SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 30, 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 [ ] No [ x].
Indicate whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act) 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.
29,798,887 shares of common stock ($0.05 par value) were outstanding on November
30, 2004.
Page 1 of 22
THE DRESS BARN, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED OCTOBER 30, 2004
TABLE OF CONTENTS
Page
Number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
October 30, 2004
and July 31, 2004 I-3
Condensed Consolidated Statements of Earnings
for the Thirteen weeks ended
October 30, 2004 and October 25, 2003 I-4
Condensed Consolidated Statements of Cash Flows
for the Thirteen weeks ended
October 30, 2004 and October 25, 2003 I-5
Notes to Unaudited Condensed Consolidated
Financial Statement I-6 through I-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations I-11 through I-14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk I-15
Item 4 Controls and Procedures I-15
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings I-16
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds I-16
Item 4. Submissions of Matters to a Vote
of Security Holders I-17
Item 6. Exhibits and Reports on Form 8-K I-17
Signatures I-18
Item 1 - FINANCIAL STATEMENTS
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Amounts in thousands, except share data October 30, July 31,
2004 2004
---------------------- -----------------
ASSETS:
Current Assets:
Cash and cash equivalents $18,423 $15,141
Restricted cash and investments 38,775 38,661
Marketable securities and investments 126,660 122,700
Merchandise inventories 112,183 116,912
Deferred tax asset 10,583 10,583
Prepaid expenses and other 8,325 8,898
---------------------- -----------------
Total Current Assets 314,949 312,895
---------------------- -----------------
Property and Equipment:
Land and buildings 45,391 45,391
Leasehold improvements 61,340 60,978
Fixtures and equipment 175,163 173,466
Computer software 24,307 23,302
---------------------- -----------------
306,201 303,137
Less accumulated depreciation
and amortization 167,288 162,346
---------------------- -----------------
138,913 140,791
---------------------- -----------------
Other Assets 8,031 8,149
---------------------- -----------------
TOTAL ASSETS $461,893 $461,835
====================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $56,270 $ 66,776
Accrued salaries, wages and related expenses 22,024 21,349
Litigation accrual (see note 6) 36,933 36,128
Other accrued expenses 30,083 27,089
Customer credits 9,313 8,970
Income taxes payable 4,152 5,548
Current portion of long-term debt 1,046 1,033
---------------------- -----------------
Total Current Liabilities 159,821 166,893
---------------------- -----------------
Long-Term Debt (see note 6) 31,722 31,988
---------------------- -----------------
Long-Term Deferred Tax Liability 1,969 1,315
---------------------- -----------------
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- 29,673,087 and
29,256,976 shares, respectively 1,490 1,482
Additional paid-in capital 64,963 63,554
Retained earnings 202,159 197,438
Treasury stock, to be retired -- (313)
Accumulated other comprehensive loss (231) (522)
---------------------- -----------------
268,381 261,639
---------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $461,893 $461,835
====================== =================
See notes to condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings - First Quarter (unaudited)
Amounts in thousands, except per share amounts
Thirteen Weeks Ended
------------------------------------------
October 30, October 25,
2004 2003
------------------------------------------
Net sales $197,116 $192,544
Cost of sales, including
occupancy and buying costs 125,446 123,639
------------------------------------------
Gross profit 71,670 68,905
Selling, general and
administrative expenses 54,650 51,707
Depreciation and amortization 6,441 6,181
------------------------------------------
Operating income 10,579 11,017
Interest income 722 532
Interest expense (1,260) (1,352)
Other income 381 381
------------------------------------------
Earnings before provision for
income taxes 10,422 10,578
Provision for income taxes 3,804 3,808
------------------------------------------
Net earnings $6,618 $6,770
==========================================
Earnings per share:
Basic $0.22 $0.23
==========================================
Diluted $0.22 $0.23
==========================================
Weighted average shares outstanding:
Basic 29,578 29,198
==========================================
Diluted 30,356 29,847
==========================================
See notes to condensed consolidated financial statements
The Dress Barn, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
Amounts in thousands
Thirteen Weeks Ended
---------------------------------
October 30, October 25,
2004 2003
---------------------------------
Operating Activities:
Net earnings $6,618 $6,770
---------------------------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and
equipment 5,776 5,431
Deferred income tax expense 654 900
Loss related to impairment and closed store assets 665 750
Deferred compensation 106 --
Amortization of debt issuance costs 36 38
Increase (decrease) in cash surrender value of life insurance 51 (67)
Changes in assets and liabilities:
Increase in escrow funds (114) --
Decrease (increase) in merchandise inventories 4,729 (3,239)
Decrease in prepaid expenses and other 573 2,611
Decrease in other assets 30 45
(Decrease) increase in accounts payable- trade (10,506) 13,053
Increase in accrued salaries, wages and related expenses 675 580
Increase in litigation accrual 805 507
Increase in accrued expenses 2,994 5,441
Increase in customer credits 343 30
(Decrease) increase in income taxes payable (1,396) 1,295
---------------------------------
Total adjustments 5,421 27,375
---------------------------------
Net cash provided by operating activities 12,039 34,145
---------------------------------
Investing Activities:
Purchases of property and equipment, net (4,562) (5,323)
Sales and maturities of marketable securities and investments 1,100 29,079
Purchases of marketable securities and investments (4,769) (49,093)
---------------------------------
Net cash used in investing activities (8,231) (25,337)
---------------------------------
Financing Activities:
Principal payments of long-term debt (253) (240)
Proceeds from Employee Stock Purchase Plan 20 21
Proceeds from stock options exercised 1,291 702
Payment of debt issuance costs -- (90)
Purchase of treasury stock (1,584) --
---------------------------------
Net cash (used) provided by financing activities (526) 393
---------------------------------
Net increase in cash and cash equivalents 3,282 9,201
Cash and cash equivalents- beginning of year 15,141 37,551
---------------------------------
Cash and cash equivalents- end of year $18,423 $46,752
=================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $4,538 $1,708
=================================
Cash paid for interest $438 $443
=================================
See notes to condensed consolidated financial statements
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
The condensed consolidated financial statements are unaudited but, in the
opinion of management, contain all adjustments (which are of a normal recurring
nature) necessary to present fairly the financial position, results of
operations and cash flow for the periods presented. All significant intercompany
accounts and transactions have been eliminated. The results of operations for
the thirteen week period ended October 30, 2004 shown in the report are not
necessarily indicative of results expected for the fiscal year.
The July 31, 2004 condensed consolidated balance sheet amounts have been
derived from the previously audited Consolidated Balance Sheets of Dress Barn,
Inc. (the "Company").
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.
Significant accounting policies and other disclosures necessary for
complete financial statements in conformity with accounting principles generally
accepted in the United States of America have been omitted since such items are
reflected in the Company's audited financial statements and related notes
thereto. Accordingly, these condensed consolidated financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's July 31, 2004 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.
2. 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:
Thirteen Weeks Ended
October 30, October 25,
(Shares in thousands) 2004 2003
--------------- -----------------
Basic weighted average outstanding shares 29,578 29,198
Dilutive effect of options outstanding 778 649
--------------- -----------------
Diluted weighted average shares outstanding 30,356 29,847
--------------- -----------------
Anti-dilutive options excluded from calculations -- 663
--------------- -----------------
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Stock Based Compensation
At October 30, 2004, the Company had 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.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the option grant dates for awards in accordance with
the accounting provisions of SFAS No. 148 (which does not apply to awards prior
to fiscal 1996), the Company's net earnings and earnings per share would have
been reduced to the following pro forma amounts:
Thirteen Weeks Ended
(in millions, except per share amounts) October 30, October 25,
2004 2003
-------------------------------
Net earnings as reported $6,618 $6,770
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
-------------------------------
for all awards net of related tax effects (515) (519)
-------------------------------
Pro forma net earnings $6,103 $6,251
===============================
Earnings per share
Basic - as reported $0.22 $0.23
-------------------------------
Basic - pro forma $0.21 $0.21
-------------------------------
Diluted - as reported $0.22 $0.23
-------------------------------
Diluted - pro forma $0.20 $0.21
-------------------------------
The fair values of the options granted under the Company's fixed stock
option plans were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
Thirteen Weeks Ended
October 30, October 25,
2004 2003
-------------------------------
Dividend Yield (1) 0.0%
Weighted average risk-free interest rate (1) 3.2%
Weighted average expected life (years) (1) 5.0
Expected volatility of the market price of the Company's common stock (1) 41.3%
(1) There were no option grants during the fiscal quarter ended October 30,
2004.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Comprehensive Income
The Company's short-term investments are classified as available for sale
securities, and therefore, are carried at fair value, with unrealized gains and
losses reported as a component of other comprehensive income. Total
comprehensive income is composed of net earnings and net unrealized gains or
losses on available for sale securities. The following is a reconciliation of
comprehensive income and net earnings as shown on the face of the accompanying
consolidated statements of earnings:
Thirteen Weeks Ended
October 30, October 25,
(Dollars in thousands) 2004 2003
--------------- -----------------
Net earnings $6,618 $6,770
Net unrealized gain on available for sale securities 291 85
--------------- -----------------
Comprehensive income $6,909 $6,855
--------------- -----------------
5. 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 6). 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.
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.
6. Long-Term Debt
In connection with the purchase of the Suffern facility, Dunnigan Realty,
LLC, in July 2003, borrowed $34 million under a fixed rate mortgage loan. The
Dunnigan Realty, LLC mortgage loan (the "mortgage") is collateralized by a
mortgage lien on the Suffern facility, of which the major portion is the
Company's corporate offices and distribution center. Payments of principal and
interest on the mortgage, a 20-year fully amortizing loan with a fixed interest
rate of 5.33%, are due monthly through July 2023. In connection with the
mortgage, the Company paid approximately $1.7 million in debt issuance costs.
These costs have been capitalized and are being amortized over the life of the
mortgage. Scheduled maturities of the mortgage in each of the next five fiscal
years are as follows: 2005-$1.0 million; 2006-$1.1 million; 2007-$1.1 million;
2008-$1.2 million; 2009-$1.4 million and 2010 and thereafter- $27.4 million.
Interest expense for the first quarter relating to the mortgage was
approximately $424,000.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. Litigation
The Company is involved in various 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 vigorously
pursued an appeal. Plaintiffs cross-appealed seeking an increase in the amount
of the judgment. The parties are awaiting the decision of the Supreme Court of
the State of Connecticut. If upon appeal the judgment is 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. In the fourth quarter of fiscal 2004, as required as
part of the outstanding legal judgment, the Company deposited $38.6 million in
an escrow account, utilizing its operating funds. The escrow account is an
interest bearing account and is included in restricted cash and investments on
the Company's balance sheet.
8. Recent Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force Issue No. 03-1, or EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 provides guidance for identifying impaired investments and new disclosure
requirements for investments that are deemed to be temporarily impaired. On
September 30, 2004, the FASB issued a final staff position EITF Issue 03-1-1
that delays the effective date for the measurement and recognition guidance
included in paragraphs 10 through 20 of EITF 03-1. Quantitative and qualitative
disclosures required by EITF 03-1 remain effective for our fiscal year ending
2005. We do not believe the impact of adoption of this EITF consensus will be
significant to our overall results of operations or financial position.
THE DRESS BARN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In September 2004, the Emerging Issues Task Force reached a final consensus
on EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share" ("EITF 04-8"), to change the existing accounting for
convertible debt within the dilutive earnings per share calculation. The EITF
concluded the common stock underlying contingent convertible debt instruments
should be included in diluted net income per share computations using the
if-converted method regardless of whether the market price trigger or other
contingent feature has been met. The EITF concluded that this new treatment
should be applied retroactively, with the result that issuers of securities
would be required to restate previously issued diluted earnings per share. In
October 2004, The FASB approved EITF 04-8 and established an implementation date
of December 15, 2004. The Company is currently evaluating the impact of the
adoption of this EITF.
9. 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 2,442,700 shares at an
aggregate purchase price of approximately $26.7 million. During the three months
ended October 30, 2004, 100,000 shares were repurchased under this
authorization.
On October 30, 2002 the Company completed a "Dutch Auction" Tender Offer
(the "Tender Offer"), resulting in the Company's purchase of 8 million shares of
its common stock at $15 per share for a total cost of approximately $121 million
including transaction costs
Treasury (Reacquired) shares are retired and treated as authorized but
unissued shares, with the cost of the reacquired shares debited to retained
earnings and the par value debited to common stock.
10. Subsequent Event - Pending Acquisition
On November 16, 2004, The Dress Barn, Inc. (the "Company") entered into a
Stock Purchase Agreement (the "Agreement") among the Company, Maurices
Incorporated, a Delaware corporation (the "Maurices"), and American Retail
Group, Inc., a Delaware corporation (the "Seller"). Per the terms of the
Agreement, the Seller agreed to sell to the Company, and the Company agreed to
purchase, on the Closing Date, all of the outstanding shares of Maurices for a
purchase price of $320 million, subject to certain adjustments. The transaction
is subject to the satisfaction of certain conditions precedent set forth in the
Agreement, including, without limitation, the receipt of required consents and
the expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Maurices is a specialty retailer that sells fashion apparel and accessories
to 17-34 year old women and men, operating 470 on December 1, 2004 stores in 38
states.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations are based upon the Company's Condensed Consolidated Financial
Statements and should be read in conjunction with those statements, the notes
thereto and our Annual Report on Form 10-K filed with the Commission.
Subsequent Event - Pending Acquisition
On November 16, 2004 the Company entered into a Stock Purchase Agreement to
acquire Maurices Incorporated ("Maurices") for $320 million subject to certain
adjustments. The Company plans to finance the transaction through a combination
of cash on hand and new credit facilities. The acquisition, which is subject to
certain conditions, is scheduled to close in January 2005. Additional
information concerning the financing of the acquisition is described below under
"Liquidity and Capital Resources".
Maurices is headquartered in Duluth, Minnesota and, founded in 1931,
operates small town specialty stores offering apparel and accessories to 17 to
34 year old women and men. At December 1, 2004, it operated 470 stores in strip
centers and malls in 38 states.
Results of Operations
The following table sets forth the percentage change in dollars for the
quarter ended October 30, 2004 as compared to the quarter ended October 25,
2003, and the percentage of net sales for each component of the Consolidated
Statements of Earnings for each of the periods presented:
Quarter Ended
% Change October 30, October 25,
From Prior 2004 2003
Period % of Sales
Net sales 2.4% 100.0% 100.0%
Cost of sales, including occupancy & buying 1.5% 63.6% 64.2%
Gross profit 4.0% 36.4% 35.8%
Selling, general and admin. expenses 5.7% 27.7% 26.9%
Depreciation and amortization 4.2% 3.3% 3.2%
Operating income -4.0% 5.4% 5.7%
Interest income 35.7% 0.4% 0.3%
Interest expense -6.8% 0.6% 0.7%
Other income -- 0.2% 0.2%
Earnings before income taxes -1.5% 5.3% 5.5%
Net earnings -2.2% 3.4% 3.5%
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales increased by 2.4% to $197.1 million for the 13 weeks ended
October 30, 2004 ("first quarter"), from $192.5 million for the 13 weeks ended
October 25, 2003 ("last year"). Same store sales increased 1% from last year.
The sales increase was the result of 1.2% increase in sales transactions
accompanied by a 1.8% increase in units per transaction. Combined, these led to
a 3.0% increase in units sold. This increase was partially offset by 0.4%
decrease in the average price per unit sold, primarily due to increased jewelry
sales. The Company continues to believe the increase in the number of customer
transactions was the result of greater customer acceptance of the Company's
updated and fashionable merchandise assortment and intensified marketing and
store presentation efforts.
The Company's average selling square footage for the quarter increased
slightly by approximately 0.5% from last year. The increase in average selling
square footage was due to the opening of new combination Dress Barn/Dress Barn
Woman stores ("combo stores"), which carry both Dress Barn and Dress Barn Woman
merchandise, and the conversion of single-format stores into combo stores.
During the first quarter the Company opened 20 stores and closed 4
underperforming locations. The number of stores in operation at October 30, 2004
was 792, down slightly from the number of 795 stores opened at October 25, 2003.
The Company's real estate strategy for fiscal 2005 is to continue opening
primarily Combo Stores, while closing its under-performing locations. Store
expansion will focus on both expanding in the Company's existing major trading
markets and developing and expanding into new markets.
