##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended: July 1, 2006
 Commission File Number: 001-15023
 THE YANKEE CANDLE COMPANY, INC.
  MASSACHUSETTS
    
    04 259 1416(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 
 
 þ o
 þ o o
 o þ




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##### Table of Contents



Item
    
    
    
    PagePART I. Financial InformationItem 1.
    
    Financial Statements-UnauditedCondensed Consolidated Balance Sheets as of July 1, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the Thirteen and Twenty-Six weeks ended July 1, 2006 and July 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Twenty-Six weeks ended July 1, 2006 and July 2, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23PART II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3.
    
    Defaults Upon Senior Securities
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits
    
    
    29Signatures
    
    
    
    
    30EX-31.1 Section 302 Certification of C.E.OEX-31.2 Section 302 Certification of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.
 2




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##### Table of Contents



PART I  Financial Information
 
 Item 1. Financial Statements.
 
 
 July 1,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9,604
    
    
    $
    12,655Accounts receivable, net
    
    
    32,447
    
    
    
    42,546Inventory
    
    
    71,504
    
    
    
    55,528Prepaid expenses and other current assets
    
    
    11,891
    
    
    
    9,060Deferred tax assets
    
    
    5,462
    
    
    
    6,734TOTAL CURRENT ASSETS
    
    
    130,908
    
    
    
    126,523PROPERTY, PLANT AND EQUIPMENT-NET
    
    
    134,009
    
    
    
    139,089MARKETABLE SECURITIES
    
    
    2,274
    
    
    
    2,223DEFERRED TAX ASSETS
    
    
    71,807
    
    
    
    73,975GOODWILL
    
    
    7,368
    
    
    
    6,035INTANGIBLE ASSETS
    
    
    6,287
    
    
    
    6,849OTHER ASSETS
    
    
    456
    
    
    
    440TOTAL ASSETS
    
    $
    353,109
    
    
    $
    355,134LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    11,488
    
    
    $
    21,068Accrued payroll
    
    
    10,329
    
    
    
    14,319Accrued income taxes
    
    
    
    
    
    
    20,828Accrued purchases of property and equipment
    
    
    632
    
    
    
    5,944Accrued repurchases of common stock
    
    
    
    
    
    
    5,463Other accrued liabilities
    
    
    14,066
    
    
    
    22,919Short-term debt
    
    
    10,000
    
    
    
    TOTAL CURRENT LIABILITIES
    
    
    46,515
    
    
    
    90,541DEFERRED COMPENSATION OBLIGATION
    
    
    2,364
    
    
    
    2,418LONG-TERM DEBT
    
    
    241,000
    
    
    
    178,000DEFERRED RENT
    
    
    16,186
    
    
    
    16,031STOCKHOLDERS EQUITY
    
    
    47,044
    
    
    
    68,144TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    353,109
    
    
    $
    355,134
  3




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##### Table of Contents



For the Thirteen Weeks
    
    
    For the Twenty-Six WeeksEnded
    
    
    EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    116,251
    
    
    $
    108,548
    
    
    $
    250,164
    
    
    $
    227,803Cost of sales
    
    
    53,115
    
    
    
    46,694
    
    
    
    115,051
    
    
    
    101,118Gross profit
    
    
    63,136
    
    
    
    61,854
    
    
    
    135,113
    
    
    
    126,685Selling expenses
    
    
    36,582
    
    
    
    32,122
    
    
    
    73,848
    
    
    
    64,615General and administrative expenses
    
    
    15,056
    
    
    
    13,742
    
    
    
    30,520
    
    
    
    27,274Income from operations
    
    
    11,498
    
    
    
    15,990
    
    
    
    30,745
    
    
    
    34,796Interest income
    
    
    (6
    )
    
    
    (6
    )
    
    
    (13
    )
    
    
    (12
    )Interest expense
    
    
    3,740
    
    
    
    1,526
    
    
    
    6,529
    
    
    
    2,462Other (income) expense
    
    
    (148
    )
    
    
    479
    
    
    
    (294
    )
    
    
    697Income before provision for income taxes
    
    
    7,912
    
    
    
