Petite departments feature
merchandise similar to Dress Barn merchandise in petite sizes. In addition to
the Company's broad assortment of career and casual wear, the Company offers
other items including in selected stores hosiery, handbags and shoes. There are
separate merchandising teams for Dress Barn and Dress Barn Woman.
The Company's direct sourcing of its merchandise improves its control over
the flow of merchandise into its stores and enables the Company to better
specify quantities, styles, colors, size breaks and delivery dates. In addition,
the Company believes its direct sourcing provides it with more flexibility by
allowing for higher initial mark-ons. The Company believes it has the expertise
to execute its brand strategy due to its extensive experience sourcing goods,
its position as a merchandiser of established fashions, and its prior experience
with private brands. Virtually all of the Company's sales are generated from its
private brand labels.
The Company continues to expand the number of its stores with shoe and
petite-size departments. As of July 26, 2003, 314 stores had shoe departments
and 160 stores featured petites.
Buying and Distribution
Buying is conducted on a departmental basis for Dress Barn and Dress Barn
Woman by the Company's staff of over 45 buyers and assistant buyers supervised
by the General Merchandise Manager and six merchandise managers. The Company
also uses independent buying representatives in New York and overseas. The
Company obtains its merchandise from approximately 200 vendors, and no vendor
accounted for over 5% of the Company's purchases. In fiscal 2003, imports
accounted for over 50% of merchandise purchases and no vendor accounted for over
5% of the Company's import purchases Typical lead times for the Company in
making purchases from its vendors range from approximately one month for items
purchased domestically versus up to six months for merchandise purchased
overseas.
All merchandise for its stores is received from vendors at the Company's
central warehouse and distribution facility in Suffern, New York, where it is
inspected, allocated and shipped to its stores. The Company uses its strong
relationships with vendors to lower its operating costs by shifting freight and
insurance costs to the vendors and typically requires them to provide ancillary
services. For example, over 90% of the Company's merchandise is pre-ticketed by
vendors and over half of the hanging garments purchased by the Company are
delivered on floor-ready hangers. In addition, 45% of its merchandise receipts
are pre-packaged for distribution to stores, which allows for efficiencies in
its distribution center by using cross-docking.
The Company generally does not warehouse store merchandise, but distributes
it promptly to stores. There are instances where the Company does hold basic
merchandise for future distribution. Turnaround time between the receipt of
merchandise from the vendor and shipment to the stores is usually three days or
less, and shipments are made daily to most stores, maintaining the freshness of
merchandise. Because of such frequent shipments, the stores do not require
significant storage space.
Store Locations and Properties
As of July 26, 2003, the Company operated 772 stores in 44 states and
the District of Columbia. 482 of the stores were conveniently located in strip
centers and 239 stores were located in outlet centers. During fiscal 2003, no
store accounted for as much as 1% of the Company's total sales. The table below
indicates the type of shopping facility in which the stores were located:
Dress Barn
Dress Barn Woman Combo
Type of Facility Stores Stores Stores Total
Strip Shopping Centers (1) 118 28 336 482
Outlet Malls and Outlet Strip Centers 53 25 161 239
Free Standing, Downtown and Enclosed Malls 23 4 24 51(2)
Total 194 57 521 772
(1) Includes locations previously classified as outlets where the landlord
converted the shopping center from an outlet center to a non-outlet (Strip)
center.
(2) Includes 29 downtown locations
The table on the following page indicates the states in which the
stores operating on July 26, 2003 were located, and the number of stores in each
state:
Location DB DBW Combos
------- ------- ------
Alabama - - 7
Arizona 1 - 9
Arkansas - - 3
California 19 2 27
Colorado 3 1 10
Connecticut 6 3 22
District of Columbia 2 1 1
Delaware 2 1 3
Florida 11 2 15
Georgia 3 1 21
Idaho - - 2
Illinois 2 1 28
Indiana 4 - 11
Iowa - - 6
Kansas - - 5
Kentucky 2 - 7
Louisiana - - 7
Maine 2 1 -
Maryland 6 3 19
Massachusetts 10 2 26
Michigan 7 1 22
Minnesota 1 - 11
Mississippi - - 6
Missouri 5 2 14
Nebraska - - 4
Nevada 1 - 5
New Hampshire 1 - 5
New Jersey 18 8 19
New Mexico - - 1
New York 25 5 37
North Carolina 9 5 17
Ohio 4 1 18
Oklahoma - - 2
Oregon 2 2 4
Pennsylvania 20 6 20
Rhode Island 1 - 3
South Carolina 4 2 8
Tennessee 3 2 11
Texas 5 1 42
Utah 0 0 5
Vermont - - 2
Virginia 12 3 21
Washington 2 1 5
West Virginia - - 2
Wisconsin 1 - 8
Total 194 57 521
Operations and Management
In considering new store locations, the Company's focus is on expanding in
its existing major trading and high-density markets, in certain cases seeking
downtown or urban locations and/or adding to a cluster of suburban or other
locations. Downtown and urban locations are considered based on pedestrian
traffic and daytime population, proximity to major corporate centers and
occupancy costs at the location, which are substantially higher than in suburban
locations. With respect to suburban and other locations the Company considers
the concentration of the Company's target customer base, the average household
income in the surrounding area and the location of the proposed store relative
to competitive retailers and anchor tenants in the shopping center. The Company
also seeks to expand into new markets. Within the specific strip or outlet
center, the Company evaluates the proposed co-tenants, the traffic count of the
existing center and the location of the store within the center. The Company's
real estate committee, which includes members of senior management, must approve
all new leases. The committee also receives input from field management.
The Company's stores are designed to create a comfortable and pleasant
shopping environment for its customers. Merchandise and displays at all stores
are set up according to uniform guidelines and plans distributed by the Company.
The Company's merchandise is carefully arranged by lifestyle category (e.g.,
career, casual and weekend wear) for ease of shopping. The stores also have
private fitting rooms, drive aisles, appealing lighting, carpeting, background
music and centralized cashier desks. Strategically located throughout the stores
are "lifestyle" posters showing the customer models wearing outfits coordinated
from among the stores' fashion offerings. The Company has updated its interior
graphics and racktop signs in all its stores for a more open and easier to shop
environment. During fiscal 2003 the Company remodeled or updated the design of
approximately 100 of its existing stores and plans over time to update its
remaining stores, another approximately 100 of which are planned to be update or
remodel in fiscal 2004.
All stores are directly managed and operated by the Company. A supervisor,
who may be the store manager, staffs each store with at least one customer
service associate during non-peak hours, with additional customer service
associates added as needed at peak hours. The customer service associates
perform all store operations, from receiving and processing merchandise and
arranging it for display, to assisting customers. Each store manager reports to
a District Sales Manager who, in turn, reports to a Regional Sales Manager.
Dress Barn employs 10 Regional Sales Managers and approximately 100 District
Sales Managers. District Sales Managers visit each store on a regular basis to
review merchandise levels and presentation, staff training and personnel
performance, expense control, security, cleanliness and adherence to Company
operating procedures.
The Company motivates its customer service associates through promotion
from within, creative incentive programs, competitive wages and the opportunity
for bonuses. Customer service associates compete in a broad variety of
Company-wide contests involving sales goals and other measures of performance.
The contests are designed to boost store profitability, create a friendly
competitive atmosphere among associates and offer opportunities for additional
compensation. Management believes that Dress Barn's creative incentive programs
provide an important tool for building cohesive and motivated sales teams at
each store. The Company utilizes comprehensive training programs at the store
level in order to ensure that the customer will receive friendly and helpful
service. They include (i) its DVDi LMS training system (ii) ongoing DVD training
and (iii) one-on-one training of customer service associates by store managers
and district sales managers.
Almost 70% of the Company's sales in fiscal 2003 versus 66% in fiscal 2002
were paid for by credit card, with the remainder being paid by cash or check.
This increase was partially due to the Company's increased promotion of the
Dress Barn card. Consistent with the other credit cards it accepts, the Company
assumes no credit risk with respect to the Dress Barn card but pays a percentage
of sales as a service charge. As of July 26, 2003, the number of cardholders was
approximately 2.3 million. The average transaction on the Dress Barn credit card
during fiscal 2003 was approximately 30% greater than the average of all other
transactions and represented approximately 20% of the Company's sales.
Virtually all of the Company's stores are open seven days a week. Stores
located in strip and outlet centers conform to the hours of other stores in the
center and are open most evenings.
Advertising and Marketing
The Company primarily uses direct mail and select magazines for the
majority of its marketing and advertising. Until 2003, the Company primarily
relied on newspaper advertising, with weekly advertising describing the current
promotions and merchandise focuses. As the lifestyles of its customers changed,
the Company determined it was more cost effective to utilize direct mail to
communicate its promotions and merchandise focuses to its customers,
supplemented with selected "image" advertising in national magazines. The
Company has increased and continues to increase its direct mail program. The
Company utilizes a customer relationship management ("CRM") program to track
customer transactions and use as a basis for its direct mail efforts. The
Company believes focused, targeted marketing utilizing direct mail is the most
effective means to reach and build relationships with its customers as well as
drive customers into its stores.
The Company also utilizes select national advertising, including major
lifestyle magazines, to build its brand image as a primary source for a
lifestyle-oriented, fashionable, value-priced assortment of career and casual
fashions tailored to its customers' needs. The national ads are designed to
create awareness of the dressbarn(R) brand and increase the loyalty of our
existing customers by making them feel better about dressbarn(R) and its brand
philosophy.
Management Information Systems
In the past several years, the Company has made a significant investment in
technology to improve customer service, gain efficiencies and reduce operating
costs. Dress Barn has a management information system, which integrates all
major aspects of the Company's business, including sales, distribution,
purchasing, inventory control, merchandise planning and replenishment, and
financial systems. All stores utilize a point-of-sale system with price look-up
capabilities for both inventory and sales transactions. Regional and District
Sales Managers utilize a sophisticated laptop system that delivers up-to-date
store-related and other information and automates many of their reporting
functions.
The Company's merchandising system tracks merchandise from the inception of
the purchase order, through receipt at the distribution center, through the
distribution planning process, and ultimately to the point of sale. To monitor
the performance of various styles, management reviews sales and inventory
levels, organized by department, class, vendor, style, color and store. The
system enables the Company to mark down slow-moving merchandise or efficiently
transfer it to stores selling such items more rapidly. The Company analyzes
historical hourly and projected sales trends to efficiently schedule store
personnel, minimizing labor costs while allowing for a high level of customer
service. The Company believes that investments in technology enhance operating
efficiencies and position Dress Barn for future growth. The Company utilizes a
DVDi Learning Management System (LMS), where customer service associates are
able to take tests for consistency across all of its stores. The LMS system was
part of the new back-office store system which also included automated time and
attendance, quicker processing of credit card applications and integrated email
and messaging.
