United States Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended July 31, 2004. |
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or |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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Commission File Number 0-23874 |
Jos. A. Bank Clothiers, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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36-3189198 |
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(State incorporation) |
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(I.R.S. Employer |
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500 Hanover Pike, Hampstead, MD |
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21074-2095 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
None
(Former name or former address, if changed since last report)
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 if 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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
Yes ý No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
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Class |
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Outstanding as of September 3, 2004 |
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Common Stock, $.01 par value |
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13,394,608 |
Jos. A. Bank Clothiers, Inc.
Index
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(In thousands except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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August 2, 2003 |
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July 31, 2004 |
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August 2, 2003 |
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July 31, 2004 |
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Net sales |
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$ |
64,442 |
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$ |
81,994 |
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$ |
126,714 |
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$ |
161,923 |
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Cost of goods sold |
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28,840 |
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32,883 |
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55,512 |
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63,777 |
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Gross Profit |
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35,602 |
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49,111 |
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71,202 |
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98,146 |
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Operating expenses: |
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Sales and marketing |
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24,247 |
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32,011 |
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48,361 |
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62,662 |
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General and administrative |
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7,343 |
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10,253 |
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14,386 |
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18,837 |
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Store opening costs |
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226 |
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269 |
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592 |
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500 |
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Total operating expenses |
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31,816 |
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42,533 |
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63,339 |
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81,999 |
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Operating income |
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3,786 |
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6,578 |
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7,863 |
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16,147 |
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Interest expense, net |
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382 |
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433 |
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685 |
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914 |
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Income before provision for income taxes |
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3,404 |
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6,145 |
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7,178 |
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15,233 |
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Provision for income taxes |
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1,418 |
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2,616 |
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3,018 |
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6,369 |
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Net income |
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$ |
1,986 |
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$ |
3,529 |
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$ |
4,160 |
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$ |
8,864 |
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Earnings per share: |
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Net income: |
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Basic |
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$ |
0.17 |
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$ |
0.26 |
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$ |
0.36 |
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$ |
0.67 |
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Diluted |
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$ |
0.14 |
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$ |
0.25 |
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$ |
0.30 |
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$ |
0.62 |
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Weighted average shares outstanding: |
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Basic |
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11,678 |
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13,330 |
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11,651 |
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13,288 |
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Diluted |
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13,794 |
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14,196 |
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13,689 |
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14,204 |
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See accompanying notes
3
JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
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January 31, 2004 |
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July 31, 2004 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
875 |
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$ |
784 |
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Accounts receivable, net |
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4,201 |
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3,942 |
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Inventories: |
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Raw materials |
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11,652 |
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10,203 |
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Finished goods |
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109,136 |
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111,374 |
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Total inventories, net |
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120,788 |
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121,577 |
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Prepaid expenses and other current assets |
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10,323 |
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11,133 |
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Total current assets |
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136,187 |
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137,436 |
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NONCURRENT ASSETS: |
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Property, plant and equipment, net |
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47,401 |
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49,614 |
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Other noncurrent assets, net |
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2,923 |
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2,761 |
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Total assets |
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$ |
186,511 |
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$ |
189,811 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
28,748 |
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$ |
25,259 |
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Accrued expenses and other |
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33,985 |
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31,093 |
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Current portion of long-term debt |
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1,245 |
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971 |
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Total current liabilities |
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63,978 |
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57,323 |
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NONCURRENT LIABILITIES: |
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Long-term debt, net of current portion |
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28,618 |
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29,399 |
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Deferred rent and other noncurrent liabilities |
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6,413 |
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6,016 |
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Total liabilities |
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99,009 |
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92,738 |
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STOCKHOLDERS’ EQUITY: |
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Common stock |
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122 |
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124 |
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Additional paid-in capital |
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64,207 |
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64,912 |
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Retained earnings |
