Dress Barn 10-K 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
THE DRESS BARN, INC.
(Exact name of registrant as specified in its charter)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 24, 2009 was approximately $399 million, based on the last reported sales price on the NASDAQ Global Select Market on that date. As of September 10, 2009, 60,696,347 shares of voting common shares were outstanding. The registrant does not have any authorized, issued or outstanding non-voting common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on December 9, 2009 are incorporated into Part III of this Form 10-K.
THE DRESS BARN, INC.
FISCAL YEAR ENDED JULY 25, 2009
TABLE OF CONTENTS
This Annual Report on Form 10-K, including the section labeled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements and risk factors that we have included elsewhere in this report. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our results, level of activity, performance or achievements to be materially different from any future results, level of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identify these statements by words or phrases such as “believe”, “anticipate”, “expect”, “intend”, “plan”, “may”, “should”, “estimate”, “predict”, “potential”, “continue” or the negative of such terms or other similar expressions. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed below under Item 1A. RISK FACTORS, and other factors discussed in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. We disclaim any intent or obligation to update or revise any forward-looking statements as a result of developments occurring after the period covered by this report.
dressbarn®, dressbarn womanâ, mauricesâ, Studio Yâ and YVOSâ are our trademarks. Fiscal 2009 refers to the 52-week period ended July 25, 2009, fiscal 2008 refers to the 52-week period ended July 26, 2008, fiscal 2007 refers to the 52-week period ended July 28, 2007. Fiscal 2010 refers to our 53-week period that will end on July 31, 2010.
References to “we”, “us”, “our” or “our company” or other similar terms in this report are to The Dress Barn, Inc. and its subsidiaries.
ITEM 1. BUSINESS
We operate women’s apparel specialty stores, principally under the names “dressbarn”, “dressbarn woman” and “maurices”. Since our retail business began in 1962, we have established, marketed and expanded our business as a source of fashion and value. We offer a lifestyle-oriented, stylish, value-priced assortment of career and casual fashions tailored to our customers’ needs. As of July 25, 2009, we operated 1,559 stores in 48 states and the District of Columbia, including 684 dressbarn Combo stores (a combination of our dressbarn and dressbarn woman brands), 721 maurices stores, 120 dressbarn stores and 34 dressbarn woman stores.
Our dressbarn stores are typically operated as Combo stores, offering both dressbarn and larger-sized dressbarn woman merchandise. We also operate stand-alone dressbarn and dressbarn woman stores in certain markets. Our dressbarn segment caters to 35- to 55-year-old women, sizes 4 to 24. Our dressbarn stores offer in-season, moderate to better quality career and casual fashion at value prices, and are located primarily in convenient strip shopping centers in major trading and high-density markets and surrounding suburban areas. Our centrally managed merchandise selection is changed and augmented frequently to keep our merchandise presentation fresh and exciting. Carefully edited, coordinated merchandise is featured in a comfortable, easy-to-shop environment, staffed by friendly, service-oriented salespeople.
Our maurices stores cater to the apparel and accessory needs of 17- to 34-year-old women and are typically located in small markets with populations of approximately 25,000 to 100,000. Our maurices stores offer moderately priced, up-to-date fashions, sizes 4 to 24, designed to appeal to a younger female customer than our dressbarn brands. maurices merchandise is primarily sold under two brands, maurices and Studio Y. The maurices brand encompasses women’s casual clothing, career wear and accessories. Studio Y represents women’s dressy apparel. Our maurices stores are typically located near large discount and department stores to capitalize on the traffic those retailers generate. We seek to differentiate maurices from those retailers by offering a wider selection of style, color and current fashion and by the shopping experience we offer, which emphasizes a visually stimulating environment with a helpful staff. While our maurices stores offer a core merchandise assortment, individual maurices stores vary and augment their merchandise assortment to reflect individual store demands and local market preferences.
All of our stores are directly operated by us. Virtually all of our stores are open seven days a week and most evenings. We utilize creative incentive programs and comprehensive training programs to ensure that our customers receive friendly and helpful service.
Since the merger of maurices in 2005, we have sought appropriate opportunities to generate synergies through leveraging certain centralized functions, such as taxes, purchasing, lease administration, imports and loss prevention. We believe our synergies have improved bothdressbarn’s> and maurices’ performance.
On June 24, 2009, we entered into an agreement pursuant to which one of our subsidiaries will merge with Tween Brands, Inc. in a stock-for-stock transaction. Under the terms of the merger agreement, each share of Tween Brands common stock will be exchanged for 0.47 shares of our common stock. Based on our stock price of $13.24 as of June 24, 2009 (the date of the agreement), this consideration would be equal to an aggregate equity value of $157 million. In addition, Tween Brands, Inc.’s outstanding bank debt will be repaid. This transaction, unanimously approved by each of Dress Barn, Inc.’s and Tween Brands, Inc.’s Board of Directors, is expected to close in the fourth quarter of calendar year 2009 and is subject to Tween Brands, Inc. stockholder approval and other customary closing conditions. Tween Brands, Inc. stock is listed on the NYSE as “TWB”.
Locations and Properties
As of July 25, 2009, we operated 1,559 stores in 48 states and the District of Columbia, of which 1,001 of the stores were located in strip centers and 233 stores were located in outlet centers. During fiscal 2009, no store accounted for as much as 1% of our total sales. The table below indicates the type of shopping facility in which the stores were located:
As of July 25, 2009, dressbarn had 6.4 million total square feet in all its stores and maurices had 3.5 million total square feet. All of our store locations are leased. Our leases typically contain renewal options and also provide an option to terminate at little or no cost, particularly in the early years of a lease, if specified sales volumes are not achieved. Our dressbarn stores are more concentrated in the northeast while our maurices stores are more concentrated in the midwest.
During fiscal 2009, we opened 31 dressbarn Combo stores, and converted six existing stores to Combo stores. We opened 49 maurices stores during fiscal 2009. We evaluate store-level performance and seek to close or relocate underperforming stores. During fiscal 2009, we closed 24 locations, including 19 dressbarn stores and 5 maurices stores. We expect to open approximately 50 new stores in fiscal 2010, comprised of approximately 15 dressbarn locations (almost all of which will be Combo stores) and approximately 35 maurices locations. Net of store closings, we currently plan dressbarn square footage to be flat and increase our aggregate maurices square footage by approximately 4% for a net increase of approximately 2% in fiscal 2010.
We own an approximately 900,000 square-foot distribution/office facility and 16 acres of adjacent land in Suffern, New York, which houses, in approximately 510,000 square feet, our corporate offices and our dressbarn distribution center, with the remainder of the facility leased to two third parties. We own maurices’ corporate headquarters in downtown Duluth, Minnesota, which is composed of three office buildings totaling approximately 151,000 square feet. We also own an approximately 360,000 square-foot distribution center and approximately 9 acres of adjacent land in Des Moines, Iowa, which houses our maurices warehousing and distribution operations.