Trademarks
The Company has previously been issued U.S. Certificates of Registration of
Trademark for the operating names of its stores and its major private label
merchandise (Dress Barn(R) and Westport Ltd.(R)). During fiscal 2003, the
Company filed applications to register a number of additional trademarks, the
most significant being dressbarn(R) and its new logo. The Company believes its
Dress Barn(R) and dressbarn(R) trademarks are materially important to its
business. The Company operates a small number of outlet stores under the names
Westport Ltd.(R) and SBX.
Employees
As of July 26, 2003, the Company had approximately 9,100 employees of whom
approximately 5,500 worked part time. A number of temporary employees are
usually added during the peak selling periods. None of the Company's employees
are covered by any collective bargaining agreement. The Company considers its
employee relations to be good.
Seasonality
The Company's sales are evenly split between its Fall and Spring seasons.
Though the Company does not consider its business seasonal, it 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 holiday 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, net sales contributed by new stores,
and changes in the Company's merchandise mix.
Forward-Looking Statements and Factors Affecting Future Performance
This Annual Report on Form 10-K contains in the "Business" section, in the
"Properties" section, in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere, 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section below.
The women's retail apparel industry is subject to rapid change and is
highly competitive. The industry is subject to changes in the retail environment
which may be affected by overall economic conditions, women's apparel fashions,
demographics, macroeconomic factors such as consumer confidence that may affect
the level of spending for the types of merchandise sold by the Company, as well
as other factors. The Company's sales and results of operations may also be
affected by unusual weather patterns in areas where the Company has its greatest
concentration of stores. The level of occupancy costs, merchandise, labor and
other costs will affect future results of operations.
The Company competes primarily with department stores, specialty stores,
discount stores, mass merchandisers and off-price retailers, many of which have
substantially greater financial, marketing and other resources than the Company.
Many department stores offer a broader selection of merchandise than the
Company. In addition, many department stores continue to be promotional and
reduce their selling prices, and in some cases are expanding into markets in
which the Company has a significant market presence. The Company's sales and
results of operations may also be affected by closeouts and
going-out-of-business sales by other women's apparel retailers. The Company may
face periods of strong competition in the future, which could have an adverse
effect on its financial results.
The Company's success is largely dependent on the efforts and abilities of
its senior management team. During fiscal 2002, the Company promoted a key
member of its management team, David Jaffe to President and Chief Executive
Officer from Chief Operating Officer. During fiscal 2002 the Company promoted
Keith Fulsher to Senior Vice President and General Merchandising Manager. In
addition, during fiscal 2003 the Company hired Vivian Behrens as Senior Vice
President, Marketing. The Company's results of operations may be impacted by the
effect, if any, of these changes on its day-to-day operations, merchandising and
store activities, marketing efforts, growth plans and ability to continue
servicing its existing customer base.
The growth of the Company's store operations is dependent, in large part,
upon the Company's ability to successfully execute its strategy of adding new
stores. The success of the Company's growth strategy for its stores will depend
upon a number of factors, including the identification of suitable markets and
sites for new Combo Stores, negotiation of leases on acceptable terms,
construction or renovation of sites in a timely manner at acceptable costs, and
maintenance of the productivity of the existing store base. In addition, the
Company must be able to hire, train and retain competent managers and personnel
and manage the systems and operational components of its growth. The failure of
the Company to open new Combo Stores on a timely basis, attract qualified
management and personnel or appropriately adjust operational systems and
procedures would adversely affect the Company's future operating results. In
addition, there can be no assurance that the opening of new Combo Stores in
existing markets will not have an adverse effect on sales at existing stores in
these markets. There can be no assurance that the Company will be able to
successfully implement its growth strategy of continuing to introduce the Combo
Stores or to maintain its current growth levels.
The expansion of the Dress Barn(R) brand to the virtually all of the
Company's merchandise offerings and the expanded marketing campaign to promote
the Company's brand and image may not generate positive reaction from its
customers and may not increase sales. Failure of the Company to maintain its
existing customer base or the failure to attract new customers may negatively
impact sales and profits.
The Company's success also depends in part on its ability to anticipate and
respond to changing merchandise trends and consumer preferences in a timely
manner. Accordingly, any failure by the Company to anticipate, identify and
respond to changing fashion trends could adversely affect consumer acceptance of
the merchandise in the Company's stores, which in turn could adversely affect
the Company's business and its image with its customers. If the Company
miscalculates either the market for its merchandise or its customers' purchasing
habits, it may be required to sell a significant amount of unsold inventory at
below average markups over the Company's cost, or below cost, which would have
an adverse effect on the Company's financial condition and results of
operations.
The Company imports a significant portion of its merchandise from
manufacturers in Asia, the Middle East and Africa, among others. Importing
involves risks including potential disruptions such as the recent West Coast
Longshoreman's work stoppage, economic and political problems in countries from
which merchandise is imported, and duties, tariffs and quotas on imported
merchandise. The Company's ability to manage the importing of goods from
overseas, their production, timing of deliveries and US Customs-related
compliance is an important component of its merchandising strategy. Failure of
the Company to manage its import activities would have an adverse effect on the
Company's financial condition and results of operations.
The Company relies upon its existing management information systems in
operating and monitoring all major aspects of the Company's business, including
sales, warehousing, distribution, purchasing, inventory control, merchandising
planning and replenishment, as well as various financial systems. Any disruption
in the operation of the Company's management information systems, or the
Company's failure to continue to upgrade, integrate or expend capital on such
systems as its business expands, would have a material adverse effect on the
Company. In addition, any disruption in the operations of the Company's
distribution center would have a material adverse effect on the Company's
business.
The Company is committed to being more productive. The Company is planning
to continue to close or relocate underperforming stores and maintain tight cost
controls in all areas with a view to increasing shareholder value. There can be
no assurance that the Company's strategy will result in a continuation of
revenue and profit growth. Future economic and industry trends that could impact
revenue and profitability remain difficult to predict.
ITEM 2. PROPERTIES
The Company leases all its stores. Store leases generally have an initial
term ranging from 5 to 10 years with one or more 5-year options to extend the
lease. The table below, covering all stores operated by the Company on July 26,
2003, indicates the number of leases expiring during the period indicated and
the number of expiring leases with and without renewal options:
Leases Number with Number Without
Fiscal Years Expiring Renewal Options Renewal Options
2003 137 81 56
2004 138 107 31
2005 115 104 11
2006-2008 235 208 27
2009 and thereafter 157 143 14
--- --- ---
Total 772 643 139
--- --- ---
New store leases generally provide for a base rent of between $15 and $25
per square foot per annum. Most leases have formulas requiring the payment of a
percentage of sales as additional rent, generally when sales reach specified
levels. The Company's aggregate minimum rentals under operating leases in effect
at July 26, 2003, and excluding locations acquired after July 26, 2003, for
fiscal 2004 are approximately $87.4 million. In addition, the Company is also
responsible under its store leases for it's pro rata share of maintenance
expenses and common charges in strip and outlet centers.
Most of the store leases give the Company the right to terminate the lease
at little or no cost if certain specified sales volumes are not achieved. This
affords the Company greater flexibility to close underperforming stores. Usually
these provisions are operative only during the first few years of the lease.
The Company's investment in new stores consists primarily of inventory,
leasehold improvements, fixtures and equipment. Dress Barn often receives tenant
improvement allowances from the landlords to offset these initial investments.
The Company's stores are typically profitable within the first 12 months of
operation.
The Company leases its 510,000 square foot office and distribution center
in Suffern, New York from Dunnigan Realty, LLC, a wholly-owned subsidiary which
was formed solely to purchase, own and operate the entire Suffern Facility
including the portion occupied by the Company. 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. The Company's lease with Dunnigan Realty, LLC expires in
2023, which coincides with the term of the underlying mortgage that Dunnigan
Realty, LLC utilized to finance the purchase of the Suffern facility. The
Dunnigan Realty, LLC mortgage loan (the "mortgage") is collateralized by a
mortgage lien on the Suffern facility. Payments of principal and interest on the
mortgage, which is a 20-year fully amortizing loan with a fixed interest rate of
5.33%, net of closing costs, are due monthly through July 2023. Dunnigan Realty,
LLC receives rental income and reimbursement for taxes and common area
maintenance charges from the Company and two additional tenants that occupy the
Suffern facility that are not affiliated with the Company. The rental income
from the other tenants is shown as "other income" on the Company's Consolidated
Statements of Earnings. All intercompany transactions are eliminated. The
Company leases from Dunnigan Realty, LLC 510,000 square feet, with 100,000
square feet of office space and the remainder used for merchandise distribution.
Management believes the portion of the Suffern facility that it currently leases
is sufficient to meet its current needs and current expansion plans for its
stores. In addition, the Suffern facility includes 16 acres of undeveloped land
that is pre-approved for a 200,000 square foot warehouse facility.
ITEM 3. LEGAL PROCEEDINGS
On May 18, 2000, Alan M. Glazer, GLZR Acquisition Corp. and Bedford Fair
Industries, Ltd. commenced an action against the Company in the Superior Court
of Connecticut, Stamford Judicial District, seeking compensatory and punitive
damages in an unspecified amount for alleged unfair trade practices and alleged
breach of contract arising out of negotiations before Bedford Fair Industries'
Chapter 11 bankruptcy filing for the acquisition of the Bedford Fair business
which the Company never concluded.
On April 10, 2003, after a trial in the Superior Court of Connecticut,
Waterbury District, a jury returned a verdict of $30 million of compensatory
damages in the lawsuit described above. The court, on July 7, 2003, entered a
judgment of approximately $32 million in compensatory damages and expenses,
which is subject to post-judgment interest. The trial court ruled against the
plaintiffs' motion for any punitive damages or pre-judgment interest. The
Company continues to strongly believe there is no merit in the jury verdict and
both sides have appealed.
On March 17, 2003 the Company was served with a class action lawsuit in
California. This class action lawsuit is a wage and hour case and was brought on
behalf of all Managers, Assistant Managers and Associate Managers who worked for
Dress Barn in California for the past four years. The complaint alleges that
Dress Barn improperly classified these employees as "salaried exempt."
Plaintiff's argument is that if the employee spent 50% or more of their time
doing work similar to that done by hourly associates, they should be entitled to
overtime, etc. The Company does not expect the outcome to have a material
adverse effect on the Company.
