UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended:   July 3, 2004

Commission File Number:    001-15023

THE YANKEE CANDLE COMPANY, INC.

16 YANKEE CANDLE WAY
SOUTH DEERFIELD, MASSACHUSETTS 01373
(Address of principal executive office and zip code)

(413) 665-8306
(Registrant’s telephone number, including area code)

Indicate by check mark 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   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   x     No   o

The registrant had 47,865,808 shares of Common Stock, par value $0.01, outstanding as of August 9, 2004.

THE YANKEE CANDLE COMPANY, INC.

FORM 10-Q — Quarter Ended July 3, 2004

This Quarterly Report on Form 10-Q contains a number of forward-looking statements. Any statements contained herein, including without limitation statements to the effect that The Yankee Candle Company, Inc. and its subsidiaries (“Yankee Candle”, the “Company”, “we”, and “us”) or its management “believes”, “expects”, “anticipates”, “plans” and similar expressions, that relate to prospective events or developments should be considered forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. There are a number of important factors that could cause its actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Future Operating Results.” Management undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Table of Contents

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PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES

See notes to Condensed Consolidated Financial Statements

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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES

See notes to Condensed Consolidated Financial Statements

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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES

See notes to Condensed Consolidated Financial Statements

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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of The Yankee Candle Company, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). The financial information included herein is unaudited; however, in the opinion of management such information reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations, cash flows and comprehensive income for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full fiscal years.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended January 3, 2004 included in the Company’s Annual Report on Form 10-K.

2. INVENTORIES

The components of inventory were as follows:

3. INCOME TAXES

The Company’s effective tax rate for the thirteen and twenty-six weeks ended July 3, 2004 and June 28, 2003 was 39.5%. The Company has provided and expects to continue to provide in 2004 a valuation allowance against the deferred tax asset for its international operations. The valuation allowance has been considered in establishing the 39.5% effective tax rate. As a result, it is anticipated that the effective tax rate for 2004 will be approximately 39.5%. Management re-evaluates the Company’s effective tax rate on a quarterly basis.

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4. EARNINGS PER SHARE

SFAS No. 128, “Earnings Per Share,” requires two presentations of earnings per share, “basic” and “diluted.” Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted- average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The denominator in the calculation is based on the following weighted-average number of common shares:

For both the thirteen and twenty-six weeks ended June 28, 2003, 458,000 potential common shares which could dilute basic earnings per share in the future were excluded since their inclusion would have been antidilutive. For the thirteen and twenty-six weeks ended July 3, 2004, 31,000 and 28,000 potential common shares which could dilute basic earnings per share in the future were excluded, respectively since their inclusion would have been antidilutive.

5. STOCK BASED COMPENSATION

The Company sponsors stock option plans. Prior to the third quarter of fiscal 2003, the Company accounted for employee options or share awards under the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees.” Compensation expense, if any, was recognized based on the difference between the fair value of the common stock and the exercise price of the option on the measurement date, as defined by Opinion No. 25. Pro forma disclosures of net earnings and earnings per share had been provided supplementally, as if the fair value method of accounting defined in SFAS No. 123 “Accounting for Stock Based Compensation” had been applied. Effective in the third quarter of fiscal 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 using the prospective transition method provided by SFAS No. 148 “Accounting for Stock Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123.” Under the prospective transition method, the Company has valued all stock option grants beginning with grants made in fiscal 2003. These are being expensed over the vesting period based on the fair value at the date of the grant. The adoption of the fair value method of accounting for stock-based compensation resulted in a charge of $0.3 million and $0.6 million for the thirteen and twenty-six weeks ended July 3, 2004, respectively.

Awards under the Company’s option plan vest, in general, over a four year period. Therefore, the cost related to stock-based employee compensation included in the determination of net income for all periods presented in the Company’s historical consolidated Statements of Income is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

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The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

The following weighted-average assumptions were used to compute the pro forma results of operations for fiscal 2004 and 2003 and the stock option expense that was recorded in the Condensed Consolidated Statements of Income in the second quarter of fiscal 2004:

6. STOCK REPURCHASE PROGRAM

On February 18, 2004, the Company announced that its Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to $100 million of Yankee Candle common stock. During the thirteen and twenty-six weeks ended July 3, 2004, the Company repurchased a total of 1,704,000 and 2,510,100 shares of common stock for an aggregate purchase price of $48.8 million and $71.6 million, respectively. During the thirteen and twenty-six weeks ended June 28, 2003 the Company repurchased a total of 426,100 shares of common stock for an aggregate purchase price of $9.8 million. All 426,100 shares were repurchased in June 2003.

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7. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION

The Company has segmented its operations in a manner that reflects how its chief operating decision-maker (the “CEO”) currently reviews the results of the Company and its subsidiaries’ businesses. The Company has two reportable segments — retail and wholesale. The identification of these segments results from management’s recognition that while the product sold is similar, the type of customer for the product and services and methods used to distribute the product are different.

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8. RESTRUCTURING RESERVE

A restructuring charge for $8 million was recorded in fiscal 2001 to record costs associated with the Company’s decision to consolidate and restructure its distribution and manufacturing operations. The Company closed its Utah distribution facility and restructured its distribution and manufacturing work-force during 2001. Included in the restructuring charge were severance and other employee related costs, $2.1 million of a non-cash write-down of non-recoverable leasehold improvements, fixture and equipment investments and estimated continuing occupancy expenses for abandoned facilities, net of anticipated sub-lease income. As a result of this consolidation and restructuring, the Company terminated approximately 450 manufacturing and logistics employees. An analysis of the activity within the remaining restructuring reserve was as follows at July 3, 2004:

During the second quarter of fiscal 2002, the Company was successful in subletting the facility for the remaining lease term. The sublet income does not fully offset the Company’s lease obligations, therefore the initial occupancy reserve remained unchanged after this sublet.

9. LONG TERM DEBT

On May 19, 2004, the Company entered into a new $200 million senior unsecured revolving credit facility (the “Credit Facility”) with Citizens Bank of Massachusetts and a syndicate of lenders. This new Credit Facility has two Tranches, a $150 million Tranche (“Tranche A”) that expires on May 19, 2007 and a $50 million Tranche (“Tranche B”) that expires on May 18, 2005. The new Credit Facility replaced the $150 million revolving credit facility that was scheduled to expire on July 7, 2004. This new Credit Facility will be used by the Company for, among other things, working capital, refinancing existing debt, letters of credit, repurchase of the Company’s common stock and other general corporate purposes. As a result of refinancing the existing debt, all of the Company’s debt has been classified as long term as of July 3, 2004.

Amounts outstanding under the Credit Facility bear interest at a rate equal to, at the Company’s option, the Citizens Bank Base Rate, or Eurodollar Rate. Eurodollar borrowings under Tranche A of the Credit Facility include a margin rate ranging from 0.70% to 1.00% and borrowings under Tranche B include a margin rate ranging from 0.75% to 1.05%. These rates vary depending on the Company’s outstanding borrowings. In addition, the Company is required to pay the lenders a quarterly commitment fee on the unused revolving loan commitment amount. The commitment fee under Tranche A ranges from 0.15% to 0.25% and under Tranche B range from 0.10% to 0.20%. Fees for outstanding commercial and standby letters of credit range from 0.70% to 1.00%. The Company is also required to pay a utilization fee on the total Credit Facility of 0.125% once outstanding borrowings exceed $100 million. The Credit Facility requires that the Company comply with several financial and other covenants, including requirements that the Company maintain at the end of each fiscal quarter the following financial ratios as set forth in the credit agreement:

	•		a consolidated total debt to consolidated EBITDA ratio of no more than 2.00 to 1.00 at July 3, 2004 and for subsequent fiscal quarters (at July 3, 2004 this ratio was 0.90 to 1.00 ).
	•		a fixed charge coverage ratio (the ratio of the sum of consolidated EBITDA plus rent expense, less cash taxes paid and capital expenditures to the sum of consolidated cash interest expense plus rent expense and dividends) of no less than 1.75 to 1.00 for fiscal 2004; no less than 2.00 to 1.00 for fiscal 2005; and no less than 2.25 to 1.00 during fiscal 2006 and thereafter (at July 3, 2004 this ratio was 4.75 to 1.00).

The Credit Facility permits the payment of cash dividends by the Company of up to 50% of the current fiscal year’s net income and the repurchase of the Company’s shares, so long as the Company’s Consolidated Net Worth (as defined in

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the Credit Facility) is not less than $75 million for the second and third quarter of fiscal 2004, $100 million plus 25% of fiscal 2004 net income. Beginning in 2005, the Consolidated Net Worth will be the $100 million plus 25% of 2004 net income, plus 25% of net income for each fiscal quarter thereafter.

Available borrowings under the revolving credit facility were approximately $63.3 million.

10.  BUSINESS ACQUISITION

On June 7, 2004, the Company acquired substantially all of the assets of GBI Marketing, Inc. (“GBI”), a privately owned and operated distributor of selected gift products, including Yankee Candle® products, to fundraising organizations. The total purchase price was approximately $14.5 million, $3.0 million of which is contingent and will be recorded as additional goodwill upon the achievement of certain performance objectives over the next three years. The cash purchase price was borrowed under the Company’s $200 million unsecured credit facility. Due to the proximity of the acquisition date to July 3, 2004, the allocation of the purchase price is subject to refinement. The following table provides a preliminary allocation of the purchase price for the acquired assets of GBI:

The customer relationship asset is being amortized over its useful life of four years. The Company plans to operate a fundraising division using the name GBI Marketing (the “GBI Division”) and, accordingly, the trade name is deemed to have an indefinite life and will not be amortized. The goodwill is tax deductible over a 15 year period. For segment reporting purposes, the GBI Division will be included in the Wholesale segment. The GBI Division’s results of operations were immaterial to the Company’s operations during the thirteen weeks ended July 3, 2004. Historical pro forma results of operations have not been provided due to immateriality.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our 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 management to make estimates and judgments that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to inventories, restructuring costs, bad debts, intangible assets, income taxes, debt service and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about operating results and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, involve its more significant estimates and judgments and are therefore particularly important to an understanding of our results of operations and financial position.