Advertising and Marketing
We rely on direct mail, national print advertising in lifestyle magazines for our dressbarn brand>, compelling window and in-store marketing materials, our website and email to communicate our fashion and promotional message. We utilize a customer relationship management system to track customer transactions and determine strategic decisions for our direct mail initiatives. We pursue a public relations strategy to garner editorial exposure.
We participate in national cause-related marketing initiatives that resonate with our customers, creating brand affinity. Our current key partners in these programs include The American Cancer Society and Dress for Success. We believe these programs, which are conducted at the local level, reinforce that our stores are important members of their communities.
We have U.S. Certificates of Registration of Trademark and trademark applications pending for the operating names of our stores and our major private label merchandise brands. We believe our dressbarn, dressbarn woman, maurices, Studio Y and YVOS trademarks are material to the continued success of our business. We also believe that our rights to these trademarks are adequately protected.
As of July 25, 2009, we had approximately 14,100 employees, approximately 8,600 of whom worked part-time. We typically add temporary employees during peak selling periods. None of our employees are covered by any collective bargaining agreement. We consider our employee relations to be good.
We have historically experienced substantially lower earnings in our second fiscal quarter ending in January, reflecting the intense promotional atmosphere that has characterized the holiday shopping season in recent years. In addition, our quarterly results of operations may fluctuate materially depending on, among other things, adverse weather conditions, shifts in timing of certain holidays, the number and timing of new store openings and closings, net sales contributed by new stores and changes in our merchandise mix.
The retail apparel industry is highly competitive and fragmented, with numerous competitors, including department stores, off-price retailers, specialty stores, discount stores, mass merchandisers and Internet-based retailers, many of which have substantially greater financial, marketing and other resources than us. Many of our competitors are able to engage in aggressive promotions, reducing their selling prices. Some of our competitors include JCPenney, Kohl’s, Old Navy, Target and Sears. Other competitors may move into the markets that we serve. Our business is vulnerable to demand and pricing shifts, and to changes in customer tastes and preferences. If we fail to compete successfully, we could face lower net sales and may need to offer greater discounts to our customers, which could result in decreased profitability. We believe that we have established and reinforced our image as a source of fashion and value by focusing on our target customers, and by offering superior customer service and convienence.
We purchase our merchandise from many domestic and foreign suppliers. We have no long-term purchase commitment or arrangements with any of our suppliers, and believe that we are not dependent on any one supplier. We have good working relationships with our suppliers. No single supplier is more than 10% of our business.
We maintain our corporate Internet website at www.dressbarn.com. The information on our Internet website is not incorporated by reference into this report. We make available, free of charge through publication on our Internet website, a copy of our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, including any amendments to those reports, as filed with or furnished to the Securities and Exchange Commission, or SEC, as soon as reasonably practicable after they have been so filed or furnished.
ITEM 1A. RISK FACTORS
A slowdown in the United States economy, an uncertain economic outlook and escalating energy costs may continue to affect consumer demand for our apparel and accessories.
Consumer spending habits, including spending for our apparel and accessories, are affected by, among other things, prevailing economic conditions, levels of employment, fuel prices, salaries, wage rates, the availability of consumer credit, consumer confidence and consumer perception of economic conditions. A general slowdown in the United States economy and an uncertain economic outlook may adversely affect consumer spending habits and customer traffic, which may result in lower net sales. A prolonged economic downturn could have a material adverse effect on our business, financial condition, and results of operations.
Our business is dependent upon our ability to predict accurately fashion trends, customer preferences and other fashion-related factors.
Customer tastes and fashion trends are volatile and tend to change rapidly, particularly for women’s apparel. Our success depends in part upon our ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by us to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of the merchandise in our stores, which in turn could adversely affect our business and our image with our customers. If we miscalculate either the market for our merchandise or our customers’ tastes or purchasing habits, we may be required to sell a significant amount of unsold inventory at below average markups over cost, or below cost, which would have an adverse effect on our margins and results of operations.
We depend on strip shopping center and mall traffic and our ability to identify suitable store locations.
Our sales are dependent in part on a high volume of strip shopping center and mall traffic. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor stores or changes in customer shopping preferences. A decline in the popularity of strip shopping center or mall shopping among our target customers could have a material adverse effect on customer traffic and reduce our sales and net earnings.
To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations where competition for suitable store locations is intense.
We rely on foreign sources of production.
We purchase a significant portion of our apparel directly in foreign markets, including Asia, the Middle East and Africa, and indirectly through domestic vendors with foreign sources. We face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad, including:
New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries. The future performance of our business depends on foreign suppliers and may be adversely affected by the factors listed above, all of which are beyond our control. This may result in our inability to obtain sufficient quantities of merchandise or increase our cost, thereby negatively impacting sales, gross profit and net earnings.
We face challenges to grow our business and to manage our growth.
Our growth is dependent, in large part, upon our ability to successfully add new stores. In addition, on a routine basis, we close underperforming stores, which may result in write-offs. The success of our growth strategy depends upon a number of factors, including the identification of suitable markets and sites for new stores, negotiation of leases on acceptable terms, construction or renovation of sites in a timely manner at acceptable costs and maintenance of the productivity of our existing store base. We must be able to hire, train and retain competent managers and personnel and manage the systems and operational components of our growth. Our failure to open new stores on a timely basis, obtain acceptance in markets in which we currently have limited or no presence, attract qualified management and personnel or appropriately adjust operational systems and procedures would have an adverse effect on our growth prospects.
Our management information systems may fail and cause disruptions in our business.
We rely on our existing management information systems in operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, as well as various financial systems. Any disruption in the operation of our management information systems, or our failure to continue to upgrade, integrate or expend capital on such systems as our business expands, would have a material adverse effect on our business.
We utilize the Oracle Retail Merchandising System for both our dressbarn segment and our maurices segment. The purpose of the Oracle Retail Merchandising system is to expand our capability to identify and analyze sales trends and consumer data, and achieve planning and inventory management improvements.
Our business would be severely disrupted if our distribution centers were to shut down.
The distribution of our dressbarn products is centralized in one distribution center in Suffern, New York and the distribution of our maurices products is centralized in one distribution center in Des Moines, Iowa. Most of the merchandise we purchase is shipped directly to our distribution centers, where it is prepared for shipment to the appropriate stores. If either of these distribution centers were to shut down or lose significant capacity for any reason, our operations would likely be seriously disrupted. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores during the time it takes for us to reopen or replace either distribution center.
Our business could suffer as a result of a manufacturer’s inability to produce goods for us on time and to our specifications.