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28,231 |
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37,095 |
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92,560 |
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102,131 |
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Treasury stock |
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(5,058 |
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(5,058 |
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Total stockholders’ equity |
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87,502 |
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97,073 |
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Total liabilities and stockholders’ equity |
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$ |
186,511 |
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$ |
189,811 |
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See accompanying notes
4
JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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Six Months Ended |
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August 2, 2003 |
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July 31, 2004 |
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Cash flows from operating activities: |
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Net income |
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$ |
4,160 |
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$ |
8,864 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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3,121 |
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3,828 |
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Net (increase) in operating working capital and other |
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(29,954 |
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(9,171 |
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Net cash provided by (used in) operating activities |
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(22,673 |
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3,521 |
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Cash flows from investing activities: |
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Additions to property, plant and equipment |
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(8,944 |
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(5,677 |
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Proceeds from disposal of assets |
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— |
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851 |
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Net cash (used in) investing activities |
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(8,944 |
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(4,826 |
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Cash flows from financing activities: |
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Borrowings under long-term Credit Agreement |
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39,079 |
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44,173 |
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Repayments under long-term Credit Agreement |
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(15,164 |
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(41,760 |
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Repayment of other long-term debt |
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(581 |
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(1,906 |
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Net proceeds from issuance of common stock |
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619 |
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707 |
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Net cash provided by financing activities |
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23,953 |
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1,214 |
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Net (decrease) in cash and cash equivalents |
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(7,664 |
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(91 |
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Cash and cash equivalents – beginning of period |
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8,389 |
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875 |
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Cash and cash equivalents – end of period |
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$ |
725 |
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$ |
784 |
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See accompanying notes
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in Thousands Except Per Share Amounts and the Number of Stores)
1. BASIS OF PRESENTATION
Jos. A. Bank Clothiers, Inc. (the “Company”) is a nationwide retailer of classic men’s clothing through conventional retail stores and catalog and internet direct marketing. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of the operating results for these periods. These adjustments are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s January 31, 2004 Annual Report on Form 10-K.
2. SIGNIFICANT ACCOUNTING POLICIES
Inventories - Inventories are stated at the lower of first-in, first-out cost or market. The Company capitalizes into inventory certain warehousing and freight delivery costs associated with shipping its merchandise to the point of sale.
Catalog - Costs related to mail order catalogs and promotional materials are included in prepaid expenses and other current assets. These costs are amortized over the expected periods of benefit, which is typically four months.
Stock Option Plan - The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations including Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation”, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. There was no stock-based compensation expense recognized in the statement of income for the periods ended August 2, 2003 and July 31, 2004. 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”, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method
6
of accounting described above, and has adopted the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each quarter:
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Three Months Ended |
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Six Months Ended |
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August 2, 2003 |
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July 31, 2004 |
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August 2, 2003 |
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July 31, 2004 |
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Net income as reported |
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$ |
1,986 |
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$ |
3,529 |
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$ |
4,160 |
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$ |
8,864 |
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Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax |
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349 |
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75 |
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986 |
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225 |
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Pro forma net income |
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$ |
1,637 |
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$ |
3,454 |
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$ |
3,174 |
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$ |
8,639 |
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Pro forma basic net income per common share |
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$ |
0.14 |
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$ |
0.26 |
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$ |
0.27 |
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$ |
0.65 |
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Pro forma diluted net income per common share |
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$ |
0.12 |
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$ |
0.24 |
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$ |
0.23 |
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$ |
0.61 |
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The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three and six months ended August 2, 2003. For the three months and six months ended July 31, 2004, there were no stock options granted.
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Three Months Ended |
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Six Months Ended |
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August 2, 2003 |
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July 31, 2004 |
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August 2, 2003 |
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July 31, 2004 |
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Risk free interest rate |
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3.9% |
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— |
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3.3% - 3.9% |
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— |
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Expected volatility |
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44% |
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— |
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44% - 52.9% |
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— |
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Expected life |
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7 Years |
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— |
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7 Years |
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— |
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Contractual life |
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10 Years |
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— |
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10 Years |
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— |
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Expected dividend yield |
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—% |
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— |
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—% |
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— |
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Fair value of options granted |
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$20.03 |
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— |
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$13.20 - $20.03 |
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— |
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# of options granted |
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3 |
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— |
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206 |
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— |
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Reclassifications – Certain reclassifications have been made to the August 2, 2003 financial statements in order to conform to the July 31, 2004 presentation.
