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<SEC-DOCUMENT>0000950135-02-001796.txt : 20020415
<SEC-HEADER>0000950135-02-001796.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950135-02-001796
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20011229
FILED AS OF DATE: 20020329
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: YANKEE CANDLE CO INC
CENTRAL INDEX KEY: 0001084242
STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990]
IRS NUMBER: 042591416
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-15023
FILM NUMBER: 02594719
BUSINESS ADDRESS:
STREET 1: PO BOX 110
CITY: SOUTH DEERFIELD
STATE: MA
ZIP: 01373
BUSINESS PHONE: 4136658306
MAIL ADDRESS:
STREET 1: PO BOX 110
CITY: S DEERFIELD
STATE: MA
ZIP: 01373
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>b42278yce10-k405.txt
<DESCRIPTION>THE YANKEE CANDLE COMPANY
<TEXT>
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-15023
THE YANKEE CANDLE COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2591416
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16 YANKEE CANDLE WAY, SOUTH DEERFIELD, MASSACHUSETTS 01373
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (413) 665-8306
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE WHERE REGISTERED)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Based on the closing sale price of $23.05 per share on March 26, 2002, the
aggregate market value of the voting stock held by non-affiliates of the
registrant was $331,388,767.
On March 26, 2002 there were outstanding 54,210,901 shares of the
Registrant's Common Stock.
Documents incorporated by reference (to the extent indicated herein):
Registrant's proxy statement (specified portions) with respect to the
annual meeting of stockholders to be held on June 12, 2002 are incorporated into
Part III.
================================================================================
<PAGE>
This Annual Report on Form 10-K contains a number of forward-looking statements.
Any statements contained herein, including without limitation statements to the
effect that The Yankee Candle Company, Inc. ("Yankee Candle", the "Company",
"we", and "us") and its subsidiaries or its management "believes", "expects",
"anticipates", "plans" and similar expressions that relate to prospective events
or developments should be considered forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. There are a number of important
factors that could cause our actual results to differ materially from those
indicated by such forward-looking statements. These factors include, without
limitation, those set forth below in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Future Operating Results."
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business ...............................................................2
2. Properties ............................................................10
3. Legal Proceedings .....................................................12
4. Submission of Matters to a Vote of Security Holders....................12
PART II
5. Market for the Company's Common Equity and Related Stockholder
Matters..............................................................13
6. Selected Financial Data ...............................................14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................18
7A. Quantitative and Qualitative Disclosures About Market Risks............28
8. Financial Statements and Supplementary Data ...........................29
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................51
PART III
10. Directors and Executive Officers of the Registrant ....................51
11. Executive Compensation ................................................51
12. Security Ownership of Certain Beneficial Owners and Management ........52
13. Certain Relationships and Related Transactions ........................52
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......52
1
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PART I
ITEM 1. BUSINESS
We are the leading designer, manufacturer and branded marketer of premium
scented candles in the large and growing giftware industry based on sales. We
have a 32-year history of offering our distinctive products and marketing them
as affordable luxuries and consumable gifts. Our candle products are available
in approximately 170 fragrances and include a wide variety of jar candles,
Samplers (R) votive candles, Tarts (R) wax potpourri, pillars and other candle
products, all marketed under the Yankee Candle(R) brand. We also sell a wide
range of coordinated candle accessories and branded fragranced non-candle
products including Yankee Candle Car Jars(R) air fresheners, Yankee Candle(TM)
Bath personal care products and Yankee Candle sachets. We have a vertically
integrated business model that enables us to produce high quality products,
provide excellent customer service and achieve cost efficiencies.
Our multi-channel distribution strategy enables us to offer Yankee Candle
products through a wide variety of locations and sources. We sell our candles
through an extensive and growing wholesale customer network of approximately
13,500 stores primarily in non-mall locations and through our rapidly expanding
retail store base located primarily in malls. As of December 29, 2001, we had
192 Company-owned and operated stores in 39 states. We have grown our store base
41% annually over the past five years and have opened 45 new stores in each of
2000 and 2001. In addition, our 90,000 square foot flagship store in South
Deerfield, Massachusetts attracts an estimated 2.5 million visitors annually. We
also sell our products directly to consumers through our catalog and Internet
web site (www.yankeecandle.com). Outside North America, we sell our products
through 20 distributors in 23 countries and through our distribution center
located in the United Kingdom.
Since 1996, we have experienced compound annual revenue growth of 27% and
compound annual pretax income growth of 42%. Each of our distribution channels
has contributed to this growth. Retail, which includes the catalog and Internet
business, has achieved 38% compound annual revenue growth since 1996 and
accounted for 56% of our $379.8 million total sales in 2001. Wholesale, which
includes International operations and earns higher margins than our retail
channels, has achieved 18% compound annual revenue growth since 1996 and
accounted for 44% of total sales in 2001. In 2001, our revenue increased 12% as
compared to 2000, and was comprised of a 21% increase in retail sales and a 3%
increase in wholesale sales. In 2001, pretax income, adjusted for the $8.0
million restructuring charge, increased 9% as compared to 2000. In 2001, without
adjusting for this restructuring charge, our pretax income decreased 2% as
compared to 2000. We believe our growth is based on the strength of the Yankee
Candle(R) brand, our commitment to product quality, the efficiency of our
vertically integrated manufacturing and logistics operations and the success of
our multi-channel distribution strategy.
INDUSTRY OVERVIEW
Yankee Candle operates in the domestic giftware industry. The domestic giftware
industry has grown at an approximately 6% compound annual growth rate from 1996
to 2000 to reach approximately $55.2 billion in 2000, according to Unity
Marketing, an independent market research firm. According to Unity Marketing,
the domestic market for candles has grown at an approximately 11% compound
annual growth rate from 1996 to 2000 to reach approximately $2.3 billion in
2000. According to Kline & Company, Inc., an international consulting firm, the
premium scented candle segment, in which we compete, grew at an approximately
19% compound annual growth rate from 1997 to 2000, significantly exceeding the
growth rate of the overall giftware market during that period. Kline has
projected that the premium scented candle segment will continue to grow at a
compound annual growth rate of over 7% from 2000 to 2005.
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We expect the premium scented candle market to continue to grow more quickly
than the total candle market based upon favorable industry factors, including
the continued interest of consumers in home decor and branded gifting, and the
year-round usage of branded scented candles as an affordable luxury.
PRODUCTS
We develop and introduce new products and fragrances throughout the year. We
currently offer approximately 1,600 SKUs of Yankee Candle manufactured products.
Most of our products are marketed as Yankee Candle(R) branded products primarily
under the trade names Housewarmer(R), Country Kitchen(R), Country Classics(TM),
Frosted Favorites(TM) and Aroma Formula(TM) and include the following product
styles:
- Jar Candles -- scented candles in decorative glass jars; available in
22 oz., 14.5 oz., 7.5 oz. and 3.7 oz. sizes.
- Samplers(R) -- votive candles for sampling different fragrances.
- Tapers -- the oldest candle style, dipped more than 30 times.
- Scented Ionic(R) Pillars (grooved).
- Standard Pillars (smooth) -- both scented and unscented.
- Textured Pillars -- both scented and unscented.
- Tarts(R) Wax Potpouri -- scented wax without wicks that releases its
fragrance when melted and warmed in a potpourri pot.
- Scented Tea Lights -- small, colored and scented candles in clear cups
made for home fragrancing.
- Tart(R) Warmers -- white unscented candles in aluminum cups made for
potpourri pots.
- Kindle Candles(R) -- unscented wax in a paper cup for use in a
fireplace or campfire as a firestarter.
These candle products are available in a wide range of fragrances and colors. We
currently maintain approximately 170 fragrances in our retail stores, with our
85 best-selling fragrances available nationwide to our wholesale customers. In
addition to distinctive fragrances, we promote our brand through consistent
product packaging and labeling and the use of a distinctive trade dress. The
Yankee Candle name is typically embossed on the top of our glass containers and
is clearly displayed on every product label. We also package our products in
attractive gift baskets and other containers for sale in our retail stores. We
offer glassware accessories and other coordinated candle-related and home decor
accessories in dozens of exclusive patterns, colors and styles, including jar
toppers, taper holders, pillar and jar bases, jar shades, tea light holders,
potpouri burners and Samplers(R) votive candleholders.
We have extended our brand to Car Jars(R), a noncandle air freshener line and,
in 2001, to Yankee Candle(TM) Bath, a line of personal care products including:
liquid hand soap in a pump container; hand lotion in a pump container; body
lotion in a stand up tube; shower gel in a stand up tube and milled soap in an
elegant oval with an embossed logo. Each bath product is scented to match
popular Yankee Candle fragrances, with packaging reminiscent of our
Housewarmer(R) candles. Our bath products were initially introduced in four
fragrances
3
<PAGE>
including MacIntosh, Roses of Cliff Walk, Sage & Citrus and Sunflower. We
introduced Yankee Candle sachets in the same four fragrances, which enable
Yankee Candle's fragrances to be added to new environments, such as dresser
drawers, luggage and closets.
We seek to maintain a moderate price for almost all of our products in order to
reinforce our customers' perception of our products as highly affordable. As a
result, our retail prices for our core candle products range from $0.99 for a
Tarts(R) wax potpourri to $19.99 for a 22 oz. Housewarmer(R) jar candle.
RETAIL OPERATIONS
Retail Stores
Our retail operations include our retail stores, none of which are franchised,
catalog and Internet operations and Chandler's restaurant. From 1996 to 2001,
sales from our retail division, have grown at a compound annual growth rate of
38% from $42.9 million in 1996 to $211.7 million in 2001 and increased from 37%
of our total sales in 1996 to 56% in 2001. Moreover, in 2001 our retail stores
that were open for the full year, excluding the South Deerfield store, achieved
average sales per selling square foot of $822.
We opened 45 new retail stores during 2001 and ended the year with 192 retail
stores in 39 states. In opening new stores, we target high traffic retail
locations in malls, tourist destinations and selected non-mall locations,
including lifestyle centers. Of our 192 retail stores, 147 are located in malls.
We currently plan to open 45 additional stores and enter at least one additional
state during 2002.
The non-mall store count includes our flagship South Deerfield, MA store, which
is a unique store. We believe that our flagship store is the world's largest
candle and Christmas store with approximately 90,000 square feet of retail and
entertainment space. This store promotes Yankee Candle's brand image and culture
and is an important testing ground for our new product introductions. The store
carries over 20,000 SKUs of gift items and generates approximately 60% of its
revenues from the sale of Yankee Candle manufactured products. The store is a
major tourist destination, attracting an estimated 2.5 million visitors
annually, and provides visitors with a total shopping and entertainment
experience including the Yankee Candlemaking Museum and a 240-seat restaurant.
In fall 2001, we announced plans to open a Home Store within our flagship store.
The Home Store will showcase home furnishings and decorative accents in
sophisticated country decor settings. Yankee Candle products, such as our new
Yankee Candle(TM) Bath line and Country Kitchen(R) candles, will also be
featured throughout the Home Store. The Home Store is expected to open in summer
of 2002. We believe the Home Store will be an important contributor to our
flagship store and will enable us to test market new products and merchandising
concepts.
Excluding the South Deerfield flagship store, the target size of our retail
stores is 1,500 to 2,000 square feet. The average store size for our 191 retail
stores, excluding the South Deerfield store, at the end of 2001 was 1,732
square feet. We design each of our retail stores with a warm and inviting
atmosphere to attract customers and provide a convenient shopping experience.
Each store has candle displays sorted by color, fragrance type and product
category. Our store design uses rich wood and other traditional elements to
convey a high quality image that complements our product and company identity.
The display fixtures hold sufficient inventory to support fast turning sales at
peak season. Our retail stores typically offer Yankee Candle products in
approximately 150 fragrances and carry approximately 1,100 SKUs of candles and
approximately 400 SKUs of candle accessories.
Superior customer service and a knowledgeable employee base are key elements of
our retail strategy. We emphasize formal employee training, particularly with
respect to product quality, candle manufacturing and
4
<PAGE>
the heritage of Yankee Candle. We also have a well-developed, 6-day training
program for managers and assistant managers and an 8-hour training program for
sales associates. Our high customer service standards are an integral part of
our ongoing success. Each store is responsible for implementing and maintaining
these customer service standards.
Catalog and Internet
As part of our retail division we market our products through our catalogs and
Internet web site. We expect both businesses to continue to grow over the next
several years as a result of demographic and lifestyle changes in the consumer
population, including the aging of baby boomers, decreased shopping time and a
need for shopping convenience. Our catalogs feature a wide selection of our most
popular candle products, specialty retail candle and non-candle products, candle
and home decor accessories and various branded non-candle scented products,
including Car Jars(R) air fresheners and our new Yankee Candle(TM) Bath personal
care products and Yankee Candle sachets. In 2001 we had eleven catalog mailings.
We believe there are significant opportunities to grow the catalog business by
adding additional products and accessories, new catalog concepts and expanding
our mailing list. In 2002, we are planning several broad based initiatives,
including significantly increasing both the number of catalog mailings and the
number of catalogs, increasing advertising in lifestyle magazines, selective
Internet advertising, increasing our emphasis on gift products and customized
marketing and investing in a new software system.
We introduced our web site in 1996, upgraded it for retail transactions in 1997
and began generating revenues in late 1997. Our web site, www.yankeecandle.com,
provides our on-line customers with an easy and convenient way to purchase a
wide variety of our most popular candle products, specialty retail candle and
non-candle products, candle and home decor accessories and branded non-candle
scented products. This web site also offers features designed to promote sales
and provide enhanced customer service and convenience, including personalized
guest registration, gift cards and other gift giving programs, a store locator,
decorating ideas, and sites dedicated to corporate gifts, weddings and other
customized purchasing opportunities. In addition to our consumer oriented web
site, we have a separate business to business web site dedicated to our
wholesale customers which offers such features as on-line ordering, order status
information, purchase history and an enhanced dealer locator program. We
continually upgrade our web site in order to provide existing and new customers
with convenient purchase options.
Our catalog and Internet business generated $15.1 million of sales in 2001, an
increase of 68% over 2000.
WHOLESALE OPERATIONS
Our wholesale strategy focuses on gift, home decor and other image appropriate
retailers. The wholesale business is a critical part of our growth strategy and,
together with our other distribution channels, helps to further build our brand
awareness. From 1996 to 2001, sales from our wholesale accounts have grown at a
compound annual growth rate of 18% from $72.3 million in 1996 to $168.1 million
in 2001 and changed from 63% to 44% of our total sales. Our wholesale customers
currently have approximately 13,500 locations. We believe that as a result of
our strong brand name, the popularity and profitability of our products and our
emphasis on customer service, our wholesale customers are extremely loyal, with
approximately 70% of them having been customers for over five years. No customer
accounts for more than 2% of our total sales and almost 90% of our wholesale
locations are non-mall. We plan to increase sales to existing accounts, add new
accounts and focus new distribution in selected image appropriate national
retail chains such as the addition of Linens `n Things as a new wholesale
customer in September 2001, and Bed, Bath and Beyond as a new wholesale customer
in February 2002.
5
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The strength of our brand, the profitability and quality of our products, and
our successful in-store merchandising and display system have made us the top
selling brand for many of our wholesale customers. Since 1993, we have been
continuously ranked first in gift store sales in the domestic candle category
and have consistently always been ranked either first or second in product
reorders across all giftware categories by Giftbeat, a giftware industry
publication. In addition, we were ranked as the most profitable product line
across all giftware categories in a recent Giftbeat survey.
We actively seek to increase the average size and frequency of wholesale orders
through our innovative product display system, promotional programs, new
products and telemarketing initiatives. We promote a "Shop Within A Shop"
display system to our wholesale customers which presents our products vertically
by fragrance and horizontally by color in a distinctive wood hutch. We recommend
that dealers invest in a minimum of an 8- to 12-foot display system which holds
$6,000 to $9,000 of Yankee Candle products at suggested retail prices. This
display system enhances Yankee Candle's brand recognition in the marketplace and
we believe positively impacts our wholesale sales. We have also implemented a
number of promotional programs to increase the square footage dedicated to
Yankee Candle products as well as the breadth of Yankee Candle products offered
by our wholesale customers. For example, we promote a Fragrance of the Month
program, with featured fragrance suggestions for each month. This program
encourages dealers to increase their re-order schedules to 12 times per year and
implement a proven customer promotion. The promotion encourages consumers to try
different fragrances and return to the stores more frequently in order to buy
the Fragrance of the Month. In addition to specific promotions, we advise our
wholesale customers on an ongoing basis regarding product knowledge, display
suggestions, promotional ideas and geographical consumer preferences.
We have a selective dealer approval process, designed to create consistent
nationwide standards for all Yankee Candle dealers. As a result of these high
credit standards for dealers, we had bad debt expense of only 0.2% of wholesale
sales in 2001.
We use a dedicated in-house direct telemarketing sales force to service our
wholesale customers. In 1998, we eliminated our network of independent
manufacturer representatives and completed a major shift to a direct sales
force. This enabled us to gain greater control over the sales process, to
provide customers with better and more accurate information, faster order
turn-around and improved customer service, to create more consistent
merchandising nationwide and to reduce costs.
International Operations
We currently sell products through international distributors and our
distribution center in the United Kingdom. In June 1998, we established Yankee
Candle Europe, our European subsidiary, and hired the former managing director
of one of the largest United Kingdom candle manufacturers to lead our
international expansion program. In addition, we opened a new 27,000 square foot
distribution center in Bristol, England and began product shipments in January
1999. As of December 29, 2001, we were selling our products to approximately
1,500 direct accounts in the United Kingdom, 200 direct accounts on the European
continent and in the Middle East and 20 distributors covering 23 countries. We
also have a successful Canadian wholesale business, using a leading
distributor, and are further expanding our international efforts by working
with a new distributor in Central and South America.
6
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NEW PRODUCT DEVELOPMENT
We have a long history as a product innovator in the premium candle segment of
the giftware industry. We have a strong and experienced in-house product design
and development team comprised of artists, fragrance specialists, designers,
packagers and buyers who work collaboratively to design new products that are
attractive to customers and can be manufactured cost-effectively. New products
are typically developed in less than a year. Following the successful 2000
introduction of our Car Jars(R) air freshener brand extension, in September 2001
we introduced the Yankee Candle(TM) Bath personal care line in four fragrances
featuring liquid hand soap, hand lotion, body lotion, shower gel and milled bar
soap. In the fourth quarter of 2001, we introduced a line of scented sachets in
four fragrances. In addition, in 2001 we introduced 19 new fragrances in our
core candle lines, including a successful re-launch of our Country Kitchen(R)
line. We also introduced two wholesale exclusive fragrances, Yuletide Bayberry
and Sleigh Ride. In 2002, we plan to introduce a fully coordinated gift center
in all stores featuring gift bags, gift boxes, jar wraps, hand tags and high end
ribbons. Other new product ideas include new product sizes, new packaging,
variations of existing fragrances and potential new ideas for delivering
fragrance. Our expenditures on research and development during the last three
fiscal years have not been material.
MANUFACTURING
Approximately 80% of our sales are generated by products manufactured at our
294,000 square foot facility in Whately, Massachusetts. As a vertically
integrated manufacturer, we are able to closely monitor the quality of our
product, more effectively manage inventory and control our production costs. We
believe this is an important competitive advantage as it enables us to ensure
high quality products, maintain affordable pricing and provide reliable customer
service.
Our products are manufactured using filled, molded, extruded, compressed or
dipped manufacturing methods. The majority of our products are filled products
which are produced by pouring colored, scented liquid wax into a glass container
with a wick. Pillars are made by extrusion, in which wax is pressed around a
wick through a die. Tapers are produced through a dipping process and Tarts(R)
wax potpourri and Samplers(R) votive candles are made by compression.
Yankee Candle uses high quality fragrances, premium grade, highly refined
paraffin waxes, and superior wicks and dyes to create premium products. Our
manufacturing processes are designed to ensure the highest quality and quantity
of candle fragrance, wick quality and placement, color, fill level, shelf life
and burn rate. We are continuously engaged in efforts to maximize our quality
and minimize our costs by using efficient production and distribution methods
and technological advancements.
SUPPLIERS
We maintain strong, established relationships with our principal fragrance and
petroleum based wax suppliers. We believe we use the highest-quality suppliers
in our industry and maintain back-up suppliers who are able to provide services
and materials of similar quality. We have been in the business of manufacturing
premium scented candles for many years and are therefore knowledgeable about the
different levels of quality of raw materials used in manufacturing candles. We
have developed, jointly with our suppliers, several proprietary fragrances which
are exclusive to Yankee Candle. Other raw materials used in the manufacturing
process, including wax, glassware, wick and packaging materials, are readily
available from multiple sources at comparable prices. In 2001, no single
supplier represented 10% or more of our total cost of goods sold, except for our
primary glassware vendor and our primary fragrance vendor, each of whom
represented approximately 10% of our total cost of goods sold.
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ORDER PROCESSING AND DISTRIBUTION
Prior to 2001, we operated two major distribution facilities with a combined
260,000 square feet of space. The first of these was located alongside our
manufacturing operations in Whately, Massachusetts, while the second was in Salt
Lake City, Utah. In 2001, to increase cost efficiency and improve in-stock
positions, we opened a new 256,000 square foot distribution center in South
Deerfield, Massachusetts. As a result of this new facility, we were able to
convert the Whately distribution space to manufacturing use and to close the
Salt Lake City facility.
We utilize computer systems to maintain efficient order processing from the time
an order enters the system through shipping and ultimate payment collection from
customers. We operate uniform computer and communication software systems
allowing for online information access between our headquarters and retail
stores. We completed the first phase of an information systems upgrade in 1998
to improve order processing and enhance inventory management and accuracy. As
part of these upgrades, we adopted a software package that allows us to forecast
demand for our products and efficiently plan our production schedules. We also
implemented a pick-to-light system which allows Yankee Candle employees at our
distribution center to receive information directly from the order collection
center and quickly identify, by way of blinking lights, the products and
quantity necessary for a particular order. To accurately track shipments and
provide better service to customers, we also use handheld optical scanners and
bar coded labels. We believe that our systems for the processing and shipment of
orders from the distribution center greatly improve our overall customer service
through enhanced order accuracy and reduced turnaround time. In early 2000 we
began the second phase of our systems upgrades. We implemented a complete new
platform of manufacturing and distribution software as part of a comprehensive
transition of all of our major software systems. The new manufacturing and
distribution software has enabled us to further enhance our inventory management
and customer service capabilities and also support a significantly larger
infrastructure.
In late 2001 we implemented systems allowing us to provide electronic data
interchange (EDI) capabilities. We plan to expand these capabilities in 2002 to
additional customers and suppliers.
The products we sell in the United States are generally shipped by United Parcel
Service, FedEx Ground or other freight carriers. We also lease a small fleet of
trucks primarily used to ship products to select company-owned retail stores.
Our products are usually shipped to our retail stores twice a week during the
off-season and up to five times a week during the holiday season. We believe
that our timely and accurate distribution is an important differentiating factor
for our customers. This belief is based on numerous conversations between our
management and sales force, on the one hand, and our wholesalers and customers,
on the other hand.
INTELLECTUAL PROPERTY
Yankee Candle has obtained 37 U.S. trademark registrations, including Yankee(R)
(for candles), Yankee Candle(R), Housewarmer(R), Country Kitchen(R),
Samplers(R), Tarts(R), Kindle Candles(R) and Car Jars(R) and has pending several
additional trademark applications with respect to its products. We also register
certain of our trademarks in various foreign countries. Trademark registrations
allow us to use those trademarks on an exclusive basis in connection with our
products. If we continue to use our trademarks and make all required filings and
payments, these trademarks can continue in perpetuity. These registrations are
in addition to various copyright registrations and patents held by us, and all
trademark, copyright and other intellectual property rights of Yankee Candle
under statutory and common law, including those rights relating to our
distinctive "trade dress."
8
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We believe that our trademarks and intellectual property rights are valuable
assets and we intend to maintain and renew our trademarks and their
registrations and to vigorously defend them and all of our intellectual property
rights against infringement.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, local and foreign laws and regulations
governing the generation, storage, use, emission, discharge, transportation and
disposal of hazardous materials and the health and safety of our employees. In
addition, we are subject to environmental laws which may require investigation
and cleanup of any contamination at facilities we own or operate or at third
party waste disposal sites we use. These laws could impose liability even if we
did not know of, or were not responsible for, the contamination.
We have in the past and will in the future incur costs to comply with
environmental laws. We are not, however, currently aware of any costs or
liabilities relating to environmental matters, including any claims or actions
under environmental laws or obligations to perform any cleanups at any of our
facilities or any third party waste disposal sites, that are expected to have a
material adverse effect on our operations, cash flow or financial condition. It
is possible, however, that material environmental costs or liabilities may arise
in the future.
COMPETITION
We compete generally for the disposable income of consumers with other producers
in the giftware industry. The giftware industry is highly competitive with a
large number of both large and small participants. Our products compete with
other scented and unscented candle and personal care products and with other
gifts within a comparable price range, like boxes of candy, flowers, wine, fine
soap and related merchandise. Our competitors distribute their products through
independent gift retailers, department stores, mass market stores and mail order
houses and some of our competitors are part of large, diversified companies
having greater financial resources and a wider range of product offerings than
us.
The candle market overall is highly fragmented. According to a 2001 Unity
Marketing study, 61% of all candle companies had less than $10.0 million in
sales and approximately 80% had less than $25.0 million in sales. In the premium
scented candle segment of the market, in which we primarily compete, our
competitors include Blyth Industries, Inc., as well as many smaller branded
manufacturers and private label manufacturers. The Company is not aware of any
recent consolidation in the candle market, nor does it anticipate that there
will be any material consolidation based on our current knowledge and
understanding of the market.
Our retail stores compete primarily with specialty candle retailers and a
variety of other retailers including department stores, gift stores and national
specialty retailers that carry candles along with personal care items, giftware
and houseware. In addition, while we focus primarily on the premium scented
candle segment, candles are also sold outside of that segment by a variety of
retailers including several mass merchandisers.
EMPLOYEES
At December 29, 2001, we employed approximately 1,900 full-time employees and
1,100 part-time employees. We are not subject to any collective bargaining
agreements and we believe that our relations with our employees are good. We
also use between 1,400 and 1,600 seasonal and temporary workers to supplement
our labor force during the peak selling season.
9
<PAGE>
ITEM 2. PROPERTIES
Yankee Candle owns or leases several facilities located in a four mile radius in
Deerfield and Whately, Massachusetts, including those described in the table
below:
<TABLE>
<CAPTION>
TYPE OF FACILITY LOCATION SIZE
- ---------------- --------------------- -------------
<S> <C> <C>
Manufacturing Whately, Mass. 294,000 sq.ft.
Distribution center (1)(2) South Deerfield, Mass 256,000 sq.ft.
Flagship retail store and restaurant (3) South Deerfield, Mass. 90,000 sq.ft.
Corporate offices (1)(4) South Deerfield, Mass. 75,000 sq.ft.
Distribution center South Deerfield, Mass. 60,000 sq.ft.
Employee health and fitness center South Deerfield, Mass. 12,000 sq.ft.
</TABLE>
NOTES:
------
(1) Leased facility.
(2) We have the right under the lease to expand this facility from time to
time. We believe that the facility has the capacity to be expanded by
up to an additional 105,000 square feet.
(3) There is an additional 11,000 sq. ft. of office space.
(4) We have the right under the lease to expand this facility from time to
time. We believe that the facility has the capacity to be expanded by
up to an additional 30,000 square feet.
We also lease a 27,000 square foot distribution facility in Bristol, England.
We believe these facilities are suitable and adequate and have sufficient
capacity to meet our current needs.
In addition to the foregoing facilities, and the retail satellite stores
referenced below, we own various other properties in the Deerfield/Whately area
which we are currently in the process of attempting to sell and/or lease as a
result of the consolidation of most of our administrative functions into our new
corporate office building in 2001. These facilities include an approximately
48,000 sq. ft. building in Deerfield, a 16,000 sq. ft. building in Whately, and
a 6,600 sq. ft. building and the land theron located in Deerfield and Whately
(the sale of which is currently pending).
Other than the South Deerfield flagship store and three smaller retail
locations, we lease our retail stores. Initial store leases for mall locations
typically range from eight to ten years. For non-mall locations, most leases are
five years, with a five-year renewal option.
10
<PAGE>
Our retail stores were located in the following 39 states as of December 29,
2001:
STORE COUNT
-----------
STATE MALL NON-MALL TOTAL
- ----- ---- -------- -----
ALABAMA 1 - 1
ARIZONA 3 - 3
CALIFORNIA 12 1 13
COLORADO 3 1 4
CONNECTICUT 7 2 9
DELAWARE 1 - 1
FLORIDA 11 1 12
GEORGIA 7 1 8
ILLINOIS 4 3 7
INDIANA 6 1 7
KANSAS 1 1 2
KENTUCKY 2 1 3
LOUISIANA 1 - 1
MAINE 1 2 3
MARYLAND 5 4 9
MASSACHUSETTS 8 10 18
MICHIGAN 4 1 5
MINNESOTA 3 - 3
MISSOURI 2 - 2
NEBRASKA 1 1 2
NEVADA 1 - 1
NEW HAMPSHIRE 2 1 3
NEW JERSEY 6 - 6
NEW YORK 12 2 14
NORTH CAROLINA 7 - 7
OHIO 7 1 8
OKLAHOMA 2 - 2
PENNSYLVANIA 6 2 8
RHODE ISLAND 1 2 3
SOUTH CAROLINA 2 2 4
SOUTH DAKOTA 1 - 1
TENNESSEE 3 - 3
TEXAS 6 1 7
UTAH - 1 1
VERMONT - 2 2
VIRGINIA 4 1 5
WASHINGTON 2 - 2
WEST VIRGINIA 1 - 1
WISCONSIN 1 - 1
- - -
TOTALS 147 45 192
=== == ===
39 STATES
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in ordinary routine legal proceedings relating
to our business. We believe that none of these legal proceedings will have a
material adverse impact on our results of operations, cash flow or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting will be held on June 12, 2002. No matter was
submitted to a vote of security holders in the fourth quarter of the fiscal year
ended December 29, 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of all current
executive officers for the Company as of March 26, 2002:
Name Age Position
- ---- --- ---------
Michael J. Kittredge 50 Chairman of the Board
Craig W. Rydin 50 President and Chief Executive Officer
Robert R. Spellman 54 Senior Vice President, Finance and Chief
Financial Officer
Gail M. Flood 42 Senior Vice President, Retail
Paul J. Hill 47 Senior Vice President, Operations
Harlan M. Kent 39 Senior Vice President, Wholesale
MICHAEL J. KITTREDGE is the Chairman of the Board and the founder of Yankee
Candle. He served as a Director until April 1998 and was re-elected as a
Director in April 1999. He has been honored several times by the United States
Small Business Administration (S.B.A.), once in 1985 as the winner of the
"Entrepreneurial Success Award," and again in 1986 as the "Businessman of the
Year" for Massachusetts and the New England region. In 1996, Mr. Kittredge
received USA Today's and Ernst & Young's Retail Entrepreneur of the Year Award.
CRAIG W. RYDIN is a Director and the President and Chief Executive Officer.
Prior to joining Yankee Candle in April 2001, Mr. Rydin was the President of the
Away From Home food services division of Campbell Soup Company since 1998, and
President of the Godiva Chocolates division of Campbell from 1996 to 1998. Prior
to Godiva, Mr. Rydin had held a number of senior management positions at
Pepperidge Farm, Inc., also a part of Campbell.
ROBERT R. SPELLMAN is the Senior Vice President, Finance and Chief Financial
Officer. Prior to joining Yankee Candle in November 1998, Mr. Spellman was
Senior Vice President of Finance of Staples, Inc. from 1988 through 1994, and
Chief Financial Officer of Star Markets Company, Inc. from 1994 through 1998.
12
<PAGE>
GAIL M. FLOOD is the Senior Vice President, Retail. Ms. Flood joined Yankee
Candle in 1982 as Retail Store Manager. Since 1988, she has been in charge of
the Company's retail operations. She was appointed Vice President of Retail
Operations in July 1996, and promoted to her current position in November 1998.
PAUL J. HILL is the Senior Vice President, Operations. Prior to joining Yankee
Candle in October 2000, Mr. Hill was employed by Kraft Foods, Inc. from 1987 to
2000. At Kraft, Mr. Hill held various supply chain and strategy positions. His
last assignment with Kraft, from 1997 to 2000, was as the Plant Manager at one
of the largest plants in Kraft's system.
HARLAN M. KENT is the Senior Vice President, Wholesale. Prior to joining Yankee
Candle in June, 2001, Mr. Kent was Senior Vice President and General Manager of
the Wholesale Division of Totes Isotoner Corporation from 1997 to 2001, and Vice
President of Global Sales and Marketing for the Winchester Division of Olin
Corporation from 1995 to 1997. Mr. Kent has also held a number of senior
marketing and strategic planning positions at both the Campbell Soup Company and
its Pepperidge Farm Division.
There are no family relationships among any of the executive officers.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock has been traded on the New York Stock Exchange since July 1,
1999 under the symbol "YCC". For the fiscal periods indicated, the high and low
sales prices per share of the common stock as reported on the New York Stock
Exchange - Composite Transaction Reporting System were as follows:
FIFTY-TWO WEEKS ENDED DECEMBER 29, 2001 HIGH LOW
------ ------
First Quarter ......................... $18.95 $10.56
Second Quarter ........................ 19.98 12.88
Third Quarter ......................... 19.09 15.70
Fourth Quarter ........................ 22.93 16.86
FIFTY-TWO WEEKS ENDED DECEMBER 30, 2000
First Quarter ......................... $17.81 $12.38
Second Quarter ........................ 25.94 14.13
Third Quarter ......................... 24.50 17.00
Fourth Quarter ........................ 21.00 10.00
On March 26, 2002, the closing sale price as reported on the New York Stock
Exchange-Composite Transaction Reporting System for our common stock was $23.05
per share. As of March 26, 2002, there were 305 holders of record of our
common stock. This does not include the number of persons whose stock is in
nominee or "street name" accounts through brokers.
13
<PAGE>
DIVIDENDS
We have never paid a cash dividend on our common stock as a public company and
we do not intend to pay any cash dividends in the foreseeable future, but
instead intend to retain earnings for the future operation of our business. Any
determination to pay dividends in the future will be at the discretion of the
board of directors and will be dependent upon results of operations, financial
condition, contractual and legal restrictions and other factors deemed relevant
by our board of directors. Under the terms of our existing credit agreement, we
may not declare or pay dividends on our common stock unless our ratio of
consolidated total debt to consolidated EBITDA is less than or equal to 2:1 or
our aggregate principal amount of loans and letters of credit outstanding is
less than $100 million. Although we meet this requirement, we do not currently
intend to pay dividends.
USE OF PROCEEDS
Not applicable
SALES OF UNREGISTERED SECURITIES
None
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial and other data that follows
should be read in conjunction with the "Consolidated Financial Statements", the
accompanying notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Annual Report on
Form 10-K. The historical financial data as of December 30, 2000 and December
29, 2001 and for the fifty-two weeks ended January 1, 2000, December 30, 2000
and December 29, 2001 have been derived from the audited consolidated financial
statements and the accompanying notes included in this document at Item 8.
The historical financial data as of December 31, 1997, 1998 and January 1, 2000
and for the years ended December 31, 1997 and 1998 has been derived from audited
financial statements for the corresponding period, which are not contained in
this document.
The selected historical financial data may not be indicative of our future
performance.
Before the recapitalization on April 27, 1998, Yankee Candle was an S
corporation for federal and state income tax purposes. As a result, taxable
earnings were taxed directly to the then existing sole stockholder. Since the
1998 recapitalization, Yankee Candle has been a C corporation subject to federal
and state income taxes.
The data set forth for the following items assumes that Yankee Candle was
subject to federal and state income taxes and was taxed as a C corporation at
the effective tax rates that would have applied for all periods:
- Pro forma provision (benefit) for income taxes,
- Pro forma net income (loss), and
- Pro forma earnings per share (basic and diluted).
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 FIFTY-TWO WEEKS ENDED
----------------------- --------------------------
JANUARY 1, DECEMBER 30, DECEMBER 29,
1997 1998 2000 2000 2001
--------- --------- ---------- ------------ ------------
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales $ 147,364 $ 188,722 $ 262,075 $ 338,805 $ 379,831
Cost of goods sold 65,330 83,350 115,119 153,667 174,107
--------- --------- --------- --------- ---------
Gross profit 82,034 105,372 146,956 185,138 205,724
Selling expenses 26,935 30,546 44,547 64,464 77,348
General and administrative expenses 27,031 19,753 26,023 31,576 38,515
Bonus related to the 1998 recapitalization -- 61,263 -- -- --
Restructuring charge -- -- -- -- 8,000
--------- --------- --------- --------- ---------
Income (loss) from operations 28,068 (6,190) 76,386 89,098 81,861
Interest income (151) (219) (627) (235) (72)
Interest expense 2,154 16,268 19,971 16,900 10,596
Other expense (income) 334 737 (116) (165) 378
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes 25,731 (22,976) 57,158 72,598 70,959
Provision for income taxes 1,360 9,656 22,863 29,039 27,674
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss on early
extinguishment of debt 24,371 (32,632) 34,295 43,559 43,285
Extraordinary loss on early extinguishment of
debt, net of tax -- -- 3,162 -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 24,371 $ (32,632) $ 31,133 $ 43,559 $ 43,285
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Income (loss) before extraordinary item $ 0.25 $ (0.51) $ 0.69 $ 0.82 $ 0.81
========= ========= ========= ========= =========
Net income (loss) $ 0.25 $ (0.51) $ 0.62 $ 0.82 $ 0.81
========= ========= ========= ========= =========
Diluted earnings per share:
Income (loss) before extraordinary item $ 0.25 $ (0.51) $ 0.66 $ 0.80 $ 0.79
========= ========= ========= ========= =========
Net income (loss) $ 0.25 $ (0.51) $ 0.60 $ 0.80 $ 0.79
========= ========= ========= ========= =========
Pro forma provision (benefit) for income taxes 10,686 (8,731)
--------- ---------
Pro forma net income (loss) $ 15,045 $ (14,245)
========= =========
Pro forma basic earnings (loss) per share $ 0.15 $ (0.22)
Pro forma diluted earnings (loss) per share $ 0.15 $ (0.22)
Weighted average basic shares outstanding 98,005 64,458 49,857 52,900 53,537
Weighted average diluted shares outstanding 98,005 64,458 51,789 54,663 54,643
SUPPLEMENTAL EARNINGS PER SHARE DATA:
Diluted earnings per share before
restructuring charge $ 0.25 $ (0.51) $ 0.60 $ 0.80 $ 0.88
========= ========= ========= ========= =========
BALANCE SHEET DATA (AS OF END OF PERIOD):
Cash and cash equivalents $ 7,377 $ 30,411 $ 23,569 $ 13,297 $ 30,531
Working capital (4,986) 31,005 (1,700) (1,048) (1,307)
Total assets 73,096 275,345 286,474 311,828 321,284
Total debt 25,264 320,000 187,568 157,512 115,000
Total stockholders' equity (deficit) 34,791 (68,591) 61,435 105,167 148,104
OTHER DATA:
Number of retail stores (at end of period) 47 62 102 147 192
Comparable store sales growth 16.4% 16.5% 14.8% 8.9% (1.7)%
Comparable store sales growth with catalog and
Internet 15.9% 17.6% 16.8% 12.8% 2.0%
Gross profit margin 55.7% 55.8% 56.1% 54.6% 54.2%
Depreciation and amortization $ 3,581 $ 4,662 $ 6,709 $ 10,762 $ 14,347
Capital expenditures 9,173 9,433 22,749 37,122 26,844
EBITDA (1) 31,315 (2,865) 82,237 98,861 94,716
Adjusted EBITDA (2) 42,139 59,251 83,150 99,300 103,664
Adjusted EBITDA margin (3) 28.6% 31.4% 31.7% 29.3% 27.3%
CASH FLOW DATA:
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net cash flows from operating activities $ 30,035 $ (11,578) $ 55,430 $ 57,310 $ 86,962
Net cash flows from investing activities (9,961) (9,305) (22,676) (37,457) (26,428)
Net cash flows from financing activities (13,541) 43,917 (39,683) (30,042) (43,256)
</TABLE>
(1) EBITDA represents earnings before extraordinary items, interest, income
taxes, depreciation and amortization. For this purpose, amortization does not
include amortization of deferred financing costs of $974 in 1999, $1,164 in 2000
and $1,114 in 2001, respectively, which amounts are included in interest
expense. EBITDA is presented because management believes it is a widely accepted
financial indicator used by certain investors and analysts to analyze and
compare companies on the basis of operating performance. EBITDA as presented may
not be comparable to similarly titled measures reported by other companies since
not all companies necessarily calculate EBITDA in an identical manner and
therefore is not necessarily an accurate means of comparison between companies.
EBITDA is not intended to represent cash flows for the period or funds available
for management's discretionary use nor has it been represented as an alternative
to operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
(2) Adjusted EBITDA reflects EBITDA adjusted to eliminate (a) the bonus of
$61,263 in 1998 related to the 1998 recapitalization, (b) the $8,000
restructuring charge in 2001, (c) other expense (income), (d) non-cash stock
based compensation, and (e) compensation and benefits paid to the former sole
stockholder of the S corporation of $10,490 in 1997.
(3) Adjusted EBITDA margin reflects adjusted EBITDA as a percentage of net
sales.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgements, including those related to inventories,
restructuring costs, bad debts, intangible assets, income taxes, debt service
and contingencies and litigation. Management bases its estimates and judgements
on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgements about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following critical accounting policies, among others, affect its more
significant judgements and estimates used in the preparation of our consolidated
financial statements.
As described in the Notes to the Consolidated Financial Statements, we sell our
products both directly to retail customers and through wholesale channels.
Revenue from the sale of merchandise to retail customers is recognized at the
time of sale while revenue from wholesale customers is recognized when shipped.
Customers, be they retail or wholesale, do have the right to return product to
us in certain limited situations. Such rights of return have not precluded
revenue recognition because we have a long history with such returns on which we
construct a reserve. This reserve, as a percentage of sales has historically
approximated 0.2%. This estimate, however, is subject to change. In addition to
returns, we bear credit risk relative to our
16
<PAGE>
wholesale customers. We have provided a reserve for bad debts in our financial
statements based on our estimates of the creditworthiness of our customers.
However, this estimate is also subject to change.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value, based upon assumptions about future demand and market conditions. If
actual future demand or market conditions are less favorable than those
projected by management, additional inventory write-downs may be required. In
addition, our inventory is stated at the lower of cost or market on a last-in
first-out ("LIFO") basis. Fluctuations in inventory levels along with the cost
of raw materials could impact the carrying value of our inventory.
We have a significant deferred tax asset recorded on our financial statements.
This asset arose at the time of the our recapitalization in 1998 and is, in
essence, a future tax deduction for us. The recoverability of this future tax
deduction is dependent upon our future profitability. We have made an assessment
that this asset is more likely than not to be recovered and that the asset is
appropriately reflected on the balance sheet. Should we find that we are not
able to utilize this deduction in the future, we would have to record a reserve
for all or a part of this asset.
In fiscal 2001, we closed our distribution facility in Utah and recorded a
restructuring charge. Part of the shut-down charge related to the lease
commitment that we have through 2005. Management has not recorded the entire
commitment as a liability since it believes that it will be able to sublet the
facility at some time in the near future. However, there is no absolute
certainty relative to this and the estimate of future net lease commitments
could change in the future. We estimate the remaining occupancy obligation that
has not been reserved for is approximately $1.5 million.
PERFORMANCE MEASURES
We measure the performance of our retail and wholesale segments through a
segment margin calculation, which specifically identifies not only gross profit
on the sales of products through the two channels but also costs and expenses
specifically related to each segment.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We have experienced, and may experience in the future, fluctuations in our
quarterly operating results. There are numerous factors that can contribute to
these fluctuations; however, the principal factors are seasonality and new store
openings.
Seasonality. We have historically realized higher revenues and operating income
in our fourth quarter, particularly in our retail business which is becoming a
larger portion of our sales. We believe that this has been due primarily to
increased sales in the giftware industry during the holiday season of the fourth
quarter.
New Store Openings. The timing of our new store openings may also have an impact
on our quarterly results. First, we incur certain one-time expenses related to
opening each new store. These expenses, which consist primarily of salaries,
supplies and marketing costs, are expensed as incurred. Second, most store
expenses vary proportionately with sales, but there is a fixed cost component.
This typically results in lower store profitability when a new store opens
because new stores generally have lower sales than mature stores. Due to both of
these factors, during periods when new store openings as a percentage of the
base are higher, operating profit may decline in dollars and/or as a percentage
of sales. As the overall store base matures, the fixed cost component of selling
expenses is spread over an increased level of sales, resulting in a decrease in
selling and other expenses as a percentage of sales.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIFTY-TWO WEEKS ENDED DECEMBER 29, 2001 ("2001") COMPARED TO FIFTY-TWO WEEKS
ENDED DECEMBER 30, 2000 ("2000")
NET SALES
Net sales increased 12.1% to $379.8 million in 2001 from $338.8 million in 2000.
This growth was primarily achieved by increasing the number of retail stores
from 147 to 192, increasing sales through catalog and Internet operations and
increasing sales to wholesale customers.
Wholesale sales, including European operations, increased 2.8% to $168.1 million
in 2001 from $163.5 million for 2000. This growth was achieved both by
increasing sales to existing customers and by increasing the number of wholesale
locations. We believe that wholesale sales growth has been and will continue to
be positively impacted by marketing and merchandising programs, new product
introductions, wholesale exclusive products, the addition of new wholesale
locations and the anticipated continued growth of our European operations.
Retail sales increased 20.8% to $211.7 million in 2001 from $175.3 million for
2000. There were 192 retail stores open as of December 29, 2001 compared to 147
stores open at December 30, 2000. The increase in retail sales was achieved
primarily through the addition of 45 new stores and increased sales in catalog
and Internet operations. Comparable store and catalog and Internet sales in 2001
increased 2.0% compared to 2000. Retail comparable store sales in 2001 decreased
1.7 % compared to 2000. There were 147 stores included in the comparable store
base at the end of 2001, and 45 of these stores were included for less than a
full year.
The events of September 11th had significant negative effects on both our
wholesale and retail divisions in 2001. In wholesale we had achieved low
double-digit year-to-date growth in incoming order volume as of the week
preceding September 11th . Incoming order volume for the 15 weeks subsequent to
September 11th grew 2.3% over the comparable prior year period. In retail, with
mall traffic down significantly after September 11th, comparable store and
catalog and Internet sales declined, on a year to date basis, from 10% through
August of 2001 to 2.0% as of the end of the year.
GROSS PROFIT
Gross profit increased 11.1% to $205.7 million in 2001 from $185.1 million in
2000. As a percentage of net sales, gross profit decreased to 54.2% in 2001 from
54.6% in 2000. The decrease in gross profit as a percentage of net sales for
2001 was primarily attributable to discounts associated with the sell-through of
holiday merchandise in the retail business during the first quarter of 2001, a
higher mix of sales associated with our fragrance of the month sales program and
a higher mix of non-manufactured sales. The gross profit rate in each of the
third and fourth quarters of 2001 was higher than the comparable prior year
quarter, and for the last half of 2001 increased to 56.3% from 55.0% in the last
half of 2000. The improvement in the gross profit rate in the last half of 2001
compared to the last half of 2000 was primarily the result of supply chain
inefficiencies in the fourth quarter of 2000 that were not experienced in the
latter half of 2001. The supply chain inefficiencies in the fourth quarter of
2000 were related to significant over-staffing in our manufacturing and
logistics operations. These supply chain inefficiencies were corrected in the
first quarter of 2001 through
18
<PAGE>
the closure of our Salt Lake City distribution center and the reduction of our
workforce by approximately 450 people.
SELLING EXPENSES
Selling expenses increased 20.0% to $77.3 million in 2001 from $64.5 million in
2000. These expenses are related to both wholesale and retail operations and
consist of payroll, occupancy, advertising and other operating costs, as well as
preopening costs, which are expensed as incurred. As a percentage of net sales,
selling expenses were 20.4% in 2001 and 19.0% in 2000. The primary factor behind
the increase in selling expenses in dollars and as a percentage of sales was the
increase in the number of retail stores we operated and the resulting shift in
business mix between retail and wholesale sales. Retail sales, which have higher
selling expenses as a percentage of sales than wholesale sales, represented
55.7% of total sales in 2001 compared to 51.7% in 2000. The number of retail
stores increased from 147 in 2000 to 192 in 2001. The increase in selling
expenses as a percentage of sales is also explained by the heavy weighting of
new stores. We opened 45 new stores in 2001 and 2000. New stores typically
generate lower operating margin contributions than stores that have been open
for more than one year since fixed costs, as a percentage of sales, are higher
during the early sales maturation period and since preopening costs are fully
expensed in the year of opening. Excluding the sales and selling expenses of the
2000 and 2001 store classes from the fifty-two weeks ended December 29, 2001,
and the sales and selling expenses of the 2000 store class from the fifty-two
weeks ended December 30, 2000, store selling expense declined as a percentage of
sales.
SEGMENT PROFITABILITY
Segment profitability is net sales less cost of sales and selling expenses.
Segment profitability for our wholesale operations, including Europe, was $65.4
million, or 38.9% of wholesale sales in 2001 compared to $64.7 million or 39.6%
of wholesale sales in 2000. Segment profitability for our retail operations was
$63.0 million or 29.8% of retail sales in 2001 compared to $55.9 million or
31.9% of retail sales in 2000. The decrease in segment profitability as a
percentage of sales for 2001 was primarily attributable to discounts associated
with the sell-through of holiday merchandise in the retail business during the
first quarter of 2001, a higher mix of sales associated with our fragrance of
the month sales program and a higher mix of non-manufactured sales. Segment
profitability for the last half of 2001 increased to 38.5% from 38.0% in the
last half of 2000. The improvement in segment profitability in the last half of
2001 compared to the last half of 2000 was primarily the result of supply chain
inefficiencies in the fourth quarter of 2000 that were not experienced in the
fourth quarter of 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which consist primarily of
personnel-related costs incurred in support functions, increased 22.0% to $38.5
million in 2001 from $31.6 million in 2000. As a percentage of net sales,
general and administrative expenses increased to 10.1% from 9.3%. The increase
in general and administrative expenses was primarily due to the new systems
infrastructure installed in the last half of fiscal 2000, occupancy expenses
associated with our new headquarters building opened in May 2001 and expenses
associated with the bonus program.
RESTRUCTURING CHARGE
A restructuring charge for $8.0 million was recorded in 2001 to record costs
associated with our decision to consolidate and restructure our distribution and
manufacturing operations. We closed our Utah distribution facility and
restructured our distribution and manufacturing work-force during 2001. Included
in the
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restructuring charge are severance and other employee related costs, the
non-cash write-down of non-recoverable leasehold improvements, fixture and
equipment investments and estimated continuing occupancy expenses for abandoned
facilities, net of anticipated sub-lease income. An analysis of the
restructuring reserve is as follows:
Costs Paid During
the Fifty-Two
Weeks Ended Accrued as of
Expense December 29, 2001 December 29, 2001
------- ----------------- -----------------
Occupancy $2,635 $ 781 $1,854
Employee related 2,635 2,304 331
Other 606 606 --
------ ------ ------
Total $5,876 $3,691 $2,185
====== ====== ======
In addition, as described above, we recorded a $2,124 pre-tax write-down of
non-recoverable leasehold improvements, fixture and equipment investments at our
Utah facility.
The closure of our Utah distribution facility and the restructuring of our
distribution and manufacturing workforce in the first quarter of 2001 did not
negatively impact our ability to execute our growth strategy in 2001, and we do
not believe it will have any negative impact on our ability to execute our
growth strategy in the future. In April 2001, we opened a new 256,000 square
foot distribution center in South Deerfield, Massachusetts and consolidated
substantially all distribution operations in this facility. We believe that our
current workforce and our new distribution center (which can be expanded by up
to 105,000 square feet under the existing lease) are adequate to support our
current growth plans throughout all regions of North America, including our
plans to increase distribution in the South and West markets.
NET OTHER EXPENSE
Net other expense was $10.9 million in 2001 compared to $16.5 million in 2000.
The primary component of this expense was interest expense, which was $10.6
million in 2001 compared to $16.9 million in 2000. The decrease in interest
expense was the result of the reduction in total debt outstanding from $157.5
million at December 30, 2000 to $115.0 million at December 29, 2001, and a
reduction in borrowing rates resulting from decreases in the federal funds and
eurodollar rates.
INCOME TAXES
The income tax provision for 2001 was $27.7 million compared to $29.0 million
for 2000. The 2001 tax provision reflects an effective tax rate of 39% compared
to 40% in 2000.
NET INCOME
Net income decreased 0.6% to $43.3 million in 2001 from $43.6 million in 2000.
The restructuring charge recorded in 2001 reduced 2001 net income by $4.9
million.
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FIFTY-TWO WEEKS ENDED DECEMBER 30, 2000 ("2000") COMPARED TO THE FIFTY-TWO WEEKS
ENDED JANUARY 1, 2000 ("1999")
NET SALES
Net sales increased 29.3% to $338.8 million in 2000 from $262.1 million in 1999.
This growth was primarily achieved by increasing the number of retail stores
from 102 to 147, increasing sales in existing retail stores and catalog and
Internet operations and increasing sales to wholesale customers.
Wholesale sales, including European operations, increased 17.8% to $163.5
million from $138.9 million for 1999. This growth was achieved primarily by
increasing sales to existing customers. We believe that wholesale sales growth
has been and will continue to be positively impacted by increased promotional
spending, the addition of new wholesale locations and the anticipated growth of
our European operations.
Retail sales increased 42.3% to $175.3 million in 2000 from $123.2 million for
1999. This growth was achieved primarily through the addition of 45 new stores,
increased sales in existing stores and increased sales in catalog and Internet
operations. Comparable store and catalog and Internet sales in 2000 increased
12.8% over 1999. Retail comparable store sales in 2000 increased 8.9% over 1999.
There were 102 stores included in the comparable store base at the end of 2000,
and 40 of these stores were included for less than a full year. Our continued
growth in comparable store sales was attributable to the increased number and
strong performance of new stores entering the comparable store base and
continued sales growth in stores opened prior to 1999.
GROSS PROFIT
Gross profit increased 26.0% to $185.1 million in 2000 from $147.0 million in
1999. As a percentage of net sales, gross profit decreased to 54.6% in 2000 from
56.1% in 1999. The decrease in gross profit as a percentage of net sales was
primarily due to inefficiencies in supply chain operations. In anticipation of a
significantly stronger holiday selling season in the fourth quarter of 2000, we
increased our logistics and manufacturing infrastructure more rapidly than was
ultimately required. As a result, during the fourth quarter we incurred excess
labor and support costs due to significant over-staffing in both our
manufacturing and logistics operations. Other factors that contributed to the
decline in gross profit as a percentage of sales were approximately $1.3 million
of unexpected distribution costs incurred during the third quarter of 2000, due
to shipping inefficiencies caused during the implementation of new distribution
software, and the cost of operating our Salt Lake City distribution center for a
full year in 2000 compared to approximately 18 weeks in 1999.
SELLING EXPENSES
Selling expenses increased 45.0% to $64.5 million in 2000 from $44.5 million in
1999. These expenses were related to both wholesale and retail operations and
consist of payroll, advertising, occupancy and other operating costs. As a
percentage of net sales, selling expenses were 19.0% in 2000 and 17.0% in 1999.
The primary factor behind the increase in selling expense in dollars and as a
percentage of sales was the increase in the number of retail stores operated by
us and the resulting shift in business mix between retail and wholesale sales.
Retail sales, which have higher selling expenses as a percentage of sales than
wholesale sales, represented 51.7% of total sales in 2000 compared to 47.0% in
1999. The number of retail stores increased from 102 in 1999 to 147 in 2000.
Selling expenses as a percentage of sales in new stores are generally higher
than in stores that have been open for more than one year since fixed costs, as
a percentage of
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sales, are higher during the early sales maturation period and since preopening
costs are fully expensed in the year of opening.
SEGMENT PROFITABILITY
Segment profitability is net sales less cost of sales and selling expenses.
Segment profitability for our wholesale operations, including Europe, was $64.7
million, or 39.6% of wholesale sales in 2000 compared to $59.4 million or 42.7%
of wholesale sales in 1999. Segment profitability for our retail operations was
$55.9 million or 31.9% of retail sales in 2000 compared to $43.1 million or
35.0% of retail sales in 1999. The decrease in wholesale and retail segment
profitability as a percentage of net sales was largely attributable to
inefficiencies in supply chain operations, as described above. Other factors
that contributed significantly to the decline in segment profitability as a
percentage of net sales were approximately $1.3 million of unexpected
distribution costs incurred during the third quarter of 2000, due to shipping
inefficiencies caused during the implementation of new distribution software;
and the cost of operating our Utah distribution facility for a full year in 2000
compared to approximately 18 weeks in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which consist primarily of
personnel-related costs incurred in support functions, increased 21.3% to $31.6
million in 2000 from $26.0 million in 1999. As a percentage of net sales,
general and administrative expenses decreased to 9.3% from 9.9% in 1999. The
increase in general and administrative expense in dollars was primarily
attributable to our continued investment in building our organizational
infrastructure. The decrease in general and administrative expenses as a
percentage of net sales was attributable to our leveraging of these expenses
over a larger sales base.
INCOME FROM OPERATIONS
Income from operations increased 16.6% to $89.1 million in 2000 from $76.4
million for 1999. Income from operations as a percentage of net sales decreased
to 26.3% in 2000 compared to 29.1% in 1999.
NET OTHER EXPENSE
Net other expense was $16.5 million in 2000 compared to $19.2 million in 1999.
The primary component of this expense was interest expense, which was $16.9
million in 2000 compared to $20.0 million in 1999. The decrease in interest
expense was the result of the reduction in total debt outstanding from $187.5
million at January 1, 2000 compared to $157.5 million at December 30, 2000.
INCOME TAXES
The income tax provision for 2000 was $29.0 million compared to $22.9 million
for 1999. The 2000 and 1999 tax provision reflects an effective tax rate of 40%.
NET INCOME
Net income increased 40% to $43.6 million in 2000 from $31.1 million in 1999.
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LIQUIDITY AND CAPITAL RESOURCES
We have consistently generated positive cash flow from operations. Specifically,
over the last three fiscal years the we have generated a total of approximately
$200 million, including almost $87 million in 2001. These amounts have exceeded
net income in all the fiscal years presented due to two factors. First, we have
incurred non-cash charges for depreciation and amortization. Second, income tax
expense has significantly exceeded taxes actually paid out owing to tax
deductions that we continue to avail ourselves of that arose from the 1998
recapitalization. These significant tax deductions are to continue for the next
eleven years. On an annual basis, this results in tax savings of approximately
$11.7 million per year through 2013 assuming sufficient income to realize the
full benefit of this deduction.
These internally generated cash flows have been sufficient to fund necessary
capital expenditures for our expansion plans. Capital expenditures in 2001 were
$26.8 million and were related to (i) the capital requirements to open 45 new
stores; (ii) investments in logistics operations including the opening of a new
distribution center in April 2001; (iii) information systems; and (iv)
manufacturing operations. Such capital expenditures were approximately $37.1
million in 2000 and related to similar type expenditures. More specifically, 45
new stores were opened in 2000 and we undertook a significant upgrade to our
information systems in that year. We anticipate that capital expenditures in
2002 will total approximately $28.0 million and will be spent in a similar
manner as in 2001. We believe that we will open approximately 45 new stores in
2002.
Despite significant capital expenditures, operating cash flows have still
provided sufficient cash to both fund repayments of our term loan and borrowings
under our credit facility. We currently have a credit agreement with a
consortium of banks that was established at the time of our initial public
offering. This credit agreement provides for a maximum borrowing of $300 million
and consists of a revolving credit facility for $150 million and a term loan for
$150 million. We can elect to set the interest rates on all or a portion of the
borrowings outstanding under the credit agreement at a rate per annum equal to
(a) the greatest of (1) the prime rate, (2) the base CD rate plus 1.00% or (3)
the federal funds effective rate plus 1/2% plus a margin ranging from 0.00% to
0.75%, or (b) the eurodollar rate plus a margin ranging from 1.00% to 1.75%. The
weighted-average interest rate on outstanding borrowings at December 29, 2001
was 2.94%.
Our credit agreement requires that we comply with several financial and other
covenants, including requirements that we maintain at the end of each fiscal
quarter the following financial ratios as set forth in our credit agreement:
- - a consolidated total debt to consolidated EBITDA ratio of no more than 3.00
to 1.00 at December 29, 2001 (at December 29, 2001 this ratio was 1.13 to
1.00) and of no more than 2.50 to 1.00 for subsequent fiscal quarters.
- - a fixed charge coverage ratio (the ratio of the sum of consolidated EBITDA
plus lease expense to the sum of consolidated cash interest expense plus
lease expense) of no less than 3.50 to 1.00 at December 29, 2001 (at
December 29, 2001 this ratio was 4.96 to 1.00) and of no less than 4.00 to
1.00 for subsequent fiscal quarters.
Our credit agreement defines EBITDA generally as our consolidated net income
(excluding extraordinary gains, and gains and losses from material
dispositions), plus the amount of net interest expense, depreciation and
amortization, income taxes, certain non-cash compensation expenses, and certain
rental expenses. EBITDA as defined in our credit agreement differs from the
definition of EBITDA used elsewhere herein, in that it excludes gains and losses
from dispositions of material assets and non-cash compensation expense. We have
included the amount of these expenses in our more conservative calculation of
EBITDA used elsewhere, which calculation is therefore lower than EBITDA as used
in our credit agreement.
This credit arrangement does not mature until 2004. No payments of principal are
due on the revolving credit facility until this maturity date. The term loan is
payable in quarterly installments ranging from $7.5 million to $9.5 million in
March, June, September and December of each year commencing on December 31,
1999. As of December 29, 2001, $32.5 million was outstanding under the revolving
credit facility, leaving $117.5 million in availability.
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In addition to obligations to repay our long-term debt, we lease the majority of
our retail stores under long-term operating leases. The following table
summarizes our commitments under both our debt and lease obligations:
<TABLE>
<CAPTION>
Payments due by period (in thousands)
-----------------------------------------------------
Less than After
Contractual obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- -------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Long term debt $115,000 $31,500 $ 83,500 $ -- $ --
Operating leases 146,290 17,218 33,209 30,013 65,850
-------- ------- -------- ------- -------
Total contractual cash obligations $261,290 $48,718 $116,709 $30,013 $65,850
======== ======= ======== ======= =======
</TABLE>
We believe that cash flow from operations and funds available under our credit
agreement have been and will be sufficient for our working capital needs,
planned capital expenditures and debt service obligations for the next twelve
months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, was required to be adopted by the
Company on December 31, 2000. The effect of adopting this standard was not
material to the Company's financial position, results of operations or cash
flows.
In August, 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. This statement amends the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and Accounting Principles Board No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This statement, which excludes goodwill from its scope,
establishes the methodology to be used for evaluating (i) long-lived assets to
be held and used, (ii) long-lived assets to be disposed of other than by sale,
and (iii) long-lived assets to be disposed of by sale, for both ongoing and
discontinued operations. In addition, SFAS No. 144 broadens the treatment of
discontinued operations to include components of an entity rather than just
segments of a business. SFAS No. 144 is required to be adopted by the Company in
fiscal 2002. The Company has not completed the process of evaluating the impact
that will result from adopting this statement and is therefore unable to
disclose the impact that adopting SFAS No. 144 will have on our financial
position and results of operations.
IMPACT OF INFLATION
We do not believe inflation has a significant impact on our operations. The
prices of our products have not varied based on the movement of the consumer
price index. The majority of our material and labor costs have not been
materially affected by inflation.
FUTURE OPERATING RESULTS
As referenced above, there are a number of factors that might cause our actual
results to differ significantly from the results reflected by the
forward-looking statements contained herein. In addition to factors generally
affecting the political, economic and competitive conditions in the United
States and abroad, such factors include those set forth below.
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IF WE FAIL TO GROW OUR BUSINESS AS PLANNED, OUR BUSINESS COULD SUFFER AND
FINANCIAL RESULTS COULD DECLINE; AS WE GROW IT WILL BE DIFFICULT TO MAINTAIN OUR
HISTORICAL GROWTH RATES.
We intend to continue to pursue a business strategy of increasing sales and
earnings by expanding our retail and wholesale operations both in the United
States and internationally. We intend to grow internally and not by acquisition.
In particular, our retail growth strategy depends in large part on our ability
to open new stores in both existing and new geographic markets. Since our
ability to implement our growth strategy successfully will be dependent in part
on factors beyond our control, including consumer preferences and our
competitive environment, we may not be able to achieve our planned growth or
sustain our financial performance. Our ability to anticipate changes in the
candle and giftware industries, and identify industry trends, will be critical
factors in our ability to remain competitive.
We expect that, as we grow, it will become more difficult to maintain our growth
rate, which could negatively impact our operating margins and results of
operations. New stores typically generate lower operating margin contributions
than mature stores because fixed costs, as a percentage of sales, are higher and
because pre-opening costs are fully expensed in the year of opening. In
addition, our retail sales generate lower margins than our wholesale sales. Our
wholesale business has grown by increasing sales to existing customers and by
adding new customers. If we are not able to continue this, our sales growth and
profitability could be adversely affected. In addition, if we do not effectively
manage our growth, we may experience problems such as the supply chain
inefficiencies that occurred in 2000 due to overstaffing in our manufacturing
and logistics operations. These inefficiencies were corrected in 2001 through a
workforce reduction and the closing of our Salt Lake City distribution center,
but resulted in a decline in our gross profit in the last quarter of 2000 and a
restructuring charge of $8 million in 2001. We cannot assure that we will
continue to grow at a rate comparable to our historic growth rate or that our
historic financial performance will continue as we grow.
WE FACE SIGNIFICANT COMPETITION IN THE GIFTWARE INDUSTRY. THIS COMPETITION COULD
CAUSE OUR REVENUES OR MARGINS TO FALL SHORT OF EXPECTATIONS WHICH COULD
ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY
AND OUR ABILITY TO CONTINUE TO GROW OUR BUSINESS.
We compete generally for the disposable income of consumers with other producers
in the approximately $55.2 billion giftware industry. The giftware industry is
highly competitive with a large number of both large and small participants. Our
products compete with other scented and unscented candle and personal care
products and with other gifts within a comparable price range, like boxes of
candy, flowers, wine, fine soap and related merchandise. Our retail stores
compete with franchised candle store chains, specialty candle stores and gift
and houseware retailers. Some of our competitors are part of large, diversified
companies which have greater financial resources and a wider range of product
offerings than we do. This competitive environment could adversely affect our
future revenues and profits, financial condition and liquidity and our ability
to continue to grow our business.
A MATERIAL DECLINE IN CONSUMERS' DISCRETIONARY INCOME COULD CAUSE OUR SALES AND
INCOME TO DECLINE.
Our results depend on consumer spending, which is influenced by general economic
conditions and the availability of discretionary income. Accordingly, we may
experience declines in sales during economic downturns or during periods of
uncertainty like that which followed the terrorist attacks on the United States,
and the possibility of further terrorist attacks. Any material decline in the
amount of discretionary spending could have a material adverse effect on our
sales and income.
BECAUSE WE ARE NOT A DIVERSIFIED COMPANY AND ARE DEPENDENT UPON ONE INDUSTRY, WE
HAVE LESS FLEXIBILITY IN REACTING TO UNFAVORABLE CONSUMER TRENDS, ADVERSE
ECONOMIC CONDITIONS OR BUSINESS CYCLES.
We rely primarily on the sale of premium scented candles and related products in
the giftware industry. In the event that sales of these products decline or do
not meet our expectations, we cannot rely on the sales of other products to
offset such a shortfall. As a significant portion of our expenses is comprised
of fixed costs, such
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as lease payments, our ability to decrease expenses in response to adverse
business conditions is limited in the short term. As a result, unfavorable
consumer trends, adverse economic conditions or changes in the business cycle
could have a material and adverse impact on our earnings.
IF WE LOSE OUR SENIOR EXECUTIVE OFFICERS, OUR BUSINESS COULD BE DISRUPTED AND
OUR FINANCIAL PERFORMANCE COULD SUFFER.
Our success is substantially dependent upon the retention of our senior
executive officers. If our senior executive officers become unable or unwilling
to participate in our business, our future business and financial performance
could be materially affected.
MANY ASPECTS OF OUR MANUFACTURING AND DISTRIBUTION FACILITIES ARE CUSTOMIZED FOR
OUR BUSINESS; AS A RESULT, THE LOSS OF ONE OF THESE FACILITIES WOULD DISRUPT OUR
OPERATIONS.
Approximately 80% of our sales are generated by products we manufacture at our
manufacturing facility in Whately, Massachusetts and we rely primarily on our
distribution facilities in South Deerfield, Massachusetts to distribute our
products. Because most of our machinery is designed or customized by us to
manufacture our products, and because we have strict quality control standards
for our products, the loss of our manufacturing facility, due to natural
disaster or otherwise, would materially affect our operations. Similarly, our
distribution facilities rely upon customized machinery, systems and operations,
the loss of which would materially affect our operations. Although our
manufacturing and distribution facilities are adequately insured, we believe it
would take up to twelve months to resume operations at a level equivalent to
current operations.
SEASONAL, QUARTERLY AND OTHER FLUCTUATIONS IN OUR BUSINESS, AND GENERAL INDUSTRY
AND MARKET CONDITIONS, COULD AFFECT THE MARKET FOR OUR COMMON STOCK.
Our net sales and operating results vary from quarter to quarter. We have
historically realized higher net sales and operating income in our fourth
quarter, particularly in our retail business, which accounts for a larger
portion of our sales. We believe that this has been due primarily to an increase
in giftware industry sales during the holiday season of the fourth quarter. As a
result of this seasonality, we believe that quarter to quarter comparisons of
our operating results are not necessarily meaningful and that these comparisons
cannot be relied upon as indicators of future performance. In addition, we may
also experience quarterly fluctuations in our net sales and income depending on
various factors, including, among other things, the number of new retail stores
we open in a particular quarter, changes in the ordering patterns of our
wholesale customers during a particular quarter, and the mix of products sold.
Most of our operating expenses, such as rent expense, advertising and
promotional expense and employee wages and salaries, do not vary directly with
net sales and are difficult to adjust in the short term. As a result, if net
sales for a particular quarter are below our expectations, we might not be able
to proportionately reduce operating expenses for that quarter, and therefore a
net sales shortfall could have a disproportionate effect on our operating
results for that quarter. Further, our comparable store sales from our retail
business in a particular quarter could be adversely affected by competition,
economic or other general conditions or our inability to execute a particular
business strategy. As a result of these factors, we may report in the future net
sales, operating results or comparable store sales that do not match the
expectations of market analysts and investors. This could cause the trading
price of our common stock to decline. In addition, broad market and industry
fluctuations may adversely affect the price of our common stock, regardless of
our operating performance.
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OUR TWO LARGEST STOCKHOLDERS, WHO ARE AFFILIATES OF FORSTMANN LITTLE & CO.,
EFFECTIVELY CONTROL US AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OTHER
STOCKHOLDERS.
Partnerships affiliated with Forstmann Little & Co. own approximately 63% of our
outstanding common stock and effectively control us. Accordingly, they are able
to:
- - influence the election of our entire board of directors and, until they no
longer own any shares of our common stock, they have the contractual right
to nominate two directors to our board of directors,
- - control our management and policies, and
- - affect the outcome of any corporate transaction or other matter submitted
to our stockholders for approval, including mergers, consolidations and the
sale of all or substantially all of our assets, even where the transaction
is not in the best interests of all stockholders.
They will also able to prevent or cause a change in control of Yankee Candle and
may be able to amend our Articles of Organization and By-Laws. The interests of
the Forstmann Little partnerships also may conflict with the interests of the
other holders of common stock.
PROVISIONS IN OUR CORPORATE DOCUMENTS AND MASSACHUSETTS LAW COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF YANKEE CANDLE.
Our Articles of Organization and By-Laws may discourage, delay or prevent a
merger or acquisition involving Yankee Candle that our stockholders may consider
favorable, by:
- - authorizing the issuance of preferred stock, the terms of which may be
determined at the sole discretion of the board of directors,
- - providing for a classified board of directors, with staggered three-year
terms, and
- - establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at meetings.
Massachusetts law may also discourage, delay or prevent someone from acquiring
or merging with us.
THE PLEDGE OF SUBSTANTIALLY ALL OF OUR ASSETS TO SECURE OUR OBLIGATIONS UNDER
OUR CREDIT AGREEMENT MAY HINDER OUR ABILITY TO OBTAIN ADDITIONAL DEBT FINANCING
ON FAVORABLE TERMS.
We have pledged substantially all of our assets to secure our obligations under
our credit agreement. Subject to restrictions contained in our credit agreement,
we may incur additional indebtedness in the future. However, due to the pledge
of our assets, a creditor lending to us on a senior unsecured basis will be
effectively subordinated to our bank lenders. This could limit our ability to
obtain, or obtain on favorable terms, and may make more costly additional debt
financing outside of our credit agreement. While we do not expect to require
additional financing prior to the expiration of our credit agreement, if we
needed to do so the inability to obtain additional financing on favorable terms
could adversely impact our results of operations or inhibit our ability to
realize our growth strategy.
WE DO NOT CURRENTLY INTEND TO PAY DIVIDENDS ON OUR CAPITAL STOCK.
We have never paid a cash dividend on our common stock as a public company and
we do not intend to pay any cash dividends in the foreseeable future. Instead we
intend to retain earnings for the future operation of
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<PAGE>
the business. Any determination to pay dividends in the future will be at the
discretion of our board of directors and will be dependent upon our results of
operations, our financial condition, contractual and legal restrictions and
other factors deemed relevant by our board of directors. Under the terms of our
existing credit agreement, we may not declare or pay dividends on our common
stock unless our ratio of consolidated total debt to consolidated EBITDA is less
than or equal to 2:1 or our aggregate principal amount of loans and letters of
credit outstanding is less than $100 million. Although we meet this requirement,
we do not currently intend to pay dividends.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our market risks relate primarily to changes in interest rates. We bear this
risk in two specific ways. First, we have debt outstanding. At December 29,
2001, we had $115.0 million outstanding under our New Credit Agreement, which
bears interest at variable rates. This facility is intended to fund operating
needs if necessary. Because this facility carries a variable interest rate
pegged to market indices, our results of operations and cash flows will be
exposed to changes in interest rates. Based on December 29, 2001 borrowing
levels, a 1.00% increase or decrease in current market interest rates would have
the effect of causing a $1.2 million additional pre-tax charge or credit to the
statement of operations.
The second component of interest rate risk involves the short-term investment of
excess cash. This risk impacts fair values, earnings and cash flows. Excess cash
is primarily invested in overnight repurchase agreements backed by U.S.
Government securities. These are considered to be cash equivalents and are shown
that way on our balance sheet. The balance of such securities at December 29,
2001 was approximately $13.1 million. Earnings from cash equivalents were
approximately $45.0 for the fifty-two weeks ended December 29, 2001. Based on
December 29, 2001 cash equivalents, a 1.00% increase or decrease in current
market interest rates would have the effect of causing an approximately $131.0
additional pre-tax credit or charge to the statement of operations.
We buy a variety of raw materials for inclusion in our products. The only raw
material that is considered to be of a commodity nature is wax. Wax is a
petroleum-based product. However, its market price has not historically
fluctuated with the movement of oil prices. Rather, over the past five years wax
prices have generally moved with inflation.
At this point in time, operations outside of the United States are immaterial.
Accordingly, we are not exposed to substantial risks arising from foreign
currency exchange rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Yankee Candle Company, Inc.
South Deerfield, Massachusetts 01373
We have audited the accompanying consolidated balance sheets of The Yankee
Candle Company, Inc. and subsidiaries (the "Company") as of December 30, 2000
and December 29, 2001, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the fifty-two weeks ended
January 1, 2000, December 30, 2000 and December 29, 2001. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Yankee Candle Company, Inc. and
subsidiaries as of December 30, 2000 and December 29, 2001 and the results of
their operations and their cash flows for the fifty-two weeks ended January 1,
2000, December 30, 2000 and December 29, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche, LLP
Boston, Massachusetts
February 12, 2002
29
<PAGE>
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 30, DECEMBER 29,
2000 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,297 $ 30,531
Accounts receivable less allowance of $352 at
December 30, 2000 and $325 at December 29, 2001 17,945 23,141
Inventory 35,036 23,680
Prepaid expenses and other current assets 5,419 4,340
Deferred tax assets 3,027 3,544
--------- ---------
Total current assets 74,724 85,236
PROPERTY, PLANT AND EQUIPMENT - NET 92,875 103,975
MARKETABLE SECURITIES 1,072 961
CLASSIC VEHICLES 874 351
DEFERRED FINANCING COSTS 3,929 2,815
DEFERRED TAX ASSETS 138,061 127,029
OTHER ASSETS 293 917
--------- ---------
TOTAL ASSETS $ 311,828 $ 321,284
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,133 $ 19,044
Accrued interest 2,524 125
Accrued payroll 7,757 9,170
Accrued income taxes 12,006 14,462
Other accrued liabilities 7,352 12,242
Current portion of long-term debt 30,000 31,500
--------- ---------
Total current liabilities 75,772 86,543
DEFERRED COMPENSATION OBLIGATION 1,074 1,055
LONG-TERM DEBT - Less current portion 127,512 83,500
DEFERRED RENT 2,303 2,082
COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 300,000 shares
authorized; 104,061 issued; 54,499 and
54,211 shares outstanding at December 30, 2000
and December 29, 2001, respectively 1,041 1,041
Additional paid-in capital 224,381 224,850
Treasury stock (212,988) (213,752)
Retained earnings 93,740 137,025
Unearned stock compensation (631) (522)
Accumulated other comprehensive loss (376) (538)
--------- ---------
Total stockholders' equity 105,167 148,104
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 311,828 $ 321,284
========= =========
See notes to consolidated financial statements.
30
<PAGE>
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
---------------------------------------
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
---------- ----------- ------------
<S> <C> <C> <C>
NET SALES $ 262,075 $ 338,805 $ 379,831
COST OF SALES 115,119 153,667 174,107
--------- --------- ---------
GROSS PROFIT 146,956 185,138 205,724
--------- --------- ---------
OPERATING EXPENSES:
Selling expenses 44,547 64,464 77,348
General and administrative expenses 26,023 31,576 38,515
Restructuring charge -- -- 8,000
--------- --------- ---------
Total operating expenses 70,570 96,040 123,863
--------- --------- ---------
INCOME FROM OPERATIONS 76,386 89,098 81,861
--------- --------- ---------
OTHER (INCOME) EXPENSE:
Interest income (627) (235) (72)
Interest expense 19,971 16,900 10,596
Other (income) expense (116) (165) 378
--------- --------- ---------
Total other expense 19,228 16,500 10,902
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 57,158 72,598 70,959
PROVISION FOR INCOME TAXES 22,863 29,039 27,674
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT 34,295 43,559 43,285
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, Less income tax benefit of $2,108 3,162 -- --
--------- --------- ---------
NET INCOME $ 31,133 $ 43,559 $ 43,285
========= ========= =========
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 0.69 $ 0.82 $ 0.81
========= ========= =========
Net income $ 0.62 $ 0.82 $ 0.81
========= ========= =========
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.66 $ 0.80 $ 0.79
========= ========= =========
Net income $ 0.60 $ 0.80 $ 0.79
========= ========= =========
WEGHTED-AVERAGE BASIC SHARES OUTSTANDING 49,857 52,900 53,537
========= ========= =========
WEIGHTED-AVERAGE DILUTED SHARES OUTSTANDING 51,789 54,663 54,643
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FIFTY TWO-WEEKS ENDED JANUARY 1, 2000, DECEMBER 30, 2000 AND DECEMBER 29, 2001
(in thousands)
<TABLE>
<CAPTION>
Accumu-
lated
Capital Other
Common Stock Additional Subscrip- Unearned Compre- Compre-
--------------- Paid in Treasury Retained tion Stock hensive hensive
Shares Amount Capital Stock Earnings Receivable Compensation Loss Income Total
------- ------ ---------- --------- -------- ---------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 98,005 $ 980 $126,610 $(212,448) $ 19,048 $(1,084) $(1,698) $ 1 -- $(68,591)
Redemption of common stock -- -- -- (540) -- -- -- -- -- (540)
Payment of capital
subscription receivable -- -- -- -- -- 1,084 -- -- -- 1,084
Unearned stock compensation -- -- 566 -- -- -- (566) -- -- --
Amortization of unearned
stock compensation -- -- -- -- -- -- 1,029 -- -- 1,029
Issuance of common stock
less underwriting fees
and other expenses 6,054 61 96,948 -- -- -- -- -- -- 97,009
Tax benefits on option
exercises -- -- 359 -- -- -- -- -- -- 359
Comprehensive income (loss):
Net income -- -- -- -- 31,133 -- -- -- $ 31,133 31,133
Foreign currency
translation loss -- -- -- -- -- -- -- (48) (48) (48)
--------
Comprehensive income -- -- -- -- -- -- -- -- $ 31,085 --
------- ------ -------- --------- -------- ------- ------- -------- ======== --------
BALANCE, JANUARY 1, 2000 104,059 1,041 224,483 (212,988) 50,181 -- (1,235) (47) 61,435
Amortization of unearned
stock compensation -- -- -- -- -- -- 604 -- -- 604
Additional expenses relative
to 1999 issuance of
common stock -- -- (102) -- -- -- -- -- -- (102)
Comprehensive income (loss):
Net income -- -- -- -- 43,559 -- -- -- 43,559 43,559
Foreign currency
translation loss -- -- -- -- -- -- -- (329) (329) (329)
--------
Comprehensive income -- -- -- -- -- -- -- -- $ 43,230
------- ------ -------- --------- -------- ------- ------- -------- ======== --------
BALANCE, DECEMBER 30, 2000 104,059 1,041 224,381 (212,988) 93,740 -- (631) (376) 105,167
Redemption of common stock -- -- -- (764) -- -- -- -- -- (764)
Issuance of common stock on
option exercises 2 -- 8 -- -- -- -- -- -- 8
Unearned stock compensation -- -- 461 -- -- -- (461) -- -- --
Amortization of unearned
stock compensation -- -- -- -- -- -- 570 -- -- 570
Comprehensive income (loss):
Net income -- -- -- -- 43,285 -- -- -- 43,285 43,285
Foreign currency
translation loss -- -- -- -- -- -- -- (162) (162) (162)
--------
Comprehensive income -- -- -- -- -- -- -- -- $ 43,123 --
------- ------ -------- --------- -------- ------- ------- -------- ======== --------
BALANCE, DECEMBER 29, 2001 104,061 $1,041 $224,850 $(213,752) $137,025 $ -- $ (522) $ (538) $148,104
======= ====== ======== ========= ======== ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
----------------------------------------
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
---------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,133 $ 43,559 $ 43,285
Adjustments to reconcile net income to net cash
from operating activities:
Extraordinary loss on early extinguishment of debt 3,162 -- --
Depreciation and amortization 6,709 10,762 14,347
Impairment -- -- 2,324
Realized and unrealized (gain) loss on marketable securities (4) 79 47
Non-cash stock compensation 1,029 604 570
Deferred taxes 13,915 11,013 10,515
Loss (gain) on disposal of fixed assets and classic vehicles 132 (123) 519
Changes in assets and liabilities
Accounts receivable, net (4,817) (4,766) (5,240)
Inventory (9,586) (13,254) 11,276
Prepaid expenses and other assets (2,225) (2,287) 275
Accounts payable 1,365 1,495 2,917
Accrued expenses and other liabilities 13,776 10,228 6,127
Deferred rent 841 -- --
--------- -------- --------
Net cash from operating activities 55,430 57,310 86,962
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,749) (37,122) (26,844)
Proceeds from sale of property and equipment 29 -- 352
Investments in marketable securities (366) (335) (191)
Proceeds from sale of marketable securities 410 -- 255
--------- -------- --------
Net cash from investing activities (22,676) (37,457) (26,428)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for redemption of common stock (540) -- (764)
Proceeds from issuance of common stock on option exercises -- -- 8
Repayment of