##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One)þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended January 29, 2005 
 o TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number: 1-14987 
 (TOO, INC. LOGO) 
  Delaware
    
    31-1333930(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 8323 Walton Parkway, New Albany, Ohio 43054 
  Registrants telephone number, including area code 614-775-3500 
 Securities registered pursuant to Section 12(b) of the Act: 
 Title of each class
    
    Name of each exchange on which registeredCommon Shares, $.01 par value
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None




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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act).

YES þ NO o

The aggregate market value of the voting stock held by non-affiliates of the Registrant at July 31,
2004 was $511,373,234. There were 34,340,627 shares of the Registrants common stock outstanding at
April 7, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our proxy statement for the Annual Meeting of Stockholders scheduled for May 19, 2005
are incorporated by reference into Part III .







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TOO, INC. TABLE OF CONTENTS PagePART 1Item 1. Business
    
    4Item 2. Properties
    
    9Item 3. Legal Proceedings
    
    9Item 4. Submission of Matters to a Vote of Security Holders
    
    9PART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    10Item 6. Selected Financial Data
    
    11Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    12Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 8. Financial Statements and Supplementary Data
    
    32Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    54Item 9A. Controls and Procedures
    
    58Item 9B. Other Information
    
    60PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    61Item 11. Executive Compensation
    
    61Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    61Item 13. Certain Relationships and Related Transactions
    
    61Item 14. Principal Accounting Fees and Services
    
    61PART 1VItem 15. Exhibits, Financial Statement Schedules
    
    62SIGNATURES
    
    67EX-10.11EX-23EX-24EX-31.1EX-31.2EX-32.1EX-32.2
  3




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PART I 
 Item 1. Business. Restatement of Prior Financial Information We have restated the consolidated balance sheet at January 31, 2004, and the consolidated
statements of operations, changes in stockholders equity and cash flows for the years ended
January 31, 2004 and February 1, 2003 in this Annual Report on Form 10-K. We have also restated
the quarterly financial information for fiscal 2003 and the first three quarters of fiscal 2004.
See Note 14 to the accompanying consolidated financial statements. The restatement also affects
periods prior to fiscal 2002. The impact of the restatement on such prior periods has been
reflected as an adjustment to retained earnings as of February 2, 2002 in the accompanying
consolidated statement of changes in stockholders equity. We have also restated the applicable financial information for fiscal 2000, fiscal 2001, fiscal
2002 and fiscal 2003 in Item 6. Selected Financial Data. The restatement corrects our historical
accounting for operating leases. For information with respect to the restatement, see Note 2 to
the accompanying consolidated financial statements. We did not amend our previously filed Annual
Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement, and the financial
statements and related financial information contained in such reports should no longer be relied
upon. Throughout this Form 10-K all referenced amounts for prior periods and prior period
comparisons reflect the balances and amounts on a restated basis. The Company Too, Inc. (hereafter referred to as Too, the Company, us or we) is a rapidly growing
operator of two specialty retailing concepts, Limited Too and Justice. Limited Too sells apparel,
underwear, sleepwear, swimwear, lifestyle and personal care products for fashion-aware,
trend-setting girls ages seven to fourteen years. Justice, launched in January 2004, sells
fashionable, value-priced sportswear and key accessory items for girls ages seven to fourteen
years. Justice is intended to be located principally in non-mall locations such as power strip and
specialty centers. We design, source and market products under the proprietary Limited Too and
Justice brand names. In 1987, The Limited established Limited Too brand stores adjacent to or as departments within
The Limited stores to provide apparel to young girls, and also apparel for infants and toddlers.
From 1987 to the end of fiscal 1995, we expanded our locations from two stores to 288 stores. In
1996, a new management team recognized that its core customer had her own emerging sense of style
and revised our strategy to focus on girls seven to fourteen years of age as our target customer
group. Since then, we have implemented an aggressive store opening campaign to capitalize on our
business strengths and have grown our total store base from 308 stores at the end of fiscal 1996 to
603 stores in 46 states and Puerto Rico at the end of fiscal 2004. In 1999, the Board of Directors of The Limited approved a plan to distribute to its shareholders
all of the outstanding common shares of Too, Inc. Effective August 23, 1999, The Limited
distributed to its shareholders of record as of August 11, 1999, all of its interest in Too on the
basis of one share of Too common stock for each seven shares of The Limited common stock (the
spin-off). The spin-off resulted in 30.7 million shares of Too common stock initially outstanding
as of August 23, 1999. As a result of the spin-off, we became an independent, separately traded,
public company. In connection with the spin-off, we entered into various 4