7
3. SUPPLEMENTAL CASH FLOW DISCLOSURE:
a. Working Capital and other Components:
The net change in working capital and other components consists of the following:
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Six Months Ended |
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August 2, 2003 |
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July 31, 2004 |
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(Increase) decrease in accounts receivable, net |
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$ |
(1,060 |
) |
$ |
259 |
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Decrease (increase) in inventories |
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(32,929 |
) |
(789 |
) |
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Decrease (increase) in prepaids and other assets |
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3 |
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(648 |
) |
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Increase (decrease) in accounts payable |
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7,391 |
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(3,489 |
) |
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(Decrease) in accrued expenses and other liabilities |
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(3,359 |
) |
(4,504 |
) |
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|
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Net (increase) in operating working capital and other |
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$ |
(29,954 |
) |
$ |
(9,171 |
) |
b. Interest and Income Taxes Paid:
Interest and income taxes paid were as follows:
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Six Months Ended |
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Six Months Ended |
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||
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|
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August 2, 2003 |
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July 31, 2004 |
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||
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|
|
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Interest paid |
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$ |
628 |
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$ |
989 |
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Income taxes paid |
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$ |
4,972 |
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$ |
12,245 |
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4. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the year. Diluted net income per share is calculated by dividing net income by the diluted weighted average common shares, which reflect the potential dilution of stock options. The weighted average shares used to calculate basic and diluted earnings per share are as follows:
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Three Months Ended |
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Six Months Ended |
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August 2, 2003 |
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July 31, 2004 |
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August 2, 2003 |
|
July 31, 2004 |
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|
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Weighted average shares outstanding for basic |
|
11,678 |
|
13,330 |
|
11,651 |
|
13,288 |
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|
|
|
|
|
|
|
|
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Dilutive effect of stock options |
|
2,116 |
|
866 |
|
2,038 |
|
916 |
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|
|
|
|
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Weighted average shares outstanding for diluted |
|
13,794 |
|
14,196 |
|
13,689 |
|
14,204 |
|
The Company uses the treasury method for calculating the dilutive effect of stock options. There were no anti-dilutive options as of July 31, 2004.
8
5. SEGMENT REPORTING
The Company has two reportable segments: stores and direct marketing. While each segment offers a similar mix of men’s clothing to the retail customer, the full line stores also provide alterations.
The accounting policies of the segments are the same as those described in the Company’s January 31, 2004 Annual Report on Form 10-K. The Company evaluates performance of the segments based on “four wall” contribution which excludes any allocation of “management company” costs, distribution center costs (except order fulfillment costs which are allocated to direct marketing), interest and income taxes.
The Company’s segments are strategic business units that offer similar products to the retail customer by two distinctively different methods. In stores the typical customers travel to the store and purchase men’s clothing and/or alterations and take their purchases with them. The direct marketing customers receive catalogs in their homes and/or offices and/or visit our web page via the internet and place orders by phone, mail, fax or on line. The merchandise is then shipped to the customers. Segment data is presented in the following table:
Three months ended July 31, 2004
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Stores |
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Direct Marketing |
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Other |
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Total |
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|
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Net sales (a) |
|
$ |
71,022 |
|
$ |
8,573 |
|
$ |
2,399 |
|
$ |
81,994 |
|
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Depreciation and amortization |
|
1,447 |
|
18 |
|
424 |
|
1,889 |
|
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Operating income (b) |
|
13,747 |
|
2,910 |
|
(10,079 |
) |
6,578 |
|
||||
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Capital expenditures (d) |
|
2,376 |
|
8 |
|
156 |
|
2,540 |
|
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Three months ended August 2, 2003
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Stores |
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Direct Marketing |
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Other |
|
Total |
|
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|
||||
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Net sales (a) |
|
$ |
54,871 |
|
$ |
7,274 |
|
$ |
2,297 |
|
$ |
64,442 |
|
|
Depreciation and amortization |
|
1,151 |
|
16 |
|
454 |
|
1,621 |
|
||||
|
Operating income (b) |
|
9,544 |
|
2,302 |
|
(8,060 |
) |
3,786 |
|
||||
|
Capital expenditures (d) |
|
4,030 |
|
6 |
|
1,085 |
|
5,121 |
|
||||
Six Months ended July 31, 2004
|
|
|
Stores |
|
Direct Marketing |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net sales (a) |
|
$ |
140,780 |
|
$ |
16,576 |
|
$ |
4,567 |
|
$ |
161,923 |
|
|
Depreciation and amortization |
|
2,804 |
|
34 |
|
990 |
|
3,828 |
|
||||
|
Operating income (b) |
|
29,381 |
|
5,694 |
|
(18,928 |
) |
16,147 |
|
||||
|
Identifiable assets (c) |
|
146,258 |
|
29,652 |
|
13,901 |
|
189,811 |
|
||||
|
Capital expenditures (d) |
|
5,333 |
|
13 |
|
331 |
|
5,677 |
|
||||
Six Months ended August 2, 2003
|
|
|
Stores |
|
Direct Marketing |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net sales (a) |
|
$ |
108,273 |
|
$ |
14,014 |
|
$ |
4,427 |
|
$ |
126,714 |
|
|
Depreciation and amortization |
|
2,248 |
|
32 |
|
841 |
|
3,121 |
|
||||
|
Operating income (b) |
|
19,145 |
|
4,524 |
|
(15,806 |
) |
7,863 |
|
||||
|
Identifiable assets (c) |
|
126,536 |
|
23,643 |
|
15,959 |
|
166,138 |
|
||||
|
Capital expenditures (d) |
|
7,075 |
|
6 |
|
1,863 |
|
8,944 |
|
||||
9
(a) Direct marketing net sales represent catalog and internet sales including catalog orders placed in new stores. Net sales from segments below the quantitative thresholds are attributable primarily to factory stores, franchise stores and regional tailor shops. None of these operations have ever met any of the quantitative thresholds for determining reportable segments and are included in “other”.
(b) Operating income for Stores and Direct Marketing segments represents profit before allocations of overhead from the corporate office and the distribution center (which are included in the “other” segment), interest and income taxes. Total Operating Income represents profit before interest and income taxes.
(c) Identifiable assets include cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets and property, plant and equipment residing in or related to the reportable segment. Assets included in Other are primarily cash and cash equivalents, property, plant and equipment associated with the corporate office and distribution center, deferred tax assets, and inventories, which have not been assigned to one of the reportable segments.
(d) Capital expenditures include purchases of property, plant and equipment made for the reportable segment.
6. COMMON STOCK DIVIDENDS
On January 13, 2004, the Company’s Board of Directors declared a 50% Common stock dividend payable on February 18, 2004 to stockholders of record as of January 30, 2004.
On June 8, 2004, the Company’s Board of Directors declared a 25% stock dividend payable on August 18, 2004 to stockholders of record as of July 30, 2004.
Unless otherwise indicated, all historical weighted average share and per share amounts and all references to the number of common shares elsewhere in the consolidated financial statements, and notes thereto, have been restated to reflect the two stock dividends.
7. OTHER MATTERS
As previously disclosed in the Company’s Form 10-Q for the quarter ended May 1, 2004, on or about April 22, 2004, the Company received a subpoena from the New York Attorney General requiring the production of certain documents relating to the Company’s advertising and in store promotions. The Company has produced documents in response to the subpoena and is currently seeking a resolution of the matter. While the exact amount of any loss which may arise from this matter is not known, the Company has determined that a reasonable estimate of the loss is $475. A loss contingency in this amount has been recorded as a general and administrative expense in the accompanying Statement of Income for the three months ended July 31, 2004.
10
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto and with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
Overview - For the second quarter of the Company’s fiscal year ending January 29, 2005 (“fiscal 2004”), the Company’s net income increased 75% to $3.5 million compared with net income of $2.0 million for the second quarter of the Company’s fiscal year ended January 31, 2004 (“fiscal 2003”). The Company earned $.25 per diluted share in the second quarter of fiscal 2004 compared with $0.14 per diluted share in the second quarter of fiscal 2003. The increased earnings were primarily attributable to a 27% increase in net sales with increases in both the store and direct marketing (catalog and internet) segments and a 470 basis point increase in gross profit margins.
Management believes that the chain can grow to approximately 500 stores from the fiscal 2003 year-end base of 210 stores. The Company plans to open approximately 60 stores in 2004, including 20 that were opened in the first half of the year, and up to 75 stores each year thereafter to grow the chain to the 500 store level. The store growth is part of a strategic plan the Company initiated in fiscal 2000. In the past four years, the Company has continued to increase the amount of store openings as its infrastructure and operating performance improved. As such, there were ten new stores opened in fiscal 2000 (including two factory stores), 21 new stores in fiscal 2001, 25 new stores in fiscal 2002 and 50 new stores in fiscal 2003.