Except for the above cases, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business,
to which the Company or any of its subsidiaries is a party or of which any of
their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
ITEM 4A. Executive Officers of the Registrant
The following table sets forth the name, age and position with the Company
of the Executive Officers of the Registrant:
Name Age Positions
Elliot S. Jaffe 77 Chairman of the Board,
Co-Founder and Director
David R. Jaffe 44 President,
Chief Executive Officer and Director
Vivian Behrens 50 Senior Vice President
Marketing
Armand Correia 57 Senior Vice President and Chief
Financial Officer
Keith Fulsher 49 Senior Vice President
And General Merchandise Manager
Eric Hawn 53 Senior Vice President
Store Operations
Elise Jaffe 48 Senior Vice President
Real Estate
Mr. Elliot S. Jaffe was Chief Executive Officer of the Company from 1966
until February 2002.
Mr. David R. Jaffe became President and Chief Executive Officer in February
2002. Previously he had been Vice Chairman, Chief Operating Officer and a member
of the Board of Directors since September 2001. He had been Vice Chairman since
February 2001. He joined the Company in 1992 as Vice President-Business
Development and became Senior Vice President in 1995 and Executive Vice
President in 1996. Mr. Jaffe is the son of Elliot S. and Roslyn S. Jaffe,
Secretary, Treasurer and Director of the Company.
Ms. Behrens started with the Company in September 2002 as Senior Vice
President, Marketing. Previously, Ms. Behrens was President of Vivian B
Consulting, a marketing consultant to several retail and consumer product
companies. She was Chief Executive Officer of Posh & Sticks, Ltd., a consumer
products multi-channel retailer, from 1999 to 2000. From 1998 to 1999 she was
Senior Vice President-Marketing of the Foot Locker Division of Venator, Inc.
From 1994 to 1997 she was Vice President-Marketing of Charming Shoppes, Inc.
Previously she held senior marketing positions at Limited Inc. and Avon
Products, Inc. and was formerly a member of the Company's Board of Directors
from 2001 to 2002.
Mr. Correia has been Senior Vice President and Chief Financial Officer of
the Company since 1991.
Mr. Fulsher became Senior Vice President and General Merchandise Manager of
the Company in February 2002. Previously, Mr. Fulsher had been with the Company
for eight years, most recently as Merchandise Manager, Sportswear. Previously he
was at Macy's for 18 years, leaving as Group Vice-President of Better
Sportswear.
Mr. Hawn has been Senior Vice President of the Company since 1989.
Ms. Elise Jaffe has been Senior Vice President of the Company since January
1, 1995. She previously was Vice President. Ms. Jaffe is the daughter of Elliot
S. and Roslyn S. Jaffe.
The Company's officers are elected by the Board of Directors for one-year
terms and serve at the discretion of the Board of Directors.
Code of Ethics
The company has adopted a Code of Ethics for the Chief Executive Officer
and Senior Financial Officers. The Code of Ethics for the Chief Executive
Officer and Senior Financial Officers is posted on the company's website,
www.dressbarn.com (under the "Governance" caption) and is included as Exhibit 14
to the Form 10-K. The company intends to satisfy the disclosure requirement
regarding any amendment to, or a waiver of, a provision of the Code of Ethics
for the Chief Executive Officer and Senior Financial Officers by posting such
information on its website. The Company undertakes to provide to any person a
copy of this Code of Ethics upon request to the Secretary of the Company at the
Company's principal executives offices.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Market Prices of Common Stock
The Common Stock of The Dress Barn, Inc. is traded over-the-counter on the
NASDAQ National Market System under the symbol DBRN.
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 split 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.
The table below sets forth the high and low bid prices as reported by
NASDAQ for the last eight fiscal quarters. These quotations represent prices
between dealers and do not include retail mark-ups, mark-downs or other fees or
commissions and may not represent actual transactions.
Fiscal 2003 Fiscal 2002
Bid Prices Bid Prices
High Low High Low
Fiscal Period
First Quarter $15.90 $11.06 $12.20 $9.64
Second Quarter $16.19 $13.09 $13.94 $10.83
Third Quarter $15.00 $12.43 $15.62 $12.55
Fourth Quarter $15.23 $12.20 $17.50 $12.14
Number of Record Holders
The number of record holders of the Company's common stock as of October 1,
2003 was approximately 2,000.
Dividend Policy
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes our equity compensation plans as of July 26,
2003.
Number of securities
remaining available
for future issuance
under equity
Number of securities Weighted average compensation plans
to be issued upon exercise price (excluding
exercise of of outstanding securities reflected
Plan Category outstanding options options in column (a))
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans approved by security holders 2,950,495 $9.80 3,920,233
Equity compensation plans not approved by security holders --- --- ---
..........................................................
Total 2,950,495 $9.80 3,920,233
==========================================================
ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands except per share
information
Fiscal Year Ended
------------------------------------------------------------------------------------
July 26, July 27, July 28, July 29, July 31,
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------
Net sales $ 707,121 $717,136 $695,008 $656,174 $615,975
Cost of sales, including
occupancy and buying costs 453,178 453,428 443,426 419,479 398,282
------------------------------------------------------------------------------------
Gross profit 253,943 263,708 251,582 236,695 217,693
Selling, general and
administrative expenses 192,466 186,375 180,991 165,336 150,897
Depreciation & amortization 20,856 23,508 23,916 21,164 23,104
Litigation charge 32,000 -- -- -- --
------------------------------------------------------------------------------------
Operating income 8,621 53,825 46,675 50,195 43,692
Interest income- net
3,168 5,458 8,949 7,667 8,787
Other income
779 -- -- -- --
------------------------------------------------------------------------------------
Earnings before
income taxes 12,568 59,283 55,624 57,862 52,479
Income taxes 4,524 21,342 20,303 21,120 19,155
------------------------------------------------------------------------------------
Net earnings $ 8,044 $37,941 $35,321 $36,742 $33,324
====================================================================================
Earnings per share - basic (1) $ .26 $ 1.04 $ .97 $ .97 $ .78
====================================================================================
Earnings per share - diluted (1) $ .25 $ 1.01 $ .94 $ .95 $ .77
====================================================================================
Balance sheet data:
Working capital $107,859 $230,959 $197,258 $159,105 $159,089
Total assets $422,963 $462,997 $411,560 $374,236 $363,579
Long-term debt $33,021 -- -- -- --
Shareholders' equity $226,893 $334,253 $296,597 $259,561 $253,600
Percent of net sales:
Cost of sales, including
occupancy and buying costs 64.1% 63.2% 63.8% 63.9% 64.7%
Gross profit 35.9% 36.8% 36.2% 36.1% 35.3%
Selling, general and
administrative expenses 27.2% 26.0% 26.0% 25.2% 24.5%
Litigation charge 4.5% -- -- -- --
Operating income 1.2% 7.5% 6.7% 7.6% 7.1%
Net earnings 1.1% 5.3% 5.1% 5.6% 5.4%
(1) All earnings per share amounts reported above reflect the effect of the
2-for-1 stock split, distributed May 31, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used in
this report, the terms "fiscal 2003," "fiscal 2002," and "fiscal 2001" refer to
our fiscal years ended July 26, 2003, July 27, 2002, and July 28, 2001,
respectively. Fiscal 2003, fiscal 2002 and fiscal 2001 all consisted of 52
weeks. The term "fiscal 2004" refers to our fiscal year that will end on July
31, 2004.
Forward-Looking Statements
Certain statements contained in this Annual Report are forward-looking and
involve a number of risks and uncertainties. Among the factors that could cause
actual results to differ materially are, but are not limited to, the following:
general economic conditions and consumer confidence, including consumers'
reaction to global political instability; competitive factors and pricing
pressures, including the promotional activities of department stores, mass
merchandisers and other specialty chains; changes in levels of store traffic or
consumer apparel buying patterns; import risks, including potential disruptions,
an increase in the rate of import duties or export quotas and increased U.S.
Customs regulation of importing activities, effectiveness of the Company's brand
awareness and marketing programs, economic and political problems in countries
from which merchandise is imported, and duties, tariffs and quotas on imported
merchandise; the Company's ability to predict fashion trends; the availability,
selection and purchasing of attractive merchandise on favorable terms; adverse
weather conditions; inventory risks due to shifts in market demand and other
factors that may be described in the Company's filings with the Securities and
Exchange Commission. The Company does not undertake to publicly update or revise
the forward-looking statements even if experience or future changes make it
clear that the projected results expressed or implied therein will not be
realized.
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in Note 1 of the
Notes to Consolidated Financial Statements. 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, claims and contingencies and litigation. 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. As discussed in Note 1 to the Consolidated Financial Statements, 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 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.
Physical inventories are conducted in January and July to calculate actual
shrinkage and inventory on hand. Estimates are used to charge inventory
shrinkage for the first and third fiscal quarters of the fiscal year. 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.
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 during the first few 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 and other matters arising out of the normal course of business.
The Company is self-insured for expenses related to its employee medical and
dental plans, and its worker's compensation plan, up to certain thresholds.
Claims filed, as well as claims incurred but not reported, are accrued based on
management's estimates, using information received from plan administrators,
historical analysis, and other relevant data. The Company has stop-loss
insurance coverage for individual claims in excess of $250,000. 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. Although the
Company is generally conservative in the estimation of its claims and
contingencies and believes its accruals for claims and contingencies are
adequate, it is possible that actual results could significantly differ from the
recorded accruals for claims and contingencies.
Litigation
The Company is subject to various claims and contingencies relating to
litigation arising out of the normal course of business. 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.
On July 7, 2003, after an unforeseen jury verdict, a trial court entered a final
judgment of approximately $32 million in compensatory damages and expenses
against the Company in a previously disclosed lawsuit brought by Alan M. Glazer
and related parties. As a result, the Company recorded a litigation charge of
$32 million for the judgment, even though the Company continues to strongly
believe there is no merit in the jury verdict and is vigorously pursuing an
appeal. If upon appeal the entire judgment or a portion thereof is modified, the
Company will adjust its litigation accrual accordingly (see note 5 of the Notes
to the Consolidated Financial Statements for additional information).
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 be different.
Stock Split
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 shares
in May 2002 (the "stock split"). 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.