Revenue/receivables

We sell our products both directly to retail customers and through wholesale channels. Revenue from the sale of merchandise to retail customers is recognized at the time of sale, while revenue from wholesale customers is recognized when risk of loss has passed to the customers. We believe that this is the time that persuasive evidence of an agreement exists, delivery has occurred, the price is fixed and determinable and collectability is reasonably assured. Revenue is recognized net of any applicable discounts and allowances. Customers, be they retail or wholesale, do have the right to return product to us in certain limited situations. Such rights of return have not precluded revenue recognition because we have a long history with such returns, which we use in constructing a reserve. This reserve,

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however, is subject to change. In addition to returns, we bear credit risk relative to our wholesale customers. We have provided a reserve for bad debts in our financial statements based on our estimates of the creditworthiness of our customers. However, this reserve is also subject to change. Changes in these reserves could affect our operating results.

Inventory

We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In addition, our inventory is stated at the lower of cost or market on a last-in first-out (“LIFO”) basis. Fluctuations in inventory levels along with the cost of raw materials could impact the carrying value of our inventory. Changes in the carrying value of inventory could affect our operating results.

Taxes

We have a significant deferred tax asset recorded on our financial statements. This asset arose at the time of our recapitalization in 1998 and is a future tax benefit for us. The realization of this future tax benefit is dependent upon our future profitability. We have made an assessment that this asset is likely to be recovered and is appropriately reflected on the balance sheet. Should we find that we are not able to utilize this benefit in the future, we would have to record a reserve for all or a part of this asset, which would adversely affect our operating results and cash flows.

Restructuring reserve

In fiscal 2001, we closed our distribution facility in Utah, recorded a restructuring charge and established a reserve for future expenses related to the restructuring. Part of the restructuring charge related to the lease commitment that we have through 2005. In connection with the restructuring, we did not record the entire lease commitment as a liability because we believed we would be able to sublet the facility. During the second quarter of fiscal 2002, we were successful in subletting the facility for the remaining lease term. If the facility were to be vacated by the current tenant in breach of its sublease, this would negatively affect our results of operations and cash flows.

Value of long-lived assets, including intangibles

Long-lived assets on our balance sheet consist primarily of property, plant and equipment, customer relationships, trade name, goodwill and trademarks. We periodically review the carrying value of all of these assets based, in part, upon our projections of anticipated undiscounted future cash flows. We undertake this review when facts and circumstances suggest that cash flows emanating from those assets may be diminished. Any impairment charge that we record reduces our earnings. While we believe that our future estimates are reasonable, different assumptions regarding items such as future cash flows and the volatility inherent in markets which we serve could affect our evaluations and result in impairment charges against the carrying value of those assets.

Stock based compensation

Effective in 2003, we adopted the fair value recognition provisions of SFAS No. 123 “Accounting for Stock Based Compensation.” Under the prospective transition method selected by us, as described in SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123,” all stock option grants beginning with grants made in fiscal 2003 are being expensed over the vesting period, based on the fair value at the date of the grant. Fair value is determined based on a variety of factors, all of which are estimates subject to judgment. Changes in estimated lives of options, risk free interest rates or exercise patterns could impact our results of operations. We recorded a charge of approximately $0.3 million and $0.6 million for the thirteen and twenty-six weeks ended July 3, 2004.

Self-insurance

We are self-insured for certain losses related to health insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities associated with these losses are estimated in part by considering historical claims experience, industry factors, severity factors and other actuarial assumptions.

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PERFORMANCE MEASURES

We measure the performance of our retail and wholesale segments through a segment margin calculation, which specifically identifies not only gross profit on the sales of products through the two channels but also costs and expenses specifically related to each segment.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

We have experienced, and may experience in the future, fluctuations in our quarterly operating results. There are numerous factors that can contribute to these fluctuations; however, the principal factors are seasonality and new store openings.

Seasonality. We have historically realized higher revenues and operating income in our fourth quarter, particularly in our retail business. We believe that this has been due primarily to the increase in the number of our retail stores and to increased sales in the giftware industry during the holiday season of the fourth quarter.

New Store Openings. The timing of our new store openings may also have an impact on our quarterly results. First, we incur certain one-time expenses related to opening each new store. These expenses, which consist primarily of salaries, supplies and marketing costs, are expensed as incurred. Second, most store expenses vary proportionately with sales, but there is a fixed cost component. This typically results in lower store profitability when a new store opens because new stores generally have lower sales than mature stores. Due to both of these factors, during periods when new store openings as a percentage of the base are higher, operating profit may decline in dollars and/or as a percentage of sales. As the overall store base matures, the fixed cost component of selling expenses is spread over an increased level of sales, assuming sales increase as stores age, resulting in a decrease in selling and other expenses as a percentage of sales.

RESULTS OF OPERATIONS — Thirteen and Twenty-six weeks ended July 3, 2004 versus June 28, 2003

SALES

Sales increased 9.2% to $100.9 million for the thirteen weeks ended July 3, 2004 from $92.4 million for the thirteen weeks ended June 28, 2003; and increased 9.5% to $207.4 million for the twenty-six weeks ended July 3, 2004 from $189.4 million for the twenty-six weeks ended June 28, 2003.

