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TUMI HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with Tumi Holdings, Inc.'s (together with its subsidiaries, "Tumi", the "Company", "we", "us", and "our") condensed consolidated financial statements and notes thereto included elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. See "Cautionary Note Regarding Forward-Looking Statements" for further information regarding forward-looking statements. We generally identify forward-looking statements by words such as"anticipate," "estimate," "expect," "intend," "project," "plan," "predict," "believe," "seek," "continue," "outlook," "may," "might," "will," "should," "can have," "likely" or the negative version of these words or comparable words. Factors that can cause actual results to differ materially from those reflected in the forward-looking statements include, among others, those discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014 and elsewhere in this report. We urge you not to place undue reliance on these forward looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable securities laws and regulations. Historical results are not necessarily indicative of the results expected for any future period. The reporting periods for our unaudited quarterly financial information are based on the first month of each fiscal quarter including five Sundays and the second and third months of each fiscal quarter including four Sundays, with the fourth fiscal quarter always ending on December 31. Accordingly, the three-month reporting periods for the unaudited interim condensed consolidated financial statements included herein commenced on March 31, 2014 and April 1, 2013 and ended on June 29, 2014 and June 30, 2013, respectively. The six-month reporting periods for the unaudited interim condensed consolidated financial statements included herein commenced on January 1, 2014 and 2013 and ended on June 29, 2014 and June 30, 2013, respectively. Executive Overview We are a leading, growing, global, premium lifestyle brand whose products offer superior quality, durability and innovative design. We offer a comprehensive line of travel and business products and accessories in multiple categories. We design our products for, and market our products to, sophisticated professionals, frequent travelers and brand-conscious individuals who enjoy the premium status of Tumi products. We sell our products through a network of company-owned full-price stores and outlet stores, partner stores, concessions, shop-in-shops, specialty luggage shops, high-end department stores and e-commerce distribution channels. We have approximately 1,900 points of distribution in over 75 countries, and our global distribution network is enhanced by the use of our three logistics facilities located in the United States, Europe and Asia. We design our products in our U.S. design studios and selectively collaborate with well-known, international industrial and fashion designers for limited edition product lines. Production is sourced globally through a network of suppliers based in Asia, many of which are longtime suppliers, and the Caribbean. We have expanded our global presence by successfully implementing our growth strategies, which have included opening additional company-owned stores and increasing wholesale points of distribution. Our net sales have grown from $108.2 million and $211.1 million in the three and six months ended June 30, 2013, respectively, to $124.6 million and $233.2 million in the three and six months ended June 29, 2014, respectively. This increase in net sales resulted primarily from an increase in the number of company-owned stores, positive overall comparable store sales from existing stores and continuous growth in both Direct-to-Consumer and Indirect-to-Consumer e-commerce. Our ability to expand our points of distribution and to grow our net sales in existing stores has been driven by increasing demand for our products, as well as growing recognition of the Tumi brand. We have also increased our focus on our women's line and on our online presence. In recent years, the travel products industry has seen a trend in consumer preferences towards lighter weight luggage and travel accessories, as well as merchandise that makes mobile computing and communication more convenient. In light of these trends, we have developed products that fulfill those identified needs, such as our Vapor and Tegra-Lite lines, as well as a variety of mobile electronic accessories designed for frequent travelers. We have seen an increase in the relative percentage of our net sales derived from our accessories line and our premium product line and a decrease in the relative percentage of our new sales derived from our core product line in recent years. We believe there is a significant opportunity to continue to expand our store base globally, and we plan to add new company-owned and partner stores in upscale malls and prestigious street venues. We had 5 and 6 new company-owned store openings, offset by 1 and 2 store closings, in the three and six months ended June 29, 2014, respectively. We expect to open 20 19-------------------------------------------------------------------------------- Table of Contents to 25 company-owned stores in North America and Western Europe in 2014, with the majority being full-price stores, while also expanding our online presence. We believe we have the capacity to increase our Indirect-to-Consumer net sales, both in North America and internationally. In particular, we plan to continue to grow in key Asian markets, particularly China. We also plan to increase the number of wholesale doors in key European markets, including Germany, France and the United Kingdom, and to expand wholesale distribution in Central and South America, while also expanding our product portfolio offered in existing wholesale doors. We believe there is also significant opportunity to open additional points of distribution in airport locations in many of these regions. In North America, we expect to grow net sales by increasing our wholesale door presence, expanding our accessories business in department stores, increasing the variety of products available to third party e-commerce providers, and increasing penetration of the Canadian market through department stores, specialty stores, e-commerce sales and new distribution partners. We generally expect the return of our initial investment in a new company-owned store to occur in less than two and a half years. We also believe we can increase our average net sales per square foot by continuing to improve store efficiency and increase our overall net sales by capitalizing on our flexible distribution model. For example, in 2010, we converted certain company-owned stores in the Asia-Pacific region into wholesale distribution points in order to improve our operational effectiveness and profitability in that market. In particular, this enabled us to incentivize our local distributors to accelerate store development in a manner that would optimize net sales. We will continue to look for ways to improve our capital efficiency in both current and new markets in the future. Growth Strategy The key elements of our growth strategy are: • Expand our store base. We believe there continues to be significant opportunity for us to expand our company-owned retail store network in North America and internationally. We plan to add new stores in upscale mall market locations and prestigious street venues where we are currently underrepresented as well as open our own travel retail stores. In addition, we selectively target the affluent and business markets in small and mid-sized cities where there is demonstrated foot traffic and an established Tumi consumer base that is not being sufficiently served by multi-brand travel goods and accessories retailers. We also believe there is further opportunity to develop company-owned outlet stores in premium outlet malls where we currently do not have a presence. Our store-opening strategy focuses on opening profitable company-owned retail locations. We have opened 64 company-owned stores since January 1, 2009 (3 stores in 2009, 8 stores in 2010, 11 stores in 2011, 19 stores in 2012, 17 stores in 2013 and 6 stores in the six months ended June 29, 2014), bringing our total to 134 company-owned stores as of June 29, 2014. We currently expect to open 20 to 25 company-owned stores in 2014, and expect that the majority will be located in North America and that several will be located in Western Europe. While we may be unable to successfully open new company-owned stores according to plan, we have identified approximately 200 potential sites for new company-owned stores and believe we have a market opportunity to more than triple our current number of company-owned retail and outlet stores over the long term. • Expand wholesale distribution globally. We currently sell products in approximately 1,700 wholesale doors in over 75 countries. We plan to continue expanding wholesale distribution globally, with a focus on key markets in Asia (including mainland China, India, Japan and Korea), Eastern Europe and Central and South America. As part of this strategy, we will continue to develop relationships with wholesale distributors in these attractive geographies (in both new and existing markets), increase wholesale and distribution opportunities as well as expand into additional airport locations worldwide. We expect this distribution expansion will take several forms as appropriate for the specific market opportunity, including Tumi shop-in-shops, Tumi-defined corners within existing wholesale accounts or concession and consignment arrangements. • Continue to increase our brand awareness. We seek to increase our brand awareness among our targeted consumer base through retail and wholesale distribution expansion, select marketing initiatives, new product lines and brand extensions. In the wholesale distribution channel, we target distribution expansion by increasing the number of our partner stores where we can control the consumer experience. We will continue to focus on in-store marketing, and we plan to effectively utilize our website, social networking sites and other online forms of communication to build consumer knowledge of the Tumi brand. We believe increasing brand awareness will lead to greater foot traffic in our current locations, enable us to continue expanding our loyal consumer base and ultimately contribute to enhanced growth and profitability. • Broaden the appeal of our products through new product introductions. We seek to design products that are innovative, functional and stylish. We anticipate introducing new products in lighter weight and durable materials, colors which appeal to women and men, premium products with a classic or contemporary design, as well as stylish and durable 20-------------------------------------------------------------------------------- Table of Contents products at more accessible price points for our younger consumer. We also plan to continue to introduce new products to our successful brand extension lines, including eyewear, belts, outerwear and other accessories. • Improve our store operations. We continue to focus on improving store efficiency, primarily through our retail performance maximization program (the "RPM program") which was implemented in 2009. The RPM program emphasizes training and staff development programs and the effective use of visual merchandising and fixtures. Our goal is to continue to increase net sales per store by increasing conversion rates and units and dollars per transaction, while enhancing the consumer experience. • Expand our e-business. Our e-commerce business consists of our websites and our wholesale sales to third-party e-commerce websites. This online presence is an extension of our brand and points of distribution, serving both as an informational resource and a complementary sales channel for our consumers. We expect net sales from this channel to continue to grow as consumers become more aware of our e-commerce capabilities and we continue to expand our online transactional presence into new markets. In addition, we believe that our previously announced migration to a more insourced model will improve our websites' functionality and efficiency in the future. Key Performance Indicators Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include adjusted EBITDA and average net sales per square foot. Adjusted EBITDA provides us with a measure of our financial performance that we use to evaluate profitability. In addition, we have historically used adjusted EBITDA in determining our incentive compensation. Average net sales per square foot, which relates to company-owned stores only, provides us with a measure to evaluate our store sales trends and to assess the operational performance of our stores. These measures are supplemented by a number of non-financial operating metrics related to store performance, which provide benchmarks against which to evaluate store efficiencies but are not considered by management to be reliable financial metrics. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income plus interest expense, provision for income taxes, depreciation and amortization, loss on disposal of fixed assets and other specified non-cash charges. Adjusted EBITDA is not a measure of operating income or operating performance presented in accordance with US GAAP. Adjusted EBITDA is an important supplemental measure of our internal reporting, including for our Board of Directors and management, and is a key measure we use to evaluate profitability and operating performance. Historically, our incentive compensation plan has been based on the attainment of certain adjusted EBITDA objectives. Additionally, adjusted EBITDA, when viewed in conjunction with our condensed consolidated financial statements, provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operating performance and facilitates comparisons with other companies. We use this metric in conjunction with US GAAP operating performance measures as part of our overall assessment of our performance. US GAAP measures of performance remain our primary means of assessing our overall financial results. Undue reliance should not be placed on this measure as our only measure of operating performance. Adjusted EBITDA has limitations as an analytical tool. When assessing our operating performance, investors should not consider adjusted EBITDA in isolation or as a substitute for net income. Adjusted EBITDA remained consistent at $42.5 million for the six months ended June 29, 2014 and June 30, 2013, respectively. 21-------------------------------------------------------------------------------- Table of Contents A reconciliation of net income to adjusted EBITDA is presented below: Six Months Ended June 29, 2014 June 30, 2013 (In thousands) Net income $ 20,372 $ 21,729 Interest expense 242 408 Provision for income taxes 12,354 12,982 Depreciation and amortization 8,157 6,864 Loss on disposal of fixed assets 566 141 Other 835 404 Adjusted EBITDA $ 42,526 $ 42,528 Average net sales per square foot is calculated using net sales for the last twelve months for all stores open for the full twelve months. Average net sales per square foot decreased by approximately $14, or 1%, to $1,074 as of June 29, 2014 from $1,088 as of December 31, 2013. This decrease was primarily due to the effect of the relocation of certain highly productive stores and their related exclusion from the square footage base, as well as the addition of several large but less mature stores to the square footage base during the first half of 2014. 22-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth condensed consolidated operating results and other operating data for the periods indicated: Operating results Three Months Ended Six Months Ended June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 (In thousands) Net sales $ 124,582 $ 108,189 $ 233,184 $ 211,114 Cost of sales 52,480 45,879 97,999 90,791 Gross margin 72,102 62,310 135,185 120,323 OPERATING EXPENSES Selling 8,569 7,237 16,836 13,606 Marketing 4,548 3,528 8,903 7,028 Retail operations 28,432 24,467 54,538 46,043 General and administrative 10,697 9,220 21,671 18,174 Total operating expenses 52,246 44,452 101,948 84,851 Operating income 19,856 17,858 33,237 35,472 OTHER INCOME (EXPENSES) Interest expense (113 ) (199 ) (242 ) (408 ) Earnings from joint venture investment 7 32 154 487 Foreign exchange gains (losses) (253 ) 12 (351 ) (634 ) Other non-operating income (expenses) 205 16 (72 ) (206 ) Total other expenses (154 ) (139 ) (511 ) (761 ) Income before income taxes 19,702 17,719 32,726 34,711 Provision for income taxes 7,483 6,525 12,354 12,982 Net income $ 12,219 $ 11,194 $ 20,372 $ 21,729 23-------------------------------------------------------------------------------- Table of Contents Percentage of Net Sales* Three Months Ended Six Months Ended June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 Net sales 100 % 100 % 100 % 100 % Cost of sales 42 % 42 % 42 % 43 % Gross margin 58 % 58 % 58 % 57 % OPERATING EXPENSES Selling 7 % 7 % 7 % 6 % Marketing 4 % 3 % 4 % 3 % Retail operations 23 % 23 % 23 % 22 % General and administrative 9 % 8 % 9 % 9 % Total operating expenses 42 % 41 % 44 % 40 % Operating income 16 % 17 % 14 % 17 % OTHER INCOME (EXPENSES) Interest expense - % - % - % - % Earnings from joint venture investment - % - % - % - % Foreign exchange losses - % - % - % - % Other non-operating expenses - % - % - % - % Total other expenses - % - % - % - % Income before income taxes 16 % 17 % 14 % 17 % Provision for income taxes 6 % 7 % 5 % 7 % Net income 10 % 10 % 9 % 10 % ___________________________________________________ *The percentages in the table may not foot due to rounding. The following table summarizes the number of company-owned stores open at the beginning and end of the six months ended June 29, 2014: Six Months Ended June 29, 2014 Number of stores open at beginning of period 130 Stores opened 6 Stores closed (2 ) Number of stores open at end of period 134 24-------------------------------------------------------------------------------- Table of Contents Three months ended June 29, 2014 compared with the three months ended June 30, 2013 Net Sales The following table presents net sales by operating segment for the three months ended June 29, 2014 compared with the three months ended June 30, 2013: Three Months Three Months Ended June 29, Ended June 30, % 2014 2013 Change (In thousands) Direct-to-Consumer North America $ 57,354 $ 48,186 19 % Direct-to-Consumer International 6,350 5,067 25 % Indirect-to-Consumer North America 26,710 24,171 11 % Indirect-to-Consumer International 34,168 30,765 11 % Total $ 124,582 $ 108,189 15 % Net sales increased $16.4 million, or 15%, to $124.6 million for the three months ended June 29, 2014 from $108.2 million for the three months ended June 30, 2013. Net sales increased across all of our operating segments for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. The increase in net sales was due principally to an increase in volume resulting from new store openings, positive overall comparable store sales from existing stores, and continued growth in both Direct-to-Consumer and Indirect-to-Consumer e-commerce. There were no significant new product collections launched in the second quarter of 2014, although there remains consumer enthusiasm surrounding our lightweight travel product category, as well as our re-launched Alpha Travel Collection (Alpha 2). Overall, store traffic patterns improved during the quarter, most noticeably in our outlet stores. There were no significant price increases during the quarter. Additionally, there were 5 new company-owned store openings, 3 store renovations and 1 store closure during the three months ended June 29, 2014. New stores opened since the first half of 2013 contributed to approximately 29% of the overall sales growth from the three months ended June 30, 2013 to the three months ended June 29, 2014. Net sales attributable to the Direct-to-Consumer North America segment experienced a 19% increase for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. Comparable store sales are calculated based on our company-owned stores that have been open for at least a full calendar year as of the end of our annual reporting period. For example, a store opened in October 2012 will not impact the comparable store comparison until January 1, 2014. Additionally, temporary store closings, store expansions and store relocations are excluded from the comparable store base, under most circumstances. North America full-price comparable store sales increased 3%, North America outlet comparable store sales increased 19% and our North America e-commerce sales increased 39%. Overall, including our e-commerce website, North America comparable store sales increased 12% for the period. Of the new stores opened since the second quarter of 2013, 15 were in the North America segment and contributed to approximately 46% of the net sales growth in the Direct-to-Consumer North America segment from the three months ended June 30, 2013 to the three months ended June 29, 2014. Net sales attributable to the Direct-to-Consumer International segment experienced a 25% increase for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013, with international full-price comparable store sales up 2% (down 3% in Euros) and outlet comparable store sales up 37% (31% in Euros). Our international e-commerce sales increased 6% (1% in Euros). Overall, including our e-commerce websites, our international comparable store sales increased 18% (12% in Euros) for the period. Of the new stores opened since the second quarter of 2013, 2 were in Western Europe and contributed to approximately 39% of the Direct-to-Consumer International net sales growth from the three months ended June 30, 2013 to the three months ended June 29, 2014. Overall, including e-commerce, comparable store sales for all Direct-to-Consumer channels increased 13% globally for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. Net sales attributable to the Indirect-to-Consumer North America segment increased 11% for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. The Indirect-to-Consumer North America net sales have been favorably impacted by strong sales through our wholesale customers' e-commerce websites and improved sales in our Canadian business, as well as the aforementioned enthusiasm around our lightweight products and additions to our collections. Net sales attributable to the Indirect-to-Consumer International segment increased 11% for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. This was primarily due to a return to historic sales levels in the Asia-Pacific region from a reduced level in the first quarter and strong performance in the Central and South 25-------------------------------------------------------------------------------- Table of Contents America region, partially offset by a temporary slow-down in sales growth in the Europe, Middle East and Africa region, which was temporarily impacted by our transition to an expanded warehouse in Western Europe. Operating income The following table presents operating income (loss) by segment for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013: Three Months Ended Three Months Ended % June 29, 2014 June 30, 2013 Change (In thousands) Direct-to-Consumer North America $ 16,229 $ 14,515 12 % Direct-to-Consumer International 220 538 (59 )% Indirect-to-Consumer North America 9,967 8,762 14 % Indirect-to-Consumer International 9,725 9,488 2 % Non-allocated corporate expenses (16,285 ) (15,445 ) (5 )% Total $ 19,856 $ 17,858 11 % Operating income increased $2.0 million, or 11%, to $19.9 million for the three months ended June 29, 2014 from $17.9 million for the three months ended June 30, 2013. Overall, our operating income has benefited from continued volume-related growth, store openings in the Direct-to-Consumer segments, and distribution expansion in the Indirect-to-Consumer segments. We are continuing to invest in the Company's logistics capabilities, design resources, product management, IT infrastructure and human resource base. Operating income attributable to the Direct-to-Consumer North America segment experienced a 12% increase for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. This was primarily due to growth in our comparable stores, particularly outlet stores, and growth from stores opened since the second quarter of 2013, partially offset by new store expenses as well as renovations in the second quarter of 2014. Historically, company-owned store operating margins generally strengthen after their first year of operation. In addition, the incremental investment of approximately $0.7 million required to support the transition of our web stores to a more insourced model, which we expect to improve functionality and efficiency, had a negative effect on operating margin in the three months ended June 29, 2014. Operating income attributable to the Direct-to-Consumer International segment experienced a 59% decrease for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. This decrease was principally related to the pre-opening expenses and start-up costs for our new flagship store on Regent Street in London, which opened in the second quarter of 2014. Operating income attributable to the Indirect-to-Consumer North America segment experienced a 14% increase for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. This was primarily due to continued sales growth in this segment, particularly impacted by strong sales through our wholesale customers' e-commerce websites. Operating income attributable to the Indirect-to-Consumer International segment experienced a 2% increase for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. This increase was primarily due to an increase in gross margin dollars, partially offset by additional marketing expenses of approximately $0.8 million in the segment. Non-allocated corporate expenses represent expenses not attributable to a particular operating segment, and consist of core corporate expenses such as corporate marketing, design, general and administrative expenses, after sales service costs, shipping and warehousing, human resources related to corporate overhead, finance, legal and professional fees and other costs. As we expand our business, we believe general and administrative expenses will increase in dollar amount in future periods, although we expect to leverage these expenses against sales as the business grows. Non-allocated corporate expenses increased 5% for the three months ended June 29, 2014 as compared with the three months ended June 30, 2013. We have added several designers, creative talent and product management personnel to help support our existing product lines and to aid in the development of our expanded product line. These aforementioned investments resulted in approximately $0.6 million of additional cost in the three months ended June 29, 2014. We have also increased our investment in marketing by approximately $0.3 million and our after sales service capabilities by approximately $0.2 million. 26-------------------------------------------------------------------------------- Table of Contents Operating margin was 16% for the three months ended June 29, 2014 compared to 17% for the three months ended June 30, 2013. The previously mentioned investments in marketing, our human resource base and our insourced webstores expected to open later this year, as well as retail operations expense for new stores and the wrap effect (expenses for stores for which there were little or no expenses in the comparable prior period) of stores opened in the last half of 2013, offset some of our fixed cost leverage. During the three months ended June 30, 2013, we accrued a $1.5 million termination fee associated with the termination of a contract with our website e-services provider in order to move to a more insourced model. Excluding this one-time expense, operating income would have been $19.4 million and operating income margin would have been 18% for the three months ended June 30, 2013. Other income and expenses Other expenses, net increased less than $0.1 million to $0.2 million for the three months ended June 29, 2014 from $0.1 million for the three months ended June 30, 2013. This was mainly driven by foreign exchange losses in the quarter. Income tax expense Provision for income taxes increased $1.0 million, or 15%, to $7.5 million in the three months ended June 29, 2014 from $6.5 million in the three months ended June 30, 2013, due principally to higher income before taxes, as well as a higher effective tax rate for the quarter ended June 29, 2014. The change in the effective tax rate was largely driven by the change in apportionment percentages for state purposes. Net income Net income increased $1.0 million to $12.2 million for the three months ended June 29, 2014 from $11.2 million for the three months ended June 30, 2013. This increase was due mainly to the increase in net sales and gross margin dollars, partially offset by the aforementioned higher operating expenses which reflect an increase in our investment in marketing and the incremental personnel and professional services investment required to support the transition of our web stores to a more insourced model, as well as higher retail operations expenses related to new stores opened in 2014 and the wrap effect of stores opened in the last half of 2013. Basic and diluted weighted average shares outstanding for both of the three month periods ended June 29, 2014 and June 30, 2013 were unchanged at 67.9 million shares. Basic and diluted EPS was $0.18 per common share for the three months ended June 29, 2014 versus $0.16 per common share for the three months ended June 30, 2013. In addition, adjusting for the aforementioned one-time expense for the three months ended June 30, 2013 ($1.5 million termination fee, or $0.9 million after tax), net income in the second quarter of 2014 would have increased $0.1 million, or 1%, to $12.2 million from $12.1 million in the second quarter of 2013. Basic and diluted EPS adjusted for the aforementioned one-time cost would have been $0.18 per common share for the three months ended June 30, 2013. Six months ended June 29, 2014 compared with the six months ended June 30, 2013 Net Sales The following table presents net sales by operating segment for the six months ended June 29, 2014 compared with the six months ended June 30, 2013: Six Months Ended Six Months Ended % June 29, 2014 June 30, 2013 Change (In thousands) Direct-to-Consumer North America $ 107,401 $ 92,350 16 % Direct-to-Consumer International 11,309 9,341 21 % Indirect-to-Consumer North America 48,084 45,537 6 % Indirect-to-Consumer International 66,390 63,886 4 % Total $ 233,184 $ 211,114 10 % Net sales increased $22.1 million, or 10%, to $233.2 million for the six months ended June 29, 2014 from $211.1 million for the six months ended June 30, 2013. Net sales increased across all of our operating segments for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. Net sales increased due principally to an increase in volume resulting from new store openings, positive overall comparable store sales from existing stores, continued growth in 27-------------------------------------------------------------------------------- Table of Contents both Direct-to-Consumer and Indirect-to-Consumer e-commerce and continued consumer acceptance of our lighter weight product and new product introductions. During the first quarter of 2014, we successfully re-launched our Alpha Travel Collection (Alpha 2) and introduced seasonal colors which continue to receive positive consumer acceptance. Overall, store traffic patterns improved slightly during the first half of the year. While there were no significant price increases on existing products during the period, we did raise price points on Alpha 2. The effect on net sales was immaterial. As previously disclosed, weaker than expected first quarter wholesale sales in Asia and North America had a moderating effect on these positive factors. We believe that the inclement weather in the first quarter in certain North American markets also had a negative effect on sales. In addition, the Company made the strategic decision to reduce promotional activity. There were 6 new company-owned store openings, 2 store relocations, 5 store renovations and 2 store closures during the six months ended June 29, 2014. New stores opened since the second quarter of 2013 contributed to approximately 36% of the overall sales growth from the six months ended June 30, 2013 to the six months ended June 29, 2014. Net sales attributable to the Direct-to-Consumer North America segment experienced a 16% increase for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. North America full-price comparable store sales increased 1%, North America outlet comparable store sales increased 13% and our North America e-commerce sales increased 32%. Overall, including our e-commerce website, North America comparable store sales increased 9% for the period. Of the new stores opened since the second quarter of 2013, 15 were in the North America segment and contributed to approximately 49% of the net sales growth in the Direct-to-Consumer North America segment from the six months ended June 30, 2013 to the six months ended June 29, 2014. Net sales attributable to the Direct-to-Consumer International segment experienced a 21% increase for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013, with international full-price comparable store sales up 4% (down less than 1% in Euros) and outlet comparable store sales up 29% (24% in Euros). Our international e-commerce sales were up 49% (43% in Euros). Overall, including our e-commerce websites, our international comparable store sales were up 19% (14% in Euros) for the period. Of the new stores opened since the second quarter of 2013, 2 were in Western Europe and contributed to approximately 26% of the Direct-to-Consumer International net sales growth from the six months ended June 30, 2013 to the six months ended June 29, 2014. Overall, including e-commerce, comparable store sales for all Direct-to-Consumer channels increased 10% globally for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. Net sales attributable to the Indirect-to-Consumer North America segment increased 6% for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. The Indirect-to-Consumer North America net sales have been favorably impacted by strong sales through our wholesale customers' e-commerce websites and improved sales in our Canadian business, as well as the aforementioned enthusiasm around our lightweight products and additions to our collections. This increase was partially offset by a decline in sales to our specialty stores. Net sales attributable to the Indirect-to-Consumer International segment increased 4% for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. This was primarily due to a rebound in sales in the Asia-Pacific region during the second quarter of 2014, after inventory re-balancing by certain customers during the first quarter reduced our sell-in rates. Operating income The following table presents operating income (loss) by segment for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013: Six Months Ended Six Months Ended June % June 29, 2014 30, 2013 Change (In thousands) Direct-to-Consumer North America $ 28,613 $ 26,349 9 % Direct-to-Consumer International (124 ) 638 *NM Indirect-to-Consumer North America 18,317 16,833 9 % Indirect-to-Consumer International 19,193 19,942 (4 )% Non-allocated corporate expenses (32,762 ) (28,290 ) (16 )% Total $ 33,237 $ 35,472 (6 )% _____________ *Not meaningful. 28-------------------------------------------------------------------------------- Table of Contents Operating income decreased $2.2 million, or 6%, to $33.2 million for the six months ended June 29, 2014 from $35.5 million for the six months ended June 30, 2013. Notwithstanding this, overall, our operating income has benefited from continued volume related growth, store openings in the Direct-to-Consumer segments, and distribution expansion in the Indirect-to-Consumer segments. We are continuing to invest in the Company's logistics capabilities, design resources, product management, IT infrastructure and human resource base. Operating income attributable to the Direct-to-Consumer North America segment experienced a 9% increase for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. This was primarily due to growth in our comparable stores, particularly outlet stores, and growth from stores opened since the second quarter of 2013, partially offset by new store expenses as well as renovations in 2014. Historically, company-owned store operating margins generally strengthen after their first year of operation. In addition, the incremental investment of approximately $1.1 million required to support the transition of our web stores to a more insourced model, which we expect to improve functionality and efficiency, had a negative effect on operating income in the six months ended June 29, 2014. Operating income attributable to the Direct-to-Consumer International segment experienced a decrease for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. This decrease was principally related to the pre-opening expenses and start-up costs for our new flagship store on Regent Street in London, which opened in the second quarter of 2014. Operating income attributable to the Indirect-to-Consumer North America segment experienced a 9% increase for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. This was primarily due to continued sales growth in this segment, particularly impacted by strong sales through our wholesale customers' e-commerce websites. Operating income attributable to the Indirect-to-Consumer International segment experienced a 4% decrease for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. In our Indirect-to-Consumer International segment, operating income was impacted by additional marketing expenses of approximately $1.0 million and additional investment in our human resource base of approximately $0.4 million. Non-allocated corporate expenses increased 16% for the six months ended June 29, 2014 as compared with the six months ended June 30, 2013. This increase was primarily due to the addition of several designers, creative talent and product management personnel to help support our existing product lines and to aid in the development of our expanded product line. These aforementioned investments resulted in approximately $1.2 million of additional cost in the the six months ended June 29, 2014. We have also increased our investment in marketing by approximately $1.0 million and our after sales service capabilities by approximately $0.5 million. In addition, we invested in our logistics capabilities in Western Europe by moving to an expanded warehouse facility to serve our growing business in the Europe, Middle East and Africa region, while continuing to operate our existing warehouse in transition, which resulted in incremental costs of approximately $0.2 million during the six months ended June 29, 2014. Operating margin was 14% for the six months ended June 29, 2014, compared to 17% for the six months ended June 30, 2013, as the previously mentioned investments in marketing and our insourced webstores expected to open later this year, as well as retail operations expense for new stores and the wrap effect of stores opened in the last half of 2013, offset some of our fixed cost leverage. During the six months ended June 30, 2013, we incurred $0.5 million of offering costs associated with the secondary offering completed in April 2013 and the aforementioned $1.5 million termination fee to our website e-services provider in order to move to a more insourced model. Excluding the aforementioned termination fee and offering costs from the six months ended June 30, 2013, operating income would have been $37.4 million and operating margin would have been 18% for the first half of 2013. Other income and expenses Other expenses, net decreased $0.3 million to $0.5 million for the six months ended June 29, 2014 from $0.8 million for the six months ended June 30, 2013, due principally to a decrease in earnings from our joint venture offset by a decrease in foreign exchange losses. Income tax expense Provision for income taxes decreased $0.6 million, or 5%, to $12.4 million in the six months ended June 29, 2014 from $13.0 million in the six months ended June 30, 2013, due principally to lower income before taxes. 29-------------------------------------------------------------------------------- Table of Contents Net income Net income decreased $1.4 million to $20.4 million for the six months ended June 29, 2014 from $21.7 million for the six months ended June 30, 2013. This decrease was due largely to the aforementioned higher operating expenses which reflect an increase in our investment in marketing and the incremental personnel and professional services investment required to support the transition of our web stores to a more insourced model, as well as higher retail operations expenses related to new stores opened in 2014 and the wrap effect of stores opened in the last half of 2013. Basic and diluted weighted average shares outstanding for both of the six month periods ended June 29, 2014 and June 30, 2013 were unchanged at 67.9 million shares. Basic and diluted EPS was $0.30 per common share for the six months ended June 29, 2014 versus $0.32 per common share for the six months ended June 30, 2013. In addition, adjusting for the aforementioned one-time expenses for the six months ended June 30, 2013 ($1.5 million termination fee, or $0.9 million after tax, and $0.5 million offering costs, or $0.3 million after tax), net income in the first six months of 2014 would have decreased $2.6 million, or 11%. Basic and diluted EPS adjusted for the aforementioned one-time costs would have been $0.34 per common share for the six months ended June 30, 2013. Seasonality Our business is seasonal in nature and, as a result, our net sales and working capital requirements fluctuate from quarter to quarter. Our fourth quarter is a significant period for our results of operations due to increased Direct-to-Consumer sales during the holiday season in North America and Europe. During the fourth quarter, the Company expects inventory levels, accounts payable and accrued expenses to increase commensurate with net sales. In 2013, fourth quarter net sales represented approximately 32% of our total annual net sales. Operating income in the same period represented 37% of our total annual operating income. Liquidity and Capital Resources Historically, our primary source of liquidity has been cash flows from operations. Our long-term credit facility has not historically been used to finance our capital requirements. The previous balance outstanding represented remaining refinanced acquisition indebtedness originally incurred when Doughty Hanson and certain members of management at that time acquired the Company in 2004, although we have from time to time drawn down on our revolving line of credit as short-term liquidity needs arise. During the six months ended June 29, 2014, the Company paid the remaining balance outstanding on the Amended and Restated Credit Facility. We use our cash flows from operations to fund our store development activities. Inflationary factors such as increases in the cost of sales, including raw materials costs and transportation costs, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain our gross margin levels and our current levels of selling expenses and general and administrative expenses as a percentage of net sales if the sale prices of our products do not increase with any increase in cost of sales. We believe we have sufficient working capital and liquidity to support our operations for at least the next twelve months. Cash and cash equivalents As of June 29, 2014, we had cash and cash equivalents of $24.2 million. A summary of our cash flows provided by and used in operating, investing and financing activities is presented below. Cash flows from operating activities Cash flows from operating activities consisted primarily of net income adjusted for certain non-cash items, including depreciation and amortization, share-based compensation expense and other non-cash charges. Our cash flows from operations are largely dependent on sales to consumers and wholesale customers, which are in turn dependent on consumer confidence, store traffic, conversion, business travel and general economic conditions. We believe we have the ability to conserve liquidity when economic conditions become less favorable through any number of strategies including curtailment of store expansion plans and cutting discretionary spending. We generated cash flows from operations of $11.2 million during the six months ended June 29, 2014, compared to $21.6 million during the six months ended June 30, 2013. The principal reasons for this decrease was the reduction in net income and prepayments for our estimated income taxes. 30-------------------------------------------------------------------------------- Table of Contents Investing activities Cash flows used for investing activities consisted of capital expenditures for store expansion plans, store renovations, store openings, store relocations, information technology infrastructure, distribution infrastructure and product tooling costs. Cash used for capital expenditures was $16.6 million and $10.6 million for the six months ended June 29, 2014 and June 30, 2013, respectively. The increase was due principally to the investment in our insourced web platform and retail store construction for stores opened in the first half of 2014 as well as retail stores expected to open in the third quarter of 2014. Financing activities Cash used in financing activities was $8.0 million for the six months ended June 29, 2014 compared to $22.0 million for the six months ended June 30, 2013. The decrease was mainly attributable to lower repayments of bank debt during the first half of 2014, during which the balance outstanding was paid in full. Amended and restated credit facility On April 4, 2012, Tumi, Inc. and Tumi Stores, Inc., the Borrowers, entered into the Amended Credit Facility, with Wells Fargo as lender and collateral agent. On April 4, 2012, we had $60,000,000 outstanding on our then-current term loan facility and no balance outstanding on our revolving credit facility for which the total capacity was $10,000,000. We had, however, utilized $250,000 under the revolving facility for letters of credit. Based on our calculated leverage ratio at the time, the facility bore interest at either the market LIBOR rate plus 175 basis points or the prime rate plus 75 basis points. The Amended Credit Facility consolidated the term loan facility and the revolving credit facility previously provided in our former credit facility into a single $70,000,000 senior secured revolving credit facility, with Wells Fargo as the sole lender, and extended the maturity of the facility until April 4, 2017. The Amended Credit Facility included a letter of credit sublimit not to exceed the undrawn amount of the revolving commitments. On August 29, 2013, the Amended Credit Facility was amended to reduce the letter of credit sublimit to $5,000,000. Borrowings under the Amended Credit Facility bear interest at a per annum rate equal to, at the Borrowers' option, the one, two, three or six month (or such other period as Wells Fargo may agree) LIBOR rate plus a margin of 1.00% or 1.25%, or a base rate (the greater of (i) Wells Fargo's prime rate in effect on such day and (ii) the federal funds rate plus 1/2 of 1.00%) plus a margin of zero or 0.25%. The Borrowers are required to pay an undrawn commitment fee equal to 0.15% or 0.20% of the undrawn portion of the commitments under the Amended Credit Facility, as well as customary letter of credit fees. The margin added to LIBOR, or the base rate, as well as the amount of the commitment fee, depends on Tumi, Inc.'s leverage at the time. Interest is payable monthly, bi-monthly or quarterly on LIBOR rate loans depending on the interest period for each LIBOR rate loan, or quarterly on base rate loans. As of June 29, 2014 the Company had no balance outstanding under the Amended Credit Facility and $8,000,000 outstanding as of December 31, 2013. As of December 31, 2013, the balance oustanding on the facility bore interest at the market LIBOR rate of 0.17% plus 100 basis points. Letters of credit outstanding at June 29, 2014 and December 31, 2013 totaled $286,000 under the facility and, accordingly, the unused portion of the facility was $69,714,000 and $61,714,000, respectively. The fee for the unused portion of the facility was $26,000 and $51,000 for the three and six months ended June 29, 2014, respectively, and $16,000 and $28,000 for the three and six months ended June 30, 2013, respectively. All obligations under the Amended Credit Facility are required to be guaranteed by each of the Borrowers' material domestic subsidiaries, subject to certain exclusions. The obligations under the Amended Credit Facility are secured by substantially all of the Borrowers' assets and, if applicable, those of the Borrowers' subsidiary guarantors. Currently the Borrowers do not have any subsidiary guarantors. The Amended Credit Facility contains customary covenants, including, but not limited to, limitations on the ability of the Borrowers and their subsidiaries to incur additional debt and liens, dispose of assets, and make certain investments and restricted payments, including the prepayment of certain debt and cash dividends. In addition, the Amended Credit Facility contains financial covenants requiring that the Borrowers maintain (a) a minimum ratio of consolidated adjusted EBITDA to consolidated cash interest expense (as such terms are defined in the Amended Credit Facility) of not less than 4.00 to 1.00 and (b) a maximum ratio of consolidated total debt to consolidated adjusted EBITDA of no greater than 2.25 to 1.00. The Borrowers were in compliance in all material respects with all such covenants as of June 29, 2014. 31-------------------------------------------------------------------------------- Table of Contents The Amended Credit Facility also contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults under material debt, certain events of bankruptcy and insolvency, defaults based on certain judgments, failure of any material provision of any loan document to be in full force and effect, change of control, and certain ERISA defaults. If an event of default were to occur and continue, amounts due under the Amended Credit Facility could be accelerated and the commitments to extend credit thereunder terminated, and the rights and remedies of Wells Fargo under the Amended Credit Facility available under the applicable loan documents could be exercised, including rights with respect to the collateral securing the obligations under the Amended Credit Facility. The foregoing summaries of certain provisions of the Amended Credit Facility do not purport to be complete and are qualified in their entirety by reference to the full text of the Amended Credit Facility, which is incorporated by reference as exhibit 10.3b to our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014. Contractual Obligations There have been no material changes to the contractual obligations table included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014, except for the balance of the revolving credit facility, which decreased $8.0 million since December 31, 2013, as it was paid in full during the six months ended June 29, 2014. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements. Critical Accounting Policies and Estimates There have been no material changes to the description of our critical accounting policies and estimates included in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC on February 28, 2014. Recently Issued Accounting Pronouncements In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists." This amended guidance requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss carry forward, a similar tax loss or a tax credit carry forward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. The new guidance is effective prospectively for fiscal years and interim periods beginning after December 15, 2013, with early adoption permitted. The Company adopted the amended guidance effective January 1, 2014 and it did not have a material effect on its condensed consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, but does not expect the impact to be material. In June 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (Topic 718)". ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the potential impacts of the new standard on its existing share-based compensation plans, but does not expect the impact to be material. 32-------------------------------------------------------------------------------- Table of Contents |