Results of Operations
The table below sets forth certain financial data of the Company expressed
as a percentage of net sales for the periods indicated:
Fiscal Year Ended
July 26, July 27, July 28,
2003 2002 2001
--------- --------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales, including
occupancy and buying costs 64.1% 63.8% 63.9%
Selling, general and
administrative expenses 27.2% 26.0% 25.2%
Depreciation and amortization 2.9% 3.5% 3.2%
Litigation charge 4.5% -- --
Interest income - net 0.4% 1.3% 1.2%
Earnings before income taxes 1.7% 8.0% 8.8%
Net earnings 1.0% 5.1% 5.6%
Fiscal 2003 Compared to Fiscal 2002
Net sales decreased by 1.4% to $707.1 million for fiscal 2003, from $717.1
million for fiscal 2002. The sales decrease from fiscal 2003 was due to a 4.6%
decrease in same store sales, offset by approximately 4% increase in total
selling square footage. The increase in store square footage was due to the
opening of 46 new stores, primarily combination Dress Barn/Dress Barn Woman
stores ("Combo Stores"), which carry both Dress Barn and Dress Barn Woman
merchandise, offset in part by the square footage reduction from the closing of
28 under-performing stores. The number of stores in operation increased to 772
stores as of July 26, 2003, from 754 stores in operation as of July 27, 2002.
The Company believes the sales decrease was the result of less customer traffic
to its stores resulting in fewer customer transactions. The Company believes the
war, the economy, unemployment, as well as unseasonable weather all affected its
customer traffic.
The Company's real estate strategy for fiscal 2004 is to continue opening
primarily Combo Stores and converting its existing single-format stores into
Combo Stores, while closing its under-performing locations. Store expansion will
focus on both expanding in the Company's existing major trading markets and
developing and expanding into new markets.
The Company suspended all mailing of catalogs and e-commerce sales in
November 2001. The Company retested e-commerce and telephone sales in fiscal
2003 with little success. The Company discontinued all e-commerce operations,
choosing to utilize its internet site to reinforce store promotions and provide
store and product information, helping to drive store traffic and communicate
with its retail customers. The financial impact of the e-commerce operation was
minimal in fiscal 2003. Fiscal 2002 earnings per share-diluted were reduced by
approximately $0.11 due to the operating costs of the catalog and e-commerce
operations.
Gross profit (net sales less cost of goods sold, including occupancy and
buying costs) decreased by 3.7% to $253.9 million, or 35.9% of net sales, in
fiscal 2003 from $263.7 million, or 36.8% of net sales, in fiscal 2002. The
decrease in gross profit as a percentage of sales was primarily due to negative
leverage on buying and occupancy costs from decreased same store sales. In
addition, fiscal 2003 markdowns were higher as a percentage of sales due to
lower than expected sales volumes requiring increased promotional activities to
maintain inventory levels in line with sales trends. These additional markdowns
were slightly offset by higher initial margins due to continued sourcing
improvements and efficiencies. Inventory levels as of the end of fiscal 2003
were more current and lower per store than the prior year.
Selling, general and administrative ("SG&A") expenses increased by 3.3% to
$192.5 million, or 27.2% of net sales, in fiscal 2003 from $186.4 million, 26.0%
of sales, in fiscal 2002. The increase in SG&A as a percentage of net sales for
fiscal 2003 was primarily due to negative same store sales leverage on SG&A
expenses. SG&A expenses increased primarily due to increased store operating
costs, primarily selling, benefits, maintenance and repair and insurance 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 and third quarters. The Company continues to focus on
controlling its costs and enhancing productivity.
Depreciation expense decreased by 11.1% to $20.9 million in fiscal 2003,
versus $23.5 million in fiscal 2002. Fiscal 2003 was favorably impacted by the
fiscal 2002 fourth quarter writedown of obsolete software and equipment. This
offset the increase in depreciation from the acquisition by Dunnigan Realty,
LLC, a wholly-owned subsidiary of the Company, of a distribution/office facility
in Suffern, New York (the "Suffern facility"), of which the major portion is the
Company's corporate offices and distribution center. Fiscal 2003 also benefited
from less store construction costs than the prior year as the Company opened 50
stores in fiscal 2003 versus 74 stores opened during the prior year.
The litigation charge of $32 million is the result of court judgment
against the Company relating to a previously disclosed lawsuit arising from an
unsuccessful acquisition. On July 7, 2003, after a jury trial the trial court
entered a final judgment of approximately $32 million in compensatory damages
and expenses, which is subject to post-judgment interest. The trial court ruled
against the plaintiffs' motion for any punitive damages or pre-judgment
interest. The Company believes there is no merit in the jury verdict. If upon
appeal the judgment is subsequently modified, the Company will adjust its
litigation accrual accordingly (see note 5 of the Notes to the Consolidated
Financial Statements).
Interest income - net decreased by 42.0% to $3.2 million for fiscal 2003
from $5.5 million for fiscal 2002. This decrease was due to lower investment
rates versus last year coupled with less cash available for investments. During
fiscal 2003, the Company used approximately $120.8 million for the Dutch Auction
Tender Offer completed at the end of October 2002 (the "Tender Offer"), in which
the Company repurchased 8 million of its common shares. The Company used
approximately $45 million to acquire the Suffern facility in January 2003.
Other income for fiscal 2003 was approximately $0.8 million. Other income
represents rental income by Dunnigan Realty, LLC from the unaffiliated tenants
of the Suffern facility.
Net earnings for fiscal 2003 decreased 78.8% to $8.0 million versus $37.9
million in fiscal 2002. Diluted earnings per share also decreased 75.1% to $0.25
per share versus $1.01 in fiscal 2002. Excluding the litigation charge of $32
million, net earnings would have been $28.5 million, a decrease of 24.8% from
$37.9 million. Operating income would have been $40.6 million, compared to $53.8
million last year. Diluted earnings per share would have been $0.89, a decrease
of 11.9% from earnings of $1.01 last year.
Fiscal 2002 Compared to Fiscal 2001
Net sales increased by 3.2% to $717.1 million for the 52 weeks ended July
27, 2002 ("fiscal 2002"), from $695.0 million for the 52 weeks ended July 28,
2001 ("fiscal 2001"). The sales increase from fiscal 2001 was due to an
approximately 6% increase in total selling square footage, offset in part by a
1.9% decrease in same store sales. The increase in store square footage was due
to the opening of 66 new stores, primarily combination Dress Barn/Dress Barn
Woman stores ("Combo Stores"), which carry both Dress Barn and Dress Barn Woman
merchandise, offset in part by the square footage reduction from the closing of
32 under-performing stores. The number of stores in operation increased to 754
stores as of July 27, 2002, from 720 stores in operation as of July 28, 2001.
The Company believes that the events of September 11th and the economic
uncertainty that followed were the key influences of the weak fall selling
season resulting in a 5% decrease in comparable store sales for the first six
months of fiscal 2002. Sales strengthened modestly in the spring, helped by the
unseasonably warm weather in April, with comparable store sales increasing 2%
for the second half of fiscal 2002. The Company believes the second half of
fiscal 2002 benefited from easier sales comparisons versus fiscal 2001's spring
season. Nevertheless, diminished consumer confidence, a perceived slowing
economy and international uncertainties negatively impacted sales during the
second half of fiscal 2002.
Due to the continued operating losses of its catalog and e-commerce
operations and significant weaknesses in its new fulfillment and order
processing software, the Company suspended all mailing of catalogs and
e-commerce sales in November 2001. The Company's fiscal 2002 earnings per
share-diluted were reduced by approximately $.11 due to the operating costs of
the catalog and e-commerce operations, versus approximately $.20 for fiscal
2001.
Gross profit (net sales less cost of goods sold, including occupancy and
buying costs) increased by 4.8% to $263.7 million, or 36.8% of net sales, in
fiscal 2002 from $251.6 million, or 36.2% of net sales, in fiscal 2001. The
increase in gross profit as a percentage of sales was primarily due to higher
initial margins from the Company's increased mix to more dressbarn (R) brand
merchandise and lower markdowns due to tight inventory controls, which helped
increase inventory turns and minimize markdowns. Markdowns as a percentage of
sales were lower than fiscal 2001, particularly during the fourth fiscal quarter
of fiscal 2002. This was offset, in part, by higher store occupancy costs as a
percentage of sales resulting from higher rents for new stores, store expansions
and lease renewals.
Selling, general and administrative ("SG&A") expenses increased by 3.0% to
$186.4 million, or 26.0% of net sales, in fiscal 2002 from $181.0 million, also
26.0% of sales, in fiscal 2001. The increase in SG&A expenses versus the prior
year was reduced by the suspension of the catalog and e-commerce operations in
November 2001. Combined with cost controls and productivity improvements, SG&A
as a percent of sales was flat as compared to fiscal 2001. This was in spite of
the negative leverage from the 1.9% decrease in comparable store sales and its
impact on fixed costs, and increases in store operating, benefits and insurance
costs.
Depreciation expense decreased by 1.7% to $23.5 million in fiscal 2002,
versus $23.9 million in fiscal 2001, primarily due to the write-off of certain
obsolete computer equipment and software in fiscal 2001. Depreciation expense
for both periods also includes certain write-offs related to the closure of 32
stores and 37 stores during fiscal 2002 and fiscal 2001, respectively.
Interest income - net decreased by 39.0% to $5.5 million for fiscal 2002
from $8.9 million for fiscal 2001. This was the result of the dramatic reduction
in interest rates, although funds available for investment increased during the
year.
Net earnings for fiscal 2002 increased 7.4% to $37.9 million versus
$35.3 million in fiscal 2001, while diluted earnings per share also increased
7.4% to $1.01 per share versus $0.94 in fiscal 2001.
Liquidity and Capital Resources
The Company has generally funded, through internally generated cash flow,
all of its operating and capital needs. These include the opening or acquisition
of new stores, the remodeling of existing stores, and the continued expansion of
its Combo Stores. In fiscal 2003, total capital expenditures were $63.3 million.
Excluding the $45.3 million for the acquisition of the Suffern facility, capital
expenditures were $18.0 million, $28.3 million and $25.8 million in fiscal 2003,
fiscal 2002 and fiscal 2001, respectively, net of landlord construction
allowances. The sharp reduction in fiscal 2003 capital expenditures was due to
fewer store openings, higher construction allowances per store and the
investment in new store technology and back office operating systems in fiscal
2002. The Company also repurchased 8,000,000 outstanding shares of its stock in
the Tender Offer for a total cost of $120.8 million during fiscal 2003. The
Company repurchased in the open market 757,600 outstanding shares of its stock
for a total cost of $9.0 million during fiscal 2002 and 620,000 outstanding
shares for $7.4 million during fiscal 2001. Shares repurchased are retired and
treated as authorized but unissued shares, with the cost of the reacquired
shares debited to retained earnings and the par value debited to common stock.