Wholesale sales, including European operations, increased 12.0% to $52.8 million for the thirteen weeks ended July 3, 2004 from $47.1 million for the thirteen weeks ended June 28, 2003; and increased 13.2% to $113.4 million for the twenty-six weeks ended July 3, 2004 from $100.2 million for the twenty-six weeks ended June 28, 2003. This growth was achieved primarily by increasing sales to existing customers and to a lesser extent by increasing the number of wholesale locations.

Retail sales increased 6.3% to $48.1 million for the thirteen weeks ended July 3, 2004 from $45.3 million for the thirteen weeks ended June 28, 2003; and increased 5.3% to $94.0 million for the twenty-six weeks ended July 3, 2004 from $89.3 million for the twenty-six weeks ended June 28, 2003. The increase in retail sales for the thirteen and twenty-six weeks ended July 3, 2004 compared to the prior year, was due primarily to increased sales attributable to the 49 stores opened in 2003 (which in 2003 were open for less than a full year), and to a lesser extent to the addition of new stores opened in 2004. The increase for the thirteen and twenty-six weeks ended July 3, 2004 was partially offset by a decrease in retail comparable store and catalog and Internet sales. Comparable store and catalog and Internet sales for the thirteen and twenty-six weeks ended July 3, 2004 decreased 4.0% compared to the thirteen and twenty-six weeks ended June 28, 2003. Retail comparable store sales for the thirteen and twenty-six weeks ended July 3, 2004 decreased 3.0% compared to the thirteen and twenty-six weeks ended June 28, 2003. The major factor contributing to the decrease in comparable store sales was the decrease in sales at our 90,000 square foot South Deerfield, Massachusetts flagship store. We believe our flagship store was negatively impacted by a decline in tourism traffic, perhaps influenced by higher gasoline prices. Comparable store sales represent a comparison of the sales, during the corresponding fiscal periods of the two fiscal years compared, of the stores included in our comparable store sales base. A store first enters our comparable store sales base in the first fiscal period that begins after the first full year of operation. There were 263 stores included in the comparable store base as of July 3, 2004, and 47 of these stores were included for less than a full year. There were 319 retail stores open as of July 3, 2004 compared to 269 retail stores open as of June 28, 2003 and 286 retail stores open as of January 3, 2004.

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GROSS PROFIT

Gross profit increased 11.4% to $57.0 million for the thirteen weeks ended July 3, 2004 from $51.2 million for the thirteen weeks ended June 28, 2003; and increased 11.5% to $116.2 million for the twenty-six weeks ended July 3, 2004 from $104.1 million for the twenty-six weeks ended June 28, 2003. As a percentage of sales, gross profit increased to 56.5% for the thirteen weeks ended July 3, 2004 from 55.4% for the thirteen weeks ended June 28, 2003; and increased to 56.0% for the twenty-six weeks ended July 3, 2004 from 55.0% for the twenty-six weeks June 28, 2003. The increase in gross profit dollars was primarily attributable to an increase in sales. The improvement in gross profit rate for the thirteen and twenty-six weeks ended July 3, 2004 compared to June 28, 2003 was primarily the result of improved productivity in supply chain operations and the benefit of cost reduction initiatives.

SELLING EXPENSES

Selling expenses increased 10.9% to $29.8 million for the thirteen weeks ended July 3, 2004 from $26.8 million for the thirteen weeks ended June 28, 2003; and increased 11.8% to $57.6 million for the twenty-six weeks ended July 3, 2004 from $51.5 million for the twenty-six weeks ended June 28, 2003. These expenses are related to both wholesale and retail operations and consist of payroll, occupancy, advertising and other operating costs, as well as pre-opening costs, which are expensed as incurred. As a percentage of sales, selling expenses increased to 29.5% for the thirteen weeks ended July 3, 2004 from 29.0% for the thirteen weeks ended June 28, 2003; and increased to 27.8% for the twenty-six weeks ended July 3, 2004 from 27.2% for the twenty-six weeks ended June 28, 2003. The increase in selling expenses in dollars for the thirteen and twenty-six weeks ended July 3, 2004 was primarily related to the continued growth in the number of retail stores, from 269 as of June 28, 2003 to 319 as of July 3, 2004. The increase in selling expenses as a percentage of sales for the thirteen weeks ended July 3, 2004 was primarily related to the continued growth in the number of retail stores, from 269 as of June 28, 2003 to 319 as of July 3, 2004 and to a lesser extent a decline in retail comparable store sales. The increase in selling expenses as a percentage of sales for the twenty-six weeks ended July 3, 2004 was primarily related to a decline in retail comparable store sales since the fixed components of labor and occupancy do not decrease with negative retail comparable store sales.

SEGMENT PROFITABILITY

Segment profitability is sales less cost of goods sold and selling expenses. Segment profitability for our wholesale operations, including Europe, was $21.7 million, or 41.2% of wholesale sales, for the thirteen weeks ended July 3, 2004 compared to $18.6 million, or 39.4% of wholesale sales, for the thirteen weeks ended June 28, 2003. The increase in wholesale segment profitability was primarily attributable to increased wholesale sales and increased wholesale gross profit dollars and rate. Segment profitability for the Company’s retail operations was $5.5 million or 11.4% of retail sales for the thirteen weeks ended July 3, 2004 compared to $5.8 million or 12.8% of retail sales for the thirteen weeks ended June 28, 2003. The decrease in retail segment profitability in dollars and as a percentage of sales was primarily attributable to lower profitability in our Catalog and Internet operations, and to a lesser extent the decrease in comparable store sales. We also incurred lease buyout and asset impairment charges of $0.2 million related to a planned store closing.

Segment profitability for our wholesale operations, including Europe, was $47.0 million, or 41.5% of wholesale sales, for the twenty-six weeks ended July 3, 2004 compared to $40.5 million, or 40.5% of wholesale sales, for the twenty-six weeks ended June 28, 2003. The increase in wholesale segment profitability was primarily attributable to increased wholesale sales and increased wholesale gross profit dollars and rate. Segment profitability for the Company’s retail operations was $11.5 million or 12.3% of retail sales for the twenty-six weeks ended July 3, 2004 compared to $12.1 million or 13.5% of retail sales for the twenty-six weeks ended June 28, 2003. The decrease in retail segment profitability for the twenty-six weeks ended July 3, 2004 compared to June 28, 2003 was primarily attributable to lower profitability in our Catalog and Internet operations.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses, which consist primarily of personnel-related costs incurred in support functions, increased 5.4% to $12.3 million for the thirteen weeks ended July 3, 2004 from $11.7 million for the thirteen weeks ended June 28, 2003; and increased 5.9% to $25.6 million for the twenty-six weeks ended July 3, 2004 from $24.1 million for the twenty-six weeks ended June 28, 2003. As a percentage of sales, general and administrative expenses decreased to 12.2% for the thirteen weeks ended July 3, 2004 from 12.6% for the thirteen weeks ended June 28, 2003; and decreased to 12.3% for the twenty-six weeks ended July 3, 2004 from 12.7% for the twenty-six weeks ended June 28, 2003. The increase in general and administrative expense was primarily attributable to labor costs. The increase in

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labor costs is due primarily to new hires made subsequent to the second quarter of 2003, and to stock option expense, which were not expensed in the same period last year.

In the third quarter of 2003, we adopted the fair value recognition provisions of SFAS No. 123. Under the prospective transition method selected by us as described in SFAS No. 148, all stock option grants beginning with grants made in fiscal 2003 are being expensed over the vesting period, based on the fair value at the date of the grant. This resulted in $0.3 million of incremental stock compensation expense in the thirteen weeks ended July 3, 2004 and $0.6 million of incremental stock compensation expense in the twenty-six weeks ended July 3, 2004.

NET OTHER EXPENSE

Net other expense was $1.0 million for the thirteen weeks ended July 3, 2004, compared to $0.8 million for the thirteen weeks ended June 28, 2003; and was $1.7 million for the twenty-six weeks ended July 3, 2004 and June 28, 2003. The primary component of the expense in each of these periods was interest expense, which was $1.1 million for the thirteen weeks ended July 3, 2004 compared to $0.8 million for the thirteen weeks ended June 28, 2003; and was $2.0 million for the twenty-six weeks ended July 3, 2004 compared to $1.6 million for the twenty-six weeks ended June 28, 2003. The average daily debt outstanding increased in the thirteen and twenty-six weeks ended July 3, 2004 compared to the thirteen and twenty-six weeks ended June 28, 2003 primarily due to repurchases of our common stock, the impact of which was offset in part by a reduction in our borrowing rates under our credit facility.

PROVISION FOR INCOME TAXES

The effective tax rate for the thirteen and twenty-six weeks ended July 3, 2004 and June 28, 2003 was 39.5%. We have provided and expect to continue to provide in 2004 a valuation allowance against the deferred tax asset for our international operations. The valuation allowance has been considered in establishing the 39.5% effective tax rate. As a result, it is anticipated that our effective tax rate for 2004 will be approximately 39.5%. We re-evaluate our effective tax rate on a quarterly basis.

LIQUIDITY AND CAPITAL RESOURCES

We have consistently generated positive cash flow from operations. Specifically, over the last three fiscal years we have generated a total cash flow of approximately $292 million, including approximately $113 million in 2003. These amounts have exceeded net income in the last three fiscal years due to two factors. First, we have incurred non-cash charges for depreciation and amortization. Second, income tax expense has significantly exceeded taxes actually paid owing to the tax deduction that we continue to utilize that arose from the 1998 recapitalization. This tax deduction is expected to continue to provide an annual cash benefit for the next ten years. On an annual basis, this results in tax savings of approximately $11.7 million per year through 2013 assuming sufficient income to realize the full benefit of this deduction. These internally generated cash flows have been sufficient to fund necessary capital expenditures for our expansion plans and other working capital needs.

Cash and cash equivalents as of July 3, 2004 decreased by $31.7 million compared to January 3, 2004. This decrease was due primarily to cash used in operating activities of $13.3 million, which includes total payments of $28.0 million of corporate income taxes for fiscal 2003 and fiscal 2004. Capital expenditures for the twenty-six weeks ended July 3, 2004 were $9.8 million, primarily related to the capital requirements to open 33 new stores as well as investments in information systems and supply chain operations. On June 7, 2004, we acquired substantially all of the assets of GBI Marketing, Inc. (“GBI”), a privately owned and operated distributor of selected gift products, including Yankee Candle® products, to fundraising organizations. The total cash purchase price was approximately $11.5 million. Net cash provided by financing activities was $3.2 million for the twenty-six weeks ended July 3, 2004, which includes net borrowings of $71.2 million under our credit facility used to fund operations and repurchase common stock.

On February 18, 2004, we announced that our Board of Directors had approved a stock repurchase program authorizing us to repurchase up to $100 million of Yankee Candle common stock. During the fiscal 2004 second quarter ended July 3, 2004 we repurchased a total of 1,704,000 shares of common stock for an aggregate purchase price of $48.8 million. On a cumulative basis during fiscal 2004, we have repurchased a total of 2,510,100 shares of our common stock for an aggregate purchase price of $71.6 million.

We opened 33 new stores during the twenty-six weeks ended July 3, 2004, and we expect to open approximately 12 to 15 additional stores during the last two quarters of fiscal 2004. We expect to meet our cash requirements through a combination of available cash, operating cash flow and borrowings under our credit facility.

On May 19, 2004, we entered into a new $200 million senior unsecured revolving credit facility (the “Credit Facility”) with Citizens Bank of Massachusetts and a syndicate of lenders. This new Credit Facility has two Tranches, a $150

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million Tranche (“Tranche A”) that expires on May 19, 2007 and a $50 million Tranche (“Tranche B”) that expires on May 18, 2005. The new Credit Facility replaced the $150 million revolving credit facility that was scheduled to expire on July 7, 2004. This new Credit Facility will be used by us for, among other things, working capital, refinancing existing debt, letters of credit, repurchase of our common stock and other general corporate purposes. As a result of refinancing our existing debt, all of our debt has been classified as long term as of July 3, 2004.

Amounts outstanding under the Credit Facility bear interest at a rate equal to, at our option, the Citizens Bank Base Rate, or Eurodollar Rate. Eurodollar borrowings under Tranche A of the Credit Facility include a margin rate ranging from 0.70% to 1.00% and borrowings under Tranche B include a margin rate ranging from 0.75% to 1.05%. These rates vary depending on our outstanding borrowings. In addition, we are required to pay the lenders a quarterly commitment fee on the unused revolving loan commitment amount. The commitment fee under Tranche A ranges from 0.15% to 0.25% and under Tranche B range from 0.10% to 0.20%. Fees for outstanding commercial and standby letters of credit range from 0.70% to 1.00%. We are also required to pay a utilization fee on the total Credit Facility of 0.125% once outstanding borrowings exceed $100 million. The Credit Facility requires that we comply with several financial and other covenants, including requirements that we maintain at the end of each fiscal quarter the following financial ratios as set forth in the credit agreement:

	•		a consolidated total debt to consolidated EBITDA ratio of no more than 2.00 to 1.00 at July 3, 2004 and for subsequent fiscal quarters (at July 3, 2004 this ratio was 0.90 to 1.00 ).
	•		a fixed charge coverage ratio (the ratio of the sum of consolidated EBITDA plus rent expense, less cash taxes paid and capital expenditures to the sum of consolidated cash interest expense plus rent expense and dividends) of no less than 1.75 to 1.00 for fiscal 2004; no less than 2.00 to 1.00 for fiscal 2005; and no less than 2.25 to 1.00 during fiscal 2006 and thereafter (at July 3, 2004 this ratio was 4.75 to 1.00).

The Credit Facility permits the payment of cash dividends by us of up to 50% of the current fiscal year’s net income and the repurchase of our shares, so long as our Consolidated Net Worth (as defined in the Credit Facility) is not less than $75 million for the second and third quarter of fiscal 2004, $100 million plus 25% of fiscal 2004 net income. Beginning in 2005, the Consolidated Net Worth will be the $100 million plus 25% of 2004 net income, plus 25% of net income for each fiscal quarter thereafter.

As of July 3, 2004, we were in compliance with all covenants under our new credit facility. Available borrowings under the revolving credit facility were approximately $63.3 million.

We expect that the principal sources of funding for our planned store openings and other working capital needs, capital expenditures, debt service obligations and stock repurchase program will be a combination of our available cash and cash equivalents, funds generated from operations, and borrowings under our credit facility. We believe that our current funds and sources of funds will be sufficient to fund our liquidity needs for at least the next 12 months. However, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan and general economic conditions. In addition, borrowings under our credit facility are dependent upon our continued compliance with the financial and other covenants contained therein.

BUSINESS ACQUISITION

On June 7, 2004, we acquired substantially all of the assets of GBI Marketing, Inc. (“GBI”), a privately owned and operated distributor of selected gift products, including Yankee Candle® products, to fundraising organizations. The total purchase price was approximately $14.5 million, $3.0 million of which is contingent and will be recorded as additional goodwill upon the achievement of certain performance objectives over the next three years. The cash purchase price was borrowed under our $200 million unsecured credit facility. Due to the proximity of the acquisition date to July 3, 2004, the allocation of the purchase price is subject to refinement. The following table provides a preliminary allocation of the purchase price for the acquired assets of GBI:

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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The only off-balance sheet contractual obligations and commercial commitments as of July 3, 2004 relate to operating lease obligations and letters of credit. We have excluded these items from the balance sheet in accordance with generally accepted accounting principles.

