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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 29, 2006
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-10738
ANNTAYLOR STORES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-3499319 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
7 Times Square, New York, NY | 10036 | |
(Address of principal executive offices) | (Zip Code) |
(212) 541-3300
(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. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of August 22, 2006 | |
Common Stock, $.0068 par value | 72,750,313 |
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Statement Regarding Forward-Looking Disclosures
Certain sections of this Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may use the words “expect”, “anticipate”, “plan”, “intend”, “project”, “may”, “believe” and similar expressions. Forward-looking statements also include representations of the Company’s expectations or beliefs concerning future events that involve risks and uncertainties, including:
• | the Company’s ability to predict accurately client fashion preferences; |
• | competitive influences and decline in the demand for merchandise offered by the Company; |
• | effectiveness of the Company’s brand awareness and marketing programs; |
• | the Company’s ability to secure and protect trademarks and other intellectual property rights in the United States and/or foreign countries; |
• | general economic conditions, including the impact of higher fuel and energy prices, interest rates, a downturn in the retail industry or changes in levels of store traffic; |
• | fluctuation in the Company’s level of sales and earnings growth; |
• | the Company’s ability to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; |
• | risks associated with the performance and operations of the Company’s Internet operations; |
• | a significant change in the regulatory environment applicable to the Company’s business; |
• | risks associated with the possible inability of the Company, particularly through its sourcing and logistics functions, to operate within production and delivery constraints and the Company’s dependence on a single distribution facility; |
• | the uncertainties of sourcing associated with the new quota environment, including changes in sourcing patterns resulting from the elimination of quota on apparel products and the re-imposition of quotas in certain categories, and other possible trade law or import restrictions; |
• | financial or political instability in any of the countries in which the Company’s goods are manufactured; |
• | the potential impact of natural disasters and public health concerns, particularly on the Company’s foreign sourcing offices and manufacturing operations of the Company’s vendors; |
• | acts of war or terrorism in the United States or worldwide; |
• | work stoppages, slowdowns or strikes; |
• | the Company’s ability to hire, retain and train key personnel; |
• | the Company’s ability to successfully upgrade and maintain its information systems; and |
• | the impact of the Company’s AnnTaylor Factory business strategy. |
Further description of these risks and uncertainties and other important factors are set forth in the Company’s latest Annual Report on Form 10-K, including but not limited to Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations therein, and in the Company’s other filings with the SEC. Although these forward-looking statements reflect the Company’s current expectations concerning future events, actual results may differ materially from current expectations or historical results. The Company does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.
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Item 1. Condensed Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Six Months Ended July 29, 2006 and July 30, 2005
(unaudited)
Quarters Ended | Six Months Ended | |||||||||||
July 29, 2006 | July 30, 2005 | July 29, 2006 | July 30, 2005 | |||||||||
(In thousands, except per share amounts) | ||||||||||||
Net sales | $ | 609,998 | $ | 508,684 | $ | 1,166,171 | $ | 985,130 | ||||
Cost of sales | 279,296 | 267,157 | 520,357 | 500,460 | ||||||||
Gross margin | 330,702 | 241,527 | 645,814 | 484,670 | ||||||||
Selling, general and administrative expenses | 262,587 | 231,064 | 514,231 | 446,797 | ||||||||
Operating income | 68,115 | 10,463 | 131,583 | 37,873 | ||||||||
Interest income | 4,642 | 2,175 | 7,949 | 3,942 | ||||||||
Interest expense | 558 | 453 | 1,067 | 868 | ||||||||
Income before income taxes | 72,199 | 12,185 | 138,465 | 40,947 | ||||||||
Income tax provision | 29,001 | 5,046 | 56,278 | 16,837 | ||||||||
Net income | $ | 43,198 | $ | 7,139 | $ | 82,187 | $ | 24,110 | ||||
Earnings per share: | ||||||||||||
Basic earnings per share of common stock | $ | 0.60 | $ | 0.10 | $ | 1.15 | $ | 0.34 | ||||
Weighted average shares outstanding | 71,637 | 71,907 | 71,758 | 71,454 | ||||||||
Diluted earnings per share of common stock | $ | 0.59 | $ | 0.10 | $ | 1.13 | $ | 0.33 | ||||
Weighted average shares outstanding, assuming dilution | 72,772 | 72,508 | 72,893 | 72,018 |
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
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CONDENSED CONSOLIDATED BALANCE SHEETS
July 29, 2006 and January 28, 2006
(unaudited)
July 29, 2006 | January 28, 2006 | |||||||
(in thousands, except per share data) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 457,892 | $ | 380,654 | ||||
Accounts receivable | 20,391 | 17,091 | ||||||
Merchandise inventories | 208,274 | 204,503 | ||||||
Prepaid expenses and other current assets | 63,119 | 73,964 | ||||||
Total current assets | 749,676 | 676,212 | ||||||
Property and equipment, net | 528,557 | 512,765 | ||||||
Goodwill | 286,579 | 286,579 | ||||||
Other assets | 27,856 | 17,350 | ||||||
Total assets | $ | 1,592,668 | $ | 1,492,906 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 89,562 | $ | 97,398 | ||||
Accrued salaries and bonus | 30,638 | 8,633 | ||||||
Accrued tenancy | 43,084 | 44,036 | ||||||
Gift certificates and merchandise credits redeemable | 33,919 | 45,916 | ||||||
Accrued expenses | 85,699 | 61,603 | ||||||
Total current liabilities | 282,902 | 257,586 | ||||||
Deferred lease costs | 204,228 | 198,714 | ||||||
Other liabilities | 3,149 | 2,124 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity | ||||||||
Common stock, $.0068 par value; 200,000,000 shares authorized; 82,102,508 and 81,998,648 shares issued, respectively | 558 | 558 | ||||||
Additional paid-in capital | 735,816 | 723,230 | ||||||
Retained earnings | 609,512 | 527,325 | ||||||
Deferred compensation on restricted stock | — | (12,006 | ) | |||||
1,345,886 | 1,239,107 | |||||||
Treasury stock, 9,353,728 and 9,507,361 shares respectively, at cost | (243,497 | ) | (204,625 | ) | ||||
Total stockholders’ equity | 1,102,389 | 1,034,482 | ||||||
Total liabilities and stockholders’ equity | $ | 1,592,668 | $ | 1,492,906 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended July 29, 2006 and July 30, 2005
(unaudited)
Six Months Ended | ||||||||
July 29, 2006 | July 30, 2005 | |||||||
(in thousands) | ||||||||
Operating activities: | ||||||||
Net income | $ | 82,187 | $ | 24,110 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Deferred income taxes | (7,596 | ) | (10,108 | ) | ||||
Depreciation and amortization | 49,536 | 45,624 | ||||||
Loss on disposal and write-down of property and equipment | 3,315 | 512 | ||||||
Non-cash interest | 271 | 183 | ||||||
Non-cash compensation expense | 11,630 | 4,960 | ||||||
Tax benefit from exercise of stock options | 8,011 | 8,908 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (3,306 | ) | (5,106 | ) | ||||
Merchandise inventories | (3,771 | ) | (2,116 | ) | ||||
Prepaid expenses and other current assets | 10,745 | 576 | ||||||
Accounts payable and accrued expenses | 10,630 | (26,838 | ) | |||||
Other non-current assets and liabilities, net | 3,510 | 34,871 | ||||||
Net cash provided by operating activities | 165,162 | 75,576 | ||||||
Investing activities: | ||||||||
Purchases of available-for-sale securities | — | (20,600 | ) | |||||
Sales of available-for-sale securities | — | 213,000 | ||||||
Purchases of property and equipment | (58,799 | ) | (99,196 | ) | ||||
Net cash (used in) provided by investing activities | (58,799 | ) | 93,204 | |||||
Financing activities: | ||||||||
Issuance of common stock pursuant to Associate Discount Stock Purchase Plan | 1,625 | 1,623 | ||||||
Proceeds from exercise of stock options | 22,661 | 38,666 | ||||||
Excess tax benefits from stock-based compensation | 4,791 | — | ||||||
Repurchases of common and restricted stock | (58,202 | ) | (18,606 | ) | ||||
Net cash (used in) provided by financing activities | (29,125 | ) | 21,683 | |||||
Net increase in cash | 77,238 | 190,463 | ||||||
Cash and cash equivalents, beginning of period | 380,654 | 62,412 | ||||||
Cash and cash equivalents, end of period | $ | 457,892 | $ | 252,875 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 805 | $ | 585 | ||||
Income taxes | $ | 48,181 | $ | 9,142 | ||||
Accrual for purchases of property and equipment | $ | 26,999 | $ | 23,421 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The Condensed Consolidated Financial Statements are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated.
The results of operations for the 2006 interim period shown in the Condensed Consolidated Financial Statements are not necessarily indicative of results to be expected for Fiscal 2006.
The January 28, 2006 Condensed Consolidated Balance Sheet amounts have been derived from the audited Consolidated Balance Sheet of AnnTaylor Stores Corporation (the “Company”).
Detailed footnote information is not included in this Report. The financial information set forth herein should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006.
2. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and vesting of unvested restricted stock if the effect is dilutive.
Quarters Ended | ||||||||||||||||
July 29, 2006 | July 30, 2005 | |||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net Income | Shares | Per Share Amount | Net Income | Shares | Per Share Amount | |||||||||||
Basic Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 43,198 | 71,637 | $ | 0.60 | $ | 7,139 | 71,907 | $ | 0.10 | ||||||
Effect of Dilutive Securities | ||||||||||||||||
Stock options and restricted stock | — | 1,135 | — | 601 | ||||||||||||
Diluted Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 43,198 | 72,772 | $ | 0.59 | $ | 7,139 | 72,508 | $ | 0.10 | ||||||
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
2. Earnings Per Share (continued)
Six Months Ended | ||||||||||||||||
July 29, 2006 | July 30, 2005 | |||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net Income | Shares | Per Share Amount | Net Income | Shares | Per Share Amount | |||||||||||
Basic Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 82,187 | 71,758 | $ | 1.15 | $ | 24,110 | 71,454 | $ | 0.34 | ||||||
Effect of Dilutive Securities | ||||||||||||||||
Stock options and restricted stock | — | 1,135 | — | 564 | ||||||||||||
Diluted Earnings per Share | ||||||||||||||||
Income available to common stockholders | $ | 82,187 | 72,893 | $ | 1.13 | $ | 24,110 | 72,018 | $ | 0.33 | ||||||
Options to purchase 32,744 and 18,122 shares of common stock during the quarter and six months ended July 29, 2006, respectively, and 2,587,100 and 2,685,600 shares of common stock during the quarter and six months ended July 30, 2005, respectively, were excluded from the above computations of weighted average shares for diluted earnings per share. This was due to the antidilutive effect of the options’ exercise prices as compared to the average market price of the common shares during those periods. In addition, 266,667 shares of unvested restricted stock were excluded from the above calculation due to contigencies placed on their vesting rights which had not yet been satisfied as of July 29, 2006.
3. Share-based Payments
Effective January 29, 2006, the Company began recording compensation expense associated with stock options and other forms of equity awards in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R),Share-Based Payment, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 29, 2006, the Company had accounted for stock options according to the provisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value (defined as the excess of the fair market value on date of grant of an option over its exercise price). On January 29, 2006, the Company adopted the modified prospective transition method provided under SFAS No. 123(R), and, accordingly, has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock options recognized in Fiscal 2006 includes: 1) quarterly amortization related to the remaining unvested portion of all stock option awards granted prior to January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) quarterly amortization related to all stock option awards granted on or after to January 29, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
3. Share-based Payments (continued)
Stock Incentive Plans
The Company has established four stock incentive plans (the “Plans”), which are summarized below:
Shares Reserved | ||||||||
Year Established | Defined Name | Plan Name | Restricted Stock (a) | Total Authorized | ||||
1992 | 1992 Plan | 1992 Stock Option and | 713,250 | 7,200,000 | ||||
Restricted Stock and | ||||||||
Unit Award Plan | ||||||||
2000 | 2000 Plan | 2000 Stock Option and | 562,500 | 2,250,000 | ||||
Restricted Stock | ||||||||
Award Plan | ||||||||
2001 | 2002 Plan | 2002 Stock Option and | 787,500 | 4,500,000 | ||||
Restricted Stock and | ||||||||
Unit Award Plan | ||||||||
2003 | 2003 Plan | 2003 Equity Incentive Plan | 1,760,000 | 5,500,000 |
(a) | Included in the number of total authorized shares. The Company may issue restricted stock grants up to the levels provided under each plan, however shares not used for this purpose are available for issuance as stock option grants, except for 150,750 shares under the 1992 Plan. |
At the Company’s 2006 Annual Meeting of Stockholders held on April 27, 2006, the stockholders approved certain amendments to the Company’s 2003 Equity Incentive Plan, including increasing the total authorized shares reserved for issuance under the 2003 Plan from 3,300,000 to 5,500,000 shares.
Stock option awards outstanding under the Company’s current Plans have been granted at exercise prices which are equal to the market value of the Company’s stock on the grant date (determined in accordance with the applicable Plan), generally vest over four years and expire no later than ten years after the grant date. Each of the Plans also includes an acceleration clause by which all options not exercisable by their terms will, upon the occurrence of certain events, become exercisable. Shares underlying stock award grants are generally issued out of treasury stock. All the Plans allow for restricted stock awards, and the 2002 Plan and 2003 Plan also include restricted unit awards. A restricted unit represents the right to receive a share of common stock and/or the cash value of a share of common stock on the date the restrictions on the restricted unit lapse. No restricted units have been granted under the Plans. The restrictions on restricted stock or restricted unit grants generally lapse over a four-year period from the date of the grant. In the event a grantee terminates employment with the Company, any restricted stock or restricted units remaining subject to restrictions are generally forfeited.
Stock Options
Effective January 29, 2006, the Company began recognizing stock option expense on a straight-line basis over the vesting period, net of estimated forfeitures. As of July 29, 2006, there was $18.4 million of unrecognized compensation cost related to unvested options, which is expected to be recognized over a remaining weighted average vesting period of 2.9 years. The total
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
3. Share-based Payments (continued)
Stock Options (continued)
intrinsic value of options exercised during the quarter ended July 29, 2006 was approximately $3.6 million as compared to total intrinsic value of options exercised during the quarter ended July 30, 2005 of $1.4 million. The total intrinsic value of options exercised during the six months ended July 29, 2006 was approximately $17.6 million as compared to total intrinisic value of options exercised during the six months ended July 30, 2005 of $24.4 million.
The following table summarizes stock option activity for the quarter and six months ended July 29, 2006:
Quarter Ended | Six Months Ended | |||||||||||
Shares | Weighted - Average Exercise Price | Shares | Weighted - Average Exercise Price | |||||||||
Options outstanding at beginning of period | 4,459,353 | $ | 25.87 | 4,739,049 | $ | 23.39 | ||||||
Granted | 76,050 | 38.94 | 801,450 | 35.83 | ||||||||
Forfeited or expired | (155,508 | ) | 29.13 | (276,914 | ) | 27.17 | ||||||
Exercised | (201,022 | ) | 21.71 | (1,084,712 | ) | 20.85 | ||||||
Options outstanding at July 29, 2006 | 4,178,873 | 26.19 | 4,178,873 | 26.19 | ||||||||
Vested and exercisable at July 29, 2006 | 1,275,912 | $ | 22.13 | 1,275,912 | $ | 22.13 | ||||||
The weighted-average fair value of options granted during the quarters ended July 29, 2006 and July 30, 2005, estimated as of the grant date using the Black-Scholes option pricing model, was $15.85 and $6.88 per share, respectively. The weighted-average fair value of options granted during the six months ended July 29, 2006 and July 30, 2005, estimated as of the grant date using the Black-Scholes option pricing model, was $15.45 and $6.81 per share, respectively. The weighted-average remaining contractual term for options outstanding at both July 29, 2006 and January 28, 2006 was 7.7 years. The weighted-average remaining contractual term for options vested and exercisable at July 29, 2006 was 6.3 years. At July 29, 2006, the aggregate intrinsic value was $58.1 million and for options outstanding and $23.1 million for options vested and exercisable.
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions including the expected stock price volatility. The fair value of options granted under the Company’s stock option Plans were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Quarters Ended | Six Months Ended | |||||||||||
July 29, 2006 | July 30, 2005 | July 29, 2006 | July 30, 2005 | |||||||||
Weighted average risk-free interest rate | 4.8 | % | 3.0 | % | 4.8 | % | 2.6 | % | ||||
Weighted average expected life (years) | 4.9 | 4.0 | 4.7 | 4.0 | ||||||||
Weighted average expected volatility | 38.4 | % | 28.6 | % | 38.6 | % | 28.9 | % | ||||
Expected dividend yield | — | — | — | — |
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
3. Share-based Payments (continued)
Stock Options (continued)
The risk-free rate is based on a zero-coupon U.S. Treasury rate in effect at the time of grant with maturity dates that coincide with the expected life of the options. The expected life of the options is based on a calculation of the Company’s historical exercise patterns to estimate future exercise patterns. The expected volatility for grants made subsequent to the adoption of SFAS No. 123(R) is based on a simple average of (i) historical volatility of stock price returns using daily closing prices and (ii) the volatility implied by exchange-traded call options to purchase the Company’s common stock. The expected volatility for grants made prior to the adoption of SFAS No. 123(R) is based on historical volatility of stock price returns using daily closing prices. Historical volatility was calculated as of the grant date using stock price data over periods of time equal in duration to the expected life of the options granted. In assessing implied volatility data, the Company analyzed call option market activity during the three month period preceding the grant date. Only option contracts with remaining terms of more than 6 months, strike prices equal to $35, and trading volume greater than zero were considered. Additionally, only option contracts with strike prices that were within +/- 10% of the market price of the Company’s common stock (as of the date of trading activity) were used.
Restricted Stock
In accordance with SFAS No. 123(R), the fair value of restricted stock awards is determined on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods, net of estimated forfeitures. As of July 29, 2006, there was $22.1 million of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.3 years. SFAS No. 123(R) requires that the deferred stock-based compensation on the condensed consolidated balance sheet on the date of adoption be netted against additional paid-in capital. As of January 28, 2006, there was approximately $12 million of deferred stock-based compensation that was netted against additional paid-in capital on January 29, 2006. The total fair value of restricted stock awards vested during the quarters ended July 29, 2006 and July 30, 2005 was $0.5 million and $0.7 million, respectively. The total fair value of the restricted stock awards vested during the six months ended July 29, 2006 and July 30, 2005 was $9.8 million and $4.5 million, respectively.
The following table summarizes restricted stock activity for the quarter and six months ended July 29, 2006:
Quarter Ended | Six Months Ended | |||||||||||
Number of Shares | Weighted - Average Grant Date Fair Value | Number of Shares | Weighted - Average Grant Date Fair Value | |||||||||
Restricted stock awards at beginning of period | 1,387,928 | $ | 31.49 | 932,902 | $ | 25.33 | ||||||
Granted | 29,950 | 38.80 | 750,724 | 36.96 | ||||||||
Vested | (14,125 | ) | 26.13 | (273,445 | ) | 24.45 | ||||||
Forfeited | (80,950 | ) | 26.74 | (87,378 | ) | 26.97 | ||||||
Restricted stock awards at July 29, 2006 | 1,322,803 | $ | 32.00 | 1,322,803 | $ | 32.00 | ||||||
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
3. Share-based Payments (continued)
Associate Discount Stock Purchase Plan
In Fiscal 1999, the Company established an Associate Discount Stock Purchase Plan (the “Stock Purchase Plan”). Under the terms of the Stock Purchase Plan, as amended, eligible employees may purchase shares of the Company’s common stock quarterly, at a price equal to the lower of 85% of the closing price of the Company’s common stock at the beginning or end of each quarterly stock purchase period. Participating employees pay for their stock purchases under the Stock Purchase Plan by authorizing limited payroll deductions of up to a maximum of 15% of their compensation. During the quarter ended July 29, 2006, the Company sold 26,890 shares to employees at an average discount of $5.52 per share under the Stock Purchase Plan. The compensation expense recognized for the Stock Purchase Plan was approximately $0.2 million and $0.4 million for the quarter and six months ended July 29, 2006, respectively, as a result of the adoption of SFAS No. 123(R).
General
SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the quarter and six months ended July 29, 2006 such that expense was recorded only for those stock-based awards that are expected to vest. Previously, under APB No. 25, to the extent awards were forfeited prior to vesting, the corresponding previously recognized compensation expense was reversed in the period of forfeiture. Upon adoption of SFAS No. 123(R), the Company recorded an adjustment to account for the expected forfeitures of stock-based awards granted prior to January 29, 2006, for which the Company previously recorded compensation expense. This adjustment was not material.
For the quarter and six months ended July 29, 2006, the adoption of SFAS No. 123(R) resulted in incremental stock-based compensation expense of $2.1 million and $3.6 million, respectively, and a decrease in net income of $1.4 million and $2.4 million, respectively. The effect on both basic and diluted earnings per share for the quarter and six month period was $0.02 and $0.03 per share, respectively.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from stock-based compensation arrangements as operating cash flows in the Condensed Consolidated Statements of Cash Flows. SFAS No. 123(R) requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for stock-based compensation arrangements (“excess tax benefits”) be classified as financing cash flows. For the quarter and six months ended July 29, 2006, excess tax benefits realized from stock-based compensation arrangements were $1.1 million and $4.8 million, respectively. The Company received $4.4 million and $22.7 million cash from the exercise of stock options during the quarter and six months ended July 29, 2006, respectively. The Company received $2.0 million and $38.7 million cash from the exercise of stock options during the quarter and six months ended July 30, 2005, respectively.
During the quarters and six months ended July 29, 2006, the Company recognized approximately $6.4 million and $9.9 million, respectively, in share-based compensation expense. During the quarters and six months ended July 30, 2005, the Company recognized approximately $2.1 million and $4.3 million, respectively, in share-based compensation expense. The total tax benefit for the quarter and six months ended July 29, 2006 was approximately $2.4 million and $3.6 million, respectively, and approximately $0.7 million and $1.4 million for the quarter and six months ended July 30, 2005, respectively. Had compensation costs of option awards been determined under a fair value alternative method as stated in SFAS No. 148 “Accounting for Stock-Based Compensation—Transition
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
3. Share-based Payments (continued)
General (continued)
and Disclosure, an amendment of FASB Statement No. 123”, the Company would have been required to prepare a fair value model for such options, and record such amount in the consolidated financial statements as compensation expense and the Company’s net income and earnings per share for the quarter and for the six months ended July 30, 2005 would have been reduced to the following pro forma amounts:
For the Quarter July 30, 2005 | For the Six Months Ended July 30, 2005 | |||||||
(in thousands, except per share data) | ||||||||
Net income as reported: | $ | 7,139 | $ | 24,110 | ||||
Add: Stock-based employee compensation expense included in net income, net of related tax effects | 1,538 | 2,920 | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (2,061 | ) | (5,596 | ) | ||||
Pro forma net income | $ | 6,616 | $ | 21,434 | ||||
Basic earnings per share: | ||||||||
As reported | $ | 0.10 | $ | 0.34 | ||||
Pro forma | $ | 0.09 | $ | 0.30 | ||||
Diluted earnings per share: | ||||||||
As reported | $ | 0.10 | $ | 0.33 | ||||
Pro forma | $ | 0.09 | $ | 0.30 | ||||
4. Long-Term Debt
In November 2003, Ann Taylor, Inc. and certain of its subsidiaries entered into a Second Amended and Restated $175.0 million senior secured revolving credit facility (the “Credit Facility”) with Bank of America N.A. and a syndicate of lenders. The Credit Facility, which, at the Company’s option, provides for an increase in the total facility and the aggregate commitments thereunder up to $250.0 million, matures on November 14, 2008 and is used by Ann Taylor, Inc. and certain of its subsidiaries for letters of credit and other general corporate purposes. Maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. There were no borrowings outstanding under the Credit Facility at any point during the six months ended July 29, 2006 or as of the date of this filing.
The Credit Facility permits the payment of cash dividends by the Company (and dividends by certain of its subsidiaries to fund such cash dividends) if, after the payment of such dividends, liquidity (as defined in the Credit Facility) is greater than $35 million. Certain subsidiaries of the Company are also permitted to: pay dividends to the Company to fund certain taxes owed by the Company; fund ordinary operating expenses of the Company not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year; and for certain other stated purposes.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
5. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (FIN No. 48)“Accounting for Uncertainty in Income Taxes”,which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN No. 48 will be effective as of the beginning of the fiscal year that starts after December 15, 2006. The Company is in the process of determining the effect, if any, the adoption of FIN No. 48 will have on its financial statements.
In September 2005, the FASB issued a Proposed SFAS which amends SFAS No. 128,Earnings per Share. The proposed statement would be effective in the second half of Fiscal 2006 and is intended to clarify guidance on the computation of earnings per share for certain items such as mandatory convertible instruments, the treasury stock method, and contingently issuable shares. The Company is currently evaluating the proposed standard.
In June 2006, the FASB Emerging Issues Task Force reached a consensus on EITF No. 06-3,How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation). The Task Force reached a consensus that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of this Issue. If taxes included in gross revenues are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The consensus position is effective for the first annual or interim reporting period beginning after December 15, 2006. The disclosures are required for annual and interim financial statements for each period for which an income statement is presented. The Company has evaluated the EITF and has determined that the Company will be required to disclose its accounting policy regarding presentation of taxes beginning with the first quarter of Fiscal 2007.
In March 2006, the FASB issued a proposed SFAS,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). The proposed statement would require companies to recognize the over- or underfunded status of defined benefit postretirement plans and would be effective for fiscal years ending after December 15, 2006. The Company is currently evaluating the proposed standard.
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
6. Employee Benefits
The following table summarizes the components of net periodic pension cost for the Company:
Quarters Ended | Six Months Ended | |||||||||||||||
July 29, 2006 | July 30, 2005 | July 29, 2006 | July 30, 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost | $ | 1,425 | $ | 1,193 | $ | 2,850 | $ | 2,386 | ||||||||
Interest cost | 525 | 421 | 1,050 | 842 | ||||||||||||
Prior service and interest cost | — | 57 | — | 113 | ||||||||||||
Expected return on plan assets | (625 | ) | (478 | ) | (1,250 | ) | (956 | ) | ||||||||
Amortization of prior service cost | 25 | 19 | 50 | 38 | ||||||||||||
Amortization of actuarial loss | 400 | 376 | 800 | 752 | ||||||||||||
Net periodic pension cost | $ | 1,750 | $ | 1,588 | $ | 3,500 | $ | 3,175 | ||||||||
The Company contributed $7.7 million to its pension plan during the six months ended July 29, 2006.
7. Securities Repurchase Program
On August 18, 2005, the Company’s Board of Directors approved a $100 million securities repurchase program. Under the program, purchases of shares of the Company’s common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock will become treasury shares available for general corporate and other purposes. During the quarter and six months ended July 29, 2006, the Company repurchased 750,000 and 1.5 million shares of its common stock, respectively, at a cost of approximately $29.6 million and $54.8 million, respectively.
On August 17, 2006, the Company’s Board of Directors approved a new $125 million securities repurchase program which replaced the August 2005 program. Under the new program, purchases of shares of the Company’s common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock will become treasury shares available for general corporate and other purposes.
8. Legal Proceedings
As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2006, in Fiscal 2005, the Company was served with three putative class action lawsuits in California relating to how it classified certain of its employees under California overtime laws and a putative class action lawsuit alleging that it denied its California employees earned vacation pay through allegedly unlawful policies related to vacation, personal days and floating holidays. The following is an update to these lawsuits.
On July 10, 2006, the Los Angeles County Superior Court granted final approval of the class-wide settlement reached on February 28, 2006 in two of the overtime putative class action lawsuits. The settlement in the third case became final upon final approval of the settlement in the first two lawsuits.
On May 17, 2006, the Company participated in a non-binding mediation in the vacation putative class action matter. Following the mediation, the parties reached a tentative agreement to settle this matter, which is subject to final documentation and
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ANNTAYLOR STORES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
8. Legal Proceedings (continued)
court approval. The preliminary approval hearing on the class settlement is currently scheduled for September 19, 2006.
The Company is also a party to routine litigation arising in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
AnnTaylor Stores Corporation (the “Company”, “we, “us” and “our”), through its wholly owned subsidiaries, is a leading national specialty retailer of women’s apparel, shoes and accessories sold primarily under the “Ann Taylor”, “Ann Taylor Loft” and “Ann Taylor Factory” brands. Ann Taylor stores offer polished, sophisticated, updated classic styles while Ann Taylor Loft (“LOFT”) stores focus on relaxed, fashionable styles at a great value. Ann Taylor Factory stores are primarily found in outlet malls and currently offer a mix of factory-direct and clearance product. As of July 29, 2006, the Company operated 828 stores in 46 states, the District of Columbia and Puerto Rico, and also online stores atwww.anntaylor.com andwww.anntaylorLOFT.com. Unless the context indicates otherwise, all references herein to the Company include the Company and its wholly owned subsidiaries.
Key Performance Indicators
In order to monitor our success, senior management monitors certain key performance indicators, including:
Comparable store sales – Comparable store sales provide a measure of existing store sales performance for stores open at least a year. Comparable store sales for the quarter ended July 29, 2006 increased 10.3%, as compared to a 3.9% decrease for the quarter ended July 30, 2005.
Gross margin – Gross margin measures our ability to control direct costs associated with the manufacturing and selling of our products. Gross margin is the difference between the net sales and cost of sales, which is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third party suppliers to our distribution center. Buying and occupancy costs are excluded from cost of sales.
Operating income – Operating income allows us to benchmark our performance relative to other retailers. Operating income is a measure of our earning power from ongoing operations and is measured as our earnings before interest and income taxes.
Store productivity – Store productivity, including sales per square foot, average unit retail price, number of units per transaction, dollars per transaction, traffic and conversion, is evaluated by management in assessing our operating performance.
Inventory turnover – Inventory turnover measures a company’s ability to sell its products and how many times it is replaced over time. This ratio is important for determining the need for markdowns, purchasing of inventory, and product effectiveness.
Quality of merchandise offerings – To monitor and maintain the acceptance of our merchandise offerings, we monitor sell-through levels, inventory turnover, gross margins, returns and markdown rates on a class and style level. This analysis helps identify fit and any other issues at an early date and helps us plan future product development and buying.
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Management Overview
During the second quarter of fiscal 2006, we experienced continued strong performance, built on the positive momentum we achieved at both Ann Taylor and LOFT during the first quarter. We saw significantly higher full-price selling, fueled by a strong product assortment and a more effective inventory management strategy, which contributed to significant increases in both gross margin and operating income for the quarter. Total net sales were up 19.9 percent to $610.0 million compared to $508.7 million in the second quarter of last year, with comparable store sales up 10.3 percent. Net income increased fivefold over the second quarter of last year, resulting in a record $0.59 in diluted earnings per share.
On the product side, both Ann Taylor and LOFT remained strongly differentiated, with the right balance of merchandise by end-use, the right color focus and the right mix of fashion. We entered the second quarter with approximately 9 percent less inventory overall and 19 percent less on a square foot basis, which allowed us to be more strategic and selective in our promotional activities, and contributed to the increases in full-price sales and gross margin we experienced.
Our strategy at Ann Taylor has been to reposition it as a full-price business and re-establish the brand as the premier destination for special event and professional dressing. Toward that end, we strengthened our investment in the daytime social, go-to-work and special occasion categories during the second quarter, and began flowing new merchandise in-store every two-to-three weeks to keep our offering fresh. July marked the twelfth consecutive month that Ann Taylor delivered positive comparable store sales. As we look to the fall, we will maintain an assortment consistent with our renewed focus on the professional and special occasion categories.
Results at LOFT reflect the steps taken to drive full-price selling, increase profitability and reduce store inventory levels. Our overall success on the product side reflects the work done to evolve the merchandise offering, particularly the fashion component. All regions delivered double-digit positive comparable store sales for the quarter, driven by increased full-price selling. Results were strong across all merchandise categories—relaxed and casual separates, dresses, knit tops, and petites were standouts, with summer fashion items driving the business. Heading into fall, we will continue to put the emphasis on fashion, with clear product statements emphasizing our complete head-to-toe assortment and supported by the in-store environment and our marketing efforts.
During the second quarter, we completed the transition from clearance vehicle to direct sourcing at Ann Taylor Factory stores. May marked the first month of in-store receipts in line with this new strategy, which blends Ann Taylor past-season bestsellers with current fashion trends and colors. The results to date have been very positive, and we look forward to continued growth as this concept matures.
Overall, we are pleased with our second quarter performance, and are committed to building on the business strategies that helped deliver these results. While the current macroeconomic environment is uncertain, we are confident that we have the right strategic priorities in place to move the business forward long-term.
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Results of Operations
The following table sets forth condensed consolidated income statement data expressed as a percentage of net sales:
Quarters Ended | Six Months Ended | |||||||||||
July 29, 2006 | July 30, 2005 | July 29, 2006 | July 30, 2005 | |||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales | 45.8 | 52.5 | 44.6 | 50.8 | ||||||||
Gross margin | 54.2 | 47.5 | 55.4 | 49.2 | ||||||||
Selling, general and administrative expenses | 43.0 | 45.4 | 44.1 | 45.4 | ||||||||
Operating income | 11.2 | 2.1 | 11.3 | 3.8 | ||||||||
Interest income | 0.8 | 0.4 | 0.7 | 0.4 | ||||||||
Interest expense | 0.1 | 0.1 | 0.1 | 0.1 | ||||||||
Income before income taxes | 11.9 | 2.4 | 11.9 | 4.1 | ||||||||
Income tax provision | 4.8 | 1.0 | 4.8 | 1.7 | ||||||||
Net income | 7.1 | % | 1.4 | % | 7.1 | % | 2.4 | % | ||||
The following table sets forth condensed consolidated income statement data expressed as a percentage increase (decrease) from the comparable prior year period:
Quarters Ended | Six Months Ended | |||||||||||
July 29, 2006 | July 30, 2005 | July 29, 2006 | July 30, 2005 | |||||||||
increase (decrease) | ||||||||||||
Net sales | 19.9 | % | 7.6 | % | 18.4 | % | 8.7 | % | ||||
Operating income | 551.0 | % | (79.0 | )% | 247.4 | % | (63.4 | )% | ||||
Net income | 505.1 | % | (76.3 | )% | 240.9 | % | (61.0 | )% |
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Sales and Store Data
The following table sets forth certain sales and store data:
Quarters Ended | Six Months Ended | |||||||||||
July 29, 2006 | July 30, 2005 | July 29, 2006 | July 30, 2005 | |||||||||
Net sales (in thousands) | ||||||||||||
Total Company | 609,998 | 508,684 | 1,166,171 | 985,130 | ||||||||
Ann Taylor | 224,572 | 212,227 | 446,072 | 417,965 | ||||||||
LOFT | 315,533 | 245,389 | 589,156 | 468,793 | ||||||||
Other | 69,893 | 51,068 | 130,943 | 98,372 | ||||||||
Comparable stores sales percentage | ||||||||||||
Increase (decrease) (a) | ||||||||||||
Total Company | 10.3 | % | (3.9 | )% | 8.0 | % | (3.5 | )% | ||||
Ann Taylor | 6.4 | % | (6.1 | )% | 6.9 | % | (5.5 | )% | ||||
LOFT | 14.2 | % | (3.2 | )% | 9.7 | % | (2.4 | )% | ||||
Net sales per average gross square foot (b) | 126 | 116 | 242 | 227 | ||||||||
Total square footage at end of period (in thousands) (b) | 4,841 | 4,484 | ||||||||||
Number of: | ||||||||||||
Total stores open at beginning of period | 824 | 756 | 824 | 738 | ||||||||
New stores | 9 | 26 | 19 | 46 | ||||||||
Expanded stores | 3 | 1 | 6 | 2 | ||||||||
Closed stores | (5 | ) | — | (15 | ) | (2 | ) | |||||
Total stores open at end of period | 828 | 782 | 828 | 782 |
(a) | A store is included in comparable store sales in its thirteenth month of operation. A store that is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store. |
(b) | Net sales per average gross square foot is determined by dividing net sales for the period by the average of the gross square feet at the beginning and end of each period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. |
Net sales increased $101.3 million or 19.9% during the quarter ended July 29, 2006 over the comparable 2005 period due to higher comparable store sales, resulting from an increase in full price selling, combined with the addition of 70 new stores since the second quarter of last year. By division, Ann Taylor’s net sales increased $12.3 million or 5.8%, while LOFT experienced an increase of $70.1 million or 28.6%. Net sales increased $181.0 million or 18.4% in the first six months of Fiscal 2006 over the comparable 2005 period due to higher comparable store sales, resulting from an increase in full price selling, combined with the addition of new stores. By division, Ann Taylor’s net sales increased $28.1 million or 6.7%, while LOFT experienced an increase of $120.4 million or 25.7%.
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Cost of Sales
Cost of sales is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third party suppliers to our distribution center. Buying and occupancy costs are excluded from cost of sales. Cost of sales as a percentage of net sales decreased to 45.8% in the second quarter of Fiscal 2006 from 52.5% in the second quarter of Fiscal 2005. For the six months ended July 29, 2006, cost of sales as a percentage of net sales decreased to 44.6% compared to 50.8% for the same period last year.
Gross Margin
Gross margin as a percentage of net sales increased to 54.2% in the second quarter of Fiscal 2006 from 47.5% in the second quarter of Fiscal 2005. For the six months ended July 29, 2006 gross margin as a percentage of net sales increased to 55.4% from 49.2% for the six months ended July 30, 2005. The increase in gross margin as a percentage of net sales is primarily due to higher full price sales at both divisions, and higher margin rates achieved on non-full price sales, based on the Company’s strong product coupled with effective inventory management.
Selling, General and Administrative Expenses
Costs included in selling, general and administrative expenses include advertising, tenancy, payroll and benefits, certain product design costs and general and administrative expenses. Selling, general and administrative expenses as a percentage of net sales decreased to 43.0% in the second quarter of Fiscal 2006 from 45.4% in the comparable 2005 period. Selling, general and administrative expenses as a percentage of net sales decreased to 44.1% for the six months ended July 29, 2006 from 45.4% in the comparable 2005 period. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to the combined effect of the absence of the 2005 corporate office relocation charge and leverage from an increase in comparable store sales partially offset by an increase in management performance bonus.
Interest Income
Interest income increased to approximately $4.6 million in the second quarter of Fiscal 2006 from approximately $2.2 million in the comparable 2005 period. The increase was primarily attributable to higher investment balances as well as higher interest rates during the second quarter of Fiscal 2006 as compared to the second quarter of Fiscal 2005.
For the six months ended July 29, 2006 interest income increased to approximately $7.9 million from approximately $3.9 million in the comparable 2005 period. The increase was primarily attributable to higher investment balances as well as higher interest rates.
Interest Expense
Interest expense increased to approximately $0.6 million in the second quarter of Fiscal 2006 from approximately $0.5 million in the comparable 2005 period. For the six months ended July 29, 2006 interest expense increased to approximately $1.1 million from approximately $0.9 million in the comparable 2005 period.
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Liquidity and Capital Resources
Our primary source of working capital is cash flow from operations. The following table sets forth material measures of the Company’s liquidity:
July 29, 2006 | January 28,2006 | |||||
(dollars in thousands) | ||||||
Working capital | $ | 466,774 | $ | 418,626 | ||
Current ratio | 2.65:1 | 2.63:1 |
For the six months ended July 29, 2006, net cash provided by operating activities totaled approximately $165.2 million, as compared to net cash provided by operating activities of approximately $75.6 million for the same period last year. Net cash provided by operating activities during the six months ended July 29, 2006 resulted from increased net earnings before non-cash expenses such as depreciation and amortization, a decrease in prepaid expenses and other current assets and an increase in accounts payable and other accrued expenses. Cash used in investing activities during the six months ended July 29, 2006 amounted to approximately $58.8 million due to the purchase of property and equipment. Cash used in financing activities amounted to approximately $29.1 million, and related primarily to the repurchase of shares of the Company’s common stock partially offset by proceeds from the exercise of stock options.
On August 18, 2005, our Board of Directors approved a $100 million securities repurchase program. Under the program, purchases of shares of our common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock will become treasury shares available for general corporate and other purposes. During the quarter and six months ended July 29, 2006, the Company repurchased 750,000 and 1.5 million shares of its common stock, respectively, at a cost of approximately $29.6 million and $54.8 million, respectively.
On August 17, 2006, our of Directors approved a new $125 million securities repurchase program which replaced the August 2005 program. Under the new program, purchases of shares of our common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock will become treasury shares available for general corporate and other purposes.
We expect our total capital expenditure requirements in Fiscal 2006 will range from approximately $160 million to $165 million. The actual amount of our capital expenditures will depend in part on the number of stores opened, expanded and refurbished. We expect to use cash flows from operations to fund our capital expenditure requirements.
Critical Accounting Policies
Management has determined that our most critical accounting policies are those related to merchandise inventory valuation, asset impairment, stock compensation, and income taxes. We continue to monitor our accounting policies to ensure proper application. Other than described below, there have been no changes to these policies as discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006:
Stock compensation
Effective January 29, 2006, we adopted SFAS No. 123(R) using the modified prospective method. The calculation of stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and pre-vesting forfeitures. We estimate the expected life of shares granted in connection with stock-based awards based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock at the date of grant based on an average of our historical volatility and the implied volatility of
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publicly traded options on our common stock. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be different from what we have recorded in the current period. See Note 3, “Share-based Payments”, in the Condensed Consolidated Financial Statements for additional information.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (FIN No. 48)“Accounting for Uncertainty in Income Taxes”, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN No. 48 will be effective as of the beginning of the fiscal year that starts after December 15, 2006. We are in the process of determining the effect, if any, the adoption of FIN No. 48 will have on our financial statements.
In September 2005, the FASB issued a Proposed SFAS which amends SFAS No. 128,Earnings per Share. The proposed statement would be effective in the second half of Fiscal 2006 and is intended to clarify guidance on the computation of earnings per share for certain items such as mandatory convertible instruments, the treasury stock method, and contingently issuable shares. We are currently evaluating the proposed standard.
In June 2006, the FASB Emerging Issues Task Force reached a consensus on EITF No. 06-3,How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation). The Task Force reached a consensus that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of this Issue. If taxes included in gross revenues are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The consensus position is effective for the first annual or interim reporting period beginning after December 15, 2006. The disclosures are required for annual and interim financial statements for each period for which an income statement is presented. We have evaluated the EITF and have determined that we would be required to disclose our accounting policy regarding presentation of taxes beginning with the first quarter of Fiscal 2007.
In March 2006, the FASB issued a proposed SFAS,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). The proposed statement would require companies to recognize the over- or underfunded statuses of defined benefit postretirement plans and would be effective for fiscal years ending after December 15, 2006. We are currently evaluating the proposed standard.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk of our cash and cash equivalents as of July 29, 2006 has not significantly changed since January 28, 2006. Information regarding our financial instruments and market risk as of January 28, 2006 is disclosed in our 2005 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.
There was no change in the Company’s internal control over financial reporting during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2006, in Fiscal 2005, the Company was served with three putative class action lawsuits in California relating to how it classified certain of its employees under California overtime laws and a putative class action lawsuit alleging that it denied its California employees earned vacation pay through allegedly unlawful policies related to vacation, personal days and floating holidays. The following is an update to these lawsuits.
On July 10, 2006, the Los Angeles County Superior Court granted final approval of the class-wide settlement reached on February 28, 2006 in two of the overtime putative class action lawsuits. The settlement in the third case became final upon final approval of the settlement in the first two lawsuits.
On May 17, 2006, the Company participated in a non-binding mediation in the vacation putative class action matter. Following the mediation, the parties reached a tentative agreement to settle this matter, which is subject to final documentation and court approval. The preliminary approval hearing on the class settlement is currently scheduled for September 19, 2006.
The Company is also a party to routine litigation arising in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated:
Total Number of Shares Purchased (a) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan (b) | Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plan | |||||||
(in thousands) | ||||||||||
April 30, 2006 to May 27, 2006 | 4,027 | $ | 37.35 | — | $ | 46,480 | ||||
May 28, 2006 to July 1, 2006 | 750,142 | 39.50 | 750,000 | 16,855 | ||||||
July 2, 2006 to July 29, 2006 | 685 | 42.13 | — | 16,855 | ||||||
754,854 | 750,000 | |||||||||
(a) | Includes 4,854 shares of restricted stock repurchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under the Company’s publicly announced Plan. |
(b) | These shares were part of a $100.0 million securities repurchase plan, announced by the Company in August 2005. On August 17, 2006, the Company’s Board of Directors approved a new $125.0 million securities repurchase plan. This plan replaced the August 2005 plan and will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by resolution of the Board of Directors. |
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Exhibit Number | Description | |
*10.1 | Stipulation of Settlement and Release of Certain Class Action and Individual Claims | |
*31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed electronically herewith. |
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Table of Contents
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.
AnnTaylor Stores Corporation | ||||
Date: August 25, 2006 | By: | /s/ Kay Krill | ||
Kay Krill | ||||
President & Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: August 25, 2006 | By: | /s/ James M. Smith | ||
James M. Smith | ||||
Executive Vice President, Chief Financial Officer and Treasurer | ||||
(Principal Financial Officer) |
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Table of Contents
Exhibit Number | Description | |
*10.1 | Stipulation of Settlement and Release of Certain Class Action and Individual Claims | |
*31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed electronically herewith. |
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