SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 24, 2004 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 28,561,651 shares on March 4, 2004
Page 1 of 22
THE DRESS BARN, INC.
FORM 10-Q
QUARTER ENDED JANUARY 24, 2004
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
January 24, 2004 (unaudited)
and July 26, 2003 I-3
Condensed Consolidated Statements of Earnings
(unaudited) for the Thirteen weeks ended
January 24, 2004 and January 25, 2003 I-4
Condensed Consolidated Statements of Earnings
(unaudited) for the Twenty-six weeks ended
January 24, 2004 and January 25, 2003 I-5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Twenty-six weeks ended
January 24, 2004 and January 25, 2003 I-6
Notes to Unaudited Condensed Consolidated
Financial Statements I-7 through I-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations I-12 through I-19
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-20
Item 4 Controls and Procedures I-20
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings I-21
Item 6. Exhibits and Reports on Form 8-K I-21
Signatures I-22
Item 1 - FINANCIAL STATEMENTS
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Amounts in thousands, except share data
January 24, July 26,
ASSETS 2004 2003
---------------------- -----------------
(unaudited)
Current Assets:
Cash and cash equivalents $50,808 $37,551
Marketable securities and investments 130,467 113,897
Merchandise inventories 100,213 110,348
Prepaid expenses and other 5,699 9,112
---------------------- -----------------
Total Current Assets 287,187 270,908
---------------------- -----------------
Property and Equipment:
Land and buildings 45,391 45,391
Leasehold improvements 64,408 61,014
Fixtures and equipment 171,128 163,407
Computer software 20,901 19,369
Automotive equipment 752 756
---------------------- -----------------
302,580 289,937
Less accumulated depreciation
and amortization 169,768 154,033
---------------------- -----------------
132,812 135,904
---------------------- -----------------
Deferred Income Taxes 9,597 11,255
---------------------- -----------------
Other Assets 6,823 4,896
---------------------- -----------------
TOTAL ASSETS $436,419 $422,963
====================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $65,051 $65,090
Accrued salaries, wages and related expenses 20,492 18,882
Litigation accrual (see note 8) 35,632 35,592
Other accrued expenses 28,059 28,134
Customer credits 10,023 7,284
Income taxes payable 3,515 7,088
Current portion of long-term debt 1,005 979
---------------------- -----------------
Total Current Liabilities 163,777 163,049
---------------------- -----------------
Long-Term Debt (see note 7) 32,512 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- 29,405,454 and
29,169,559 shares, respectively 1,470 1,458
Additional paid-in capital 60,038 58,200
Retained earnings 178,577 167,297
Accumulated other comprehensive income (loss) 45 (62)
---------------------- -----------------
240,130 226,893
---------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $436,419 $422,963
====================== =================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - Second Quarter (unaudited)
Amounts in thousands, except per share amounts
Thirteen Weeks Ended
------------------------------------------
January 24, January 25,
2004 2003
------------------------------------------
Net sales $171,053 $167,372
Cost of sales, including
Occupancy and buying costs 107,518 107,265
------------------------------------------
Gross profit 63,535 60,107
Selling, general and
administrative expenses 50,007 48,080
Depreciation and amortization 6,271 5,564
------------------------------------------
Operating income 7,257 6,463
Interest income 682 832
Interest expense (1,219) -
Other income 382 -
------------------------------------------
Earnings before provision for
income taxes 7,102 7,295
Provision for income taxes 2,592 2,627
------------------------------------------
Net earnings $4,510 $4,668
==========================================
Earnings per share:
Basic $0.15 $0.16
==========================================
Diluted $0.15 $0.15