Capital expenditures should range between $17 and $20 million in fiscal 2004, primarily to fund the opening of approximately 60 new stores, the renovation and/or relocation of two stores, an expansion in distribution center capacity, and the implementation of various systems initiatives. The Company expects to fund substantially all of its growth program in 2004 with cash from operations, while using borrowings under its revolver during the year to fund any required increases in cash needs.
On June 8, 2004, the Company’s Board of Directors declared a 25% stock dividend payable on August 18, 2004 to stockholders of record as of July 30, 2004.
Unless otherwise indicated, all historical weighted average share and per share amounts and all references to the number of common shares elsewhere in the consolidated financial statements, and notes hereto, have been restated to reflect the two stock dividends.
11
While the Company has taken reasonable care in preparing these estimates and making these judgments, actual results could and probably will differ from the estimates. Management believes any difference in the actual results from the estimates will not have a material effect upon the Company’s financial position or results of operations.
Results of Operations
The following table is derived from the Company’s Consolidated Statements of Income and sets forth, for the periods indicated, the items included in the Consolidated Statements of Income expressed as a percentage of net sales.
|
|
|
Percentage
of Net Sales |
|
Percentage
of Net Sales |
|
||||
|
|
|
August 2, 2003 |
|
July 31, 2004 |
|
August 2, 2003 |
|
July 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Cost of goods sold |
|
44.8 |
|
40.1 |
|
43.8 |
|
39.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
55.2 |
|
59.9 |
|
56.2 |
|
60.6 |
|
|
General and administrative expenses |
|
11.4 |
|
12.5 |
|
11.4 |
|
11.6 |
|
|
Sales and marketing expenses |
|
37.6 |
|
39.0 |
|
38.2 |
|
38.7 |
|
|
Store opening costs |
|
0.3 |
|
0.3 |
|
0.4 |
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
5.9 |
|
8.0 |
|
6.2 |
|
10.0 |
|
|
Interest expense, net |
|
0.6 |
|
0.5 |
|
0.5 |
|
0.6 |
|
|
Income before provision for income taxes |
|
5.3 |
|
7.5 |
|
5.7 |
|
9.4 |
|
|
Provision for income taxes |
|
2.2 |
|
3.2 |
|
2.4 |
|
3.9 |
|
|
Net income |
|
3.1 |
% |
4.3 |
% |
3.3 |
% |
5.5 |
% |
Net sales - Net sales increased 27% to $82.0 million in the second quarter of fiscal 2004 compared with $64.4 million in the second quarter of fiscal 2003. Net sales for the first half of fiscal 2004 increased 28% to $161.9 million, compared with $126.7 million in the first half of fiscal 2003. The sales increase was primarily related to increases in store sales (including new stores as shown below) and in direct marketing sales. Comparable store sales increased 10.2% and 11.9% in the second quarter and first half of fiscal 2004, respectively. All major product categories generated sales increases in each quarter of 2004, lead by sales of sportswear which increased over 40% in the first half of 2004.
12
The following table summarizes store opening and closing activity during the respective periods.
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||
|
|
|
August 2, 2003 |
|
July 31, 2004 |
|
August 2, 2003 |
|
July 31, 2004 |
|
||||||||
|
|
|
Stores |
|
Square |
|
Stores |
|
Square |
|
Stores |
|
Square |
|
Stores |
|
Square |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at the beginning of the period |
|
175 |
|
915 |
|
218 |
|
1,095 |
|
160 |
|
846 |
|
210 |
|
1,062 |
|
|
Stores opened |
|
6 |
|
25 |
|
11 |
|
44 |
|
21 |
|
94 |
|
20 |
|
82 |
|
|
Stores closed |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1 |
) |
(5 |
) |
|
Stores open at the end of the period |
|
181 |
|
940 |
|
229 |
|
1,139 |
|
181 |
|
940 |
|
229 |
|
1,139 |
|
*square feet is presented in thousands and excludes franchise stores
Gross profit - Gross profit (net sales less cost of goods sold) represented 59.9% of net sales in the second quarter of fiscal 2004 compared with 55.2% of net sales in the second quarter of fiscal 2003. For the first six months of fiscal 2004, gross profit represented 60.6% of net sales compared with 56.2% for the same period of fiscal 2003. The increased gross profit percentages are primarily due to the continued improvement in sourcing of merchandise, thus reducing the cost of items purchased, and increases in retail prices primarily through the introduction of new products and management of retail prices. Gross profit margins increased in substantially all major product categories.
Sales and Marketing Expenses – Sales and marketing expenses consist primarily of a) full-line store, factory store and direct marketing occupancy, payroll, selling and other variable costs and b) advertising and marketing expenses. These expenses increased by $7.8 million and $14.3 million in the three and six months ended July 31, 2004, respectively.
The increase in sales and marketing expenses in the 49 stores which opened since the end of the second quarter of fiscal 2003 plus the incremental increase in expense in the 21 stores opened throughout the first half of 2003 was $5.1 million and $9.9 million in the second quarter and six months ended July 31, 2004, respectively. Sales and marketing expenses in the stores which were open prior to fiscal 2003 were $2.2 million and $3.2 million higher in the second quarter and six months ended July 31, 2004, respectively, than in the same periods in fiscal 2003 primarily as a result of higher sales commissions on higher sales and increased occupancy costs and advertising costs. In addition, direct marketing sales and marketing expenses increased $0.5 million and $1.1 million respectively in the three months and six month ended July 31, 2004. The direct marketing increases resulted primarily from increased sales and higher catalog circulation.
The Company expects sales and marketing expenses to increase in fiscal 2004 primarily as a result of a) opening approximately 60 new stores, b) the full year operation of stores that were opened during fiscal 2003, and c) an increase in advertising expenditures, including the expenditure of at least $2.5 million related to image advertising in magazines and on television. The majority of the image advertising expenses will be incurred in the fourth quarter of 2004.
General and Administrative Expenses – General and administrative expenses, which consist primarily of corporate payroll costs and overhead and distribution center costs, increased $2.9 million and $4.5 million in the second quarter and first six months of fiscal 2004, respectively. The increases were primarily due to higher payroll and payroll-related costs, travel costs, distribution center costs and other expenses related to business expansion, and professional fees principally related to internal control documentation efforts in compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Continued growth in stores and the direct marketing segment may result in additional increases in these expenses. In addition, the Company recorded a loss contingency in the amount of $475 thousand in the second quarter of 2004 representing the Company's reasonable estimate of the loss which may arise in connection with the New York Attorney General's inquiry into the Company's advertising practices in New York.
13
Store Opening Costs – Store opening costs, which include the initial promotional advertising costs as well as other start-up costs such as travel for recruitment, training, and setup of new stores, declined slightly per store in 2004 based on the timing and location of new store openings (which impact the advertising and travel incurred for the stores).
Interest Expense, net – Interest expense increased in the second quarter of fiscal 2004 compared with the same period of 2003. The increase was due primarily to higher borrowing levels under the revolver, primarily related to the opening of new stores.
Interest expense increased $0.2 million to $0.9 million in the first six months of fiscal 2004 from $0.7 million for the same period of 2003. The increase was due primarily to higher borrowing levels under the revolver, primarily related to the opening of new stores, and was partially offset by a lower average interest rate.
Income Taxes – The first half of fiscal 2004 effective income tax rate decreased to 41.8% compared with 42.0% in the first half of fiscal 2003. The decrease was primarily due to higher projected full year profitability, which will provide greater leverage against the non-deductible expenses.
Liquidity and Capital Resources - The Company maintains a bank credit agreement (the “Credit Agreement”), which provides for a revolving loan having a limit determined by a formula based on the Company’s inventories and accounts receivable. In January 2004, the Company extended the maturity date under the Credit Agreement to April 2008. The amended Credit Agreement increased the available maximum revolving amount under the facility up to $100 million. In addition, at any time prior to April 30, 2006, the Company has the option to increase the amount which may be borrowed to $125 million. The Credit Agreement also includes a) financial covenants concerning minimum EBITDA, b) limitations on capital expenditures and additional indebtedness and c) a restriction on the payment of dividends. The financial covenants are in effect only if the Company’s availability in excess of outstanding borrowings is less than $7.5 million. The Company does not believe its availability in excess of borrowings will be less than $7.5 million during fiscal 2004.