    13,991
    
    
    
    24,523
    
    
    
    31,649Provision for income taxes
    
    
    3,086
    
    
    
    5,457
    
    
    
    7,226
    
    
    
    12,343Net income
    
    $
    4,826
    
    
    $
    8,534
    
    
    $
    17,297
    
    
    $
    19,306Basic earnings per share
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.42
    
    
    $
    0.42Diluted earnings per share
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.42
    
    
    $
    0.42Weighted average shares:Basic
    
    
    40,412
    
    
    
    45,048
    
    
    
    40,714
    
    
    
    45,963Diluted
    
    
    40,791
    
    
    
    45,594
    
    
    
    41,066
    
    
    
    46,453
  4




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##### Table of Contents



For the Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,2006
    
    
    2005CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:Net income
    
    $
    17,297
    
    
    $
    19,306Adjustments to reconcile net income to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    12,980
    
    
    
    12,095Unrealized loss on marketable securities
    
    
    5
    
    
    
    6Stock-based compensation expense
    
    
    2,762
    
    
    
    1,707Deferred taxes
    
    
    3,440
    
    
    
    4,504Loss on disposal of fixed assets
    
    
    117
    
    
    
    62Changes in assets and liabilities:Accounts receivable, net
    
    
    10,487
    
    
    
    (4,671
    )Inventory
    
    
    (15,422
    )
    
    
    (10,872
    )Prepaid expenses and other assets
    
    
    (2,815
    )
    
    
    (3,367
    )Investments in marketable securities
    
    
    (437
    )
    
    
    (419
    )Accounts payable
    
    
    (9,633
    )
    
    
    (1,058
    )Accrued income taxes
    
    
    (20,114
    )
    
    
    (25,609
    )Accrued expenses and other liabilities
    
    
    (18,093
    )
    
    
    (10,415
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (19,426
    )
    
    
    (18,731
    )CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (12,434
    )
    
    
    (10,045
    )Proceeds from sale of property and equipment
    
    
    7
    
    
    
    14Payment of contingent consideration on GBI acquisition
    
    
    (1,333
    )
    
    
    Purchase of intangible assets
    
    
    
    
    
    
    (604
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (13,760
    )
    
    
    (10,635
    )CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Net borrowings under bank credit agreements
    
    
    73,000
    
    
    
    107,000Deferred financing costs
    
    
    (246
    )
    
    
    (343
    )Payments for redemption of common stock
    
    
    (41,977
    )
    
    
    (100,000
    )Excess tax benefit from exercise of stock options
    
    
    914
    
    
    
    Dividends paid
    
    
    (5,093
    )
    
    
    (5,757
    )Net proceeds from issuance of common stock
    
    
    3,406
    
    
    
    2,231NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    30,004
    
    
    
    3,131EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    131
    
    
    
    (75
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,051
    )
    
    
    (26,310
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    12,655
    
    
    
    36,424CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    9,604
    
    
    $
    10,114SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    5,794
    
    
    $
    1,706Income taxes
    
    $
    26,300
    
    
    $
    35,321Net decrease in accrued purchases of property and equipment
    
    $
    5,312
    
    
    $
    
  5




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6




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For the Thirteen Weeks
    
    
    For the Twenty-Six WeeksEnded
    
    EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share data)Net income, as reported
    
    $
    4,826
    
    
    $
    8,534
    
    
    $
    17,297
    
    
    $
    19,306Add: Stock-based compensation expense
included in reported net income, net of
related tax effects
    
    
    964
    
    
    
    586
    
    
    
    1,685
    
    
    
    1,041Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (964
    )
    
    
    (715
    )
    
    
    (1,685
    )
    
    
    (1,299
    )Pro forma net income
    
    $
    4,826
    
    
    $
    8,405
    
    
    $
    17,297
    
    
    $
    19,048Earnings per share:Basic-as reported
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.42
    
    
    $
    0.42Basic-pro forma
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.42
    
    
    $
    0.41Weighted average basic shares outstanding
    
    
    40,412
    
    
    
    45,048
    
    
    
    40,714
    
    
    