We do not own or operate any manufacturing facilities and therefore depend upon independent third parties for the manufacture of all of the goods that we sell. Both domestic and international manufacturers produce these goods. The inability of a manufacturer to ship orders in a timely manner or to meet our standards could have a material adverse impact on our business.
Our business could suffer if we need to replace manufacturers.
We compete with other companies for the production capacity of our manufacturers and import quota capacity. Many of our competitors have greater financial and other resources than we have and thus may have an advantage in the competition for production capacity. If we experience a significant increase in demand, or if an existing manufacturer of the goods that we sell must be replaced, we may have to increase purchases from our third-party manufacturers and we cannot guarantee we will be able to do so at all or on terms that are acceptable to us. This may negatively affect our sales and net earnings. We enter into a number of purchase order commitments each season specifying a time for delivery, method of payment, design and quality specifications and other standard industry provisions, but we do not have long-term contracts with any manufacturer. None of the manufacturers we use produces products for us exclusively.
Our business could suffer if one of the manufacturers of the goods that we sell fails to use acceptable labor practices.
We require manufacturers of the goods that we sell to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices and our staff and our agents periodically visit and monitor the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer used by us, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of products to us or damage our reputation, which may result in a decrease in customer traffic to our stores and adversely affect our sales and net earnings.
Existing and increased competition in the women’s retail apparel industry may reduce our net revenues, profits and market share.
The women’s retail apparel industry is highly competitive. We compete primarily with department stores, off-price retailers, specialty stores, discount stores, mass merchandisers and Internet-based retailers, many of which have substantially greater financial, marketing and other resources than we have. Many department stores offer a broader selection of merchandise than we offer. In addition, many department stores continue to be promotional and reduce their selling prices, and in some cases are expanding into markets in which we have a significant market presence. As a result of this competition, including close-out sales and going-out-of-business sales by other women’s apparel retailers, we may experience pricing pressures, increased marketing expenditures and loss of market share, which could have a material adverse effect on our business, financial condition and results of operations.
We depend on key personnel in order to support our existing business and future expansion and may not be able to retain or replace these employees or recruit additional qualified personnel.
Our success and our ability to execute our business strategy depends largely on the efforts of our management. The loss of the services of one or more of our key personnel could have a material adverse effect on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not have key man life insurance on our key personnel. We compete for experienced personnel with companies which have greater financial resources than we do. If we fail to attract, motivate and retain qualified personnel, it could harm our business and limit our ability to expand.
Covenants in our revolving credit facility agreement may impose operating restrictions.
Our revolving credit facility agreement has financial covenants with respect to consolidated net worth, as well as other financial ratios. If we fail to meet these covenants or obtain appropriate waivers, our lender may terminate the revolving credit facility.
Our business may be affected by regulatory and litigation developments.
Various aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Additionally, we are regularly involved in various litigation matters that arise in the ordinary course of our business.
Natural disasters, war and acts of terrorism on the United States or international economies may adversely impact our business.
A significant act of terrorism or a natural disaster event in the United States or elsewhere could have an adverse impact on the delivery of imports or domestic products to us, or by disrupting production of our goods or interfering with our distribution or information systems. Additionally, any of these events could result in higher costs of doing business, lower client traffic and reduced consumer confidence and spending resulting in a material adverse effect on our business, financial condition and results of operations.
The recent downturn in the financial markets could have an adverse effect on our ability to access our cash and investment securities.
We have significant amounts of cash and cash equivalents at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions we cannot be assured that we will not experience losses on our deposits.
Funds associated with the auction rate securities held by us that we have traditionally held as short-term investments may not be liquid or readily available.
Our investment in securities currently consists partially of auction rate securities that are not currently liquid or readily available to convert to cash and, therefore, we have reclassified such auction rate securities as long-term investment securities. We do not believe that the current liquidity issues related to our auction rate securities will impact our ability to fund our ongoing business operations. However, if the global credit crisis persists or intensifies, it is possible that we will be required to further adjust the fair value of our auction rate securities. If we determine that the decline in the fair value of our auction rate securities is other-than-temporary, it would result in an impairment charge being recognized on our Consolidated Statement of Operations which could be material and which could adversely affect our financial results.
Our stock price may be volatile.
Our stock price may fluctuate substantially as a result of quarter to quarter variations in our actual or anticipated financial results, the results of other companies in the retail industry, or the markets we serve. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies.
We could be required to repurchase our 2.5% Convertible Senior Notes due in 2024 for cash prior to maturity of the notes.
During fiscal 2005, we issued $115.0 million principal amount of 2.5% Convertible Senior Notes due in 2024, or Convertible Senior Notes, in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Convertible Senior Notes were subsequently registered with the SEC. The holders of the Convertible Senior Notes could require us to repurchase the principal amount of the notes for cash before maturity of the notes under certain circumstances (see “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 6. Debt” below). Such a repurchase would require significant amounts of cash and could adversely affect our financial condition.
New accounting rules or regulations or changes in existing rules or regulations could adversely impact our reported results of operations.
Changes to existing accounting rules or the adoption of new rules could have an adverse effect on our reported results of operations. In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion, which applies to any convertible debt instrument that may be settled in whole or in part with cash upon conversion, which would include our 2.5% Convertible Senior Notes. We are required to adopt the FSP at the beginning of our fiscal year 2010, with retroactive application to financial statements for periods prior to the date of adoption.
Recent and future economic conditions, including turmoil in the financial and credit markets, may adversely affect our business.
Recent economic conditions may adversely affect our business, including the potential impact on the apparel industry, our customers, our financing and other contractual arrangements. In addition, conditions may remain depressed in the future or may be subject to further deterioration. Recent or future developments in the U.S. and global economies may lead to a reduction in consumer spending overall, which could have an adverse impact on sales of our products.
Tightening of the credit markets and recent or future turmoil in the financial markets could also make it more difficult for us to refinance our existing indebtedness (if necessary), to enter into agreements for new indebtedness or to obtain funding through the issuance of the Company’s securities. Worsening economic conditions could also result in difficulties for financial institutions (including bank failures) and other parties that we may do business with, which could potentially, impair our ability to access financing under existing arrangements or to otherwise recover amounts as they become due under our other contractual arrangements.
As described in Note 5 to our consolidated financial statements included elsewhere herein, we have significant goodwill and other intangible assets related to our acquisition of maurices in January 2005. Current and future economic conditions may adversely impact maurices’ ability to attract new customers, retain existing customers, maintain sales volumes, and maintain margins. These events could materially reduce maurices’ profitability and cash flow which could, in turn, lead to an impairment of maurices’ goodwill. Furthermore, if customer attrition were to accelerate significantly, the value of maurices’ customer relationships, trade names and proprietary technology could be impaired or subject to accelerated amortization.
