TALBOTS INC Item 1A Risk Factors (Dollar amounts in thousands) The success of the business depends on the Company’s ability to respond to constantly changing fashion trends and consumer demands |
The Company’s success depends in large part on its ability to originate and define fashion product trends, as well as to anticipate, gauge, and react to changing consumer demands in a timely manner |
The retail business fluctuates according to consumer preferences dictated, in part, by fashion and season |
Decisions with respect to product designs are generally made well in advance of the season and frequently before fashion trends are evidenced by customer purchases |
To the extent the Company fails to anticipate, identify, and respond effectively to consumer preferences, sales will be adversely affected and the markdowns required to move the resulting excess inventory will adversely affect the Company’s operating results |
The retail apparel industry is highly competitive |
The Company competes with national department stores as well as regional department store chains |
The Company also competes with other specialty retailers and catalog companies |
The Company is faced with a variety of competitive challenges including: • anticipating and responding to changing consumer demands; • maintaining favorable brand recognition; • developing classic high quality products in sizes, colors, and styles that appeal to consumers; • sourcing merchandise efficiently; and • effectively marketing the Company’s products to consumers |
Increased competition could cause the Company’s sales and margins to be reduced and adversely affect results of operations |
The Company cannot assure the successful implementation of its growth strategy |
The Company’s continued growth depends on its ability to open and operate stores successfully and to manage the Company’s planned expansion |
During 2006, the Company plans to open approximately 50 Talbots stores |
The Company’s planned expansion is dependent upon a number of factors, including general economic and business conditions affecting consumer confidence and spending, the level of sales volume and profitability at existing store locations, the availability of sufficient capital resources to effect expansion plans, the continuing availability of desirable locations, the ability to negotiate acceptable lease terms for prospective new and expanded locations, sourcing sufficient levels of inventory, hiring and training qualified management level and other associates, and integrating new stores into its existing operations |
There can be no assurance that the Company will achieve its planned expansion or that such expansion will be profitable or that the Company will be able to manage its growth effectively |
The Company may not be able to successfully integrate J Jill’s operations |
The Company announced its planned acquisition of J Jill in February 2006 |
The Company’s ability to continue to grow and sustain long-term profitability may depend upon effectively integrating J Jill’s operations and achieving significant cost efficiencies |
The Company may not be able to effectively integrate and successfully implement appropriate operational, financial, and management systems and controls to achieve the benefits expected to result from this planned acquisition |
Also, integration activities may not be completed within the 11 _________________________________________________________________ [60]Table of Contents expected time periods |
The Company’s effort to integrate could be affected by a number of factors beyond its control, such as regulatory developments, general economic conditions, increased competition, the loss of customers resulting from the acquisition, and the assumption of liabilities |
In addition, the process of integrating J Jill could cause an interruption of, or loss of momentum in, the activities of the Company’s existing business and the loss of key personnel and customers |
The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of J Jill could negatively impact the Company’s business |
Further, the benefits and cost synergies anticipated from the planned J Jill acquisition may not develop |
The Company also has and will incur significant transaction costs in connection with this acquisition |
Finally, the acquisition of J Jill may not be consummated as it remains subject to approval by the stockholders of J Jill, clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary closing conditions |
The Company plans to incur substantial debt to finance its planned J Jill acquisition |
In order to finance the acquisition of J Jill, the Company plans to borrow dlra400cmam000 under a five-year term loan |
The Company also expects that as a result of the planned acquisition, borrowings under the Company’s short-term credit facilities will be higher than in prior years |
Those borrowings will result in higher levels of interest expense than historically experienced |
There can be no assurance that the Company’s cash requirements will be met by existing and planned available borrowing facilities |
The Company experiences fluctuations in comparable store sales results |
Comparable stores are those that were open for at least one full fiscal year |
When a new Talbots Petites store, Talbots Woman store, or Talbots Accessories & Shoes store is opened adjacent to or in close proximity to an existing comparable Misses store, such Misses store is excluded from the computation of comparable store sales for a period of 13 months so that the performance of the full Misses assortment may be properly compared |
The Company’s comparable store sales results have fluctuated in the past on a monthly, quarterly, and annual basis, and are expected to fluctuate in the future |
A variety of factors affect comparable store sales results, including changes in fashion trends, changes in the Company’s merchandise mix, timing of catalog mailings, calendar shifts of holiday periods, actions by competitors, weather conditions, and general economic conditions |
Past comparable store sales are not an indicator of future results, and there can be no assurance that the Company’s comparable store sales will not decrease in the future |
The Company’s comparable store sales performance is likely to have a significant effect on the Company’s results of operations |
The Company experiences fluctuations in operating results |
The Company’s annual and quarterly operating results have fluctuated, and are expected to continue to fluctuate |
Among the factors that may cause the Company’s operating results to fluctuate are customers’ response to merchandise offerings, the timing of the rollout of new stores, seasonal variations in sales, the timing and size of catalog mailings, the costs of producing and mailing catalogs, the timing of merchandise receipts, the level of merchandise returns, changes in merchandise mix and presentation, the Company’s cost of merchandise, unanticipated operating costs, and other factors beyond the Company’s control, such as general economic conditions and actions of competitors |
As a result of these factors, the Company believes that period-to-period comparisons of historical and future results will not necessarily be meaningful and should not be relied on as an indication of future performance |
If the Company fails to maintain the value of its brand, sales are likely to decline |
The Company’s success depends on the value of the Talbots brand |
