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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 August 3, 2002
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)
Registrant's telephone number, including area code (614) 775-3500
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 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 September 3, 2002
------------ --------------------------------
$.01 Par Value 34,060,548 Shares
1
TOO, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the Thirteen and Twenty-Six Weeks Ended
August 3, 2002 and August 4, 2001 .............................................................. 3
Consolidated Balance Sheets
August 3, 2002 and February 2, 2002 ............................................................ 4
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended
August 3, 2002 and August 4, 2001 .............................................................. 5
Notes to Consolidated Financial Statements ........................................................... 6
Report of Independent Accountants .................................................................... 11
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .......... 12
PART II. Other Information
Item 1. Legal Proceedings .............................................................................. 17
Item 4. Matters Submitted to a Vote of Security Holders ................................................ 17
Item 6. Exhibits and Reports on Form 8-K ............................................................... 17
Signature ............................................................................................... 18
Certifications .......................................................................................... 19
Exhibit Index ........................................................................................... 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 Twenty-Six Weeks Ended
----------------------------- -----------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net sales $ 141,248 $ 125,468 $ 299,839 $ 262,125
Costs of goods sold, buying and
occupancy costs 91,803 84,494 196,871 176,188
-------------- -------------- -------------- --------------
Gross income 49,445 40,974 102,968 85,937
General, administrative and store
operating expenses 39,898 35,720 83,423 74,236
-------------- -------------- -------------- --------------
Operating income 9,547 5,254 19,545 11,701
Interest expense, net 516 377 769 509
-------------- -------------- -------------- --------------
Income before income taxes 9,031 4,877 18,776 11,192
Provision for income taxes 3,500 2,000 7,400 4,500
-------------- -------------- -------------- --------------
Net income $ 5,531 $ 2,877 $ 11,376 $ 6,692
============== ============== ============== ==============
Earnings per share:
Basic $ 0.17 $ 0.09 $ 0.35 $ 0.22
============== ============== ============== ==============
Diluted $ 0.16 $ 0.09 $ 0.34 $ 0.21
============== ============== ============== ==============
Weighted average common shares:
Basic 33,483 30,938 32,454 30,878
============== ============== ============== ==============
Diluted 34,501 32,006 33,518 31,803
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
August 3, February 2,
2002 2002
------------- ---------------
(unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 79,572 $ 63,538
Receivables 2,629 2,547
Inventories 55,462 44,537
Store supplies 11,095 10,357
Other 1,443 2,409
---------- ----------
Total current assets 150,201 123,388
Property and equipment, net 144,842 126,415
Deferred income taxes 14,249 14,786
Other assets 81 988
---------- ----------
TOTAL ASSETS $ 309,373 $ 265,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion long-term debt $ - $ 17,500
Accounts payable 31,139 23,341
Accrued expenses 40,517 39,036
Income taxes payable 11,103 19,696
---------- ----------
Total current liabilities 82,759 99,573
Long-term debt, less current portion - 32,500
Other long-term liabilities 6,764 5,295
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares authorized - -
Common stock, $.01 par value, 100 million shares
authorized, 34.1 million and 31.3 million issued and
outstanding at August 3, 2002 and February 2, 2002, respectively 341 313
Paid in capital 115,575 35,338
Retained earnings 103,934 92,558
---------- ----------
Total shareholders' equity 219,850 128,209
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 309,373 $ 265,577
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Twenty-Six Weeks Ended
----------------------
August 3, August 4,
2002 2001
----------------------
Cash flows from operating activities:
Net income $ 11,376 $ 6,692
Impact of other operating activities on cash flows:
Depreciation and amortization 9,946 8,852
Changes in assets and liabilities:
Inventories (10,925) (6,162)
Accounts payable and accrued expenses 9,500 2,937
Income taxes (6,220) (7,317)
Other assets 894 2
Other liabilities 1,469 802
-------- --------
Net cash provided by operating activities 16,040 5,806
-------- --------
Investing activities:
Capital expenditures (28,434) (23,552)
-------- --------
Net cash used for investing activities (28,434) (23,552)
-------- --------
Financing activities:
Net proceeds from issuance of common stock 73,606 -
Repayment of term loan (50,000) -
Stock options, restricted stock and other equity changes 4,822 3,301
-------- --------
Net cash provided by financing activities 28,428 3,301
-------- --------
Net increase (decrease) in cash and equivalents 16,034 (14,445)
Cash and equivalents, beginning of period 63,538 54,788
-------- --------
Cash and equivalents, end of period $ 79,572 $ 40,343
======== ========
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, lifestyle and personal care
products for fashion-aware, trend-setting young girls ages seven to
fourteen years. mishmash, launched by the Company in late September 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. 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
August 3, 2002 and for the thirteen and twenty-six weeks ended August 3,
2002 and August 4, 2001, 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 2001 Annual Report on 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 August 3, 2002, and for the
thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001
included herein have been reviewed by the independent public accounting
firm of PricewaterhouseCoopers LLP and the report of such firm follows the
notes to 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.
2. 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.
6
The following table shows the amounts used in the computation of basic and
diluted earnings per share (in thousands):
Thirteen Weeks Twenty-Six Weeks
Ended Ended
------------------- -------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 5,531 $ 2,877 $11,376 $ 6,692
======= ======= ======= =======
Weighted average common shares - basic 33,483 30,938 32,454 30,878
Dilutive effect of stock options
and restricted stock 1,018 1,068 1,064 925
------- ------- ------- -------
Weighted average common shares - diluted 34,501 32,006 33,518 31,803
======= ======= ======= =======
Due to the options' 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 2002, options to
purchase 14,000 common shares were not included in the computation of net
income per diluted share for both the thirteen and twenty-six weeks ended
August 3, 2002. In fiscal 2001, options to purchase 185,000 and 215,000
common shares were not included in the computation of net income per
diluted share for the thirteen and twenty-six weeks ended August 4, 2001,
respectively.
3. 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 markdowns and shrinkage estimates for the total
selling season.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, consisted of (in thousands):
August 3, February 2,
2002 2002
--------- -----------
Land $ 8,040 $ 7,797
BuildingS 41,241 -
Furniture, fixtures and equipment 123,486 105,554
Leasehold improvements 44,005 45,408
Construction-in-progress 6,347 49,069
--------- ---------
Total 223,119 207,828
Less: accumulated depreciation and amortization (78,277) (81,413)
--------- ---------
Property and equipment, net $ 144,842 $ 126,415
========= =========
7
5. RELATIONSHIP WITH THE LIMITED
In connection with the August 23, 1999 Spin-off, the Company entered into
a service agreement with Limited Logistics Services (formerly known as
Limited Distribution Services), a wholly owned subsidiary of The Limited,
to provide distribution services to us covering flow of merchandise from
factory to our stores for up to three years after the Spin-off. Most of
the merchandise and related materials for the Company's stores were
shipped to a distribution center owned by The Limited in Columbus, Ohio,
where the merchandise was received, inspected, allocated and packed for
shipment to stores. Under the service agreement, The Limited 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. In February 2002, the Company
began operating its own distribution center and, beginning in the second
quarter of 2002, inbound and outbound freight is handled by common and
contract carriers under contracts negotiated by Too, Inc.
Our former main office was owned by Distribution Land Corp., a wholly
owned subsidiary of the Limited, 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, as of May 2002, no further
amounts were due Distribution Land Corp. under the lease.
Our largest apparel supplier has been Mast Industries, Inc., a wholly
owned subsidiary of The Limited. Mast Industries supplied approximately
30% of the apparel that we purchased in 2001. 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 The Limited, including merchandise payables to Mast
Industries, approximated $9.2 and $8.0 million at August 3, 2002 and
February 2, 2002, respectively.
6. CREDIT FACILITY
During August 1999, the Company entered into a five-year $100 million
credit agreement (the "Credit Facility") with a syndicate of banks. The
Credit Facility is 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 The Limited and $14
million was drawn under the revolving loan commitment principally to
repay a portion of working capital advances made by the Limited prior to
the Spin-off.
The $50 million revolving loan commitment is available to fund working
capital requirements and for general corporate purposes. Interest on
borrowings under the Credit Facility is based on matrix pricing applied
to either the London Interbank Offered Rate or Prime, as defined in the
agreement. A commitment fee based on matrix pricing is charged on the
unused portion of the revolving loan commitment. The commitment fee is up
to 1/2 of 1% of the unused revolving credit commitment per annum. Under
the terms of the Credit Facility, the Company is required to comply with
certain covenants including financial ratios. The Credit Facility limits
the Company from incurring certain additional indebtedness and restricts
substantial asset sales, capital expenditures above approved limits and
cash dividends. The Company is in compliance with all applicable terms of
the Credit Facility. As of August 3, 2002, there were no amounts
outstanding under the revolving portion of the Credit Facility.
On May 24, 2002, the Company paid off the entire $50 million term loan
due under the Credit Facility from the proceeds of the common stock
offering (see Note 9). The $50 million revolving loan commitment under
the Credit Facility remains in effect and is available to the Company for
future business purposes.
8
Interest expense, including the amortization and write-off of financing
fees, amounted to $884,000 for the thirteen weeks ended August 3, 2002.
Interest expense was partially offset by interest income of $368,000 for
the quarter. Interest expense and interest income amounted to $1,015,000
and $638,000, respectively, for the thirteen weeks ended August 4, 2001.
For the twenty-six weeks ended August 3, 2002 and August 4, 2001,
interest expense amounted to $1,922,000 and $2,067,000, respectively, and
interest income amounted to $1,153,000 and $1,558,000, respectively.
7. ADVERTISING BARTER TRANSACTIONS
During the quarter, the Company entered into barter transactions for
advertising whereby advertising space was allotted to third-parties in
the Company's catalog in exchange for production of Limited Too
television promotional spots and other forms of promotion. The Company
accounts for barter transactions in accordance with EITF 99-17,
"Accounting for Advertising Barter Transactions." EITF 99-17 requires
that barter transactions be recorded at the fair value of advertising
surrendered only if the fair value is determinable based on the entity's
own historical practice of receiving cash for similar advertising. No
revenues or expenses were recorded for the quarter ended August 3, 2002.
8. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations," will be effective in the first quarter
of 2003. The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity
capitalizes the corresponding estimated retirement cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. Because costs associated
with exiting leased properties at the end of the lease terms are minimal,
the Company believes that when the statement is adopted, it will not have
a significant effect on the Company's results of operations or its
financial position.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections" was issued by the
Financial Accounting Standards Board during the second quarter of 2002.
SFAS 145 eliminates FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." As a result, gains and losses from extinguishment of debt
should be classified as extraordinary items only if they meet the
criteria in Accounting Principles Board (APB) Opinion No. 30. SFAS 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings,
or describe their applicability under changed conditions. The provisions
of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of
this Statement related to Statement 13 shall be effective for
transactions occurring after May 15, 2002. All other provisions of this
Statement shall be effective for financial statements issued on or after
May 15, 2002. The Company believes that the adoption of the provisions of
this statement related to the recission of Statement 4 will not have a
significant effect on the Company's results of operations or its
financial position. The adoption of the other provisions of this
statement did not have a material impact on the Company's consolidated
financial statements.
9
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued by the Financial Accounting Standards Board during
the second quarter of 2002. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 eliminates the definition and requirement
for recognition of exit costs in EITF Issue No. 94-3 where a liability
for an exit cost was recognized at the date of an entity's commitment to
an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. This statement is
effective for exit or disposal activities initiated after December 31,
2002. The Company believes that the adoption of this statement will not
have a significant impact on its results of operations or financial
position.
9. COMMON STOCK OFFERING
On April 29, 2002, the Company filed a registration statement on Form
S-3, File Number 333-87188, with the Securities and Exchange Commission
to sell up to 2.8 million shares of its common stock.
On May 24, 2002, the Company received $73.6 million net proceeds from the
sale of 2.4 million shares of its common stock. On that day, the Company
paid off the entire $50 million term loan under the Credit Facility and
the remaining proceeds will be used for general corporate purposes. The
$50 million revolving loan commitment under the Credit Facility remains
in effect and is available to the Company for future business purposes.
10
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 August 3, 2002, and the related
consolidated statements of income for each of the thirteen and twenty-six week
periods ended August 3, 2002 and August 4, 2001 and the consolidated statements
of cash flows for the twenty-six week periods ended August 3, 2002 and August 4,
2001. These 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 to financial
data 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
2, 2002, and the related consolidated statements of income, shareholders'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated February 20, 2002 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 2, 2002
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
August 14, 2002
11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net sales for the thirteen weeks ended August 3, 2002 were $141.2 million, an
increase of 13% from $125.5 million for the comparable period of 2001. Gross
income increased 20% to $49.4 million from $41.0 million in 2001 and operating
income rose 79% to $9.5 million from $5.3 million in 2001. Net income increased
90% to $5.5 million from $2.9 million in 2001. Diluted earnings per share
increased 78% to $.16, from $.09 in 2001.
Net sales for the twenty-six weeks ended August 3, 2002 were $299.8 million, an
increase of 14% from $262.1 million for the comparable period of 2001. Gross
income increased 20% to $103.0 million from $85.9 million in 2001 and operating
income rose 67% to $19.5 million from $11.7 million in 2001. Net income
increased 70% to $11.4 million from $6.7 million in 2001. Diluted earnings per
share increased to $.34, a 62% increase, from diluted earnings per share of $.21
in 2001.
FINANCIAL SUMMARY
The following summarized financial and statistical data compares the thirteen
and twenty-six weeks ended August 3, 2002, to the comparable 2001 period:
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------------------------- -----------------------------------------
August 3, August 4, Percent August 3, August 4, Percent
2002 2001 Change 2002 2001 Change
----------------------------------------- -----------------------------------------
Net sales (millions) $ 141.2 $ 125.5 13% $ 299.8 $ 262.1 14%
Comparable store sales performance/(1)/ 0% 0% 2% (1%)
Retail sales per average square foot/(2)/ $ 71 /(3)/ $ 73 (3%) $ 153 /(3)/ $ 155 (1%)
Retail gross square feet at end of
quarter (thousands) 1,985 /(3)/ 1,725 15%
Stores with "Girl Power" format 247 176
Percentage of Limited Too stores in
"Girl Power" format 51% 42%
Number of Stores:
- ----------------
Limited Too:
Beginning of period 471 413 459 406
Opened 14 9 27 17
Closed (1) - (2) (1)
------------------------------ -----------------------------
End of period 484 422 484 422
============================== =============================
mishmash 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 feet are treated as new stores for purposes of this
calculation. Fiscal 2001 comparable store sales are reported on a
calendar-shifted basis.
/(2)/ Retail 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)/ Amounts exclude mishmash stores.
12
Net Sales
Net sales for the second quarter of 2002 increased 13% to $141.2 million from
$125.5 million in 2001. Comparable store sales were flat for the second quarter
of 2002 compared to flat comparable store sales during the second quarter of
2001. Net sales benefited from a 15% increase in Limited Too square footage over
last year.
Year-to-date net sales were $299.8 million, a 14% increase over 2001
year-to-date sales of $262.1. The increase was primarily due to the net addition
of 62 new Limited Too and 11 new mishmash stores since the end of the second
quarter of 2001.
The best performing merchandise categories during the thirteen and twenty-six
weeks ended August 3, 2002 were active wear led by active pants and shorts, as
well as jeanswear and skirts.
Gross Income
Gross income, expressed as a percentage of net sales, was 35.0% for the second
quarter of 2002, an increase of 230 basis points from a gross income rate of
32.7% for the second quarter of 2001. This rate increase was due to higher
initial mark-ups and an improved markdown rate, at cost, which more than offset
the increased buying and occupancy rate due to increased catalog circulation.
For the year-to-date period, the gross income rate increased 150 basis points to
34.3% from 32.8% in 2001. Higher initial mark-ups and a lower markdown rate, at
cost, more than offset increased buying and occupancy costs.
General, Administrative and Store Operating Expenses
General, administrative and store operating expense, expressed as a percentage
of net sales, was 28.2% for the second quarter of 2002, a decrease of 30 basis
points from a rate of 28.5% for the second quarter of 2001. This rate decrease
was primarily due to lower home office and web related expenses, which more than
offset the increase in marketing expense.
On a year-to-date basis, general, administrative and store operating expense
decreased by 50 basis points to 27.8% in 2002 from 28.3% in 2001. The decrease
in rate for the year-to-date period was due to lower distribution center and web
related expenses, along with a decrease in the store payroll rate.
Operating Income
Operating income, expressed as a percentage of net sales, was 6.8% in the second
quarter of 2002, an increase of 260 basis points from 4.2% for the same period
in 2001. Year-to-date operating income increased to 6.5% in 2002 compared to
4.5% in 2001. The increase in operating income, expressed as a percentage of net
sales, for both the quarter and year-to-date periods was due to higher
merchandise margins and lower general, administrative and store operating
expenses.
Income Taxes
Income tax expense during the second quarter amounted to $3.5 million and $7.4
million for the quarter ending and year to date period ending August 3, 2002,
respectively, compared to $2.0 million and $4.5 million for the comparable
periods ending August 4, 2001. During the second quarter the income tax
provision rate decreased from 40.0% to 38.5% as a result of realigning our
corporate operations, including the start up of our direct sourcing initiatives.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided from operating activities is the primary resource to support
operations, including projected growth, seasonal working capital requirements
and capital expenditures.
13
Net cash provided by operating activities amounted to $16.0 million for the
twenty-six weeks ended August 3, 2002 versus $5.8 million for the comparable
period in 2001. The increase in net cash provided by operating activities versus
the comparable period in 2001 was due to an increase in net income and
depreciation expense and better leveraging of inventory builds via accounts
payable.
Investing activities represented capital expenditures, which were primarily for
completing construction of the new home office and distribution center, as well
as for new and remodeled stores.
Financing activities represented proceeds from the sale of 2.4 million common
stock shares, including the inherent repayment of the term loan and employee
stock option exercises.
A summary of our working capital position and capitalization follows
(in thousands):
August 3, February 2,
2002 2002
--------------- -------------
Working capital (inclusive of current portion of
long-term debt of $17,500 at
February 2, 2002) $ 67,442 $ 23,815
=============== ==============
Capitalization:
Long-term debt - 32,500
Shareholders' equity 219,850 128,209
--------------- --------------
Total capitalization $ 219,850 $ 160,709
=============== ==============
Amounts authorized under revolving portion
of credit facility $ 50,000 $ 50,000
=============== ==============
In August 1999, we entered into a five-year, $100 million collateralized Credit
Facility. The Credit Facility consisted of a $50 million five-year term loan and
a $50 million, five-year annual revolving credit commitment. The Credit
Facility's interest rates, which reflect matrix pricing, are 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 principle balance would begin. The Credit
Facility contains customary representations and warranties as well as certain
affirmative, negative and financial covenants.
On May 24, 2002, the Company received net proceeds from the sale of 2.4 million
shares of its common stock of $73.6 million. On that day, the Company paid off
the entire $50 million term loan under the Credit Facility. The $50 million
revolving loan commitment under the Credit Facility remains in effect and is
available to the Company for future business purposes.
No amounts were borrowed against the $50 million revolving credit commitment
during the twenty-six weeks ended August 3, 2002.
Capital Expenditures
Capital expenditures totaled $28.4 million for the twenty-six weeks ended August
3, 2002 compared to $23.6 million for the comparable period of 2001. 2002
capital expenditures included $8.2 million for new and remodeled stores, $6.7
million for the new distribution center and $13.5 million for the new home
office and other items. We anticipate spending approximately $40 million in 2002
for capital expenditures including the construction of 50 to 55 new Limited Too
stores, at least five new
14
mishmash stores and the remodeling or expansion of approximately ten stores
identified for remodeling. Our store expansion and remodel program should add
210,000 to 220,000 gross square feet during 2002, representing an 11% to 12%
increase over year-end 2001. The Company expects that capital expenditures will
be funded principally by 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 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.
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 if 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,
initial merchandise markup, markdowns and shrinkage, all of which significantly
impact the ending inventory valuation at cost as well as the resulting gross
margins. The Company calculates inventory valuations on an individual item-class
basis to ensure a high degree of accuracy 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.
Long-Lived Assets - 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 is assigned service lives between 5 and 20 years.
The distribution center and home office buildings are depreciated over 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.
Sales Returns - Sales are recorded when the customer takes possession of
merchandise. A reserve is provided for projected merchandise returns based on
prior experience.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," will be effective in the first quarter of 2003.
The standard requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes the corresponding
estimated retirement cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Because costs associated with exiting leased properties at the end of the lease
terms are minimal, the Company believes that when the statement is adopted, it
will not have a significant effect on the Company's results of operations or its
financial position.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" was issued by the Financial
Accounting Standards Board during the second quarter of 2002. SFAS 145
eliminates FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." As a result, gains and losses
from extinguishment of debt should be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board (APB) Opinion No. 30. SFAS
145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS 145 also amends other existing
authoritative
15
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of this
Statement related to the rescission of Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. The provisions of this Statement related to
Statement 13 shall be effective for transactions occurring after May 15, 2002.
All other provisions of this Statement shall be effective for financial
statements issued on or after May 15, 2002. The Company believes that the
adoption of the provisions of this statement related to the recission of
Statement 4 will not have a significant effect on the Company's results of
operations or its financial position. The adoption of the other provisions of
this statement did not have a material impact on the Company's consolidated
financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
was issued by the Financial Accounting Standards Board during the second quarter
of 2002. SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. SFAS 146
eliminates the definition and requirement for recognition of exit costs in EITF
Issue No. 94-3 where a liability for an exit cost was recognized at the date of
an entity's commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair value. This
statement is effective for exit or disposal activities initiated after December
31, 2002. The Company believes that the adoption of this statement will not have
a significant impact on its results of operations or financial position.
16
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 statements
in this Management's Discussion and Analysis relating to anticipated capital
expenditures in 2002 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 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 4. Matters Submitted to a Vote of Security Holders
The 2002 annual meeting of stockholders was held on Tuesday, May 21, 2002, at
9:00 a.m. Eastern Time at our corporate offices, located at 8323 Walton Parkway,
New Albany, Ohio.
ELECTION OF DIRECTORS FOR AGAINST WITHHELD RESULTS
----------------------- ------------ --------- ------------ ---------
Philip E. Mallott 28,456,414 - 1,050,039 Elected
Michael W. Rayden 21,705,829 - 7,800,624 Elected
Item 6. Exhibits
(a) Exhibits
15 Letter re: Unaudited Interim Financial Information to Securities
and Exchange Commission re: Incorporation of Report of Independent
Accountants.
99.1 Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
(b) Reports on Form 8-K
On May 13, 2002, the Company filed a current report on Form 8-K that
announced the Company's first quarter results.
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: September 11, 2002
18
CERTIFICATION
I, Michael Rayden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Too, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 11, 2002
/s/ Michael Rayden
-------------------------
Michael Rayden
President, Chief Executive Officer and
Chairman of the Board of Directors
19
CERTIFICATION
I, Kent Kleeberger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Too, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 11, 2002
/s/ Kent A. Kleeberger
--------------------------
Kent A. Kleeberger
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
20
EXHIBIT INDEX
Exhibit
No. Document
15 Letter re: Unaudited Interim Financial Information to Securities and
Exchange Commission re: Incorporation of Report of Independent
Accountants.
99.1 Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
21