As described in Note 5 to our consolidated financial statements included elsewhere herein, we continuously evaluate the recoverability of our long-lived assets. As economic conditions change we perform tests to evaluate the profitability and cash flow of our individual stores. Based on these evaluations it may be determined that a store’s assets are impaired and, therefore, we would record an asset impairment charge.
Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact our business, the price of our common stock and market confidence in our reported financial information.
We must continue to document, test, monitor and enhance our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be assured that our disclosure controls and procedures and our internal controls over financial reporting required under Section 404 of the Sarbanes-Oxley Act will prove to be adequate in the future. Any failure to maintain the effectiveness of internal controls over financial reporting or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse impact on our business, our financial condition and the price of our common stock.
Risks associated with the pending Tween Brands, Inc. merger.
The pending merger of our subsidiary and Tween Brands, Inc. is subject to Tween Brands’ stockholder approval and other conditions, which are beyond our control. Accordingly, we cannot assure you that the merger will be consummated. Even if the merger is consummated, the transaction involves risks, including the following:
We currently anticipate that the merger will be accretive to earnings per share during the second full year after the merger. This expectation is based on preliminary estimates which may materially change. We could also encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the merger. All of these factors could cause dilution to our earnings per share or decrease or delay the expected accretive effect of the merger and cause a decrease in the price of our common stock.
The success of the merger will depend on our ability to manage both our operations and Tween Brands’ operations, to realize opportunities for revenue growth and, to some degree, to eliminate redundant and excess costs. Achieving the anticipated benefits of the merger may present a number of significant risks and considerations, including, but not limited to:
The success of the combined operations after the merger will depend in part upon our ability to retain key employees of Tween Brands. Key employees of Tween Brands may depart because of issues relating to post-transaction differences, including the different corporate cultures and our compensation structure that may differ from the current structure in place for Tween Brands employees. Accordingly, no assurance can be given that we will be able to retain key employees of Tween Brands. The loss of these key employees could adversely impact our business.
Purported class action lawsuits have been filed by third parties challenging the proposed merger and seeking, among other things, to enjoin the consummation of the merger. One of the conditions to the closing of the merger is that no governmental entity of competent jurisdiction has permanently enjoined the consummation of the merger or the transactions contemplated by the merger agreement. If a plaintiff is successful in obtaining an injunction prohibiting consummation of the merger, then the injunction may delay the merger or prevent the merger from being completed.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
We lease all of our stores. Store leases generally have an initial term ranging from 5 to 10 years with one or more options to extend the lease. The table below, covering all open store locations leased by us on July 25, 2009, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:
New store leases generally provide for an average base rent of approximately $15 to $25 per square foot per annum. Certain of our leases have formulas requiring the payment of a percentage of sales as additional rent, generally when sales reach specified levels. Our aggregate minimum rentals under operating leases in effect at July 25, 2009 and excluding locations acquired after July 25, 2009, for fiscal 2010, are approximately $145.8 million. In addition, we are also typically responsible under our store leases for our pro rata share of maintenance expenses and common charges in strip and outlet centers.
Most of the store leases give us the right to terminate the lease at little or no cost if certain specified sales volumes are not achieved. This affords us greater flexibility to close underperforming stores. Usually these provisions are operative only during the first few years of a lease.
Our investment in new stores consists primarily of inventory, leasehold improvements, fixtures and equipment. We often receive tenant improvement allowances from landlords to offset these initial investments in leasehold improvements.
We own an approximately 900,000 square-foot distribution/office facility and 16 acres of adjacent land in Suffern, New York, which houses, in approximately 510,000 square feet, our corporate offices and our dressbarn distribution center. The remainder of the rentable square footage is 100% leased through 2011. The purchase of the Suffern facility was financed with a mortgage that is collateralized by a mortgage lien on the Suffern facility. Payments of principal and interest on the mortgage, which is a 20-year fully amortizing loan with a fixed interest rate of 5.33%, are due monthly through July 2023. We receive rental income and reimbursement for taxes and common area maintenance charges from two tenants that occupy the Suffern facility that are not affiliated with us. The rental income from the other tenants is shown as “other income” on our Consolidated Statements of Operations. We own maurices’ corporate headquarters in downtown Duluth, Minnesota, which is composed of three office buildings totaling approximately 151,000 square feet. We also own maurices’ distribution center, which has 360,000 square feet of space and approximately 9 acres of adjacent land which is located in Des Moines, Iowa.
ITEM 3. LEGAL PROCEEDINGS
We are subject to ordinary routine litigation incidental to our business. Although the outcome of such items cannot be determined with certainty, in our opinion, dispositions of these matters are not expected to have a material adverse affect on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with our company of our Executive Officers:
Mr. Elliot S. Jaffe, our co-founder and Chairman of the Board, was Chief Executive Officer of our company from 1966 until 2002.
Mr. David R. Jaffe became President and Chief Executive Officer in 2002. Previously he had been Vice Chairman, Chief Operating Officer and a member of the Board of Directors since 2001. He joined us in 1992 as Vice President-Business Development and became Senior Vice President in 1995 and Executive Vice President in 1996. Mr. Jaffe is the son of Elliot S. and Roslyn S. Jaffe. Mrs. Jaffe serves as Secretary and Treasurer of our company.
Ms. Vivian Behrens has been employed by our company since 2002 as Senior Vice President and Chief Marketing Officer. She was a member of our Board of Directors from 2001 to 2002. Previously, Ms. Behrens held senior marketing positions at Posh & Sticks, Ltd., a consumer products multi-channel retailer, the Foot Locker Division of Venator, Inc., Charming Shoppes, Inc., Estee Lauder, Limited Inc. and Avon Products, Inc.
Mr. Armand Correia has been Senior Vice President and Chief Financial Officer of our company since 1991.
Mr. Gene Wexler has been Senior Vice President, General Counsel and Assistant Secretary of our company since 2005. He previously served as Vice President, General Counsel and Secretary for Del Laboratories from 1999 until 2005.
Mr. Reid Hackney became Vice President - Finance and Corporate Controller in 2005. Prior to that date, he was Vice President – Finance and Controller. He has been employed at our company since 1983.
Market Prices of Common Stock
The Common Stock of The Dress Barn, Inc. is quoted on the NASDAQ Global Select Market under the symbol DBRN.
The table below sets forth the high and low prices as reported on the NASDAQ Global Select Market for the last eight fiscal quarters.
Number of Holders of Record
As of September 11, 2009, we had approximately 201 holders of record of our common stock.
We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings and available cash to fund the growth of our business and do not expect to pay dividends in the foreseeable future. However, payment of dividends is within the discretion of our Board of Directors. Payments of dividends are limited in any one year by our revolving credit facility.