    45,963Diluted-as reported
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.42
    
    
    $
    0.42Diluted-pro forma
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.42
    
    
    $
    0.41Weighted average diluted shares outstanding
    
    
    40,791
    
    
    
    45,594
    
    
    
    41,066
    
    
    
    46,453
  Stock Options
     2006
    
    
    2005Volatility
    
    
    33.0
    %
    
    
    34.1
    %Dividend yield
    
    
    0.2
    %
    
    
    0.0
    %Risk free interest rate
    
    
    3.5
    %
    
    
    3.2
    %Expected lives
    
    4.1 years
    
    4.0 years
 7




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Weighted Average ExercisePriceOptions
    
    
    Per ShareOutstanding at December 31, 2005
    
    
    2,054,080
    
    
    $
    22.35Granted
    
    
    329,350
    
    
    
    27.99Exercised
    
    
    (110,675
    )
    
    
    15.07Forfeited
    
    
    (78,450
    )
    
    
    28.18Outstanding at April 1, 2006
    
    
    2,194,305
    
    
    $
    23.36Granted
    
    
    33,000
    
    
    
    26.70Exercised
    
    
    (101,690
    )
    
    
    17.09Forfeited
    
    
    
    
    
    
    Outstanding at July 1, 2006
    
    
    2,125,615
    
    
    $
    23.71Exercisable at July 1, 2006
    
    
    991,614
    
    
    $
    18.88
  Weighted Average Grant DateOptions
    
    
    Fair ValueUnvested at December 31, 2005
    
    
    992,588
    
    
    $
    7.97Granted
    
    
    329,350
    
    
    
    8.16Vested
    
    
    (31,562
    )
    
    
    7.84Forfeited
    
    
    (70,500
    )
    
    
    7.70Unvested at April 1, 2006
    
    
    1,219,876
    
    
    $
    8.04Granted
    
    
    33,000
    
    
    
    7.87Vested
    
    
    (118,875
    )
    
    
    8.09Forfeited
    
    
    
    
    
    
    Unvested at July 1, 2006
    
    
    1,134,001
    
    
    $
    8.03
   8




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##### Table of Contents



Range of Exercise
    
    
    
    
    
    
    
    
    
    Average RemainingPrices
    
    Options Outstanding
    
    
    Options Exercisable
    
    
    Life (Years)$4.25
    
    
    14,183
    
    
    
    14,183
    
    
    
    2.111.88-16.20
    
    
    357,500
    
    
    
    352,500
    
    
    
    4.916.80-18.00
    
    
    128,407
    
    
    
    125,282
    
    
    
    3.821.13-29.75
    
    
    1,251,075
    
    
    
    459,337
    
    
    
    8.030.10-32.81
    
    
    374,450
    
    
    
    40,312
    
    
    
    8.9$4.25-$32.81
    
    
    2,125,615
    
    
    
    991,614
    
    
    
    7.3
 Restricted Stock and Performance Shares
     Weighted AverageRestricted
    
    
    Performance
    
    
    Grant DateShares
    
    
    Shares
    
    
    Fair ValueUnvested shares at December 31, 2005
    
    
    
    
    
    
    188,700
    
    
    $
    31.31Granted
    
    
    84,000
    
    
    
    38,000
    
    
    
    28.01Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    (6,300
    )
    
    
    33.03Unvested shares at April 1, 2006
    
    
    84,000
    
    
    
    220,400
    
    
    $
    29.95Granted
    
    
    
    
    
    
    2,000
    
    
    
    26.36Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (1,000
    )
    
    
    (4,475
    )
    
    
    30.71Unvested shares at July 1, 2006
    
    
    83,000
    
    
    
    217,925
    
    
    $
    29.91
 9




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##### Table of Contents



July 1,
    
    
    December 31,2006
    
    
    2005(in thousands)Finished goods
    
    $
    67,689
    
    
    $
    52,164Work-in-process
    
    
    157
    
    
    
    1Raw materials and packaging
    
    
    6,280
    
    
    
    5,91874,126
    
    
    
    58,083Less LIFO adjustment
    
    
    (2,622
    )
    
