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 April 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 29,625,179 shares on June 2, 2004
Page 1 of 21
THE DRESS BARN, INC.
FORM 10-Q
QUARTER ENDED APRIL 24, 2004
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
April 24, 2004 (unaudited)
and July 26, 2003 I-3
Condensed Consolidated Statements of Earnings
(unaudited) for the Thirteen weeks ended
April 24, 2004 and April 26, 2003 I-4
Condensed Consolidated Statements of Earnings
(unaudited) for the Thirty-nine weeks ended
April 24, 2004 and April 26, 2003 I-5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Thirty-nine weeks ended
April 24, 2004 and April 26, 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-18
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-19
Item 4 Controls and Procedures I-19
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings I-20
Item 6. Exhibits and Reports on Form 8-K I-21
Signatures I-21
Item 1 - FINANCIAL STATEMENTS
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Amounts in thousands, except share data
April 24, July 26,
2004 2003
---------------------- -----------------
ASSETS
Current Assets: (unaudited)
Cash and cash equivalents $66,248 $37,551
Marketable securities and investments 127,103 113,897
Merchandise inventories 112,636 110,348
Prepaid expenses and other 6,586 9,112
---------------------- -----------------
Total Current Assets 312,573 270,908
---------------------- -----------------
Property and Equipment:
Land and buildings 45,391 45,391
Leasehold improvements 64,083 61,014
Fixtures and equipment 177,754 163,407
Computer software 22,108 19,369
Automotive equipment 746 756
---------------------- -----------------
310,082 289,937
Less accumulated depreciation
and amortization 173,525 154,033
---------------------- -----------------
136,557 135,904
---------------------- -----------------
Deferred Income Taxes 8,620 11,255
---------------------- -----------------
Other Assets 7,464 4,896
---------------------- -----------------
TOTAL ASSETS $465,214 $422,963
====================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $83,751 $ 65,090
Accrued salaries, wages and related expenses 20,422 18,882
Litigation accrual (see note 8) 35,911 35,592
Other accrued expenses 32,254 28,134
Customer credits 8,792 7,284
Income taxes payable 4,197 7,088
Current portion of long-term debt 1,019 979
---------------------- -----------------
Total Current Liabilities 186,346 163,049
---------------------- -----------------
Long-Term Debt (see note 7) 32,252 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- 29,606,679 and
29,169,559 shares, respectively 1,480 1,458
Additional paid-in capital 61,733 58,200
Retained earnings 183,966 167,297
Accumulated other comprehensive (loss) (563) (62)
---------------------- -----------------
246,616 226,893
---------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $465,214 $422,963
====================== =================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - Third Quarter (unaudited)
Amounts in thousands, except per share amounts
Thirteen Weeks Ended
------------------------------------------
April 24, April 26,
2004 2003
------------------------------------------
Net sales $183,331 $165,692
Cost of sales, including
Occupancy and buying costs 119,080 110,354
------------------------------------------
Gross profit 64,251 55,338
Selling, general and
administrative expenses 50,388 46,973
Depreciation and amortization 4,963 5,193
------------------------------------------
Operating income 8,900 3,172
Interest income 553 507
Interest expense (1,347) -
Other income 381 398
------------------------------------------
Earnings before provision for
income taxes 8,487 4,077
Provision for income taxes 3,098 1,468
------------------------------------------
Net earnings $5,389 $2,609
==========================================
Earnings per share:
Basic $0.18 $0.09
==========================================
Diluted $0.18 $0.09
==========================================
Weighted average shares outstanding:
Basic 29,522 29,125
==========================================
Diluted 30,370 29,847
==========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - Nine Months (unaudited) Amounts
in thousands, except per share amounts
Thirty-Nine Weeks Ended
-----------------------------------------
April 24, April 26,
2004 2003
-----------------------------------------
Net sales $546,928 $518,990
Cost of sales, including
Occupancy and buying costs 350,237 337,325
-----------------------------------------
Gross profit 196,691 181,665
Selling, general and
administrative expenses 152,102 142,671
Depreciation and amortization 17,415 17,225
-----------------------------------------
Operating income 27,174 21,769
Interest income 1,767 2,891
Interest expense (3,918) -
Other income 1,144 398
-----------------------------------------
Earnings before provision for
income taxes 26,167 25,058
Provision for income taxes 9,498 9,022
-----------------------------------------
Net earnings $16,669 $16,036
=========================================
Earnings per share:
Basic $0.57 $0.50
=========================================
Diluted $0.56 $0.49
=========================================