The Company funds inventory expenditures through cash flows from operations
and the favorable payment terms the Company has established with its vendors.
The Company's net cash provided by operations in fiscal 2003 decreased to $56.8
million as compared to $72.4 million in fiscal 2002 and $57.9 million in fiscal
2001. The decrease in fiscal 2003 was primarily due to lower net earnings, while
the increase in fiscal 2002 versus fiscal 2001 was primarily due to the timing
of its income tax payments and the estimated realization of a portion of its
deferred tax asset during fiscal 2002.
In January 2003, Dunnigan Realty, LLC, a wholly-owned consolidated
subsidiary of the Company, purchased the Suffern facility, of which the major
portion is the Company's corporate offices and distribution center for
approximately $45.3 million utilizing the Company's internally generated funds.
In July 2003, Dunnigan Realty, LLC borrowed $34,000,000 under a favorable fixed
rate mortgage loan. The mortgage has a twenty-year term with annual payments of
$2.8 million including principal and interest and is secured by a first mortgage
lien on the Suffern facility. Dunnigan Realty, LLC receives rental income and
reimbursement for taxes and common area maintenance charges from the Company and
two additional tenants that occupy the Suffern facility that are not affiliated
with the Company. These rental payments are more than sufficient to cover the
mortgage payments and planned capital and maintenance expenditures.
At July 26, 2003, the Company had $113.9 million in marketable securities
and other investments. The portfolio consists primarily of municipal bonds that
can readily be converted to cash. The Company holds no options or other
derivative instruments. Working capital was approximately $107.9 million at July
26, 2003. In addition, the Company had available $75 million in unsecured lines
of credit bearing interest below the prime rate. The Company had no debt
outstanding under any of the lines at July 26, 2003. However, potential
borrowings were limited by approximately $41.0 million of outstanding letters of
credit primarily to vendors for import merchandise purchases. 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 Company does not have any
undisclosed material transactions or commitments involving related persons or
entities.
In fiscal 2004, the Company plans to open approximately 60 additional
stores and continue its store-remodeling program. Total fiscal 2004 capital
expenditures, which are primarily attributable to the Company's store expansion,
renovation and refurbishment programs, and the replacement of its POS registers
and systems, are expected to be approximately $27 million net of landlord
construction allowances. The Company intends to focus on both expanding in the
Company's existing major trading markets and developing and expanding into new
markets. The Company believes that its cash, cash equivalents, marketable
securities and investments, together with cash flow from operations, will be
adequate to fund the Company's proposed capital expenditures and any other
operating requirements.
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. The Company expects this trend to
continue for fiscal 2004. 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, net sales
contributed by new stores, and changes in the Company's merchandise mix.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 majority of the
Company's money market funds at July 26, 2003 were maintained with one financial
institution.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of The Dress Barn, Inc. and
subsidiaries are filed together with this report: See Index to Financial
Statements, Item 16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-14 of the Securities Exchange Act of 1934. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information which is required to be included in the periodic
reports that the Company must file with the Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 16. (a) (1) FINANCIAL STATEMENTS PAGE NUMBER
- --------------------------------------- -----------
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Earnings F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 to F-18
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
ITEM 16. (a) (3) LIST OF EXHIBITS
The following exhibits are filed as part of this Report and except Exhibits
10(mm), 10(xx), 21, 23, 31.1, 31.2, 32.1 and 32.2 are all incorporated by
reference (utilizing the same exhibit numbers) from the sources shown.
Incorporated By
Reference From
3(c) Amended and Restated Certificate of Incorporation (1)
3(e) Amended and Restated By-Laws (13)
3(f) Amendments to Amended and Restated Certificate of Incorporation (5)
4. Specimen Common Stock Certificate (1)
10 Purchase and Sale Agreement- 30 Dunnigan Drive, Suffern NY (17)
10(a) 1993 Incentive Stock Option Plan (10)
10(b) Employment Agreement With Burt Steinberg (14)
10(f) Agreement terminating Agreement for Purchase of Certain Stock
from Elliot S. Jaffe upon death (6)
10(g) Agreement terminating Agreement for Purchase of Certain Stock
from Roslyn S. Jaffe upon death (6)
Incorporated By
Reference From
Leases of Company premises of which the lessor is Elliot S. Jaffe or members of
his family or related trusts:
10(l) Danbury, CT store (1)
10(hh) Norwalk, CT Dress Barn/Dress Barn Woman store (8)
10(aa) The Dress Barn, Inc. 1987 Non-Qualified Stock Option Plan (5)
10(dd) Nonqualified Stock Option Agreement with Armand Correia (7)
10(ff) Nonqualified Stock Option Agreement with Elliot Jaffe (7)
10(gg) Nonqualified Stock Option Agreement with Burt Steinberg (7)
10(mm) Lease between Dress Barn and Dunnigan Realty, LLC for Office
and Distribution Space in Suffern, New York
10(nn) The Dress Barn, Inc. 1995 Stock Option Plan (11)
10(oo) Split Dollar Agreement between Dress Barn and (12)
Steinberg Family Trust f/b/o Michael Steinberg
10(pp) Split Dollar Agreement between Dress Barn and (12)
Steinberg Family Trust f/b/o Jessica Steinberg
10(qq) Split Dollar Agreement between Dress Barn and (12)
Jaffe 1996 Insurance Trust
10(ss) The Dress Barn, Inc. 2001 Stock Option Plan (14)
10(tt) Employment Agreement with Elliot S. Jaffe (15)
10(uu) Employment Agreement with David R. Jaffe (15)
10(ww) Employment Agreement with Vivian Behrens (16)
10(xx) Mortgage Agreement- Dunnigan Realty, LLC
14. Code of Ethics for the Chief Executive Officer and Senior
Financial Officers
21. Subsidiaries of the Registrant
23. Independent Auditors' Consent
31.1 Section 302 Certification of President and
Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of President and
Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
References on following page:
- --------------------------------------------------------------------------------
(1) The Company's Registration Statement on Form S-1 under the Securities Act of
1933 (Registration No. 2-82916) declared effective May 4, 1983.
(2) The Company's Annual Report on Form 10-K for the fiscal year ended July 28,
1984.
(3) The Company's Annual Report on Form 10-K for the fiscal year ended July 27,
1985.
(4) The Company's Annual Report on Form 10-K for the fiscal year ended July 26,
1986.
(5) The Company's Annual Report on Form 10-K for the fiscal year ended July 30,
1988.
(6) The Company's Annual Report on Form 10-K for the fiscal year ended July 28,
1990.
(7) The Company's Annual Report on Form 10-K for the fiscal year ended July 27,
1991.
(8) The Company's Annual Report on Form 10-K for the fiscal year ended July 25,
1992.
(9) The Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1993.
(10) The Company's Registration Statement on Form S-8 under the Securities Act
of 1933 (Registration No. 33-60196) filed on March 29, 1993.
(11) The Company's Annual Report on Form 10-K for the fiscal year ended July 27,
1996.
(12) The Company's Annual Report on Form 10-K for the fiscal year ended July 25,
1998.
(13) The Company's Annual Report on Form 10-K for the fiscal year ended July 29,
2000.
(14) The Company's Annual Report on Form 10-K for the fiscal year ended July 28,
2001.
(15) The Company's Annual Report on Form 10-K for the fiscal year ended July 27,
2002.
(16) The Company's Quarterly Report on Form 10-Q for the quarter ended October
26, 2002.
(17) The Company's Quarterly Report on Form 10-Q for the quarter ended January
26, 2003.
ITEM 16. (b) REPORT ON FORM 8-K
The Company filed two reports on Form 8-K during the quarter
ended July 26, 2003.
Date Filed Description
May 21, 2003 Press Release, issued May 21, 2003- The Dress Barn, Inc.
Reports Third Quarter Fiscal 2003 Results
July 8, 2003 Press Release, issued July 8, 2003 - "Judge Denies Punitive
Damages in Dress Barn Lawsuit"
ITEM 16. (c) EXHIBITS
All exhibits are incorporated by reference as shown in Item 14(a)3, except
Exhibits 10(mm), 10(xx), 21, 23, 31.1, 31.2, 32.1 and 32.2 which are filed as
part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
The Dress Barn, Inc.
by /s/ ELLIOT S. JAFFE
-----------------------
Elliot S. Jaffe
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ ELLIOT S. JAFFE 10/17/03
- --------------------
Elliot S. Jaffe Chairman of the Board
/s/ ROSLYN S. JAFFE 10/17/03
- ---------------------
Roslyn S. Jaffe Director and Secretary and Treasurer
/s/ DAVID R. JAFFE 10/17/03
- ---------------------
David R. Jaffe Director, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ BURT STEINBERG 10/17/03
- ---------------------
Burt Steinberg Director and Executive Director
/s/ KLAUS EPPLER 10/17/03
- -----------------------
Klaus Eppler Director
/s/ DONALD JONAS 10/17/03
- ----------------
Donald Jonas Director
/s/ EDWARD D. SOLOMON 10/17/03
- ---------------------
Edward D. Solomon Director
JOHN USDAN 10/17/03
- -----------
John Usdan Director
/s/ ARMAND CORREIA 10/17/03
- ---------------------
Armand Correia Chief Financial Officer (Principal
Financial and Accounting Officer)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Dress Barn, Inc.
Suffern, New York
We have audited the accompanying consolidated balance sheets of The Dress Barn,
Inc. and Subsidiaries (the "Company") as of July 26, 2003 and July 27, 2002, and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years in the period ended July 26, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of July
26, 2003 and July 27, 2002, and the consolidated results of its operations and
its consolidated cash flows for each of the three years in the period ended July
26, 2003 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
New York, New York
October 10, 2003
The Dress Barn, Inc. and Subsidiaries
Consolidated Balance Sheets
Amounts in thousands, except share data
July 26, July 27,
2003 2002
---------------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $37,551 $83,690
Marketable securities and investments (see note 2) 113,897 159,049
Merchandise inventories 110,348 113,371
Prepaid expenses and other 9,112 3,593
---------------------- -----------------
Total Current Assets 270,908 359,703
---------------------- -----------------
Property and Equipment:
Land and buildings 45,391 --
Leasehold improvements 61,014 61,414
Fixtures and equipment 163,407 154,139
Computer software 19,369 17,344
Automotive equipment 756 554
---------------------- -----------------
289,937 233,451
Less accumulated depreciation
and amortization 154,033 140,025
---------------------- -----------------
135,904 93,426
---------------------- -----------------
Deferred Income Taxes (See note 7) 11,255 5,869
---------------------- -----------------
Other Assets 4,896 3,999
---------------------- -----------------
TOTAL ASSETS $422,963 $462,997
====================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable- trade $ 65,090 $64,034
Accrued salaries, wages and related expenses 18,882 18,089
Litigation accrual (see note 5) 35,592 4,048
Other accrued expenses 28,134 27,268
Customer credits 7,284 6,650
Income taxes payable 7,088 8,655
Current portion of long-term debt 979 --
---------------------- -----------------
Total Current Liabilities 163,049 128,744
---------------------- -----------------
Long-Term Debt (See note 3) 33,021 --
---------------------- -----------------
Commitments and Contingencies (See note 8)
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- 29,169,559 and
36,507,919 shares, respectively 1,458 1,825
Additional paid-in capital 58,200 52,209
Retained earnings 167,297 279,672
Accumulated other comprehensive (loss) income (62) 547
---------------------- -----------------
226,893 334,253
---------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $422,963 $462,997
====================== =================
See notes to consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Consolidated Statements of Earnings
Amounts in thousands, except per share amounts
Fiscal Year Ended
------------------------------------------------------------
July 26, July 27, July 28,
2003 2002 2001
------------------------------------------------------------
Net sales $707,121 $717,136 $695,008
Cost of sales, including
occupancy and buying costs 453,178 453,428 443,426
------------------------------------------------------------
Gross profit 253,943 263,708 251,582
Selling, general and
administrative expenses 192,466 186,375 180,991
Depreciation and amortization 20,856 23,508 23,916
Litigation charge (see note 5) 32,000 -- --
------------------------------------------------------------
Operating income 8,621 53,825 46,675
Interest income- net 3,168 5,458 8,949
Other income 779 -- --
------------------------------------------------------------
Earnings before provision for
income taxes 12,568 59,283 55,624
Provision for income taxes 4,524 21,342 20,303
------------------------------------------------------------
Net earnings $8,044 $37,941 $35,321
============================================================
Earnings per share:
Basic $0.26 $ 1.04 $ 0.97
============================================================
Diluted $0.25 $ 1.01 $ 0.94
============================================================
Weighted average shares outstanding:
Basic 31,219 36,495 36,481
============================================================
Diluted 31,942 37,516 37,494
============================================================
See notes to consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Amounts and shares in thousands. Accumulated
Additional Other Total
Common Stock Paid-In Retained Treasury Comprehensive Shareholders'
--------------------------
Shares Amount Capital Earnings Stock Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 29, 2000 35,972 $2,510 $35,828 $329,170 $(107,162) $(785) $259,561
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 35,321 35,321
Unrealized holding gain on marketable securities 846 846
---------------
Total comprehensive income 36,167
---------------
Deferred compensation 16 183 183
Tax benefit from exercise of stock options 1,668 1,668
Employee Stock Purchase Plan activity 10 102 102
Shares issued pursuant to
exercise of stock options 1,096 56 6,275 6,331
Purchase of treasury stock (620) (7,415) (7,415)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 28, 2001 36,474 2,566 44,056 364,491 (114,577) 61 296,597
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 37,941 37,941
Unrealized holding gain on marketable securities 486 486
--------------
Total comprehensive income 38,427
--------------
Deferred compensation 291 291
Tax benefit from exercise of stock options 2,953 2,953
Employee Stock Purchase Plan activity 9 1 90 91
Shares issued pursuant to
exercise of stock options 783 39 4,819 4,858
Purchase of treasury stock (758) (8,964) (8,964)
Retirement of treasury stock (781) (122,760) 123,541 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 27, 2002 36,508 1,825 52,209 279,672 0 547 334,253
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 8,044 8,044
Unrealized holding loss on marketable securities (609) (609)
-------------
Total comprehensive income 7,435
-------------
Deferred compensation 20 1 264 265
Tax benefit from exercise of stock options 1,381 1,381
Employee Stock Purchase Plan activity 7 87 87
Shares issued pursuant to
exercise of stock options 635 32 4,259 4,291
Purchase of treasury stock-Tender Offer (8,000) (120,819) (120,819)
Retirement of treasury stock (400) (120,419) 120,819 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 26, 2003 29,170 $1,458 $58,200 $167,297 $0 ($62) $226,893
====================================================================================================================================
See note to consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Amounts in thousands Fiscal Year Ended
-----------------------------------------------------
July 26, July 27, July 28,
2003 2002 2001
-----------------------------------------------------
Operating Activities:
Net earnings $8,044 $37,941 $35,321
-----------------------------------------------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and
equipment 19,317 21,827 22,309
Loss on disposal of closed store assets 1,539 1,681 1,607
Deferred income tax (benefit) expense (5,386) 1,409 2,586
Deferred compensation 265 291 183
Changes in assets and liabilities:
Decrease (increase) in merchandise inventories 3,023 (8,884) 7,414
(Increase) decrease in prepaid expenses and other (3,789) 1,910 58
(Increase) decrease in other assets (897) (536) 372
(Decrease) increase in accounts payable- trade 1,056 4,484 (12,335)
Increase (decrease) in accrued salaries and wages 793 870 (753)
Increase (decrease) in litigation accrual 31,544 1,600 (1,065)
Increase (decrease) in accrued expenses 866 (1,480) 3,804
Increase in customer credits 634 839 556
(Decrease) increase in income taxes payable (187) 10,421 (2,152)
-----------------------------------------------------
Total adjustments 48,778 34,432 22,584
-----------------------------------------------------
Net cash provided by operating activities 56,822 72,373 57,905
-----------------------------------------------------
Investing Activities:
Purchases of property and equipment (63,334) (28,335) (25,758)
Sales and maturities of marketable securities and investments 138,346 109,142 119,697
Purchases of marketable securities and investments (93,803) (94,278) (141,139)
-----------------------------------------------------
Net cash used in investing activities (18,791) (13,472) (47,199)
-----------------------------------------------------
Financing Activities:
Proceeds from long-term debt, net of debt issuance costs 32,270 -- --
Purchase of treasury stock (120,818) (8,964) (7,415)
Proceeds from Employee Stock Purchase Plan 87 91 102
Proceeds from stock options exercised 4,291 4,858 6,331
-----------------------------------------------------
Net cash used in financing activities (84,170) (4,015) (982)
-----------------------------------------------------
Net (decrease) increase in cash and cash equivalents (46,139) 54,886 9,724
Cash and cash equivalents- beginning of year 83,690 28,804 19,080
-----------------------------------------------------
Cash and cash equivalents- end of year $37,551 $83,690 $28,804
=====================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $10,206 $9,511 $20,005
=====================================================
Cash paid for interest $35 --- ---
=====================================================
See notes to consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Three Years Ended July 26, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions are
eliminated. The Company reports on a 52-53 week fiscal year ending on the last
Saturday in July. All fiscal years presented consist of 52 weeks. Certain
reclassifications have been made to the prior years' consolidated financial
statements to conform to fiscal 2003's presentation.
Business
The Dress Barn, Inc. (including The Dress Barn, Inc. and it's wholly-owned
subsidiaries (the "Company")) operates a chain of women's apparel specialty
stores. The stores, operating principally under the names "Dress Barn" and
"Dress Barn Woman", offer in-season, moderate to better quality fashion apparel.
The Company is a specialty retailer of women's apparel (in both regular and
large sizes), including shoes and accessories. Given the similarities of the
economic characteristics and how the Company manages its different store
formats, the operations of the Company are aggregated into one reportable
segment.
Dunnigan Realty, LLC, a wholly-owned subsidiary of the Company, was formed
in fiscal 2003 to purchase, own and operate a distribution/office facility in
Suffern, New York (the "Suffern facility"), of which the major portion is the
Company's corporate offices and distribution center. Dunnigan Realty, LLC
receives rental income and reimbursement for taxes and common area maintenance
charges from the Company and two additional tenants that occupy the Suffern
facility that are not affiliated with the Company. The rental income from the
unaffiliated tenants is shown as "other income" on the Company's Consolidated
Statements of Earnings. Intercompany rentals between the Company and Dunnigan
Realty, LLC are eliminated in consolidation.
Revenue recognition
Revenues from retail sales, net of returns, are recognized at the point of
purchase upon delivery of the merchandise to the customer and exclude sales
taxes. 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.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers its
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents. These amounts are stated at cost, which approximates
market value. The majority of the Company's money market funds at July 26, 2003
were maintained with one financial institution.
Marketable securities and investments
The Company has categorized its marketable securities as available for
sale, stated at market value. The unrealized holding gains and losses are
included in other comprehensive income, a component of shareholders' equity,
until realized. The amortized cost is adjusted for amortization of premiums and
discounts to maturity, with the net amortization included in interest income.
Merchandise inventories
Merchandise inventories are valued at the lower of cost or market as
determined by the retail method.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the following estimated useful lives:
Building 25 years
Leasehold improvements 10 years or term of lease, if shorter
Fixtures and equipment 10 years
Software 5-7 years
Automotive equipment 5 years
Valuation of long-lived assets
The Company periodically reviews its long-lived assets for potential
impairment, where events or changes in circumstances indicate that their
carrying amount may not be recoverable. In that event, a loss is recognized
based on the amount the carrying amount exceeds the fair market value of the
long-lived asset.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred taxes are provided using the asset and
liability method, whereby deferred income taxes result from temporary
differences between the reported amounts in the financial statements and the tax
basis of assets and liabilities, as measured by presently enacted tax rates. The
Company establishes valuation allowances against deferred tax assets when it is
more likely than not the realization of those deferred tax assets will not
occur.
Store preopening costs
Non-capital expenditures, such as advertising and payroll costs incurred
prior to the opening of a new store are charged to expense in the period they
are incurred.
Earnings per share (EPS)
The Company calculates EPS in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS
No. 128 requires dual presentation of basic EPS and diluted EPS on the face of
all income statements for all entities with complex capital structures. Basic
EPS is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options, warrants and
other convertible securities.
Advertising costs
Advertising costs are included in selling, general and administrative
expenses and are expensed in the period in which they are incurred. Advertising
expenses were $10.1 million, $10.0 million and $8.6 for fiscal 2003, 2002 and
2001, respectively.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 became effective for
the Company at the beginning of fiscal 2003. 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 adoption of SFAS No. 144 did not have any 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 No. 94-3. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. The Company adopted the provisions of SFAS No. 146 for any restructuring
activities initiated after December 31, 2002. The Company will adopt this
pronouncement for any restructurings in the future.