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agreements with the Limited, which covered certain aspects of our past and ongoing relationships.
Refer to pages 24-25 for a description of these agreements. On May 28, 2003, we announced the discontinuation of our mishmash retail concept in favor of
redirecting our resources to the Justice concept. Also on that date, we announced we were ending
our involvement in the Goldmark joint venture. Description of Operations Limited Too is a specialty retailer of quality apparel, underwear, sleepwear, swimwear, lifestyle
and personal care products for fashion-aware, trend-setting young girls ages seven to fourteen
years. Our target customers are active, creative and image-conscious, enjoy shopping and want to
describe themselves as fun and cool. We believe our target customers want a broad assortment of
merchandise for their range of dressing occasions, including school, leisure activities and special
occasions. We continually update our merchandise assortment, which includes non-apparel
merchandise, such as candy, jewelry, toiletries, cosmetics and lifestyle furnishings for her room. To attract our target customers, we create an in-store atmosphere that is visually appealing and
provides an enjoyable, safe and exciting shopping experience. We design our stores to provide a
theme park destination in the mall and to encourage our customers to touch and sample our
products. All of our stores contain a wide variety of merchandise for a one-stop shopping
experience, which has been specifically designed to embody a store for her theme. Our stores
feature colorful storefront windows, light displays, photographic sticker booths, gumball machines,
and eye-catching photographs. All stores opened or remodeled from mid-1997 to Fall 2004 were under
the Girl Power format, which further enhanced the shopping experience. In late 2004, we
introduced our Its a Girls World format into our stores and currently have 11 stores operating
under this format. All remodels since November 2004 and new 2005 stores will operate under this new
format. Our Limited Too merchandise includes:  
    apparel, such as jeans and other jeanswear and bottoms, knit tops and T-shirts containing our brand name and other
graphics, dresses and outerwear;
    accessories, such as costume jewelry, hair ornaments, slippers, key chains, wallets, backpacks, purses, watches and
shoes;
    lifestyle products, such as bedroom furnishings, music, stationery and candy;
    personal care products such as age-appropriate cosmetics and toiletries; and
    add-ons, such as underwear, sleepwear and swimwear. Justice is our specialty retail brand launched in late January 2004, which offers fashionable,
value-priced sportswear for girls ages seven to fourteen years. Justice also has key accessories,
such as hats, belts and socks, as well as jewelry and lifestyle items, all presented in a unique,
fun store environment primarily in off-the-mall locations. At the end of fiscal 2004, 35 Justice
stores were open. 5