The following graph illustrates, for the period from July 31, 2004 through July 25, 2009, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the S&P Composite-500 Stock Index, and (3) the S&P Specialty Apparel Retailers Index.
The comparisons in this table are required by the rules of the Securities and Exchange Commission and, therefore, are not intended to forecast or be indicative of possible future performance of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes our equity compensation plans as of July 25, 2009.
Issuer Purchases of Equity Securities
Quarter Ended July 25, 2009
We did not purchase any securities in the quarter ending July 25, 2009.
In September 2007, our Board of Directors authorized an additional $100 million stock buyback program (the “Program”). The purchases are authorized to be made by us from time to time when market conditions warrant. The Program authorizes the purchase of Dress Barn Common Stock through open market purchases and/or privately negotiated transactions and will be subject to applicable SEC rules. The Program has no expiration date. The purchase of our shares are limited to $100 million in any one year by our revolving credit facility. No purchases were made under the Program during the quarter ended July 25, 2009.
The maximum number of shares that may yet be purchased under the Program is 6,163,072, based on the closing price of $15.47 on July 24, 2009, and the remaining authorized balance is approximately $95.3 million.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes, Management’s Discussion and Analysis and Quantitative and Qualitative Disclosures About Market Risk included in this Form 10-K.
(1) All earnings per share amounts reflect the 2-for-1 stock split, effective April 3, 2006.
(2) In 2003, after a trial in the Superior Court of Connecticut, Waterbury District, a jury returned a verdict of $30 million of compensatory damages against us. The court then entered a judgment of approximately $32 million in compensatory damages and expenses, which was subject to post-judgment interest. In addition to the original litigation charge of $32 million recorded in fiscal 2003, we accrued interest and other amounts of approximately $3.3 million in the consolidated statement of operations in fiscal 2004. In July 2005, the Supreme Court of Connecticut's decision to reverse the judgment against us became final. Upon the Supreme Court of Connecticut's decision reversing the judgment described above, approximately $35.3 million of previously recognized litigation charges were reversed in the consolidated statement of operations in fiscal 2005 and amounts held in the escrow account established in connection with our appeal were released.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K. Fiscal 2009 refers to the 52-week period ended July 25, 2009, fiscal 2008 refers to the 52-week period ended July 26, 2008, and fiscal 2007 refers to the 52-week period ended July 28, 2007. Fiscal 2010 refers to our 53-week period that will end on July 31, 2010.
This Management Overview section of Management’s Discussion and Analysis of Financial Condition and Results of Operations provides a high-level summary of the more detailed information elsewhere in this annual report and an overview to put this information into context. This section is also an introduction to the discussion and analysis that follows. Accordingly, it omits details that appear elsewhere in this annual report. It should not be relied upon separately from the balance of this annual report.
We operate a chain of women’s apparel specialty stores, operating principally under the names “dressbarn” and “dressbarn woman” and, since our January 2005 acquisition of Maurices Incorporated, “maurices.” Our dressbarn stores are operated mostly in a combination of dressbarn and dressbarn woman stores, or Combo stores, which carry dressbarn and larger-sized dressbarn woman merchandise, as well as freestanding dressbarn and dressbarn woman stores. These stores offer in-season, moderate to better quality career and casual fashion at value prices. Our maurices stores are concentrated in small markets in the United States and their product offerings are designed to appeal to the apparel and accessory needs of the 17- to 34-year-old woman.
The retail environment remains very competitive and is subject to macroeconomic conditions. We expect to continue our strategy of opening new stores while closing underperforming locations. We expect to continue store expansion focusing on both expanding in our major trading markets and developing and expanding into new domestic markets. For fiscal 2010, we are currently projecting net square footage growth in the low single-digit percentage range.
Customer tastes and fashion trends are volatile and can change rapidly. Our success depends in part on our ability to effectively predict and respond to changing fashion trends and consumer demands, and to translate market trends into appropriate, saleable product offerings. If we are unable to successfully predict or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales will be lower and we may be faced with a substantial amount of unsold inventory. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory, which may have a material adverse effect on our financial condition or results of operations.
We consider comparable store sales to be an important indicator of our current performance. Comparable store sales results are important in leveraging our costs, including store payroll, rent and other operating costs. Positive comparable store sales contribute to greater leveraging of costs. Comparable store sales also have a direct impact on our total net sales, operating income and working capital.
We calculate comparable store sales based on the sales of stores open throughout the full period and throughout the full prior period (including stores relocated within the same shopping center and stores with minor square footage additions). If a single-format store is converted into a Combo store, the additional sales from the incremental format are not included in the calculation of same store sales. The determination of which stores are included in the comparable store sales calculation only changes at the beginning of each fiscal year except for stores that close during the fiscal year which are excluded from comparable store sales beginning with the fiscal month the store actually closes.
Management uses a number of key indicators of financial condition and operating performance to evaluate the performance of our business, including the following:
We include in our cost of sales line item all costs of merchandise (net of purchase discounts and vendor allowances), freight on inbound, outbound and internally transferred merchandise, merchandise acquisition costs (primarily commissions and import fees), occupancy costs (excluding utilities and depreciation), and all costs associated with the buying and distribution functions. Our cost of sales may not be comparable to those of other entities, since some entities include all costs related to their distribution network including depreciation and all buying and occupancy costs in their cost of sales, while other entities, including us, exclude a portion of these expenses from cost of sales and include them in selling, general and administrative expenses or depreciation. We include depreciation related to the distribution network in depreciation and amortization, and utilities and insurance expenses, among other expenses, in selling, general and administrative expenses on the consolidated statements of operations.
The dressbarn and maurices customers have both been negatively impacted by the continued slowdown in consumer spending in fiscal 2009. This has led to the implementation of significant inventory controls during the year to reduce the need for markdowns to control inventory levels. The dressbarn business improved in the second half of the fiscal year with trend-right merchandise and effective marketing programs. The maurices business was softer than expected as the macroeconomic slowdown affected our previously more resilient younger maurices customers.
During fiscal 2009, we continued three key strategic initiatives to help improve the dressbarn customer experience. The first was the Oracle Retail (Retek) merchandising system, which we began utilizing during the first quarter of fiscal 2008, for merchandising, the retail stock ledger and data warehousing (Phase I). This initiative is currently in Phase II, which enhances merchandise financial planning, allocation and invoice matching. The second initiative was Global Store, a new POS application, giving our stores greater functionality. This was piloted in stores in fiscal 2009, with a complete rollout expected to be completed during fiscal 2010. The third initiative was the implementation of an upgrade to our CRM system that will improve data analysis and the efficiency of our marketing efforts for both brands.
