UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14987
TOO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1333930
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8323 WALTON PARKWAY, NEW ALBANY, OH 43054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(614) 775-3500
(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 (or such shorter time as the Company became
effective).
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (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.
COMMON STOCK OUTSTANDING AT SEPTEMBER 3, 2003
------------ --------------------------------
$.01 Par Value 34,322,008 Shares
TOO, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended
August 2, 2003 and August 3, 2002.............................................................. 3
Consolidated Balance Sheets
August 2, 2003 and February 1, 2003............................................................ 4
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended
August 2, 2003 and August 3, 2002.............................................................. 5
Notes to Consolidated Financial Statements.......................................................... 6
Report of Independent Accountants................................................................... 13
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 19
Item 4. Controls and Procedures........................................................................ 19
PART II. Other Information
Item 1. Legal Proceedings.............................................................................. 20
Item 4. Matters Submitted to a Vote of Security Holders................................................ 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 20
Signature ............................................................................................. 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------- ----------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 134,849 $ 141,248 $ 274,976 $ 299,839
Costs of goods sold, buying and
occupancy costs 94,865 91,803 192,323 196,871
--------- --------- --------- ---------
Gross income 39,984 49,445 82,653 102,968
General, administrative and store
operating expenses 39,046 39,898 75,280 83,423
Store closing and impairment costs 7,333 - 7,333 -
--------- --------- --------- ---------
Operating income (loss) (6,395) 9,547 40 19,545
Interest (income) expense, net (65) 516 (189) 769
--------- --------- --------- ---------
Income (loss) before income taxes (6,330) 9,031 229 18,776
Provision (benefit) for income taxes (2,500) 3,500 (100) 7,400
--------- --------- --------- ---------
Net income (loss) $ (3,830) $ 5,531 $ 329 $ 11,376
========= ========= ========= =========
Earnings (loss) per share:
Basic $ (0.11) $ 0.17 $ 0.01 $ 0.35
========= ========= ========= =========
Diluted $ (0.11) $ 0.16 $ 0.01 $ 0.34
========= ========= ========= =========
Weighted average common shares:
Basic 34,271 33,483 34,185 32,454
========= ========= ========= =========
Diluted 34,271 34,501 34,649 33,518
========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
3
TOO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AUGUST 2, FEBRUARY 1,
2003 2003
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 62,028 $ 101,300
Restricted cash 23,249 -
Receivables 9,683 4,957
Inventories 66,000 55,080
Store supplies 13,533 12,285
Other 1,010 2,260
----------- -----------
Total current assets 175,503 175,882
Property and equipment, net 151,142 145,530
Deferred income taxes 14,929 14,929
Other assets 10,457 10,990
----------- -----------
Total assets $ 352,031 $ 347,331
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,166 $ 22,550
Accrued expenses 47,026 44,600
Income taxes payable 7,733 16,088
----------- -----------
Total current liabilities 80,925 83,238
Other long-term liabilities 12,041 10,433
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, 50 million shares authorized - -
Common stock, $.01 par value, 100 million shares
authorized, 34.4 million and 34.1 million issued and outstanding
at August 2, 2003 and February 1, 2003 344 341
Treasury stock, at cost, 29,709 shares (998) (998)
Paid in capital 119,494 114,421
Retained earnings 140,225 139,896
----------- -----------
Total shareholders' equity 259,065 253,660
----------- -----------
Total liabilities and shareholders' equity $ 352,031 $ 347,331
=========== ===========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
4
TOO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
-------------------------
AUGUST 2, AUGUST 3,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 329 $ 11,376
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS:
Depreciation and amortization 9,502 9,946
Loss on impairment of assets 5,560 -
CHANGES IN ASSETS AND LIABILITIES:
Inventories (10,920) (11,642)
Accounts payable and accrued expenses (589) 12,711
Income taxes (8,371) (6,220)
Other assets (3,604) 894
Other liabilities 1,608 1,730
----------- -----------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (6,485) 18,795
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (9,833) (28,434)
Restricted cash (23,249) -
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (33,082) (28,434)
----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 73,606
Repayment of term loan - (50,000)
Stock options, restricted stock and other equity changes 295 2,067
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 295 25,673
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (39,272) 16,034
Cash and equivalents, beginning of period 101,300 63,538
----------- -----------
Cash and equivalents, end of period $ 62,028 $ 79,572
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accrual for point of sale operating lease buy out $ 11,288 $ -
=========== ===========
Exercise of restricted stock options $ 4,045 $ 2,755
=========== ===========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
5
TOO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Too, Inc. (referred to herein as "Too" or "the Company") is the
operator of two specialty retailing businesses, Limited Too and
mishmash. Limited Too sells apparel, underwear, sleepwear, swimwear,
footwear, lifestyle and personal care products for fashion-aware,
trend-setting young girls ages seven to fourteen years. mishmash,
launched by the Company in fiscal 2001, sells cosmetics, sportswear,
intimate apparel and footwear to young women ages fourteen to nineteen.