==========================================
Weighted average shares outstanding:
Basic 29,308 29,902
==========================================
Diluted 30,050 30,687
==========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - Six Months (unaudited) Amounts
in thousands, except per share amounts
Twenty-Six Weeks Ended
------------------------------------------
January 24, January 25,
2004 2003
------------------------------------------
Net sales $363,597 $353,298
Cost of sales, including
Occupancy and buying costs 231,157 226,971
------------------------------------------
Gross profit 132,440 126,327
Selling, general and
administrative expenses 101,714 95,698
Depreciation and amortization 12,452 12,032
------------------------------------------
Operating income 18,274 18,597
Interest income 1,214 2,384
Interest expense (2,571) -
Other income 763 -
------------------------------------------
Earnings before provision for
income taxes 17,680 20,981
Provision for income taxes 6,400 7,554
------------------------------------------
Net earnings $11,280 $13,427
==========================================
Earnings per share:
Basic $0.39 $0.40
==========================================
Diluted $0.38 $0.39
==========================================
Weighted average shares outstanding:
Basic 29,253 33,292
==========================================
Diluted 29,915 34,219
==========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Twenty-Six Weeks Ended
---------------------------------
January 24, January 25,
2004 2003
---------------------------------
Operating Activities:
Net earnings $11,280 $13,427
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 12,452 12,032
Change in deferred income taxes 1,658 53
Changes in assets and liabilities:
Decrease in merchandise inventories 10,135 13,273
Decrease (increase) in prepaid expenses and other 3,413 (123)
(Increase) in other assets (1,927) (5,306)
(Decrease) in accounts payable- trade (39) (1,275)
Increase in accrued salaries, wages and related expenses 1,610 585
(Decrease) increase in other accrued expenses (75) 115
Increase (decrease) in litigation accrual 40 (491)
Increase in customer credits 2,739 2,139
(Decrease) in income taxes payable (3,573) (2,310)
---------------------------------
Total adjustments 26,433 18,692
---------------------------------
Net cash provided by operating activities 37,713 32,119
---------------------------------
Investing Activities:
Purchases of property and equipment - net of allowances (9,360) (7,923)
Sales and maturities of marketable securities and investments 33,040 106,186
Purchases of marketable securities and investments (49,503) (66,353)
---------------------------------
Net cash (used in) provided by investing activities (25,823) 31,910
---------------------------------
Financing Activities:
Purchase of treasury stock - (120,818)
Payment for long-term debt (483) -
Proceeds from Employee Stock Purchase Plan 42 45
Proceeds from stock options exercised 1,808 4,058
---------------------------------
Net cash provided by (used in) financing activities 1,367 (116,715)
---------------------------------
Net increase (decrease) in cash and cash equivalents 13,257 (52,686)
Cash and cash equivalents- beginning of period 37,551 83,690
---------------------------------
Cash and cash equivalents- end of period $50,808 $31,004
=================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $8,221 $4,827
---------------------------------
Cash paid for interest $901 -
---------------------------------
See notes to unaudited 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 January 24, 2004 and July 26, 2003, the
consolidated results of its operations and its cash flows for the thirteen weeks
and twenty-six weeks ended January 24, 2004 and January 25, 2003. The results of
operations for a thirteen-week or a twenty-six 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 as 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 six months
ended January 24, 2004, 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 par value debited to common stock and the remaining
cost of the reacquired shares debited to retained earnings.
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)
Thirteen Weeks Ended Twenty-Six Weeks Ended
January 24, January 25, January 24, January 25,
Shares in thousands 2004 2003 2004 2003
--------------- -------------- -------------- ---------------
Basic weighted average outstanding shares 29,308 29,902 29,253 33,292
Dilutive effect of options outstanding 742 785 662 927
--------------- -------------- -------------- ---------------
Diluted weighted average shares outstanding 30,050 30,687 29,915 34,219
--------------- -------------- -------------- ---------------
Anti-dilutive options excluded from calculations 150 150 337 --
--------------- -------------- -------------- ---------------
4. Comprehensive Income
The Company's short-term investments are classified as available for sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses reported as a component of other comprehensive income. Total
comprehensive income is composed of net earnings and net unrealized gains or
losses on available for sale securities. The following is a reconciliation of
comprehensive income and net earnings as shown on the face of the accompanying
consolidated statements of earnings:
Thirteen Weeks Ended Twenty-Six Weeks Ended
January 24, January 25, January 24, January 25,
Dollars in thousands 2004 2003 2004 2003
--------------- -------------- -------------- ---------------
Net earnings $4,510 $4,668 $11,280 $13,427
Net unrealized gain (loss) on available for sale
securities 22 59 107 (358)
--------------- -------------- -------------- ---------------
Comprehensive income $4,532 $4,727 $11,387 $13,069
--------------- -------------- -------------- ---------------
5. Stock Based Compensation
At January 24, 2004, 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)
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 issued
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 Twenty-six Weeks Ended
(in millions, except per share amounts) January 24, January 25, January 24, January 25,
2004 2003 2004 2003
----------------------------------------------------------------------
Net earnings as reported $4,510 $4,668 $11,280 $13,427
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards net of related tax effects (546) (473) (1,061) (899)
----------------------------------------------------------------------
Pro forma net earnings $3,964 $4,195 $10,219 $12,528
======================================================================
Earnings per share
Basic - as reported $0.15 $0.16 $0.39 $0.40
----------------------------------------------------------------------
Basic - pro forma $0.14 $0.14 $0.35 $0.38
----------------------------------------------------------------------
Diluted - as reported $0.15 $0.15 $0.38 $0.39
----------------------------------------------------------------------
Diluted - pro forma $0.13 $0.14 $0.34 $0.37
----------------------------------------------------------------------
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 Twenty-six Weeks Ended
-------------------- ----------------------
January 24, January 25, January 24, January 25,
2004 2003 2004 2003
----------------------------------------------------------------------
Weighted average risk-free interest rate 3.3% 3.2% 3.3% 3.1%
Weighted average expected life (years) 5.0 5.0 5.0 5.0
Expected volatility of the market price of
the Company's common stock 39.1% 44.5% 39.8% 43.9%
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)
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 principal 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 six months relating to the mortgage was
approximately $.4 and $.9 million for the three and six month periods,
respectively.
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. Plaintiffs
have cross-appealed seeking an increase in the amount of the judgment. 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
pending, resulting in a total litigation accrual of approximately $35.6 million
as of January 24, 2004.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 effect on the
Company's consolidated 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 effect on the Company's consolidated 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 Unaudited Condensed Consolidated
Financial Statements and should be read in conjunction with those statements,
the notes thereto and our Annual Report on Form 10-K for the fiscal year ended
July 26, 2003, filed with the Commission on October 22, 2003.
Results of Operations
The following table sets forth the percentage change in dollars from
last year's comparable periods for the thirteen and twenty-six week periods
ended January 24, 2004, and the percentage of net sales for each component of
the Consolidated Statements of Earnings for each of the periods presented:
Second Quarter Six Months
-------------- ----------
% Change % of Sales % Change % of Sales
---------- ----------
from L/Y T/Y L/Y from L/Y T/Y L/Y
-------- --- --- -------- --- ---
Net Sales 2.2% 2.9%
Cost of Sales, including
Occupancy & Buying 0.2% 62.9% 64.1% 1.8% 63.6% 64.2%
Gross Profit 5.7% 37.1% 35.9% 4.8% 36.4% 35.8%
Selling, General and
Admin. Expenses 4.0% 29.2% 28.7% 6.3% 28.0% 27.1%
Depreciation and Amortization 12.7% 3.7% 3.3% 3.5% 3.4% 3.4%
Operating Income 12.3% 4.2% 3.9% -1.7% 5.0% 5.3%
Interest Income -18.0% 0.5% 0.5% -49.1% 0.4% 0.6%
Interest Expense -- -0.7% -- -- -0.7% --
Other Income -- 0.2% -- -- 0.2% --
Earnings Before Income Taxes -2.6% 4.2% 4.4% -15.7% 4.9% 5.9%
Net Earnings -3.4% 2.6% 2.8% -16.0% 3.1% 3.8%
Net sales for the thirteen weeks ended January 24, 2004 (the "second
quarter") increased by 2.2% to $171.1 million from $167.4 million for the
thirteen weeks ended January 25, 2003 (the "prior period"). Net sales for the
twenty-six weeks ended January 24, 2004 (the "six months") increased by 2.9% to
$363.6 million from $353.3 million versus the twenty-six weeks ended January 25,
2003 ("last year"). The sales increase for both periods came entirely from
recently opened stores, as the Company's same store sales decreased 1% in the
second quarter and were flat for the six months as compared to the prior year's
comparable periods. Same store sales are the primary means most retailers use to
evaluate their sales performance. For the six months same store sales
represented approximately 88 percent of total sales and approximately 87 percent
of the total sales for the second quarter.
The Company's same store sales have been trending higher in the past two
months as both January and February 2004's same store sales increased 5% versus
prior year's comparable periods. The Company believes both of these increases
were the result of its strategy of transitioning spring merchandise into its
stores earlier and having less fall inventory on clearance than the prior year,
providing fresh merchandise to its customers after the holidays. Customers
responded favorably and as a result, sales of new spring merchandise were above
plan.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For both the second quarter and six months merchandise units sold increased
in proportion to the overall sales increase from the prior year's comparable
periods. Merchandise units per transaction decreased slightly in the second
quarter, offset by an increase in sales transactions. The Company believes the
increase in the number of customer transactions in the second quarter was the
result of a combination of more favorable weather conditions and positive
reaction to the Company's merchandising and marketing initiatives.
As of January 24, 2004, the Company's total selling square footage was
approximately 3% higher than January 25, 2003. The increase in store square
footage was primarily due to the opening of new combination Dress Barn/Dress
Barn Woman stores ("combo stores"), which carry both Dress Barn and Dress Barn
Woman merchandise, as well as the conversion of single-format stores into combo
stores. The Company treats combo stores as two store units- one Dress Barn and
the other Dress Barn Woman, while single-format stores are treated as one store
unit. During the six months the Company opened 33 new stores, or 66 store units,
and closed or relocated 31 underperforming stores, or 49 store units. During the
second quarter the Company opened 3 stores, converted 2 stores to combos (for a
total addition of 8 store units), and closed or relocated 24 stores, or 39 store
units. The majority of the Company's store openings have generally occurred in
the first and third fiscal quarters, while the majority of store closings have
generally occurred in the second and fourth fiscal quarters.
As of January 24, 2004, the Company had 774 stores, or 1,310 store units in
operation, (183 Dress Barn stores, 55 Dress Barn Woman stores and 536 combo
stores), versus 761 stores, or 1,266 store units in operation as of January 25,
2003 (199 Dress Barn stores, 57 Dress Barn Woman stores and 505 combo stores).
During the second half of its fiscal year ending July 31, 2004 ("fiscal 2004")
the Company anticipates opening or relocating approximately 50 store units and
closing 30 store units, ending fiscal 2004 with an approximately 3% growth in
net square footage versus the prior year. For fiscal 2005 the Company is
currently projecting net square footage growth in the low single digit
percentage range.
The Company's real estate strategy for the remainder of fiscal 2004 and
fiscal 2005 is to continue opening primarily combo stores, while closing its
under-performing locations. Store expansion is expected to focus on both
expanding in the Company's existing major trading markets and developing and
expanding into new markets.
During the first quarter of fiscal 2004 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 approximately $2 million of additional marketing
expenses in the six months versus last year, though the majority of this
increase was in the first quarter. 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
Gross profit ("GP", which represents net sales less cost of goods sold,
including occupancy and buying costs) for the second quarter increased by 5.7%
to $63.5 million, or 37.1% of net sales, from $60.1 million, or 35.9% of net
sales, for the prior period. For the six months, gross profit increased 4.8%, to
$132.4 million, or 36.4% of net sales, from $126.3 million, or 35.8% of net
sales, for the prior six-month period. The increase in both periods of GP as a
percentage of sales was primarily due to improvements in merchandise margins due
to higher initial margins and less markdowns. GP in the second quarter
additionally benefited from the better than expected sales of spring merchandise
at initial retail prices and the lower level of clearance inventory versus the
prior year. In addition, home office occupancy costs were favorably impacted by
the purchase of the Suffern facility in January 2003 (see note 6), which mostly
offset increased depreciation and interest expense. Increased store occupancy
costs, including higher rents for new stores, increases in real estate taxes,
store expansions and lease renewals were more than offset by the increase in
merchandise margins.
Selling, general and administrative (SG&A) expenses increased by 4.0% to
$50.0 million, or 29.2% of net sales, in the second quarter as compared to $48.1
million, or 28.7% of net sales, in the prior period. For the six months, SG&A
expenses increased by 6.3% to $101.7 million, or 28.0% of net sales, versus
$95.7 million, or 27.1% of net sales, in the comparable six-month period. The
increase in SG&A as a percentage of net sales for both the second quarter and
the six months was primarily due to a lack of sales leverage on SG&A expenses
from the relatively flat same store sales. SG&A expenses increased in both
periods primarily due to increased store operating costs, primarily selling,
benefits and maintenance costs resulting from the increase in the Company's
store base. In addition, the previously mentioned marketing campaign added
approximately $2 million to SG&A costs in the first quarter. The Company
continues to control its costs and enhance productivity, partially offsetting
the increase in store operating costs.
The Company currently anticipates approximately $750,000 to $1 million of
SG&A expenses in the second half of fiscal 2004 due to the costs of compliance
with the internal control attestations mandated by the Sarbanes-Oxley Act of
2002. The Company currently anticipates that most of the expense will be
incurred in the second half of fiscal 2004. The Company is also in the process
of a chain-wide rollout of a new point of sale register system and wide area
communications network. The Company currently estimates this will also result in
additional SG&A expenses during the second half of fiscal 2004, which is
currently anticipated to be approximately $650,000.
Depreciation increased to $6.3 million in the second quarter from $5.6
million in the prior period. For the six months, depreciation expense increased
to $12.5 million from $12.0 million last year. The increase in depreciation
expense reflected higher fixed asset purchases during the last six months and
the additional depreciation from the purchase of the Suffern facility. The
depreciation for the Suffern facility is approximately $2 million per year.
Interest income decreased 18.0% to $0.7 million in the second quarter and
decreased 49.1% to $1.2 million in the six months versus last year's $0.8
million and $2.4 million, respectively. These decreases were primarily due to
the significant reduction in investment rates in the current periods versus last
year. In addition funds available for investment were lower during the first
quarter versus the prior year as a result of the tender offer completed on
October 30, 2002 for approximately $121 million. Funds available for investment
were higher in the second quarter this year versus the prior year due to the
Company's positive cash flow during the prior twelve months.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, which the Company is accruing and adding to its litigation accrual (see
note 8). Unless this litigation is resolved, interest expense for the remaining
two quarters of the Company's fiscal year ending July 30, 2004 ("fiscal 2004")
will approximate the first six month's amount.
Other income represents rental income that Dunnigan Realty, LLC, a wholly
owned consolidated subsidiary of the Company, 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.
During the second quarter the Company increased its effective tax rate to
36.5% from 36.0% as the result of less tax-free interest income, which lowers
the effective tax rate. The Company anticipates the 36.5% rate will remain in
effect for the remainder of fiscal 2004.
Principally as a result of the above factors, net income for the second
quarter was $4.5 million, or 2.6% of net sales, a decrease of 3.4% from $4.7
million, or 2.8% of net sales, in the prior period. Net income for the six
months decreased 16.0% to $11.3 million, or 3.1% of net sales, versus $13.4
million, or 3.8% of net sales, for the prior six-month period.
The Company's earnings per share for the six months were positively
impacted by approximately $.03 per share as a result of the tender offer which
was completed October 30, 2002. The impact on earnings per share for the second
quarter was minimal. The Company purchased 8,000,000 shares of its common stock,
which was approximately 21% of the outstanding shares, at $15 per share. The
Company has not repurchased any additional shares since the completion of the
tender offer.
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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 of the Notes to Consolidated Financial
Statements in the Company's Annual Report to Shareholders, 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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $200,000. The Company
accrues its estimate of probable settlements of 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 unexpected 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 the plaintiffs,
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. Plaintiffs have also appealed, seeking an
increase in the amount of the judgment. 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 (approximately $800,000 per quarter), which the Company is accruing and
adding to its litigation accrual.
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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Net cash provided by operations was $37.7 million for the six months
compared with $32.1 million during last year's comparable period. Cash flows
from operating activities for the period were primarily generated by income from
operations, adjustments for depreciation and amortization and changes in working
capital account balances, specifically the decrease in merchandise inventories,
increase in accrued expenses, offset by decreases in accounts payable, trade and
other assets. An additional source of cash from operations is the sale of gift
certificates that are not redeemed during the same fiscal period. For the six
months this resulted in additional cash flow from operations of $2.7 million
versus $2.1 million in the prior period. Approximately 50% of the Company's
annual sales of gift certificates are during the holiday season, the weeks
between Thanksgiving and Christmas. During this year's holiday season, sales of
gift certificates increased approximately 15% from the prior year's comparable
period. Sales of gift certificates are recorded as a liability until they are
redeemed.
Investing activities consist primary of two components: capital
expenditures; and purchases, sales and maturities of marketable securities and
investments. During the six months, the Company used $25.8 million in its
investing activities from internally generated funds, consisting of $9.4 million
in capital expenditures (versus $7.9 million in the prior period) and $16.9
million of net purchases of marketable securities and investments. In the prior
period the Company sold a net of $39.8 million of marketable securities and
investments, as additional funding was required for the tender offer (see note 2
for additional information).
For the six months, the Company spent $9.4 million on capital expenditures,
including approximately $6.1 million for leasehold improvements, net of landlord
allowances, and fixtures and equipment principally for new store facilities,
approximately $2.0 million of improvements to existing stores, and $1.3 million
of improvements to its distribution and corporate facilities and information
systems. The increase in capital expenditures from the comparable prior period
primarily reflects an increase in expenditures for new stores and information
systems.
Cash provided by financing activities was $1.4 million in the six months
versus net cash used for investing activities of $116.7 million last year. This
year's amount consists of $1.8 million in proceeds from the exercise of stock
options; offset by $0.5 million of principal payments on the Suffern facility
mortgage. Last year the Company completed its tender offer on October 30, 2002,
using approximately $121 million to repurchase outstanding shares of its common
stock.
The Company plans to spend approximately $21 million on capital
expenditures during the last six months of fiscal 2004, including approximately
$10 million for the chain-wide point of sale system rollout, primarily in the
fourth quarter of fiscal 2004. This compares to approximately $10 million of
capital expenditures in the second half of fiscal 2003, not including purchase
of the Suffern facility (see Note 6).
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.
The Company does not have any off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities. In the normal course
of its business, the Company enters into operating leases for its store
locations and utilizes letters of credit principally for the importation of
merchandise. The Company does not have any undisclosed material transactions or
commitments involving related persons or entities.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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
The Chief Executive Officer and Chief Financial Officer of the Company have
conducted an evaluation of the effectiveness of the Company's current disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) 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.
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 as of the end of the period covered by this quarterly
report. There have been no changes in internal control over financial reporting
that has materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting, subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
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 was included as Exhibit
14 to the Company's Annual Report on Form 10-K for its fiscal year ended July
26, 2003. 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 - 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 consolidated financial condition, results of its
operations or cash flows.
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 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
January 24, 2004.
Date Filed Description
November 19, 2003 Release of First Quarter 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)