During fiscal 2009, we undertook four key strategic initiatives to help improve the maurices customer experience. The first was the rollout of our new décor developed in partnership with a third party design firm for new stores and remodels. The new décor was utilized as we continued our new store expansion with the opening of 49 locations to allow us to continue to grow our market share. The second initiative was Global Store, a new POS application, providing our stores greater functionality. This was piloted in stores in fiscal 2009, with a complete rollout targeted during fiscal 2010. The third initiative was investing in our DC packing area to allow us to support our store growth and significantly improve labor productivity. The fourth initiative was focused on continuing the maturation of our 14-24 (Plus Sizes) department.
In fiscal 2008, we introduced a new line of coordinates called YVOS (“Your Very Own Style”). Our YVOS brand is designed to be very stylish and fresh and it creates a bold fashion statement for work and play at an affordable price. This merchandise is priced 20% to 25% higher than current dressbarn merchandise due to more expensive fabrics, yarns, designs and trims. Our competitors offer similar styles that are 35% to 40% higher in price than YVOS. The YVOS line of coordinates is now in approximately 50% of our stores.
On June 24, 2009, we entered into an agreement pursuant to which one of our subsidiaries will merge with Tween Brands, Inc. in a stock-for-stock transaction. Under the terms of the merger agreement, each share of Tween Brands common stock will be exchanged for 0.47 shares of our common stock. Based on our stock price of $13.24 as of June 24, 2009 (the date of the agreement), this consideration would be equal to an aggregate equity value of $157 million. In addition, Tween Brands, Inc.’s outstanding bank debt will be repaid. This transaction, unanimously approved by each of Dress Barn, Inc.’s and Tween Brands, Inc.’s Board of Directors, is expected to close in the fourth quarter of calendar year 2009 and is subject to Tween Brands, Inc. stockholder approval and other customary closing conditions.
Results of Operations
We have two reportable segments, dressbarn (which consists of the dressbarn and dressbarn woman brands) and maurices. We believe that maurices is a reportable segment due to management’s review of maurices’ separately available operating results and other financial information used to regularly assess their performance for decision-making purposes. maurices is discussed separately in the following Management’s Discussion and Analysis, as appropriate.
Fiscal 2009 Compared to Fiscal 2008
Net sales for the fifty-two weeks ended July 25, 2009 increased 3.5% to $1,494.2 million from $1,444.2 million in the prior year. This increase was mainly driven by a 3.9% square footage increase offset by a comparable store sales decrease of 0.4%. The same store sales decrease was the result of several factors including decreased customer traffic to our stores and fewer customer transactions. We believe the decrease in the number of customer transactions was the result of the continuing economic challenges that are affecting a significant number of our customers.
During fiscal 2009, the dressbarn brand continued to be impacted by the slowdown in consumer spending, however, the dressbarn brand still managed to have positive comparable sales. The strongest comparable store sales for the fifty-two week period were in the midwest, mid-atlantic and northeast regions. The regions with the weakest comparable store sales were the northwest and southeast. The best performing departments were suit separates, outerwear, shoes and accessories. The weakest departmental performers were coordinates and casual bottoms.
For the maurices brand, fiscal 2009 comparable sales were down slightly in a very challenging retail environment. The two regions with comparable sales increases were the mid-atlantic and the midwest regions. The regions with the weakest comparable store sales were the southeast, northeast and northwest regions. Strong sales trends were noted for casual tops within the core women’s collections and within the dressier “Wear @ Work” assortment dressy tops performed well. The weakest results came from the dressier club assortment, shoes and a general softening in sales trends of bottoms. For the year, the Plus size collection produced an 18% comparable sales increase. The growth in the Plus size collection represented approximately two percentage points of the comparable store sales results for fiscal 2009. Knit tops and Denim continue to be the key drivers within the Plus collection.
Revenue also includes income from the non-redemption of a portion of gift cards and gift certificates sold, and merchandise credits issued (gift card breakage). We recognize income on unredeemed gift cards when it can be determined that the likelihood of the remaining balances being redeemed are remote and that there are no legal obligations to remit the remaining balances to relevant jurisdictions. During fiscal 2009, we recognized $1.8 million of breakage income related to unredeemed gift cards which included $1.3 million for dressbarn and $0.5 million for maurices. During fiscal 2008, we recognized $2.2 million of breakage income related to unredeemed gift cards which included $1.8 million for dressbarn and $0.4 million for maurices.
Cost of sales, including occupancy and buying costs, excluding depreciation:
Cost of sales increased by 20 basis points to 61.5% of net sales in the current year period from 61.3% of net sales in the prior year period. For the dressbarn brand, cost of sales was $568.7 million or 62.7% of net sales, a decrease of 70 basis points as compared to $562.3 million or 63.4% from the same period last year. This decrease was the result of higher merchandise margins from last year mainly due to lower markdowns. maurices cost of sales for fiscal 2009 was $349.7 million or 59.5% of net sales as compared to $323.6 million or 58.1% of net sales in fiscal 2008. The increase in cost of sales as a percentage of sales was primarily the result of higher markdowns and the deleveraging of occupancy costs due to the comparable store sales decline.
As a percentage of sales, selling, general and administrative expenses (“SG&A”) increased 80 basis points to 28.3% of net sales versus 27.5% last year. dressbarn SG&A increased 50 basis points to 29.2% of net sales versus 28.7% last year due to increased professional fees relating to the pending Tween Brand, Inc. merger and store impairment charges. Excluding the professional fees related to the Tween Brands, Inc. merger, SG&A expenses would have been 28.8% of net sales. maurices SG&A was $157.5 million or 26.8% of net sales for fiscal 2009 as compared to $142.7 million or 25.6% of net sales for fiscal 2008. The increase was primarily attributable to a de-leveraging of payroll and benefits due to the comparable sales decrease coupled with a trade name impairment (described in Note 5 to the Financial Statements). Excluding the trade name impairment SG&A would have been 26.4% of net sales.
Depreciation and amortization:
Depreciation expense increased 0.6% in fiscal 2009 as compared to last year primarily from the net opening of 56 stores, store remodels and relocations, and investment in technology.
As a result of the above factors, operating income as a percent of net sales was 7.0% for fiscal 2009 compared to 7.8% for fiscal 2008. For the dressbarn brand, operating income as a percent of sales increased to 5.0% versus 4.8% fiscal 2008. For the maurices brand, operating income as a percent of sales decreased to 10.3% versus 12.6% last fiscal year.
Interest income for the fifty-two week period was $5.4 million as compared to interest income of $7.8 million in fiscal 2008 due to lower interest rate yields in the current year. During fiscal 2009 we adopted a more conservative strategy with investments in higher grade securities with shorter term maturities for greater security and liquidity.
Interest expense for the fiscal year, primarily on our Convertible Senior Notes and the mortgage on our Suffern, NY facilities, remained consistent with the prior fiscal year.
Other income (expense):
Other income (expense) for the fiscal year was $1.1 million as compared to $0.5 million last year. The majority of this amount represents rental income from the two tenants currently occupying space in our corporate headquarters property in Suffern, New York. Fiscal 2008 included approximately $1.1 million of a cost basis investment impairment.
The effective tax rate for fiscal 2009 was 34.7% as compared to 36.2% effective tax rate reported for fiscal 2008. Refer to Note 11 to the consolidated financial statements for additional details.
Fiscal 2008 Compared to Fiscal 2007
Net sales for the fifty-two weeks ended July 26, 2008 increased 1.2% to $1,444.2 million from $1,426.6 million in the prior year. This increase was mainly driven by a 5.2% square footage increase offset by a comparable store sales decrease of 2.9%. The same store sales decrease was the result of several factors including decreased customer traffic to our stores and fewer customer transactions. We believe the decrease in the number of customer transactions was the result of the continuing economic challenges that are affecting a significant number of our customers.
During fiscal 2008, the dressbarn brand was negatively impacted by the slowdown in consumer spending. All regions posted decreased comparable store sales for the fifty-two week period. The best performing departments were leather and outerwear, blazers and social occasion dresses. The weakest departmental performers were career bottoms and sweaters.
For the maurices brand, fiscal 2008 was a solid year. All six regions had comparable sales increases with the Midwest and the Northwest leading regional performance. Strong sales trends were noted for the dressier “Wear @ Work” assortment with additionally strong results from outerwear, knit tops, denim and lounge apparel. The strategic decision to exit the men’s product line and replace it with plus size women’s apparel was implemented in the fourth quarter of fiscal 2007. While we fell short of our sales and margin targets during the fall season, both sales and margin fell in line with expectations as the year progressed. For the year, the Plus size apparel was 23% more productive on a square footage basis than the prior men’s concept. The Plus size apparel is represented in approximately 75% of our current store locations, and will be placed in most future stores.
Revenue also includes income from the non-redemption of a portion of gift cards and gift certificates sold, and merchandise credits issued (gift card breakage). We recognize income on unredeemed gift cards when it can be determined that the likelihood of the remaining balances being redeemed are remote and that there are no legal obligations to remit the remaining balances to relevant jurisdictions. Prior to fiscal 2007, we were unable to reliably estimate such gift card breakage and therefore recorded no such income in fiscal 2006, or prior years. During the fourth quarter of fiscal 2007, we accumulated a sufficient level of historical data to determine an estimate of gift card breakage for the first time. During fiscal 2008, we recognized $2.2 million of breakage income related to unredeemed gift cards which included $1.8 million for dressbarn and $0.4 million for maurices. During fiscal 2007, we recognized $3.7 million of breakage income related to unredeemed gift cards which included $2.6 million for dressbarn and $1.1 million for maurices.
Cost of sales, including occupancy and buying costs, excluding depreciation:
Cost of sales increased by 230 basis points to 61.3% of net sales in the current year period from 59.0% of net sales in the prior year period. For the dressbarn brand, cost of sales was $562.3 million or 63.4% of net sales, an increase of 410 basis points as compared to $554.5 million or 59.3% from the same period last year. This increase was the result of lower merchandise margins from last year mainly due to increased markdowns and the de-leveraging of store occupancy costs. maurices cost of sales for fiscal 2008 was $323.6 million or 58.1% of net sales as compared to $287.7 million or 58.5% of net sales in fiscal 2007. The decrease in cost of sales as a percentage of sales was primarily the result of higher initial markons.
As a percentage of sales, selling, general and administrative expenses (“SG&A”) increased 60 basis points to 27.5% of net sales versus 26.9% last year. dressbarn SG&A increased 120 basis points to 28.7% of net sales versus 27.5% last year due primarily to the de-leveraging of payroll related expenses as a result of our comparable store sales decrease and increased marketing, utilities and professional fees. maurices SG&A was $142.7 million or 25.6% of net sales for the fiscal 2008 as compared to $126.1 million or 25.6% in fiscal 2007. Increased marketing investments were partially offset by lower health insurance and workers compensation claims and improved leveraging from the increase in comparable store sales.
Depreciation and amortization:
Depreciation expense increased 5.2% in fiscal 2008 as compared to last year primarily from the opening of 107 stores, store remodels and relocations, and investment in technology.
As a result of the above factors, operating income as a percent of net sales was 7.8% for fiscal 2008 compared to 10.9% for fiscal 2007. For the dressbarn brand, operating income as a percent of sales decreased to 4.8% versus 10.1% fiscal 2007. For the maurices brand, operating income as a percent of sales increased to 12.6% versus 12.3% last fiscal year.
Interest income for the fifty-two week period was $7.8 million as compared to interest income of $7.1 million in fiscal 2007 due to higher investment balances combined with investments with higher interest rates.
Interest expense for the fiscal year decreased to $4.8 million from $4.9 million due to slightly lower average debt levels over the comparable prior year period.
Other income (expense):
Other income (expense) for the fiscal year was $0.5 million as compared to $1.4 million last year. The majority of this amount represents the recording of approximately $1.1 million of a cost basis investment impairment offset by rental income from the two tenants currently occupying space in our corporate headquarters property in Suffern, New York.
The effective tax rate for fiscal 2008 did not change from the 36.2% rate reported for fiscal 2007. Refer to Note 11 to the consolidated financial statements for additional details.
Liquidity and Capital Resources
Cash generated from operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our uses of cash are generally for working capital, the construction of new stores and remodeling of existing stores, information technology upgrades and the purchase of short-term investments. We use lines of credit on our $100 million revolving credit facility to facilitate imports of our products.
On June 24, 2009, we entered into an agreement pursuant to which one of our subsidiaries will merge with Tween Brands, Inc. in a stock-for-stock transaction. Under the terms of the merger agreement, this consideration would be equal to an aggregate equity value of $157 million. In addition, Tween Brands, Inc.’s outstanding bank debt will be repaid. This transaction, unanimously approved by each of Dress Barn, Inc.’s and Tween Brands, Inc.’s Board of Directors, is expected to close in the fourth quarter of calendar year 2009 and is subject to Tween Brands, Inc. stockholder approval and other customary closing conditions.
At July 25, 2009, we had cash, cash equivalents, investment securities and long-term investments of $384.6 million as compared to $278.3 million as of July 26, 2008. The increase was due primarily to the cash generated by operations of $172.7 million offset by treasury stock purchases of $4.7 million and capital expenditures of $58.4 million.
Net cash provided by operations was $172.7 million for the fifty-two weeks ended July 25, 2009 compared with $145.5 million during last year’s comparable period. The increase of $27.2 million was primarily driven by the higher level of accounts payable and income taxes payable offset by an increase of merchandise inventories due to earlier shipments of fall merchandise compared to the prior year decrease of inventories due to improved inventory management and aggressive promotions.
