UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended January 29, 2005

 

OR

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file no. 1-9659

 

The Neiman Marcus Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		95-4119509
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Marcus Square 1618 Main Street Dallas, Texas 75201
(Address of principal executive offices)
(214) 741-6911
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES ý                NO o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES ý                NO o

 

As of March 2, 2005, the number of outstanding shares of each of the issuer’s classes of common stock was:

 

Class		Outstanding Shares
Class A Common Stock, $.01 Par Value		29,521,377
Class B Common Stock, $.01 Par Value		19,422,379

 

 

THE NEIMAN MARCUS GROUP, INC.

 

INDEX

 

Part I.	Financial Information
Item 1.	Condensed Consolidated Balance Sheets as of January 29, 2005, July 31, 2004 and January 31, 2004
	Condensed Consolidated Statements of Earnings for the Thirteen Weeks and Twenty-Six Weeks Ended January 29, 2005 and January 31, 2004
	Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended January 29, 2005 and January 31, 2004
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits
Signatures

 

 

THE NEIMAN MARCUS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 

(in thousands)		January 29, 2005			July 31, 2004			January 31, 2004
ASSETS
Current assets:
Cash and cash equivalents		$	377,857		$	368,367		$	251,658
Undivided interests in NMG Credit Card Master Trust		—			—			164,652
Accounts receivable, net of allowance of $11,259, $10,078 and $5,091		659,015			551,687			321,005
Merchandise inventories		726,169			720,277			658,177
Other current assets		79,679			65,835			75,985
Total current assets		1,842,720			1,706,166			1,471,477
Property and equipment, net		793,146			763,931			746,816
Other assets		119,327			145,812			112,380
Total assets		$	2,755,193		$	2,615,909		$	2,330,673
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	241,946		$	289,282		$	227,121
Accrued liabilities		327,435			286,833			304,103
Notes payable and current maturities of long-term liabilities		2,200			1,563			845
Current portion of borrowings under Credit Card Facility		225,000			150,000			—
Total current liabilities		796,581			727,678			532,069
Long-term liabilities:
Notes and debentures		249,768			249,757			249,745
Borrowings under Credit Card Facility		—			75,000			111,326
Deferred real estate credits		68,707			70,159			72,677
Other long-term liabilities		118,862			112,455			90,884
Total long-term liabilities		437,337			507,371			524,632
Minority interest		11,664			10,298			10,729
Common stocks		497			492			492
Additional paid-in capital		510,119			491,849			481,598
Accumulated other comprehensive loss		(1,996		)	(4,536		)	(25,326		)
Retained earnings		1,026,652			905,330			828,525
Treasury stock, at cost (768,731 shares, 710,227 shares and 699,777 shares)		(25,661		)	(22,573		)	(22,046		)
Total shareholders’ equity		1,509,611			1,370,562			1,263,243
Total liabilities and shareholders’ equity		$	2,755,193		$	2,615,909		$	2,330,673

 

See Notes to Condensed Consolidated Financial Statements.

 

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THE NEIMAN MARCUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

 

(in thousands, except per share data)		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		January 29, 2005			January 31, 2004			January 29, 2005			January 31, 2004
Revenues		$	1,129,225		$	1,048,367		$	2,037,161		$	1,867,136
Cost of goods sold including buying and occupancy costs		761,989			718,986			1,316,699			1,229,336
Selling, general and administrative expenses		247,576			239,380			475,539			450,511
Loss on disposition of Chef’s Catalog		—			—			15,348			—
Operating earnings		119,660			90,001			229,575			187,289
Interest expense, net		3,978			3,764			8,015			7,225
Earnings before income taxes and minority interest		115,682			86,237			221,560			180,064
Income taxes		44,326			26,132			85,301			62,724
Earnings before minority interest		71,356			60,105			136,259			117,340
Minority interest in net earnings of subsidiaries		(769		)	(934		)	(1,556		)	(1,944		)
Net earnings		$	70,587		$	59,171		$	134,703		$	115,396
Weighted average number of common and common equivalent shares outstanding:
Basic		48,309			47,954			48,268			47,789
Diluted		49,454			48,897			49,293			48,647
Earnings per share:
Basic		$	1.46		$	1.23		$	2.79		$	2.41
Diluted		$	1.43		$	1.21		$	2.73		$	2.37

 

See Notes to Condensed Consolidated Financial Statements.

 

2

 

THE NEIMAN MARCUS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

(in thousands)		Twenty-Six Weeks Ended
		January 29, 2005			January 31, 2004
CASH FLOWS - OPERATING ACTIVITIES
Net earnings		$	134,703		$	115,396
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation		51,196			48,284
Loss on disposition of Chef’s Catalog		15,348			—
Minority interest		1,556			1,944
Other – primarily costs related to defined benefit pension and other long-term benefit plans		16,090			24,829
		218,893			190,453
Changes in operating assets and liabilities:
Increase in accounts receivable		(106,830		)	(298,410		)
(Increase)/decrease in merchandise inventories		(16,209		)	28,885
Decrease in accounts payable and accrued liabilities		(1,970		)	(3,410		)
Contribution to defined benefit pension plan		—			(30,000		)
Other		(17,797		)	7,023
Net cash provided by (used for) operating activities		76,087			(105,459		)
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures		(80,999		)	(52,942		)
Transactions related to undivided interests in NMG Credit Card Master Trust:
Purchases of held-to-maturity securities		—			(240,808		)
Maturities of held-to-maturity securities		—			318,721
Proceeds from sale of Chef’s Catalog		14,419			—
Net cash (used for) provided by investing activities		(66,580		)	24,971
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from borrowings		637			1,000
Repayment of debt		—			(1,000		)
Borrowings under Credit Card Facility		—			111,326
Acquisitions of treasury stock		(3,088		)	(7,026		)
Proceeds from stock-based compensation awards		16,273			21,560
Cash dividends paid		(12,664		)	—
Distribution paid		(1,175		)	(664		)
Net cash (used for) provided by financing activities		(17		)	125,196
CASH AND CASH EQUIVALENTS
Increase during the period		9,490			44,708
Beginning balance		368,367			206,950
Ending balance		$	377,857		$	251,658
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest		$	10,250		$	8,918
Income taxes		$	72,151		$	51,935

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

THE NEIMAN MARCUS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

1.               Basis of Presentation

 

We have prepared the Condensed Consolidated Financial Statements of The Neiman Marcus Group, Inc. and its subsidiaries in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of 2005 relate to the thirteen weeks ended January 29, 2005 and all references to the second quarter of 2004 relate to the thirteen weeks ended January 31, 2004.  All references to 2005 relate to the twenty-six weeks ended January 29, 2005 and all references to 2004 related to the twenty-six weeks ended January 31, 2004.

 

In our opinion, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.  The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

 

We are required to make estimates and assumptions about future events in preparing financial statements in conformity with generally accepted accounting principles.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the Condensed Consolidated Financial Statements.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying Condensed Consolidated Financial Statements.

 

We believe the following critical accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of our financial statements:

 

•                  Revenue recognition;

 

•                  Valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage, and determination of cost of goods sold;

 

•                  Determination of impairment of long-lived assets;

 

•                  Recognition of income and expenses related to our previous securitization program;

 

•                  Recognition of advertising and catalog costs;

 

•                  Measurement of liabilities related to our loyalty programs;

 

•                  Recognition of income taxes; and

 

•                  Measurement of accruals for litigation, general liability, workers’ compensation and health insurance, short-term disability, pension and postretirement health care benefits.

 

A description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

 

4

 

Stock-Based Compensation.  We account for stock-based compensation awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, we have recognized no compensation expense for stock options since all options granted had an exercise price equal to the market value of our common stock on the grant date.

 

The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation using the Black-Scholes option-pricing model for 2005 and 2004:

 

(in thousands, except per share data)		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		January 29, 2005			January 31, 2004			January 29, 2005			January 31, 2004
Net earnings:
As reported		$	70,587		$	59,171		$	134,703		$	115,396
Less: stock-based employee compensation expense determined under fair value based method, net of related taxes		(2,147		)	(2,158		)	(4,110		)	(4,201		)
Pro forma		$	68,440		$	57,013		$	130,593		$	111,195
Basic earnings per share:
As reported		$	1.46		$	1.23		$	2.79		$	2.41
Pro forma		$	1.42		$	1.19		$	2.71		$	2.33
Diluted earnings per share:
As reported		$	1.43		$	1.21		$	2.73		$	2.37
Pro forma		$	1.38		$	1.17		$	2.65		$	2.29

 

The effects on pro forma net earnings and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net earnings for future periods due to such factors as the vesting periods of stock options and the potential issuance of additional stock options in future years.  In addition, the Black-Scholes option-pricing model has inherent limitations in calculating the fair value of stock options for which no active market exists since the model does not consider the inability to sell or transfer options, vesting requirements and a reduced exercise period upon termination of employment - all of which would reduce the fair value of the options.

 

5

 

Reclassification – Loyalty Programs.  A substantial portion of the points earned by customers in connection with our loyalty programs are redeemed for gift cards.  At the time the qualifying sales giving rise to the loyalty program points are made, we defer the portion of the revenues on the qualifying sales transactions equal to our estimate of the retail value of the gift cards to be issued upon conversion of the points to gift cards.   Beginning in the first quarter of 2005, we began to record the deferral of revenues related to gift card awards under our loyalty programs as a reduction of revenues. Previously, we charged  such amounts to selling, general and administrative expenses (SG&A).  In addition, we now charge the cost of all other awards under our loyalty programs to cost of goods sold (COGS) rather than SG&A.  These changes in classification do not impact the previously reported operating earnings, net income or earnings per share amounts.

 

The following table presents quarterly and annual information giving recognition to the changes in classification related to our loyalty programs:

 

(in thousands)		Revenues			COGS			SG&A
Fiscal Year 2004:
First quarter		$	818,769		$	510,350		$	211,130
Second quarter		1,048,367			718,985			239,381
Third quarter		873,167			544,663			208,909
Fourth quarter		784,468			553,231			189,033
Total		$	3,524,771		$	2,327,229		$	848,453
Fiscal Year 2003:
First quarter		$	727,832		$	455,307		$	197,281
Second quarter		934,844			655,459			220,981
Third quarter		718,557			465,160			181,565
Fourth quarter		699,120			502,510			179,981
Total		$	3,080,353		$	2,078,436		$	779,808

 

Reclassification – Construction Allowances.  We periodically receive allowances from developers related to the construction of our stores.  We have historically recorded these allowances as a reduction of our capital expenditures and, as a result, the carrying values of our property and equipment.  Like other retailers, we have recently reviewed our accounting for leases and after consultation with Deloitte & Touche LLP, our independent registered public accounting firm, we have changed the classification of these developer funds from a reduction of property and equipment to deferred real estate credits on our balance sheet.  These deferred real estate credits are amortized over the lease term which is consistent with amortization period for the constructed assets.  As a result of the change in classification, property and equipment and long-term liabilities have been increased by $69 million at January 29, 2005 and $73 million at January 31, 2004.

 

2.               Loss on Disposition of Chef’s Catalog

 

In November 2004, we sold our Chef’s Catalog direct marketing business to a private equity firm.  Chef’s Catalog is a multi-channel retailer of professional-quality kitchenware with revenues of approximately $73 million in fiscal year 2004.  At October 30, 2004, Chef’s Catalog had net tangible assets, primarily inventory, of $12.5 million and net intangible assets of $17.2 million.  We received proceeds, net of selling costs, of $14.4 million from the sale.  As the carrying value of the Chef’s Catalog assets exceeded the net proceeds from the sale, we incurred a pre-tax loss of $15.3 million in the first quarter of 2005 related to the disposition of Chef’s Catalog.

 

3.               Operating Segments

 

We have identified two reportable segments: Specialty Retail Stores and Direct Marketing.  Our Specialty Retail Stores

 

6

 

segment includes all of our Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores.  Our Direct Marketing segment conducts both print catalog and online operations under the Neiman Marcus, Horchow and Bergdorf Goodman brand names and, until its disposition in November 2004, the Chef’s Catalog brand name.  Other includes the operations of Kate Spade LLC and Gurwitch Products, LLC (the Brand Development Companies) and corporate expenses.

 

The following table sets forth the information for our reportable segments:

 

(in thousands)		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		January 29, 2005			January 31, 2004			January 29, 2005			January 31, 2004
REVENUES:
Specialty Retail Stores		$	911,982		$	831,775		$	1,648,872		$	1,496,249
Direct Marketing		188,183			191,484			327,982			319,490
Other		29,060			25,108			60,307			51,397
Total		$	1,129,225		$	1,048,367		$	2,037,161		$	1,867,136
OPERATING EARNINGS:
Specialty Retail Stores		$	98,688		$	72,799		$	218,877		$	163,909
Direct Marketing		27,893			24,760			39,251			35,383
Other		(6,921		)	(7,558		)	(13,205		)	(12,003		)
Loss on disposition of Chef’s Catalog		—			—			(15,348		)	—
Total		$	119,660		$	90,001		$	229,575		$	187,289

 

4.               Stock Repurchase Program

 

In prior years, our Board of Directors authorized various stock repurchase programs and increases in the number of shares subject to repurchase.  In the second quarter of 2005, we repurchased 4,100 shares at an average price of $57.60.  In the first quarter of 2005, we repurchased 54,404 shares at an average price of $52.40.  As of January 29, 2005, approximately 1.2 million shares remain available for repurchase under our stock repurchase programs.

 

5.               Earnings per Share

 

The weighted average shares used in computing basic and diluted earnings per share (EPS) are presented in the table below.  We made no adjustments to net earnings for the computations of basic and diluted EPS during the periods presented.

 

(in thousands of shares)		Thirteen Weeks Ended				Twenty-Six Weeks Ended
		January 29, 2005		January 31, 2004		January 29, 2005		January 31, 2004
Weighted average shares outstanding		48,865		48,304		48,798		48,191
Less: shares of non-vested restricted stock		(556	)	(350	)	(530	)	(402	)
Shares for computation of basic EPS		48,309		47,954		48,268		47,789
Effect of dilutive stock options and restricted stock		1,145		943		1,025		858
Shares for computation of diluted EPS		49,454		48,897		49,293		48,647
Shares represented by antidilutive stock options		—		—		285		14

 

We do not include antidilutive stock options in the computation of diluted EPS because the exercise price of those options is greater than the average market price of the common shares.

 

7

 

6.               Undivided Interests in NMG Credit Card Master Trust

 

Pursuant to a revolving credit card securitization program (the Credit Card Facility), we transfer substantially all of our credit card receivables to a wholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turn sells such receivables to the Neiman Marcus Credit Card Master Trust (Trust).  At the inception of the Credit Card Facility in September 2000, the Trust issued certificates representing undivided interests in the credit card receivables to third-party investors in the face amount of $225 million (Sold Interests).  We hold certificates representing interests in the credit card portfolio equal to the excess of the balance of the credit card portfolio over $225 million (Retained Interests).  In order to maintain the committed level of securitized assets, the Trust uses cash collections on the securitized receivables to purchase new credit card balances from us in accordance with the terms of the Credit Card Facility.

 

From the inception of the Credit Card Facility until December 2003, our transfers and sales of credit card receivables pursuant to the terms of the Credit Card Facility were accounted for as sales (Off-Balance Sheet Accounting).  As a result, we removed $225 million of credit card receivables from our balance sheet at the inception of the Credit Card Facility and our $225 million repayment obligation to the holders of the certificates representing the Sold Interests was not required to be shown as a liability on our consolidated balance sheet.  During the period the transfers and sales qualified for Off-Balance Sheet Accounting, our Retained Interests were shown as “Undivided interests in NMG Credit Card Master Trust” on our consolidated balance sheets.

 

Beginning in December 2003, our transfers to the Trust ceased to qualify for Off-Balance Sheet Accounting.  Rather, credit card receivables transferred to the Trust after November 2003 remain on our balance sheet and our borrowings collateralized by those accounts receivable are recorded as liabilities on our balance sheet  (Financing Accounting).  The transition period from Off-Balance Sheet Accounting to Financing Accounting (Transition Period) lasted approximately four months (December 2003 to March 2004).  During the Transition Period, we allocated cash collections on our credit card receivables to the previous Sold Interests and Retained Interests until such time as those balances were reduced to zero and we recorded a liability for our repayment obligation to the holders of the $225 million of certificates representing the Sold Interests.

 

A reconciliation of the outstanding balance of our accounts receivable to the balances recorded at January 29, 2005 and January 31, 2004 is as follows:

 

(in millions)		January 29, 2005			January 31, 2004
Credit card receivables, net		$	630.2		$	570.6
Other receivables		28.8			28.8
		659.0			599.4
Less: Sold Interests originally qualifying for Off-Balance Sheet Accounting		—			(225.0		)
Add: debt brought back onto the balance sheet		—			111.3
Net balance		$	659.0		$	485.7
Amounts reflected in the balance sheet:
Undivided interests in NMG Credit Card Master Trust		$	—		$	164.7
Accounts receivable, net		659.0			321.0
		$	659.0		$	485.7
Current portion of borrowings under Credit Card Facility		$	225.0		$	—
Borrowings under Credit Card Facility		$	—		$	111.3

 

After the Transition Period, our entire credit card portfolio is included in accounts receivable in our consolidated balance sheet and the $225 million repayment obligation is shown as a liability.

 

8

 

7.               Employee Benefit Plans

 

Description of Benefit Plans.  We sponsor a defined benefit pension plan (Pension Plan) covering substantially all full-time employees.  We also sponsor an unfunded supplemental executive retirement plan (SERP Plan) that provides additional pension benefits to certain employees.  Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.  Pension Plan assets consist primarily of equity and fixed income securities.

 

Retirees and active employees hired prior to March 1, 1989 are eligible to participate in a plan providing certain limited postretirement health care benefits (Postretirement Plan) if they have met certain service and minimum age requirements.

 

Costs of Benefits.  The components of the expenses incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:                       

 

(in thousands)		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		January 29, 2005			January 31, 2004			January 29, 2005			January 31, 2004
Pension Plan:
Service cost		$	3,196		$	2,935		$	6,392		$	6,103
Interest cost		4,636			4,469			9,271			9,292
Expected return on plan assets		(4,712		)	(4,481		)	(9,425		)	(9,316		)
Net amortization of losses and prior service costs		1,208			866			2,418			1,799
Pension Plan expense		$	4,328		$	3,789		$	8,656		$	7,878
SERP Plan:
Service cost		$	361		$	342		$	722		$	682
Interest cost		1,014			979			2,028			1,953
Net amortization of losses and prior service costs		384			367			768			733
SERP Plan expense		$	1,759		$	1,688		$	3,518		$	3,368
Postretirement Plan:
Service cost		$	15		$	20		$	29		$	40
Interest cost		318			386			636			770
Net amortization of losses		26			111			53			220
Postretirement Plan expense		$	359		$	517		$	718		$	1,030

 

Funding Policy and Plan Assets.  Our policy is to fund the Pension Plan at or above the minimum required by law.  In 2004, we made voluntary contributions of $30.0 million in the second quarter and $15.0 million in the fourth quarter for the plan year ended July 31, 2003.  Based upon currently available information, we will not be required to make contributions to the Pension Plan for either the 2004 or 2005 plan years.

 

8.               Commitments and Contingencies

 

We are involved in various suits and claims in the ordinary course of business.  We do not believe that the disposition of any such suits or claims will have a material adverse effect upon our consolidated results of operations, cash flows or financial position.

 

9

 

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

EXECUTIVE OVERVIEW

 

Company Profile

 

The Neiman Marcus Group, Inc., together with its operating divisions and subsidiaries, is a high-end specialty retailer.  Our operations include the Specialty Retail Stores segment and the Direct Marketing segment.  Our Specialty Retail Stores segment consists primarily of Neiman Marcus and Bergdorf Goodman stores.  Our Direct Marketing segment conducts both print catalog and online operations under the brand names of Neiman Marcus, Horchow and Bergdorf Goodman and until its disposition in November 2004, the Chef’s Catalog brand name.  In November 2004, we sold our Chef’s Catalog operations, as more fully described in Note 2 to the Condensed Consolidated Financial Statements.

 

We own a 51 percent interest in Gurwitch Products, LLC, which distributes and markets the Laura Mercier cosmetic line, and a 56 percent interest in Kate Spade LLC, a manufacturer and retailer of high-end designer handbags and accessories.  Gurwitch Products, LLC and Kate Spade LLC are hereafter referred to collectively as the “Brand Development Companies.”

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of 2005 relate to the thirteen weeks ended January 29, 2005 and all references to the second quarter of 2004 relate to the thirteen weeks ended January 31, 2004.  All references to 2005 relate to the twenty-six weeks ended January 29, 2005 and all references to 2004 relate to the twenty-six weeks ended January 31, 2004.

 

The information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 31, 2004.  Unless otherwise specified, the meanings of all defined terms in MD&A are consistent with the meanings of such terms as defined in the Notes to the Condensed Consolidated Financial Statements.

 

Overview of the Business

 

We believe that our unique product assortment of luxury, designer and fashion merchandise, coupled with our sales promotion activities and our commitment to superior customer service, have been critical to our success in the past.  In addition, we believe these factors are critical to our future growth and success.

 

We conduct our selling activities in two primary selling seasons, Fall and Spring.  Sales and margins fluctuate during each selling season due to the results of in-store marketing and full-price selling towards the beginning of each season and sales  on a marked down basis towards the end of each season.  As a result of the seasonality of our selling activities, inventory management is critical to our success.

 

Inherent in the successful execution of our business plans, particularly our inventory management strategy, is our ability both to predict the fashion trends that will be of interest to our customers and to anticipate the future spending patterns of our customer base.  Accordingly, we monitor the sales performance of our inventories throughout each season.  We seek to order additional goods to supplement our original purchasing decisions when the level of customer demand is higher than originally anticipated.  However, in certain merchandise categories, particularly fashion apparel, our ability to purchase additional goods can be limited.  This can result in lost sales in the event of higher than anticipated demand for the fashion goods offered or a higher than anticipated level of consumer spending.  Conversely, in the event we buy fashion goods that are not accepted by our customer or the level of consumer spending is less than we anticipated, we typically incur a higher than anticipated level of markdowns, net of vendor allowances, to sell the goods that remain at the end of the season, resulting in lower operating profits.  We believe that the experience of our merchandising and selling organizations helps to minimize the inherent risk in predicting fashion trends and related demand.

 

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Second Quarter Fiscal Year 2005 Highlights

 

Diluted earnings per share for the second quarter of 2005 increased 18.2 percent to $1.43 from $1.21 in the prior year period. Other significant highlights for the second quarter of 2005 include:

 

•                  Revenues – Our revenues for the second quarter of 2005 were $1,129.2 million compared to $1,048.4 million in the prior year period.  Revenues increased 7.7 percent in the second quarter of 2005 while comparable revenues increased 10.4 percent.  Year to date, revenues have increased 9.1 percent while comparable revenues have increased 10.8 percent.  We have experienced double digit percentage increases in comparable store sales in each of our last six consecutive quarters.  For Specialty Retail Stores, our sales per square foot for the last twelve trailing months increased to $555 as of January 2005 compared to $494 as of January 2004.

 

•                  Margins – Margins increased to 32.5 percent of revenues in the second quarter of 2005 from 31.4 percent in the second quarter of 2004.  Year to date, margins have increased to 35.4 percent of revenues from 34.2 percent in the prior year period.  These increases are reflective of the high level of acceptance and demand for the fashion goods we offer as well as our efforts to more closely align purchases and customer demand.

 

•                  Selling, general and administrative expenses – Selling, general and administrative (SG&A) expenses decreased to 21.9 percent of revenues in the second quarter of 2005 from 22.8 percent in the second quarter 2004 and to 23.3 percent of revenues year-to-date from 24.1 percent in the prior year period.

 

•                  Operating earnings – Operating earnings increased 33.0 percent in the second quarter of 2005, representing 10.6 percent of our revenues compared to 8.6 percent in the second quarter of 2004.  Year to date, operating earnings increased 22.6 percent, representing 11.3 percent of our revenues for 2005 compared to 10.0 percent in 2004.  Operating earnings were 10.8 percent of revenues in the second quarter and 13.3 percent year to date for our Specialty Retail Stores and 14.8 percent of revenues in the second quarter and 12.0 percent year to date for Direct Marketing.

 

OPERATING RESULTS

 

Performance Summary

 

The following table sets forth certain items expressed as percentages of net sales for the periods indicated.

 

		Thirteen Weeks Ended				Twenty-Six Weeks Ended
		January 29, 2005		January 31, 2004		January 29, 2005		January 31, 2004
Revenues		100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold including buying and occupancy costs		67.5		68.6		64.6		65.8
Selling, general and administrative expenses		21.9		22.8		23.3		24.1
Loss on disposition of Chef’s Catalog		—		—		0.8		—
Operating earnings		10.6		8.6		11.3		10.0
Interest expense, net		0.4		0.4		0.4		0.4
Earnings before income taxes and minority interest		10.2		8.2		10.9		9.6
Income taxes		3.9		2.5		4.2		3.3
Earnings before minority interest		6.3		5.7		6.7		6.3
Minority interest in net earnings of subsidiaries		(0.1	)	(0.1	)	(0.1	)	(0.1	)
Net earnings		6.3	%	5.6	%	6.6	%	6.2	%

 

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Set forth in the following table is certain summary information with respect to our operations for the periods indicated.

 

(dollars in millions)		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		January 29, 2005			January 31, 2004			January 29, 2005			January 31, 2004
REVENUES
Specialty Retail Stores		$	912.0		$	831.8		$	1,648.9		$	1,496.2
Direct Marketing		188.2			191.5			328.0			319.5
Other (1)		29.0			25.1			60.3			51.4
Total		$	1,129.2		$	1,048.4		$	2,037.2		$	1,867.1
OPERATING EARNINGS
Specialty Retail Stores		$	98.7		$	72.8		$	218.9		$	163.9
Direct Marketing		27.9			24.8			39.3			35.4
Other (1)		(6.9		)	(7.6		)	(13.3		)	(12.0		)
Loss on disposition of Chef’s Catalog		—			—			(15.3		)	—
Total		$	119.7		$	90.0		$	229.6		$	187.3
OPERATING PROFIT MARGIN
Specialty Retail Stores		10.8		%	8.8		%	13.3		%	11.0		%
Direct Marketing		14.8		%	12.9		%	12.0		%	11.1		%
Total		10.6		%	8.6		%	11.3		%	10.0		%
COMPARABLE REVENUES (2)
Specialty Retail Stores (3)		9.6		%	10.2		%	10.3		%	10.0		%
Direct Marketing (4)		15.8		%	25.7		%	14.7		%	20.3		%
Total (3), (4)		10.4		%	12.7		%	10.8		%	11.9		%
SALES PER SQUARE FOOT
Specialty Retail Stores		$	168		$	154		$	305		$	278
STORE COUNT
Neiman Marcus and Bergdorf Goodman stores:
Open at beginning of period		37			37			37			37
Opened during the period		—			—			—			—
Open at end of period		37			37			37			37
Clearance centers:
Open at beginning of period		14			14			14			14
Opened during the period		1			—			1			—
Open at end of period		15			14			15			14

 

(1)   Other includes the operations of the Brand Development Companies and corporate expenses.

 

(2)   Comparable revenues include 1) revenues derived from our retail stores open for more than 52 weeks, including stores that have been relocated or expanded, 2) revenues from our Direct Marketing operations and 3) wholesale revenues from our Brand Development Companies.

 

(3)   The calculation of the changes in comparable revenues has been adjusted to give recognition to the change in classification of revenues deferred in connection with our loyalty programs, as more fully described in Note 1 to the Condensed Consolidated Financial Statements.

 

(4)   The calculation of the changes in comparable revenues has been adjusted to exclude the revenues of Chef’s Catalog for all periods prior to our sale of these operations in November 2004, as more fully described in Note 2 to the Condensed Consolidated Financial Statements.

 

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