ITEM 1. BUSINESS
General
Dress Barn operates a national chain of value-priced specialty stores offering in-season, moderate to better quality career apparel and accessories to the fashion-conscious working woman. In addition, the Company's stores carry a broad assortment of casual wear to suit its customers' total lifestyle needs. Over the past several years, the Company has evolved from an off-price chain to a value-priced specialty retailer. The Company distinguishes itself from (i) off-price retailers by its carefully edited selection of in-season, first-quality merchandise, service-oriented salespeople and its comfortable shopping environment, (ii) department stores by its value pricing and convenient locations and (iii) other specialty apparel retailers by its continuous focus on Dress Barn's target customer for more than 35 years. As part of this focus, the Company has successfully developed its own line of private brands, which constituted approximately 65% of net sales for the fiscal year ended July 25, 1998 ("fiscal 1998").
The Company's stores operate primarily under the names Dress Barn and Dress Barn Woman, the latter featuring larger sizes of styles similar to those found in the Dress Barn stores. The Company also operates combination Dress Barn/Dress Barn Woman stores ("Combo Stores"), which carry both Dress Barn and Dress Barn Woman merchandise. As of July 25, 1998, the Company operated 669 stores in 43 states and the District of Columbia, consisting of 341 Dress Barn stores, 68 Dress Barn Woman stores and 260 Combo Stores. The Dress Barn and Dress Barn Woman stores average approximately 4,500 and approximately 4,000 square feet, respectively, and the Combo Stores average approximately 9,000 square feet. Based on the success of its Combo Stores, the Company is focusing its expansion strategy on opening new Combo Stores and converting existing Dress Barn and Dress Barn Woman stores to the combination format. The Company plans to open approximately 60 additional Combo Stores by the end of its fiscal year ending July 31, 1999 ("fiscal 1999").
Company Strengths and Strategies
Dress Barn is one of the largest national specialty store chains offering women's career fashions at value prices. Dress Barn attributes its success to its: (i) strong name recognition and loyal customer base; (ii) long-standing relationships with vendors of quality merchandise; (iii) experienced management team; (iv) commitment to technology; (v) strong, consistent customer focus; (vi) low cost operating structure; and (vii) strong balance sheet.
Since the Company's formation in 1962, Dress Barn has established and reinforced its image as a source of fashion and value for the working woman. The Company's 669 store locations in 43 states and the District of Columbia provide it with a nationally recognized name. In addition, the Company believes it has developed high awareness among its target customers through on-going advertising and local marketing activities.
The Company has developed and maintains strong and lasting relationships with its domestic and offshore vendors, often being one of the vendors' largest accounts. These relationships, along with the Company's buying power and strong credit profile, enable the Company to receive favorable purchase terms, exclusive merchandise and expedited delivery times.
The three senior members of the Company's merchandising team have worked together at Dress Barn for over 15 years, with each having substantial previous fashion retailing experience. This team engineered the Company's evolution from an off-price retailer to a value-priced specialty store. The Company's executive officers have an average tenure at Dress Barn of 16 years. The stability of its management has enabled the Company to develop a shared culture and vision and to maintain its focus on growing and refining its business.
Dress Barn has used technology to improve merchandising and customer service, reduce costs and enhance productivity. The Company continues to enhance its management information systems, which include an IBM AS/400 integrated financial system and IBM 4694 point-of-sale system. The enhanced point-of-sale system allows the Company to provide better service to customers by reducing paperwork and decreasing the average transaction processing time. This enables sales associates to spend more time assisting customers. The Company continues to enhance its laptop system that delivers up-to-date store related information to its regional sales managers. The Company's distribution center systems continue to be refined, further reducing per-unit distribution costs.
All aspects of Dress Barn's business are designed to be responsive to the Dress Barn customer. Since 1962, the Company has been consistent in targeting price-conscious and fashion-minded working women. The convenient locations of the Company's stores primarily in strip and outlet centers, carefully edited merchandise arranged for ease of shopping, comfortable store environment and friendly customer service embody Dress Barn's strong focus on its customers. Dress Barn's comprehensive training program encourages its sales associates to assist customers in a low-key and friendly manner. The Company believes it enhances its customers' shopping experience by avoiding aggressive sales tactics that would result from a commission-based compensation structure.
The Company continually seeks to reduce costs in all aspects of its operations and to create cost-consciousness at all levels. The Company believes that its highly liquid balance sheet and internally generated funds provide a competitive advantage that enables the Company to pursue its long-term strategies regarding new stores, capital expenditures and acquisitions. The Company has an ongoing strategy of supplementing the Company's growth and enhancing shareholder value through expansion into related businesses, including through acquisitions. The Company considers three types of acquisition opportunities: (i) real estate oriented acquisitions to gain access to attractive sites and favorable lease terms; (ii) other retail operations that could benefit from Dress Barn's management and expertise, and (iii) alternate channels of distribution, such as mail order catalogs. The Company is currently developing its own mail order catalog, with the first mailing planned for Fall, 1999.
The Company's objective is to become the leading national chain of value-priced specialty apparel stores offering career fashions to the moderate income working woman. The Company has developed the following strategies to achieve this goal: (i) further development of Dress Barn's private brands; (ii) maintenance of Dress Barn's merchandise focus; (iii) continuation of the Combo Store roll-out; (iv) further development of customer targeted marketing; and (v) further improvement of customer service.
The Company has gradually increased the percentage of sales from goods manufactured under Dress Barn's private brands, as well as goods produced by national brand manufacturers exclusively for Dress Barn, to approximately 65% and 10%, respectively, of the Company's net sales for fiscal 1998. While the Company intends to continue to offer a balanced mix of both national brand name and private brand merchandise, it plans to continue to increase the percentage of private brand merchandise sold by its stores, including its successful Westport(R) Princeton Club(R), Atrium(R) brands, as well as its Dress Barn(R) label. Dress Barn's private brands typically provide more value for its customers.
The Company's stores carry a broad assortment of career wear, including dresses, suits, separates, blouses, sweaters and other knitwear, as well as casual wear items, that are carefully edited to suit the lifestyle needs of its target customer. Dress Barn does not seek to dictate fashion trends; rather it offers current styles but avoids fashion-forward merchandise that is subject to rapidly changing trends. While career fashions remain the Company's primary focus, it continues to adapt to the evolving definition of "career," such as casual Fridays. In addition, the Company seeks to broaden its appeal by expanding its merchandise mix.
Based on the success of its larger size Combo Stores, the Company expects most future store openings to be Combo Stores between 9,000 and 10,000 square feet. Combo Stores provide the Company with greater presence in shopping centers, give the Company more leverage in negotiating lease terms, enable the Company to achieve lower operating cost ratios and offer increased flexibility in merchandise presentation. Of the approximately 80 additional Combo units which the Company plans to open by the end of fiscal 1999, 60 are expected to be new stores and 20 are expected to be conversions from existing Dress Barn or Dress Barn Woman stores. The Company expects to continue to open stores primarily in strip centers, while also seeking downtown locations.
In conjunction with its strategy of adding Combo Stores, the Company continues to close or relocate its underperforming locations and expects to close approximately 40 such locations during fiscal 1999, compared to 60 closed in fiscal 1998. The Company has the option under a substantial number of its store leases to terminate the lease at little or no cost if specified sales volumes are not achieved, affording the Company greater flexibility to close certain underperforming stores. The Company's continued opening of new Combo Stores, net of store closings, is expected to result in an approximately 8% increase in the Company's aggregate store square footage for fiscal 1999.
The Company uses several marketing tools, such as transactional analyses through point-of-sale systems and customer surveys, in order to determine the preferences of its target customers, working women ages 25-55. The Company continues to collect data from its credit card program and is developing a marketing program utilizing such data. Management believes that these tools will further improve the Company's ability to align its operations with the demands of its target customers on a consistent basis.
Dress Barn continually seeks to improve the customer's shopping experience. For example, the Company's enhanced management information systems enables store managers and sales associates to spend more time serving customers. The Company utilizes an ongoing video-training program to improve customer service and sales associates' product knowledge and selling skills.
Merchandising
In addition to the Company's broad assortment of career wear and casual wear, the Company offers other wardrobe items including accessories, jewelry, hosiery and shoes. Dress Barn and Dress Barn Woman are organized as separate divisions, each with a separate merchandising team.
A key component of the Company's merchandising strategy is to increase the percentage of its sales derived from private brands. Private brands allow the Company to differentiate itself from other retailers by providing an assortment of merchandise that is not available elsewhere and to improve the Company's control over the flow of merchandise into its stores by enabling the Company to better specify quantities, styles, colors, size breaks and delivery dates. In addition, the Company believes private brands provide it with more flexibility in the marketing process by allowing for higher initial mark-ons and limiting the ability of customers to compare prices with competing retailers. The Company believes it has the expertise to execute its private brand strategy due to its extensive experience sourcing goods, primarily overseas, its position as a merchandiser of established fashions and its already successful line of private brands. The percentage of the Company's sales generated from private brands has increased to approximately 65% in fiscal 1998 from 55% in fiscal 1997, and 40% in fiscal 1996.
The Company continues to expand its successful shoes and petite-size departments. As of July 25, 1998, 194 stores had shoe departments and 75 stores featured petites. The Company expects to add another approximately 100 shoe departments and approximately 25 petite departments in fiscal 1999.
Virtually all merchandising decisions affecting the Company's stores are made centrally. Merchandising policy is under the direction of the Chairman, the President and six merchandise managers. Prices and markdowns are determined centrally but may be adjusted locally in response to competitive situations. Generally, the majority of the merchandise sold by the Company is uniformly carried by all stores, with a percentage varied by management according to regional or consumer tastes or the size of particular stores. To keep merchandise seasonal and in current fashion, inventory is reviewed weekly and markdowns are taken as appropriate to expedite selling. The Company's stores offer first-quality current merchandise, with approximately half of the Company's sales volume derived from sportswear, and the remainder consisting of dresses, suits, blazers and accessories.
Buying and Distribution
Buying is conducted on a departmental basis for each of the Dress Barn and Dress Barn Woman divisions by the Company's staff of over 35 buyers and assistant buyers supervised by the President and six merchandise managers. The Company also uses independent buying representatives in New York and overseas. The Company obtains its nationally branded merchandise from approximately 350 vendors and its private brand merchandise from more than 50 vendors. Typical lead times for the Company in making purchases from its vendors range from approximately one month for items such as t-shirts, socks and hosiery to approximately six months for items such as suits and dresses. Generally, lead times do not vary significantly between the Company's private brands and nationally branded merchandise.
The Company has in the past always been able to purchase sufficient quantities of first-quality domestic merchandise at attractive prices from vendors who typically sell to department and specialty stores, and management believes that there will continue to be an adequate supply of such merchandise available. The Company has also established strong relationships with its private label manufacturers, and does not anticipate any difficulties in obtaining sufficient quantities of its private label merchandise. No vendor accounted for as much as 5% of the Company's purchases in fiscal 1998.
All merchandise is received from vendors at the Company's central warehouse and distribution facility in Suffern, New York, where it is inspected, allocated and shipped to its stores. The Company seeks to use its strong relationships with vendors to lower its operating costs by shifting freight and insurance costs to the vendors and by requiring them to provide ancillary services. For example, over 90% of the Company's merchandise is pre-ticketed by vendors and over 35% is pre-packaged for distribution to stores, which allows cross-docking in the distribution center to the stores. In addition, nearly half of the hanging garments purchased by the Company are delivered on floor-ready hangers.
The Company generally does not warehouse merchandise, but distributes it promptly to stores. Turnaround time between the receipt of merchandise from the vendor and shipment to the stores is usually three days or less, and shipments are made daily to most stores, maintaining the freshness of merchandise. Because of such frequent shipments, the stores do not require significant storage space. The Company may on occasion buy certain basic clothing that does not change in style from year to year at attractive prices and warehouse such items at its distribution center until needed.
Store Locations and Properties
As of July 25, 1998, the Company operated 669 stores in 43 states and the District of Columbia. 334 of the stores were conveniently located in strip centers and 258 stores were located in outlet centers. During fiscal 1998, no store accounted for as much as 1% of the Company's total sales.
Store Development, Operations and Management
In considering new store locations, the Company typically focuses on several criteria, such as concentration of the Company's target customer base, the average household income in the surrounding area and the location of the proposed store relative to competitive retailers. Within the specific strip or outlet center, the Company evaluates the proposed co-tenants, the traffic count of the existing center and the location of the store within the center. The Company's real estate committee, which includes members of senior management, must approve each new lease. The committee receives input from field management.
The Company's stores are designed to create a comfortable and pleasant shopping environment for its customers. Merchandise and displays at all of the stores are set up according to uniform guidelines and plans distributed by the Company. The Company's merchandise is carefully arranged by lifestyle category (e.g., career, casual and weekend wear) for ease of shopping. The stores also have private fitting rooms, drive aisles, appealing lighting, carpeting, background music and centralized cashier desks. Strategically located throughout the stores are "lifestyle" posters showing the customer complete outfits coordinated from among the stores' fashion offerings.
All stores are directly managed and operated by the Company. Each store is staffed by a supervisor, who may be the store manager, and at least one sales associate during non-peak hours, with additional sales associates added as needed at peak hours. The supervisors and sales associates perform all store operations, from receiving and processing merchandise and arranging it for display, to assisting customers. Each store manager reports to a District Sales Manager who, in turn, reports to a Regional Sales Manager. Dress Barn employs 10 Regional Sales Managers and approximately 90 District Sales Managers. District sales managers typically visit each store at least once a week to review merchandise levels and presentation, staff training and personnel performance, expense control, security, cleanliness and adherence to Company operating procedures.
The Company motivates its sales associates through promotion from within, creative incentive programs, competitive wages and the opportunity for bonuses. Sales associates compete in a broad variety of Company-wide contests involving sales goals and other measures of performance. The contests are designed to boost store profitability, create a friendly competitive atmosphere among associates and offer opportunities for additional compensation. Management believes that Dress Barn's creative incentive programs provide an important tool for building cohesive and motivated sales teams. The Company utilizes comprehensive training programs at the store level in order to ensure that the customer will receive friendly and helpful service, which include (i) on-going video training, (ii) workbooks and manuals and (iii) one-on-one training of sales associates by store managers.
In fiscal 1998, approximately 57% of the Company's sales were paid for by credit card, with the remainder being by cash or check. The Company utilizes its own Dress Barn credit card. Consistent with the other credit cards it accepts, the Company assumes no credit risk with respect to its Dress Barn card but pays a percentage of sales as a service charge. The number of cardholders has steadily increased to approximately 1.1 million currently. The average transaction on the Dress Barn credit card during fiscal 1998 was approximately 50% more than the average of all other transactions and represented approximately 13% of the Company's sales.
The Company mainly uses print advertising that emphasizes current fashion apparel at value prices. The Company also uses direct mail programs, with seven mailings during fiscal 1998, each to approximately one million households including its credit card holders. At the store level, the store supervisors host local marketing programs, including fashion shows and in-store events designed to create greater awareness of Dress Barn's merchandise. In addition, the Company considers its credit card program to be a significant component in the development of its targeted marketing efforts, enabling it to develop segmented marketing programs.
Virtually all of the Company's stores are open seven days a week. Stores located in strip and outlet centers conform to the hours of other stores in the center and are open most evenings, while downtown and freestanding stores are usually open two nights per week.
Management Information Systems
In the past several years, the Company has made a significant investment in technology to improve customer service, gain efficiencies and reduce operating costs. Dress Barn has installed an IBM AS/400 management information system, which integrates all major aspects of the Company's business, including sales, distribution, purchasing, inventory control, merchandise planning and replenishment, and financial systems. In August 1997, the Company completed rolling out to all its stores IBM 4694 point-of-sale systems with price look-up capabilities for both inventory and sales transactions. These systems can accommodate substantial growth in additional stores with minimal incremental investment. The Company has also developed and continues to refine a laptop system that delivers up-to-date store-related information to its Regional Sales Managers.
The Company's merchandising system tracks merchandise from the inception of the purchase order, through receipt at the distribution center, through the distribution planning process, and ultimately to the point of sale. To monitor the performance of various styles, management reviews sales and inventory levels on-line, organized by department, class, vendor, style, color and store. The system enables the Company to mark down slow-moving merchandise or efficiently transfer it to stores selling such items more rapidly. Through sophisticated yet inexpensive off-the-shelf systems, the Company analyzes historical hourly and projected sales trends to efficiently schedule sales personnel, minimizing labor costs while producing a higher level of customer service. The Company believes that such investments in technology enhance operating efficiencies and position Dress Barn for future growth.
Trademarks
The Company has previously been issued U.S. Certificates of Registration of Trademark for the operating names of its stores and its major private label merchandise. The Company believes the following trademarks are materially important to its business:
Trademark Registration Date - --------- ----------------- Dress Barn March 5, 1985 Westport, Ltd. August 20, 1985 Atrium March 16, 1993 Princeton Club April 30, 1985 Lise J. February 15, 1984 Lee David Ltd. May 7, 1985
Approximately 5% of the Company's stores currently in operation, located in outlet centers, operate under the name Westport Ltd. and Westport Woman. Subject to landlord approval and underlying lease restrictions, if any, the Company intends to convert as many of these stores as possible to the Dress Barn or Dress Barn Woman name by the end of fiscal 1999.
Employees
As of July 25, 1998, the Company had approximately 7,000 employees of whom approximately 4,000 worked part time. A number of temporary employees are usually added during the peak selling periods. None of the Company's employees are covered by any collective bargaining agreement. The Company considers its employee relations to be good.
Seasonality
The Company's sales are evenly split between its Fall and Spring seasons. Though the Company does not consider its business seasonal, it has historically experienced substantially lower earnings in its second fiscal quarter ending in January than during its other three fiscal quarters, reflecting the intense promotional atmosphere that has characterized the Christmas shopping season in recent years. In addition, the Company's quarterly results of operations may fluctuate materially depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in timing of certain holidays, the timing of new store openings, net sales contributed by new stores, and changes in the Company's merchandise mix.
Forward-Looking Statements and Factors Affecting Future Performance
This Annual Report on Form 10-K contains in the "Business" section, in the "Properties" section, in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect the Company's current views with respect to future events and financial performance. The Company's actual results of operations and future financial condition may differ materially from those expressed or implied in any such forward looking statements as a result of certain factors set forth below and elsewhere in this Form 10-K.
Among the factors that could cause actual results to differ materially are, but are not limited to, the following: general economic conditions and consumer confidence; competitive factors and pricing pressures; the availability, selection and purchasing of attractive merchandise on favorable terms; import risks, including potential disruptions and duties, tariffs and quotas on imported merchandise, including economic and political problems in countries from which merchandise is imported; the Company's ability to predict fashion trends; consumer apparel buying patterns; adverse weather conditions; inventory risks due to shifts in market demand and other factors that may be described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise the forward-looking statements even if experience or future changes make it clear that the projected results expressed or implied therein will not be realized.
The women's retail apparel industry is subject to rapid change and is highly competitive. The industry is subject to changes in the retail environment which may be affected by overall economic conditions, women's apparel fashions, demographics, macroeconomic factors such as consumer confidence that may affect the level of spending for the types of merchandise sold by the Company, as well as other factors. The Company's sales and results of operations may also be affected by unusual weather patterns in areas where the Company has its greatest concentration of stores. The level of occupancy costs, merchandise, labor and other costs will affect future results of operations.
The Company competes primarily with department stores, off-price retailers, specialty stores, discount stores and mass merchandisers, many of which have substantially greater financial, marketing and other resources than the Company. Many department stores offer a broader selection of merchandise than the Company. In addition, many department stores continue to be promotional and reduce their selling prices, and certain of the Company's competitors and vendors have opened outlet stores which offer off-price merchandise. The Company's sales and results of operations may also be affected by close-outs and going-out-of-business sales by other women's apparel retailers. The Company may face periods of strong competition in the future which could have an adverse effect on its financial results.
The growth of the Company is dependent, in large part, upon the Company's ability to successfully execute its strategy of adding new stores and expanding into related businesses. The success of the Company's growth strategy will depend upon a number of factors, including the identification of suitable markets and sites for new Combo 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 the existing store base. In addition, the Company must be able to hire, train and retain competent managers and personnel and manage the systems and operational components of its growth. The failure of the Company to open new Combo Stores on a timely basis, obtain acceptance in markets in which it currently has limited or no presence, attract qualified management and personnel or appropriately adjust operational systems and procedures would adversely affect the Company's future operating results. In addition, there can be no assurance that the opening of new Combo Stores in existing markets will not have an adverse effect on sales at existing stores in these markets. There can be no assurance that the Company will be able to successfully implement its growth strategy of continuing to introduce the Combo Stores or to maintain its current growth levels.
The Company's success also depends in part on its ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by the Company to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of the merchandise in the Company's stores, which in turn could adversely affect the Company's business and its image with its customers. If the Company miscalculates either the market for its merchandise or its customers' purchasing habits, it may be required to sell a significant amount of unsold inventory at below average markups over the Company's cost, or below cost, which would have an adverse effect on the Company's financial condition and results of operations. In addition, the Company has increased its use of private brands. The nature of the Company's obligations with respect to private brand purchases may make it more difficult to respond to changing trends by reducing order quantities. These factors could result in higher markdowns and lower gross profits to the extent that sales of private brand merchandise are lower than expected.
The Company's success is largely dependent on the efforts and abilities of its executive officers, particularly Elliot S. Jaffe, its Chairman and Chief Executive Officer, and Burt Steinberg, its President and Chief Operating Officer. The loss of the services of any of its executive officers could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company relies upon its existing management information systems in operating and monitoring all major aspects of the Company's business, including sales, warehousing, distribution, purchasing, inventory control, merchandising planning and replenishment, as well as various financial systems. Any disruption in the operation of the Company's management information systems, or the Company's failure to continue to upgrade, integrate or expend capital on such systems as its business expands, would have a material adverse effect on the Company. In addition, any disruption in the operations of the Company's distribution center would have a material adverse effect on the Company's business.
The Company is committed to being leaner and more productive. The Company is planning to continue to close or relocate underperforming stores and maintain tight cost controls in all areas with a view to increasing shareholder value. There can be no assurance that the Company's strategy will result in a continuation of revenue and profit growth. Future economic and industry trends that could impact revenue and profitability remain difficult to predict.
ITEM 2.
ITEM 2. PROPERTIES
New store leases generally provide for a base rent of between $10 and $20 per square foot per annum. Most leases have formulas requiring the payment of a percentage of sales as additional rent, generally when sales reach specified levels. The Company's aggregate minimum rentals under operating leases in effect at July 25, 1998, and excluding locations acquired after July 25, 1998, for fiscal 1999 are approximately $54.2 million. In addition, the Company is also responsible under its store leases for its pro rata share of maintenance expenses and common charges in strip and outlet centers.
Most of the store leases give the Company the option to terminate the lease at little or no cost if certain specified sales volumes are not achieved. This affords the Company greater flexibility to close underperforming stores. Usually these provisions are operative only during the first few years of the lease.
The Company's investment in new stores consists primarily of inventory, leasehold improvements, fixtures and equipment. Dress Barn often receives tenant improvement allowances from the landlords to offset these initial investments. The Company's stores are typically profitable within the first 12 months of operation.
The Company leases its executive offices and distribution facilities in Suffern, New York. The Suffern facility has a total of 510,000 square feet, with 100,000 square feet of office space and the remainder for merchandise distribution. This lease expires on April 30, 2007, with three five-year options to extend the lease. Management believes the Suffern facility is sufficient to meet its current needs and any foreseeable increase in the Company's store base resulting from expansion or acquisition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
ITEM 4.
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.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets for the name, age and position with the Company of the Executive Officers of the Registrant:
Name Age Positions
Elliot S. Jaffe 72 Chairman of the Board, Chief Executive Officer and Director
Burt Steinberg 53 President, Chief Operating Officer and Director
David R. Jaffe 39 Executive Vice President
Armand Correia 52 Senior Vice President and Chief Financial Officer
Eric Hawn 48 Senior Vice President Store Operations
Elise Jaffe 43 Senior Vice President Real Estate
Mr. Elliot S. Jaffe has been Chief Executive Officer of the Company since 1966.
Mr. Steinberg has been President and Chief Operating Officer of the Company since 1989.
Mr. David R. Jaffe has been Executive Vice President of the Company since 1996. He joined the Company in 1992 as Vice President Business Development and became Senior Vice President in 1995. Mr. Jaffe is the son of Elliot S. and Roslyn S. Jaffe, Secretary, Treasurer and Director of the Company.
Mr. Correia has been Senior Vice President and Chief Financial Officer of the Company since 1991.
Mr. Hawn has been Senior Vice President of the Company since 1989.
Ms. Elise Jaffe has been Senior Vice President of the Company since January 1, 1995. She previously was Vice President. Ms. Jaffe is the daughter of Elliot S. and Roslyn S. Jaffe, Secretary, Treasurer and Director of the Company.
The Company's officers are elected by the Board of Directors for one-year terms and serve at the discretion of the Board of Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Market Prices of Common Stock
Number of Record Holders
The number of record holders of the Company's common stock as of October 15, 1998 was approximately 2,000.
Dividend Policy
The Company has never paid cash dividends on its common stock. Payment of dividends is within the discretion of the Company's Board of Directors.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Net sales increased by 7.8% to $598.2 million for the 52 weeks ended July 25, 1998 ("fiscal 1998"), from $554.8 million for the 52 weeks ended July 26, 1997 ("fiscal 1997"), due primarily to a 3.6% increase in comparable store sales. The increase in comparable store sales resulted primarily from the positive reaction by customers to the Company's merchandise offerings and the generally improved retail climate for apparel during fiscal 1998. The improvement in net sales was also attributable to an approximately 6% increase in total selling square footage. This increase in square footage was due to the opening of new combination Dress Barn/Dress Barn Woman stores ("combo stores"), which carry both Dress Barn and Dress Barn Woman merchandise, and the conversion of single-format stores into combo stores. This offset the square foot reduction from the closing of underperforming stores. The number of stores in operation declined to 669 stores as of July 25, 1998, from 690 stores in operation as of July 26, 1997. The Company's strategy for fiscal 1999 is to continue opening primarily combo stores and converting its existing single-format stores into combo stores, while closing its underperforming locations.
Gross profit (net sales less cost of goods sold, including occupancy and buying costs) increased by 10.2% to $216.8 million, or 36.2% of net sales, in fiscal 1998 from $196.7 million, or 35.5% of net sales, in fiscal 1997. The increase in gross profit as a percentage of net sales was primarily due to decreased markdowns, higher initial margins resulting from the increased percentage of private brand merchandise and lower shrinkage.
Selling, general and administrative ("SG&A") expenses increased by 5.0% to $142.1 million, or 23.8% of net sales, in fiscal 1998 from $135.4 million, or 24.4% of net sales, in fiscal 1997. The Company's continued productivity improvements from the larger-size combo stores, focus on controlling costs and the comparable store sales increase all contributed to the decline in SG&A as a percentage of sales.
Depreciation expense increased by 10.0% to $17.8 million for fiscal 1998 from $16.1 million for fiscal 1997. This was primarily due to the increase in fixed asset additions in fiscal 1998 to $21.7 million from $16.7 million in fiscal 1997. Depreciation expense for both periods also includes certain write-offs related to the closure of 60 stores and 61 stores during fiscal 1998 and fiscal 1997, respectively.
Interest income - net increased by 33.0% to $6.4 million for fiscal 1998 from $4.8 million for fiscal 1997. The increase resulted primarily from an increase in the Company's investment portfolio.
Fiscal 1997 Compared to Fiscal 1996
Net sales increased by 7.6% to $554.8 million for the 52 weeks ended July 26, 1997 ("fiscal 1997"), from $515.5 million for the 52 weeks ended July 27, 1996 ("fiscal 1996"), due primarily to a 5.4% increase in comparable store sales. The increase in comparable store sales resulted primarily from better weather conditions during fiscal 1997 and positive reaction by customers to the Company's merchandise offerings. The improvement in net sales was also attributable to an approximately 3.5% increase in total selling square footage, which was due to the opening of new combination Dress Barn/Dress Barn Woman stores ("combo stores"), which carry both Dress Barn and Dress Barn Woman merchandise, and the conversion of single-format stores into combo stores. This offset the closing of underperforming stores, which resulted in the number of stores in operation declining to 690 stores as of July 26, 1997, from 726 stores in operation as of July 27, 1996.
Gross profit (net sales less cost of goods sold, including occupancy and buying costs) increased by 10.8% to $196.7 million, or 35.5% of net sales, in fiscal 1997 from $177.5 million, or 34.4% of net sales, in fiscal 1996. The increase in gross profit as a percentage of net sales was primarily due to higher initial margins resulting from the increased percentage of private brand merchandise, decreased markdowns and lower shrinkage. Occupancy costs also decreased as a percentage of sales as leverage from the increase in comparable store sales offset higher rents paid for new stores and lease renewals.
Selling, general and administrative ("SG&A") expenses increased by 2.4% to $135.4 million, or 24.4% of net sales, in fiscal 1997 from $132.2 million, or 25.6% of net sales, in fiscal 1996. The Company's continued productivity improvements from the larger-size combo stores, focus on controlling costs and the comparable store sales increase all contributed to the decline in SG&A as a percentage of sales.
Depreciation expense increased by 2.0% to $16.1 million for fiscal 1997 from $15.8 million for fiscal 1996. Depreciation expense for both periods also includes certain writeoffs related to the closure of 61 stores and 72 stores during fiscal 1997 and fiscal 1996, respectively.
Interest income - net increased by 44.0% to $4.8 million for fiscal 1997 from $3.3 million for fiscal 1996. The increase resulted primarily from an increase in the Company's investment portfolio.
Liquidity and Capital Resources
The Company has generally funded, through internally generated cash flow, all of its operating and capital needs. These include the opening or acquisition of new stores, the remodeling of existing stores and the continued expansion of its successful combination store format. Total capital expenditures were $21.7 million, $16.5 million and $17.1 million in fiscal 1998, 1997 and 1996, respectively.
The Company funds inventory expenditures through cash flows from operations and the favorable payment terms the Company has established with its vendors. The Company's quick ratio (i.e., the ratio of current assets less inventory to current liabilities) has improved steadily over the past three years (1.85, 1.75 and 1.54 at the end of fiscal 1998, 1997 and 1996, respectively). The Company's net cash provided by operations in fiscal 1998 increased to $62.1 million as compared to $48.4 million in fiscal 1997 and $35.6 million in fiscal 1996. The increase in fiscal 1998 was due primarily to the increase in earnings, offset by an increase in taxes paid.
At July 25, 1998, the Company had $140.0 million in marketable securities and other investments. The portfolio consists primarily of municipal bonds that can readily be converted to cash. The Company holds no options or other derivative instruments. Working capital was $170.4 million at July 25, 1998. In addition, the Company had available $100 million in unsecured lines of credit bearing interest at below the prime rate. The Company had no debt outstanding under any of the lines at July 25, 1998. However, potential borrowings were limited by approximately $32 million of outstanding letters of credit primarily to vendors for import merchandise purchases.
In fiscal 1999, the Company plans to open approximately 60 additional stores, convert approximately 20 single-format stores to its larger combination store format and continue its store remodeling program. The Company intends to look at new markets, and expects to enter the Southern California market in fiscal 1999. In addition, the Company continues to pursue acquisition opportunities. The Company believes that its cash, cash equivalents, marketable securities and investments, together with cash flow from operations, will be adequate to fund the Company's proposed capital expenditures and any other operating requirements.
Other assets, as of July 25, 1998, include a $3 million non-trading, equity investment, which is net of a $7 million write-off to reflect its estimated net realizable value.
Inflation
The Company does not believe that inflation had a material effect on its results of operations during the past three years. However, there can be no assurance that the Company's business will not be affected by inflation in the future.
Seasonality
The Company has historically experienced substantially lower earnings in its second fiscal quarter ending in January than during its other three fiscal quarters, reflecting the intense promotional atmosphere that has characterized the Christmas shopping season in recent years. The Company expects this trend to continue for fiscal 1999. In addition, the Company's quarterly results of operations may fluctuate materially depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in timing of certain holidays, the timing of new store openings, net sales contributed by new stores, and changes in the Company's merchandise mix.
Information Systems and "Year 2000" Compliance
The Company has completed a comprehensive review of its information systems and is involved in an enterprise-wide program to update computer systems and applications in preparation for the year 2000. The Company expects this process to be completed in early 1999. The Company has and will incur internal staff costs as well as outside consulting and other expenditures related to this initiative. Total costs related to remediation to bring current systems into compliance, testing, conversion, the purchase of new package systems and upgrading system applications are not expected to be material. The Company is surveying its service providers and others whom it relies on to assure that their systems will be converted in a timely fashion. Based on the results of this survey, the Company will develop appropriate contingency plans. However, there can be no assurance that the systems of other companies on which the Company's systems rely will also be converted in a timely fashion, or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Furthermore, no assurance can be given that any or all of the Company's systems are or will be Year 2000 compliant, or that the ultimate costs required to address the Year 2000 issue or the impact of any failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's financial condition.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of The Dress Barn, Inc. and subsidiaries are filed together with this report: See Index to Financial Statements, Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10, 11, 12 and 13 is incorporated herein by reference from the definitive proxy statement to be filed by the Company in connection with its 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14.
ITEM 14. (a) (3) LIST OF EXHIBITS
ITEM 14. (b) REPORT ON FORM 8-K
The Company has not filed any reports on Form 8-K during the last quarter of the fiscal year ended July 25, 1998.
ITEM 14. (c) EXHIBITS
All exhibits are incorporated by reference as shown in Item 14(a)3, except Exhibits 22 and 24 which are filed as part of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Dress Barn, Inc.
by /s/ ELLIOT S. JAFFE Elliot S. Jaffe Chairman of the Board
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders The Dress Barn, Inc. Suffern, New York
We have audited the accompanying consolidated balance sheets of The Dress Barn, Inc. and Subsidiaries as of July 25, 1998 and July 26, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended July 25, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Dress Barn, Inc. and Subsidiaries as of July 25, 1998 and July 26, 1997, and the results of their operations and their cash flows for each of the three years in the period ended July 25, 1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Stamford, Connecticut September 17, 1998
The Dress Barn, Inc. and Subsidiaries Notes to Consolidated Financial Statements Three Years Ended July 25, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Dress Barn, Inc. (including The Dress Barn, Inc. and it's wholly-owned subsidiaries (the "Company")) operates a chain of women's apparel specialty stores. The stores, operating principally under the names "Dress Barn" and "Dress Barn Woman", offer in-season, moderate to better quality fashion apparel. The Company operates in one business segment.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions are eliminated. The Company reports on a 52-53 week fiscal year ending on the last Saturday in July.
Merchandise inventories
Merchandise inventories are valued at the lower of cost, on a first-in, first-out basis, or market as determined by the retail method.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets which range from 3 to 10 years. For income tax purposes, accelerated methods are generally used.
Income taxes
Deferred income taxes are provided using the asset and liability method, whereby deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.
Store preopening costs
Expenses associated with the opening of new stores are charged to expense as incurred.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers its highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. These amounts are stated at cost, which approximates market value. The majority of the Company's money market funds are maintained with one financial institution.
Marketable securities and investments
The Company has categorized its marketable securities as available for sale, stated at market value. The unrealized holding gains and losses are included in shareholders' equity until realized. The amortized cost is adjusted for amortization of premiums and discounts to maturity, with the net amortization included in interest income. Other investments, due to their nature, are carried at cost.
Earnings per share (EPS)
Earnings per share is calculated by dividing net earnings by the total of the weighted average number of common shares and common share equivalents outstanding during the period, assuming the dilutive effect of stock options, computed in accordance with the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS128). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The number of shares used in the computation of basic earnings per share was 23,032,400, 22,738,322 and 22,413,267 for fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The number of shares used in the computation of diluted earnings per share was 23,653,899, 23,941,070 and 22,631,574 for fiscal 1998, fiscal 1997 and fiscal 1996, respectively. All periods presented reflect the adoption of SFAS128
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement requires companies to classify items of other comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of a statement of financial position. SFAS No. 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company will adopt the provisions of SFAS No. 130 in fiscal 1999.
Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock based compensation
In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", ("SFAS 123"), was issued. SFAS 123 requires the Company elect to either adopt a fair value based expense recognition method of accounting for stock-based compensation plans or continue to use the current valuation methods with pro forma disclosure of net income and earnings per share as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company has elected to retain its current method of accounting for stock-based compensation and provide the required disclosures in its financial statements.
The company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price on the measurement date.
Disclosure about fair value of financial instruments
The fair value of financial instruments classified as current assets or liabilities approximate carrying amount due to the short-term maturity of the instruments. The fair value of long term debt, discounted using current borrowing rates available for financing with similar terms and maturities, was approximately $2.1 million at the end of the 1997 fiscal year.
Other assets, as of July 25, 1998, include a $3 million non-trading, equity investment, which is net of a $7 million write-off to reflect its estimated net realizable value.
2. MARKETABLE SECURITIES AND INVESTMENTS
Unrealized holding gains and losses at July 25, 1998 netted to an unrealized gain of approximately $1.1 million. Proceeds and gross realized losses from the sale of securities in fiscal 1998, 1997 and 1996 were $118.7 million and $0.1 million, $38.9 million and $0.3 million and $110.6 million and $0.6 million, respectively. For the purposes of determining gross realized gains and losses, the cost of securities is based upon specific identification.
3. LONG-TERM DEBT
During fiscal 1998, the Company repaid its $3.5 million unsecured loan from the New York State Urban Development Corporation. This loan was due October 1, 2004, with interest at rates ranging from 0% to 3% over the term of the loan. The Company had no other long-term debt outstanding at any time during the three years ended July 25, 1998.
At July 25, 1998, the Company had unsecured lines of credit with three banks totaling $100 million with interest payable at rates below prime. None of the Company's lines of credit contain any significant covenants or commitment fees. The Company had no debt outstanding under any of the lines at July 25, 1998. However, the credit lines available were reduced by approximately $32 million of outstanding letters of credit.
4. EMPLOYEE BENEFIT PLANS
In August 1995, the Company established a defined contribution retirement savings plan (401(k)) covering all eligible employees. This plan succeeds the previous discretionary profit-sharing plan, with all prior individual account balances and vesting terms transferred to the new plan. The Company has also established an Executive Retirement Plan for certain officers and key executives not participating in the 401(k) plan. Both plans allow participants to defer a portion of their annual compensation and receive a matching employer contribution on a portion of that deferral. During fiscal 1998, 1997 and 1996, the Company incurred expenses of $982,000, $738,000 and $712,000, respectively, relating to the contributions to and administration of the above plans. The Company also has an Employee Stock Purchase Plan, which allows employees to purchase shares of company stock during each quarterly offering period at a 10% discount through weekly payroll deductions. The Company does not provide any additional postretirement benefits.
5. INCOME TAXES
6. COMMITMENTS
Lease commitments
The Company leases all its stores and its distribution center. Certain leases provide for additional rents based on percentages of net sales, charges for real estate taxes, insurance and other occupancy costs. Store leases generally have an initial term ranging from 5 to 15 years with one or more 5-year options to extend the lease. Some of these leases have provisions for rent escalations during the initial term. The Company leases its 510,000 square foot office and distribution center in Suffern, New York. The lease has an initial term expiring in 2007 with three 5-year options to extend the lease.
The following is a schedule of future minimum rentals under noncancellable operating leases as of July 25, 1998 (dollars in thousands):
Fiscal Year Amount ------------- ------------ 1999 $ 54,244 2000 48,160 2001 37,342 2002 29,229 2003 17,625 Subsequent years 24,070
Total future minimum rentals $210,670
Although the Company has the ability to cancel certain leases if specified sales levels are not achieved, future minimum rentals under such leases have been included in the above table. Leases with related parties
The Company leases five stores from the Chief Executive Officer or related trusts. Future minimum rentals under leases with such related parties which extend beyond July 25, 1998, included in the above schedule, are approximately $404,000 annually and aggregate $1.7 million. The leases also contain provisions for cost escalations and additional rent based on net sales in excess of stipulated amounts. Rent expense for fiscal years 1998, 1997 and 1996 under these leases amounted to approximately $438,000, $443,000 and $492,000, respectively.
7. STOCK-BASED COMPENSATION PLANS
At July 25, 1998, the Company had five stock-based compensation plans. The Company's 1983 Incentive Stock Option Plan expired on April 4, 1993, and accordingly, the Company can no longer grant options under such plan. The Company's 1993 Incentive Stock Option Plan, which contains provisions similar to the expired plan, provides for the grant of options to purchase up to 1,250,000 shares of the Company's common stock. The exercise price of the options granted under both plans may not be less than the market price of the common stock at the date of grant. All options granted under both plans vest over a five year period and generally expire after ten years from date of grant. At July 25, 1998, there were 663,000 shares under the 1993 plan available for future grant. The Company's 1987 Non-Qualified Stock Option Plan, which expired December 7, 1997, provides for the granting of options to purchase up to 1,000,000 shares of Common Stock to key employees. The Company's 1995 Stock Option Plan provides for the granting of either incentive or non-qualified options to purchase up to 2,000,000 shares of Common Stock. As of July 25, 1998, 340,000 options had been issued under the 1995 Stock Option Plan. The Company's Employee Stock Purchase Plan allows employees to purchase shares of company stock during each quarterly offering period at a 10% discount through weekly payroll deductions.
These pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. SFAS 123 does not apply to awards prior to fiscal 1996, and additional awards in future years are anticipated.
8. WRITE-DOWN OF UNDERPERFORMING AND CLOSED STORE ASSETS
In fiscal 1996, the Company implemented the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement addresses the timing of recognition and the measurement of impairment of (a) long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and (b) long-lived assets and certain identifiable intangibles to be disposed of. The statement requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, and that such assets be reported at the lower of carrying amount or fair value.
EXHIBIT 22
THE DRESS BARN, INC.
SUBSIDIARIES OF THE REGISTRANT (All 100% Owned)
State of Subsidiary Incorporation
D.B.R., Inc. Delaware
The Dress Barn, Inc. of New Hampshire, Inc. (**) New Hampshire
Raxton Corp. (**) Massachusetts
JRL Consulting Corp. (**) New Jersey
D.B.X. Inc. New York
(**) Inactive Subsidiary
EXHIBIT 24
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders The Dress Barn, Inc. Suffern, New York
We consent to the incorporation by reference in Registration Statement Nos. 33-16857, 33-47415, 33-60196, 333-18135 and 33-17488 (on Form S-8) of our report, dated September 17, 1998, appearing in this Annual Report on Form 10-K of The Dress Barn, Inc. and Subsidiaries for the year ended July 25, 1998.
Deloitte & Touche LLP Stamford, Connecticut October 21, 1998