    
    (2,555
    )$
    71,504
    
    
    $
    55,528
    July 1, 2006
    
    
    December 31, 2005Average
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossUseful Life
    
    
    Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net Book(in years)
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    Value(in thousands)Indefinite life:Tradename
    
    
    N/A
    
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520
    
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520Finite life:Deferred
financing costs
    
    
    5
    
    
    
    1,233
    
    
    
    (491
    )
    
    
    742
    
    
    
    987
    
    
    
    (393
    )
    
    
    594Customer list
    
    
    4
    
    
    
    3,880
    
    
    
    (1,767
    )
    
    
    2,113
    
    
    
    3,880
    
    
    
    (1,283
    )
    
    
    2,597Non-competes
    
    
    34
    
    
    
    1,123
    
    
    
    (508
    )
    
    
    615
    
    
    
    1,123
    
    
    
    (361
    )
    
    
    762Trademarks
    
    
    15
    
    
    
    231
    
    
    
    (186
    )
    
    
    45
    
    
    
    231
    
    
    
    (178
    )
    
    
    53Formulas
    
    
    3
    
    
    
    431
    
    
    
    (179
    )
    
    
    252
    
    
    
    431
    
    
    
    (108
    )
    
    
    3236,898
    
    
    
    (3,131
    )
    
    
    3,767
    
    
    
    6,652
    
    
    
    (2,323
    )
    
    
    4,329Total intangible
assets
    
    
    
    
    
    $
    9,418
    
    
    $
    (3,131
    )
    
    $
    6,287
    
    
    $
    9,172
    
    
    $
    (2,323
    )
    
    $
    6,849
    10




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##### Table of Contents



(in thousands)2006
    
    $
    8582007
    
    
    1,6222008
    
    
    8672009
    
    
    3582010
    
    
    62Total
    
    $
    3,767
   
    
    A required consolidated total debt to consolidated EBITDA ratio of no
more than 3.00 to 1.00. The original Credit Facility required a
consolidated total debt to consolidated EBITDA ratio of no more than
2.25 to 1.00.
    
    A fixed charge coverage ratio (the ratio of the sum of consolidated
EBITDA plus rent expense, less cash taxes paid and capital
expenditures to the sum of consolidated cash interest expense plus
rent expense and dividends) of no less than 2.00 to 1.00. The
original Credit Facility required a fixed charge coverage ratio of no
less than 2.25 to 1.00.
    
    Amounts outstanding under the Amended Credit Facility bear interest at
a rate equal to, at the Companys option, Citizens Bank prime rate or
a Eurodollar rate that ranges from 0.50% to 1.125% above LIBOR. Under
the original Credit Facility, the Eurodollar rate ranged from 0.50% to
0.85% above LIBOR.
    
    The Company is required to pay the lenders a quarterly commitment fee
on the unused revolving loan commitment amount which ranges from
0.125% to 0.25%. Under the original Credit Facility, the commitment
fee ranged from 0.125% to 0.20%.
    
    
    a consolidated total debt to consolidated EBITDA ratio of no more than 3.00 to
1.00, measured quarterly (at July 1, 2006 this ratio was 1.58 to 1.00); and
    
    a fixed charge coverage ratio (the ratio of the sum of consolidated EBITDA
plus rent expense, less cash taxes paid and capital expenditures to the sum of
consolidated cash interest expense plus rent expense and dividends) of no less than
2.00 to 1.00, measured quarterly (for the thirteen weeks ended July 1, 2006 this
ratio was 2.34 to 1.00).
  11




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Costs Paid During
    
    
    
    
    
    
    Costs Paid DuringAccrued as of
    
    
    the Thirteen Weeks
    
    
    Accrued as of
    
    
    the Thirteen Weeks
    
    
    Accrued as ofDecember 31, 2005
    
    
    Ended April 1, 2006
    
    
    April 1, 2006
    
    
    Ended July 1, 2006
    
    
    July 1, 2006(in thousands)Occupancy
    
    $
    1,150
    
    
    $
    809
    
    
    $
    341
    
    
    $
    64
    
    
    $
    277Other expenses
    
    
    84
    
    
    
    26
    
    
    
    58
    
    
    
    30
    
    
    
    28Employee related
    
    
    473
    
    
    
    133
    
    
    
    340
    
    
    
    125
    
    
    
    215Total
    
    $
    1,707
    
    
    $
    968
    
    
    $
    739
    
    
    $
    219
    
    
    $
    520
      For the Thirteen Weeks Ended
    
    
    For the Twenty-Six Weeks EndedJuly 1, 2006
    
    
    July 2, 2005
    
    
    July 1, 2006
    
    
    July 2, 2005(in thousands)Basic
    
    
    40,412
    
    
    
    45,048
    
    
    
    40,714
    
    
    
    45,963Add:Shares issuable
pursuant to stock
awards
    
    
    379
    
    
    
    546
    
    
    
    352
    
    
    
    490Diluted
    
    
    40,791
    
    
    
    45,594
    
    
    
    41,066
    
    
    
    46,453
 12




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13




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(in thousands)Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofThirteen Weeks Ended July 1, 2006
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    59,068
    
    
    $
    57,183
    
    
    $
    
    
    
    $
    116,251Gross Profit
    
    
    38,879
    
    
    
    24,257
    
    
    
    
    
    
    
    63,136Selling Expenses
    
    
    31,234
    
    
    
    5,348
    
    
    
    
    
    
    
    36,582Operating Margin
    
    
    7,645
    
    
    
    18,909
    
    
    
    (15,056
    )
    
    
    11,498Other expense
    
    
    
    
    
    
    
    
    
    
    (3,586
    )
    
    
    (3,586
    )Income before provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,912
 Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofThirteen Weeks Ended July 2, 2005
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    49,889
    
    
    $
    58,659
    
    
    $
    
    
    
    $
    108,548Gross Profit
    
    
    34,191
    
    
    
    27,663
    
    
    
    
    
    
    
    61,854Selling Expenses
    
    
    27,891
    
    
    
    4,231
    
    
    
    
    
    
    
    32,122Operating Margin
    
    
    6,300
    
    
    
    23,432
    
    
    
    (13,742
    )
    
    
    15,990Other expense
    
    
    
    
    
    
    
    
    
    
    (1,999
    )
    
    
    (1,999
    )Income before provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,991
 Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofTwenty-Six Weeks Ended July 1, 2006
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    120,704
    
    
    $
    129,460
    
    
    $
    
    
    
    $
    250,164Gross Profit
    
    
    77,637
    
    
    
    57,476
    
    
    
    
    
    
    
    135,113Selling Expenses
    
    
    63,210
    
    
    
    10,638
    
    
    
    
    
    
    
    73,848Operating Margin
    
    
    14,427
    
    
    
    46,838
    
    
    
    (30,520
    )
    
    
    30,745Other expense
    
    
    
    
    
    
    
    
    
    
    (6,222
    )
    
    
    (6,222
    )Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,523
 Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofTwenty-Six Weeks Ended July 2, 2005
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    101,709
    
    
    $
    126,094
    
    
    $
    
    
    
    $
    227,803Gross Profit
    
    
    65,632
    
    
    
    61,053
    
    
    
    
    
    
    
    126,685Selling Expenses
    
    
    56,231
    
    
    
    8,384
    
    
    
    
    
    
    
    64,615Operating Margin
    
    
    9,401
    
    
    
    52,669
    
    
    
    (27,274
    )
    
    
    34,796Other expense
    
    
    
    
    
    
    
    
    
    
    (3,147
    )
    
    
    (3,147
    )Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,649
   ®
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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Sales/receivables
  Other income statement accounts
    Inventory
  15




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Taxes
  Value of long-lived assets, including intangibles
  Stock-based compensation
      16




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##### Table of Contents



Self-insurance
  PERFORMANCE MEASURES
  FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
  Seasonality.
 New Store Openings.
 New Wholesale Accounts.
 RESULTS OF OPERATIONS
 Overview
 ® ® ® ® ® ®
 ®
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##### Table of Contents



EXECUTIVE SUMMARY
 
    
    For the thirteen weeks ended July 1, 2006, we reported net earnings of $4.8 million and
diluted earnings per share of $0.12 compared to net earnings of $8.5 million and diluted
earnings per share of $0.19 for the thirteen weeks ended July 2, 2005. Net sales increased
7.1% to $116.3 million for the thirteen weeks ended July 1, 2006 from $108.5 million for
the thirteen weeks ended July 2, 2005.
    
    For the twenty-six weeks ended July 1, 2006, we reported net earnings of $17.3 million
and diluted earnings per share of $0.42 compared to net earnings of $19.3 million and
diluted earnings per share of $0.42 for the twenty-six weeks ended July 2, 2005. Net sales
increased 9.8% to $250.2 million for the twenty-six weeks ended July 1, 2006 from $227.8
million for the twenty-six weeks ended July 2, 2005.
    
    During the thirteen weeks ended July 2, 2005, we recognized $0.9 million of revenue
related to gift card breakage. The gift card breakage amount recognized was based upon
historical redemption patterns and represents the remaining balance of gift cards for which
we believe the likelihood of redemption by the customer is remote. The thirteen weeks ended
July 2, 2005 was the first period in which we recognized gift card breakage and therefore
the amount recognized includes the breakage revenue related to gift cards sold since the
inception of our gift card program. This revenue is recorded as retail store revenue in the
Condensed Consolidated Statements of Income. While we will continue to recognize gift card
breakage revenue each quarter, the amounts are expected to be significantly less than the
amount recognized in the second quarter of fiscal 2005.
    
    We opened five new retail stores and closed one underperforming store during the
thirteen weeks ended July 1, 2006. We opened nine new retail stores and closed 14
underperforming stores during the twenty-six weeks ended July 1, 2006, 12 of which were
closed pursuant to the restructuring plan announced in fiscal 2005, bringing our total
retail store count to 385. We added 1,006 net new wholesale doors during the twenty-six
weeks ended July 1, 2006, bringing our total wholesale count to approximately 19,590
including our European operations.
    
    We ended the second quarter with $251.0 million of outstanding borrowings under our
Credit Facilities as compared to $182.0 million at July 2, 2005. The increase was primarily
due to using the Credit Facilities to fund share repurchases, capital expenditures and our
seasonal borrowing requirements. Additional borrowing availability totaled $97.2 million at
July 1, 2006.
 Thirteen and Twenty-six weeks ended July 1, 2006 versus July 2, 2005
 SALES
  Retail Sales
  18




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##### Table of Contents



Wholesale Sales
   GROSS PROFIT
   Retail Gross Profit
   19




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##### Table of Contents



Wholesale Gross Profit
   SELLING EXPENSES
  Retail Selling Expenses
   Wholesale Selling Expenses
  20




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##### Table of Contents



SEGMENT PROFITABILITY
  Retail Operations
  Wholesale Operations
    GENERAL AND ADMINISTRATIVE EXPENSES
  21




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##### Table of Contents



NET OTHER EXPENSE
  PROVISION FOR INCOME TAXES
     LIQUIDITY AND CAPITAL RESOURCES
   
    
    a consolidated total debt to consolidated EBITDA ratio of no more than 3.00 to
1.00, measured quarterly; and
    
    a fixed charge coverage ratio (the ratio of the sum of consolidated EBITDA
plus rent expense, less cash taxes paid and capital expenditures to the sum of
consolidated cash interest expense plus rent expense and dividends) of no less than
2.00 to 1.00, measured quarterly.
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##### Table of Contents



®
  
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4.
    
    Controls and Procedures
 23




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.  Risk Factors
   If we fail to grow our business as planned, our future operating results may suffer. As we grow, it
will be difficult to maintain our historical growth rates.
   We may be unable to continue to open new stores successfully.
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##### Table of Contents



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.
  A material decline in consumers discretionary income could cause our sales and income to decline
  Because we are not a diversified company and are effectively dependent upon one industry, we have
less flexibility in reacting to unfavorable consumer trends, adverse economic conditions or
business cycles.
  If we lose our senior executive officers, or are unable to attract and retain the talent required
for our business, our business could be disrupted and our financial performance could suffer.
 25




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##### Table of Contents



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.
  Seasonal, quarterly and other fluctuations in our business, and general industry and market
conditions, could affect the market for our common stock.
  Sustained interruptions in the supply of products from overseas may affect our operating results.
  Provisions in our corporate documents and Massachusetts law could delay or prevent a change in
control of Yankee Candle.
  
    
    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.
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##### Table of Contents



We are subject to a class action lawsuit in California.
  Further increases in oil prices will negatively impact our cost of goods sold and margins. Any
shortages in refined oil supplies could impact our wax supply. Further increases in wax prices
above the rate of inflation may also negatively impact our cost of goods sold and margins.
    Other factors may also cause our actual results to differ materially from our estimates and
projections.
          27




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  Total Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value of SharesPart of Publicly
    
    
    that May Yet beTotal Number of
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Shares Purchased(1)
    
    
    Paid per Share
    
    
    Programs (2)
    
    
    Plans or Programs1/1/06-4/1/06
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    64,989,5354/2/06-5/6/06
    
    
    333,200
    
    
    
    29.91
    
    
    
    333,200
    
    
    $
    55,023,5235/7/06-6/3/06
    
    
    845,700
    
    
    
    29.57
    
    
    
    845,700
    
    
    $
    30,016,1746/4/06-7/1/06
    
    
    257,800
    
    
    
    27.15
    
    
    
    257,800
    
    
    $
    23,016,904Total
    
    
    1,436,700
    
    
    $
    29.22
    
    
    
    1,436,700
 
 (1)
    
    All repurchases by us of our common stock during the twenty-six weeks ended July 1,
2006 were done pursuant to the repurchase programs that we publicly announced on July
27, 2005.(2)
    
    Our Board of Directors approved the repurchase of up to $150 million of our
common stock pursuant to the stock repurchase program announced on July 27, 2005. There
is currently no expiration date for this stock repurchase program. Unless terminated
earlier by resolution of our Board of Directors, this stock repurchase program will
expire when we have reached the $150 million threshold. 
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  Nominee
    
    Votes For
    
    
    Votes WithheldMichael G. Archbold
    
    
    36,542,934
    
    
    
    928,189
 28




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##### Table of Contents



Nominee
    
    Votes For
    
    
    Votes WithheldCarol M. Meyrowitz
    
    
    36,408,418
    
    
    
    1,062,705Michael B. Polk
    
    
    37,148,591
    
    
    
    322,532Vijay Vishwanath
    
    
    37,149,645
    
    
    
    321,478
   
 Item 5.  Other Information
  
 Item 6.  Exhibits
 10.1
    
    
    Revolving Credit Agreement dated as of April 25, 2006 by and between The Yankee Candle
Company, Inc. and Citizens Bank of Massachusetts*10.2
    
    
    Subsidiary Guaranty dated as of April 25, 2006 by and between Aroma Naturals, Inc. and
Citizens Bank of Massachusetts pertaining to the Revolving Credit Agreement dated as of
April 25, 2006*10.3
    
    
    Second Amendment to Revolving Credit Agreement dated as of March 28, 2006 by and
between The Yankee Candle Company, Inc. and Citizens Bank of Massachusetts*10.4
    
    
    Subsidiary Guaranty dated as of April 25, 2006 by and between Aroma Naturals, Inc. and
Citizens Bank of Massachusetts pertaining to the Revolving Credit Agreement dated as of May
19, 2004*31.1
    
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, dated August 1, 2006.31.2
    
    
    Certification of Bruce H. Besanko Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, dated August 1, 2006.32.1
    
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, dated August 1, 2006.32.2
    
    
    Certification of Bruce H. Besanko Pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, dated August 1, 2006.
 *
    
    Incorporated by reference from the Companys Current Report on Form 8-k dated April 26,
2006.
 29




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##### Table of Contents



THE YANKEE CANDLE COMPANY, INC./s/ Bruce H. BesankoDate: August 1, 2006
    
    By: Bruce H. BesankoSenior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer) 30