The assortment also includes accessories, jewelry, room decor
furnishings and lifestyle products. On May 28, 2003, the Company
announced the discontinuation of its mishmash retail concept in favor
of a new value-priced concept for 'tween girls. See Note 4 for further
information regarding the mishmash store closings. The Consolidated
Financial Statements include the accounts of Too, Inc. and its
wholly-owned subsidiaries and reflect the Company's assets,
liabilities, results of operations and cash flows on a historical cost
basis.
The accompanying unaudited interim Consolidated Financial Statements as
of August 2, 2003 and for the thirteen and twenty-six weeks ended
August 2, 2003 and August 3, 2002, are presented to comply with the
rules and regulations of the Securities and Exchange Commission.
Accordingly, these Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes
thereto contained in the Company's 2002 Form 10-K. In the opinion of
management, the accompanying interim Consolidated Financial Statements
reflect all adjustments (which are of a normal, recurring nature)
necessary to present fairly the financial position, results of
operations and cash flows for the interim periods, but are not
necessarily indicative of the results of operations for a full fiscal
year.
The Consolidated Financial Statements as of August 2, 2003, and for the
thirteen and twenty-six weeks ended August 2, 2003 and August 3, 2002
included herein have been reviewed by the independent public accounting
firm of PricewaterhouseCoopers LLP and the report of such firm follows
the notes to the Consolidated Financial Statements.
PricewaterhouseCoopers LLP is not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for its report on the
Consolidated Financial Statements because that report is not a "report"
within the meaning of Sections 7 and 11 of that Act.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. STOCK-BASED COMPENSATION
At August 2, 2003, the Company has various stock option and restricted
stock plans. The Company accounts for these plans under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock
option-based employee compensation cost is reflected in net income, as
all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of the
grant.
6
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, to stock-based employee
compensation (in millions, except per share amounts):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- -------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss), as reported $ (3.8) $ 5.5 $ 0.3 $ 11.4
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (0.8) (0.7) (1.6) (1.3)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ (4.6) $ 4.8 $ (1.3) $ 10.1
=========== =========== =========== ===========
Earnings (loss) per share:
Basic - as reported $ (0.11) $ 0.17 $ 0.01 $ 0.35
=========== =========== =========== ===========
Basic - pro forma $ (0.13) $ 0.14 $ (0.04) $ 0.31
=========== =========== =========== ===========
Diluted - as reported $ (0.11) $ 0.16 $ 0.01 $ 0.34
=========== =========== =========== ===========
Diluted - pro forma $ (0.13) $ 0.14 $ (0.04) $ 0.30
=========== =========== =========== ===========
The weighted average fair value per share of options granted is
estimated using the Black-Scholes option-pricing model and the
following weighted average assumptions for the thirteen and twenty-six
weeks ended August 2, 2003 and August 3, 2002:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- -------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Expected life 5.0 5.0 5.0 5.0
Forfeiture rate 20% 20% 20% 20%
Dividend rate - - - -
Price volatility 51% 50% 52% 50%
Risk-free interest rate 2.3% 2.9% 2.6% 2.9%
The weighted average fair value of options granted during the thirteen
and twenty-six weeks ended August 2, 2003 was $7.76 and $7.53,
respectively. The weighted average fair value of options granted during
both the thirteen and twenty-six weeks ended August 3, 2002 was $12.35.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if stock options or restricted stock were converted to common
stock using the treasury stock method.
7
The following table shows the amounts used in the computation of basic
and diluted earnings per share (in thousands):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------------- ----------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
------------- ------------ ------------- ----------
Net income (loss) $ (3,830) $ 5,531 $ 329 $ 11,376
========= ========== ======== ========
Weighted average common shares - basic 34,271 33,483 34,185 32,454
Dilutive effect of stock options
and restricted stock - 1,018 464 1,064
--------- ---------- -------- --------
Weighted average common shares - diluted 34,271 34,501 34,649 33,518
========= ========== ======== ========
Due to the options' strike price exceeding the average market price of
the common shares for the reporting periods, certain options were
excluded from the calculation of net income per diluted share. In
fiscal 2003, options to purchase 1,147,000 common shares were not
included in the computation of net income per diluted share for the
twenty-six weeks ended August 2, 2003. In fiscal 2002, options to
purchase 14,000 common shares were not included in the computation of
net income per diluted share for both the thirteen and twenty-six weeks
ended August 3, 2002. For the thirteen weeks ended August 2, 2003,
stock options and restricted stock were not included in the computation
of diluted loss per share because to do so would have been
antidilutive.
4. STORE CLOSING AND IMPAIRMENT COSTS
On May 28, 2003, the Company announced that it is ending the rollout of
its mishmash retail concept in favor of redirecting its resources to
the development of a new concept focused on value-priced sportswear and
accessories for `tween girls, ages 7 to 14. The mishmash stores will
remain open through the back-to-school selling season, at which time 7
of the 18 mishmash stores will be converted to the new concept. In
accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," the Company recorded an expense of $1.8
million, which is shown in the store closing and impairment costs line
of the accompanying Consolidated Statements of Income. The following
table provides a detail for each major type of cost associated with the
closing activity (in thousands):
EXPECTED INCURRED
TO BE IN CURRENT INCURRED
INCURRED PERIOD TO DATE
--------------- -------------- -------------
One-time termination benefits $ 225 $ - $ -
Contract termination costs 1,600 1,600 1,600
Other associated costs 173 173 173
------ ------ -------
Store closing costs $1,998 $1,773 $ 1,773
====== ====== =======
8
The following table provides a reconciliation of the liability balance
during the quarter (in thousands):
BEGINNING CURRENT COSTS ENDING
RESERVE PERIOD PAID OR OTHER RESERVE
BALANCE EXPENSE SETTLED ADJUSTMENTS BALANCE
--------- ---------- -------- ----------- ---------
Contract termination costs $ - $ 1,600 $ - $ - $ 1,600
Other associated costs - 173 - - 173
--------- ---------- -------- ----------- ---------
Store closing costs $ - $ 1,773 $ - $ - $ 1,773
========= ========== ======== =========== =========
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," an impairment charge of $4.9 million
was also recorded during the second quarter of fiscal 2003. The
impairment charge reflects the difference between the carrying value
and fair value of mishmash's store assets. Fair value of the mishmash
store assets was based on the expected future cash flows of the
mishmash stores. The impairment loss is shown in the store closing and
impairment costs line of the accompanying Consolidated Statements of
Operations.
In addition, the Company announced the discontinuation of its Goldmark
joint venture during the second quarter of fiscal 2003. In accordance
with Accounting Principles Board Opinion ("APB") No. 18, "The Equity
Method of Accounting for Investments in Common Stock," an impairment
charge of $0.6 million was recorded, which reflects the difference
between the carrying value and the fair value of the Company's
investment in the joint venture. The Goldmark impairment charge is
shown in the store closing and impairment costs line of the
accompanying Consolidated Statements of Operations.
5. INVENTORIES
The fiscal year of the Company is comprised of two principal selling
seasons: Spring (the first and second quarters) and Fall (the third and
fourth quarters). Inventories are principally valued at the lower of
average cost or market, on a first-in, first-out basis utilizing the
retail method. Inventory valuation at the end of the first and third
quarters reflects adjustments for inventory markdowns and shrinkage
estimates for the total selling season.
9
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, at cost, consisted of (in thousands):
AUGUST 2, FEBRUARY 1,
2003 2003
------------ ------------
Land $ 8,047 $ 8,041
Buildings 41,962 41,611
Furniture, fixtures and equipment 155,303 140,312
Leasehold improvements 36,039 40,182
Construction-in-progress 4,417 1,587
------------ ------------
Total 245,768 231,733
Less: accumulated depreciation and amortization (94,626) (86,203)
------------ ------------
Property and equipment, net $ 151,142 $ 145,530
============ ============
7. RELATED PARTY TRANSACTIONS
In connection with the August 23, 1999 Spin-off, the Company entered
into a service agreement with Limited Logistics Services, a
wholly-owned subsidiary of Limited Brands, to provide distribution
services to us covering transportation of merchandise to our stores for
up to three years after the Spin-off. Under the service agreement,
Limited Brands distributed merchandise and related materials using
common and contract carriers to the Company's stores. Inbound freight
was charged to Too based upon actual receipts and related charges,
while outbound freight was charged based on a percentage of cartons
shipped. The Company terminated the service agreement in mid-2002.
Our main office was owned by Distribution Land Corp., a wholly-owned
subsidiary of Limited Brands, and leased to us with a lease term
expiring in August 2002. In April 2002, the Company completed
construction of its new home office and terminated the aforementioned
lease.
Our largest apparel supplier has been Mast Industries, Inc., a
wholly-owned subsidiary of Limited Brands. Mast Industries supplied
approximately 24% of the apparel that we purchased in 2002. We believe
that all transactions that we have entered into with Mast Industries
have been on terms that would have been obtained on an arm's length
basis since we treat them as if they were a third party. We were not,
and will not be, obligated to continue to source products through Mast
Industries.
Amounts payable to Limited Brands, including merchandise payables to
Mast Industries, approximated $6.3 million and $6.8 million at August
2, 2003 and February 1, 2003, respectively.
During fiscal year 2002, the Company formed a 50% owned joint venture,
which was accounted for under the equity method of accounting. On May
28, 2003, the Company announced the discontinuation of the joint
venture and, accordingly, wrote-off its investment in the joint venture
during the second quarter. The investment in the joint venture amounted
to $620,000 as of February 1, 2003. The Company continues to provide
certain services on behalf of the joint venture, for which the Company
is reimbursed. The net receivable due to the Company for these services
was $260,000 and $840,000 as of August 2, 2003 and February 1, 2003,
respectively.
10
8. CREDIT FACILITY
During August 1999, the Company entered into a five-year $100 million
credit agreement with a syndicate of banks. This credit agreement was
collateralized by virtually all assets of the Company and was comprised
of a $50 million five-year term loan and a $50 million revolving loan
commitment. The entire amount of the term portion was drawn in order to
fund a $50 million dividend to Limited Brands. On May 24, 2002, the
Company paid off the entire $50 million term loan.
On April 29, 2003, the Company terminated the aforementioned credit
agreement and entered into a new credit facility (the "Credit
Facility") with a syndicate of banks. The Credit Facility consists of a
$100 million unsecured revolving loan commitment. Interest expense on
borrowings under the Credit Facility is based on, at the borrower's
option, either (1) the higher of the Prime rate and the federal funds
effective rate plus 1/2 of 1% or (2) matrix pricing applied to the
LondoN Interbank Offered Rate. Under the terms of the Credit Facility,
the Company is required to comply with certain covenants, including
financial ratios such as leverage, coverage and tangible net worth. The
Credit Facility limits the Company from incurring certain additional
indebtedness, restricts substantial asset sales and provides for a
springing lien against certain assets in the event of default. See Note
10 for further information.
Interest (income) expense consisted of the following (in thousands):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- ------------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest expense $ 146 $ 884 $ 266 $ 1,922
Interest income (211) (368) (455) (1,153)
----------- ----------- ----------- -----------
Interest (income) expense, net $ (65) $ 516 $ (189) $ 769
=========== =========== =========== ===========
9. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards Board Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," in January 2003. FIN 46
establishes accounting and disclosure requirements for ownership
interests in entities that have certain financial or ownership
characteristics (sometimes known as Special Purpose Entities). FIN 46
is applicable for variable interest entities created after January 31,
2003 and becomes effective in the first fiscal year or interim
accounting period beginning after June 15, 2003 for variable interest
entities created before February 1, 2003. The Company is currently
evaluating the impact of adopting FIN 46, but the Company's management
does not expect the adoption of FIN 46 to have a significant impact on
the results of operations, cash flows or the financial position of the
Company.
11
The Emerging Issues Task Force ("EITF") reached a consensus on issues
raised in EITF 03-03, "Accounting for Retroactive Insurance Contracts
Purchased by Entities Other Than Insurance Enterprises," in May 2003.
This consensus states that a claims-made insurance policy that contains
no retroactive provisions should be accounted for on a prospective
basis. However, if a claims-made insurance policy contains a
retroactive provision, the retroactive and prospective provisions of
the policy should be accounted for separately, if practicable;
otherwise, the claims-made insurance policy should be accounted for
entirely as a retroactive contract. The consensus is effective for all
new insurance arrangements entered into in the next reporting period
beginning after May 28, 2003. The adoption of this consensus will not
have a significant impact on the results of operations, cash flows or
the financial position of the Company.
10. SUBSEQUENT EVENT
On September 16, 2003, the unsecured Credit Facility was amended, and
became retroactively effective as of July 31, 2003. In exchange for the
modification of certain financial covenants the Company agreed to
maintain a pledged investment account equal to 110% of any outstanding
letters of credit or any revolving commitment usage. As of the end of
the second quarter of 2003, the Company had outstanding letters of
credit under the Credit Facility amounting to $21.1 million. The
Company is in compliance with all applicable terms of the amended
Credit Facility.
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Too, Inc.:
We have reviewed the accompanying consolidated balance sheet of Too, Inc. and
its subsidiaries (the "Company") as of August 2, 2003, and the related
consolidated statements of operations for each of the thirteen and twenty-six
week periods ended August 2, 2003 and August 3, 2002 and the consolidated
statements of cash flows for the twenty-six week periods ended August 2, 2003
and August 3, 2002. These interim financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of February
1, 2003, and the related consolidated statements of income, changes in
shareholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated February 21, 2003 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet information
as of February 1, 2003 is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
August 13, 2003
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the thirteen weeks ended August 2, 2003 were $134.8 million, a
decrease of 5% from $141.2 million for the comparable period of 2002. Gross
income decreased 19% to $40.0 million from $49.4 million in 2002. The Company
had an operating loss of $6.4 million after recognizing $7.3 million of store
closing and impairment charges, compared with operating income of $9.5 million
in 2002. The net loss for the quarter was $3.8 million, versus net income of
$5.5 million in 2002. The loss per share for the quarter was $0.11, versus
diluted earnings per share of $0.16 in 2002.
Net sales for the twenty-six weeks ended August 2, 2003 were $275.0 million, a
decrease of 8% from $299.8 million for the comparable period of 2002. Gross
income decreased 20% to $82.7 million from $103.0 million in 2002 and operating
income was nearly breakeven compared to $19.5 million in 2002. Net income
decreased 97% to $0.3 million from $11.4 million in 2002. Diluted earnings per
share was $0.01, versus $0.34 in 2002.
FINANCIAL SUMMARY
The following summarized financial and statistical data compares the thirteen
week period ended May 3, 2003, to the comparable 2002 period:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------------------- ----------------------------------------
August 2, August 3, Percent August 2, August 3, Percent
2003 2002 Change 2003 2002 Change
------------- -------------- --------- ------------ ------------ --------
Net sales (millions) $ 134.8 $ 141.2 (5)% $ 275.0 $ 299.8 (8)%
Limited Too:
Comparable store sales increase
(decrease)(1) (13)% 0% (16)% 2%
Sales per average square foot(2) $ 60 $ 71 (15)% $ 125 $ 153 (18)%
Sales per average store (thousands) $ 248 $ 289 (14)% $ 514 $ 624 (18)%
Average store size at quarter end
(square feet) 4,121 4,101 0 %
Total square feet at quarter end
(thousands) 2,213 1,985 11 %
Number of stores:
Beginning of period 515 471 510 459
Opened 22 14 29 27
Closed - (1) (2) (2)
------------- -------------- ------------ ------------
End of period 537 484 537 484
============= ============== ============ ============
Stores remodeled 1 3 3 5
Stores with "Girl Power" format 312 247
Percentage of stores in "Girl Power"
format 58% 51%
Number of mishmash stores 18 11
(1) A store is included in our comparable store sales calculation once it
has completed 52 weeks of operation. Further, stores that have changed
more than 20% in square footage are treated as new stores for purposes
of this calculation.
(2) Sales per average square foot is the result of dividing net sales for
the fiscal quarter by average gross square feet, which reflects the
impact of opening and closing stores throughout the quarter.
14
NET SALES
Net sales for the second quarter of 2003 decreased 5% to $134.8 million from
$141.2 million in 2002. Comparable store sales declined 13% for the second
quarter of 2003 compared to flat comparable store sales performance during the
second quarter of 2002. The decline resulted primarily from a fashion misstep
that hindered the Company's results beginning with the fourth quarter of fiscal
2002, and continued to impact Limited Too's spring apparel assortment through
the second quarter of fiscal 2003. Also contributing to the decrease was a weak
economy and declining mall traffic. These factors more than offset the benefit
of an eight day shift in the Company's spring Too Bucks redemption period caused
by the late Easter holiday. The shift represents approximately $6.5 million in
sales moving from the first quarter to the second quarter of fiscal 2003.
Year-to-date net sales were $275.0 million, an 8% decrease from $299.8 million
in 2002. Comparable store sales declined 16% for the year-to-date period
compared to 2% comparable store sales growth in 2002. Year-to-date sales were
negatively impacted by a fashion misstep that affected Limited Too's spring
apparel assortment. In addition, colder and more inclement weather, along with
ebbing consumer confidence and its consequent effect on mall traffic,
contributed to the year-to-date decline.
Virtually all of Limited Too's hanging merchandise categories experienced
average store sales decreases for the thirteen and twenty-six weeks ended August
2, 2003 versus the comparable periods in 2002. However, the innerwear, swimwear,
jewelry and lifestyles categories posted average store increases over 2002.
GROSS INCOME
Gross income, expressed as a percentage of net sales, was 29.7% for the second
quarter of 2003, a decrease of 530 basis points from a gross income rate of
35.0% for the second quarter of 2002. This rate decrease was due to higher
markdowns to clear slow-moving spring merchandise, which more than offset a 50
basis point gain in initial mark-ups. The rate decline was further exacerbated
by our inability to leverage fixed buying and occupancy costs due to the
negative comparable store sales performance.
For the year-to-date period, the gross income rate decreased 420 basis points to
30.1% from 34.3% in 2002. Higher initial mark-ups were more than offset by
higher markdowns and the inability to leverage buying and occupancy costs.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES
General, administrative and store operating expense increased 80 basis points to
29.0% expressed as a percentage of net sales for the second quarter of 2003 from
28.2% for the second quarter of 2002. However, in dollars, total general,
administrative and store operating expenses declined by $0.9 million in the
second quarter of 2003 versus the same period in 2002. The decrease was
primarily due to declines in marketing and distribution center expenses. These
cost savings more than offset the $1.0 million charge incurred to settle certain
California labor matters.
On a year-to-date basis, general, administrative and store operating expense,
expressed as a percentage of sales, decreased by 40 basis points to 27.4% in
2003 from 27.8% in 2002. The decrease in rate for the year-to-date period was
due to lower incentive compensation expense, settlement proceeds received in
lieu of a litigation claim and certain one-time expenses incurred last year for
brand protection litigation, tax consulting, as well as moving and start-up
costs associated with the Company's new home office and distribution center. The
aforementioned items more than offset increases in store payroll and the
settlement of certain California labor matters incurred in the second quarter of
2003.
STORE CLOSING AND IMPAIRMENT COSTS
On May 28, 2003, the Company announced that it is ending the rollout of its
mishmash retail concept in favor of redirecting its resources to the development
of a new concept focused on value-priced sportswear and accessories for `tween
girls, ages 7 to 14. Most of the mishmash stores will remain open through the
back-to-school selling season, at which point 7 of the 18 mishmash stores will
be converted to the new concept. The Company also announced the discontinuation
of its Goldmark joint venture. Accordingly, the Company recorded a charge of
$7.3 million during the second quarter, consisting primarily of
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impairment charges on mishmash's store assets, as well as costs associated with
early termination of the mishmash store leases.
OPERATING INCOME (LOSS)
The Company experienced an operating loss for the second quarter of $6.4 million
versus operating income of $9.5 million for the same period in 2002. Operating
income for the year-to-date period, expressed as a percentage of sales, was
0.0%, a decrease of 650 basis points from a rate of 6.5% for the same period in
2002. The decrease in the operating income for both the quarter and year-to-date
periods was due to lower merchandise margins, higher markdown and occupancy
rates and store closing and impairment costs.
INCOME TAXES
The benefit for income taxes amounted to $2.5 million and $100,000 for the
quarter and year-to-date periods ending August 2, 2003, respectively, compared
to a provision for income taxes of $3.5 million and $7.4 million for the
comparable periods ending August 3, 2002. The income tax provision rate
decreased beginning in the second quarter of fiscal 2002 as a result of
realigning our corporate operations, including our direct sourcing and supply
chain management initiatives that provided state tax benefits. The rate was
further reduced due to the Company's investment in certain short-term, tax-free
municipal bonds.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities is the primary resource to support
operations, including projected growth, seasonal working capital requirements
and capital expenditures.
Net cash used for operating activities amounted to $6.5 million for the
twenty-six weeks ended August 2, 2003 versus net cash provided by operating
activities of $18.8 million for the same period in 2002. The decrease was
primarily due to lower net income and increased cash outflows in accounts
payable and accrued expenses.
For the twenty-six weeks ended August 2, 2003, investing activities represented
capital expenditures primarily for new and remodeled stores. For the comparable
period in 2002, capital expenditures also included progress payments on the
completion of construction of our new home office and distribution center.
Investing activities for the second quarter of 2003 reflect the designation of
restricted cash as a result of the Company's efforts to modify the Credit
Facility.
Financing activities for the year-to-date period ended August 2, 2003,
principally represented proceeds from employee stock option exercises and the
issuance of restricted stock. For the comparable period in 2002, financing
activities also included proceeds from a follow-on offering of 2.4 million
common stock shares, and the accompanying repayment of the Company's term loan.
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A summary of our working capital position and capitalization follows (in
thousands):
AUGUST 2, FEBRUARY 1,
2003 2003
--------- -----------
Working capital $ 94,578 $ 92,644
Capitalization:
Shareholders' equity 259,065 253,660
--------- -----------
Total capitalization $ 259,065 $ 253,660
========= ===========
Additional amounts available under the revolving
Portion of the Credit Facility $ 100,000 $ 50,000
========= ===========
During August 1999, the Company entered into a five-year $100 million credit
agreement with a syndicate of banks. This credit agreement was collateralized by
virtually all assets of the Company and was comprised of a $50 million five-year
term loan and a $50 million revolving loan commitment. The entire amount of the
term portion was drawn in order to fund a $50 million dividend to Limited
Brands. On May 24, 2002, the Company paid off the entire $50 million term loan
with the proceeds from the follow-on stock offering.
On April 29, 2003, the Company terminated the aforementioned credit agreement
and entered into a new credit facility (the "Credit Facility") with a syndicate
of banks. The Credit Facility consists of a $100 million unsecured revolving
loan commitment. Interest expense on borrowings under the Credit Facility is
based on, at the borrower's option, either (1) the higher of the Prime rate and
the federal funds effective rate plus 1/2 of 1% or (2) matrix pricing applied to
the London Interbank Offered Rate. Under the terms of the Credit Facility, the
Company is required to comply with certain covenants, including financial ratios
such as leverage, coverage and tangible net worth. The Credit Facility limits
the Company from incurring certain additional indebtedness, restricts
substantial asset sales and provides for a springing lien against certain assets
in the event of default. On September 16, 2003, the unsecured Credit Facility
was amended, and became retroactively effective as of July 31, 2003. In exchange
for the modification of certain financial covenants the Company agreed to
maintain a pledged investment account equal to 110% of any outstanding letters
of credit or any revolving commitment usage. As of the end of the second quarter
of 2003, the Company had outstanding letters of credit under the Credit Facility
amounting to $21.1 million. The Company is in compliance with all applicable
terms of the amended Credit Facility.
