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UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) For the quarterly period ended July 5, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) For the transition period from __________ to __________ Commission File Number 1-10746 JONES APPAREL GROUP, INC.
WASHINGTON, D.C. 20549
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
Pennsylvania |
06-0935166 |
1411
Broadway |
10018 |
(212) 642-3860
(Registrant's telephone number,
including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] |
Accelerated filer [ ] |
Non-accelerated filer [ ] |
Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
of Common Stock |
Outstanding
at July 29, 2008 |
JONES APPAREL GROUP, INC.
Index |
Page No.
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PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | ||
Consolidated Balance Sheets July 5, 2008, July 7, 2007 and December 31, 2007 |
3 | |
Consolidated Statements of
Operations Fiscal Quarters and Six Months ended July 5, 2008 and July 7, 2007 |
4 | |
Consolidated Statements of Stockholders' Equity Fiscal Six Months ended July 5, 2008 and July 7, 2007 |
5 | |
Consolidated Statements of Cash Flows Fiscal Six Months ended July 5, 2008 and July 7, 2007 |
6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 29 | |
Item 4. Controls and Procedures | 29 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 30 | |
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 30 | |
Item 4. Submission of Matters to a Vote of Security Holders | 31 | |
Item 5. Other Information | 31 | |
Item 6. Exhibits | 32 | |
Signatures | 33 | |
Exhibit Index | 34 |
DEFINITIONS
As used in this Report, unless the context requires otherwise, "our," "us" and "we" means Jones Apparel Group, Inc. and consolidated subsidiaries, "Barneys" means Barneys New York, Inc., "Polo" means Polo Ralph Lauren Corporation, "GRI" means GRI Group Limited, "FASB" means the Financial Accounting Standards Board, "SFAS" means Statement of Financial Accounting Standards and "SEC" means the United States Securities and Exchange Commission.
- 2 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones Apparel Group, Inc.July 5, 2008 |
July 7, 2007 |
December 31, 2007 |
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ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and cash equivalents | $ 322.2 | $ 53.6 | $ 302.8 | |
Accounts receivable | 382.6 | 374.5 | 337.0 | |
Inventories | 466.7 | 535.7 | 523.9 | |
Assets held for sale | - | 645.3 | - | |
Prepaid income taxes | 25.2 | - | 30.6 | |
Deferred taxes | 23.8 | 68.8 | 33.9 | |
Prepaid expenses and other current assets | 50.6 | 60.6 | 65.9 | |
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TOTAL CURRENT ASSETS | 1,271.1 | 1,738.5 | 1,294.1 | |
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $454.2, $418.9 and $439.7 | 305.4 | 283.3 | 312.1 | |
GOODWILL | 974.6 | 1,051.9 | 973.9 | |
OTHER INTANGIBLES, at cost, less accumulated amortization | 616.9 | 626.6 | 618.0 | |
DEFERRED TAXES | - | 14.5 | - | |
OTHER ASSETS | 58.0 | 52.9 | 38.5 | |
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$ 3,226.0 | $ 3,767.7 | $ 3,236.6 | ||
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LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
CURRENT LIABILITIES: | ||||
Short-term borrowings | $ - | $ 184.1 | $ - | |
Current portion of capital lease obligations | 4.2 | 3.9 | 4.8 | |
Accounts payable | 215.3 | 219.1 | 223.6 | |
Liabilities related to assets held for sale | - | 165.9 | - | |
Income taxes payable | 13.8 | 5.9 | 20.4 | |
Accrued employee compensation and benefits | 30.9 | 36.2 | 40.2 | |
Accrued restructuring and severance payments | 17.7 | 9.4 | 23.0 | |
Accrued expenses and other current liabilities | 76.1 | 81.6 | 83.6 | |
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TOTAL CURRENT LIABILITIES | 358.0 | 706.1 | 395.6 | |
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NONCURRENT LIABILITIES: | ||||
Long-term debt | 749.4 | 749.3 | 749.4 | |
Obligations under capital leases | 26.5 | 29.7 | 28.3 | |
Deferred taxes | 14.8 | - | - | |
Other | 67.4 | 73.0 | 66.5 | |
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TOTAL NONCURRENT LIABILITIES | 858.1 | 852.0 | 844.2 | |
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TOTAL LIABILITIES | 1,216.1 | 1,558.1 | 1,239.8 | |
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COMMITMENTS AND CONTINGENCIES | - | - | - | |
STOCKHOLDERS' EQUITY: | ||||
Preferred stock, $.01 par value - shares authorized 1.0; none issued | - | - | - | |
Common stock, $.01 par value - shares authorized 200.0; issued 154.9, 154.3 and 153.6 | 1.5 | 1.5 | 1.5 | |
Additional paid-in capital | 1,347.5 | 1,344.3 | 1,339.7 | |
Retained earnings | 2,486.9 | 2,196.8 | 2,480.8 | |
Accumulated other comprehensive income (loss) | 0.3 | (2.6) | 2.1 | |
Treasury stock, 71.5, 45.3 and 68.3 shares, at cost | (1,826.3) | (1,330.4) | (1,827.3) | |
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TOTAL STOCKHOLDERS' EQUITY | 2,009.9 | 2,209.6 | 1,996.8 | |
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$ 3,226.0 | $ 3,767.7 | $ 3,236.6 | ||
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See accompanying notes to consolidated financial statements
- 3 -
Fiscal Quarter Ended
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Fiscal Six Months Ended
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July 5, 2008 | July 7, 2007 | July 5, 2008 | July 7, 2007 | |||
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Net sales | $ 820.2 | $ 894.5 | $ 1,783.6 | $ 1,959.0 | ||
Licensing income | 9.0 | 9.2 | 20.5 | 21.4 | ||
Service and other revenue | 0.2 | 0.2 | 0.7 | 2.0 | ||
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Total revenues | 829.4 | 903.9 | 1,804.8 | 1,982.4 | ||
Cost of goods sold | 547.0 | 613.7 | 1,201.7 | 1,327.1 | ||
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Gross profit | 282.4 | 290.2 | 603.1 | 655.3 | ||
Selling, general and administrative expenses | 256.9 | 263.1 | 537.6 | 544.9 | ||
Trademark impairments | - | 69.0 | - | 69.0 | ||
Losses on assets held for sale | - | 30.4 | - | 30.4 | ||
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Operating income (loss) | 25.5 | (72.3) | 65.5 | 11.0 | ||
Interest income | 2.2 | 0.4 | 4.6 | 0.7 | ||
Interest expense and financing costs | 12.0 | 13.5 | 24.2 | 28.1 | ||
Gain on sale of interest in Australian joint venture | 0.5 | - | 0.8 | - | ||
Equity in earnings of unconsolidated affiliates | - | 1.5 | - | 2.1 | ||
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Income (loss) from continuing operations before provision for income taxes | 16.2 | (83.9) | 46.7 | (14.3) | ||
Provision (benefit) for income taxes | 5.6 | (32.8) | 16.5 | (7.6) | ||
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Income (loss) from continuing operations | 10.6 | (51.1) | 30.2 | (6.7) | ||
Income from discontinued operations, net of tax | - | 4.0 | - | 7.5 | ||
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Net income (loss) | $ 10.6 | $ (47.1) | $ 30.2 | $ 0.8 | ||
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Earnings per share | ||||||
Basic | ||||||
Income (loss) from continuing operations | $ 0.13 | $(0.48) | $ 0.36 | $(0.06) | ||
Income from discontinued operations | - | 0.04 | - | 0.07 | ||
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Basic earnings (loss) per share | $ 0.13 | $(0.44) | $ 0.36 | $0.01 | ||
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Diluted | ||||||
Income (loss) from continuing operations | $ 0.13 | $(0.48) | $ 0.35 | $(0.06) | ||
Income from discontinued operations | - | 0.04 | - | 0.07 | ||
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Basic earnings (loss) per share | $ 0.13 | $(0.44) | $ 0.35 | $0.01 | ||
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Weighted average common shares and share equivalents outstanding | ||||||
Basic | 83.8 | 107.1 | 84.2 | 106.9 | ||
Diluted | 84.9 | 107.1 | 85.2 | 109.0 | ||
Dividends declared per share | $0.14 | $0.14 | $0.28 | $0.28 |
See accompanying notes to consolidated financial statements
- 4 -
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
(All amounts in millions, except per share data)
Number of common shares outstanding |
Total stock- holders' equity |
Common stock |
Additional paid-in capital |
Retained earnings |
Accumu- lated other compre- hensive income (loss) |
Treasury stock |
||||||||
Balance, January 1, 2007 |
107.9 |
$ 2,211.6 |
$ 1.5 |
$ 1,320.0 |
$ 2,226.4 |
$ (5.9) |
$ (1,330.4) |
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Fiscal six months ended July 7, 2007: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 0.8 | - | - | 0.8 | - | - | |||||||
Change in fair value of cash flow hedges, net of $0.6 tax | - | (0.9) | - | - | - | (0.9) | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.2 tax | - | (0.3) | - | - | - | (0.3) | - | |||||||
Foreign currency translation adjustments | - | 4.5 | - | - | - | 4.5 | - | |||||||
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Total comprehensive income | 4.1 | |||||||||||||
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Issuance of restricted stock to employees, net of forfeitures | 0.6 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 11.6 | - | 11.6 | - | - | - | |||||||
Exercise of employee stock options | 0.5 | 10.3 | - | 10.3 | - | - | - | |||||||
Excess tax benefits from share-based payment arrangements | - | 2.4 | - | 2.4 | - | - | - | |||||||
Dividends on common stock ($0.28 per share) | - | (30.4) | - | - | (30.4) | - | - | |||||||
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Balance, July 7, 2007 | 109.0 | $ 2,209.6 | $ 1.5 | $ 1,344.3 | $ 2,196.8 | $ (2.6) | $ (1,330.4) | |||||||
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Balance, January 1, 2008 |
85.3 |
$ 1,996.8 |
$ 1.5 |
$ 1,339.7 |
$ 2,480.8 |
$ 2.1 |
$ (1,827.3) |
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Fiscal six months ended July 5, 2008 | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 30.2 | - | - | 30.2 | - | - | |||||||
Change in fair value of cash flow hedges, net of $0.2 tax | - | 0.2 | - | - | - | 0.2 | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.3 tax benefit | - | 0.5 | - | - | - | 0.5 | - | |||||||
Foreign currency translation adjustments | - | (2.5) | - | - | - | (2.5) | - | |||||||
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Total comprehensive income | 28.4 | |||||||||||||
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Issuance of restricted stock to employees, net of forfeitures | 1.3 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 9.1 | - | 9.1 | - | - | - | |||||||
Settlement of accelerated share repurchase program | (3.2) | 1.0 | - | - | - | - | 1.0 | |||||||
Excess tax benefits from share-based payment arrangements | - | (1.3) | - | (1.3) | - | - | - | |||||||
Dividends on common stock ($0.28 per share) | - | (24.1) | - | - | (24.1) | - | - | |||||||
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Balance, July 5, 2008 | 83.4 | $ 2,009.9 | $ 1.5 | $ 1,347.5 | $ 2,486.9 | $ 0.3 | $ (1,826.3) | |||||||
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See accompanying notes to consolidated financial statements
- 5 -
Fiscal Six Months Ended
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July 5, 2008 | July 7, 2007 | |||
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CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net income | $ 30.2 | $ 0.8 | ||
Less: income from discontinued operations | - | (7.5) | ||
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Income (loss) from continuing operations | 30.2 | (6.7) | ||
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Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of acquisitions and divestitures: | ||||
Amortization expense in connection with employee stock options and restricted stock | 9.1 | 8.6 | ||
Depreciation and other amortization | 41.4 | 37.9 | ||
Trademark impairments | - | 69.0 | ||
Losses on assets held for sale | - | 30.4 | ||
Equity in earnings of unconsolidated affiliates | - | (2.1) | ||
Provision for losses on accounts receivable | 4.7 | 0.3 | ||
Deferred taxes | 26.7 | (35.1) | ||
Other items, net | (0.7) | (3.3) | ||
Changes in operating assets and liabilities: | ||||
Accounts receivable | (50.5) | (36.9) | ||
Inventories | 57.1 | (25.1) | ||
Prepaid expenses and other current assets | 14.9 | 3.1 | ||
Other assets | (1.4) | 1.0 | ||
Accounts payable | (8.6) | (54.3) | ||
Income taxes payable | (3.8) | (5.0) | ||
Accrued expenses and other current liabilities | (21.7) | (9.3) | ||
Other liabilities | 0.8 | 0.2 | ||
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Total adjustments | 68.0 | (20.6) | ||
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Net cash provided by (used in) operating activities of continuing operations | 98.2 | (27.3) | ||
Net cash provided by operating activities of discontinued operations | - | 21.4 | ||
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Net cash provided by (used in) operating activities | 98.2 | (5.9) | ||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
Capital expenditures | (38.4) | (47.7) | ||
Investment in GRI | (20.0) | - | ||
Acquisition-related costs | (0.2) | - | ||
Proceeds from sales of assets | 7.2 | 2.8 | ||
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Net cash used in investing activities of continuing operations | (51.4) | (44.9) | ||
Net cash used in investing activities of discontinued operations | - | (26.9) | ||
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Net cash used in investing activities | (51.4) | (71.8) | ||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Net borrowings under credit facilities | - | 84.1 | ||
Principal payments on capital leases | (2.4) | (1.9) | ||
Dividends paid | (24.1) | (30.4) | ||
Proceeds from exercise of employee stock options | - | 10.3 | ||
Net cash advances to discontinued operations | - | (5.6) | ||
Repayment of acquired debt | (0.2) | - | ||
Settlement of accelerated stock repurchase program | 1.0 | - | ||
Excess tax benefits from share-based payment arrangements | - | 2.4 | ||
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Net cash (used in) provided by financing activities of continuing operations | (25.7) | 58.9 | ||
Net cash provided by financing activities of discontinued operations | - | 1.8 | ||
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Net cash (used in) provided by financing activities | (25.7) | 60.7 | ||
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EFFECT OF EXCHANGE RATES ON CASH | (1.7) | 2.6 | ||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 19.4 | (14.4) | ||
CASH AND CASH EQUIVALENTS, BEGINNING, including $7.2 reported under assets held for sale in 2007 | 302.8 | 71.5 | ||
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CASH AND CASH EQUIVALENTS, ENDING, including $3.5 reported under assets held for sale in 2007 | $ 322.2 | $ 57.1 | ||
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See accompanying notes to consolidated financial statements
- 6 -
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the footnotes thereto included within our Annual Report on Form 10-K.
In accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the assets and liabilities relating to Barneys have been reclassified as held for sale in the Consolidated Balance Sheet for July 7, 2007 and the results of operations of Barneys for the fiscal quarter and six month periods ended July 7, 2007 have been reported as discontinued operations. We classify as discontinued operations for all periods presented any component of our business that we believe is probable of being sold or has been sold that has operations and cash flows that are clearly distinguishable operationally and for financial reporting purposes. For those components, we have no significant continuing involvement after disposal and their operations and cash flows are eliminated from our ongoing operations.
In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to conform prior year data with the current presentation. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 2008.
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) |
July 5, 2008 |
July 7, 2007 |
December 31, 2007 |
Trade accounts receivable | $ 417.2 | $ 404.4 | $ 365.5 |
Allowances for doubtful accounts, returns, discounts and co-op advertising | (34.6) | (29.9) | (28.5) |
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$ 382.6 | $ 374.5 | $ 337.0 | |
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INVENTORIES
Inventories are summarized as follows:
(In millions) |
July 5, 2008 |
July 7, 2007 |
December 31, 2007 |
Raw materials | $ 0.4 | $ 4.4 | $ 0.3 |
Work in process | - | 4.8 | 1.5 |
Finished goods | 466.3 | 526.5 | 522.1 |
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$ 466.7 | $ 535.7 | $ 523.9 | |
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- 7 -
EARNINGS PER SHARE
The computation of basic and diluted earnings (loss) per share is as follows:
Fiscal Quarter Ended
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Fiscal Six Months Ended
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(In millions, except per share amounts) | July 5, 2008 | July 7, 2007 | July 5, 2008 | July 7, 2007 | ||
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Income (loss) from continuing operations | $ 10.6 | $ (51.1) | $ 30.2 | $ (6.7) | ||
Income from discontinued operations | - | 4.0 | - | 7.5 | ||
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Net income (loss) | $ 10.6 | $ (47.1) | $ 30.2 | $ 0.8 | ||
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Weighted average common shares outstanding - basic | 83.8 | 107.1 | 84.2 | 106.9 | ||
Effect of dilutive employee stock options and restricted stock | 1.1 | - | 1.0 | 2.1 | ||
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Weighted average common shares and share equivalents outstanding - diluted | 84.9 | 107.1 | 85.2 | 109.0 | ||
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Earnings (loss) per share - basic | ||||||
Income (loss) from continuing operations | $ 0.13 | $ (0.48) | $ 0.36 | $ (0.06) | ||
Income from discontinued operations | - | 0.04 | - | 0.07 | ||
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Basic earnings (loss) per share | $ 0.13 | $(0.44) | $ 0.36 | $0.01 | ||
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Earnings (loss) per share - diluted | ||||||
Income (loss) from continuing operations | $ 0.13 | $ (0.48) | $ 0.35 | $ (0.06) | ||
Income from discontinued operations | - | 0.04 | - | 0.07 | ||
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Diluted earnings (loss) per share | $ 0.13 | $(0.44) | $ 0.35 | $0.01 | ||
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DISCONTINUED OPERATIONS
On September 6, 2007, we completed the sale of Barneys to an affiliate of Istithmar PJSC. In accordance with the provisions of SFAS No. 144, the results of operations of Barneys for the fiscal quarter and six months ended July 7, 2007 have been reported as discontinued operations and the assets and liabilities relating to Barneys have been reclassified as held for sale in the Consolidated Balance Sheet at July 7, 2007. Operating results of Barneys for the fiscal quarter and six months ended July 7, 2007, which were formerly included in our retail segment, are summarized as follows:
Fiscal Quarter Ended July 7, 2007 |
Fiscal Six Months Ended July 7, 2007 |
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Total revenues | $ 169.2 | $ 338.9 |
Income from operations of Barneys before provision for income taxes | $ 8.2 | $ 15.6 |
Provision for income taxes | 4.2 | 8.1 |
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Income from discontinued operations | $ 4.0 | $ 7.5 |
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We have allocated $2.0 million and $4.1 million of interest expense to discontinued operations for the quarter and six months ended July 7, 2007, respectively, based on the weighted-average monthly borrowing rate under our senior credit facilities applied to the average net monthly balance of funds that have been advanced to Barneys.
- 8 -
TRADEMARK IMPAIRMENTS
On May 1, 2007, we made the strategic decision to exit or sell some of our moderate product lines by year end 2007 as a result of the continued trend of our moderate customers towards differentiated product offerings. As a result of this exit, we have renamed our wholesale moderate apparel segment as our wholesale jeanswear segment to better reflect the products we produce in that segment. We believed that exiting these product lines would strengthen our future operating results and allow us to focus primarily on growth opportunities in our remaining wholesale product lines, which have strong fundamentals and operate at substantially higher margins. This decision did not impact in any way our denim and junior division labels such as Gloria Vanderbilt, l.e.i., Energie, GLO, Jeanstar, Grane and others, which are also reported in the wholesale moderate jeanswear segment. As a result of the loss of these projected revenues, we recorded impairments for our Norton McNaughton and Erika trademarks of $69.0 million during the fiscal quarter ended July 7, 2007.
NET ASSETS HELD FOR SALE
The assets and liabilities relating to Barneys and the moderate product lines to be exited were reclassified as held for sale in the Consolidated Balance Sheet at July 7, 2007. We estimated the fair value of the moderate net assets to be sold to be $22.5 million based upon preliminary sales negotiations. The carrying value of these net assets was $52.9 million as of July 7, 2007; therefore, we recorded a loss of $30.4 million to write these assets down to realizable value. The moderate product lines to be sold have not been classified as discontinued operations as they do not meet the criteria for discontinued operations as set forth in SFAS No. 144. Assets held for sale at July 7, 2007 also included property, plant and equipment at our Bristol, Pennsylvania distribution facility, which has been closed, and our Mexican production facilities, which have been sold.
The assets and liabilities relating to these businesses at July 7, 2007 consist of:
(In millions) |
Barneys
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Moderate
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Other
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Total
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Inventories | $ 113.8 | $ 13.7 | $ - | $ 127.5 |
Other current assets | 63.3 | 14.8 | - | 78.1 |
Property, plant and equipment | 124.3 | - | 5.5 | 129.8 |
Goodwill | 247.4 | - | - | 247.4 |
Other intangibles | 62.3 | - | - | 62.3 |
Other assets | 0.2 | - | - | 0.2 |
|
|
|
|
|
Assets held for sale | $ 611.3 | $ 28.5 | $ 5.5 | $ 645.3 |
|
|
|
|
|
Current liabilities | $ 77.2 | $ 6.0 | $ - | $ 83.2 |
Long-term portion of deferred taxes | 23.2 | - | - | 23.2 |
Other long-term liabilities | 59.5 | - | - | 59.5 |
|
|
|
|
|
Liabilities related to assets held for sale | $ 159.9 | $ 6.0 | $ - | $ 165.9 |
|
|
|
|
ACCRUED RESTRUCTURING COSTS
On September 12, 2006, we announced the closing of certain El Paso, Texas and Mexican operations related to the decision by Polo to discontinue the Polo Jeans Company product line (the "manufacturing restructuring"), which we produced for Polo subsequent to the sale of the Polo Jeans Company business to Polo in February 2006. In connection with the El Paso closing, we incurred $4.3 million of one-time termination benefits and associated employee costs for 134 employees and $0.7 million of other costs. Of this amount, $2.5 million has been reported as a selling, general and administrative expense and $2.5 million was reported as a cost of sales in the wholesale jeanswear segment (of which $0.7 million and $0.6 million was recorded in selling, general and administrative expenses and cost of sales, respectively, during the fiscal six months ended July 7, 2007). In connection with the Mexican closing, we incurred $2.8 million of one-time termination benefits and associated employee costs for 1,704 employees and $0.7 million of other costs. Of this amount, $3.2 million has been reported as cost of sales
- 9 -
(of which $0.3 million was recorded in the fiscal six months ended July 7, 2007) and $0.3 million has been reported as a selling, general and administrative expense in the wholesale jeanswear segment. In addition, we determined the estimated fair value of the property, plant and equipment employed in Mexico was less than its carrying value. As a result, we recorded an impairment loss of $8.6 million, which was reported as cost of sales in the wholesale jeanswear segment in 2006. The closings were substantially completed by the end of March 2007. On May 8, 2008, we sold the Mexican operations for $5.9 million, resulting in a gain of $0.2 million.
In connection with the exit and reorganization of certain moderate apparel product lines, we decided to close certain New York offices, and on October 9, 2007, we announced the closing of warehouse facilities in Goose Creek, South Carolina. We recorded $9.2 million of one-time termination benefits and associated employee costs for approximately 440 employees and $1.0 million of lease obligations. Of this amount, $10.1 million and $0.1 million have been reported as a selling, general and administrative expense in the wholesale jeanswear and wholesale better apparel segments, respectively, with $1.1 million recorded and $0.2 million reversed as selling, general and administrative expenses in the wholesale jeanswear and wholesale better apparel segments, respectively in the fiscal six months ended July 5, 2008. These closings were substantially complete by the end of February 2008.
On October 17, 2007, we announced the closing of warehouse facilities in Edison, New Jersey. We expect to incur $3.5 million of one-time termination benefits and associated employee costs for approximately 160 employees. Of this amount, $3.4 million has been reported as a selling, general and administrative expense in the wholesale jeanswear segment, of which $0.7 million was recorded as a selling, general and administrative expense in the wholesale jeanswear segment in the fiscal six months ended July 5, 2008. The remaining $0.1 million will be accrued during the fiscal quarter ending October 4, 2008. The closing was substantially complete by the end of June 2008.
The accruals of restructuring costs and liabilities, of which $3.4 million and $5.7 million are included in accrued restructuring and severance payments and $1.2 million and $1.6 million are included in other noncurrent liabilities at July 7, 2007 and July 5, 2008, respectively, are as follows:
(In millions) |
Severance and other employee costs |
Closing of retail stores and consolidation of facilities |
Manufacturing
restructuring
|
Total
|
Balance, January 1, 2007 | $ 1.4 | $ 1.6 | $ 3.4 | $ 6.4 |
Net additions | 1.4 | - | 1.6 | 3.0 |
Payments and reductions | (1.2) | (0.2) | (3.4) | (4.8) |
|
|
|
|
|
Balance, July 7, 2007 | $ 1.6 | $ 1.4 | $ 1.6 | $ 4.6 |
|
|
|
|
|
Balance, January 1, 2008 | $ 8.7 | $ 1.1 | $ 1.2 | $ 11.0 |
Net additions | 0.5 | 1.0 | - | 1.5 |
Payments and reductions | (4.6) | (0.5) | (0.1) | (5.2) |
|
|
|
|
|
Balance, July 5, 2008 | $ 4.6 | $ 1.6 | $ 1.1 | $ 7.3 |
|
|
|
|
Estimated severance payments and other employee costs of $4.6 million accrued at July 5, 2008 relate to the remaining estimated severance and related costs for 188 employees at locations closed or to be closed. Employee groups affected (totaling approximately 770 employees) include administrative, warehouse and management personnel. During the fiscal six months ended July 5, 2008 and July 7, 2007, $4.6 million and $1.2 million, respectively, of the reserve was utilized (relating to partial or full severance and related costs for 431 and 472 employees, respectively).
The $0.5 million addition during the fiscal six months ended July 5, 2008 is related to the exit and reorganization of certain moderate apparel product lines, which is reported as a selling, general and administrative expense in the wholesale jeanswear segment. During the six months ended July 7, 2007, we recorded $1.5 million of severance and related costs relating to the exit and reorganization of certain moderate apparel product lines as a selling, general and administrative expense in the wholesale jeanswear segment and
- 10 -
reversed $0.1 million of the severance accrual related to prior Stein Mart shoe department closings as a reduction of selling, general and administrative expenses in the retail segment.
The $1.6 million accrued at July 5, 2008 for the consolidation of facilities relates to expected costs to be incurred, including lease obligations, for closing certain acquired facilities in connection with consolidating their operations into our other existing facilities. During the six months ended July 7, 2007, we recorded $1.0 million relating to the remaining lease obligations for one of the closed warehouse facilities in Goose Creek, South Carolina as a selling, general and administrative expense in the wholesale jeanswear segment.
The details of the manufacturing restructuring accruals are as follows:
(In millions) |
One-time termination benefits |
Other associated costs |
Total manufacturing restructuring |
Balance, January 1, 2007 | $ 2.8 | $ 0.6 | $ 3.4 |
Additions | 1.3 | 0.3 | 1.6 |
Payments and reductions | (2.9) | (0.5) | (3.4) |
|
|
|
|
Balance, July 7, 2007 | $ 1.2 | $ 0.4 | $ 1.6 |
|
|
|
|
Balance, January 1, 2008 | $ 0.3 | $ 0.9 | $ 1.2 |
Payments and reductions | - | (0.1) | (0.1) |
|
|
|
|
Balance, July 5, 2008 | $ 0.3 | $ 0.8 | $ 1.1 |
|
|
|
The $1.1 million accrued at July 5, 2008 represents $0.3 million of one-time termination benefits for three employees and $0.8 million of legal fees and related costs. During the fiscal six months ended July 7, 2007, $2.9 million of the termination benefits reserve was utilized (relating to partial or full severance for 75 employees).
Our plans have not been finalized in all areas, and additional restructuring costs may result as we continue to evaluate and assess the impact of duplicate responsibilities, warehouses and office locations. We do not expect any final adjustments to be material. Any additional costs will be charged to operations in the period in which they occur.
CREDIT FACILITIES
Prior to June 6, 2008, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, of which the entire amount was available for letters of credit or cash borrowings, provided for a $1.0 billion five-year revolving credit facility expiring in June 2009 and a $750.0 million five-year revolving credit facility expiring in June 2010. On June 6, 2008, we amended these facilities. The terms and conditions of the credit facilities remain substantially unchanged, except for modification of the pricing provisions and certain covenants and reduction of the aggregate commitment under the $1.0 billion facility to $500.0 million. At July 5, 2008, $236.6 million of letters of credit were outstanding under the credit facility that expires in June 2009 and no amounts were outstanding under the credit facility that expires in June 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The amended Senior Credit Facilities are unsecured and require us to satisfy a minimum Interest Coverage Ratio, a maximum Covenant Debt to EBITDA Ratio and a minimum Asset Coverage Ratio (each as defined in the Restated Credit Agreements), and contain covenants limiting our ability to (1) incur debt and guaranty obligations, (2) incur liens, (3) make loans, advances, investments and acquisitions, (4) merge or liquidate, (5) sell or transfer assets, (6) pay dividends, repurchase shares, or make distributions to stockholders, and (7) engage in transactions with affiliates.
At July 5, 2008, we also had uncommitted unsecured lines of credit available for up to $106.6 million of letters of credit, under which an aggregate of $28.6 million was outstanding. At July 5, 2008, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.
- 11 -
FAIR VALUES
We adopted SFAS No. 157, "Fair Value Measurements," on January 1, 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. Under SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, "entities are permitted to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value measurement option under SFAS No. 159 for any of our financial assets or liabilities.
We have several financial instruments that must be measured under the new fair value standard, including derivatives and the assets and liabilities of the Jones Apparel Group, Inc. Deferred Compensation Plan (the "Rabbi Trust"). We currently do not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Our financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis at July 5, 2008.
(In millions) Description |
Classification
|
Value at July 5, 2008 |
Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Rabbi Trust assets | Other current assets | $ 8.3 | $ 8.3 | $ - | $ - |
|
|
|
|
||
Total assets | $ 8.3 | $ 8.3 | $ - | $ - | |
|
|
|
|
||
Rabbi Trust liabilities | Accrued employee compensation and benefits | $ 8.3 | $ 8.3 | $ - | $ - |
Derivatives | Other current liabilities | 0.6 | - | 0.6 | - |
|
|
|
|
||
Total liabilities | $ 8.9 | $ 8.3 | $ 0.6 | $ - | |
|
|
|
|
- 12 -
STATEMENT OF CASH FLOWS
Fiscal Six Months Ended: (In millions) |
July 5, 2008
|
July 7, 2007
|
Supplemental disclosures of cash flow information for continuing operations: | ||
Cash paid (received) during the period for: | ||
Interest | $ 21.7 | $ 30.6 |
Net income tax (refunds) payments | (8.8) | 38.7 |
Supplemental disclosures of non-cash investing and financing activities for continuing operations: | ||
Equipment acquired through capital lease financing | - | 2.4 |
Restricted stock issued to employees | 20.3 | 22.9 |
DERIVATIVES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," subsequently amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" and SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (as amended, hereinafter referred to as "SFAS 133"), establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires us to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income, depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and our Canadian subsidiary purchases a portion of its inventory from suppliers who require payment in U.S. Dollars. To minimize our exposure to changes in exchange rates between the Canadian Dollar and the U.S. Dollar, we hedge a portion of our forecasted Canadian U.S. Dollar-denominated inventory purchases. Changes in fair values of these currency hedges, which we designate as cash flow hedges, are deferred and recorded as a component of accumulated other comprehensive income until the associated hedged transactions impact the statement of operations, at which time the deferred gains and losses are reclassified to cost of sales. At July 5, 2008, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a notional total of US $12.9 million through December 2008. The $0.6 million fair value of these contracts is recorded as a current liability at July 5, 2008.
We reclassified $0.8 million of pre-tax losses and $0.5 million of pre-tax gains from foreign currency exchange contracts to cost of sales during the fiscal six months ended July 5, 2008 and July 7, 2007, respectively. There has been no material ineffectiveness related to our foreign currency exchange contracts as the instruments are designed to be highly effective in offsetting losses and gains on transactions being hedged. If foreign currency exchange rates do not change from their July 5, 2008 amounts, we estimate that any reclassifications from other comprehensive income to earnings within the next 12 months also will not be material. The actual amounts that will be reclassified to earnings over the next 12 months could vary, however, as a result of changes in market conditions.
- 13 -
PENSION PLANS
Components of Net Periodic Benefit Cost
Fiscal
Quarter Ended
|
Fiscal
Six Months Ended
|
||||
(In millions) |
July
5, 2008
|
July
7, 2007
|
July
5, 2008
|
July
7, 2007
|
|
Interest cost | $ 0.7 | $ 0.7 | $ 1.3 | $ 1.3 | |
Expected return on plan assets | (0.7) | (0.7) | (1.4) | (1.2) | |
Amortization of net loss | 0.2 | 0.2 | 0.4 | 0.5 | |
|
|
|
|
||
Net periodic benefit cost | $ 0.2 | $ 0.2 | $ 0.3 | $ 0.6 | |
|
|
|
|
Employer Contributions
During the fiscal six months ended July 5, 2008, we contributed $0.3 million to our defined benefit pension plans. We anticipate contributing an additional $1.6 million during 2008.
COMMON STOCK
The Board of Directors has authorized several programs to repurchase our common stock from time to time in open market transactions. We repurchased no common stock on the open market during the first fiscal six months of 2007 and 2008. As of July 5, 2008, $304.1 million of Board authorized repurchases was still available. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition.
On September 6, 2007, we entered into an accelerated stock repurchase ("ASR") agreement with Goldman, Sachs & Co. ("Goldman") to repurchase $400 million of our outstanding common stock. Purchases under the ASR were subject to collar provisions that established minimum and maximum numbers of shares based generally on the volume-weighted average price of our common stock during the term of the ASR program. Final settlement of the ASR program was scheduled for no later than July 19, 2008 and could occur earlier at the option of Goldman or later under certain circumstances. Through June 5, 2008, 17.9 million shares had been delivered to us by Goldman under the terms of the ASR (an initial delivery of 15.5 million shares on September 11, 2007 and a second delivery of 2.4 million shares on October 18, 2007). On June 5, 2008, Goldman informed us that it had concluded the ASR. As a result, we received a final delivery of 3.2 million shares on June 10, 2008, bringing the aggregate number of shares received under the ASR program to 21.1 million shares. No cash was required to complete the final delivery of shares. We also received approximately $1.0 million from Goldman as the final settlement of the ASR program, which has been recorded as a reduction of the cost of the shares acquired under the ASR. The combined average price for the shares delivered under the ASR was $19.00 per share.
Our Board of Directors has authorized our common stock repurchases as a tax-effective means to enhance shareholder value and distribute cash to shareholders and, to a lesser extent, to offset the impact of dilution resulting from the issuance of employee stock options and shares of restricted stock. In authorizing future share repurchase programs, our Board of Directors gives careful consideration to the most appropriate uses for our cash. In doing so, they also evaluate internal growth opportunities in connection with our projected cash flows and our existing capital resources.
SEGMENT INFORMATION
We identify operating segments based on, among other things, differences in products sold and the way our management organizes the components of our business for purposes of allocating resources and assessing performance. Our operations are comprised of four reportable segments: wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories, and retail. Segment revenues are generated from the sale of apparel, footwear and accessories through wholesale channels and our own retail locations. The wholesale
- 14 -
segments include wholesale operations with third party department and other retail stores and our own retail stores, the retail segment includes operations by our own stores, and income and expenses related to trademarks, licenses and general corporate functions are reported under "licensing, other and eliminations." We define segment profit as operating income before net interest expense, goodwill impairment charges, gains or losses on sales of subsidiaries, equity in earnings of unconsolidated affiliates and income taxes. Summarized below are our revenues and income by reportable segment for the fiscal quarters and six months ended July 5, 2008 and July 7, 2007. As a result of our exiting certain moderate product lines during 2007, we have renamed our wholesale moderate apparel segment as our wholesale jeanswear segment to better reflect the products we produce in that segment (which include jeanswear labels such as Gloria Vanderbilt, l.e.i., GLO, Bandolino Bleu, Jeanstar and Grane as well as the Energie, Erika and Pappagallo product lines).
(In millions) | Wholesale Better Apparel |
Wholesale Jeanswear |
Wholesale Footwear & Accessories |
Retail |
Licensing, Other & Eliminations |
Consolidated |
For the fiscal quarter ended July 5, 2008 | ||||||
Revenues from external customers | $ 235.0 | $ 172.2 | $ 215.6 | $ 197.5 | $ 9.1 | $829.4 |
Intersegment revenues | 30.3 | 0.8 | 15.4 | - | (46.5) | - |
|
|
|
|
|
|
|
Total revenues | 265.3 | 173.0 | 231.0 | 197.5 | (37.4) | 829.4 |
|
|
|
|
|
|
|
Segment income | $ 20.9 | $ 0.6 | $ 8.5 | $ 5.5 | $ (10.2) | 25.3 |
|
|
|
|
|
||
Net interest expense | (9.8) | |||||
Gain on sale of Mexican operations and interest in Australian joint venture | 0.7 | |||||
|
||||||
Income from continuing operations before provision for income taxes | $ 16.2 | |||||
|
||||||
For the fiscal quarter ended July 7, 2007 | ||||||
Revenues from external customers | $ 230.0 | $ 255.6 | $ 215.9 | $ 193.2 | $ 9.2 | $ 903.9 |
Intersegment revenues | 35.1 | 4.2 | 10.9 | - | (50.2) | - |
|
|
|
|
|
|
|
Total revenues | 265.1 | 259.8 | 226.8 | 193.2 | (41.0) | 903.9 |
|
|
|
|
|
|
|
Segment income (loss) | $ 23.4 | $ 3.5 | $ 18.4 | $ (5.1) | $ (82.1) | (41.9) |
|
|
|
|
|
||
Net interest expense | (13.1) | |||||
Losses on assets held for sale | (30.4) | |||||
Equity in earnings of unconsolidated affiliates | 1.5 | |||||
|
||||||
Loss from continuing operations before benefit for income taxes | $ (83.9) | |||||
|
||||||
For the fiscal six months ended July 5, 2008 | ||||||
Revenues from external customers | $ 566.4 | $ 392.8 | $ 468.2 | $ 356.3 | $ 21.1 | $ 1,804.8 |
Intersegment revenues | 70.2 | 1.9 | 35.7 | - | (107.8) | - |
|
|
|
|
|
|
|
Total revenues | 636.6 | 394.7 | 503.9 | 356.3 | (86.7) | 1,804.8 |
|
|
|
|
|
|
|
Segment income (loss) | $ 80.2 | $ 5.0 | $ 31.1 | $ (19.4) | $ (31.6) | 65.3 |
|
|
|
|
|
||
Net interest expense | (19.6) | |||||
Gain on sale of Mexican operations and interest in Australian joint venture | 1.0 | |||||
|
||||||
Income from continuing operations before provision for income taxes | $ 46.7 | |||||
|
||||||
For the fiscal six months ended July 7, 2007 | ||||||
Revenues from external customers | $ 569.9 | $ 560.5 | $ 465.2 | $ 365.1 | $ 21.7 | $ 1,982.4 |
Intersegment revenues | 78.2 | 7.3 | 27.9 | - | (113.4) | - |
|
|
|
|
|
|
|
Total revenues | 648.1 | 567.8 | 493.1 | 365.1 | (91.7) | 1,982.4 |
|
|
|
|
|
|
|
Segment income (loss) | $ 85.0 | $ 27.6 | $ 51.5 | $ (23.6) | $ (99.1) | 41.4 |
|
|
|
|
|
||
Net interest expense | (27.4) | |||||
Losses on assets held for sale | (30.4) | |||||
Equity in earnings of unconsolidated affiliates | 2.1 | |||||
|
||||||
Loss from continuing operations before benefit for income taxes | $ (14.3) | |||||
|
- 15 -
SUPPLEMENTAL SUMMARIZED FINANCIAL INFORMATION
Certain of our subsidiaries function as co-issuers (fully and unconditionally guaranteed on a joint and several basis) of the outstanding debt of Jones Apparel Group, Inc. ("Jones"), including Jones Apparel Group USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings"), Nine West Footwear Corporation ("Nine West") and Jones Retail Corporation ("Jones Retail").
The following condensed consolidating balance sheets, statements of operations and statements of cash flows for the "Issuers" (consisting of Jones and Jones USA, Jones Holdings, Nine West and Jones Retail, which are all our subsidiaries that act as co-issuers and co-obligors) and the "Others" (consisting of all of our other subsidiaries, excluding all obligor subsidiaries) have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Separate financial statements and other disclosures concerning Jones are not presented as Jones has no independent operations or assets. There are no contractual restrictions on distributions from Jones USA, Jones Holdings, Nine West or Jones Retail to Jones.
Condensed Consolidating Balance Sheets
(In millions)
July
5, 2008
|
December
31, 2007
|
|||||||||
Issuers
|
Others
|
Eliminations
|
Cons- olidated |
Issuers
|
Others
|
Eliminations
|
Cons- olidated |
|||
ASSETS | ||||||||||
CURRENT ASSETS: | ||||||||||
Cash and cash equivalents | $ 300.4 | $ 21.8 | $ - | $ 322.2 | $ 264.0 | $ 38.8 | $ - | $ 302.8 | ||
Accounts receivable | 258.7 | 123.9 | - | 382.6 | 205.3 | 131.7 | - | 337.0 | ||
Inventories | 335.6 | 131.1 | - | 466.7 | 358.5 | 165.7 | (0.3) | 523.9 | ||
Prepaid income taxes | 1.1 | 0.2 | 23.9 | 25.2 | 1.4 | 5.2 | 24.0 | 30.6 | ||
Deferred taxes | 7.9 | 15.9 | - | 23.8 | 13.6 | 19.4 | 0.9 | 33.9 | ||
Prepaid expenses and other current assets | 40.0 | 10.6 | - | 50.6 | 39.7 | 26.2 | - | 65.9 | ||
|
|
|
|
|
|
|
|
|||
TOTAL CURRENT ASSETS | 943.7 | 303.5 | 23.9 | 1,271.1 | 882.5 | 387.0 | 24.6 | 1,294.1 | ||
Property, plant and equipment - net | 140.5 | 164.9 | - | 305.4 | 161.2 | 150.9 | - | 312.1 | ||
Due from affiliates | - | 1,126.8 | (1,126.8) | - | - | 971.7 | (971.7) | - | ||
Goodwill | 973.5 | 67.6 | (66.5) | 974.6 | 972.8 | 67.6 | (66.5) | 973.9 | ||
Other intangibles - net | 0.3 | 616.6 | - | 616.9 | 0.3 | 617.7 | - | 618.0 | ||
Deferred taxes | 18.9 | - | (18.9) | - | 20.4 | - | (19.1) | 1.3 | ||
Investments in subsidiaries | 1,794.0 | - | (1,794.0) | - | 1,746.8 | - | (1,746.8) | - | ||
Other assets | 27.4 | 30.6 | - | 58.0 | 26.2 | 11.0 | - | 37.2 | ||
|
|
|
|
|
|
|
|
|||
$ 3,898.3 | $ 2,310.0 | $ (2,982.3) | $ 3,226.0 | $ 3,810.2 | $ 2,205.9 | $ (2,779.5) | $ 3,236.6 | |||
|
|
|
|
|
|
|
|
|||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Current portion of capital lease obligations | $ 0.7 | $ 3.5 | $ - | $ 4.2 | $ 0.6 | $ 4.2 | $ - | $ 4.8 | ||
Accounts payable | 133.8 | 81.5 | - | 215.3 | 175.0 | 48.6 | - | 223.6 | ||
Income taxes payable | 5.6 | 9.6 | (1.4) | 13.8 | 19.7 | 1.0 | (0.3) | 20.4 | ||
Accrued expenses and other current liabilities | 78.2 | 46.5 | - | 124.7 | 96.6 | 50.2 | - | 146.8 | ||
|
|
|
|
|
|
|
|
|||
TOTAL CURRENT LIABILITIES | 218.3 | 141.1 | (1.4) | 358.0 | 291.9 | 104.0 | (0.3) | 395.6 | ||
|
|
|
|
|
|
|
|
|||
NONCURRENT LIABILITIES: | ||||||||||
Long-term debt | 749.4 | - | - | 749.4 | 749.4 | - | - | 749.4 | ||
Obligations under capital leases | 3.9 | 22.6 | - | 26.5 | 4.3 | 24.0 | - | 28.3 | ||
Deferred taxes | - | 21.2 | (6.4) | 14.8 | - | 5.8 | (5.8) | - | ||
Due to affiliates | 1,126.8 | - | (1,126.8) | - | 971.7 | - | (971.7) | - | ||
Other | 51.6 | 15.8 | - | 67.4 | 50.8 | 15.7 | - | 66.5 | ||
|
|
|
|
|
|
|
|
|||
TOTAL NONCURRENT LIABILITIES | 1,931.7 | 59.6 | (1,133.2) | 858.1 | 1,776.2 | 45.5 | (977.5) | 844.2 | ||
|
|
|
|
|
|
|
|
|||
TOTAL LIABILITIES | 2,150.0 | 200.7 | (1,134.6) | 1,216.1 | 2,068.1 | 149.5 | (977.8) | 1,239.8 | ||
|
|
|
|
|
|
|
|
|||
STOCKHOLDERS' EQUITY: | ||||||||||
Common stock and additional paid-in capital | 1,349.0 | 1,708.3 | (1,708.3) | 1,349.0 | 1,341.2 | 1,707.8 | (1,707.8) | 1,341.2 | ||
Retained earnings | 2,225.3 | 394.2 | (132.6) | 2,486.9 | 2,226.1 | 339.7 | (85.0) | 2,480.8 | ||
Accumulated other comprehensive income | 0.3 | 6.8 | (6.8) | 0.3 | 2.1 | 8.9 | (8.9) | 2.1 | ||
Treasury stock | (1,826.3) | - | - | (1,826.3) | (1,827.3) | - | - | (1,827.3) | ||
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TOTAL STOCKHOLDERS' EQUITY | 1,748.3 | 2,109.3 | (1,847.7) | 2,009.9 | 1,742.1 | 2,056.4 | (1,801.7) | 1,996.8 | ||
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$ 3,898.3 | $ 2,310.0 | $ (2,982.3) | $ 3,226.0 | $ 3,810.2 | $ 2,205.9 | $ (2,779.5) | $ 3,236.6 | |||
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- 16 -
Condensed Consolidating Statements of Operations
(In millions)
Fiscal
Quarter Ended July 5, 2008
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Fiscal
Quarter Ended July 7, 2007
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Issuers
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Others
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Eliminations
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Cons- olidated |
Issuers
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Others
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Eliminations
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Cons- olidated |
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Net sales | $ 613.6 | $ 210.1 | $ (3.5) | $ 820.2 | $ 601.7 | $ 296.6 | $ (3.8) | $ 894.5 | ||
Licensing income | - | 9.0 | - | 9.0 | - | 9.2 | - | 9.2 | ||
Service and other revenue | - | 0.2 | - | 0.2 | 0.2 | - | - | 0.2 | ||
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Total revenues | 613.6 | 219.3 | (3.5) | 829.4 | 601.9 | 305.8 | (3.8) | 903.9 | ||
Cost of goods sold | 398.9 | 149.1 | (1.0) | 547.0 | 386.8 | 228.3 | (1.4) | 613.7 | ||
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Gross profit | 214.7 | 70.2 | (2.5) | 282.4 | 215.1 | 77.5 | (2.4) | 290.2 | ||
Selling, general and administrative expenses | 229.8 | 29.6 | (2.5) | 256.9 | 234.5 | 31.3 | (2.7) | 263.1 | ||
Trademark impairments | - | - | - | - | - | 69.0 | - | 69.0 | ||
Losses on assets held for sale | - | - | - | - | - | 30.4 | - | 30.4 | ||
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Operating (loss) income | (15.1) | 40.6 | - | 25.5 | (19.4) | (53.2) | 0.3 | (72.3) | ||
Net interest (expense) income and financing costs | (12.4) | 2.6 | - | (9.8) | (18.3) | 5.2 | - | (13.1) | ||
Gain on sale of interest in Australian joint venture | - | 0.5 | - | 0.5 | - | - | - | - | ||
Equity in earnings of unconsolidated affiliates | - | - | - | - | (1.0) | 0.1 | 2.4 | 1.5 | ||
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(Loss) income from continuing operations before provision for income taxes and equity in earnings of subsidiaries | (27.5) | 43.7 | - | 16.2 | (38.7) | (47.9) | 2.7 | (83.9) | ||
(Benefit) provision for income taxes | (8.9) | 14.1 | 0.4 | 5.6 | (13.1) | (21.0) | 1.3 | (32.8) | ||
Equity in earnings of subsidiaries | 22.8 | - | (22.8) | - | 29.6 | - | (29.6) | - | ||
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Income (loss) from continuing operations | 4.2 | 29.6 | (23.2) | 10.6 | 4.0 | (26.9) | (28.2) | (51.1) | ||
(Loss) income from discontinued operations, net of tax | - | - | - | - | (0.4) | 4.4 | - | 4.0 | ||
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Net income (loss) | $ 4.2 | $ 29.6 | $ (23.2) | $ 10.6 | $ 3.6 | $ (22.5) | $ (28.2) | $ (47.1) | ||
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Fiscal
Six Months Ended July 5, 2008
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Fiscal
Six Months Ended July 7, 2007
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Issuers
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Others
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Eliminations
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Cons- olidated |
Issuers
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Others
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Eliminations
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Cons- olidated |
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Net sales | $ 1,325.7 | $ 465.9 | $ (8.0) | $ 1,783.6 | $ 1,325.2 | $ 642.1 | $ (8.3) | $ 1,959.0 | ||
Licensing income | - | 20.5 | - | 20.5 | - | 21.4 | - | 21.4 | ||
Service and other revenue | 0.2 | 0.5 | - | 0.7 | 0.4 | 1.6 | - | 2.0 | ||
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Total revenues | 1,325.9 | 486.9 | (8.0) | 1,804.8 | 1,325.6 | 665.1 | (8.3) | 1,982.4 | ||
Cost of goods sold | 870.9 | 337.3 | (6.5) | 1,201.7 | 854.1 | 478.9 | (5.9) | 1,327.1 | ||
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Gross profit | 455.0 | 149.6 | (1.5) | 603.1 | 471.5 | 186.2 | (2.4) | 655.3 | ||
Selling, general and administrative expenses | 467.6 | 75.7 | (5.7) | 537.6 | 474.8 | 76.2 | (6.1) | 544.9 | ||
Trademark impairments | - | - | - | - | - | 69.0 | - | 69.0 | ||
Losses on assets held for sale | - | - | - | - | - | 30.4 | - | 30.4 | ||
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Operating (loss) income | (12.6) | 73.9 | 4.2 | 65.5 | (3.3) | 10.6 | 3.7 | 11.0 | ||
Net interest (expense) income and financing costs | (25.5) | 5.9 | - | (19.6) | (37.8) | 10.4 | - | (27.4) | ||
Gain on sale of interest in Australian joint venture | - | 0.8 | - | 0.8 | - | - | - | - | ||
Equity in earnings of unconsolidated affiliates | - | - | - | - | (0.9) | 1.0 | 2.0 | 2.1 | ||
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(Loss) income from continuing operations before provision for income taxes and equity in earnings of subsidiaries | (38.1) | 80.6 | 4.2 | 46.7 | (42.0) | 22.0 | 5.7 | (14.3) | ||
(Benefit) provision for income taxes | (8.1) | 26.0 | (1.4) | 16.5 | (10.0) | 2.5 | (0.1) | (7.6) | ||
Equity in earnings of subsidiaries | 53.1 | - | (53.1) | - | 22.6 | - | (22.6) | - | ||
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Income (loss) from continuing operations | 23.1 | 54.6 | (47.5) | 30.2 | (9.4) | 19.5 | (16.8) | (6.7) | ||
(Loss) income from discontinued operations, net of tax | - | - | - | - | (0.4) | 7.9 | - | 7.5 | ||
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Net income (loss) | $ 23.1 | $ 54.6 | $ (47.5) | $ 30.2 | $ (9.8) | $ 27.4 | $ (16.8) | $ 0.8 | ||
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- 17 -
Condensed Consolidating Statements of Cash Flows
(In millions)
Fiscal
Six Months Ended July 5, 2008
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Fiscal
Six Months Ended July 7, 2007
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Issuers
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Others
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Eliminations
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Cons- olidated |
Issuers
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Others
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Eliminations
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Cons- olidated |
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Cash flows from operating activities: | ||||||||||
Net cash provided by (used in) operating activities of continuing operations | $ 79.9 | $ 18.3 | $ - | $ 98.2 | $ (48.1) | $ 20.8 | $ - | $ (27.3) | ||
Net cash provided by operating activities of discontinued operations | - | - | - | - | - | 21.4 | - | 21.4 | ||
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Net cash provided by (used in) operating activities | 79.9 | 18.3 | - | 98.2 | (48.1) | 42.2 | - | (5.9) | ||
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Cash flows from investing activities: | ||||||||||
Capital expenditures | (19.9) | (18.5) | - | (38.4) | (28.4) | (19.3) | - | (47.7) | ||
Investment in GRI | - | (20.0) | - | (20.0) | - | - | - | - | ||
Acquisition-related costs | (0.2) | - | - | (0.2) | - | - | - | - | ||
Proceeds from sales of assets | 0.4 | 6.8 | - | 7.2 | 0.1 | 2.7 | - | 2.8 | ||
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Net cash used in investing activities of continuing operations | (19.7) | (31.7) | - | (51.4) | (28.3) | (16.6) | - | (44.9) | ||
Net cash used in investing activities of discontinued operations | - | - | - | - | - | (26.9) | - | (26.9) | ||
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Net cash used in investing activities | (19.7) | (31.7) | - | (51.4) | (28.3) | (43.5) | - | (71.8) | ||
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Cash flows from financing activities: | ||||||||||
Net borrowings under credit facilities | - | - | - | - | 84.1 | - | - | 84.1 | ||
Principal payments on capital leases | (0.3) | (2.1) | - | (2.4) | (0.5) | (1.4) | - | (1.9) | ||
Dividends paid | (24.1) | - | - | (24.1) | (30.4) | - | - | (30.4) | ||
Proceeds from exercise of employee stock options | - | - | - | - | 10.3 | - | - | 10.3 | ||
Net cash advances to discontinued operations | - | - | - | - | (5.6) | - | - | (5.6) | ||
Repayment of acquired debt | (0.2) | - | - | (0.2) | - | - | - | - | ||
Settlement of accelerated stock repurchase program | 1.0 | - | - | 1.0 | - | - | - | - | ||
Excess tax benefits from share-based payment arrangements | - | - | - | - | 2.4 | - | - | 2.4 | ||
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Net cash (used in) provided by financing activities of continuing operations | (23.6) | (2.1) | - | (25.7) | 60.3 | (1.4) | - | 58.9 | ||
Net cash provided by financing activities of discontinued operations | - | - | - | - | - | 1.8 | - | 1.8 | ||
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Net cash (used in) provided by financing activities | (23.6) | (2.1) | - | (25.7) | 60.3 | 0.4 | - | 60.7 | ||
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Effect of exchange rates on cash | (0.2) | (1.5) | - | (1.7) | - | 2.6 | - | 2.6 | ||
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Net increase (decrease) in cash and cash equivalents | 36.4 | (17.0) | - | 19.4 | (16.1) | 1.7 | - | (14.4) | ||
Cash and cash equivalents, beginning, including cash reported under assets held for sale | 264.0 | 38.8 | - | 302.8 | 35.1 | 36.4 | - | 71.5 | ||
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Cash and cash equivalents, ending, including cash reported under assets held for sale | $ 300.4 | $ 21.8 | $ - | $ 322.2 | $ 19.0 | $ 38.1 | $ - | $ 57.1 | ||
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JOINT VENTURES
We had two joint ventures formed with HCL Technologies Limited ("HCL") to provide us with computer consulting, programming and associated support services. HCL is a global technology and software services company offering a suite of services targeted at technology vendors, software product companies and organizations. We had a 49% ownership interest in each joint venture, which operated under the names HCL Jones Technologies, LLC and HCL Jones Technologies (Bermuda), Ltd. The agreement under which the joint ventures were established terminated in January 2008, and the parties have adopted plans of liquidation for both joint venture companies.
We also had a 50% ownership interest in a joint venture with Sutton Development Pty. Ltd. ("Sutton") to operate retail locations in Australia, which operated under the name Nine West Australia Pty Ltd. We sold our interest in this joint venture to Sutton on December 3, 2007 for $20.7 million, which resulted in an initial pre-tax gain of $8.2 million. The sales price was subject to certain working capital adjustments, which resulted in additional sales proceeds and pre-tax gain of $0.8 million in the fiscal six months ended July 5, 2008.
The results of these joint ventures were reported under the equity method of accounting.
- 18 -
RACHEL ROY JOINT VENTURE
On June 10, 2008, we formed a joint venture with Royale Etenia LLC ("Royale") to develop, market and license the New York-based fashion brand Rachel Roy. Under the terms of the agreement, we own a 50% interest in the joint venture, with the remaining interest owned by Royale. The joint venture plans to develop the Rachel Roy brand through continued global expansion of the wholesale business, introduction of new product categories, and stand-alone retail stores in key U.S. and international locations. Rachel Roy will continue to lead the design of the brand. We also assumed the operations and the assets and liabilities of the existing designer collection business formerly operated by Rachel Roy Fashions, Inc. under a license with the new joint venture. No material assets or liabilities were recorded in this transaction. An excess of the fair value of liabilities assumed over the fair value of assets assumed resulted in approximately $0.7 million being recorded as goodwill. We are currently in the process of valuing the acquired intangible assets (including trademarks, customer relationships and order backlog). The resulting values will be reclassified from goodwill to intangible assets in the fiscal quarter ending October 4, 2008.
INVESTMENT IN GRI GROUP LIMITED
On June 20, 2008, we acquired a 10% equity interest in GRI Group Limited, a leading international accessories and apparel brand management and retail-distribution network, for $20.0 million. GRI, which (including its franchisees) operates over 600 points of sale in 12 Asian countries, is the exclusive licensee of several of our brands in Asia, including Nine West, Anne Klein New York, AK Anne Klein, Easy Spirit, Enzo Angiolini and Joan & David. GRI also distributes a series of well-known ladies apparel, shoes and accessory brands such as Pringle of Scotland, EQ:IQ, Francesco Biasia, Steve Madden, Lucky Brand Jeans, IZOD and others.
Under the terms of our investment, GRI will be entitled to receive a future cash payment from us of up to $10.0 million if GRI's net income for its fiscal year ending January 31, 2009 exceeds a specified earnings target. Any additional payment will be recorded as an additional investment in GRI but will not increase our 10% equity interest. The results of GRI will be reported under the equity method of accounting.
NEW ACCOUNTING STANDARDS
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, "Earnings per Share." This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented are to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this Staff Position, with early application not permitted. The adoption of this Staff Position, which will require us to allocate a portion of net income to these participating securities, will not have a material effect on our historical or future reported earnings per share.
- 19 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information and analysis of our results of operations for the 13 and 27 week periods ended July 5, 2008 (hereinafter referred to as the "second fiscal quarter of 2008" and the "first fiscal six months of 2008," respectively) and the 13 and 27 week periods ended July 7, 2007 (hereinafter referred to as the "second fiscal quarter of 2007" and the "first fiscal six months of 2007," respectively), and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.
Business Overview
We design, contract for the manufacture of and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children, and women's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers, primarily in the United States and Canada. We also operate our own network of retail and factory outlet stores. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.
During the first fiscal six months of 2008, the following significant events took place:
Rachel Roy Joint Venture
On June 10, 2008, we formed a joint venture with Royale to develop, market and license the New York-based fashion brand Rachel Roy. Under the terms of the agreement, we own a 50% interest in the joint venture, with the remaining interest owned by Royale. The joint venture plans to develop the Rachel Roy brand through continued global expansion of the wholesale business, introduction of new product categories, and stand-alone retail stores in key U.S. and international locations. Rachel Roy will continue to lead the design of the brand. We also assumed the operations and the assets and liabilities of the existing designer collection business formerly operated by Rachel Roy Fashions, Inc. under a license with the new joint venture.
Investment in GRI
On June 20, 2008, we acquired a 10% equity interest in GRI, a leading international accessories and apparel brand management and retail-distribution network, for $20.0 million. GRI, which (including its franchisees) operates over 600 points of sale in 12 Asian countries, is the exclusive licensee of several of our brands in Asia, including Nine West, Anne Klein New York, AK Anne Klein, Easy Spirit, Enzo Angiolini and Joan & David. GRI also distributes a series of well-known ladies apparel, shoes and accessory brands such as Pringle of Scotland, EQ:IQ, Francesco Biasia, Steve Madden, Lucky Brand Jeans, IZOD and others.
- 20 -
Under the terms of our investment, GRI will be entitled to receive a future cash payment from us of up to $10.0 million if GRI's net income for its fiscal year ending January 31, 2009 exceeds a specified earnings target. Any additional payment will be recorded as an additional investment in GRI but will not increase our 10% equity interest. The results of GRI will be reported under the equity method of accounting.
Completion of ASR Program
On September 6, 2007, we entered into an ASR agreement with Goldman, Sachs & Co. ("Goldman") to repurchase $400 million of our outstanding common stock. Purchases under the ASR were subject to collar provisions that established minimum and maximum numbers of shares based generally on the volume-weighted average price of our common stock during the term of the ASR program. Final settlement of the ASR program was scheduled for no later than July 19, 2008 and could occur earlier at the option of Goldman or later under certain circumstances. Through June 5, 2008, 17.9 million shares had been delivered to us by Goldman under the terms of the ASR. On June 5, 2008, Goldman informed us that it had concluded the ASR. As a result, we received a final delivery of 3.2 million shares on June 10, 2008, bringing the aggregate number of shares received under the ASR program to 21.1 million shares. No cash was required to complete the final delivery of shares. The combined average price for the shares delivered under the ASR was $19.00 per share.
Strategic Decisions Regarding Certain Moderate Apparel Brands
Our continued strategic operational reviews and efforts to improve profitability and the continued trend of our moderate and jeanswear customers towards differentiated product offerings led us to make the strategic decision to exit some of our moderate apparel product lines during 2007. As a result of this exit, we have renamed our wholesale moderate apparel segment as our wholesale jeanswear segment to better reflect the products we produce in that segment. We believe that exiting these product lines will strengthen our future operating results and allow us to focus primarily on growth opportunities in our remaining wholesale product lines, which have strong fundamentals and operate at substantially higher margins. This decision did not impact in any way our denim and junior division labels such as Gloria Vanderbilt, l.e.i., Energie, GLO, Jeanstar, Grane and others, which are also reported in the wholesale jeanswear segment. The moderate product lines we exited have not been classified as discontinued operations as they do not meet the criteria for discontinued operations as set forth in SFAS No. 144. As a result of the loss of these projected revenues, we recorded impairments for our Norton McNaughton and Erika trademarks of $69.0 million in our licensing, other and eliminations segment during the fiscal quarter ended July 7, 2007. In connection with this decision, we also announced the closing of our Goose Creek, South Carolina and Edison, New Jersey distribution centers. See "Accrued Restructuring Costs" in Notes to Consolidated Financial Statements.
The assets and liabilities relating to the moderate product lines originally planned to be sold were classified as held for sale in the Consolidated Balance Sheet at July 7, 2007. We had estimated the fair value of the moderate net assets to be sold to be $22.5 million based upon preliminary sales negotiations. The carrying value of these net assets was $52.9 million as of July 7, 2007; therefore, we recorded a loss of $30.4 million to write these assets down to realizable value. We subsequently decided to shut down and liquidate these brands rather than sell them and, as a result, we reclassified the assets previously reported as assets held for sale as assets held and used during the fiscal quarter ended October 6, 2007. During the fiscal quarter ended October 6, 2007, we reversed $16.8 million of previously reported losses on assets held for sale since the carrying value of these current assets would be recovered during the process of shutting down and liquidating the related brands. We also reclassified the remaining $13.6 million of previously reported losses on assets held for sale as additional impairments of trademarks and property, plant and equipment of $11.5 million and $2.1 million, respectively, during the fiscal quarter ended October 6, 2007.
We also announced in February 2008 that Wal-Mart will be the exclusive retailer of our l.e.i. brand for juniors, junior plus and girls beginning with the 2008 back-to-school shopping season at Wal-Mart stores nationwide.
- 21 -
Sale of Mexican Operations
On September 12, 2006, we announced the closing of our Mexican operations related to the decision by Polo to discontinue the Polo Jeans Company product line, which we produced for Polo subsequent to the sale of the Polo Jeans Company business to Polo in February 2006. At that time, we determined the estimated fair value of the property, plant and equipment employed in Mexico was less than its carrying value. As a result, we recorded an impairment loss of $8.6 million, which was reported as cost of sales in the wholesale jeanswear segment in 2006. The closing was substantially completed by the end of March 2007. On May 8, 2008, we sold the Mexican operations for $5.9 million, resulting in a gain of $0.2 million.
Sale of Barneys
On September 6, 2007, we completed the sale of Barneys to an affiliate of Istithmar PJSC. In accordance with the provisions of SFAS No. 144, the results of operations of Barneys for the fiscal quarter and six months ended July 7, 2007 have been reported as discontinued operations and the assets and liabilities relating to Barneys have been reclassified as held for sale in the Consolidated Balance Sheet for July 7, 2007.
Critical Accounting Policies
Several of our accounting policies involve significant or complex judgements and uncertainties and require us to make certain critical accounting estimates. We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were highly uncertain at the time the estimate was made. The estimates with the greatest potential effect on our results of operations and financial position include the collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the fair values of both our goodwill and intangible assets with indefinite lives. Estimates related to accounts receivable affect our wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories and retail segments. Estimates related to inventory and goodwill affect our wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories and retail segments. Estimates related to intangible assets with indefinite lives affect our licensing, other and eliminations segment.
For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions given to our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.
We test our goodwill and our trademarks for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that would reduce the fair value of an asset below its carrying value. These tests utilize discounted cash flow models to estimate fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates and material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trade mark valuations; (iii) projected average revenue growth rates used in the reporting unit and trademark models; and (iv) projected long-term growth rates used in the derivation of terminal values. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.
- 22 -
RESULTS OF OPERATIONS
Statements of Operations Stated in Dollars and as a Percentage of Total Revenues
(In millions) |
Fiscal
Quarter Ended
|
Fiscal
Six Months Ended
|
|||||||||
July 5, 2008
|
July 7, 2007
|
July 5, 2008
|
July 7, 2007
|
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Net sales | $ 820.2 | 98.9% | $ 894.5 | 99.0% | $ 1,783.6 | 98.8% | $ 1,959.0 | 98.8% | |||
Licensing income | 9.0 | 1.1% | 9.2 | 1.0% | 20.5 | 1.1% | 21.4 | 1.1% | |||
Service and other revenue | 0.2 | 0.0% | 0.2 | 0.0% | 0.7 | 0.0% | 2.0 | 0.1% | |||
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Total revenues | 829.4 | 100.0% | 903.9 | 100.0% | 1,804.8 | 100.0% | 1,982.4 | 100.0% | |||
Cost of goods sold | 547.0 | 66.0% | 613.7 | 67.9% | 1,201.7 | 66.6% | 1,327.1 | 66.9% | |||
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Gross profit | 282.4 | 34.0% | 290.2 | 32.1% | 603.1 | 33.4% | 655.3 | 33.1% | |||
Selling, general and administrative expenses | 256.9 | 31.0% | 263.1 | 29.1% | 537.6 | 29.8% | 544.9 | 27.5% | |||
Trademark impairments | - | - | 69.0 | 7.6% | - | - | 69.0 | 3.5% | |||
Losses on assets held for sale | - | - | 30.4 | 3.4% | - | - | 30.4 | 1.5% | |||
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Operating income (loss) | 25.5 | 3.1% | (72.3) | (8.0%) | 65.5 | 3.6% | 11.0 | 0.6% | |||
Net interest expense and financing costs | 9.8 | 1.2% | 13.1 | 1.4% | 19.6 | 1.1% | 27.4 | 1.4% | |||
Gain on sale of interest in Australian joint venture | 0.5 | 0.1% | - | - | 0.8 | 0.0% | - | - | |||
Equity in earnings of unconsolidated affiliates | - | - | 1.5 | 0.2% | - | - | 2.1 | 0.1% | |||
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Income (loss) from continuing operations before provision for income taxes | 16.2 | 2.0% | (83.9) | (9.3%) | 46.7 | 2.6% | (14.3) | (0.7%) | |||
Provision (benefit) for income taxes | 5.6 | 0.7% | (32.8) | (3.6%) | 16.5 | 0.9% | (7.6) | (0.4%) | |||
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Income (loss) from continuing operations | 10.6 | 1.3% | (51.1) | (5.7%) | 30.2 | 1.7% | (6.7) | (0.3%) | |||
Income from discontinued operations, net of tax | - | - | 4.0 | 0.4% | - | - | 7.5 | 0.4% | |||
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Net income (loss) | $ 10.6 | 1.3% | $ (47.1) | (5.2%) | $ 30.2 | 1.7% | $ 0.8 | 0.0% | |||
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Percentage totals may not add due to rounding.
Fiscal Quarter Ended July 5, 2008 Compared to Fiscal Quarter Ended July 7, 2007
Revenues. Total revenues for the second fiscal quarter of 2008 were $829.4 million compared with $903.9 million for the second fiscal quarter of 2007, a decrease of 8.2%.
Revenues by segment were as follows:
(In millions) |
Second Fiscal Quarter of 2008 |
Second Fiscal Quarter of 2007 |
Increase/ (Decrease) |
Percent Change |
Wholesale better apparel | $ 235.0 | $ 230.0 | $ 5.0 | 2.2% |
Wholesale jeanswear | 172.2 | 255.6 | (83.4) | (32.6%) |
Wholesale footwear and accessories | 215.6 | 215.9 | (0.3) | (0.1%) |
Retail | 197.5 | 193.2 | 4.3 | 2.2% |
Other | 9.1 | 9.2 | (0.1) | (1.1%) |
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Total revenues | $ 829.4 | $ 903.9 | $ (74.5) | (8.2%) |
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Wholesale better apparel revenues increased due to increases in our Jones New York Signature product line from both increased customer orders based on the performance of these brands at retail and initial shipments of our new casual line of products. These increases were partially offset by lower shipments of our Jones New York, Nine West, private-label suit and specialty market product lines due to decreased orders from our customers based on the performance of these brands at retail.
Wholesale jeanswear revenues decreased approximately $67 million due to lower shipments of our Erika, Nine & Co., Evan-Picone, Bandolino, Pappagallo and Rena Rowan moderate product lines that were discontinued in 2007. Planned reductions of our GLO product line to focus on the l.e.i. brand and lower shipments of our Energie
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product line due to decreased orders from our customers based on the performance of the brand at retail were partially offset by initial sales of the relaunched Erika and Pappagallo product lines during the current period.
Wholesale footwear and accessories revenues did not significantly change from the prior period. Increased shipments in our international businesses due to continued expansion by our licensed partners, increased shipments of our Nine West and Nine & Co. handbag product lines due to increased orders from our customers based on the performance of these brands at retail and initial shipments of our AK Anne Klein handbag line were offset by decreased shipping of our Nine West footwear products based on the performance of this brand at retail.
Retail revenues increased primarily due to $3.6 million in sales from new store openings. We began the first fiscal quarter of 2008 with 1,026 retail locations and had a net decrease of eight locations during the quarter to end the quarter with 1,018 locations. This compares with 1,003 locations at the end of the second fiscal quarter of 2007.
Revenues for the second fiscal quarter of 2008 include $0.2 million in the licensing and other segment of service fees charged to Barneys under a short-term transition services agreement entered into with Barneys at the time of the sale of Barneys. These revenues are based on contractual monthly fees as set forth in the agreement. The agreement ended in May 2008.
Gross Profit. The gross profit margin increased to 34.0% in the second fiscal quarter of 2008 compared with 32.1% in the second fiscal quarter of 2007.
Wholesale better apparel gross profit margins were 31.0% and 33.1% for the second fiscal quarters of 2008 and 2007, respectively. The decrease was due to higher levels of sales to off-price retailers in our suit and dress product lines.
Wholesale jeanswear gross profit margins were 24.2% and 18.8% for the second fiscal quarters of 2008 and 2007, respectively. Margins were negatively impacted in the prior period by high levels of vendor allowances to clear inventory for the lower-margin moderate brands we had planned to exit or sell.
Wholesale footwear and accessories gross profit margins were 24.4% and 27.8% for the second fiscal quarters of 2008 and 2007, respectively. The decrease was due to higher levels of sales to off-price retailers to liquidate excess inventory, growth in our lower-margin international business and increased production costs in China in the current period, partially offset by lower levels of vendor allowances to assist our customers with the overall challenging retail environment compared with the prior period.
Retail gross profit margins were 53.8% and 49.8% for the second fiscal quarters of 2008 and 2007, respectively. The increase was primarily the result of a less promotional environment and lower levels of excess footwear inventory liquidation in the current period.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses were $256.9 million in the second fiscal quarter of 2008 and $263.1 million in the second fiscal quarter of 2007. Wholesale jeanswear SG&A expenses decreased $4.0 million, primarily from cost savings resulting from exiting of some of our moderate apparel product lines during 2007 that were partially offset by $4.1 million of additional bad debt expense related to the bankruptcy filing of Goody's Family Clothing, Inc. ("Goody's"). Wholesale better apparel SG&A expenses decreased $3.0 million, primarily from $1.9 million of cost savings realized by discontinuing the Anne Klein designer line and a $1.0 million decrease in advertising costs. These decreases were partially offset by a $3.3 million increase in wholesale footwear and accessories SG&A expenses, primarily due to a $1.4 million increase in salary and employee benefit costs and a $1.4 million increase in advertising costs.
Operating Income. The resulting operating income from continuing operations for the second fiscal quarter of 2008 was $25.5 million compared with a loss of $72.3 million for the second fiscal quarter of 2007, due to the factors described above and the $69.0 million of trademark impairments and $30.4 million of losses on assets held for sale recorded in the previous period.
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Net Interest Expense. Net interest expense from continuing operations was $9.8 million in the second fiscal quarter of 2008 compared with $13.1 million in the second fiscal quarter of 2007. The decrease was primarily the result of no outstanding borrowings under our credit facilities and higher interest income from higher cash balances during the second fiscal quarter of 2008.
Provision for Income Taxes. The effective income tax rate on continuing operations was 34.3% for the second fiscal quarter of 2008 and 39.1% for the second fiscal quarter of 2007. Excluding the effects of the trademark impairments and losses on assets held for sale associated with the exit of some of our moderate apparel product lines, the effective tax rate on continuing operations was 31.0% for the second fiscal quarter of 2007. The increase was due to a higher state effective tax rate in the current period.
Net Income and Earnings Per Share. Net income was $10.6 million in the second fiscal quarter of 2008 compared with a net loss of $47.1 million in the second fiscal quarter of 2007. Diluted earnings per share for the second fiscal quarter of 2008 was $0.13 compared with diluted loss per share of $0.44 for the second fiscal quarter of 2007, on 20.7% fewer shares outstanding.
Fiscal Six Months Ended July 5, 2008 Compared with Fiscal Six Months Ended July 7, 2007
Revenues. Total revenues for the first fiscal six months of 2008 were $1.80 billion compared with $1.98 billion for the first fiscal six months of 2007, a decrease of 9.0%.
Revenues by segment were as follows:
(In millions) |
First Fiscal Six Months of 2008 |
First Fiscal Six Months of 2007 |
Increase/ (Decrease) |
Percent Change |
Wholesale better apparel | $ 566.4 | $ 569.9 | $ (3.5) | (0.6%) |
Wholesale jeanswear | 392.8 | 560.5 | (167.7) | (29.9%) |
Wholesale footwear and accessories | 468.2 | 465.2 | 3.0 | 0.6% |
Retail | 356.3 | 365.1 | (8.8) | (2.4%) |
Other | 21.1 | 21.7 | (0.6) | (2.8%) |
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Total revenues | $ 1,804.8 | $ 1,982.4 | $ (177.6) | (9.0%) |
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Wholesale better apparel revenues did not significantly change from the prior period. Lower shipments of our Jones New York, Nine West, private-label suit and specialty market product lines due to decreased orders from our customers based on the performance of these brands at retail were partially offset by increases in our Jones New York Signature product line from both increased customer orders based on the performance of these brands at retail and initial shipments of our new casual line of products.
Wholesale jeanswear revenues decreased approximately $162 million due to lower shipments of our Erika, Nine & Co., Evan-Picone, Bandolino, Pappagallo and Rena Rowan moderate product lines, which were discontinued in 2007. We also reduced shipping of our l.e.i. product line in order to reposition the brand as an exclusive with Wal-Mart Stores Inc. beginning with the back-to-school shopping season that began in the summer of 2008. Planned reductions of our GLO product line to focus on the l.e.i. brand and lower shipments of our Energie product line due to decreased orders from our customers based on the performance of the brand at retail were partially offset by initial sales of the relaunched Erika and Pappagallo product lines during the current period.
Wholesale footwear and accessories revenues did not significantly change from the prior period. Increased shipments in our international businesses due to continued expansion by our licensed partners, increased shipments of our Nine West and Nine & Co. handbag product lines due to increased orders from our customers based on the performance of these brands at retail and initial shipments of our AK Anne Klein handbag line were partially offset by decreased shipping of our Nine West footwear products based on the performance of this brand at retail.
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Retail revenues decreased primarily due to a 4.1% decline in comparable store sales ($13.6 million) (comparable stores are those that have been open for a full year, are not scheduled to close in the current period and are not scheduled for an expansion or downsize by more than 25% or relocation to a different street or mall), partially offset by $4.7 million in sales from new store openings. We began the first fiscal six months of 2008 with 1,034 retail locations and had a net decrease of 16 locations during the period to end the period with 1,018 locations. This compares with 1,003 locations at the end of the first fiscal six months of 2007.
Revenues for the first fiscal six months of 2007 include $1.6 million of service fees charged to Polo under a short-term transition service agreement entered into with Polo at the time of the sale of the Polo Jeans Company business. These revenues are based on contractual monthly and per-unit fees as set forth in the agreement. Of this amount, $1.1 million was recorded in the wholesale better apparel segment, $0.2 million was recorded in the wholesale jeanswear segment and $0.3 million was recorded in the licensing and other segment.
Revenues for the first fiscal six months of 2008 include $0.6 million in the licensing and other segment of service fees charged to Barneys under a short-term transition services agreement entered into with Barneys at the time of the sale of Barneys. These revenues are based on contractual monthly fees as set forth in the agreement. The agreement ended in May 2008.
Gross Profit. The gross profit margin increased to 33.4% in the first fiscal six months of 2008 compared with 33.1% in the first fiscal six months of 2007.
Wholesale better apparel gross profit margins were 33.2% and 35.3% for the first fiscal six months of 2008 and 2007, respectively. The decrease was due to higher levels of sales to off-price retailers in our suit and dress product lines.
Wholesale jeanswear gross profit margins were 22.7% and 21.4% for the first fiscal six months of 2008 and 2007, respectively. Margins were positively impacted in the current period by lower levels of air shipments in the current period, offset by higher levels of sales to off-price retailers. Margins were negatively impacted in the prior period by high levels of vendor allowances to clear inventory for the lower-margin moderate brands we planned to exit or sell.
Wholesale footwear and accessories gross profit margins were 26.0% and 28.6% for the first fiscal six months of 2008 and 2007, respectively. The decrease was due to higher levels of sales to off-price retailers to liquidate excess inventory, growth in our lower-margin international business and increased production costs in China in the current period.
Retail gross profit margins were 51.6% and 48.7% for the first fiscal six months of 2008 and 2007, respectively. The increase was primarily the result of a less promotional environment and lower levels of excess footwear inventory liquidation in the current period (the prior period included the liquidation of inventory related to the closing of all our Stein Mart retail locations).
Selling, General and Administrative Expenses. SG&A expenses were $537.6 million in the first fiscal six months of 2008 and $544.9 million in the first fiscal six months of 2007. Wholesale better apparel SG&A expenses decreased $12.7 million, primarily from $4.6 million of cost savings realized in the current period by discontinuing the Anne Klein designer line and $6.6 million of expenses relating to the closing of our Bristol, Pennsylvania warehouse that were recorded in the prior period. Wholesale jeanswear SG&A expenses decreased $9.7 million, primarily from cost savings resulting from exiting of some of our moderate apparel product lines during 2007 that were partially offset by $4.1 million of additional bad debt expense related to the Goody's bankruptcy filing. These decreases were partially offset by a $10.1 million increase in wholesale footwear and accessories SG&A expenses, primarily due a $4.2 million increase in salary and employee benefit costs, a $1.8 million increase in advertising costs and a $1.7 million increase in severance costs.
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Operating Income. The resulting operating income from continuing operations for the first fiscal six months of 2008 was $65.5 million compared with $11.0 million for the first fiscal six months of 2007, due to the factors described above and the $69.0 million of trademark impairments and $30.4 million of losses on assets held for sale recorded in the previous period.
Net Interest Expense. Net interest expense from continuing operations was $19.6 million in the first fiscal six months of 2008 compared with $27.4 million in the first fiscal six months of 2007. The decrease was primarily the result of no outstanding borrowings under our credit facilities and higher interest income from higher cash balances during the first fiscal six months of 2008.
Provision for Income Taxes. The effective income tax rate on continuing operations was 35.4% for the first fiscal six months of 2008 and 53.3% for the first fiscal six months of 2007. Excluding the effects of the trademark impairments and losses on assets held for sale associated with the exit of some of our moderate apparel product lines, the effective tax rate on continuing operations was 35.2% for the first fiscal six months of 2007.
Net Income and Earnings Per Share. Net income was $30.2 million in the first fiscal six months of 2008 compared with $0.8 million in the first fiscal six months of 2007. Diluted earnings per share for the first fiscal six months of 2008 was $0.35 compared with $0.01 for the first fiscal six months of 2007, on 21.8% fewer shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been for working capital needs, capital expenditures, dividend payments, acquisition funding and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations and expansion. As of July 5, 2008, total cash and cash equivalents were $322.2 million, an increase of $19.4 million from the $302.8 million reported as of December 31, 2007.
Cash flows from operating activities of continuing operations provided $98.2 million and used $27.3 million in the first fiscal six months of 2008 and 2007, respectively. The difference was primarily due to changes in inventory and accounts payable levels. Inventory decreased in the current period compared with an increase in the prior period due to the liquidation of product lines that are being exited or scaled back as part of the moderate sportswear restructuring, a reduction in footwear inventories due to better inventory management, a reduction in jeanswear replenishment inventories, the liquidation of existing l.e.i. inventory in order to reposition the brand as an exclusive to Wal-Mart and lower levels of in-transit inventory. Accounts payable experienced a smaller decrease in the current period than the prior period due to the payment of payables in the prior period relating to the sale of our Polo Jeans Company business to Polo and lower levels of in-transit inventory in the current period.
Cash flows from investing activities of continuing operations used $51.4 million and $44.9 million in the first fiscal six months of 2008 and 2007, respectively. The difference was primarily due to our $20.0 million investment in GRI during the current period, partially offset by the proceeds from the sale of our Mexican operations and lower levels of capital expenditures in the current period.
Cash flows from financing activities of continuing operations used $25.7 million in the first fiscal quarter of 2008, primarily for the payment of dividends to our common shareholders.
Cash flows from financing activities from continuing operations provided $58.9 million in the first fiscal six months of 2007, primarily from borrowings under our Senior Credit Facilities offset by the payment of dividends to our common shareholders. The credit facility borrowings were primarily used for working capital needs. On July 2, 2007, we redeemed all of our outstanding Barneys 9% Senior Secured Notes Due 2008 at par for a total payment of $3.8 million, which is reported under net cash provided by financing activities of discontinued operations.
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We repurchased no common stock on the open market during the first fiscal six months of 2007 and 2008. As of July 5, 2008, $304.1 million of Board authorized repurchases was still available. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition. On June 10, 2008, we received a final delivery of 3.2 million shares upon the conclusion of the ASR program. No cash was required to complete the final delivery of shares. We also received approximately $1.0 million from Goldman as the final settlement of the ASR program, which has been recorded as a reduction of the cost of the shares acquired under the ASR. The combined average price for the shares delivered under the ASR was $19.00 per share.
Proceeds from the issuance of common stock to our employees exercising stock options amounted to $10.3 million in the first fiscal six months of 2007.
Prior to June 6, 2008, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, of which the entire amount was available for letters of credit or cash borrowings, provided for a $1.0 billion five-year revolving credit facility expiring in June 2009 and a $750.0 million five-year revolving credit facility expiring in June 2010. On June 6, 2008, we amended these facilities. The terms and conditions of the credit facilities remain substantially unchanged, except for modification of the pricing provisions and certain covenants and reduction of the aggregate commitment under the $1.0 billion facility to $500.0 million. At July 5, 2008, $236.6 million of letters of credit were outstanding under the credit facility that expires in June 2009 and no amounts were outstanding under the credit facility that expires in June 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The amended Senior Credit Facilities are unsecured and require us to satisfy a minimum Interest Coverage Ratio, a maximum Covenant Debt to EBITDA Ratio and a minimum Asset Coverage Ratio (each as defined in the Restated Credit Agreements), and contain covenants limiting our ability to (1) incur debt and guaranty obligations, (2) incur liens, (3) make loans, advances, investments and acquisitions, (4) merge or liquidate, (5) sell or transfer assets, (6) pay dividends, repurchase shares, or make distributions to stockholders, and (7) engage in transactions with affiliates.
At July 5, 2008, we also had uncommitted unsecured lines of credit available for up to $106.6 million of letters of credit, under which an aggregate of $28.6 million was outstanding. At April 5, 2008, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.
On July 30, 2008, we announced that the Board of Directors had declared a quarterly cash dividend of $0.14 per share to all common stockholders of record as of August 15, 2008 for payment on August 29, 2008.
On June 9, 2008, Goody's filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. As a result, we increased our reserve for doubtful accounts by $4.1 million during the second fiscal quarter of 2008. Due to the current and expected future economic conditions in the United States, we may experience increased risk related to the collectibility of our accounts receivable and we may increase our reserve for doubtful accounts during the remainder of 2008 should other of our wholesale customers experience significant financial difficulties. We believe the increased risk of customer default will not materially impact our liquidity.
We believe that available cash and cash equivalents, funds generated by operations, proceeds from the issuance of notes, the Senior Credit Facilities and our other lines of credit will provide the financial resources sufficient to meet our foreseeable working capital, dividend, capital expenditure and stock repurchase requirements and fund our contractual obligations and our contingent liabilities and commitments.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes.
The primary interest rate exposures on floating rate financing arrangements are with respect to United States and Canadian short-term interest rates. We had approximately $1.3 billion in variable rate credit facilities available at July 5, 2008, under which no cash borrowings were outstanding at July 5, 2008.
We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and our Canadian subsidiary purchases a portion of its inventory from suppliers who require payment in U.S. Dollars. To minimize our exposure to changes in exchange rates between the Canadian Dollar and the U.S. Dollar, we hedge a portion of our forecasted Canadian U.S. Dollar-denominated inventory purchases. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts offset losses and gains on the assets, liabilities, and transactions being hedged, up to the notional amount of such contracts. We are exposed to credit-related losses if the counterparty to a financial instrument fails to perform its obligation. However, we do not expect the counterparties, which presently have satisfactory credit ratings, to fail to meet their obligations.
For further information see "Derivatives" in the Notes to Consolidated Financial Statements.
Item 4. Controls and Procedures
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective in ensuring that our financial statements are fairly presented in conformity with generally accepted accounting principles.
We have made changes to our internal controls and procedures over financial reporting to address the implementation of SAP, an enterprise resource planning ("ERP") system. SAP will integrate our operational and financial systems and expand the functionality of our financial reporting processes. We began the process of implementing SAP throughout Jones Apparel Group, Inc. and our consolidated subsidiaries during the fourth quarter of 2006. During the second fiscal quarter of 2008, our Energie business was converted to this system. We have adequately controlled the transition to the new processes and controls, with no negative impact to our internal control environment. We expect to continue the implementation of this system to all locations over a multi-year period. As the phased implementation occurs, we will experience changes in internal control over financial reporting each quarter. We expect this ERP system to further advance our control environment by automating manual processes, improving management visibility and standardizing processes as its full capabilities are utilized.
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PART II. OTHER INFORMATION
We have been named as a defendant in various actions and proceedings arising from our ordinary business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, any such liability will not have a material adverse financial effect on us.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The following table sets forth the repurchases of our common stock for the fiscal quarter ended July 5, 2008.
Issuer Purchases of Equity Securities
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
April 6, 2008 to May 3, 2008 | - | - | - | $303,078,306 |
May 4, 2008 to May 31, 2008 | - | - | - | $303,078,306 |
June 1, 2008 to July 5, 2008 | 3,151,892 | N/A(1) | 3,151,892 | $304,132,220 |
Total | 3,151,892 | N/A(1) | 3,151,892 | $304,132,220 |
(1) | On September 6, 2007, we entered into an ASR agreement with Goldman, Sachs & Co. ("Goldman") to repurchase $400 million of our outstanding common stock. Purchases under the ASR were subject to collar provisions that established minimum and maximum numbers of shares based generally on the volume-weighted average price of our common stock during the term of the ASR program. Final settlement of the ASR program was scheduled for no later than July 19, 2008 and could occur earlier at the option of Goldman or later under certain circumstances. Through June 5, 2008, 17,926,388 shares had been delivered to us by Goldman under the terms of the ASR. On June 5, 2008, Goldman informed us that it had concluded the ASR. As a result, we received a final delivery of 3,151,892 shares on June 10, 2008, bringing the aggregate number of shares received under the ASR program to 21,078,280 shares. No cash was required to complete the final delivery of shares. We also received approximately $1.0 million from Goldman as the final settlement of the ASR program, which has been recorded as a reduction of the cost of the shares acquired under the ASR. The combined average price for the shares delivered under the ASR was $19.00 per share. |
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Item 4. Submission of Matters to a Vote of Securities Holders
The 2008 Annual Meeting of Stockholders was held on May 21, 2008. The proposals submitted to the vote of the stockholders and the results of the votes were as follows:
For | Against | Abstain | Broker Non-Votes |
||
Election of Directors | |||||
Wesley R. Card | 76,350,605 | 4,587,439 | 589,843 | * | |
Sidney Kimmel | 74,791,146 | 6,145,699 | 591,042 | * | |
Matthew H. Kamens | 72,131,689 | 8,797,932 | 598,267 | * | |
J. Robert Kerrey | 75,434,021 | 5,498,687 | 595,179 | * | |
Ann N. Reese | 77,985,551 | 2,948,061 | 594,275 | * | |
Gerald C. Crotty | 76,231,522 | 4,701,625 | 594,739 | * | |
Lowell W. Robinson | 78,932,044 | 2,001,463 | 594,380 | * | |
Donna F. Zarcone | 78,892,888 | 2,040,884 | 594,115 | * | |
Ratification of the selection of BDO Seidman, LLP as our independent registered public accountants for 2008 |
78,960,867 | 1,999,301 | 597,718 | * | |
Shareholder proposal regarding advisory vote on executive compensation |
32,876,128 | 43,294,628 | 1,272,674 | 4,084,457 |
_____________
*Not Applicable
Statement Regarding Forward-looking Disclosure
This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding our expected financial position, business and financing plans are forward-looking statements. The words "believes," "expects," "plans," "intends," "anticipates" and similar expressions identify forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including:
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All statements other than statements of historical facts included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.
See Exhibit Index.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JONES APPAREL GROUP, INC.
(Registrant)
Date: July 30, 2008 |
By /s/ Wesley R. Card |
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EXHIBIT INDEX
Exhibit No. |
Description of Exhibit
|
31* | Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32o | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
____________
* Filed herewith.
o Furnished herewith.
- 34 -
EXHIBIT 31
CERTIFICATIONS
I, Wesley R. Card, certify that:
1. | I have reviewed this quarterly
report on Form 10-Q of Jones Apparel Group, Inc.; |
|
2. | Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; |
|
3. | Based on my knowledge, the
financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for,
the periods presented in this report; |
|
4. | The registrant's other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have: |
|
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during
the period in which this report is being prepared; |
||
(b) Designed such internal control over
financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles; |
||
(c) Evaluated the effectiveness of the
registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and |
||
(d) Disclosed in this report any change in
the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and |
||
5. | The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions): |
|
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and |
||
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: July 30, 2008 |
|
/s/ Wesley R. Card Wesley R. Card President and Chief Executive Officer |
I, John T. McClain, certify that:
1. | I have reviewed this quarterly
report on Form 10-Q of Jones Apparel Group, Inc.; |
|
2. | Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; |
|
3. | Based on my knowledge, the
financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for,
the periods presented in this report; |
|
4. | The registrant's other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have: |
|
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during
the period in which this report is being prepared; |
||
(b) Designed such internal control over
financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles; |
||
(c) Evaluated the effectiveness of the
registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and |
||
(d) Disclosed in this report any change in
the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and |
||
5. | The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions): |
|
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and |
||
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: July 30, 2008 |
|
/s/ John T. McClain John T. McClain Chief Financial Officer |
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Wesley R. Card, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Jones Apparel Group, Inc. on Form 10-Q for the fiscal quarter ended July 5, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Jones Apparel Group, Inc.
By: /s/ Wesley R. Card
Name: Wesley R. Card
Title: President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to Jones Apparel Group, Inc. and will be retained by Jones Apparel Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
I, John T. McClain, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Jones Apparel Group, Inc. on Form 10-Q for the fiscal quarter ended July 5, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Jones Apparel Group, Inc.
By: /s/ John T. McClain
Name: John T. McClain
Title: Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Jones Apparel Group, Inc. and will be retained by Jones Apparel Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.