SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 25, 2003 Commission file number 0-11736
THE DRESS BARN, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-0812960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Dunnigan Drive, Suffern, New York 10901
(Address of principal executive offices) (Zip Code)
(845) 369-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(g) of the Act:
Title of each class
Common Stock $.05 par value
Indicate whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
.05 par value - 29,312,484 shares on December 8, 2003
Page 1 of 19
THE DRESS BARN, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED OCTOBER 25, 2003
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
October 25, 2003 (unaudited)
and July 26, 2003 I-3
Condensed Consolidated Statements of Earnings
(unaudited) for the Thirteen weeks ended
October 25, 2003 and October 26, 2002 I-4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Thirteen weeks ended
October 25, 2003 and October 26, 2002 I-5
Notes to Unaudited Condensed Consolidated
Financial Statements (unaudited) I-6 through I-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations I-11 through I-16
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-17
Item 4 Controls and Procedures I-17
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings I-18
Item 4. Submissions of Matters to a Vote
of Security Holders I-18
Item 6. Exhibits and Reports on Form 8-K I-19
Signatures I-19
Item 1 - FINANCIAL STATEMENTS
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Amounts in thousands, except share data
October 25, July 26,
2003 2003
---------------------- -----------------
ASSETS
Current Assets: (unaudited)
Cash and cash equivalents $46,752 $37,551
Marketable securities and investments 133,996 113,897
Merchandise inventories 113,587 110,348
Prepaid expenses and other 6,501 9,112
---------------------- -----------------
Total Current Assets 300,836 270,908
---------------------- -----------------
Property and Equipment:
Land and buildings 45,391 45,391
Leasehold improvements 63,220 61,014
Fixtures and equipment 168,622 163,407
Computer software 19,959 19,369
Automotive equipment 773 756
---------------------- -----------------
297,965 289,937
Less accumulated depreciation
and amortization 162,919 154,033
---------------------- -----------------
135,046 135,904
---------------------- -----------------
Deferred Income Taxes 10,355 11,255
---------------------- -----------------
Other Assets 4,970 4,896
---------------------- -----------------
TOTAL ASSETS $451,207 $422,963
====================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $78,143 $ 65,090
Accrued salaries, wages and related expenses 19,462 18,882
Litigation accrual (see note 8) 36,099 35,592
Other accrued expenses 33,575 28,134
Customer credits 7,314 7,284
Income taxes payable 8,383 7,088
Current portion of long-term debt 992 979
---------------------- -----------------
Total Current Liabilities 183,968 163,049
---------------------- -----------------
Long-Term Debt (see note 7) 32,768 33,021
---------------------- -----------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, par value $.05 per share:
Authorized- 100,000 shares
Issued and outstanding- none -- --
Common stock, par value $.05 per share:
Authorized- 50,000,000 shares
Issued and outstanding- 29,256,976 and
29,169,559 shares, respectively 1,467 1,458
Additional paid-in capital 58,914 58,200
Retained earnings 174,067 167,297
Accumulated other comprehensive income (loss) 23 (62)
---------------------- -----------------
234,471 226,893
---------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $451,207 $422,963
====================== =================
See notes to condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - First Quarter (unaudited)
Amounts in thousands, except per share amounts
Thirteen Weeks Ended
------------------------------------------
October 25, October 26,
2003 2002
------------------------------------------
Net sales $192,544 $185,926
Cost of sales, including
occupancy and buying costs 123,639 119,706
------------------------------------------
Gross profit 68,905 66,220
Selling, general and
administrative expenses 51,707 47,618
Depreciation and amortization
6,181 6,468
------------------------------------------
Operating income 11,017 12,134
Interest income 532 1,552
Interest expense (1,352) -
Other income 381 -
------------------------------------------
Earnings before provision for
income taxes 10,578 13,686
Provision for income taxes 3,808 4,927
------------------------------------------
Net earnings $6,770 $8,759
==========================================
Earnings per share:
Basic $0.23 $0.24
==========================================
Diluted $0.23 $0.23
==========================================
Weighted average shares outstanding:
Basic 29,198 36,682
==========================================
Diluted 29,847 37,455
==========================================
See notes to condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Amounts in thousands
Thirteen Weeks Ended
-------------------------------------
October 25, October 26,
2003 2002
-------------------------------------
Operating Activities:
Net earnings $6,770 $8,759
-------------------------------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and
equipment 6,181 6,468
Deferred income tax expense 900 39
Changes in assets and liabilities:
Increase in merchandise inventories (3,239) (2,169)
Decrease in prepaid expenses and other 2,611 1,293
(Increase) decrease in other assets (74) 194
Increase in accounts payable- trade 13,053 17,834
Increase in accrued salaries, wages and related expenses 580 222
Increase (decrease) in litigation accrual 507 (385)
Increase in accrued expenses 5,441 2,737
Increase (decrease) in customer credits 30 (66)
Increase in income taxes payable 1,295 1,884
-------------------------------------
Total adjustments 27,285 28,051
-------------------------------------
Net cash provided by operating activities 34,055 36,810
-------------------------------------
Investing Activities:
Purchases of property and equipment (5,323) (6,084)
Sales and maturities of marketable securities and investments 29,079 84,195
Purchases of marketable securities and investments (49,093) (8,230)
-------------------------------------
Net cash (used in) provided by investing activities (25,337) 69,881
-------------------------------------
Financing Activities:
Principal payments of long-term debt (240) -
Proceeds from Employee Stock Purchase Plan 21 22
Proceeds from stock options exercised 702 3,985
-------------------------------------
Net cash provided by financing activities 483 4,007
-------------------------------------
Net increase in cash and cash equivalents 9,201 110,698
Cash and cash equivalents- beginning of year 37,551 83,690
-------------------------------------
Cash and cash equivalents- end of year $46,752 $194,388
=====================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $1,708 $3,004
=====================================
Cash paid for interest $443 ---
=====================================
See notes to condensed consolidated financial statements
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
of normal recurring adjustments) which management considers necessary to present
fairly the consolidated financial position of The Dress Barn Inc. and its wholly
owned subsidiaries (the "Company") as of October 25, 2003 and July 26, 2003, the
consolidated results of its operations and its cash flows for the thirteen weeks
ended October 25, 2003 and October 26, 2002. The results of operations for a
thirteen-week period may not be indicative of the results for the entire year.
Significant accounting policies and other disclosures necessary for
complete financial statements in conformity with accounting principles generally
accepted in the United States of America have been omitted since such items are
reflected in the Company's audited financial statements and related notes
thereto. Accordingly, these consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's July 26, 2003 Annual Report to Shareholders. Certain
reclassifications have been made to the condensed consolidated financial
statements of prior periods to conform to the current period presentation. All
intercompany transactions have been eliminated.
2. Stock Repurchase Program and Dutch Auction Tender Offer
On March 30, 2000, the Board of Directors authorized a $50 million stock
repurchase program, which was increased to $75 million on April 5, 2001. As of
the date of this filing, the Company had repurchased 2,323,000 shares at an
aggregate purchase price of approximately $24.8 million. During the three months
ended October 25, 2003, no shares were repurchased under this authorization.
On October 30, 2002 the Company completed a "Dutch Auction" Tender Offer
(the "Tender Offer"), resulting in the Company's purchase of 8 million shares of
its common stock at $15 per share for a total cost of approximately $121 million
including transaction costs.
Treasury (Reacquired) shares 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.
3. Earnings Per Share
Basic EPS is based upon the weighted average number of common shares
outstanding and diluted EPS is based upon the weighted average number of common
shares outstanding plus the dilutive effect of stock options outstanding during
the period. Antidilutive options are excluded from the earnings per share
calculations when the option price exceeds the average market price of the
common shares for the period. The following is a reconciliation of the
denominators of the basic and diluted EPS computations shown on the face of the
accompanying condensed consolidated statements of earnings:
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
Thirteen Weeks Ended
October 25, October 26,
(Shares in thousands) 2003 2002
--------------- -----------------
Basic weighted average outstanding shares 29,198 36,682
Dilutive effect of options outstanding 649 773
--------------- -----------------
Diluted weighted average shares outstanding 29,847 37,455
--------------- -----------------
Anti-dilutive options excluded from calculations 663 150
--------------- -----------------
4. Comprehensive Income
The Company's short-term investments are classified as available for sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses reported as a component of other comprehensive income. Total
comprehensive income is composed of net earnings and net unrealized gains or
losses on available for sale securities. The following is a reconciliation of
comprehensive income and net earnings as shown on the face of the accompanying
consolidated statements of earnings:
Thirteen Weeks Ended
October 25, October 26,
(Dollars in thousands) 2003 2002
--------------- -----------------
Net earnings $6,770 $8,759
Net unrealized gain (loss) on available for sale securities 85 (417)
--------------- -----------------
Comprehensive income $6,855 $8,342
--------------- -----------------
5. Stock Based Compensation
At October 25, 2003, the Company has various stock option plans. 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.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
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 would have
been reduced to the following pro forma amounts:
Thirteen Weeks Ended
(in millions, except per share amounts) October 25, October 26,
2003 2002
-------------------------------
Net earnings as reported $6,770 $8,759
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
-------------------------------
for all awards net of related tax effects (519) (426)
-------------------------------
Pro forma net earnings $6,251 $8,333
===============================
Earnings per share
Basic - as reported $0.23 $0.24
-------------------------------
Basic - pro forma $0.21 $0.23
-------------------------------
Diluted - as reported $0.23 $0.23
-------------------------------
Diluted - pro forma $0.21 $0.22
-------------------------------
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:
Thirteen Weeks Ended
October 25, October 26,
2003 2002
-------------------------------
Weighted average risk-free interest rate 3.2% 3.0%
Weighted average expected life (years) 5.0 5.0
Expected volatility of the market price of the Company's common stock 41.3% 43.2%
6. Purchase of Real Estate
In January 2003, Dunnigan Realty, LLC, a wholly owned consolidated
subsidiary of the Company, purchased 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, for approximately $45.3 million,
financed in part by a fixed rate mortgage loan (see note 7). 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 DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
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.
7. Long-Term Debt
In connection with the purchase of the Suffern facility, Dunnigan Realty,
LLC, in July 2003, borrowed $34 million under a fixed rate mortgage loan. The
Dunnigan Realty, LLC mortgage loan (the "mortgage") is collateralized by a
mortgage lien on the Suffern facility, of which the major portion is the
Company's corporate offices and distribution center. 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 have been capitalized and are being 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- $28.6 million.
Interest expense for the first quarter relating to the mortgage was
approximately $444,000.
8. 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 fourth quarter results. 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. Interest accrues on the unpaid judgment at
the statutory rate of 10% annually, which the Company has provided for in its
litigation accrual. The Company has also accrued for other litigation currently
outstanding, resulting in a total litigation accrual of approximately $36.1
million as of October 25, 2003.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
9. Recent Accounting Pronouncements
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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations are based upon the Company's Condensed Consolidated Financial
Statements and should be read in conjunction with those statements, the notes
thereto and our Annual Report on Form 10-K filed with the Commission on October
22, 2003.
Results of Operations
The following table sets forth the percentage change in dollars from last
year for the thirteen-week period ended October 25, 2003, and the percentage of
net sales for each component of the Consolidated Statements of Earnings for each
of the periods presented:
First Quarter
% Change % of Sales
From L/Y T/Y L/Y
Net sales 3.6% 100.0% 100.0%
Cost of sales, including occupancy & buying 3.3% 64.2% 64.4%
Gross profit 4.1% 35.8% 35.6%
Selling, general and admin. Expenses 8.6% 26.9% 25.6%
Depreciation and amortization -4.4% 3.2% 3.5%
Operating income -9.2% 5.7% 6.5%
Interest income -65.7% 0.3% 0.9%
Interest expense -- 0.7% --
Other income -- 0.2% --
Earnings before income taxes -22.7% 5.5% 7.4%
Net earnings -22.7% 3.5% 4.7%
Net sales increased by 3.6% to $192.5 million for the 13 weeks ended
October 25, 2003 ("first quarter"), from $185.9 million for the 13 weeks ended
October 26, 2002 ("last year"). The sales increase can be attributed to an
approximate 4% increase in selling square footage as same store sales were flat.
Units sold and units per transaction both increased slightly from the last year;
however, the number of customer transactions decreased. The Company believes
unemployment, increased competition as well as unseasonable weather all affected
the number of customer transactions.
During the first quarter the Company initiated a comprehensive national
brand image campaign (the "marketing campaign") to strengthen brand awareness as
well as bring new customers into its stores and increase its customer traffic.
The marketing campaign featured full-page ads in national lifestyle magazines,
new in-store signage and collateral material. The marketing campaign resulted in
an approximately $2 million of additional marketing expenses in the first
quarter versus last year. Marketing expenses for the remainder of fiscal 2004
are expected to be relatively in line versus last year's comparable periods.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
During the first quarter, the Company's total selling square footage
increased approximately 4%. The increase in store square footage was due to the
opening of new combination Dress Barn/Dress Barn Woman stores ("combo stores"),
which carry both Dress Barn and Dress Barn Woman merchandise, and the conversion
of single-format stores into combo stores. During the first quarter the Company
opened 23 stores and closed 4 underperforming locations. The number of stores in
operation increased to 795 stores as of October 25, 2003, from 779 stores in
operation as of October 26, 2002.
The Company's real estate strategy for fiscal 2004 is to continue opening
primarily 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.
Gross profit (net sales less cost of goods sold, including occupancy and
buying costs) increased by 4.1% to $68.9 million, or 35.8% of net sales, in the
first quarter from $66.2 million, or 35.6% of net sales last year. The increase
in gross profit as a percentage of sales was primarily due to increased gross
margins from higher initial margins, which offset higher markdowns. In addition,
home office occupancy costs were favorably impacted by the purchase of the
Suffern facility in January 2003 (see note 6). The increase in gross profit as a
percentage of sales was offset, in part, by higher store occupancy costs as a
percentage of sales resulting from higher rents for new stores, increases in
real estate taxes, store expansions and lease renewals.
Selling, general and administrative ("SG&A") expenses increased by 8.6%, or
$4.1 million, to $51.7 million, or 26.9% of net sales, in the first quarter from
$47.6 million, or 25.6% of net sales, last year. The increase in SG&A expenses
versus last year was primarily due to the marketing campaign as well as the
increased number of stores in operation versus last year. The increase in SG&A
as a percentage of sales was primarily due to the marketing campaign and lack of
leverage from the flat same store sales.
Depreciation expense in the first quarter decreased 4.4% versus last year
to $6.2 million. The decrease in depreciation expense reflected last year's
write-off of obsolete computer software and related programming expenses, the
reduced number of store openings last year and increased landlord allowances
received in the first quarter versus last year. This was offset in part by the
additional depreciation from the purchase of the Suffern facility. The annual
depreciation for the Suffern facility is approximately $2 million per year.
Interest income was significantly decreased by less cash available for
investments and to a lesser extent lower investment rates versus last year.
During the prior twelve months, the Company used approximately $121 million for
repurchase of 8 million of its common shares in a tender offer and approximately
$45 million to acquire the Suffern facility.
Interest expense relates to interest on the mortgage loan (see note 7) and
post-judgment interest on the unpaid court award against the Company in July
2003 (see note 8). Unless this litigation is resolved, interest expense for the
remaining three quarters of the Company's fiscal year ending July 30, 2004
("fiscal 2004") will approximate the first quarter's amount.
Other income represents rental income that Dunnigan Realty, LLC receives
from the two unaffiliated tenants in the Suffern facility. That square footage
is 100% leased through 2012. Intercompany rentals between the Company and
Dunnigan Realty, LLC are eliminated in consolidation.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Principally as a result of the above factors, net earnings for the first
quarter was $6.8 million, or 3.5% of net sales, a decrease of 22.7% from the
$8.8 million, or 4.7% of net sales, for the first quarter of last year. The
income tax provision represented an effective rate of approximately 36% for the
first quarter, which was the same rate in effect for all of the Company's fiscal
year ending July 26, 2003 ("fiscal 2003").
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in Note 1 of the
Notes to Consolidated Financial Statements in the Company's Annual Report to
Shareholders. Management's discussion and analysis of the Company's financial
condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, income taxes and related disclosures of contingent assets and
liabilities. On an ongoing basis, the Company evaluates estimates, including
those related primarily to inventories, investments, long-lived assets, income
taxes and claims and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company's accounting
policies are generally straightforward; however, 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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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. The outstanding judgment
is subject to interest at the rate of 10% per year as long as it remains unpaid
and will be reversed if the judgment is overturned. The Company's litigation
accrual includes an accrual for the post-judgment interest.
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 assumptions had been made, the Company's tax
expense, assets and liabilities could be different.
The Company has provided for income taxes based on the estimated annual
effective rate method. This method requires estimates to be made of annual
taxable income, tax-free interest income and other tax-related items. Any
significant variations between these estimates and their actual amounts, or
significant changes in the annual estimates made during the year may require an
adjustment to the Company's effective tax rate.
Liquidity and Capital Resources
The Company believes that its cash, cash equivalents and short-term
investments, together with cash flow from operations, will be adequate to fund
the Company's fiscal 2004 planned capital expenditures and all other operating
requirements and other proposed or contemplated expenditures. Inventories were
current and in line with sales projections as of the end of the first quarter.
The Company does not have any off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities. The Company has
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.
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 for the Suffern facility.
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, the promotional
activities of other retailers, net sales contributed by new stores and changes
in the Company's merchandise mix.
Forward-Looking Statements and Factors Affecting Future Performance
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
reflect the Company's current views with respect to future events and financial
performance. The Company's actual results of operations and future financial
condition may differ materially from those expressed or implied in any such
forward looking statements as a result of certain factors set forth in the
Company's Annual Report on Form 10-K for its fiscal year ended July 26, 2003.
Item 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's portfolio of investments consisting of cash, cash equivalents
and marketable securities can be affected by changes in market interest rates.
The portfolio consists primarily of municipal bonds that can readily be
converted to cash. Financial instruments, which potentially subject the Company
to concentrations of credit risk, are principally bank deposits and short-term
money-market investments. Cash and cash equivalents are deposited with high
credit quality financial institutions. Short-term investments principally
consist of triple A or double A rated instruments. The carrying amounts of cash,
cash equivalents, short-term investments and accounts payable approximate fair
value because of the short-term nature and maturity of such instruments. The
Company holds no options or other derivative instruments.
A discussion of the Company's accounting policies for financial instruments
and further disclosures relating to financial instruments is included in the
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended July 26,
2003.
Item 4 -- CONTROLS AND PROCEDURES
In the 90-day period before the filing of this report, the Chief Executive
Officer and Chief Financial Officer of the Company (collectively, the
"certifying officers") have evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities and Exchange Act of 1934, as amended). These
disclosure controls and procedures are designed to ensure that the information
required to be disclosed by the Company in its periodic reports filed with the
Securities and Exchange Commission (the "Commission") is recorded, processed,
summarized and reported within the time periods specified by the Commission's
rules and forms, and that the information is communicated to the certifying
officers on a timely basis.
The certifying officers concluded, based on their evaluation, that the
Company's disclosure controls and procedures are effective for the Company,
taking into consideration the size and nature of the Company's business and
operations.
No significant changes in the Company's internal controls or in other
factors were detected that could significantly affect the Company's internal
controls subsequent to the date when the internal controls were evaluated.
Part II - OTHER INFORMATION
Item 1 - 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 court
has imposed post-judgment interest on the unpaid judgment at the statutory rate
of 10% per year. 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's financial condition or results of its
operations.
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
(a) The Annual Meeting of the Company's Shareholders was held on
November 19, 2003.
o The Company's shareholders voted for the reelection of David
R. Jaffe and John Usdan, as Directors of the Company for
3-year terms (22,384,954 and 21,864,161 shares, respectively,
voted for reelection and 5,930,413 and 6,451,206 shares,
respectively, withheld authority with respect for such
nominees),
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit Description
31.1 Certification of David R. Jaffe pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Armand Correia pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of David R. Jaffe pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Armand Correia pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed one report on Form 8-K during the quarter ended
October 25, 2003.
Date Filed Description
September 17, 2003 Release of Fourth Quarter and Year-End Financial Results
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BY: /s/ DAVID R. JAFFE
David R. Jaffe
President, Chief Executive Officer and Director
(Principal Executive Officer)
BY: /s/ ARMAND CORREIA
Armand Correia
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)