CAPITAL EXPENDITURES
Capital expenditures, primarily for new and remodeled stores, totaled $9.8
million for the twenty-six weeks ended August 2, 2003 compared to $28.4 million
for the comparable period in 2002. The decrease is primarily due to the $20.2
million in costs the Company incurred in 2002 for the completion of construction
of its new distribution center and home office. We anticipate capital
expenditures of approximately $35 to $37 million in fiscal 2003. Capital
expenditures consist primarily of costs for new Limited Too stores, remodeling
or expansion of existing stores and related fixtures and equipment, as well as
costs to convert 7 mishmash stores and build 20 new concept stores in order to
open in early spring 2004. We intend to add approximately 210,000 square feet in
2003, which will represent a 10% increase over Limited Too square footage as of
the 2002 year end. We anticipate that the increase will result from opening
approximately 50 to 55 new Limited Too stores and expanding approximately ten
stores identified for remodeling. We expect substantially all capital
expenditures in fiscal 2003 will be funded by cash on hand and net cash provided
by operating activities.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that impact the amounts reported in the Company's
consolidated financial statements and related notes. On an on-going basis,
management evaluates its estimates and judgments, including those related to
inventories, long-lived assets and sales returns. Management bases its estimates
and judgments on historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
materially from management's estimates. Management believes the following
estimates and assumptions are most significant to reporting the Company's
results of operations and financial position.
Revenue Recognition - Retail sales are recorded when the customer takes
possession of merchandise. Markdowns associated with the Frequent Buyer and "Too
Bucks" Programs are recognized upon redemption in conjunction with a qualifying
purchase. Catalog and web sales are recorded upon shipment to the customer. A
reserve is provided for projected merchandise returns based on prior experience.
Inventories - Inventories are valued at the lower of average cost or market, on
a first-in, first-out basis, utilizing the retail method. Under the retail
method, the valuation of inventories at cost and the resulting gross margins are
calculated by applying a cost-to-retail ratio to the retail value of
inventories. The use of the retail method will result in valuing inventories at
the lower of cost or market when markdowns are currently taken as a reduction of
the retail value and cost of inventories. Inherent in the retail method are
certain significant management judgments and estimates including, among others,
future sales, markdowns and shrinkage, which significantly impact the ending
inventory valuation at cost as well as the resulting gross margins. The Company
calculates inventory costs on an individual item-class basis to ensure a high
degree of accuracy in estimating the cost. Inventory valuation at the end of the
first and third quarters reflects adjustments for inventory markdowns and
shrinkage estimates for the total selling season.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Service lives are established for
store assets ranging from 5 to 10 years for building improvements and 3 to 10
years for other property and equipment. Property and equipment at the home
office and distribution center are assigned service lives between 5 and 40
years. Assets are reviewed on an annual basis for impairment, and based on
management's judgment, are written down to the estimated fair value based on
anticipated future cash flows.
Income Taxes - Income taxes are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method. Deferred tax assets and
liabilities are recognized based on the difference between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Inherent in the measurement of deferred balances are certain judgments
and interpretations of enacted tax laws and published guidance with respect to
applicability to the Company's operations. No valuation allowance has been
provided for deferred tax assets because management believes that it is more
likely than not that the full amount of the net deferred tax assets will be
realized in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Financial Accounting
Standards Board Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities," in January 2003. FIN 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as Special Purpose
Entities). FIN 46 is applicable for variable interest entities created after
January 31, 2003 and becomes effective in the first fiscal year or interim
accounting period beginning after June 15, 2003 for variable interest entities
created before February 1, 2003. The Company is currently evaluating the impact
of adopting FIN 46, but the Company's management does not expect the adoption of
FIN 46 to have a significant impact on the results of operations, cash flows or
the financial position of the Company.
The Emerging Issues Task Force ("EITF") reached a consensus on issues raised in
EITF 03-03, "Accounting for Retroactive Insurance Contracts Purchased by
Entities Other Than Insurance Enterprises," in May 2003. This consensus states
that a claims-made insurance policy that contains no retroactive provisions
should be accounted for on a prospective basis. However, if a claims-made
insurance policy contains a retroactive provision, the retroactive and
prospective provisions of the policy should be
18
accounted for separately, if practicable; otherwise, the claims-made insurance
policy should be accounted for entirely as a retroactive contract. The consensus
is effective for all new insurance arrangements entered into in the next
reporting period beginning after May 28, 2003. The adoption of this consensus
will not have a significant impact on the results of operations, cash flows or
the financial position of the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Management's Discussion and Analysis or made by management of the Company
involve risks and uncertainties and are subject to change based on various
important factors, many of which may be beyond the Company's control.