On November 25, 2002 the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees 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 interpretation expands on the accounting guidance of
SFAS No. 5 "Accounting for Contingencies", SFAS No. 57, "Related Party
Disclosures", and SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments". The interpretation also incorporates, without change, the
provisions of FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others", which it supersedes. The initial recognition and
measurement provisions of Interpretation No. 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of the
guarantor's fiscal year-end. The disclosures are effective for financial
statements of interim or annual periods ending after December 31, 2002. The
Company has no guarantees with any of its subsidiaries or other third parties;
therefore, adoption of this Interpretation will have no impact on its financial
statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements". This interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
December 15, 2003, to variable interest entities in which an enterprise holds a
variable interest it acquired before February 1, 2003. The Company has no
variable interest entities; therefore, the implementation of this interpretation
will not impact the Company's financial statements.
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.
The Company adopted the interim reporting provisions of SFAS 148 for its third
quarter ended April 26, 2003 and the annual reporting provisions for fiscal
2003.
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 149 is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 on July 1, 2003, as required, had no impact on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that certain financial instruments be classified as liabilities
that were previously considered equity. The adoption of this standard on July 1,
2003, as required, had no impact on the Company's financial statements.
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make 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.
Comprehensive income
Comprehensive income consists of net earnings and unrealized holding gains
and losses on marketable securities, net of tax.
Stock based compensation
The Company uses the intrinsic value method to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
where compensation expense, if any, is measured as the excess of the market
price of the stock over the exercise price on the measurement date. No
compensation expense is recognized for the Company's option grants that have an
exercise price equal to the market price on the date of grant or for the
Company's Employee Stock Purchase Plan. In accordance with SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment
of SFAS No. 123" ("SFAS 148"), the Company discloses the pro forma effects of
recording stock-based employee compensation plans at fair value on net earnings
and net earnings per common share--basic and diluted" as if the compensation
expense was recorded in the financial statements.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the option grant dates for awards in accordance with
the accounting provisions of SFAS No. 148 (which does not apply to awards prior
to fiscal 1996), the Company's net earnings and earnings per share for fiscal
2003, fiscal 2002 and fiscal 2001 would have been reduced to the pro forma
amounts indicated below:
Fiscal Year Ended
-----------------------
July 26, July 27, July 28,
2003 2002 2001
--------- --------- ---------
Net earnings (in 000's):
As reported $8,044 $37,941 $35,321
Pro forma $6,105 $36,512 $33,959
Earnings per share - basic:
As reported $0.26 $1.04 $0.97
Pro forma $0.20 $1.00 $0.93
Earnings per share - diluted:
As reported $0.25 $1.01 $0.94
Pro forma $0.19 $0.97 $0.91
The fair values of the options granted under the Company's fixed stock
option plans were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
Fiscal Year Ended
-----------------------
July 26, July 27, July 28,
2003 2002 2001
--------- --------- ---------
Weighted average risk-free interest rate 3.1% 4.0% 5.4%
Weighted average expected life (years) 5.0 5.0 5.0
Expected volatility of the market price
of the Company's common stock 43.9% 43.9% 44.8%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Financial instruments
Concentration of Credit Risk - 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.
Fair Value of Financial 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.
Stock Split
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.
Treasury (Reacquired) Shares
Shares repurchased are retired and treated as authorized but unissued
shares, with the cost of the reacquired shares debited to retained earnings and
the par value debited to common stock.
2. MARKETABLE SECURITIES AND INVESTMENTS
The amortized cost and estimated fair value of marketable securities and
investments consisted of the following:
July 26, 2003 July 27, 2002
------------- -------------
(In 000's) Estimated Estimated
Fair Value Cost Fair Value Cost
Money Market Funds $ 10,301 $10,301 $ 15,712 $15,712
Short Term Investments 27,581 27,581 43,041 43,041
Tax Free Municipal Bonds 74,286 74,199 102,980 102,296
US Govt. Securities Fund 1,729 1,878 1,741 1,878
--------- --------- --------- ---------
$113,897 $113,959 $163,474 $162,927
========= ========= ========= =========
The scheduled maturities of marketable securities and investments at
July 26, 2003 are:
Estimated
Due In (in 000's) Fair Value Cost
- ------ ----------- --------
One year or less $73,110 $ 73,239
One year through five years 22,742 22,722
Six years through ten years 2,531 2,533
Over ten years 15,514 15,465
--------- --------
$113,897 $113,959
========= ========
Unrealized holding gains and (losses) at July 26, 2003 netted to an
unrealized loss of approximately $62,000. Proceeds and gross realized (losses)
gains from the sale of securities in fiscal 2003, 2002 and 2001 were $138.3
million and ($0.7) million, $108.8 million and $1.0 million and $119.7 million
and $0.3 million, respectively. For the purposes of determining gross realized
gains and losses, the cost of securities is based upon specific identification.
3. LONG-TERM DEBT
Long-term debt consists of the following:
July 26, July 27,
(in 000's) 2003 2002
--------- ---------
Dunnigan Realty, LLC mortgage loan $ 34,000 $ ---
Less: current portion (979) ---
--------- ---------
Total $33,021 $ ---
======== ========
The Dunnigan Realty, LLC mortgage loan (the "mortgage") is collateralized
by a mortgage lien on a distribution/office facility in Suffern, New York (the
"Suffern facility"), of which the major portion is the Company's corporate
offices and distribution center. Dunnigan Realty, LLC, a wholly owned subsidiary
of the Company, receives rental income and reimbursement for taxes and common
area maintenance charges from the Company and two additional tenants that occupy
the Suffern facility that are not affiliated with the Company. All intercompany
transaction transactions are eliminated. Payments of principal and interest on
the mortgage, a 20-year fully amortizing loan with a fixed interest rate of
5.33%, are due monthly through July 2023. In connection with the mortgage, the
Company paid approximately $1.7 million in debt issuance costs. These costs were
capitalized and will be amortized over the life of the mortgage. Scheduled
maturities of the mortgage in each of the next five fiscal years are as follows:
2004-$1.0 million; 2005-$1.0 million; 2006-$1.1 million; 2007-$1.1
million;2008-$1.2 million and 2009 and thereafter- $28.7 million. Interest
expense relating to the mortgage for fiscal 2003 was approximately $164,000.
4. EARNINGS PER SHARE
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding. Diluted earnings per share are computed
based upon the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares outstanding consist of shares covered by
stock options.
A reconciliation of basic and diluted weighted average number of common
shares outstanding is presented below:
Fiscal Year Ended
(In 000's) July 26, July 27, July 28,
2003 2002 2001
---------- ---------- ---------
Weighted average number of common shares outstanding - basic 31,219 36,495 36,481
Net effect of dilutive stock options based on the treasury
stock method using the average market price 723 1,021 1,013
---------- ---------- ---------
Weighted average number of common shares outstanding - diluted 31,942 37,516 37,494
====== ======= ========
Common stock equivalents of 170,000 and 150,000 for the fiscal years ended
July 26, 2003 and July 27, 2002, respectively, were excluded because such common
stock equivalents were anti-dilutive. All common stock equivalents were dilutive
for the fiscal year ended July 28, 2001.
5. LITIGATION
The Company is involved in various routine legal proceedings incident to
the ordinary course of business. On May 18, 2000, an action was filed against
the Company seeking compensatory and punitive damages in an unspecified amount
for alleged unfair trade practices and alleged breach of contract arising out of
negotiations for an acquisition the Company never concluded. The case went to a
jury trial in 2003, and a jury verdict of $30 million of compensatory damages
was awarded. On July 7, 2003, the court entered a final judgment of
approximately $32 million in compensatory damages and expenses, which is subject
to post-judgment interest. The trial court ruled against the plaintiffs' motion
for any punitive damages or pre-judgment interest. Based on this judgment, the
Company recorded a litigation charge of $32 million in its fiscal 2003's fourth
quarter results for this judgment. The Company believes there is no merit in the
jury verdict and is vigorously pursuing an appeal. If upon appeal the judgment
is subsequently reduced or reversed, the Company will adjust its litigation
accrual accordingly. The Company has also accrued for other litigation currently
outstanding, resulting in a total litigation accrual of approximately $35.6
million as of July 26, 2003.
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution retirement savings plan
(401(k)) covering all eligible employees. The Company also sponsors an Executive
Retirement Plan for certain officers and key executives. Both plans allow
participants to defer a portion of their annual compensation and receive a
matching employer contribution on a portion of that deferral. During fiscal
2003, 2002 and 2001 the Company incurred expenses of $1,363,000, $1,156,000 and
$1,619,000, respectively, relating to the contributions to and administration of
the above plans. The Company also sponsors an Employee Stock Purchase Plan,
which allows employees to purchase shares of Company stock during each quarterly
offering period at a 10% discount through weekly payroll deductions. The Company
does not provide any additional postretirement benefits.
7. INCOME TAXES
The components of the provision for income taxes were as follows:
Fiscal Year Ended
(In 000's) July 26, July 27, July 28,
2003 2002 2001
---------- ---------- ---------
Federal:
Current $7,772 $16,517 $16,210
Deferred (4,314) 1,090 (749)
---------- ---------- ---------
3,458 17,607 15,461
---------- ---------- ---------
State:
Current 2,138 3,415 5,562
Deferred (1,072) 320 (720)
---------- ---------- ---------
1,066 3,735 4,842
---------- ---------- ---------
Provision for income taxes $4,524 $21,342 $20,303
========== ========== ========
Significant components of the Company's deferred tax assets and
liabilities were as follows:
July 26, July 27, July 28,
(in 000's) 2003 2002 2001
--------- --------- ---------
Deferred tax assets:
Inventory capitalization and inventory-related items $10,460 $1,927 $2,822
Capital loss carryover 2,847 2,759 2,622
Employee benefits 2,438 2,754 1,494
Litigation accrual 14,308 --- ---
Other items 2,973 4,739 8,382
--------- --------- ---------
Total deferred tax assets 33,026 12,179 15,320
--------- --------- ---------
Deferred tax liabilities:
Depreciation 17,265 4,878 4,630
Other items 1,659 1,432 3,412
--------- --------- ---------
Total deferred tax liabilities 18,924 6,310 8,042
--------- --------- ---------
Valuation allowance: (2,847) --- ---
--------- --------- ---------
Net deferred tax assets $11,255 $5,869 $7,278
======== ======= ======
The net deferred tax assets were comprised of approximately $2,240,000 in
state deferred taxes and $9,015,000 in federal deferred taxes. In fiscal 2003, a
valuation allowance of approximately $2,847,000 was been established relating to
the capital loss carryforward, as the utilization of such amount is not assured.
In addition, the Company successfully resolved several major audits during
fiscal 2003, resulting in a credit to its fiscal 2003 tax provision for
approximately $2,645,000.
Following is a reconciliation of the statutory Federal income tax rate and
the effective income tax rate applicable to earnings before income taxes:
Fiscal Year Ended
---------------------
July 26, July 27, July 28,
2003 2002 2001
---------- ---------- ---------
Statutory tax rate 35.0 % 35.0 % 35.0 %
State taxes - net of federal
Benefit 5.5 % 5.2 % 5.5 %
Valuation allowance - loss carryforward 22.7 % --- ---
Provision adjustment- resolution of tax audits (22.5)% --- ---
Other - net, primarily tax-free interest (4.7)% (4.2)% (4.0)%
------ ------ ------
Effective tax rate 36.0 % 36.0 % 36.5%
====== ======= =====
8. COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company leases all of its stores and its distribution center. Certain
leases provide for additional rents based on percentages of net sales, charges
for real estate taxes, insurance and other occupancy costs. Store leases
generally have an initial term ranging from 5 to 15 years with one or more
5-year options to extend the lease. Some of these leases have provisions for
rent escalations during the initial term. The Company leases its 510,000 square
foot office and distribution center in Suffern, New York from Dunnigan Realty,
LLC, a wholly-owned subsidiary which was formed solely to purchase, own and
operate the entire facility (the "Suffern facility") including the portion
occupied by the Company. The Company's lease with Dunnigan Realty, LLC expires
in 2023, which coincides with the term of the underlying mortgage Dunnigan
Realty, LLC utilized to finance the purchase of the Suffern facility (see Note 3
for additional information regarding the mortgage). Dunnigan Realty, LLC
receives rental income and reimbursement for taxes and common area maintenance
charges from two additional tenants that occupy the Suffern facility that are
not affiliated with the Company. The rental income from the other tenants is
shown as "other income" on the Company's Consolidated Statements of Earnings.
All intercompany transactions are eliminated.
A summary of occupancy costs follows:
Fiscal Year Ended
-----------------------
July 26, July 27, July 28,
(in 000's) 2003 2002 2001
---------- ---------- ---------
Base rentals $ 87,447 $85,593 $78,920
Percentage rentals 3,898 2,591 2,192
Other occupancy costs 29,069 25,349 23,114
---------- ---------- ---------
120,414 113,533 104,226
---------- ---------- ---------
Less: Rental income from third parties (779) --- ---
---------- ---------- ---------
Total $119,635 $113,533 $104,226
========= ========= ========
The following is a schedule of future minimum rentals under noncancellable
operating leases as of July 26, 2003, including rents payable to Dunnigan
Realty, LLC for the Suffern facility (dollars in thousands):
Fiscal Year Amount
------------- -------------
2004 $ 90,029
2005 78,206
2006 64,140
2007 50,803
2008 35,632
Subsequent years 126,608
---------
Total future minimum rentals $445,418
========
Although the Company has the ability to cancel certain leases if specified
sales levels are not achieved, future minimum rentals under such leases have
been included in the above table.
Leases with related parties
The Company leases two stores from its Chairman or related trusts. Future
minimum rentals under leases with such related parties which extend beyond July
26, 2003, included in the above schedule, are approximately $247,000 annually
and in the aggregate $1.3 million. The leases also contain provisions for cost
escalations and additional rent based on net sales in excess of stipulated
amounts. Rent expense for fiscal years 2003, 2002 and 2001 under these leases
amounted to approximately $309,000, $288,000 and $346,000, respectively.
Lines of credit
At July 26, 2003, the Company had unsecured lines of credit with two banks
totaling $75 million with interest payable at rates below prime. None of the
Company's lines of credit contain any significant covenants or commitment fees.
The Company had no debt outstanding under any of the lines at July 26, 2003.
However, approximately $41 million of outstanding letters of credit reduced the
credit lines available.
Contractual obligations and commercial commitments
The estimated significant contractual cash obligations and other commercial
commitments at July 26, 2003 are summarized in the following table:
-----------------------------------------------------------------------------
Payments Due by Period (000's)
-----------------------------------------------------------------------------
Contractual Fiscal Fiscal Fiscal 2007- Fiscal 2009
2005-
Obligations Totals 2004 2006 2008 And Beyond
- ----------------------------------------------------------------------------------------------------------------------
Operating lease obligations $445,418 $90,029 $142,346 $86,435 $126,608
Mortgage principal and interest 55,351 2,768 5,535 5,535 41,513
-----------------------------------------------------------------------------
$500,769 $92,797 $147,881 $91,970 $168,121
=============================================================================
-----------------------------------------------------------------------------
Amount of Commitment Expiration Period (000's)
-----------------------------------------------------------------------------
Other Commercial Fiscal Fiscal Fiscal 2007- Fiscal 2009
2005-
Commitments Totals 2004 2006 2008 And Beyond
- ----------------------------------------------------------------------------------------------------------------------
Trade letters of credit $37,082 $37,082 --- --- ---
Standby letters of credit 3,905 3,905 --- --- ---
-----------------------------------------------------------------------------
$40,987 $40,987 $--- $--- $---
=============================================================================
In addition to the commitments represented in the above table, the Company
enters into a number of cancelable and non-cancelable commitments during the
year. Typically, these commitments are for less than a year in duration and are
principally focused on the construction of new retail stores and the procurement
of inventory. The Company does not maintain any long-term or exclusive
commitments or arrangements to purchase merchandise from any single supplier.
Preliminary commitments with the Company's private label merchandise vendors
typically are made five to seven months in advance of planned receipt date.
Substantially all of the Company's merchandise purchase commitments are
cancelable up to 30 days prior to the vendor's scheduled shipment date.
Legal proceedings
The Company is involved in various routine legal proceedings incident to
the ordinary course of business. The Company believes that the outcome of all
pending and threatened legal proceedings (except for the matter as discussed in
Note 5) will, on the whole, not have a material adverse effect on its financial
condition or results of operations.
9. STOCK-BASED COMPENSATION PLANS
At July 26, 2003, the Company had five stock-based compensation plans. The
Company's 1993 Incentive Stock Option Plan provides for the grant of incentive
stock options ("ISO's") to purchase up to 2,500,000 shares of the Company's
common stock. As of July 26, 2003, there were 231,052 shares under the 1993 plan
available for future grant. The Company's 1995 Stock Option Plan provides for
the granting of either ISO's or non-qualified options to purchase up to
4,000,000 shares of common stock. As of July 26, 2003, there were 257,514 shares
under the 1995 plan available for future grant. The Company's 2001 Stock Option
Plan provides for the granting of either ISO's or non-qualified options to
purchase up to 4,000,000 shares of common stock. As of July 26, 2003, there were
3,431,667 shares under the 1995 plan available for future grant.
The exercise price of ISO's granted under any of the option plans may not
be less than the market price of the common stock at the date of grant.
Generally, all options granted under these plans vest over a five-year period
and expire after ten years from the date of grant.
The Company's 1983 Incentive Stock Option Plan expired on April 4, 1993,
and the Company's 1987 Non-Qualified Stock Option Plan expired December 7, 1997.
Accordingly, the Company can no longer grant options under either of the two
expired plans. The Company's Employee Stock Purchase Plan allows employees to
purchase shares of the Company's common stock during each quarterly offering
period at a 10% discount through weekly payroll deductions.
The following table summarizes the activities in all Stock Option Plans and
changes during each of the fiscal years presented:
July 26, 2003 July 27, 2002 July 28, 2001
------------- ------------- -------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------------------------------------------
Options outstanding - beginning of
year 2,734,352 $8.14 3,164,870 $7.26 3,641,286 $6.16
Granted 909,883 12.54 797,266 10.95 716,938 10.50
Cancelled (59,200) 8.27 (444,580) 10.26 (95,848) 6.92
Exercised (634,540) 6.76 (783,204) 6.21 (1,097,506) 5.77
-----------------------------------------------------------------------------------------------
Outstanding end of year 2,950,495 $9.80 2,734,352 $8.14 3,164,870 $7.26
===============================================================================================
Options exercisable
at year-end 528,208 $7.56 334,108 $4.09 469,044 $5.61
==============================================================================================
Weighted-average fair
value of options granted
during the year
$5.34 $4.81 $4.92
============== =============== =============
The following table summarizes information about stock options outstanding
at July 26, 2003:
Number Weighted Average Number Weighted
Outstanding as of Weighted Average Exercise Price Exercisable as Average
Range of Exercise Prices 7/26/03 Remaining Life of 7/26/03 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
$2.50 - $4.65 120,286 3.13 years $2.89 120,286 $2.89
5.25 - 7.03 932,660 5.95 years $6.87 189,908 $6.76
7.81 - 10.84 803,666 7.69 years $10.06 166,654 $10.01
11.25 - 13.25 430,550 8.89 years $11.27 21,360 $11.31
13.51 - 15.11 663,333 9.27 years $13.88 30,000 $15.11
----------------------------------------------------------------------------------------------
$2.50 - $15.11 2,950,495 7.48 years $9.80 528,208 $7.56
==============================================================================================
10. QUARTERLY RESULTS OF OPERATIONS (unaudited) (in thousands, except per share
amounts)
Fiscal Fourth Third Second First
Year Quarter Quarter Quarter Quarter
Fiscal Year ended July 26, 2003
Net sales $707,121 $188,131 $165,692 $167,372 $185,926
Gross profit,
less occupancy
and buying costs 253,943 72,278 55,338 60,107 66,220
Income tax expense 4,524 (4,498) 1,468 2,627 4,927
(benefit)
Net earnings (loss) 8,044 (7,992) 2,609 4,668 8,759
Earnings (loss) per share (1)
Basic $0.26 ($0.27) $0.09 $0.16 $0.24
Diluted $0.25 ($0.27) $0.09 $0.15 $0.23
Fiscal Fourth Third Second First
Year Quarter Quarter Quarter Quarter
Fiscal Year ended July 27, 2002
Net sales $717,136 $186,697 $177,119 $171,241 $182,079
Gross profit,
less occupancy
and buying costs 263,708 74,267 65,315 61,752 62,374
Income taxes 21,342 7,547 5,359 3,999 4,437
Net earnings 37,941 13,418 9,526 7,109 7,888
Earnings per share (1)
Basic $1.04 $0.37 $0.26 $0.19 $0.22
Diluted $1.01 $0.36 $0.25 $0.19 $0.21
(1) Earnings per share is computed independently for each period presented. As
a result, the total of the per share earnings for the four quarters does not
equal the annual earnings per share.