Weighted average shares outstanding:
Basic 29,343 31,903
=========================================
Diluted 30,031 32,656
=========================================
See notes to unaudited condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Dollars in thousands
Thirty-Nine Weeks Ended
---------------------------------
April 24, April 26,
2004 2003
---------------------------------
Operating Activities:
Net earnings $16,669 $16,036
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 17,415 17,225
Change in deferred income taxes 2,635 71
Deferred compensation 67 -
Changes in assets and liabilities:
Increase in merchandise inventories (2,288) (5,406)
Decrease in prepaid expenses and other 2,526 360
Increase in other assets (2,568) (909)
Increase in accounts payable- trade 18,661 819
Increase in accrued salaries, wages and related expenses 1,540 780
Increase in other accrued expenses 4,120 3,136
Increase (decrease) in litigation accrual 319 (362)
Increase in customer credits 1,508 1,014
(Decrease) in income taxes payable (2,891) (1,052)
---------------------------------
Total adjustments 41,044 15,676
---------------------------------
Net cash provided by operating activities 57,713 31,712
---------------------------------
Investing Activities:
Purchases of property and equipment - net of allowances (18,068) (60,348)
Purchases of marketable securities and investments (70,884) (22,434)
Sales and maturities of marketable securities and investments 57,177 128,636
---------------------------------
Net cash (used in) provided by investing activities (31,775) 45,854
---------------------------------
Financing Activities:
Purchase of treasury stock - (120,818)
Proceeds from Employee Stock Purchase Plan 62 66
Payment for long-term debt (729) -
Proceeds from stock options exercised 3,426 4,216
---------------------------------
Net cash provided by (used in) financing activities 2,759 (116,536)
---------------------------------
Net increase (decrease) in cash and cash equivalents 28,697 (38,970)
Cash and cash equivalents- beginning of period 37,551 83,690
---------------------------------
Cash and cash equivalents- end of period 66,248 44,720
=================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $9,858 $9,712
---------------------------------
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 April 24, 2004 and July 26, 2003, the
consolidated results of its operations and its cash flows for the thirteen weeks
and thirty-nine weeks ended April 24, 2004 and April 26, 2003. The results of
operations for a thirteen-week or a thirty-nine 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 2,342,700 shares at an
aggregate purchase price of approximately $25.1 million. During the nine months
ended April 24, 2004, no shares were repurchased under this authorization.
Between April 25, 2004 and the date of this filing the Company repurchased
19,700 shares at a cost of approximately $312,600.
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 DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
April 24, April 26, April 24, April 26,
Shares in thousands 2004 2003 2004 2003
--------------- -------------- -------------- ---------------
Basic weighted average outstanding shares 29,522 29,125 29,343 31,903
Dilutive effect of options outstanding 848 722 688 753
--------------- -------------- -------------- ---------------
Diluted weighted average shares outstanding 30,370 29,847 30,031 32,656
--------------- -------------- -------------- ---------------
Anti-dilutive options excluded from calculations - 150 152 150
--------------- -------------- -------------- ---------------
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 Thirty-Nine Weeks Ended
-------------------- -----------------------
April 24, April 26, April 24, April 26,
Dollars in thousands 2004 2003 2004 2003
--------------- -------------- -------------- ---------------
Net earnings $5,389 $2,609 $16,669 $16,036
Net unrealized gain (loss) on available for sale
securities (608) (85) (501) (443)
--------------- -------------- -------------- ---------------
Comprehensive income $4,781 $2,524 $16,168 $15,593
--------------- -------------- -------------- ---------------
5. Stock Based Compensation
At April 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 Thirty-nine Weeks Ended
-------------------- -----------------------
(in millions, except per share amounts) April 24, April 26, April 24, April 26,
2004 2003 2004 2003
----------------------------------------------------------------------
Net earnings as reported $5,389 $2,609 $16,669 $16,036
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards net of related tax effects (557) (473) (1,618) (1,372)
----------------------------------------------------------------------
Pro forma net earnings $4,832 $2,136 $15,051 $14,664
======================================================================
Earnings per share
Basic - as reported $0.18 $0.09 $0.57 $0.50
----------------------------------------------------------------------
Basic - pro forma $0.16 $0.07 $0.51 $0.46
----------------------------------------------------------------------
Diluted - as reported $0.18 $0.09 $0.56 $0.49