FUTURE OPERATING RESULTS

As referenced above, there are a number of factors that might cause our actual results to differ significantly from the results reflected by the forward-looking statements contained herein. In addition to factors generally affecting the political, economic and competitive conditions in the United States and abroad, such factors include those set forth below.

If we fail to grow our business as planned, our business could suffer and financial results could decline. As we grow it will be difficult to maintain our historical growth rates.

We intend to continue to pursue a business strategy of increasing sales and earnings by expanding our retail and wholesale operations both in the United States and internationally. Our current plans are to grow internally and not by acquisition, although from time to time we do consider possible acquisition candidates. In particular, our retail growth strategy depends in large part on our ability to open new stores in both existing and new geographic markets. Since our ability to implement our growth strategy successfully will be dependent in part on factors beyond our control, including consumer preferences and the competitive environment, we may not be able to achieve our planned growth or sustain our financial performance. Our ability to anticipate changes in the candle and giftware industries, and identify industry trends, will be critical factors in our ability to remain competitive.

We expect that, as we grow, it will become more difficult to maintain our historical growth rate, which could negatively impact our operating margins and results of operations. New stores typically generate lower operating margin contributions than mature stores because fixed costs, as a percentage of sales, are higher and because pre-opening costs are fully expensed in the year of opening. In addition, our retail sales generate lower operating margins than our wholesale sales. Our wholesale business has grown by increasing sales to existing customers and by adding new customers. If we are not able to continue this, our sales growth and profitability could be adversely affected. We cannot assure you that we will continue to grow at a rate comparable to our historic growth rate or that our historic financial performance will continue as we grow.

We face significant competition in the giftware industry. This competition could cause our revenues or margins to fall short of expectations which could adversely affect our future operating results, financial condition and liquidity and our ability to continue to grow our business.

We compete generally for the disposable income of consumers with other producers in the giftware industry. The giftware industry is highly competitive with a large number of both large and small participants. Our products compete with other scented and unscented candle and personal care products and with other gifts within a comparable price range, like boxes of candy, flowers, wine, fine soap and related merchandise. Our retail stores compete with franchised candle store chains, specialty candle stores and gift and houseware retailers. Some of our competitors are part of large, diversified companies which have greater financial resources and a wider range of product offerings than we do. This competitive environment could adversely affect our future revenues and profits, financial condition and liquidity and our ability to continue to grow our business.

A material decline in consumers’ discretionary income could cause our sales and income to decline.

Our results depend on consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns or during periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the United States, the outbreak of the war in Iraq or the possibility of further terrorist attacks. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales and income.

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Because we are not a diversified company and are effectively dependent upon one industry, we have less flexibility in reacting to unfavorable consumer trends, adverse economic conditions or business cycles.

We rely primarily on the sale of premium scented candles and related products in the giftware industry. In the event that sales of these products decline or do not meet our expectations, we cannot rely on the sales of other products to offset such a shortfall. As a significant portion of our expenses is comprised of fixed costs, such as lease payments, our ability to decrease expenses in response to adverse business conditions is limited in the short term. As a result, unfavorable consumer trends, adverse economic conditions or changes in the business cycle could have a material and adverse impact on our earnings.

If we lose our senior executive officers, our business could be disrupted and our financial performance could suffer.

Our success is substantially dependent upon the retention of our senior executive officers. If one or more of our senior executive officers become unable or unwilling to participate in our business, our future business and financial performance could be materially affected.

Many aspects of our manufacturing and distribution facilities are customized for our business; as a result, the loss of one of these facilities would disrupt our operations.

Approximately 74% of our sales in 2003 were generated by products we manufacture at our manufacturing facility in Whately, Massachusetts and we rely primarily on our distribution facilities in South Deerfield, Massachusetts to distribute our products. Because most of our machinery is designed or customized by us to manufacture our products, and because we have strict quality control standards for our products, the loss of our manufacturing facility, due to natural disaster or otherwise, would materially affect our operations. Similarly, our distribution facilities rely upon customized machinery, systems and operations, the loss of which would materially affect our operations. Although our manufacturing and distribution facilities are adequately insured, we believe it would take up to twelve months to resume operations at a level equivalent to current operations.

Seasonal, quarterly and other fluctuations in our business, and general industry and market conditions, could affect the market for our common stock.