Gross profit (net sales less cost of goods sold, including occupancy and
buying costs) increased by 4.0% to $71.7 million, or 36.4% of net sales, in the
first quarter from $68.9 million, or 35.8% of net sales last year. The increase
in gross profit as a percentage of net sales is primarily due to the leverage on
fixed occupancy costs gained from increased same store sales (approximately 0.5%
of net sales) and lower freight costs (approximately 0.3% of net sales). These
factors were partially offset by slightly lower merchandise margins due to
higher markdowns (approximately 0.2% of net sales) during the quarter as
compared to last year.
Selling, general and administrative ("SG&A") expenses increased by 5.7%, or
$2.9 million, to $54.7 million, or 27.7% of net sales, in the first quarter from
$51.7 million, or 26.9% of net sales, last year. The dollar increase is mainly
due to higher store operating costs, primarily salaries, related payroll taxes,
benefits, and repairs and maintenance. As a percent of sales, there were two one
time charges; training and other costs related to the rollout of the new POS
system and higher professional fees incurred for the impending Sarbanes Oxley
compliance.
Depreciation expense in the first quarter increased 4.2% to $6.4 million
from $6.2 million last year. The increase in depreciation expense resulted
primarily from higher depreciation related to the new POS equipment.
Interest income increased in the first quarter to $0.7 million from $0.5
million last year. The increase is due to increases in interest rates and
available funds from last year.
Interest expense relates to interest on the mortgage loan (see note 6) and
post-judgment interest on the unpaid court award against the Company in July
2003 (see note 7). Interest expense decreased slightly to $1.3 million in the
quarter from $1.4 million last year. The decrease is due to the declining level
of interest expense from the amortization of the mortgage loan.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other income represents rental income that Dunnigan Realty, LLC receives
from the two unaffiliated tenants in the Suffern facility. That square footage
is 100% leased through 2012. Intercompany rentals between the Company and
Dunnigan Realty, LLC are eliminated in consolidation.
The 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
first quarter the Company recorded a tax provision representing an effective
rate of 36.5%, up slightly from the 36% effective rate incurred in the prior
year period. This increase is a result of less tax-free income, which lowers the
effective tax rate.
Principally as a result of the above factors, net earnings for the first
quarter was $6.6 million, or 3.4% of net sales, a decrease of 2.9% from the $6.8
million, or 3.5% of net sales, for the first quarter of last year.
Critical Accounting Policies and Estimates
Management has determined that the Company's most critical accounting
policies are those related to revenue recognition, merchandise inventories,
long-lived assets, claims and contingencies, litigation and income taxes. The
Company continues to monitor its accounting policies to ensure proper
application. There have been no changes to these policies as discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2004.
Liquidity and Capital Resources
The Company believes that its unrestricted cash, cash equivalents and
short-term investments, together with cash flow from operations, will be
adequate to fund the Company's fiscal 2005 planned capital expenditures and all
other operating requirements. The net cash provided by operating activities for
the fiscal quarter ended October 30, 2004 decreased to $12.0 million from $34.1
million in the prior year period. Such decrease was primarily due to the timing
of payments for merchandise inventory at the end of the quarter. Inventories
were current and in line with sales projections as of the end of the first
quarter.
Net cash used in investing activities was $8.2 million for the quarter
ended October 30, 2004 compared to $25.3 million in the prior year, a decrease
of $17.3 million. The decrease was primarily due to lower levels of net
investing activity during the quarter.
During the quarter ended October 30, 2004, the net cash used by financing
activities was $0.5 million compared to net cash provided of $0.4 million in the
prior year. The decrease of approximately $0.9 million is primarily due to the
purchase of treasury stock, partially offset by higher amounts of proceeds from
stock options exercised during the quarter ended October 30, 2004.
In connection with the pending acquisition of Maurices, the Company expects
to finance the transaction with a portion of the Company's cash on hand and new
credit facilities. The Company expects that the credit facilities will include
bank borrowings and may also include a debt or equity-linked offering in the
capital markets.
THE DRESS BARN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company does not have any off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities. The Company has
operating leases entered into in the normal course of business and letters of
credit. The Company does not have any undisclosed material transactions or
commitments involving related persons or entities.
Dunnigan Realty, LLC receives rental income and reimbursement for taxes and
common area maintenance charges from the Company and two additional tenants that
occupy the Suffern facility that are not affiliated with the Company. The rental
payments from these two additional tenants 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 lower earnings in its second
fiscal quarter ending in January than during its other three fiscal quarters,
reflecting the intense promotional atmosphere that has characterized the
Christmas shopping season in recent years. The Company expects this trend to
continue for fiscal 2005. 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
Sections of this Quarterly Report on Form 10-Q, including the preceding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain various forward-looking statements, made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements reflect the Company's current expectations
concerning future events, and actual results may differ materially from current
expectations or historical results. Any such forward-looking statements are
subject to various risks and uncertainties, including failure by the Company to
predict accurately client fashion preferences; decline in the demand for
merchandise offered by the Company; competitive influences; changes in levels of
store traffic or consumer spending habits; effectiveness of the Company's brand
awareness and marketing programs; general economic conditions or a downturn in
the retail industry; the inability of the Company to locate new store sites or
negotiate favorable lease terms for additional stores or for the expansion of
existing stores; a significant change in the regulatory environment applicable
to the Company's business; the impact of quotas, and the elimination thereof; an
increase in the rate of import duties or export quotas with respect to the
Company's merchandise; financial or political instability in any of the
countries in which the Company's goods are manufactured; the impact of health
concerns relating to severe infectious diseases, particularly on manufacturing
operations of the Company's vendors in Asia and elsewhere; acts of war or
terrorism in the United States or worldwide; work stoppages, slowdowns or
strikes; the inability of the Company to hire, retain and train key personnel,
and other factors set forth in the Company's filings with the SEC. The Company
does not assume any obligation to update or revise any forward-looking
statements at any time for any reason.
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 escrow account referred to in Footnote 7 is invested in short term money
market instruments. The remainder of the marketable securities in 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 31,
2004.
Item 4 -- CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has conducted an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives. Based on such
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's reports filed or submitted under the
Exchange Act.
There was no change in the Company's internal control over financial
reporting during the quarterly period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 for the acquisition of the
Bedford Fair business which the Company never concluded.
On April 10, 2003, after a trial in the Superior Court of Connecticut,
Waterbury District, a jury returned a verdict of $30 million of compensatory
damages in the lawsuit described above. The court, on July 7, 2003, entered a
judgment of approximately $32 million in compensatory damages and expenses,
which is subject to post-judgment interest. The trial court ruled against the
plaintiffs' motion for any punitive damages or pre-judgment interest. The
Company vigorously pursued an appeal. Plaintiffs cross-appealed seeking an
increase in the amount of the judgment. The parties are awaiting the decision of
the Supreme Court of the State of Connecticut, which heard the appeal on
November 23, 2004.
The Company continues in settlement discussions regarding the class action
law suit in California as discussed in the Company's Annual Report on Form 10K
for the fiscal year ended July 31, 2004.
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 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS(1)
Quarter Ended October 30, 2004
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Paid Announced Plans or the Plans or
Period Shares Purchased per Share Programs Programs (2)
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
August 1, 2004--
August 31, 2004 100,000 $15.84 100,000 3,011,160
(1) The Company has a $75 million Stock Buyback Program (the "Program") which
was originally announced on April 5, 2001. Under the Program, the Company may
repurchase its shares from time to time, either in the open market or through
private transactions, whenever it appears prudent to do so. The Program has no
expiration date.
(2) Based on the closing price of $16.03 at October 29, 2004.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Company's Shareholders was held on November 17,
2004.
o The Company's shareholders voted for the reelection of Elliot S. Jaffe, Burt
Steinberg and Marc Lasry, as Directors of the Company for 3-year terms
(22,572,907, 22,247,117 and 26,941,687 shares, respectively, voted for
reelection and 5,059,098, 5,384,888 and 690,318 shares, respectively, withheld
authority with respect for such nominees); Roslyn S. Jaffe, as Director of the
Company for a 2-year term (22,247,117 voted for reelection and 5,384,888
withheld authority with respect for such nominee); and Kate Buggeln as Director
of the Company for a 1-year term (27,297,719 voted for election and 334,286
withheld authority for such nominee).
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit Description
31.1 Certification of David R. Jaffe pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Armand Correia pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of David R. Jaffe pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Armand Correia pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed two reports on Form 8-K during the quarter ended October
30, 2004.
Date Filed Description
September 22, 2004 Release of Fourth Quarter and Year-End Financial Results
September 23, 2004 Election of New Director
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)