----------------------------------------------------------------------
Diluted - pro forma $0.16 $0.07 $0.50 $0.45
----------------------------------------------------------------------
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 Thirty-nine Weeks Ended
-------------------- -----------------------
April 24, April 26, April 24, April 26,
2004 2003 2004 2003
----------------------------------------------------------------------
Weighted average risk-free interest rate 2.7% 3.0% 3.3% 3.0%
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 38.3% 43.2% 39.1% 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)
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 relating to the mortgage was approximately $.4
and $1.3 million for the three and nine month periods ended April 24, 2004,
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 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 against
the Company. 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 modified or reversed, the Company will
adjust its litigation charge accordingly. Interest accrues on the unpaid
judgment at the statutory rate of 10% annually which the Company has provided
for at the rate of approximately $800,000 each quarter in its litigation
accrual. The Company has also accrued for other pending litigation in its
litigation accrual.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Subsequent to April 24, 2004, the Company deposited in an escrow account
from its operating funds $38.6 million pending the outcome of the appeal
referred to above. The amount deposited includes interest on the unpaid judgment
through December 31, 2004. After this funding, the Company's cash and
investments were approximately $165 million. This escrow will terminate when a
final non-appealable judgment is entered. At that time, the amount of the
judgment, if any, will be paid to the plaintiff with any balance returned to the
Company.
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
I - 12
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 thirty-nine week periods ended
April 24, 2004, and the percentage of net sales for each component of the
Consolidated Statements of Earnings for each of the periods presented:
Third Quarter Nine Months
------------- -----------
% Change % of Sales % Change % of Sales
---------- ----------
from L/Y T/Y L/Y from L/Y T/Y L/Y
-------- --- --- -------- --- ---
Net Sales 10.6% 5.4%
Cost of Sales, including
Occupancy & Buying 7.9% 65.0% 66.6% 3.8% 64.0% 65.0%
Gross Profit 16.1% 35.0% 33.4% 8.3% 36.0% 35.0%
Selling, General and
Admin. Expenses 7.3% 27.5% 28.3% 6.6% 27.8% 27.5%
Depreciation and Amortization -4.4% 2.6% 3.2% 1.1% 3.2% 3.3%
Operating Income 180.6% 4.9% 1.9% 24.8% 5.0% 4.2%
Interest Income 9.1% 0.2% 0.4% -38.9% 0.3% 0.5%
Interest Expense - -0.7% - - -0.7% -
Other Income -4.3% 0.2% 0.2% 187.4% 0.2% 0.1%
Earnings Before Income Taxes 108.2% 4.6% 2.5% 4.4% 4.8% 4.8%
Net Earnings 106.6% 2.9% 1.6% 3.9% 3.0% 3.1%
Net sales for the thirteen weeks ended April 24, 2004 (the "third quarter")
increased by 10.6% to $183.3 million from $165.7 million for the thirteen weeks
ended April 26, 2003 (the "prior period"). Net sales for the thirty-nine weeks
ended April 24, 2004 (the "nine months") increased by 5.4% to $546.9 million
from $519.0 million versus the thirty-nine weeks ended April 26 2003 ("last
year"). The sales increase for the third quarter was equally split between sales
of recently opened stores (compared to sales of stores closed since the
beginning of the prior period) and the 7% increase in same store sales versus
the prior period. For the nine months the majority of the sales increase came
from sales of recently opened stores, as the Company's same store sales
increased 2% for the nine 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. Same store sales represented approximately 87% of total
sales for the nine months and approximately 86% of the total sales for the third
quarter.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's same store sales turned positive in January 2004 and have
remained positive for the entire third quarter. That trend continued into May
2004 with same store sales increasing 4% versus the prior year's comparable
period. The Company believes these increases were due to an improving economy,
the less harsh winter in 2004 compared to 2003 and greater customer acceptance
of the Company's more updated and fashionable merchandise assortment and
intensified marketing and store presentation efforts. In addition, the Company
transitioned its spring merchandise into its stores earlier and had less fall
inventory on clearance than last year.
For both the third quarter and nine months merchandise units sold increased
in proportion to the overall sales increase from last year's comparable periods.
Merchandise units per transaction increased in the third quarter, combined with
an overall increase in sales transactions. The Company believes the increase in
the number of customer transactions in the third quarter was the result of a
combination of more favorable weather conditions and positive reaction to the
Company's merchandising and marketing initiatives. The increase in units per
transaction was partially as a result of increased jewelry sales.
As of April 24, 2004, the Company's total selling square footage was
approximately 3% higher than April 26, 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. 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 nine months the Company opened 56 new stores, or 106
store units, and closed or relocated 35 underperforming stores, or 53 store
units. During the third quarter the Company opened 23 stores, converted 1 store
to a combo, and closed or relocated 4 stores, or 7 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 April 24, 2004, the Company had 793 stores, or 1,346 store units in
operation, (186 Dress Barn stores, 54 Dress Barn Woman stores and 553 combo
stores), versus 777 stores, or 1,296 store units in operation as of April 26,
2003 (200 Dress Barn stores, 58 Dress Barn Woman stores and 519 combo stores).
During the remainder of its fiscal year ending July 31, 2004 ("fiscal 2004") the
Company anticipates opening three additional store units and closing
approximately 25 store units, ending fiscal 2004 with an approximately 2% growth
in net square footage versus the prior year end. 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 trading markets and developing and expanding
into new markets.
During the third quarter the Company continued its comprehensive national
brand image campaign initiated in the first quarter of fiscal 2004 (the
"marketing campaign") to strengthen brand awareness as well as bring new
customers into its stores and increase its customer traffic. The marketing
campaign features full-page ads in national lifestyle magazines, new in-store
signage and collateral material. The marketing campaign resulted in
approximately $3 million of additional marketing expenses in the nine months
versus last year, with virtually all of this increase incurred in the first and
third quarters.
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 third quarter increased by 16.1%
to $64.3 million, or 35.0% of net sales, from $55.3 million, or 33.4% of net
sales, for the prior period. For the nine months, gross profit increased 8.3%,
to $196.7 million, or 36.0% of net sales, from $181.7 million, or 35.0% of net
sales, last year. 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 and third quarter additionally
benefited from the better than expected sales of spring merchandise at initial
retail prices and the lower level of clearance inventory versus last year. In
addition, home office occupancy costs were favorably impacted by the purchase of
the Suffern facility in January 2003 (see note 6), which generally 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 7.3% to
$50.4 million, or 27.5% of net sales, in the third quarter as compared to $47.0
million, or 28.3% of net sales, in the prior period. For the nine months, SG&A
expenses increased by 6.6% to $152.1 million, or 27.8% of net sales, versus
$142.7 million, or 27.5% of net sales, in the comparable nine-month period. 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. SG&A expenses for the third quarter also
included additional costs of compliance with the internal control attestations
mandated by the Sarbanes-Oxley Act of 2002. In addition, the previously
mentioned marketing campaign added approximately $2 million to SG&A costs in the
first quarter and approximately $1 million in the third quarter. The decrease in
SG&A as a percentage of net sales for the third quarter was primarily due to
sales leverage on SG&A expenses from the 7% increase in same store sales. For
the nine-month period, SG&A expenses as a percentage of sales were slightly
higher as the same store sales increase of 2% did not provide sufficient
leverage to offset the increase in SG&A expenses. The Company continues to
control its costs and enhance productivity, partially offsetting the increase in
store operating costs.
The Company currently anticipates an additional $500,000 of SG&A expenses
in the fourth quarter of fiscal 2004 and the first quarter of fiscal 2005 due to
the costs of compliance with the internal control attestations mandated by the
Sarbanes-Oxley Act of 2002. The Company currently anticipates an additional
$500,000 of SGA expenses during the same periods for the chain-wide rollout of a
new point of sale register system and wide area communications network.
Depreciation expense decreased slightly to $5.0 million in the third
quarter from $5.2 million in the prior period due to the fully depreciated
investment in our headquarters and DC facility which we originally occupied ten
years ago. For the nine months, depreciation expense increased to $17.4 million
from $17.2 million last year. The increase in depreciation expense reflected
higher fixed asset purchases during the last nine months and the additional
depreciation from the purchase of the Suffern facility. The depreciation for the
Suffern facility is approximately $2 million per year. Depreciation for the
fourth quarter is estimated to be approximately $5.5 million.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest income increased 9.1% to $0.6 million in the third quarter and
decreased 38.9% to $1.8 million in the nine months versus last year's $0.5
million and $2.9 million, respectively. The increase in the third quarter was
primarily due to more funds available for investment versus the prior period due
to the Company's positive cash flow during the prior twelve months. Investment
rates were significantly lower for both the third quarter and nine month periods
versus the prior year's comparable periods.
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).
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.
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. 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 third
quarter was $5.4 million, or 2.9% of net sales, an increase of 106.6% from $2.6
million, or 1.6% of net sales, in the prior period. Net income for the nine
months increased 3.9% to $16.7 million, or 3.0% of net sales, versus $16.0
million, or 3.1% of net sales, last year.
The Company's earnings per share for the nine months were positively
impacted by approximately $.03 per share as a result of the tender offer which
was completed October 30, 2002. The Company purchased 8,000,000 shares of its
common stock under the tender offer, which was approximately 21% of the
outstanding shares, at $15 per share.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in Note 1 of the
Notes to Consolidated Financial Statements in the Company's Annual Report to
Shareholders. Management's discussion and analysis of the Company's financial
condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, income taxes and related disclosures of contingent assets and
liabilities. On an ongoing basis, the Company evaluates estimates, including
those related primarily to inventories, investments, long-lived assets, income
taxes and claims and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Refer to the Note 1 to the
financial statements in the Company's Annual Report on Form 10-K for the fiscal
year ended July 26, 2003, filed with the Commission on October 22, 2003.to for a
discussion of the Company's critical accounting policies and estimates.
Liquidity and Capital Resources
Net cash provided by operations was $57.7 million for the nine months
compared with $31.7 million during last year's comparable period. Cash flows
from operating activities for the period were primarily generated by income from
operations, adjustments for deferred taxes, depreciation and amortization and
changes in working capital account balances, specifically the increase in
accounts payable, trade due to the timing of vendor payments and an increase in
accrued expenses, offset by the seasonal increase in merchandise inventories and
an increase in 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 nine months this resulted in additional cash flow from operations of
$1.5 million versus $1.0 million last year. 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 primarily of two components: capital
expenditures; and purchases, sales and maturities of marketable securities and
investments. During the nine months, the Company used $31.8 million in its
investing activities from internally generated funds, consisting of $18.1
million in capital expenditures (versus $60.3 million last year which included
$45.3 million for the purchase of the Suffern facility (see Note 6)) and $13.7
million of net purchases of marketable securities and investments. In last
year's nine months the Company sold a net of $106.2 million of marketable
securities and investments, as additional funding was required for the tender
offer (see note 2 for additional information) and the purchase of the Suffern
facility.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine months, the Company spent $18.1 million on capital
expenditures, including approximately $11.9 million for leasehold improvements,
net of landlord allowances, POS registers and related programming, fixtures and
equipment principally for new store facilities, approximately $4.2 million for
improvements to existing stores, and $2.0 million for improvements to its
distribution and corporate facilities and information systems. The increase in
capital expenditures from last year's comparable period was $15.0 million (not
including the purchase of the Suffern facility),which primarily reflects an
increase in information system expenditures, both for the stores' POS system and
corporate infrastructure.
Cash provided by financing activities was $2.8 million in the nine months
versus net cash used for investing activities of $116.5 million last year. This
year's amount consists of $3.4 million in proceeds from the exercise of stock
options, offset by $0.7 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 $12 million on capital
expenditures during the fourth quarter of fiscal 2004, primarily for the
chain-wide point of sale system rollout. This compares to approximately $3
million of capital expenditures in the fourth quarter of fiscal 2003.
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.
Subsequent to the end of the third quarter, as required as part of an
outstanding legal judgment (see note 8) the Company deposited $38.6 million in
an escrow account, utilizing its operating funds. After this funding, the
Company's cash and investments were approximately $165 million.
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.
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.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 be readily
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 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 executive 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 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.
Subsequent to April 24, 2004, the Company deposited in an escrow account
$38.6 million, pending the outcome of the appeal. The amount deposited includes
interest on the unpaid judgment through December 31, 2004. The Company has
agreed each calendar quarter (beginning January 1, 2005) to fund to the escrow
account $800,000 representing quarterly interest on the unpaid judgment, less
the escrow account's investment income during the prior calendar quarter, until
a final non-appealable judgment is entered by the appropriate court. At that
time the amount of the judgment, if any, will be paid to the plaintiff with any
balance returned to the Company.
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 of this lawsuit to have a
material adverse effect on the Company's consolidated financial condition,
results of its operations or of its 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
April 24, 2004.
Date Filed Description
February 11, 2004 Release of Second 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)