Forward-looking statements are indicated by words such as "anticipate,"
"estimate," "expect," "intend," "risk," "could," "may," "will," "pro forma,"
"likely," "possible," "potential," and similar words and phrases and the
negative forms and variations of these words and phrases, and include, but may
not be limited to, statements in this Management's Discussion and Analysis
relating to anticipated capital expenditures in 2003 for new stores, the
remodeling or expansion of existing stores and the related funding thereof. The
following factors, among others, in some cases have affected, and in the future
could affect, the Company's financial performance and actual results and could
cause future performance and financial results to differ materially from those
expressed or implied in any forward-looking statements included in this
Management's Discussion and Analysis or otherwise made by management: changes in
consumer spending patterns, consumer preferences and overall economic
conditions; the impact of competition and pricing; changes in weather patterns;
currency and exchange risks; changes in existing or potential trade
restrictions, duties, tariffs or quotas; changes in political or financial
stability; changes in postal rates and charges and paper and printing costs;
availability of suitable store locations at appropriate terms; ability to
develop new merchandise; ability to hire and train associates; and/or other risk
factors that may be described in the Safe Harbor Statement and Business Risks
section of the Company's Form 10-K, filed April 29, 2002, as well as other
filings with the Securities and Exchange Commission. Future economic and
industry trends that could potentially impact revenue and profitability are
difficult to predict. Therefore, there can be no assurance that the
forward-looking statements included herein will prove to be accurate. In light
of the significant uncertainties in the forward-looking statements included
herein, the inclusion of such information should not be regarded a
representation by the Company, or any other person, that the objectives of the
Company will be achieved. The forward-looking statements made herein are based
on information presently available to the management of the Company. The Company
assumes no obligation to publicly update or revise its forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
To the extent we borrow under our Credit Facility, we will be exposed to market
risk related to changes in interest rates. At August 2, 2003, no borrowings were
outstanding under the Credit Facility. Additionally, we are exposed to market
risk related to interest rate risk on the investment of cash in securities with
original maturities of three months or less. These investments are considered
cash equivalents and are shown as such on the Consolidated Balance Sheets. If
there are changes in interest rates, those changes would affect the interest
income we earn on those investments.
ITEM 4. Controls and Procedures
Based on an evaluation carried out, as of the end of the period covered by this
report, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective. There were
no changes in the Company's internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There are various claims, lawsuits and other legal actions pending for and
against Too incident to the operations of its business. It is the opinion of
management that the ultimate resolution of these matters will not have a
material adverse effect on Too's results of operations cash flows or financial
position.
ITEM 4. Matters Submitted to a Vote of Security Holders
The 2003 annual meeting of stockholders was held on Tuesday, May 20, 2003, at
9:00 a.m. Eastern Time at our corporate offices, located at 8323 Walton Parkway,
New Albany, Ohio.
ELECTION OF DIRECTORS FOR AGAINST WITHHELD RESULTS
-------------------------- ---------- ------- -------- -------
Nancy J. Kramer 29,328,380 - 461,617 Elected
Sally A. Boyer 29,272,834 - 517,163 Elected
Kent A. Kleeberger 29,272,768 - 517,229 Elected
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.29 First Amendment to Credit Agreement among Too, Inc., various
lending institutions and National City Bank as Administrative
Agent.
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of Report
of Independent Accountants.
31.1 Certification of Periodic Report by the Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Periodic Report by the Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Periodic Report by the Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Periodic Report by the Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On May 7, 2003, Too, Inc. filed a Current Report on Form 8-K dated
April 29, 2003, reporting pursuant to "Item 5. Other Events and
Regulation FD Disclosure," that Too, Inc. had entered into a new Credit
Agreement among Too, Inc., as Borrower, and National City Bank, as
Administrative Agent.
On May 9, 2003, Too, Inc. filed a Current Report on Form 8-K dated May
8, 2003, reporting pursuant to "Item 12. Results of Operations and
Financial Condition," (under "Item 9. Regulation FD Disclosure") that
Too, Inc. had issued a press release projecting certain first quarter
2003 results.
20
On May 14, 2003, Too, Inc. filed a Current Report on Form 8-K dated May
14, 2003, reporting pursuant to "Item 12. Results of Operations and
Financial Condition," (under "Item 9. Regulation FD Disclosure") that
Too, Inc. had issued a press release announcing its financial results
for the first quarter ended May 3, 2003, and certain expectations for
the second quarter ended August 2, 2003.
On May 30, 2003, Too, Inc. filed a Current Report on Form 8-K dated May
28, 2003, reporting pursuant to "Item 5. Other Events and Regulation FD
Disclosure," that Too, Inc. had issued a press release announcing the
discontinuation of mishmash operations and the development and roll out
of a new value-priced concept for `tween girls.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOO, INC.
(Registrant)
By /s/ Kent A. Kleeberger
-------------------------------
Kent A. Kleeberger
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
(duly authorized officer and
Principal Financial and Accounting
Officer)
Date: September 16, 2003
22