The Talbots name and “classic” niche is integral to the success of the business |
Maintaining, promoting, and positioning the Talbots brand will depend largely on the success of the Company’s marketing and merchandising efforts and the ability to provide a consistent, high quality customer experience |
Talbots brand could be adversely affected if the Company fails to achieve these objectives or if the Company’s public image is tarnished by negative publicity |
12 _________________________________________________________________ [61]Table of Contents The Company cannot assure that it will be successful in introducing new business concepts that will result in increased profitability for the Company |
During the past several years, the Company has introduced new business concepts, including Talbots Petites, Talbots Kids, Talbots Accessories & Shoes, Talbots Woman, Talbots Woman Petites, Talbots Collection, and Talbots Mens |
The Company may introduce new business concepts in the future |
There can be no assurance that these new concepts will be successful or that the Company’s overall profitability will increase as a result of introducing these concepts |
The Company cannot assure that Internet sales will continue to achieve sales and profitability growth |
The Company sells merchandise over the Internet through its website, www |
The Company’s Internet operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures, and the need to invest in additional computer systems |
The Internet operations also involve other risks that could have an impact on the Company’s results of operations, including hiring, retention and training of personnel to conduct the Company’s Internet operations, diversion of sales from the Company’s stores, rapid technological change, liability for online content, credit card fraud, and risks related to the failure of the computer systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions |
There can be no assurance that the Company’s Internet operations will continue to achieve sales and profitability growth or even remain at their current level |
The Company depends on one distribution center |
The Company’s distribution functions for all of its US stores and catalog and Internet sales are handled from a single distribution center in Lakeville, Massachusetts |
Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures, or other unforeseen causes could delay or impair the Company’s ability to distribute merchandise to its stores and/or fulfill catalog and Internet orders, which could have a significant effect on the Company’s results of operations |
Talented personnel are critical to the Company’s success |
The Company’s success and ability to properly manage its growth depends to a significant extent on both the performance of its current executive and senior management team and its ability to attract, hire, motivate, and retain additional qualified and talented management personnel in the future |
The Company’s inability to recruit and retain such personnel, or the loss of services of any of its current key employees, could have a material adverse impact on the Company’s operations |
The Company’s overseas merchandise purchasing strategy makes it vulnerable to a number of risks |
The Company purchases a significant portion of its merchandise directly from foreign sources |
Approximately 77prca of the merchandise purchased in 2005 was purchased directly from foreign sources, including 31prca sourced directly from Hong Kong |
In addition, goods purchased from domestic vendors may be sourced abroad by such vendors |
As a result, the Company’s business remains subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as: • political instability; • imposition of new legislation relating to import quotas that may limit the quantity of goods that may be imported into the US from countries in a region where the Company does business; • imposition of duties, taxes, and other charges on imports; and • local business practice and political issues, including issues relating to compliance with domestic or international labor standards |
The Company cannot predict whether the foreign countries in which Talbots apparel and accessories are currently manufactured or any of the foreign countries in which Talbots apparel and accessories may be 13 _________________________________________________________________ [62]Table of Contents manufactured in the future will be subject to import restrictions by the US government, including the likelihood, type or effect of any trade retaliation |
Trade restrictions, including increased tariffs or more restrictive quotas, applicable to apparel items could affect the importation of apparel and, in that event, could increase the cost, or reduce the supply of apparel available to the Company and adversely affect the Company’s operations |
Although the quota system established by the Agreement on Textiles and Clothing was completely phased out for World Trade Organization countries effective January 1, 2005, there can be no assurances that restrictions will not be reestablished for certain categories in specific countries |
A downturn in the economy may affect consumer purchases of discretionary items which could adversely affect the Company’s sales |
Many factors affect the level of consumer spending in the apparel industry, including: • general business conditions; • interest rates; • the availability of consumer credit; • taxation; • employment levels; • political conditions such as war, terrorism and political unrest; and • consumer confidence in future economic conditions |
Consumer purchases of discretionary items may decline during recessionary periods and other periods where disposable income is lower |
A downturn in the economies in which the Company sells its products, whether in the US or abroad, may adversely affect the Company’s operations |
A major failure of the Company’s information systems could harm the business |
The Company depends on information systems to manage its operations |
Talbots information systems consist of a full range of retail, financial, and merchandising systems, including credit, inventory distribution and control, sales reporting, accounts payable, budgeting and forecasting, financial reporting, merchandise reporting, and distribution |
The Company regularly makes investments to upgrade, enhance, or replace such systems |
Any delays or difficulties in transitioning to these new systems, or in integrating these systems with the Company’s current systems, or any other disruptions affecting the Company’s information systems, could have a material adverse impact on the Company’s operations |
The market price of the Company’s common stock is volatile |
The market price of the Company’s common stock has fluctuated in the past and there can be no assurance that the market price of the common stock will not continue to fluctuate significantly |
Future announcements or disclosures concerning the Company or its competitors, sales and profitability results, quarterly variations in operating results or monthly comparable store net sales, changes in earnings estimates by analysts, among other factors, could cause the market price of the common stock to fluctuate substantially |
In addition, stock markets, in general, have experienced extreme price and volume volatility in recent years |
This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies |