United States Securities and Exchange Commission

Washington, DC 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 April 30, 2005.
	or
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	Commission File Number    0-23874

 

Jos. A. Bank Clothiers, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		36-3189198
(State incorporation)		(I.R.S. Employer Identification Number)
500 Hanover Pike, Hampstead, MD		21074-2095
(Address of Principal Executive Offices)		(Zip Code)
410-239-2700
(Registrant’s telephone number including area 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.

 

 

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

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

Jos. A. Bank Clothiers, Inc.

 

Index

 

Part I.		Financial Information
	Item 1.		Condensed Consolidated (unaudited) Financial Statements
	Condensed Consolidated Statements of Income – Three Months ended May 1, 2004 (as restated) and April 30, 2005
	Condensed Consolidated Balance Sheets – as of January 29, 2005 and April 30, 2005
	Condensed Consolidated Statements of Cash Flows – Three Months ended May 1, 2004 (as restated) and April 30, 2005
	Notes to Condensed Consolidated Financial Statements
	Item 2.		Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 3.		Quantitative and Qualitative Disclosures about Market Risk
	Item 4.		Internal Controls and Procedures
Part II.		Other Information
	Item 1.		Legal Proceedings
	Item 6.		Exhibits
Signatures

 

2

 

PART I.                                                                            FINANCIAL INFORMATION

 

Item 1.                                   Condensed Consolidated Financial Statements

 

JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands except per share data)

(Unaudited)

 

		Three Months Ended
		May 1, 2004			April 30, 2005
		(As Restated, See Note 3)
Net sales		$	79,929		$	96,575
Cost of goods sold		30,894			35,962
Gross profit		49,035			60,613
Operating expenses:
Sales and marketing		30,757			39,540
General and administrative		8,584			9,179
Store opening costs		231			112
Total operating expenses		39,572			48,831
Operating income		9,463			11,782
Interest expense, net		481			324
Income before provision for income taxes		8,982			11,458
Provision for income taxes		3,711			4,721
Net income		$	5,271		$	6,737
Earnings per share:
Net income:
Basic		$	0.40		$	0.50
Diluted		$	0.37		$	0.47
Weighted average shares outstanding:
Basic		13,246			13,471
Diluted		14,213			14,321

 

See accompanying notes

 

3

 

JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

 

		January 29, 2005			April 30, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	1,425		$	2,137
Accounts receivable, net		4,798			9,080
Inventories:
Raw materials		8,550			12,444
Finished goods		119,143			132,170
Total inventories		127,693			144,614
Prepaid expenses and other current assets		11,892			12,688
Deferred income taxes		893			—
Total current assets		146,701			168,519
NONCURRENT ASSETS:
Property, plant and equipment, net		83,621			85,672
Other noncurrent assets		1,508			1,478
Total assets		$	231,830		$	255,669
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	40,133		$	42,724
Accrued expenses		37,505			33,652
Current portion of long-term debt		917			933
Deferred tax liability – current		—			6,169
Total current liabilities		78,555			83,478
NONCURRENT LIABILITIES:
Long-term debt, net of current portion		5,942			15,709
Noncurrent lease obligations		30,318			30,354
Deferred tax liability – noncurrent		1,753			2,960
Other noncurrent liabilities		938			939
Total liabilities		117,506			133,440
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common Stock		124			125
Additional paid-in capital		67,594			68,761
Retained earnings		51,664			58,401
		119,382			127,287
Treasury stock		(5,058		)	(5,058		)
Total stockholders’ equity		114,324			122,229
Total liabilities and stockholders’ equity		$	231,830		$	255,669

 

See accompanying notes

 

4

 

JOS. A. BANK CLOTHIERS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands) (Unaudited)

 

		Three Months Ended
		May 1, 2004			April 30, 2005
		(As Restated, See Note 3)
Cash flows from operating activities:
Net income		$	5,271		$	6,737
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,497			3,079
Loss on disposals of plant and equipment		—			3
Income tax benefit from exercise of stock options		—			952
Net increase in operating working capital		(10,120		)	(14,925		)
Net cash used in operating activities		(2,352		)	(4,154		)
Cash flows from investing activities:
Capital expenditures		(4,890		)	(5,133		)
Proceeds from disposal of assets		850			—
Net cash used in investing activities		(4,040		)	(5,133		)
Cash flows from financing activities:
Borrowings under long-term Credit Agreement		27,520			24,719
Repayments under long-term Credit Agreement		(19,869		)	(14,719		)
Repayment of other long-term debt		(1,652		)	(217		)
Net proceeds from issuance of common stock		422			216
Net cash provided by financing activities		6,421			9,999
Net increase in cash and cash equivalents		29			712
Cash and cash equivalents – beginning of period		875			1,425
Cash and cash equivalents – end of period		$	904		$	2,137

 

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 Condensed 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.

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles accepted in the United States for comparable annual financial statements.  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 Annual Report on Form 10-K for the fiscal year ended January 29, 2005.

 

2.                                      SIGNIFICANT ACCOUNTING POLICIES

 

Inventories - - The Company records inventory at the lower of cost or market (“LCM”). Cost is determined using the first-in, first-out method. The Company capitalizes into inventory certain warehousing and freight delivery costs associated with shipping its merchandise to the point of sale.  The Company periodically reviews quantities of inventories on hand and compares these amounts to the expected sale of each product.  The Company records a charge to cost of goods sold for the amount required to reduce the carrying value of inventory to net realizable value. 

 

Vendor Rebates - The Company receives credits from vendors in connection with inventory purchases.  The credits are separately negotiated with each vendor.  Substantially all of these credits are earned in one of two ways: a) as a fixed percentage of purchases when an invoice is paid or b) as an agreed-upon amount in the month a new store is opened.  There are no contingent minimum purchase amounts, milestones or other contingencies that are required to be met to earn the credits.  The credits described in a) above are recorded as a reduction to inventories in the Condensed Consolidated Balance Sheet as the inventories are purchased and the credits described in b) above are recorded as a reduction to inventories as new stores are opened.  In both cases, the credits are recognized as reductions to cost of goods sold as the product is sold.

 

Landlord Contributions - - Landlord contributions are accounted for as an increase to noncurrent lease obligations and as an increase to prepaid and other current assets until collected.  When collected, the Company records cash and reduces the prepaid and other current assets account.  The landlord contributions are presented in the Condensed Consolidated Statements of Cash Flows as an operating activity.  The noncurrent lease obligations are amortized over the life of the lease in a manner that is consistent with the Company’s policy to straight-line rent expense over the term of the lease.  The amortization is recorded as a reduction to sales and marketing expense which is consistent with the classification of lease expense. 

 

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 then-current market price of the underlying stock exceeds the exercise price. Historically, the Company has issued all options at the market price on the date of grant.  There was no stock-based compensation expense recognized in the Condensed Consolidated Statement of Income for the periods ended May 1, 2004 and April 30, 2005. 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 of accounting described above, and has adopted only 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

 

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unvested awards in each quarter and compensation expense had been recorded:

 

		Three Months Ended May 1, 2004			Three Months Ended April 30, 2005
Net income as reported		$	5,271		$	6,737
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		150			80
Pro forma net income		$	5,121		$	6,657
Pro forma basic net income per common share		$	0.39		$	0.49
Pro forma diluted net income per common share		$	0.36		$	0.46

 

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 assumption used for grants in the first fiscal quarter ended April 30, 2005.  For the fiscal quarter ended May 1, 2004, there were no stock options granted.

 

		Three Months Ended May 1, 2004		Three Months Ended April 30, 2005
		(no options granted)
Risk free interest rate		—		3.88		%
Expected volatility		—		34		%
Expected life		—		3 years
Contractual life		—		10 years
Expected dividend yield		—		0.0		%
Fair value of options granted		—		$	32.86
# of Options granted		—		29

 

Reclassifications – Certain amounts in the Condensed Consolidated Financial Statements for the quarter ended May 1, 2004 have been reclassified in order to conform to the April 30, 2005 presentation. The Company reclassified sales and related costs for new stores between the Stores and Direct Marketing segments in Note 6 to this Form 10-Q.  The Company also reclassified certain amounts of deferred income taxes in the May 1, 2004 financial statements to conform with the April 30, 2005 presentation.

 

3.                                      RESTATEMENT OF FINANCIAL STATEMENTS

 

On February 7, 2005, in a letter to the Center for Public Company Audit Firms-American Institute of Certified Public Accountants (the “SEC Letter”), the Chief Accountant of the Securities and Exchange Commission (the “SEC”) expressed the views of the SEC staff concerning certain operating lease accounting issues and their application under generally accepted accounting principles (“GAAP”).  Specifically, the SEC Letter addressed the appropriate accounting for: (1) the amortization of leasehold improvements by a lessee in an operating lease with lease renewals, (2) the pattern of recognition of rent when the lease term in an operating lease contains a period where there are free or reduced rents (commonly referred to as “rent holidays”), and (3) incentives related to leasehold improvements provided by a landlord/lessor to a tenant/lessee in an operating lease. Like many other companies in the retail industry, the Company has re-evaluated its lease accounting practices in light of the SEC Letter.

 

Amortization of Leasehold Improvements- In order to comply with GAAP regarding amortization of leasehold improvements discussed in the SEC Letter, the Company revised the straight-line rent schedules for thirteen of its stores to achieve consistency with the corresponding leasehold amortization schedules.

 

Rent Holidays- In the SEC Letter, the SEC staff reiterated that GAAP requires rent holidays in an operating lease should be recognized by the lessee on a straight-line basis over the lease term (including any rent holiday period).  In prior periods, the Company had generally recognized the straight line expense for a lease beginning on the date the store opened, which was generally the date the lease term commenced in accordance with the lease.  The period during which the store was being constructed was excluded from the straight-line rent schedule because the construction period was not considered to be part of the lease term in accordance with the lease. Based on our re-evaluation, the Company concluded that the construction period should be included in the straight-line rent schedule.

 

7

 

As a result of the correction to its rent schedules, the Company restated the Condensed Consolidated Financial Statements for the first quarter of fiscal 2004.  The foregoing corrections are inclusive of the immaterial changes resulting from the modification of the rent schedules to achieve consistency with the corresponding leasehold amortization schedules, as set forth above.

 

Landlord Contributions- Leasehold improvement incentives provided by a landlord to the Company were previously recorded by the Company as a reduction of the property, plant and equipment account on its balance sheet and amortized as a reduction to depreciation expense in its income statement.  However, GAAP requires that such incentives be recorded as deferred rent and amortized as reductions to lease expense.  As a result, the Company’s property, plant and equipment asset account and deferred rent liability account were increased which resulted in increases to cash flows provided by operating activities and cash flows used for investing activities in equal amounts.  Accordingly, the Company restated the Condensed Consolidated Financial Statements for the first quarter of fiscal 2004.  These landlord contributions are amortized over the life of the lease as a reduction to rent expense.

 

The impact of the restatement on the Condensed Consolidated Balance Sheet as of May 1, 2004 was an increase in the total property, plant and equipment account of $14,363 and an increase in the deferred rent liability account of $16,183.  The restatement also had a cumulative decrease on retained earnings of $1,112 and an increase to deferred income taxes of $708 as of May 1, 2004.  The restatement did not have any impact on our previously reported sales or comparable store sales or on our compliance with any financial covenant under our line of credit facility or other debt instruments.  For the first quarter of fiscal 2004, the impact of the restatement is a decrease in net income of $64 and a decrease in reported diluted earnings per share of $0.01, from amounts previously reported.

 

The following is a summary of the significant effects of the restatement on the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows for the first quarter of fiscal 2004.  As the Company has been using the new lease accounting practices since the beginning of fiscal 2005, the Company has accounted for its leases for the current quarter in accordance with GAAP.

 

Condensed Consolidated Statements of Income

 

		Three Months Ended May 1, 2004
		As Reported Previously			Adjustments			As Restated
NET SALES		$	79,929		$	—		$	79,929
Cost of goods sold		30,894			—			30,894
GROSS PROFIT		49,035			—			49,035
OPERATING EXPENSES:
Sales and marketing		30,651			106			30,757
General and administrative		8,584			—			8,584
Store opening costs		231			—			231
Total operating expenses		39,466			106			39,572
OPERATING INCOME		9,569			(106		)	9,463
Interest expense, net		481			—			481
Income before provision for income taxes		9,088			(106		)	8,982
Provision for income taxes		3,753			(42		)	3,711
NET INCOME		$	5,335		$	(64	)	$	5,271
EARNINGS PER SHARE
Net Income:
Basic		$	0.40		$	(0.00	)	$	0.40
Diluted		$	0.38		$	(0.01	)	$	0.37
Weighted average shares outstanding
Basic		13,246			—			13,246
Diluted		14,213			—			14,213

 

8

 

Condensed Consolidated Balance Sheets

 

		May 1, 2004
		As Reported Previously			Adjustments			As Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	904		$	—		$	904
Accounts receivable, net		6,158			—			6,158
Inventories:					—
Raw materials		7,718			—			7,718
Finished goods		118,182			—			118,182
Total inventories		125,900			—			125,900
Prepaid expenses and other current  assets		10,058			—			10,058
Deferred income taxes		—			2,697			2,697
Total current assets		143,020			2,697			145,717
NONCURRENT ASSETS:
Property, plant and equipment, net		47,749			14,363			62,112
Other noncurrent assets		970			—			970
Deferred income taxes		1,688			(1,688		)	—
Total assets		$	193,427		$	15,372		$	208,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	27,180		$	—		$	27,180
Accrued expenses and other		29,733			—			29,733
Current portion of long-term debt		1,006			—			1,006
Deferred tax liability - current		1,308			(1,308		)	—
Total current liabilities		59,227			(1,308		)	57,919
NONCURRENT LIABILITIES:
Long-term debt, net of current portion		34,856			—			34,856
Noncurrent lease obligations		5,177			16,183			21,360
Other noncurrent liabilities		908			—			908
Deferred tax liability - noncurrent		—			1,609			1,609
Total liabilities		100,168			16,484			116,652
STOCKHOLDERS’ EQUITY:
Preferred stock		—			—			—
Common stock		123			—			123
Additional paid-in capital		64,628			—			64,628
Retained earnings		33,566			(1,112		)	32,454
Treasury stock		(5,058		)	—			(5,058		)
Total stockholders’ equity		93,259			(1,112		)	92,147
Total liabilities and stockholders’ equity		$	193,427		$	15,372		$	208,799

 

9

 

Condensed Consolidated Statements of Cash Flows

 

		Three Months Ended May 1, 2004
		As Reported Previously			Adjustments			As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,335		$	(64	)	$	5,271
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,939			558			2,497
Net increase in operating working capital		(11,379		)	1,259			(10,120		)
Net cash used in operating activities		(4,105		)	1,753			(2,352		)
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures		(3,137		)	(1,753		)	(4,890		)
Proceeds from disposal of assets		850			—			850
Net cash used in investing activities		(2,287		)	(1,753		)	(4,040		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving loan  agreement		27,520			—			27,520
Repayment of borrowings under revolving loan agreement		(19,869		)	—			(19,869		)
Repayment of other long-term debt		(1,652		)	—			(1,652		)
Net proceeds from issuance of common stock		422			—			422
Net cash provided by financing activities		6,421			—			6,421
Net increase in cash and cash equivalents		29			—			29
CASH AND CASH EQUIVALENTS, beginning of year		875			—			875
CASH AND CASH EQUIVALENTS, end of year		$	904		$	—		$	904

 

4.                                      SUPPLEMENTAL CASH FLOW DISCLOSURE

 

The net change in operating working capital and other components consist of the following:

 

		Three Months Ended
		May 1, 2004			April 30, 2005
		(As Restated, See Note 3)
Increase in accounts receivable		$	(1,957	)	$	(4,282	)
Increase in inventories		(5,112		)	(16,921		)
(Increase) decrease in prepaids and other assets		530			(766		)
Increase (decrease) in accounts payable		(1,568		)	2,591
Decrease in accrued expenses and other liabilities		(2,013		)	(3,816		)
Increase in deferred taxes		—			8,269
Net increase in operating working capital and other		$	(10,120	)	$	(14,925	)

 

Interest and Income Taxes Paid:

 

		Three Months Ended
		May 1, 2004			April 30, 2005
Interest and income taxes paid were as follows:
Interest paid		$	480		$	251
Income taxes paid		$	5,472		$	96

 

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5.                                      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:

 

		Three Months Ended
		May 1, 2004		April 30, 2005
Weighted average shares outstanding for basic EPS		13,246		13,471
Dilutive effect of common stock equivalents		967		850
Weighted average shares outstanding for diluted EPS		14,213		14,321

 

The Company uses the treasury method for calculating the dilutive effect of stock options.  There were no anti-dilutive options as of May 1, 2004 and 19 anti-dilutive options as of April 30, 2005.

 

6.                                      SEGMENT REPORTING

 

The Company has two reportable segments: stores and direct marketing.  The stores segment includes all Company owned stores excluding factory stores.  The direct marketing segment includes all sales through catalog and internet.  While each segment offers a similar mix of men’s clothing to the retail customer, the stores also provide complete alterations and the direct marketing segment only provides certain alterations.

 

The accounting policies of the segments are the same as those described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.  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 customer travels to the store and purchases men’s clothing and/or alterations and takes their purchases with them.  The direct marketing customer receives a catalog in his or her home and/or office and/or visits our web page via the internet and places an order by phone, mail, fax or on line.  The merchandise is then shipped to the customer. Segment data is presented in the following table:

 

Three months ended April 30, 2005

 

		Stores			Direct Marketing			Other			Total
Net sales (a)		$	84,682		$	9,319		$	2,574		$	96,575
Depreciation and amortization		2,568			17			494			3,079
Operating income (b)		18,676			3,387			(10,281		)	11,782
Identifiable assets (c)		201,893			23,454			30,322			255,669
Capital expenditures (d)		5,004			0			129			5,133

 

Three Months ended May 1, 2004 (as restated)

 

		Stores			Direct Marketing			Other			Total
Net sales (a)		$	70,386		$	7,375		$	2,168		$	79,929
Depreciation and amortization		1,915			16			566			2,497
Operating income (b)		15,881			2,431			(8,849		)	9,463
Identifiable assets (c)		152,925			28,514			27,360			208,799
Capital expenditures (d)		4,710			5			175			4,890

 

(a)          Direct marketing net sales represent catalog and internet sales including catalog orders placed in new stores.  Net sales from

 

11

 

segments below the quantitative thresholds are attributable primarily to three operating segments of the Company. Those segments are factory stores, franchise stores and regional tailor shops.  None of these segments 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.

 

7.                                      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% common 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.

 

8.                                      LEGAL MATTERS

 

From time to time, legal matters in which the Company may be named as a defendant arise in the normal course of the Company’s 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.

 

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 29, 2005.

 

The financial information for fiscal 2004 included in this Form 10-Q has been restated to reflect the revision of the Company’s historic practices of accounting for lease transactions as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.  See Note 3 to this Form 10-Q for further discussion.

 

Overview - For the first quarter of the Company’s fiscal year ending January 28, 2006 (“fiscal 2005”), the Company’s net income increased to $6.7 million compared with net income of $5.3 million for the first quarter of the Company’s fiscal year ended January 29, 2005 (“fiscal 2004”). The Company earned $0.47 per diluted share in the first quarter of fiscal 2005 compared with $0.37 per diluted share in the first quarter of fiscal 2004.  As such, diluted earnings per share increased 27% compared with the prior year period.  The increased earnings were primarily attributable to:

 

•                  20.8% increase in net sales with increases in both the store and direct marketing (catalog and internet) segments;

•                  Over 140 basis point increase in gross profit margins; and

•                  The opening of 57 new stores since the end of the first quarter of 2004.

 

The increased earnings in the first quarter of fiscal 2005 follow an increase of 131% in earnings per share in the first quarter of fiscal 2004 above the results of the first quarter of the fiscal year ended January 31, 2004 (“fiscal 2003”).

 

Management believes that the chain can grow to approximately 500 stores from the fiscal 2004 year-end base of 269 stores.  The Company plans to open between 60 to 75 stores in fiscal 2005 as part of its plan to grow the chain to the 500 store level. The Company opened 6 stores in the first quarter of fiscal 2005 and expects to open approximately 10 to 14 stores in the second quarter, with the remaining stores to be opened in the second half of the year. The store growth is part of a strategic plan the Company initiated in the year ended February 3, 2001 (“fiscal 2000”).  In the past five years, the Company has continued to increase the number of store openings as infrastructure and performance has improved.  As such, there were ten new stores opened in fiscal 2000 (including two factory stores), 21 new stores in the year ended February 2, 2002, 25 new stores in the year ended February 1, 2003 (“fiscal 2002”), 50 new stores in fiscal 2003 and 60 new stores in fiscal 2004.

 

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Capital expenditures are expected to be approximately $35 million in fiscal 2005, primarily to fund the opening of approximately 60 to 75 new stores, the renovation and/or relocation of several stores and the implementation of various systems initiatives.  The capital expenditures include the cost of the construction of leasehold improvements for new stores of which $12-15 million is expected to be reimbursed through landlord contributions.  The Company also expects inventories to increase in 2005 to support new store openings, sales growth in existing segments and other initiatives.

 

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% common 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.

 

Critical accounting policies and estimates - In preparing the Condensed Consolidated Financial Statements, a number of assumptions and estimates are made that, in the judgment of management, are proper in light of existing general economic and company-specific circumstances. For a detailed discussion on the application of this and other accounting policies, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.

 

Inventory. The Company records inventory at the lower of cost or market (“LCM”). Cost is determined using the first-in, first-out method.   The estimated market value is based on assumptions for future demand and related pricing. The Company reduces the carrying value of inventory to net realizable value where cost exceeds estimated selling price less costs of disposal.

 

Management’s sales assumptions are based on the Company’s experience that most of the Company’s inventory is sold through the Company’s primary sales channels with virtually no inventory being liquidated through bulk sales to third parties. The Company’s LCM reserve estimates for inventory that have been made in the past have been very reliable as a significant portion of its sales (approximately 67% in fiscal 2004) are classic traditional products that are on-going programs and that bear low risk of write-down.  These products include items such as navy and grey suits, navy blazers, white and blue button-down shirts, etc.  The portion of the products that have seasonal or fashion elements are monitored closely to ensure that aging goals are achieved to limit the need to sell significant amounts of product below cost.  In addition, the Company’s strong gross profit margins enable the Company to sell substantially all of its products at levels above cost.

 

To calculate the estimated market value, the Company periodically performs a detailed review of all of its major inventory classes and stock-keeping units.  The Company compares the on-hand units and season-to-date unit sales (including actual selling prices) to the sales trend and estimated prices required to sell the units in the future, which enables the Company to estimate the amount which may have to be sold below cost.  Substantially all units sold below cost are sold in the Company’s factory stores within twenty-four months of purchase.  In fiscal 2003 and 2004, the Company’s costs in excess of selling price plus the cost of disposal in its factory stores was $1.1 million and $1.1 million, respectively.  The Company anticipates similar results in fiscal 2005.  The inventory component of these costs is recorded in cost of goods sold whereas the related costs of disposal are recorded as selling and marketing expenses.    If the inventory required to be sold through the factory stores or liquidated through other means varies from the estimate, the Company’s LCM reserve could change.

 

Asset Valuation. Long-lived assets, such as property, plant and equipment subject to depreciation, are periodically reviewed for impairment to determine whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.  The asset valuation estimate is principally dependent on the Company’s ability to generate profits at both the Company and store levels.  These levels are principally driven by the sales and gross profit trends that are closely monitored by the Company.  There were no asset valuation charges recorded for the three month periods ended May 1, 2004 and April 30, 2005.

 

Lease Accounting.  The Company uses a consistent lease period (generally, the initial non-cancelable lease term plus renewal options periods provided for in the lease that can be reasonable assured) when calculating depreciation of leasehold improvements and in determining straight-line rent expense and classification of its leases as either an operating lease or a capital lease.  The lease term and straight-line rent expense (inclusive of the construction period) commence on the date when the Company takes possession and has the right to control use of the leased premises.  Funds received from the lessor intended to reimburse the Company for the costs of leasehold improvements is recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense.

 

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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 Condensed Consolidated Statements of Income and sets forth, for the periods indicated, the items included in the Condensed Consolidated Statements of Income expressed as a percentage of net sales.

 

		Percentage of Net Sales Three Months Ended
		May 1, 2004		April 30, 2005
Net sales		100.0	%	100.0	%
Cost of goods sold		38.7		37.2
Gross profit		61.3		62.8
General and administrative expenses		10.7		9.5
Sales and marketing expenses		38.5		40.9
Store opening costs		0.3		0.1
Operating income		11.8		12.2
Interest expense, net		0.6		0.3
Income before provision for income taxes		11.2		11.9
Provision for income taxes		4.6		4.9
Net income		6.6		7.0

 

Net sales - Net sales increased 20.8% or $16.7 million to $96.6 million in the first quarter of fiscal 2005 compared with $79.9 million in the first quarter of fiscal 2004.  The sales increase was primarily related to a 20.3% increase in store sales (including a 4.1% increase in comparable store sales) and a 26.4% increase in direct marketing sales. The sales increases were primarily due to increases in sales of suits, shirts, ties and sportswear.

 

For comparable stores, the average dollars per transaction increased in the first quarter of fiscal 2005 as compared to the first quarter in fiscal 2004.  Traffic (as measured by transactions) in comparable stores also increased in first quarter of fiscal 2005 while items per transaction decreased.  Beginning in fiscal 2005, comparable store sales include merchandise sales generated in all stores that have been open for at least thirteen full months.

 

The following table summarizes store opening and closing activity during the respective periods.

 

		Three Months Ended
		May 1, 2004				April 30, 2005
		Stores		Square Feet*		Stores		Square Feet*
Stores open at the beginning of the quarter		210		1,062		269		1,318
Stores opened		9		38		6		23
Stores closed		(1	)	(5	)	—		—
Stores open at the end of the quarter		218		1,095		275		1,341

 

*square feet is presented in thousands and excludes franchise stores

 

Gross profit - Gross profit (net sales less cost of goods sold) increased to $60.6 million or 62.8% of net sales in the first quarter of fiscal 2005 from $49.0 million or 61.3% of net sales in the first quarter of fiscal 2004.  The increased gross profit percentage is primarily due to the continued improvement in sourcing of merchandise, thus reducing the cost of items purchased, and increases in retail prices.  Gross profit margins increased in substantially all major product categories. 

 

Sales and Marketing Expenses – Sales and marketing expenses, which consist primarily of a) full-line store, factory store and direct marketing occupancy, payroll, selling and other variable costs and b) total Company advertising and marketing expenses, increased to $39.5 million or 40.9% of sales in the first quarter of fiscal 2005 from $30.8 million or 38.5% of sales in the first quarter of fiscal 2004.  The $8.8 million increase in sales and marketing expenses relates primarily to a) $6.1 million of additional costs incurred in the 57 stores opened since the end of the first quarter of fiscal 2004 and the incremental costs for the 8 stores (net) which opened in the

 

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