Our sales and operating results vary from quarter to quarter. We have historically realized higher sales and operating income in our fourth quarter, particularly in our retail business, which accounts for a larger portion of our sales. We believe that this has been due primarily to an increase in giftware industry sales during the holiday season of the fourth quarter. As a result of this seasonality, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. In addition, we may also experience quarterly fluctuations in our sales and income depending on various factors, including, among other things, the number of new retail stores we open in a particular quarter, changes in the ordering patterns of our wholesale customers during a particular quarter, and the mix of products sold. Most of our operating expenses, such as rent expense, advertising and promotional expense and employee wages and salaries, do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a particular quarter are below our expectations, we might not be able to proportionately reduce operating expenses for that quarter, and therefore a sales shortfall could have a disproportionate effect on our operating results for that quarter. Further, our comparable store sales from our retail business in a particular quarter could be adversely affected by competition, economic or other general conditions or our inability to execute a particular business strategy. As a result of these factors, we may report in the future sales, operating results or comparable store sales that do not match the expectations of market analysts and investors. This could cause the trading price of our common stock to decline. In addition, broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance.

Public health epidemics such as Severe Acute Respiratory Syndrome may affect our operating results.

Approximately 11% of our sales in 2003 were generated by products, primarily accessories, that we purchased overseas. Substantially all of these products were purchased from East Asia. A sustained interruption of the operations of our suppliers, as a result of the impact of Severe Acute Respiratory Syndrome or other similar health epidemics, could have an adverse effect on our ability to receive timely shipments of certain of our products and could result in scrutiny or embargoing of goods produced in infected areas.

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Provisions in our corporate documents and Massachusetts law could delay or prevent a change in control of Yankee Candle.

Our Articles of Organization and By-Laws may discourage, delay or prevent a merger or acquisition involving Yankee Candle that our stockholders may consider favorable, by:

•		authorizing the issuance of preferred stock, the terms of which may be determined at the sole discretion of the board of directors,
•		providing for a classified board of directors, with staggered three-year terms, and
•		establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at meetings.

Massachusetts law may also discourage, delay or prevent someone from acquiring or merging with us.

We do not currently intend to pay dividends on our capital stock.

We have never paid a cash dividend on our common stock as a public company. Instead, we have retained earnings to repurchase our common stock and for the future operation of our business. Under the terms of our new credit agreement, we may not declare or pay dividends on our common stock unless our net worth exceeds $75 million for the fiscal quarter ended July 3, 2004. Although we currently meet this requirement, we have no current plan to pay dividends. However, we intend to periodically evaluate the advisability of a dividend program. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent upon our results of operations, our financial condition, contractual and legal restrictions, and other factors deemed relevant by our board of directors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks relate primarily to changes in interest rates. We bear this risk in our outstanding bank debt. At July 3, 2004, there was $136.4 million of bank debt outstanding. Because this bank debt carries a variable interest rate pegged to market indices, our results of operations and cash flows are exposed to changes in interest rates. Based on July 3, 2004 borrowing levels, a 1.00% increase or decrease in current market interest rates would have the effect of causing an approximately $1.3 million additional annual pre-tax charge or credit to the statements of income.

The second component of interest rate risk involves the short-term investment of excess cash. This risk impacts fair values, earnings and cash flows. Excess cash is primarily invested in interest bearing accounts that fluctuate with market interest rates. Based on July 3, 2004 cash equivalents, a 1.00% increase or decrease in current market interest rates would have the effect of causing an approximately $0.1 million additional pre-tax credit or charge to the annual statements of income.

We buy a variety of raw materials for inclusion in our products. The only raw material that we consider to be of a commodity nature is wax. Wax is a petroleum-based product; however, its market price has not historically fluctuated with the movement of oil prices. Rather, over the past five years wax prices have moved with inflation.

At this point in time, our operations outside of the United States are immaterial. Accordingly, we are not exposed to substantial risks arising from foreign currency exchange rates.

Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of July 3, 2004. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of July 3, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 3, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Not Applicable

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table provides information about purchases by us of our common stock during the twenty-six weeks ended July 3, 2004.

(1) All repurchases by us of our common stock during the twenty-six weeks ended July 3, 2004 were done pursuant to the repurchase program that we publicly announced on February 18, 2004 (the “Program”).

(2) Our Board of Directors approved the repurchase of up to $100,000,000 of our common stock pursuant to the Program. There is currently no expiration date for the Program. Unless terminated earlier by resolution of our Board of Directors, the Program will expire when we have reached the $100,000,000 threshold.

Item 3. Defaults Upon Senior Securities

     Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders.

At our 2004 Annual Meeting of Stockholders held on June 16, 2004, our stockholders elected Messrs. Dale F. Frey, Michael F. Hines and Ronald L. Sargent to serve as Class II Directors of the Company for a term of three years or until their respective successors are duly elected and qualified. According to the report by the Inspector of Elections, Messrs. Frey, Hines and Sargent were elected by the following vote:

			In addition to the above Directors, the following individuals currently serve as members of the Board of Directors: Sandra J. Horbach, Jamie C. Nicholls, Robert J. O’Connell, Michael B. Polk, Craig W. Rydin, Robert R. Spellman, Doreen A. Wright.
			Stockholders also ratified the selection by the Audit Committee of our Board of Directors of Deloitte & Touche LLP as our independent auditor for the current fiscal year by a vote of 47,647,495 in favor, 152,066 opposed and 513,967 abstaining.

Item 5. Other Information

     Not Applicable

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Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

	(b)		Reports on Form 8-K
			We furnished a current report on Form 8-K dated April 28, 2004 pursuant to which we furnished, under Items 7 and 9, our earnings release for the period ended April 3, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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