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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 MAY 1, 2004
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.
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 JUNE 1, 2004
- -------------- ---------------------------
$.01 Par Value 34,443,627 Shares
TOO, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income Thirteen Weeks Ended May 1, 2004 and May 3, 2003........... 3
Consolidated Balance Sheets May 1, 2004 and January 31, 2004................................. 4
Consolidated Statements of Cash Flows Thirteen Weeks Ended May 1, 2004 and May 3, 2003....... 5
Notes to Consolidated Financial Statements................................................... 6
Report of Independent Registered Public Accounting Firm...................................... 12
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition............................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 20
Item 4. Controls and Procedures................................................................. 21
PART II. Other Information
Item 1. Legal Proceedings....................................................................... 21
Item 5. Other Information....................................................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................................ 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED
----------------------------
MAY 1, MAY 3,
2004 2003
--------- ---------
Net sales $ 154,131 $ 137,971
Costs of goods sold, buying and
occupancy costs 103,092 95,344
--------- ---------
Gross income 51,039 42,627
General, administrative and store
operating expenses 42,909 35,555
--------- ---------
Operating income 8,130 7,072
Interest income, net 213 124
--------- ---------
Income from continuing operations
before income taxes 8,343 7,196
Provision for income taxes 3,100 2,600
--------- ---------
Income from continuing operations 5,243 4,596
Loss on discontinued operations of
mishmash, net of tax - 437
--------- ---------
Net income $ 5,243 $ 4,159
========= =========
Income (loss) per share - basic:
Continuing operations $ 0.15 $ 0.13
Discontinued operations - (0.01)
--------- ---------
Net income per basic share $ 0.15 $ 0.12
========= =========
Income (loss) per share - diluted:
Continuing operations $ 0.15 $ 0.13
Discontinued operations - (0.01)
--------- ---------
Net income per diluted share $ 0.15 $ 0.12
========= =========
Weighted average common shares:
Basic 34,403 34,098
========= =========
Diluted 34,914 34,604
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MAY 1, JANUARY 31,
2004 2004
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 119,853 $ 115,886
Restricted cash 15,264 20,846
Receivables 3,818 6,802
Income taxes receivable 655 5,542
Inventories 56,364 58,299
Store supplies 13,619 13,285
Other 2,638 2,542
--------- ---------
Total current assets 212,211 223,202
Property and equipment, net 147,761 147,038
Deferred income taxes 6,780 6,780
Other assets 14,660 14,434
--------- ---------
Total assets $ 381,412 $ 391,454
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,088 $ 36,556
Accrued expenses 42,562 41,725
Income taxes payable 11,584 17,464
--------- ---------
Total current liabilities 79,234 95,745
Other long-term liabilities 13,969 13,956
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares authorized - -
Common stock, $.01 par value, 100 million shares
authorized, 34.5 million and 34.4 million issued and outstanding
at May 1, 2004 and January 31, 2004, respectively 345 344
Treasury stock, at cost, 29,709 shares (998) (998)
Paid in capital 121,172 119,960
Retained earnings 167,690 162,447
--------- ---------
Total shareholders' equity 288,209 281,753
--------- ---------
Total liabilities and shareholders' equity $ 381,412 $ 391,454
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THIRTEEN WEEKS ENDED
------------------------
MAY 1, MAY 3,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,243 $ 4,159
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS:
Depreciation and amortization 5,157 4,682
CHANGES IN ASSETS AND LIABILITIES:
Inventories 1,935 9,624
Accounts payable and accrued expenses (8,637) (23,944)
Income taxes (1,010) (3,561)
Other assets 1,677 (1,234)
Other liabilities 13 976
--------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 4,378 (9,298)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (6,444) (5,636)
Restricted cash 5,582 -
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (862) (5,636)
--------- ---------
FINANCING ACTIVITIES:
Stock options and other equity changes 709 102
Change in cash overdraft (258) 9,696
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 451 9,798
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,967 (5,136)
Cash and equivalents, beginning of period 115,886 106,004
--------- ---------
Cash and equivalents, end of period $ 119,853 $ 100,868
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Issuance of restricted stock $ 521 $ 936
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
Too, Inc. (referred to herein as "Too" or "the Company") is the operator of two
specialty retailing businesses, Limited Too and Justice. 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. Justice, launched by the Company in late January 2004, sells value-priced
sportswear and accessories for girls ages seven to fourteen years.
On May 28, 2003, the Company announced the discontinuation of its mishmash
retail concept in favor of redirecting its resources to the Justice concept. See
Note 4 for further information regarding the Company's discontinued operations.
Also on that date, the Company announced it was ending its involvement in the
Goldmark joint venture. See Note 7 for further information.
The accompanying unaudited interim Consolidated Financial Statements as of May
1, 2004 and for the thirteen weeks ended May 1, 2004 and May 3, 2003, 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 2003 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 May 1, 2004, and for the thirteen
weeks ended May 1, 2004 and May 3, 2003 included herein have been reviewed by
the independent registered 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 stock 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
---------------------
MAY 1, MAY 3,
2004 2003
------- -------
Net income, as reported $ 5.2 $ 4.2
Stock-based compensation expense recorded
under APB Opinion No. 25, net of tax 0.3 0.2
Stock-based compensation expense
determined under fair value based
method, net of tax (1.1) (1.0)
------- -------
Pro forma net income $ 4.4 $ 3.4
======= =======
Earnings per share:
Basic - as reported $ 0.15 $ 0.12
======= =======
Basic - pro forma $ 0.13 $ 0.10
======= =======
Diluted - as reported $ 0.15 $ 0.12
======= =======
Diluted - pro forma $ 0.12 $ 0.10
======= =======
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:
THIRTEEN WEEKS ENDED
---------------------
MAY 1, MAY 3,
2004 2003
------- -------
Expected life 5.0 5.0
Forfeiture rate 20% 20%
Dividend rate - -
Price volatility 50% 52%
Risk-free interest rate 3.5% 2.9%
The weighted average fair value of options granted was $7.75 and $7.30 for the
thirteen weeks ended May 1, 2004 and May 3, 2003, respectively.
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
-----------------------
MAY 1, MAY 3,
2004 2003
-------- --------
Net income $ 5,243 $ 4,159
======== ========
Weighted average common shares - basic 34,403 34,098
Dilutive effect of stock options
and restricted stock 511 506
-------- --------
Weighted average common shares - diluted 34,914 34,604
======== ========
Due to the options' strike price exceeding the average market price of the
common shares for the reporting periods, options to purchase 974,000 and
1,284,000 common shares were not included in the computation for the thirteen
weeks ended May 1, 2004 and May 3, 2003, respectively.
4. DISCONTINUED OPERATIONS
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 years. All 18 of the mishmash stores open at the time of the
announcement were closed by the end of November 2003. Four of the former
mishmash locations have been converted to the Justice format and have since
reopened. In accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the Company has reclassified its
Consolidated Statements of Income to segregate the revenues and expenses of its
mishmash operations. The operating loss of mishmash of $0.4 million, net of an
income tax benefit of $0.2 million, for the thirteen weeks ended May 3, 2003 is
shown on the Loss on Discontinued Operations line of the Consolidated Statements
of Income. The net operating loss of mishmash includes net sales of $2.2 million
for the thirteen weeks ended May 3, 2003.
In fiscal 2003, the Company incurred store closing costs, which were recorded in
accordance with the provisions of SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." No store closing costs were incurred for the
thirteen weeks ended May 1, 2004 and May 3, 2003, and the Company does not
expect to incur any additional material expenses in association with these store
closing activities. All store closing liabilities are expected to be settled in
fiscal 2004.
8
The following table provides a reconciliation of the store closing liability
balance during the quarter, which is included in the Accrued Expenses line of
the Consolidated Balance Sheets (in thousands):
BEGINNING ENDING
ACCRUAL ACCRUAL
BALANCE CURRENT COSTS BALANCE
FEBRUARY 1, PERIOD PAID OR MAY 1,
2004 EXPENSE SETTLED 2004
----------- ------- ------- -------
Contract termination costs $1,192 $ - $ (393) $ 799
------ --- ------ ------
Store closing costs $1,192 $ - $ (393) $ 799
====== === ====== ======
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.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of (in thousands):
MAY 1, JANUARY 31,
2004 2004
--------- -----------
Land $ 8,103 $ 8,103
Buildings 42,049 42,045
Furniture, fixtures and equipment 167,027 163,748
Leasehold improvements 34,890 33,192
Construction-in-progress 4,123 4,378
Total --------- ---------
256,192 251,466
Less: accumulated depreciation and
amortization (108,431) (104,428)
--------- ---------
Property and equipment, net $ 147,761 $ 147,038
========= =========
9
7. RELATED PARTY TRANSACTIONS
During fiscal year 2002, the Company formed a 50% owned joint venture, Goldmark,
which was accounted for under the equity method of accounting. On May 28, 2003,
the Company announced it was ending its involvement in the joint venture. 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 $475,000 and $292,000 as of May 1, 2004 and
January 31, 2004, respectively.
8. CREDIT FACILITY
In August 1999, we entered into a five-year, $100 million collateralized credit
facility ("Old Credit Facility"). The Old Credit Facility consisted of a $50
million five-year term loan and a $50 million, five-year annual revolving credit
commitment. The Old Credit Facility's interest rates, which reflected matrix
pricing, were based on the London Interbank Offered Rate or Prime plus a spread
as defined in the agreement. The term loan was interest only until the end of
the third year at which time the amortization of the outstanding principal
balance would have begun. The Old Credit Facility contained customary
representations and warranties as well as certain affirmative, negative and
financial covenants. In November 2001, the Company amended the Old Credit
Facility. The amendment allowed for the investment of cash in short-term,
AAA-rated municipal bonds, as well as less stringent limitations on 2001 capital
expenditures and on indebtedness incurred in relation to lease agreements.
On May 24, 2002, the Company sold 2.4 million shares of its common stock,
resulting in net proceeds of $73.4 million. Concurrently, the Company paid off
the entire $50 million term loan due under the Old Credit Facility, and the
remaining proceeds from the sale of common stock were used for general corporate
purposes. The $50 million revolving loan commitment under the Old Credit
Facility remained in effect and was available to the Company for future business
purposes.
On April 29, 2003, the Company terminated the aforementioned Old Credit Facility
and entered into a new unsecured credit facility ("New Credit Facility") with a
syndicate of banks. The New Credit Facility consists of a $100 million unsecured
revolving loan commitment. Interest expense on borrowings under the New Credit
Facility is based on, at the borrower's option, either (1) the higher of the
Prime rate or 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 New
Credit Facility, the Company is required to comply with certain covenants,
including financial ratios such as leverage, coverage and tangible net worth.
The New 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
New Credit Facility was amended, and the amendment 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. The Company had outstanding letters of credit under the New Credit
Facility amounting to $13.1 million and $18.2 million as of May 1, 2004 and
January 31, 2004, respectively. The Company is in compliance with all applicable
terms of the amended New Credit Facility.
10
Interest income, net, consisted of the following (in thousands):
THIRTEEN WEEKS ENDED
--------------------
MAY 1, MAY 3,
2004 2003
----- -----
Interest income $ 483 $ 244
Interest expense (270) (120)
----- -----
Interest income, net $ 213 $ 124
===== =====
9. RECENTLY ISSUED ACCOUNTING STANDARD
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). Subsequent to issuing FIN No. 46, the FASB continued to propose
modifications and issue FASB Staff Positions ("FSPs") that changed and clarified
FIN No. 46. These modifications and FSPs were subsequently incorporated into FIN
No. 46 (revised) ("FIN No. 46R"), which was issued in November 2003 and replaces
FIN No. 46. Among other things, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to certain conditions, b) states the
provisions of FIN No. 46R are not required to be applied if a company is unable
to obtain the necessary information, c) includes new definitions and examples of
what variable interests are, d) clarifies and changes the definition of a
variable interest entity and e) clarifies and changes the definition and
treatment of de facto agents. FIN No. 46R is effective for companies that have
interests in variable interest entities or potential variable interest entities
for periods ending after December 15, 2003. Application of FIN No. 46R for all
other types of entities is required for periods ending after March 15, 2004. The
adoption of FIN No. 46R did not have a significant impact on the results of
operations, cash flows or the financial position of the Company.
10. SUBSEQUENT EVENT
On May 24, 2004, Kent A. Kleeberger resigned as Executive Vice President and
Chief Financial Officer, effective June 23, 2004, to pursue other career
interests. William E. May, Executive Vice President and Chief Operating Officer,
will assume Mr. Kleeberger's responsibilities.
The Company also announced on that day the resignation of James C. Petty as
President and General Manager of Limited Too, effective June 23, 2004, to pursue
other career interests. The Company has begun a search for Mr. Petty's
replacement. In the interim, Michael W. Rayden, Chairman of the Board, President
and Chief Executive Officer, will assume Mr. Petty's day-to-day
responsibilities.
The Company estimates that the costs related to separation under the employment
agreements with both of the executives will be in the range of $1.2 million to
$1.5 million, or $0.02 to $0.03 per diluted share.
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 May 1, 2004 and the related consolidated
statements of income and cash flows for each of the thirteen-week periods ended
May 1, 2004 and May 3, 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
January 31, 2004, 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 24, 2004 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 January 31, 2004, 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
May 12, 2004
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
On May 28, 2003, the Company announced the discontinuation of its mishmash
retail concept, and all mishmash stores were closed by November 25, 2003.
Accordingly, mishmash's operating results have been reflected as discontinued
operations in this Form 10-Q. Unless otherwise indicated, the following
discussion relates only to Too, Inc.'s continuing operations.
Net sales for the thirteen weeks ended May 1, 2004 were $154.1 million, an
increase of 12% from $138.0 million for the comparable period of 2003. Gross
income increased 20% to $51.0 million in 2004 from $42.6 million in 2003 and
operating income increased 15% to $8.1 million in 2004 from $7.1 million in
2003. Net income, which included a loss on discontinued operations in 2003,
increased 26% to $5.2 million in 2004 from $4.2 million in 2003. Diluted
earnings per share increased 25% to $0.15 in 2004 versus $0.12 in 2003.
The following table represents the amounts shown in the Company's Consolidated
Statements of Income for the thirteen weeks ended May 1, 2004 and May 3, 2003,
expressed as a percentage of net sales:
THIRTEEN WEEKS ENDED
--------------------
MAY 1, MAY 3,
2004 2003
------ ------
Net sales 100.0% 100.0%
Cost of goods sold, buying and occupancy costs 66.9 69.1
----- -----
Gross income 33.1 30.9
General, administrative and store operating expenses 27.8 25.8
----- -----
Operating income 5.3 5.1
Interest income, net 0.1 0.1
----- -----
Income from continuing operations before income taxes 5.4 5.2
Provision for income taxes 2.0 1.9
----- -----
Income from continuing operations 3.4 3.3
Loss on discontinued operations of mishmash, net of tax 0.0 0.3
----- -----
Net income 3.4% 3.0%
===== =====
13
FINANCIAL SUMMARY
Summarized financial data for the thirteen weeks ended May 1, 2004 and May 3,
2003 is presented below:
Thirteen Weeks Ended
-------------------------------
May 1, May 3, Percent
2004 2003 Change
------- ------- -------
Net sales (millions) $ 154.1 $ 138.0 12%
Limited Too:
Comparable store sales increase (decrease) (1) 2% (18)%
Sales per average square foot (2) $ 65 $ 65 -%
Sales per average store (thousands) (3) $ 267 $ 266 -%
Average store size at quarter end (square feet) 4,124 4,117 -%
Total square feet at quarter end (thousands) 2,285 2,120 8%
Number of stores:
Beginning of period 553 510
Opened 3 7
Closed (2) (2)
------- -------
End of period 554 515
======= =======
Stores remodeled 5 2
Number of mishmash stores - 14
Number of Justice stores 26 -
(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 feet 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.
(3) Sales per average store is the result of dividing net sales for the fiscal
quarter by average store count, which reflects the impact of opening and
closing stores throughout the quarter.
NET SALES
Net sales increased 12% to $154.1 million in the first quarter of fiscal 2004
from $138.0 million for 2003. The increase was primarily a result of the net
addition of 39 Limited Too stores and 26 Justice stores. Also contributing to
the increase was a 2% increase in comparable store sales ("comps"). The first
quarter of fiscal 2004 also benefited from the earlier Easter holiday, and the
resultant shift of the redemption period of the Company's spring Too Bucks
promotion. This earlier redemption resulted in a benefit of approximately two
percentage points in comps for the first quarter of fiscal 2004.
For Limited Too, transactions per average store increased 10% in the first
quarter of fiscal 2004 compared to the comparable period in 2003. Also, Limited
Too's average dollar sale was down 9%, which was comprised of a 4% decrease in
units per transaction and a 5% decrease in average unit retail.
14
From a merchandising standpoint, the non-apparel portion of the business
continued to post strong sales increases on an average store basis during the
first quarter of 2004. The introduction of the "Fun Zone" area in the Fall of
fiscal 2003, located in the front corner of our stores, was a major factor in
the improvement of the non-apparel sales performance. The best performing
apparel categories included girls skirts and skorts, dresses and jackets.
Underperforming apparel categories included active and casual shorts, and active
tops.
GROSS INCOME
Gross income, expressed as a percentage of net sales, was 33.1% for the first
quarter of fiscal 2004, an increase of 220 basis points from a gross income rate
of 30.9% for the comparable period of 2003. This rate increase was due to lower
markdowns and lower buying and occupancy costs, and partially offset by a
decrease in initial markup ("IMU") rate.
Markdowns, as a rate to net sales, decreased 100 basis points in the first
quarter of fiscal 2004 versus the comparable period in 2003 due to tight control
of inventory levels. In addition, the Company had a reduced level of promotional
activity during the quarter.
Buying and occupancy costs declined 140 basis points as a rate to net sales in
the first quarter of fiscal 2004 compared to the first quarter of 2003,
primarily due to a decrease in catalog production costs, net of partner revenue.
The decrease in catalog costs was caused by a reduction of catalog circulation
during the first quarter versus last year.
The Limited Too IMU rate in the first quarter of fiscal 2004 decreased 150 basis
points compared to the first quarter of 2003. The decline in rate was primarily
due to a shift in the Company's merchandise mix from apparel to non-apparel
categories.
The Company's gross income may not be comparable to that of other retailers
since all significant costs related to the Company's distribution network,
excluding freight costs, are included in general, administrative and store
operating expenses (see "General, Administrative and Store Operating Expenses"
section below).
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, administrative and store operating expenses, expressed as a percentage
of net sales, were 27.8% for the first quarter of fiscal 2004, an increase of
200 basis points from a rate of 25.8% for the comparable period of 2003. The
increase in rate was attributable to higher store expenses and higher home
office expenses.
Store expenses increased 20 basis points as a rate to net sales in the first
quarter of fiscal 2004 versus the first quarter of 2003. The change was due to
increased store payroll and other store costs associated with the net addition
of 39 Limited Too stores and 26 Justice stores.
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Home office expenses increased 260 basis points as a rate to net sales in the
first quarter of fiscal 2004 versus the first quarter of 2003. The change was
due to an accrual for incentive compensation made during the first quarter of
fiscal 2004, while no such accrual was made during the first quarter of fiscal
2003 because of the Company's disappointing results. In addition, general,
administrative and store operating expenses in the first quarter of 2003
benefited from settlement proceeds received by the Company in lieu of a
litigation claim.
Costs related to the distribution center, excluding freight costs, included in
general, administrative and store operating expenses were $1.9 million and $2.1
million for the first quarters of fiscal 2004 and 2003, respectively.
OPERATING INCOME
Operating income, expressed as a percentage of net sales, was 5.3% in the first
quarter of fiscal 2004, an increase of 20 basis points from 5.1% in the first
quarter of 2003. The rate increase was a result of a 220 basis point increase in
gross income, which was partially offset by a 200 basis point increase in
general, administrative and store operating expenses.
INTEREST INCOME, NET
Interest income, net, amounted to $213,000 for the first quarter of fiscal 2004
versus $124,000 in the first quarter of 2003. Interest income is earned on
investments in money market securities and short-term, AAA-rated and insured
municipal bonds. Interest income amounted to $483,000 and $244,000 for the first
quarters of fiscal 2004 and 2003, respectively. Interest expense represents
facility and letters of credit fees, as well as net interest expense related to
the Company's nonqualified benefit plans. Interest expense amounted to $270,000
and $120,000 for the first quarters of fiscal 2004 and 2003, respectively.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $3.1 million in the first quarter of
fiscal 2004 from $2.6 million for the first quarter of 2003. The income tax
provision rate increased 60 basis points to 37.2% in the first quarter of fiscal
2004 from 36.6% in the first quarter of 2003. The rate increase is attributable
to higher pre-tax income in the current quarter reducing the effect of the tax
benefit derived from municipal interest income.
DISCONTINUED OPERATIONS
On May 28, 2003, the Company announced that it was ending the rollout of its
mishmash retail concept in favor of redirecting its resources to the development
of a new concept, Justice, focused on value-priced sportswear and accessories
for `tween girls, ages 7 to 14 years. All 18 of the mishmash stores open at the
time of the announcement were closed by the end of November 2003.
No expense for discontinued operations was recognized in the first quarter of
fiscal 2004. For the first quarter of fiscal 2003, the loss on discontinued
operations of mishmash amounted to $437,000, net of tax.
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FINANCIAL CONDITION
Our balance sheet remains strong due to positive cash flows from operations. We
were able to finance all capital expenditures with working capital generated
from operations and ended the quarter with $135.1 million in cash and
equivalents, of which $15.3 million was restricted by our Credit Facility and
insurance trust deposits. A more detailed discussion of liquidity, capital
resources and capital requirements follows.
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):
MAY 1, JANUARY 31,
2004 2004
-------- -----------
Working capital, excluding restricted cash of
$15.3 and $20.8 million at May 1, 2004 and
January 31, 2004, respectively $117,713 $106,611
======== ========
Capitalization:
Shareholders' equity $288,209 $281,753
======== ========
Additional amounts available under the revolving
portion of the Credit Facility $ 86,897 $ 81,822
Net cash provided by operating activities amounted to $4.4 million for the first
quarter of fiscal 2004, while cash used for operating activities totaled $9.3
million for the comparable period of 2003. The increase over the first quarter
of last year was due to the change in accrued expenses, which was partially
offset by the change in inventories.
The change in accrued expenses was driven primarily by the timing of rent
payments, as well as the increase in the incentive compensation accrual in
fiscal 2004.
The change in inventories decreased in the first quarter of 2004 versus the
comparable period in 2003. This was caused by high inventory levels at the end
of fiscal 2002 due to a combination of early receipts of spring goods prior to
the end of fiscal 2002 and, to a lesser extent, missed sales in late December
and January of that fiscal year.
Net cash used for investing activities amounted to $0.9 million and $5.6 million
for the first quarters of 2004 and 2003, respectively. For the first quarter of
2004, investing activities represented capital expenditures primarily for new
and remodeled Limited Too and Justice stores. Investing activities also reflect
the designation of restricted cash as a result of the Company's amendment to its
Credit Facility. For the comparable period in 2003, investing activities
represented capital expenditures for new and remodeled Limited Too stores. See
further discussion in the "Capital Expenditures" section below.
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Net cash provided by financing activities amounted to $0.5 million and $9.8
million for the first quarters of 2004 and 2003, respectively. Financing
activities represent proceeds from employee stock option exercises, as well as
the change in outstanding checks classified in Accounts Payable and Accrued
Expenses on the balance sheet.
In August 1999, we entered into a five-year, $100 million collateralized credit
facility ("Old Credit Facility"). The Old Credit Facility consisted of a $50
million five-year term loan and a $50 million, five-year annual revolving credit
commitment. The Old Credit Facility's interest rates, which reflected matrix
pricing, were based on the London Interbank Offered Rate or Prime plus a spread
as defined in the agreement. The term loan was interest only until the end of
the third year at which time the amortization of the outstanding principal
balance would have begun. The Old Credit Facility contained customary
representations and warranties as well as certain affirmative, negative and
financial covenants. In November 2001, the Company amended the Old Credit
Facility. The amendment allowed for the investment of cash in short-term,
AAA-rated municipal bonds, as well as less stringent limitations on 2001 capital
expenditures and on indebtedness incurred in relation to lease agreements.
On May 24, 2002, the Company sold 2.4 million shares of its common stock,
resulting in net proceeds of $73.4 million. Concurrently, the Company paid off
the entire $50 million term loan due under the Old Credit Facility, and the
remaining proceeds from the sale of common stock were used for general corporate
purposes. The $50 million revolving loan commitment under the Old Credit
Facility remained in effect and was available to the Company for future business
purposes.
On April 29, 2003, the Company terminated the aforementioned Old Credit Facility
and entered into a new unsecured credit facility ("New Credit Facility" or
"Credit Facility") with a syndicate of banks. The New Credit Facility consists
of a $100 million unsecured revolving loan commitment. Interest expense on
borrowings under the New Credit Facility is based on, at the borrower's option,
either (1) the higher of the Prime rate or 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 New Credit Facility, the Company is required to comply
with certain covenants, including financial ratios such as leverage, coverage
and tangible net worth. The New 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 New Credit Facility was amended, and the amendment
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. The Company had outstanding letters of credit
under the New Credit Facility amounting to $13.1 million and $18.2 million as of
May 1, 2004 and January 31, 2004, respectively. The Company is in compliance
with all applicable terms of the amended New Credit Facility.
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CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, totaled $6.4
million for the thirteen weeks ended May 1, 2004 compared to $5.6 million for
the comparable period in 2003. We anticipate spending between $20 million and
$22 million in fiscal 2004, primarily for new Limited Too and Justice stores,
remodeling or expansion of existing Limited Too stores and related fixtures and
equipment. We intend to add 240,000 to 260,000 square feet in 2004, which will
represent a 10% to 11% increase over year-end 2003. We anticipate that the
increase will result from opening approximately 20 to 25 new Limited Too stores
and expanding about half of the approximately 20 stores identified for
remodeling. Additionally, we plan to open approximately 30 to 35 Justice stores
during fiscal 2004. We expect that substantially all capital expenditures in
fiscal 2004 will be funded by cash on hand and net cash provided by operating
activities.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Information regarding the Company's contractual obligations and commercial
commitments can be found in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of Too, Inc.'s Form 10-K
for the fiscal year ended January 31, 2004.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
The Company's critical accounting policies and estimates can be found in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of Too, Inc.'s Form 10-K for the fiscal year ended January
31, 2004.
RECENTLY ISSUED ACCOUNTING STANDARD
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). Subsequent to issuing FIN No. 46, the FASB continued to propose
modifications and issue FASB Staff Positions ("FSPs") that changed and clarified
FIN No. 46. These modifications and FSPs were subsequently incorporated into FIN
No. 46 (revised) ("FIN No. 46R"), which was issued in November 2003 and replaces
FIN No. 46. Among other things, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to certain conditions, b) states the
provisions of FIN No. 46R are not required to be applied if a company is unable
to obtain the necessary information, c) includes new definitions and examples of
what variable interests are, d) clarifies and changes the definition of a
variable interest entity and e) clarifies and changes the definition and
treatment of de facto agents. FIN No. 46R is effective for companies that have
interests in variable interest entities or potential variable interest entities
for periods ending after December 15, 2003. Application of FIN No. 46R for all
other types of entities is required for periods ending after March 15, 2004. The
adoption of FIN No. 46R did not have a significant impact on the results of
operations, cash flows or the financial position of the Company.
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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 Form 10-Q 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 Form
10-Q relating to anticipated capital expenditures in 2004 for new stores, the
remodeling or expansion of existing stores and the related funding thereof, and
the effect of certain severance expenses as described in Item 5 of Part II of
this Form 10-Q. 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 Form 10-Q 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 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 May 1, 2004, 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.
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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 Operating Officer
(in his capacity as the Company's Principal Financial Officer), the Chief
Executive Officer and Chief Operating 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) were effective as of the end of the
period covered by this report. 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
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 5. OTHER INFORMATION
On May 24, 2004, Kent A. Kleeberger resigned as Executive Vice President and
Chief Financial Officer, effective June 23, 2004, to pursue other career
interests. William E. May, Executive Vice President and Chief Operating Officer,
will assume Mr. Kleeberger's responsibilities.
The Company also announced on that day the resignation of James C. Petty as
President and General Manager of Limited Too, effective June 23, 2004, to pursue
other career interests. The Company has begun a search for Mr. Petty's
replacement. In the interim, Michael W. Rayden, Chairman of the Board, President
and Chief Executive Officer, will assume Mr. Petty's day-to-day
responsibilities.
The Company estimates that the costs related to separation under the employment
agreements with both of the executives will be in the range of $1.2 million to
$1.5 million, or $0.02 to $0.03 per diluted share.
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
Registered Public Accounting Firm.
31.1 Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
21
31.2 Certification of Periodic Report by the Chief Operating 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.
32.2 Certification of Periodic Report by the Chief Operating Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On February 18, 2004, Too, Inc. filed a Current Report on Form 8-K dated
February 18, 2004, 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 fourth quarter ended January 31,
2004, and certain expectations for the 2004 fiscal year ended January 29,
2005.
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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/ William E. May
---------------------------------
William E. May
Executive Vice President and Chief Operating
Officer
(duly authorized officer and Principal
Accounting Officer)
Date: June 9, 2004
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