The Company’s availability in excess of outstanding borrowings, as supported by the existing borrowing base under its Credit Agreement, was $52.2 million at July 31, 2004 compared with $52.4 million at January 31, 2004. The July 31, 2004 revolver balance was $23.0 million compared with $21.9 million at August 2, 2003, as the Company has funded substantially all of its growth in 2004 from cash from operations.
As of July 31, 2004, the Company was in compliance with all loan covenants. Both currently and for the same three and six-month periods of fiscal 2003, interest rates under the amended agreement are either at the prime rate or at LIBOR plus 1.5%. The agreement also includes provisions for a seasonal over-advance.
14
The following table summarizes the Company’s sources and uses of funds as reflected in the Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
|
Six Months Ended |
|
||||
|
|
|
August 2, 2003 |
|
July 31, 2004 |
|
||
|
|
|
|
|
|
|
||
|
Cash provided by (used in): |
|
|
|
|
|
||
|
Operating activities |
|
$ |
(22,673 |
) |
$ |
3,521 |
|
|
Investing activities |
|
(8,944 |
) |
(4,826 |
) |
||
|
Financing activities |
|
23,953 |
|
1,214 |
|
||
|
Net (decrease) in cash and cash equivalents |
|
$ |
(7,664 |
) |
$ |
(91 |
) |
Cash provided by the Company’s operating activities in the first half of fiscal 2004 increased compared with the first half of 2003 primarily due to lower expenditures for inventory compared with the same period of 2003. Cash used for purchase of inventory was $0.8 million for the first half of fiscal 2004 compared with $32.9 million for the same period of fiscal 2003, as the Company increased its inventories in 2003 to replenish inventory shortfalls, open new stores, build safety stock and increase its raw materials purchases. Cash used in investing activities in the first half of fiscal 2004 relates primarily to capital expenditures for new stores and was partially offset by the proceeds from the disposal of certain equipment. Cash provided by financing activities relates primarily to borrowing under the Company’s revolving loan under the Credit Agreement and $0.7 million from the proceeds of the exercise of stock options. Also, the Company used $1.9 million for the repayment of long-term debt.
For fiscal 2004, the Company expects to spend between $17 to $20 million on capital expenditures, primarily to fund the opening of approximately 60 new stores, the renovation and/or relocation of two major stores, an expansion of distribution center capacity and the implementation of various systems initiatives. Management believes that the Company’s cash from operations and availability under its Credit Agreement will be sufficient to fund its planned capital expenditures and operating expenses for fiscal 2004. The cost to open new stores is net of negotiated landlord contributions to help fund the construction of leasehold improvements for new stores. These amounts are typically paid by the landlords after the completion of construction by the Company and the receipt of appropriate lien waivers from contractors. For the stores opened in fiscal 2003, the Company negotiated approximately $9 million of landlord contributions of which approximately $8 million have been collected, including approximately $2 million which was collected in the first half of fiscal 2004. The remaining amount is expected to be received in fiscal 2004. For the stores opened in the first half of fiscal 2004, the Company negotiated approximately $4 million of landlord contributions.
Disclosures about Contractual Obligations and Commercial Commitments
The Company’s principal commitments are non-cancelable operating leases in connection with its retail stores, certain tailoring spaces and equipment. Under the terms of certain of these leases, the Company is required to pay a base annual rent plus a contingent amount based on sales. In addition, many of these leases include scheduled rent increases.
15
The following table reflects a summary of the Company’s contractual cash obligations and other commercial commitments as of July 31, 2004; including amounts paid in the first half of 2004 except for long-term debt:
|
|
|
Payments
Due by Fiscal Year |
|
||||||||
|
|
|
2004 |
|
2005-2007 |
|
2008-2009 |
|
Beyond |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
457 |
|
3,083 |
|
24,795 |
|
2,035 |
|
30,370 |
|
|
Operating leases (a) |
|
26,173 |
|
80,323 |
|
44,043 |
|
68,630 |
|
219,169 |
|
|
Stand-by Letter-of-credit (b) |
|
400 |
|
|
|
|
|
|
|
400 |
|
|
Purchase Commitment (c) |
|
8,956 |
|
— |
|
— |
|
— |
|
8,956 |
|
(a) Includes various lease agreements for stores to be opened and equipment placed in service subsequent to July 31, 2004.
(b) To secure the payment of rent at one leased location included in “Operating Leases” above and is renewable each year through the end of the lease term.
(c) The Company generally does not make unconditional, noncancelable purchase commitments. In fiscal 2003, the Company entered into an agreement with one raw material supplier to purchase a specified quantity of fabric through fiscal 2004 at a specified price. This commitment could extend into 2005; however, the amount of the commitment would not change.
Additional Information
As previously disclosed in the Company’s Form 10-Q for the quarter ended May 1, 2004, on or about April 22, 2004, the Company received a subpoena from the New York Attorney General requiring the production of certain documents relating to the Company’s advertising and in store promotions. The Company has produced documents in response to the subpoena and is currently seeking a resolution of the matter. While the exact amount of any loss which may arise from this matter is not known, the Company has determined that a reasonable estimate of the loss is $475 thousand. A loss contingency in this amount has been recorded as a general and administrative expense in the accompanying Statement of Income for the three months ended July 31, 2004.
The Company’s statements concerning future operations contained herein are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forecasted due to a variety of factors outside of the Company’s control that can affect the Company’s operating results, liquidity and financial condition such as risks associated with economic, weather, public health and other factors affecting consumer spending, the ability of the Company to finance its expansion plans, the mix and pricing of goods sold, the market price of key raw materials such as wool and cotton, availability of lease sites for new stores, the ability to source product from its global supplier base and other competitive factors. These cautionary statements qualify all of the forward-looking statements the Company makes herein. The Company cannot assure you that the results or developments anticipated by the Company will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for the Company or affect the Company, its business or its operations in the way the Company expects. The Company cautions you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates, and assumes no obligation to update any of the forward-looking statements. These risks should be carefully reviewed before making any investment decision.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At July 31, 2004, there were no derivative financial instruments. In addition, the Company does not believe it is materially at risk for changes in market interest rates or foreign currency fluctuations. The Company’s interest on borrowings under its Credit Agreement is at a variable rate based on the prime rate or a spread over the LIBOR.
16
Item 4. Internal Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of July 31, 2004 the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.
The Company has been named as a defendant in legal actions arising from its normal business activities. Although the outcome of these lawsuits or other proceedings against the Company cannot be accurately predicted, the Company does not expect that any such liability will have a material adverse effect on the business, net assets or financial position of the Company.
The following information is furnished with respect to matters submitted to a vote of security holders during the period covered by this report:
a) The 2004 annual meeting of shareholder of the Company was held on June 25, 2004.
b) Gary S. Gladstein was elected as director at the meeting. Andrew A. Giordano, David A. Preiser and Robert N. Wildrick continued in their respective terms of office as directors.
c) The matters voted upon at the meeting and the votes were as follows:
1. Election of Director
|
|
|
For |
|
Against |
|
Gary S. Gladstein |
|
9,116,552 |
|
253,427 |
2. Ratification of selection of Deloitte and Touche, LLP as the Company’s independent public accountants for the fiscal year ending January 29, 2005.
|
For |
|
Against |
|
Withheld |
|
|
9,326,068 |
|
38,072 |
|
5,830 |
|
As the annual meeting was held prior to the distribution of the stock dividend declared on June 8, 2004, the foregoing votes do not reflect any adjustment which otherwise may have occurred as a result of said stock dividend.
17
(a) Exhibits
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a). |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a). |
|
32.1 |
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K
On June 9, 2004, the Company filed a Form 8-K, Item 5, disclosing that on June 9, 2004 the Company issued a press release in which the Company announced that the Company’s Board of Director’s declared a 25% stock dividend to shareholders of record on July 30, 2004.
On May 25, 2004, the Company filed a report on Form 8-K, Item 12, announcing that on May 25, 2004 the Company issued a press release in which the Company announced, among other things, certain results of operations for its first quarter ended May 1, 2004.
On May 14, 2004, the Company filed a report on Form 8-K, Item 4, announcing that on May 12, 2004, Deloitte & Touche LLP was engaged as our principal accountant to audit our financial statements for the 2004 Fiscal Year.
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.
|
Date: September 9, 2004 |
Jos. A. Bank Clothiers, Inc. |
|
|
(Registrant) |
|
|
|
|
|
/s/ David E. Ullman |
|
|
David E. Ullman |
|
|
Chief Financial Officer |
18