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: April 2, 2005

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 þ   No o

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

The registrant had 45,403,048 shares of Common Stock, par value $0.01, outstanding as of May 9, 2005.

THE YANKEE CANDLE COMPANY, INC.

FORM 10-Q – Quarter Ended April 2, 2005

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

PART I. Financial Information

Item 1. 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 periods 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 1, 2005 included in the Company’s Annual Report on Form 10-K.

2. NEW ACCOUNTING POLICY

During the first quarter of 2005, the Company adopted a new accounting policy related to rent expense as it relates to operating leases. Under the new accounting policy, rent expense is recognized on a straight-line basis, including consideration of rent holidays and applicable rent escalations over the term of the lease. The Company begins to recognize rent expense on the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the leased premises or has rights to use the property for construction purposes. Straight-line rent recorded during the construction period is capitalized as a component of the historical cost of leasehold improvements included in property and equipment. The capitalized rent is amortized over the useful life of the related asset or the lease term, whichever is shorter. Straight-line rent recorded during the Company’s pre-opening period (generally from the date of construction completion through store open date) is recorded as a pre-opening expense.

3. INVENTORIES

The components of inventory were as follows:

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4. GOODWILL AND INTANGIBLE ASSETS

The following sets forth the intangible assets, excluding goodwill, by major category:

During the thirteen weeks ended April 2, 2005 the Company purchased certain product formulas from Innovation2, LLC and entered into non-compete agreements with certain related principals from Innovation2, LLC. These product formulas and non-compete agreements will be amortized over their estimated useful lives of three years commencing in the second fiscal quarter of 2005. The previously existing non-compete agreements and customer lists assets acquired from GBI Marketing, Inc. are being amortized over their estimated useful lives of four years. Amortization expense related to the customer list and non-compete agreements for the thirteen weeks ended April 2, 2005 was $246. The trademark asset is being amortized over 15 years. Amortization expense related to the trademark asset was $4 and zero for the thirteen weeks ended April 2, 2005 and April 3, 2004, respectively. The deferred financing costs are being amortized over the life of the Credit Facility. Amortization expense related to the deferred financing costs was $77 and $278 for the thirteen weeks ended April 2, 2005 and April 3, 2004, respectively.

Aggregate amortization expense related to intangible assets at April 2, 2005 in the remainder of fiscal 2005 and in each of the next three fiscal years is expected to be as follows:

5. LONG-TERM DEBT

The Company has a $200 million senior unsecured revolving credit facility (the “Credit Facility”) with Citizens Bank of Massachusetts and a syndicate of lenders. The 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 Credit Facility is being used by the Company for, among other things, working capital, letters of credit, repurchase of the Company’s common stock and other general corporate purposes.

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 ranges 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

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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 Facility:

	•	a consolidated total debt to consolidated EBITDA ratio of no more than 2.00 to 1.00 at January 1, 2005 and for subsequent fiscal quarters (at April 2, 2005 this ratio was 0.74 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 2.00 to 1.00 for fiscal 2005; and no less than 2.25 to 1.00 during fiscal 2006 and thereafter (at April 2, 2005 this ratio was 4.26 to 1.00).

The Credit Facility defines EBITDA as the Company’s consolidated net income, plus the amount of net interest expense, depreciation and amortization, income taxes, and certain non-cash compensation expenses.

As of April 2, 2005, $120 million was outstanding under the revolving credit facility and $0.9 million was outstanding for letters of credit, leaving $79.1 million in availability. As of April 2, 2005, the Company was in compliance with all covenants under the Credit Facility.

The Company is currently in negotiations to amend its Credit Facility to provide a $250 million senior unsecured revolving credit facility with a five-year term, and has signed a commitment letter with Citizens Bank and RBS Securities Corporation relating to this amendment. The amended facility would replace Tranches A and B described above. The Company currently anticipates executing an amendment prior to May 18, 2005.

6. INCOME TAXES

The Company’s effective tax rate in the first quarters of fiscal 2005 and 2004 was 39.0% and 39.5%, respectively. The decrease from 39.5% is due to the deduction for Domestic Production Activities Income available to the Company under the new American Jobs Creation Act. The Company has provided and expects to continue to provide in 2005 a valuation allowance against the deferred tax asset for its international operations. As a result, it is anticipated that the effective tax rate for 2005 will be approximately 39.0%. Management re-evaluates the Company’s effective tax rate on a quarterly basis.

7. 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:

At April 2, 2005 and April 3, 2004 approximately 27 and 34 shares, respectively, issuable pursuant to option grants were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

8. 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

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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. The fair value of these options is being expensed over the vesting period based on the fair value at the date of the grant. Stock-based compensation charges amounted to $746 and $283 for the thirteen weeks ended April 2, 2005 and April 3, 2004, respectively. In the first quarter of fiscal 2006 in accordance with SFAS No. 123(R), “Share-Based Payment,” the Company will be required to record the fair value of stock options for all unvested options granted prior to 2003. The Company estimates this will result in additional stock compensation expense of approximately $0.3 million during fiscal 2006.

Awards under the Company’s option plans 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.

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 stock-based compensation expense for fiscal 2005 and 2004 and the stock option expense that was recorded in the Condensed Consolidated Statements of Income in the first quarter of fiscal 2005 and 2004:

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9. STOCK REPURCHASE PROGRAM

On December 7, 2004 the Company announced that its Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to $100.0 million of Yankee Candle common stock commencing in fiscal 2005. During the thirteen weeks ended April 2, 2005 the Company repurchased a total of 1,286 shares of common stock for an aggregate purchase price of $39.9 million. During the thirteen weeks ended April 3, 2004, under a separate authorization from the Board of Directors, the Company repurchased a total of 806 shares of common stock for an aggregate purchase price of $22.8 million.

10. 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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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 condensed 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.

Sales/receivables

We sell our products both directly to retail customers and through wholesale channels. Sales to retail customers are recognized at the time of sale, while sales to wholesale customers are 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. Sales are 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 sales recognition because we have a long history with such returns, which we use in constructing a reserve. This reserve, 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 net deferred tax asset recorded on our condensed consolidated balance sheet. 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.

Value of long-lived assets, including intangibles

Long-lived assets on our balance sheet consist primarily of property, plant and equipment, customer list, tradename, 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 and at least annually in the case of tradename and goodwill. 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.

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Operating Leases

Rent expense is recognized on a straight-line basis, including consideration of rent holidays and applicable rent escalations over the term of the lease. We begin to recognize rent expense on the earlier of the date when we become legally obligated for the rent payments or the date when we take possession of the leased premises or have rights to use the property for construction purposes. Straight-line rent recorded during the construction period is capitalized as a component of the historical cost of leasehold improvements included in property and equipment. The capitalized rent is amortized over the useful life of the related asset or the lease term, whichever is shorter. Straight-line rent recorded during our pre-opening period (generally from the date of construction completion through store open date) is recorded as a pre-opening expense.

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 $0.7 million and $0.3 million for the thirteen weeks ended April 2, 2005 and April 3, 2004, respectively. In the first quarter of fiscal 2006 in accordance with SFAS No. 123(R), “Share-Based Payment,” we will be required to record the fair value of stock options for all unvested options granted prior to 2003. We estimate this will result in additional stock compensation expense of approximately $0.3 million during fiscal 2006.

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.

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, occupancy costs, 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 weeks ended April 2, 2005 versus thirteen weeks ended April 3, 2004

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SALES

Sales increased 12.0% to $119.3 million for the thirteen weeks ended April 2, 2005 from $106.5 million for the thirteen weeks ended April 3, 2004. Wholesale sales, including European operations, increased 11.3% to $67.4 million for the thirteen weeks ended April 2, 2005 from $60.6 million for the thirteen weeks ended April 3, 2004. This growth was achieved primarily by increasing sales to existing locations and to a lesser extent by increasing the number of wholesale locations.

Retail sales increased 12.9% to $51.8 million for the thirteen weeks ended April 2, 2005 from $45.9 million for the thirteen weeks ended April 3, 2004. The increase in retail sales was due primarily to increased sales attributable to the 60 stores opened in 2004 (which in 2004 were open for less than a full year), and to a lesser extent to the addition of 13 new stores in the thirteen weeks ended April 2, 2005. We closed one underperforming retail store during the thirteen weeks ended April 2, 2005. Comparable store and catalog and Internet sales for the thirteen weeks ended April 2, 2005 increased 2.0% compared to the thirteen weeks ended April 3, 2004. Retail comparable store sales for the thirteen weeks ended April 2, 2005 increased 1.0% compared to the thirteen weeks ended April 3, 2004. 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 fourteenth fiscal month of operation. There were 295 stores included in the comparable store base as of April 2, 2005, and 45 of these stores were included for less than a full year. There were 357 retail stores open as of April 2, 2005 compared to 300 retail stores open as of April 3, 2004 and 345 retail stores open as of January 1, 2005.

GROSS PROFIT

Gross profit increased 9.6% to $64.8 million for the thirteen weeks ended April 2, 2005 from $59.1 million for the thirteen weeks ended April 3, 2004. As a percentage of sales, gross profit decreased to 54.4% for the thirteen weeks ended April 2, 2005 from 55.5% for the thirteen weeks ended April 3, 2004. The increase in gross profit dollars was primarily attributable to an increase in sales. The decrease in gross profit rate was primarily the result of discounts associated with the sell-through of holiday and discontinued merchandise in the retail business during our extended January clearance program offset, in part, by improved productivity in supply chain operations.

SELLING EXPENSES

Selling expenses increased 16.7% to $32.5 million for the thirteen weeks ended April 2, 2005 from $27.9 million for the thirteen weeks ended April 3, 2004. 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 27.2% for the thirteen weeks ended April 2, 2005 from 26.1% for the thirteen weeks ended April 3, 2004. The increase in selling expenses in dollars and as a percentage of sales was primarily related to the continued growth in the number of retail stores, from 300 as of April 3, 2004 to 357 as of April 2, 2005. These new stores are considered immature stores, which are generally stores that are less than three years old. Immature stores typically generate higher selling expenses as a percentage of sales than stores that have been open for more than three years since fixed costs, as a percent of sales, are higher in the early sales maturation period.

SEGMENT PROFITABILITY

Segment profitability is sales less cost of goods sold and selling expenses. Segment profitability for our wholesale operations, including Europe, was $29.2 million, or 43.4% of wholesale sales, for the thirteen weeks ended April 2, 2005 compared to $25.3 million, or 41.7% of wholesale sales, for the thirteen weeks ended April 3, 2004. The increase in wholesale segment profitability was primarily attributable to increased wholesale sales and increased wholesale gross profit dollars and rate. Segment profitability for our retail operations was $3.1 million or 6.0% of retail sales for the thirteen weeks ended April 2, 2005 compared to $6.0 million or 13.1% of retail sales for the thirteen weeks ended April 3, 2004. The decrease in retail segment profitability in dollars and as a percentage of sales was primarily the result of discounts associated with the sell-through of holiday and discontinued merchandise in the retail business during our extended January clearance program.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses, which consist primarily of personnel-related costs incurred in support functions, increased 2.2% to $13.5 million for the thirteen weeks ended April 2, 2005 from $13.2 million for the thirteen weeks ended April 3, 2004. As a percentage of sales, general and administrative expenses decreased to 11.3% for the thirteen

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weeks ended April 2, 2005 from 12.4% for the thirteen weeks ended April 3, 2004. The increase in general and administrative expense in dollars in 2005 compared to 2004 was primarily attributable to labor costs associated with new hires made during the latter part of 2004 and to an increase in stock-based compensation expense in 2005 compared to 2004. The decrease in general and administrative expense as a percentage of sales for 2005 compared to 2004 was primarily due to our leveraging of these expenses over a larger sales base.

NET OTHER EXPENSE

Net other expense was $1.1 million for the thirteen weeks ended April 2, 2005, compared to $0.7 million for the thirteen weeks ended April 3, 2004. The increase in interest expense is primarily attributable to an increase in the average daily debt outstanding for the thirteen weeks ended April 2, 2005 compared to the thirteen weeks ended April 3, 2004 along with an increase in the borrowing rates under our credit facility.

PROVISION FOR INCOME TAXES

The effective tax rate for the thirteen weeks ended April 2, 2005 and April 3, 2004 was 39.0% and 39.5%, respectively. The decrease from 39.5% is due to the deduction for Domestic Production Activities Income available to us under the new American Jobs Creation Act. We have provided and expect to continue to provide in 2005 a valuation allowance against the deferred tax asset for our international operations. As a result, it is anticipated that our effective tax rate for 2005 will be approximately 39.0%. We re-evaluate our effective tax rate on a quarterly basis.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of April 2, 2005 decreased by $18.3 million compared to January 1, 2005. This decrease was due mainly to cash used in operating activities of $19.3 million, which includes total payments of $25.8 million for corporate income taxes for fiscal 2004 and fiscal 2005. Capital expenditures for the thirteen weeks ended April 2, 2005 were $4.0 million, primarily related to the capital requirements to open 13 new stores, construction costs associated with our 65,000 square foot flagship store in Williamsburg, Virginia as well as investments in supply chain operations. Net cash provided by financing activities was $5.5 million for the thirteen weeks ended April 2, 2005, which represents net borrowings of $45.0 million under our credit facility used primarily to repurchase common stock and to fund operations.

On December 7, 2004 we announced that our Board of Directors had approved a stock repurchase program authorizing us to repurchase up to $100.0 million of Yankee Candle common stock commencing in fiscal 2005. During the thirteen weeks ended April 2, 2005 we repurchased a total of 1,286,475 shares of common stock for an aggregate purchase price of $39.9 million.

We opened 13 stores during the thirteen weeks ended April 2, 2005 and we expect to open approximately 33 additional stores during the last three quarters of fiscal 2005. We expect to meet our cash requirements through a combination of available cash, operating cash flow and borrowings under our credit facility.

As of April 2, 2005, we were in compliance with all covenants under our credit facility. We had $120 million outstanding under the revolving credit facility and $0.9 million of outstanding letters of credit, leaving $79.1 million in availability.

On February 14, 2005 we announced that our Board of Directors authorized us to initiate an annual cash dividend at the annual rate of $0.25 per share of outstanding common stock. The first semi-annual payment of $0.125 per share will be paid on June 1, 2005, to shareholders of record on May 11, 2005. Under the terms of the existing Credit Facility, we may not declare or pay dividends on common stock unless our Consolidated Net Worth (as defined in the Credit Facility) is more than the sum of $100 million plus 25% of our 2004 net income, plus 25% of our net income for each fiscal quarter thereafter. Our net income for fiscal 2004 was $82.7 million, and 25% of our 2004 net income was therefore approximately $20.7 million. Our net income for the thirteen weeks ended April 2, 2005 was $10.8 million, and 25% of our net income for the first fiscal quarter was therefore approximately $2.7 million. As of April 2, 2005, our Consolidated Net Worth was approximately $151.9 million, in excess of the $123.4 million required under the Credit Facility for the declaration or payment of dividends. We anticipate that our Consolidated Net Worth as of June 1, 2005, the date on which the first semi-annual payment is scheduled to be made, will likewise exceed the required amount under the Credit Facility. While it is our current intention to pay annual cash dividends in years following 2005, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.

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We expect that the principal sources of funding for our planned store openings and other working capital needs, capital expenditures, debt service obligations, payment of dividends 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.

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 future operating results may suffer. 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. Because our ability to implement our growth strategy successfully will be dependent in part on factors beyond our control, including consumer preferences, macro-economic conditions, the competitive environment in the markets in which we compete and other factors, we may not be able to achieve our planned growth or sustain our financial performance. Our ability to anticipate changes in the candle, home fragrance and giftware industries, and identify industry trends, will be critical factors in our ability to grow as planned and remain competitive.

We expect that, as we continue to 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 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. In addition, as we expand our wholesale business into new channels of trade that we believe to be appropriate, sales in some of these new channels may, for competitive reasons within the channels, generate lower margins than do our existing wholesale sales. Similarly, as we continue to broaden our product offerings in order to meet consumer demand, we may do so in part by adding products that, while still very profitable, have lower product margins than those of our extremely profitable core candle products. 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 may be unable to continue to open new stores successfully.

Our retail growth strategy depends in large part on our ability to successfully open new stores in both existing and new geographic markets. For our growth strategy to be successful, we must identify and lease favorable store sites on favorable economic terms, hire and train managers and associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully. If we are unable to open new stores as quickly as planned, then our future sales and profits could be materially adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our retail growth strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs, or the opening of new malls or centers n the market. However, these new stores may result in the loss of sales in existing stores in nearby areas, thereby negatively impacting our comparable store sales. Our retail growth strategy also depends upon our ability to successfully renew the expiring leases of our profitable existing stores. If we are unable to do so at planned levels and upon favorable economic terms, then our future sales and profits could be negatively affected.

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.

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We compete generally for the disposable income of consumers with other producers and retailers in the giftware industry. The giftware industry is highly competitive with a large number of both large and small participants and relatively low barriers to entry. Our products compete with other scented and unscented candle, home fragrance 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 primarily with specialty candle retailers and a variety of other retailers including department stores, gift stores and national specialty retailers that carry candles along with personal care items, giftware and houseware. In addition, while we focus primarily on the premium scented candle segment, scented and unscented candles are also sold outside of that segment by a variety of retailers including mass merchandisers. In our wholesale business, we compete with numerous manufacturers and importers of candles, home fragrance products and other home décor and gift items for the limited space available in our wholesale customer locations for the display and sale of such products to consumers. 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. Many of our competitors source their products from low cost manufacturers outside of the United States. 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 or which result from the threat of war 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.

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, or are unable to attract and retain the talent required for our business, 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 our senior executive officers become unable or unwilling to participate in our business, our future business and financial performance could be materially affected. In addition, as our business grows in size and complexity we must be able to continue to attract, develop and retain qualified personnel sufficient to allow us to adequately manage and grow our business. If we are unable to do so, our operating results could be negatively impacted. We cannot guarantee that we will be able to attract and retain personnel as and when necessary in the future.

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 2004 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.

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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, pricing and promotional activities of our competitors, 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, the opening nearby of new retail stores or wholesale locations, 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 2004 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, natural disasters such as the 2004 tsunami, or other factors could have an adverse effect on our ability to receive timely shipments of certain of our products.

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 are subject to a class action lawsuit in California.

A class action lawsuit has been filed against us for alleged violations of certain California state wage and hour and employment laws with respect to certain employees in our California retail stores. This complaint was filed in February 2005 and we have therefore only begun to investigate the allegations and have yet to file our answer. While we intend to vigorously defend ourselves against the allegations, it is too early in the litigation process for us to fully evaluate or predict the outcome of the litigation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks relate primarily to changes in interest rates. We bear this risk in two specific ways. First, we have debt outstanding. At April 2, 2005, we had $120 million outstanding under our Credit Facility, which bears interest at variable rates. At April 2, 2005, the weighted-average interest rate on outstanding borrowings was 4.06%. This facility is intended to fund operating needs and stock repurchases if necessary. Because this facility carries a variable interest rate pegged to market indices, our results of operations and cash flows will be exposed to changes in interest rates. Based on

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April 2, 2005 borrowing levels, a 1.00% increase or decrease in current market interest rates would have the effect of causing an approximately $1.2 million additional annual pre-tax charge or credit to the statement 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 April 2, 2005 cash equivalents, a 1.00% increase or decrease in current market interest rates would have the effect of causing an approximately $0.2 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 is considered 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 and has instead generally moved with inflation. In 2004, however, significant increases in the price of crude oil resulted in corresponding increases in the price of petroleum-based wax. These crude oil price increases also negatively impacted our transportation costs. Future significant increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.

At this point in time, 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 April 2, 2005. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of April 2, 2005, 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 April 2, 2005 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. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Under The Yankee Candle Company, Inc. 401(k) and Profit Sharing Plan (the “Plan”), participating employees may, as one of several investment options, direct their Plan contributions to the purchase of shares of our common stock. If a Plan participant directs his or her contribution to the purchase of our common stock, the Plan trustee purchases shares of our common stock in the open market for the benefit of that participant’s Plan account. Neither the shares of our common stock that have been offered and sold under the Plan to Plan participants, nor the interests in the Plan, have been registered under Section 5 of the Securities Act of 1933. Since April 1, 2002, a total 27,662 shares of our common stock were purchased under the Plan by Plan participants for an aggregate purchase price of $681,765 (or an average of $24.65 per share). We recently discovered that those offers and sales of our common stock and Plan interests may have been done in contravention of the registration requirements of Section 5 of the Securities Act of 1933. When our management discovered this situation, we promptly suspended the right of Plan participants to buy our common stock under the Plan. We plan to file a Registration Statement on Form S-8 covering both the shares of our common stock that may be purchased under the Plan as well as the interests in the Plan.

The following table provides information about purchases by us of our common stock during the thirteen weeks ended April 2, 2005.

(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.

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

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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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