Merchandise inventories were $194.0 million at July 25, 2009 compared to $187.0 million at July 26, 2008. The increase is a result of the opening of new stores in fiscal 2009 and the earlier receipt of fall inventory in the dressbarn brand. We believe current inventory levels are appropriate, based on sales trends and the industry environment.
As of July 25, 2009, $61.7 million was available under a $100.0 million revolving credit facility. The $38.3 million balance of our revolving credit facility consists of $4.2 million of outstanding standby letters of credit, primarily relating to insurance policies, and $34.1 million of trade letters of credit relating to the importation of merchandise. We believe this revolving credit facility gives us ample capacity to fund any short-term working capital needs that may arise in the operation of our business.
Net cash used in investing activities for the fifty-two weeks ended July 25, 2009 was $57.0 million consisting primarily of $58.4 million of property and equipment mainly for new store openings, store remodels and renovations and costs associated with information system implementations and upgrades during fiscal 2009. Net cash used in investing activities for the fifty-two weeks ended July 26, 2008 was $46.2 million consisting primarily of $66.1 million of property and equipment mainly for new store openings, store remodels and renovations and costs associated with information system implementations and upgrades during fiscal 2008. The impact of these reductions was partially offset by net sales of $22.5 million in marketable securities and investments during fiscal 2008.
Our investments are comprised primarily of municipal bonds and a small amount of auction rate securities (“ARS”). Our ARS are all AAA/Aaa rated with the vast majority collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program with the remaining securities backed by monoline insurance companies. Until February 2008, the auction rate securities market was highly liquid. During the week of February 11, 2008, a substantial number of auctions “failed,” meaning that there was not enough demand to sell the entire issue at auction. The immediate effect of a failed auction is that holders could not sell the securities and the interest or dividend rate on the security generally resets to a “penalty” rate. In the case of a failed auction, the auction rate security is deemed not currently liquid and in the event we need to access these funds, we may not be able to do so without a potential loss of principal, unless a future auction on these investments is successful or they are redeemed by the seller. We believe that the current lack of liquidity relating to our ARS investments will not have an impact on our ability to fund our ongoing operations and growth initiatives; for that reason, we have the ability and intent to hold these ARS investments until a recovery of the auction process, redemption by the seller or until maturity.
As of July 25, 2009, we had approximately $30.8 million of long-term marketable security investments which consisted of $39.9 million of ARS at cost, less a valuation allowance of $9.1 million to reflect our estimate of fair value given the current lack of liquidity of these investments while taking into account the current credit quality of the underlying securities. If market conditions deteriorate further, or a recovery in market values does not occur, we may be required to record additional unrealized or realized losses in future quarters.
In November 2008, we accepted a settlement offer whereby UBS would purchase eligible ARS it sold to us prior to February 13, 2008 (“Settlement Agreement”). Under the terms of the Settlement Agreement, at our option, UBS will purchase eligible ARS from us at par value during the period June 30, 2010 through July 2, 2012. UBS has offered to also provide us with access to “no net cost” loans up to 75% of the par value of eligible ARS until June 30, 2010. We held approximately $7.2 million, at par value, of eligible ARS with UBS as of November 2008. By entering into the Settlement Agreement, we (1) received the right (“Put Option”) to sell these auction rate securities back to the investment firm at par, at our sole discretion, anytime during the period from June 30, 2010 through July 2, 2012, and (2) gave the investment firm the right to purchase these auction rate securities or sell them on our behalf at par anytime after the execution of the Settlement Agreement through July 2, 2012. We elected to measure the Put Option under the fair value option of SFAS No. 159, and therefore, recorded interest income and recorded a corresponding other asset. Simultaneously, we transferred these long term auction rate securities from available-for-sale to trading investment securities at market value on our consolidated balance sheets.
We have no reason to believe that any of the underlying issuers of our ARS are presently at risk of default. Although we continue to receive interest payments on these securities in accordance with their stated terms, we expect the interest payments to significantly decrease in accordance with the terms of these securities. In addition, we believe that we will not be able to access funds if needed from these securities until future auctions for these ARS are successful, we sell the securities in a secondary market which is currently limited or they are redeemed by the seller. As a result, we may be unable to liquidate our investment in these ARS without incurring significant losses. We may have to hold these securities until final maturity in order to redeem them without incurring any losses. For these reasons, we believe the recovery period for these investments is likely to be longer than 12 months. Based on our expected operating cash flows and our other sources of cash, we do not anticipate the lack of liquidity on these investments will affect our ability to execute our current business plan.
In January 2003, Dunnigan Realty, LLC, our wholly-owned consolidated subsidiary, purchased the Suffern facility, of which the major portion is our corporate offices and dressbarn distribution center, for approximately $45.3 million utilizing internally generated funds. In July 2003, Dunnigan Realty, LLC borrowed $34.0 million with a 5.33% rate mortgage loan. The mortgage has a twenty-year term with annual payments of $2.8 million including principal and interest and is secured by a first mortgage lien on the Suffern facility. Dunnigan Realty, LLC receives rental income and reimbursement for taxes and common area maintenance charges from two tenants that occupy the Suffern facility that are not affiliated with us. These unaffiliated rental payments are used to offset the mortgage payments and planned capital and maintenance expenditures for the Suffern facility.
Net cash used by financing activities was $2.2 million during fiscal 2009 while net cash used by financing activities was $39.1 million during fiscal 2008. Our use of cash was primarily related to the purchases of $4.7 million of treasury stock slightly offset by the exercise of stock options and the related excess tax benefits.
In September 2007, our Board of Directors authorized a $100 million stock buyback program. Purchases of shares of our common stock will be made at our discretion from time to time, subject to market conditions and prevailing market prices.
We anticipate that total capital expenditures for fiscal 2010 will be approximately $55 million. Of this amount, approximately $48 million is for new store openings, renovations and remodels, and information system upgrades. We plan to open approximately 50 additional stores in the upcoming fiscal year.
We do not have any undisclosed material transactions or commitments involving related persons or entities. We held no material options or other derivative instruments at July 25, 2009. We do not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of business, we enter into operating leases for our store locations and utilize letters of credit principally for the importation of merchandise.
We believe that our cash, cash equivalents, short-term investments and cash flow from operations, along with the credit agreement mentioned above, will be adequate to fund our planned merger with Tween Brands, Inc., capital expenditures and all other operating requirements, including those of Tween Brands, Inc., and other proposed or contemplated expenditures for at least the next 12 months.
Contractual Obligations and Commercial Commitments
The estimated significant contractual cash obligations and other commercial commitments at July 25, 2009 are summarized in the following table: