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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14987
TOO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1333930
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8323 WALTON PARKWAY, NEW ALBANY, OH 43054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(614) 775-3500
(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 (or such shorter time as the Company became
effective).
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT DECEMBER 2, 2003
------------ -------------------------------
$.01 Par Value 34,348,377 Shares
TOO, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended
November 1, 2003 and November 2, 2002.......................................................... 3
Consolidated Balance Sheets
November 1, 2003 and February 1, 2003.......................................................... 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
November 1, 2003 and November 2, 2002.......................................................... 5
Notes to Consolidated Financial Statements.......................................................... 6
Report of Independent Accountants................................................................... 13
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 20
Item 4. Controls and Procedures........................................................................ 20
PART II. Other Information
Item 1. Legal Proceedings.............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 20
Signature.............................................................................................. 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 148,864 $ 164,629 $ 423,840 $ 464,468
Costs of goods sold, buying and
occupancy costs 100,767 105,608 293,090 302,479
--------- --------- --------- ---------
Gross income 48,097 59,021 130,750 161,989
General, administrative and store
operating expenses 40,463 41,606 115,743 125,029
Store closing and impairment costs 188 - 7,521 -
--------- --------- --------- ---------
Operating income 7,446 17,415 7,486 36,960
Interest (income) expense, net 125 (121) (64) 648
--------- --------- --------- ---------
Income before income taxes 7,321 17,536 7,550 36,312
Provision for income taxes 2,800 6,700 2,700 14,100
--------- --------- --------- ---------
Net income $ 4,521 $ 10,836 $ 4,850 $ 22,212
========= ========= ========= =========
Earnings per share:
Basic $ 0.13 $ 0.32 $ 0.14 $ 0.67
========= ========= ========= =========
Diluted $ 0.13 $ 0.31 $ 0.14 $ 0.65
========= ========= ========= =========
Weighted average common shares:
Basic 34,322 34,061 34,230 32,990
========= ========= ========= =========
Diluted 34,668 34,903 34,514 33,980
========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOVEMBER 1, FEBRUARY 1,
2003 2003
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 70,845 $ 101,300
Restricted cash 17,042 -
Receivables 9,698 4,957
Income taxes receivable 5,542 -
Inventories 64,162 55,080
Store supplies 13,452 12,285
Other 3,054 2,260
---------- ----------
Total current assets 183,795 175,882
Property and equipment, net 149,403 145,530
Deferred income taxes 9,212 14,929
Other assets 10,514 10,990
---------- ----------
Total assets $ 352,924 $ 347,331
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 27,480 $ 22,550
Accrued expenses 38,700 44,600
Income taxes payable 10,086 16,088
---------- ----------
Total current liabilities 76,266 83,238
Other long-term liabilities 13,067 10,433
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares authorized - -
Common stock, $.01 par value, 100 million shares
authorized, 34.4 million and 34.1 million issued and outstanding
at November 1, 2003 and February 1, 2003 344 341
Treasury stock, at cost, 29,709 shares (998) (998)
Paid in capital 119,499 114,421
Retained earnings 144,746 139,896
---------- ----------
Total shareholders' equity 263,591 253,660
---------- ----------
Total liabilities and shareholders' equity $ 352,924 $ 347,331
========== ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THIRTY-NINE WEEKS ENDED
------------------------------
NOVEMBER 1, NOVEMBER 2,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,850 $ 22,212
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS:
Depreciation and amortization 14,543 14,248
Loss on impairment of assets 5,579 -
CHANGES IN ASSETS AND LIABILITIES:
Inventories (9,082) (11,649)
Accounts payable and accrued expenses (766) 12,768
Income taxes (300) (5,896)
Other assets (12,048) 722
Other liabilities 2,634 2,855
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,410 35,260
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (19,122) (36,047)
Restricted cash (17,042) -
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (36,164) (36,047)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 73,394
Repayment of term loan - (50,000)
Stock options and other equity changes 299 2,082
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 299 25,476
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (30,455) 24,689
Cash and equivalents, beginning of period 101,300 63,538
--------- ---------
Cash and equivalents, end of period $ 70,845 $ 88,227
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accrual for point of sale operating lease buy out $ 4,464 $ -
========= =========
Issuance of restricted stock $ 4,045 $ 2,755
========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Too, Inc. (referred to herein as "Too" or "the Company") is the
operator of two specialty retailing businesses, Limited Too and
mishmash. Limited Too sells apparel, underwear, sleepwear, swimwear,
footwear, lifestyle and personal care products for fashion-aware,
trend-setting young girls ages seven to fourteen years. mishmash,
launched by the Company in fiscal 2001, sells cosmetics, sportswear,
intimate apparel and footwear to young women ages fourteen to nineteen.
The assortment also includes accessories, jewelry, room decor
furnishings and lifestyle products. On May 28, 2003, the Company
announced the discontinuation of its mishmash retail concept in favor
of a new value-priced concept for `tween girls. See Note 4 for further
information regarding the mishmash store closings. The Consolidated
Financial Statements include the accounts of Too, Inc. and its
wholly-owned subsidiaries and reflect the Company's assets,
liabilities, results of operations and cash flows on a historical cost
basis.
The accompanying unaudited interim Consolidated Financial Statements as
of November 1, 2003 and for the thirteen and thirty-nine weeks ended
November 1, 2003 and November 2, 2002, are presented to comply with the
rules and regulations of the Securities and Exchange Commission.
Accordingly, these Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes
thereto contained in the Company's 2002 Form 10-K. In the opinion of
management, the accompanying interim Consolidated Financial Statements
reflect all adjustments (which are of a normal, recurring nature)
necessary to present fairly the financial position, results of
operations and cash flows for the interim periods, but are not
necessarily indicative of the results of operations for a full fiscal
year.
The Consolidated Financial Statements as of November 1, 2003, and for
the thirteen and thirty-nine weeks ended November 1, 2003 and November
2, 2002 included herein have been reviewed by the independent public
accounting firm of PricewaterhouseCoopers LLP and the report of such
firm follows the notes to the Consolidated Financial Statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for its report on the
Consolidated Financial Statements because that report is not a "report"
within the meaning of Sections 7 and 11 of that Act.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the recognition
and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no compensation expense for options has
been recognized as all options granted had an exercise price equal to
the market value of the underlying common stock on the date of the
grant. The Company does recognize compensation expense related to
restricted stock awards.
6
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," to stock-based employee compensation (in millions, except
per share amounts):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------ ------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income, as reported $ 4.5 $ 10.8 $ 4.9 $ 22.2
Stock-based compensation expense
determined under fair value based
method, net of tax (0.8) (0.7) (2.4) (2.0)
------- ------- ------- -------
Pro forma net income $ 3.7 $ 10.1 $ 2.5 $ 20.2
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.13 $ 0.32 $ 0.14 $ 0.67
======= ======= ======= =======
Basic - pro forma $ 0.11 $ 0.30 $ 0.07 $ 0.61
======= ======= ======= =======
Diluted - as reported $ 0.13 $ 0.31 $ 0.14 $ 0.65
======= ======= ======= =======
Diluted - pro forma $ 0.11 $ 0.29 $ 0.07 $ 0.59
======= ======= ======= =======
The weighted average fair value per share of options granted is
estimated using the Black-Scholes option-pricing model and the
following weighted average assumptions for the thirteen and thirty-nine
weeks ended November 1, 2003 and November 2, 2002:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------ ------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Expected life 5.0 5.0 5.0 5.0
Forfeiture rate 20% 20% 20% 20%
Dividend rate - - - -
Price volatility 48% 50% 52% 50%
Risk-free interest rate 3.2% 3.5% 2.9% 3.5%
The weighted average fair value of options granted during the thirteen
and thirty-nine weeks ended November 1, 2003 was $7.56 and $7.36,
respectively. The weighted average fair value of options granted during
both the thirteen and thirty-nine weeks ended November 2, 2002 was
$12.35.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if stock options or restricted stock were converted to common
stock using the treasury stock method.
7
The following table shows the amounts used in the computation of basic
and diluted earnings per share (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 4,521 $ 10,836 $ 4,850 $ 22,212
========= ========= ========== =========
Weighted average common shares - basic 34,322 34,061 34,230 32,990
Dilutive effect of stock options
and restricted stock 346 842 284 990
--------- --------- ---------- ---------
Weighted average common shares - diluted 34,668 34,903 34,514 33,980
========= ========= ========== =========
Due to the options' strike price exceeding the average market price of
the common shares for the reporting periods, certain options were
excluded from the calculation of net income per diluted share. In
fiscal 2003, options to purchase 1,317,800 and 1,203,600 common shares
were not included in the computation of net income per diluted share
for the thirteen and thirty-nine weeks ended November 1, 2003,
respectively. In fiscal 2002, options to purchase 853,000 and 140,700
common shares were not included in the computation of net income per
diluted share for the thirteen and thirty-nine weeks ended November 2,
2002, respectively.
4. STORE CLOSING AND IMPAIRMENT COSTS
On May 28, 2003, the Company announced the discontinuation of its
mishmash retail concept in favor of redirecting its resources to the
development of a new concept focused on value-priced sportswear and
accessories for `tween girls, ages 7 to 14. Eleven mishmash stores were
open at the end of the third quarter, with the remaining stores to be
closed early in the fourth quarter. Four former mishmash stores will be
converted to the new concept. In accordance with the provisions of SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," the Company recorded an expense of $169 thousand and $1.9
million for the thirteen and thirty-nine weeks ended November 1, 2003,
respectively, which is included in the store closing and impairment
costs line of the accompanying Consolidated Statements of Operations.
The following table provides a detail for each major type of cost
associated with the closing activity (in thousands):
EXPECTED INCURRED
TO BE IN CURRENT INCURRED
INCURRED PERIOD TO DATE
-------- ---------- --------
One-time termination benefits $ 225 $ 26 $ 26
Contract termination costs 1,700 - 1,600
Other associated costs 316 143 316
-------- ------ --------
Store closing costs $ 2,241 $ 169 $ 1,942
======== ====== ========
8
The following table provides a reconciliation of the liability balance
during the quarter (in thousands):
BEGINNING CURRENT COSTS ENDING
RESERVE PERIOD PAID OR OTHER RESERVE
BALANCE EXPENSE SETTLED ADJUSTMENTS BALANCE
--------- ------- ------- ----------- -------
One-time termination benefits $ - $ 26 $ (26) $ - $ -
Contract termination costs 1,600 - (75) - 1,525
Other associated costs 173 143 (164) - 152
------- ----- ------ ----- -------
Store closing costs $ 1,773 $ 169 $ (265) $ - $ 1,677
======= ===== ====== ===== =======
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," an impairment charge of $19 thousand
and $4.9 million was recorded during the thirteen and thirty-nine weeks
ended November 1, 2003. The impairment charge reflects the difference
between the carrying value and fair value of mishmash's store assets.
Fair value of the mishmash store assets was based on the expected
future cash flows of the mishmash stores. The impairment loss is
included in the store closing and impairment costs line of the
accompanying Consolidated Statements of Operations.
In addition, the Company announced the discontinuation of its Goldmark
joint venture during the second quarter of fiscal 2003. In accordance
with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," an impairment charge of $0.6 million was
recorded during the second quarter, which reflects the difference
between the carrying value and the fair value of the Company's
investment in the joint venture, as well as the cost of reserving
certain receivables due to Too, Inc. from the joint venture that were
deemed uncollectible. The Goldmark impairment charge is included in the
store closing and impairment costs line of the accompanying
Consolidated Statements of Operations.
5. INVENTORIES
The fiscal year of the Company is comprised of two principal selling
seasons: Spring (the first and second quarters) and Fall (the third and
fourth quarters). Inventories are principally valued at the lower of
average cost or market, on a first-in, first-out basis utilizing the
retail method. Inventory valuation at the end of the first and third
quarters reflects adjustments for inventory markdowns and shrinkage
estimates for the total selling season.
9
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, consisted of (in thousands):
NOVEMBER 1, FEBRUARY 1,
2003 2003
----------- -----------
Land $ 8,089 $ 8,041
Buildings 42,010 41,611
Furniture, fixtures and equipment 161,761 140,312
Leasehold improvements 33,383 40,182
Construction-in-progress 3,581 1,587
--------- ---------
Total 248,824 231,733
Less: accumulated depreciation and amortization (99,421) (86,203)
--------- ---------
Property and equipment, net $ 149,403 $ 145,530
========= =========
7. RELATED PARTY TRANSACTIONS
In connection with the August 23, 1999 Spin-off, the Company entered
into a service agreement with Limited Logistics Services, a
wholly-owned subsidiary of Limited Brands, to provide distribution
services to us covering transportation of merchandise to our stores for
up to three years after the Spin-off. Under the service agreement,
Limited Brands distributed merchandise and related materials using
common and contract carriers to the Company's stores. Inbound freight
was charged to Too based upon actual receipts and related charges,
while outbound freight was charged based on a percentage of cartons
shipped. The Company terminated the service agreement in mid-2002.
Previously, our main office was owned by Distribution Land Corp., a
wholly-owned subsidiary of Limited Brands, and leased to us with a
lease term expiring in August 2002. In April 2002, the Company
completed construction of its new home office and terminated the
aforementioned lease.
Our largest apparel supplier has been Mast Industries, Inc., a
wholly-owned subsidiary of Limited Brands. Mast Industries supplied
approximately 24% of the apparel that we purchased in 2002. We believe
that all transactions that we have entered into with Mast Industries
have been on terms that would have been obtained on an arm's length
basis since we treat them as if they were a third party. We were not,
and will not be, obligated to continue to source products through Mast
Industries.
Amounts payable to Limited Brands, including merchandise payables to
Mast Industries, approximated $7.2 million and $6.8 million at November
1, 2003 and February 1, 2003, respectively.
During fiscal year 2002, the Company formed a 50% owned joint venture,
which was accounted for under the equity method of accounting. On May
28, 2003, the Company announced the discontinuation of the joint
venture and, accordingly, wrote-off its investment in the joint venture
during the second quarter. The investment in the joint venture amounted
to $620,000 as of February 1, 2003. The Company continues to provide
certain services on behalf of the joint venture, for which the Company
is reimbursed. The receivable, net of allowances, due to the Company
for these services was $60,000 and $840,000 as of November 1, 2003 and
February 1, 2003, respectively.
10
8. CREDIT FACILITY
During August 1999, the Company entered into a five-year $100 million
credit agreement with a syndicate of banks. This credit agreement was
collateralized by virtually all assets of the Company and was comprised
of a $50 million five-year term loan and a $50 million revolving loan
commitment. The entire amount of the term portion was drawn in order to
fund a $50 million dividend to Limited Brands. On May 24, 2002, the
Company paid off the entire $50 million term loan.
On April 29, 2003, the Company terminated the aforementioned credit
agreement and entered into a new credit facility (the "Credit
Facility") with a syndicate of banks. The Credit Facility consists of a
$100 million unsecured revolving loan commitment. Interest expense on
borrowings under the Credit Facility is based on, at the borrower's
option, either (1) the higher of the Prime rate and the federal funds
effective rate plus 1/2 of 1% or (2) matrix pricing applied to the
London Interbank Offered Rate. Under the terms of the Credit Facility,
the Company is required to comply with certain covenants, including
financial ratios such as leverage, coverage and tangible net worth. The
Credit Facility limits the Company from incurring certain additional
indebtedness, restricts substantial asset sales and provides for a
springing lien against certain assets in the event of default. On
September 16, 2003, the unsecured Credit Facility was amended, and
became retroactively effective as of July 31, 2003. In exchange for the
modification of certain financial covenants the Company agreed to
maintain a pledged investment account equal to 110% of any outstanding
letters of credit or any revolving commitment usage. As of November 1,
2003, the Company had outstanding letters of credit under the Credit
Facility amounting to $15.5 million. The Company is in compliance with
all applicable terms of the amended Credit Facility.
Interest (income) expense consisted of the following (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------ ------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest expense $ 646 $ 239 $ 912 $ 2,161
Interest income (521) (360) (976) (1,513)
----------- ----------- ----------- -----------
Interest (income) expense, net $ 125 $ (121) $ (64) $ 648
=========== =========== =========== ===========
9. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards Board Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," in January 2003. FIN No.
46 establishes accounting and disclosure requirements for ownership
interests in entities that have certain financial or ownership
characteristics (sometimes known as Special Purpose Entities). FIN No.
46 is applicable for variable interest entities created after January
31, 2003 and becomes effective in the first fiscal year or interim
accounting period beginning after December 15, 2003 for variable
interest entities created before February 1, 2003. The Company is
currently evaluating the impact of adopting FIN No. 46, but the
Company's management does not expect the adoption of FIN No. 46 to have
a significant impact on the results of operations, cash flows or the
financial position of the Company.
11
The Emerging Issues Task Force ("EITF") reached a consensus on issues
raised in EITF 03-03, "Accounting for Retroactive Insurance Contracts
Purchased by Entities Other Than Insurance Enterprises," in May 2003.
This consensus states that a claims-made insurance policy that contains
no retroactive provisions should be accounted for on a prospective
basis. However, if a claims-made insurance policy contains a
retroactive provision, the retroactive and prospective provisions of
the policy should be accounted for separately, if practicable;
otherwise, the claims-made insurance policy should be accounted for
entirely as a retroactive contract. The consensus is effective for all
new insurance arrangements entered into in the next reporting period
beginning after May 28, 2003. The adoption of this consensus did not
have a significant impact on the results of operations, cash flows or
the financial position of the Company.
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Too, Inc.:
We have reviewed the accompanying consolidated balance sheet of Too, Inc. and
its subsidiaries (the "Company") as of November 1, 2003, and the related
consolidated statements of operations for each of the thirteen and thirty-nine
week periods ended November 1, 2003 and November 2, 2002 and the consolidated
statements of cash flows for the thirty-nine week periods ended November 1, 2003
and November 2, 2002. These interim financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of February
1, 2003, and the related consolidated statements of income, changes in
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 21, 2003 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet information
as of February 1, 2003 is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
November 12, 2003
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the thirteen weeks ended November 1, 2003 were $148.9 million, a
decrease of 10% from $164.6 million for the comparable period of 2002. Gross
income decreased 18% to $48.1 million from $59.0 million in 2002 and operating
income decreased 57% to $7.4 million from $17.4 million in 2002. Net income
decreased 58% to $4.5 million from $10.8 million in 2002. Diluted earnings per
share decreased 58% to $0.13, versus $0.31 in 2002.
Net sales for the thirty-nine weeks ended November 1, 2003 were $423.8 million,
a decrease of 9% from $464.5 million for the comparable period of 2002. Gross
income decreased 19% to $130.8 million from $162.0 million in 2002 and operating
income decreased 80% to $7.5 million from $37.0 million in 2002. Net income
decreased 78% to $4.9 million from $22.2 million in 2002. Diluted earnings per
share decreased 78% to $0.14, versus $0.65 in 2002.
The following table represents the amounts shown in the Company's Consolidated
Statements of Operations for the thirteen and thirty-nine weeks ended November
1, 2003 and November 2, 2002, expressed as a percentage of net sales:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying and
occupancy costs 67.7 64.1 69.2 65.1
----- ----- ----- -----
Gross income 32.3 35.9 30.8 34.9
General, administrative and store
operating expenses 27.2 25.3 27.3 26.9
Store closing and impairment costs 0.1 0.0 1.8 0.0
----- ----- ----- -----
Operating income 5.0 10.6 1.8 8.0
Interest (income) expense, net 0.1 (0.1) 0.0 0.1
----- ----- ----- -----
Income before income taxes 4.9 10.7 1.8 7.8
Provision for income taxes 1.9 4.1 0.6 3.0
----- ----- ----- -----
Net income 3.0% 6.6% 1.1% 4.8%
===== ===== ===== =====
14
FINANCIAL SUMMARY
The following summarized financial and statistical data compares the thirteen
thirty-nine weeks ended November 1, 2003, to the comparable 2002 period:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------------------- -------------------------------------
November 1, November 2, Percent November 1, November 2, Percent
2003 2002 Change 2003 2002 Change
----------- ----------- ------- ----------- ----------- -------
Net sales (millions) $ 148.9 $ 164.6 (10)% $ 423.8 $ 464.5 (9)%
Limited Too:
Comparable store sales increase
(decrease)(1) (17)% (1)% (16)% 1%
Sales per average square foot(2) $ 65 $ 80 (19)% $ 190 $ 233 (18)%
Sales per average store (thousands) $ 267 $ 329 (19)% $ 781 $ 953 (18)%
Average store size at quarter end
(square feet) 4,120 4,107 0%
Total square feet at quarter end
(thousands) 2,266 2,041 11%
Number of stores:
Beginning of period 537 484 510 459
Opened 13 15 42 42
Closed - (2) (2) (4)
--------- --------- --------- ----------
End of period 550 497 550 497
========= ========= ========= ==========
Stores remodeled - 2 3 7
Number of mishmash stores 11 11
(1) A store is included in our comparable store sales calculation once it
has completed 52 weeks of operation. Further, stores that have changed
more than 20% in square footage are treated as new stores for purposes
of this calculation.
(2) Sales per average square foot is the result of dividing net sales for
the fiscal quarter by average gross square feet, which reflects the
impact of opening and closing stores throughout the quarter.
NET SALES
Net sales for the third quarter of 2003 decreased 10% to $148.9 million from
$164.6 million in 2002. Comparable store sales declined 17% for the third
quarter of 2003 compared to a 1% decline in comparable store sales during the
third quarter of 2002. The decline was primarily attributable to the poor
performing back-to-school apparel assortment, which incorporated styles and
colors prevalent in junior fashions, but was not popular with Too's core `tween
customer. Also contributing to the decrease was inconsistent mall traffic and
competition from off-the-mall retailers.
Year-to-date net sales were $423.8 million, a 9% decrease from $464.5 million in
2002. Comparable store sales declined 16% for the year-to-date period compared
to a 1% comparable store sales increase in 2002. Year-to-date sales were
negatively impacted primarily by fashion missteps that negatively affected
Limited Too's results. In addition, colder and more inclement weather in the
spring, along with ebbing consumer confidence and its consequent effect on mall
traffic, contributed to the year-to-date decline.
15
Virtually all of Limited Too's hanging merchandise categories experienced
average store sales decreases for the thirteen and thirty-nine weeks ended
November 1, 2003 versus the comparable periods in 2002. However, the innerwear,
accessories, footwear and lifestyles categories posted average store increases
over 2002.
GROSS INCOME
Gross income, expressed as a percentage of net sales, was 32.3% for the third
quarter of 2003, a decrease of 360 basis points from a gross income rate of
35.9% for the third quarter of 2002. This rate decrease was due to higher
markdowns to clear slow-moving merchandise, as well as a 50 basis point decline
in initial mark-ups due in part to value pricing initiatives. The rate decrease
was further exacerbated by our inability to leverage fixed buying and occupancy
costs due to the negative comparable store sales performance.
For the year-to-date period, the gross income rate decreased 410 basis points to
30.8% from 34.9% in 2002. The year-to-date rate decrease was due to higher
markdowns and the inability to leverage buying and occupancy costs.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, administrative and store operating expense increased 190 basis points
to 27.2% expressed as a percentage of net sales for the third quarter of 2003
from 25.3% for the third quarter of 2002. However, in dollars, total general,
administrative and store operating expenses declined by $1.1 million in the
third quarter of 2003 versus the same period in 2002. The decrease was primarily
due to lower incentive compensation expense and lower distribution center costs.
On a year-to-date basis, general, administrative and store operating expense,
expressed as a percentage of net sales, increased by 40 basis points to 27.3% in
2003 from 26.9% in 2002. However, in dollars, total general, administrative and
store operating expenses declined by $9.3 million for the year-to-date period of
2003 versus the same period in 2002. The decrease for the year-to-date period
was due to lower incentive compensation expense, settlement proceeds in the
first quarter received in lieu of a litigation claim and certain one-time
expenses incurred last year for brand protection litigation, tax consulting, as
well as moving and start-up costs associated with the Company's new home office
and distribution center. The aforementioned items more than offset increases in
store payroll and the $1.0 million charge incurred during the second quarter of
2003 to settle certain California labor matters.
STORE CLOSING AND IMPAIRMENT COSTS
On May 28, 2003, the Company announced that it is ending the rollout of its
mishmash retail concept in favor of redirecting its resources to the development
of a new concept focused on value-priced sportswear and accessories for `tween
girls, ages 7 to 14. The remaining 11 mishmash stores open at the end of the
third quarter will close early in the fourth quarter. Four mishmash stores will
be converted to the new concept. In addition, the Company announced the
discontinuation of its Goldmark joint venture during the second quarter.
Accordingly, the Company recorded a charge of $188 thousand and $7.5 million
during the quarter and year-to-date periods ended November 1, 2003,
respectively. These charges consisted primarily of impairment charges on
mishmash's store assets, as well as costs associated with early termination of
the mishmash store leases.
OPERATING INCOME
Operating income, expressed as a percentage of net sales, was 5.0% in the third
quarter of 2003, a decrease of 560 basis points from 10.6% in the third quarter
of 2002. The year-to-date operating income rate decreased to 1.8% in 2003 from
8.0% in 2002, a decline of 620 basis points. The decrease in the operating
income rate for both the quarter and year-to-date periods was due to lower
merchandise margins and occupancy rates. In addition, the year-to-date operating
income rate was significantly impacted by the mishmash store closing costs and
impairment charges.
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INTEREST (INCOME) EXPENSE, NET
Net interest amounted to an expense of $125,000 and income of $64,000 for the
quarter and year-to-date periods ended November 1, 2003. For the comparable
periods in 2002, net interest amounted to income of $121,000 and an expense of
$648,000, respectively. Interest expense represents facility and letters of
credit fees, as well as interest related to the Company's nonqualified benefit
plans. Interest income is earned on investments in money market securities and
short-term municipal bonds.
INCOME TAXES
Income tax expense amounted to $2.8 million and $2.7 million for the quarter and
year-to-date periods ended November 1, 2003, respectively, compared to $6.7
million and $14.1 million for the comparable periods ended November 2, 2002. The
income tax provision rate decreased beginning in the second quarter of fiscal
2002 as a result of realigning our corporate operations, including our direct
sourcing and supply chain management initiatives that provided state tax
benefits. The rate was further reduced due to the Company's investment in
certain short-term, tax-free municipal bonds.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities is the primary resource to support
operations, including projected growth, seasonal working capital requirements
and capital expenditures. A summary of our working capital position and
capitalization follows (in thousands):
NOVEMBER 1, FEBRUARY 1,
2003 2003
----------- -----------
Working capital $ 107,529 $ 92,644
=========== ===========
Capitalization:
Shareholders' equity $ 263,591 $ 253,660
=========== ===========
Additional amounts available under the revolving
portion of the Credit Facility $ 100,000 $ 50,000
=========== ===========
Net cash provided by operating activities amounted to $5.4 million and $35.3
million for the year-to-date period ended November 1, 2003 and November 2, 2002,
respectively. The year-to-date decrease in 2003 from 2002 was primarily due to
lower net income and increased cash outflows in accounts payable and accrued
expenses and other assets.
For the year-to-date period ended November 1, 2003, investing activities
represented capital expenditures primarily for new and remodeled stores.
Investing activities also reflect the designation of restricted cash as a result
of the Company's efforts to amend its Credit Facility. For the comparable period
in 2002, investing activities represented capital expenditures for new and
remodeled stores, as well as progress payments on the completion of construction
of our new home office and distribution center.
Financing activities for the year-to-date period ended November 1, 2003
principally represented proceeds from employee stock option exercises. For the
comparable period in 2002, financing activities also included proceeds from the
May 2002 follow-on offering of 2.4 million common shares, and the accompanying
repayment of the Company's term loan.
During August 1999, the Company entered into a five-year $100 million credit
agreement with a syndicate of banks. This credit agreement was collateralized by
virtually all assets of the Company and was comprised of a $50 million five-year
term
17
loan and a $50 million revolving loan commitment. The entire amount of the term
portion was drawn in order to fund a $50 million dividend to Limited Brands. On
May 24, 2002, the Company paid off the entire $50 million term loan with the
proceeds from the follow-on stock offering.
On April 29, 2003, the Company terminated the aforementioned credit agreement
and entered into a new credit facility (the "Credit Facility") with a syndicate
of banks. The Credit Facility consists of a $100 million unsecured revolving
loan commitment. Interest expense on borrowings under the Credit Facility is
based on, at the borrower's option, either (1) the higher of the Prime rate and
the federal funds effective rate plus 1/2 of 1% or (2) matrix pricing applied to
the London Interbank Offered Rate. Under the terms of the Credit Facility, the
Company is required to comply with certain covenants, including financial ratios
such as leverage, coverage and tangible net worth. The Credit Facility limits
the Company from incurring certain additional indebtedness, restricts
substantial asset sales and provides for a springing lien against certain assets
in the event of default. On September 16, 2003, the unsecured Credit Facility
was amended, and became retroactively effective as of July 31, 2003. In exchange
for the modification of certain financial covenants the Company agreed to
maintain a pledged investment account equal to 110% of any outstanding letters
of credit or any revolving commitment usage. As of November 1, 2003, the Company
had outstanding letters of credit under the Credit Facility amounting to $15.5
million. The Company is in compliance with all applicable terms of the amended
Credit Facility.
CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, totaled $19.1
million for the year-to-date period ended November 1, 2003 compared to $36.0
million for the comparable period in 2002. The decrease was primarily due to the
$22.1 million in costs the Company incurred in 2002 for the completion of
construction of its new distribution center and home office. We anticipate
capital expenditures of approximately $30 million in fiscal 2003. Capital
expenditures consist primarily of costs for new Limited Too stores, remodeling
or expansion of existing stores and related fixtures and equipment, as well as
costs to convert 4 mishmash stores and build approximately 25 new concept stores
in order to open in early spring 2004. We intend to add approximately 210,000
square feet in 2003, which will represent a 10% increase over Limited Too square
footage as of the 2002 year end. We anticipate that the increase will result
from opening 49 new Limited Too stores and expanding four stores identified for
remodeling. We expect substantially all capital expenditures in fiscal 2003 will
be funded by cash on hand and net cash provided by operating activities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that impact the amounts reported in the Company's
consolidated financial statements and related notes. On an on-going basis,
management evaluates its estimates and judgments, including those related to
inventories, long-lived assets and sales returns. Management bases its estimates
and judgments on historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
materially from management's estimates. Management believes the following
estimates and assumptions are most significant to reporting the Company's
results of operations and financial position.
Revenue Recognition - Retail sales are recorded when the customer takes
possession of merchandise. Markdowns associated with the Frequent Buyer and "Too
Bucks" Programs are recognized upon redemption in conjunction with a qualifying
purchase. Catalog and web sales are recorded upon shipment to the customer. A
reserve is provided for projected merchandise returns based on prior experience.
Inventories - Inventories are valued at the lower of average cost or market, on
a first-in, first-out basis, utilizing the retail method. Under the retail
method, the valuation of inventories at cost and the resulting gross margins are
calculated by applying a cost-to-retail ratio to the retail value of
inventories. The use of the retail method will result in valuing inventories at
the lower of cost or market when markdowns are currently taken as a reduction of
the retail value and cost of inventories. Inherent in the retail method are
certain significant management judgments and estimates including, among others,
future sales, markdowns and shrinkage, which significantly impact the ending
inventory valuation at cost as well as the resulting gross margins. The Company
calculates inventory costs on an individual item-class basis to ensure a high
degree of accuracy
18
in estimating the cost. Inventory valuation at the end of the first and third
quarters reflects adjustments for inventory markdowns and shrinkage estimates
for the total selling season.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Service lives are established for
store assets ranging from 5 to 10 years for building improvements and 3 to 10
years for other property and equipment. Property and equipment at the home
office and distribution center are assigned service lives between 5 and 40
years. Assets are reviewed on an annual basis for impairment, and based on
management's judgment, are written down to the estimated fair value based on
anticipated future cash flows.
Income Taxes - Income taxes are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method. Deferred tax assets and
liabilities are recognized based on the difference between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Inherent in the measurement of deferred balances are certain judgments
and interpretations of enacted tax laws and published guidance with respect to
applicability to the Company's operations. No valuation allowance has been
provided for deferred tax assets because management believes that it is more
likely than not that the full amount of the net deferred tax assets will be
realized in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Financial Accounting
Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities," in January 2003. FIN No. 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as Special Purpose
Entities). FIN No. 46 is applicable for variable interest entities created after
January 31, 2003 and becomes effective in the first fiscal year or interim
accounting period beginning after December 15, 2003 for variable interest
entities created before February 1, 2003. The Company is currently evaluating
the impact of adopting FIN No. 46, but the Company's management does not expect
the adoption of FIN No. 46 to have a significant impact on the results of
operations, cash flows or the financial position of the Company.
The Emerging Issues Task Force ("EITF") reached a consensus on issues raised in
EITF 03-03, "Accounting for Retroactive Insurance Contracts Purchased by
Entities Other Than Insurance Enterprises," in May 2003. This consensus states
that a claims-made insurance policy that contains no retroactive provisions
should be accounted for on a prospective basis. However, if a claims-made
insurance policy contains a retroactive provision, the retroactive and
prospective provisions of the policy should be accounted for separately, if
practicable; otherwise, the claims-made insurance policy should be accounted for
entirely as a retroactive contract. The consensus is effective for all new
insurance arrangements entered into in the next reporting period beginning after
May 28, 2003. The adoption of this consensus did not have a significant impact
on the results of operations, cash flows or the financial position of the
Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Management's Discussion and Analysis or made by management of the Company
involve risks and uncertainties and are subject to change based on various
important factors, many of which may be beyond the Company's control.
Forward-looking statements are indicated by words such as "anticipate,"
"estimate," "expect," "intend," "risk," "could," "may," "will," "pro forma,"
"likely," "possible," "potential," and similar words and phrases and the
negative forms and variations of these words and phrases, and include, but may
not be limited to, statements in this Management's Discussion and Analysis
relating to anticipated capital expenditures in 2003 for new stores, the
remodeling or expansion of existing stores and the related funding thereof. The
following factors, among others, in some cases have affected, and in the future
could affect, the Company's financial performance and actual results and could
cause future performance and financial results to differ materially from those
expressed or implied in any forward-looking statements included in this
Management's Discussion and Analysis or otherwise made by management: changes in
consumer spending patterns, consumer preferences and overall economic
conditions; the impact of competition and pricing; changes in weather patterns;
currency and exchange risks; changes in existing or potential trade
restrictions, duties, tariffs or quotas; changes in political or financial
stability; changes in postal rates and charges and paper and printing costs;
availability of suitable store
19
locations at appropriate terms; ability to develop new merchandise; ability to
hire and train associates; and/or other risk factors that may be described in
the Safe Harbor Statement and Business Risks section of the Company's Form 10-K,
filed April 29, 2002, as well as other filings with the Securities and Exchange
Commission. Future economic and industry trends that could potentially impact
revenue and profitability are difficult to predict. Therefore, there can be no
assurance that the forward-looking statements included herein will prove to be
accurate. In light of the significant uncertainties in the forward-looking
statements included herein, the inclusion of such information should not be
regarded a representation by the Company, or any other person, that the
objectives of the Company will be achieved. The forward-looking statements made
herein are based on information presently available to the management of the
Company. The Company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
To the extent we borrow under our Credit Facility, we will be exposed to market
risk related to changes in interest rates. At November 1, 2003, no borrowings
were outstanding under the Credit Facility. Additionally, we are exposed to
market risk related to interest rate risk on the investment of cash in
securities with original maturities of three months or less. These investments
are considered cash equivalents and are shown as such on the Consolidated
Balance Sheets. If there are changes in interest rates, those changes would
affect the interest income we earn on those investments.
ITEM 4. Controls and Procedures
Based on an evaluation carried out, as of the end of the period covered by this
report, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective. There were
no changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There are various claims, lawsuits and other legal actions pending for and
against Too incident to the operations of its business. It is the opinion of
management that the ultimate resolution of these matters will not have a
material adverse effect on Too's results of operations cash flows or financial
position.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of Report
of Independent Accountants.
31.1 Certification of Periodic Report by the Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Periodic Report by the Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Periodic Report by the Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
20
32.2 Certification of Periodic Report by the Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On August 8, 2003, Too, Inc. filed a Current Report on Form 8-K dated
August 8, 2003, reporting pursuant to "Item 12. Results of Operations
and Financial Condition," (under "Item 9. Regulation FD Disclosure")
that Too, Inc. had issued a press release announcing actual net sales
and certain projected financial results for the quarter ended August 2,
2003.
On August 13, 2003, Too, Inc. filed a Current Report on Form 8-K dated
August 13, 2003, reporting pursuant to "Item 12. Results of Operations
and Financial Condition," that Too, Inc. had issued a press release
announcing its financial results for the second quarter ended August 2,
2003, and certain expectations for the third quarter ended November 1,
2003.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOO, INC.
(Registrant)
By /s/ Kent A. Kleeberger
----------------------------
Kent A. Kleeberger
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(duly authorized officer and Principal
Financial and Accounting Officer)
Date: December 5, 2003
22