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Product Development We develop substantially all of our Limited Too and Justice apparel and add-on assortment through
internal design groups, which allow us to create a vast array of exclusive merchandise under our
proprietary brands while bringing our products to market expediently. Additionally, because our
merchandise is sold exclusively in our own stores, we are able to control the presentation and
pricing of our merchandise and provide a higher level of customer service. Sourcing We use a variety of sourcing arrangements. We purchased merchandise from 296 suppliers during
fiscal 2004, down from 417 in fiscal 2003. Our largest supplier in fiscal 2004 was Li & Fung,
which provided approximately 24% of our merchandise purchases during the year. Our second largest
supplier, Mast Industries, Inc., a wholly-owned subsidiary of Limited Brands, supplied
approximately 12% of the merchandise that we purchased in 2004, down from 13% in 2003. We believe
that all transactions that we have entered into with Mast Industries over the years have been on
terms consistent with an arms length basis since we have consistently treated them as if they were
a third party. We have not been, nor will we be, obligated to source products through Mast
Industries in the future. We source a significant amount of our merchandise from foreign factories located primarily in the
Pacific Rim. We do not have any long-term merchandise supply contracts, and many of our imports
are subject to existing or potential duties, tariffs or quotas that may limit the quantity of goods
which may be imported into the United States from countries in that region. Additionally, as we
may enter into manufacturing contracts in advance of the selling season, we may be subject to
shifts in demand for certain or all of our products. Our business is subject to a variety of risks
generally associated with doing business in foreign markets and importing merchandise from abroad,
such as political instability, currency and exchange risks, and local business practice and
political issues. During fiscal 2002, we opened our direct sourcing office in Hong Kong. This arrangement allows us
to bypass agents, brokers and middlemen as we establish and develop increased direct relationships
with factories and reduce our sourcing costs. We source primarily from factories with which we
have pre-existing relationships, and only on basic apparel items. Direct sourcing purchases
represented approximately 15% of our total purchases in fiscal 2004, up from 11% in 2003. We
intend to increase our internal sourcing as a percent of our total business and we expect direct
sourcing to account for approximately 17% to 20% of our total merchandise purchases in 2005. Distribution On February 15, 2002, we opened our own 470,000 square foot distribution center in Etna Township,
Ohio. We distribute all of our Limited Too and Justice merchandise from this center. Prior to the
completion of our own distribution center, we utilized services provided for a fee by Limited
Brands. Inventory Management Our approach to inventory management emphasizes rapid turnover of a broad assortment of outfits and
taking markdowns where required to keep merchandise fresh and current with fashion trends. Our
policy is to 6




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maintain sufficient quantities of inventory on hand in our retail stores and distribution center so
that we can offer customers a full selection of current merchandise. Seasonality We view the retail apparel market as having two principal selling seasons, Spring and Fall. As is
generally the case in the apparel industry, we experience our peak sales activity during the Fall
season. This seasonal sales pattern results in increased inventory during the back-to-school and
Christmas holiday selling periods. During fiscal year 2004, the highest inventory level
approximated $78.1 million at the November 2004 month-end and the lowest inventory level
approximated $45.5 million at the May 2004 month-end. Merchandise sales are predominantly paid for
by cash, personal check or credit cards. Stores At the end of fiscal 2004, we operated 568 Limited Too and 35 Justice stores in 46 states and
Puerto Rico. The following table shows the number of retail stores we operated over the past five
fiscal years: Fiscal Years EndedJanuary 29,
    
    
    January 31,
    
    
    February 1,
    
    
    February 2,
    
    
    February 3,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Limited Too and Justice:Number of stores:Beginning of year
    
    
    558
    
    
    
    510
    
    
    
    459
    
    
    
    406
    
    
    
    352Opened
    
    
    55
    
    
    
    54
    
    
    
    56
    
    
    
    57
    
    
    
    58Closed
    
    
    (10
    )
    
    
    (6
    )
    
    
    (5
    )
    
    
    (4
    )
    
    
    (4
    )603
    
    
    
    558
    
    
    
    510
    
    
    
    459
    
    
    
    406Stores remodeled
    
    
    20
    
    
    
    4
    
    
    
    9
    
    
    
    6
    
    
    
    10Total square feet at period end
(thousands)
    
    
    2,495
    
    
    
    2,307
    
    
    
    2,091
    
    
    
    1,881
    
    
    
    1,669Average store size at period end
(square feet)
    
    
    4,138
    
    
    
    4,134
    
    
    
    4,100
    
    
    
    4,098
    
    
    
    4,111Annual sales per average gross
square foot
    
    $
    271
    
    
    $
    260
    
    
    $
    319
    
    
    $
    336
    
    
    $
    341Number of mishmash stores
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    7
    
    
    
    Number of Justice stores
    
    
    35
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
 Additional information about our business, including our revenues and profits for the last three
years and gross square footage, is set forth under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7. 7




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Trademarks and Service Marks We own, other than our brand name Limited Too, trademarks and service marks, including Justice,
used to identify our merchandise and services. Many of these marks are registered with the U.S.
Patent and Trademark Office. These marks are important to us, and we intend to, directly or
indirectly, maintain and protect these marks and their registrations. However, we may choose not
to renew a registration of one or more of our merchandise marks if we determine that the mark is no
longer important to our business. We also conduct business in foreign countries, principally because a substantial portion of our
merchandise is manufactured outside the United States. We have registered marks in foreign
countries to the degree necessary to protect these marks, although there may be restrictions on the
use of these marks in a limited number of foreign jurisdictions. A wholly-owned subsidiary of Limited Brands owns the brand name Limited Too, which is registered
in the United States and in numerous foreign countries. This subsidiary licenses the brand name,
royalty-free, to one of our wholly-owned subsidiaries. In connection with the spin-off, these
subsidiaries entered into a trademark and service mark licensing agreement that allows us to
operate under the Limited Too brand name in connection with our tween business. The agreement
is for an initial term of five years after the spin-off, renewable annually thereafter at our
option. Competition The sale of apparel, accessories and personal care products through retail stores and
direct-to-consumer channels is a highly competitive business with numerous competitors, including
individual and chain fashion specialty stores, department stores, discount retailers and direct
marketers. Depth of selection, colors and styles of merchandise, merchandise procurement and
pricing, ability to anticipate fashion trends and customer preferences, inventory control,
reputation, quality of merchandise, store design and location, advertising and customer services
are all important factors in competing successfully in the retail industry. Additionally, factors
affecting consumer spending such as interest rates, employment levels, taxation and overall
business conditions could have a material adverse effect on our results of operations and financial
condition. Associate Relations As of January 29, 2005, we employed approximately 9,600 associates (none of whom were parties to a
collective bargaining agreement), approximately 7,000 of whom were part-time. In addition,
temporary associates are hired during peak periods, such as the back-to-school and Christmas
holiday shopping seasons. Available Information We provide free of charge access to our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports, through our website, www.tooinc.com,
as soon as reasonably practicable after such reports are electronically filed with the Securities
and Exchange Commission. These reports are also available through the Securities and Exchange
Commission website at www.sec.gov. We also post on our website, under the caption Corporate
Governance, our Corporate Governance Guidelines; Charters of our Board of Directors Audit
Committee, Nominating and Governance Committee, and Stock Option Compensation Committee; the Code
of Ethics for Senior Financial Officers; and Code of Business 8




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Conduct and Ethics, which applies to all of our directors and associates. These materials will
also be provided without charge to any stockholder submitting a written request to Too, Inc., Attn:
Investor Relations, 8323 Walton Parkway, New Albany, Ohio 43054. 
 Item 2. Properties. Our home office facilities are located in New Albany, Ohio. In February 2002 we transitioned our
distribution operations to our own distribution center in Etna Township, Ohio, within 15 miles of
our home office facilities. Our distribution center is approximately 470,000 square feet. We own
both our distribution center and home office facilities. On March 1, 2005, we purchased office
space and two parking spaces at a commercial building in Hong Kong. The cost of this property was
$1.7 million. As of January 29, 2005, we operated 568 Limited Too and 35 Justice stores, which are located
primarily in shopping malls and off-the-mall power retail and strip centers throughout the United
States. Of the 568 Limited Too stores, 486 were leased directly from third parties  principally
shopping mall developers  and 82 are governed by leases where the primary tenant is Limited Brands
or an affiliate of Limited Brands. Of the 486 stores directly leased, 37 are guaranteed by Limited
Brands. Our leases expire at various dates between 2005 and 2016. In fiscal 2004, total store
rent for Limited Too and Justice was $59.7 million. Minimum rent commitments under non-cancelable
store leases as of January 29, 2005 total $58.0 million, $52.9 million, $45.7 million, $40.5
million and $37.2 million for fiscal years 2005 through 2009, respectively, and $88.5 million
thereafter. Typically, when space is leased for a retail store in a shopping center, all improvements,
including interior walls, floors, ceilings, fixtures and decorations, are supplied by the tenant.
In certain cases, the landlord of the property may provide a construction allowance to fund all or
a portion of the cost of improvements. The cost of improvements varies widely, depending on the
size and location of the store. Lease terms are typically 10 years and usually include a fixed
minimum rent plus a contingent rent based on the stores annual sales in excess of a specified
amount. Certain operating costs such as common area maintenance, utilities, insurance and taxes are
typically paid by tenants. Leases with Limited Brands or an affiliate of Limited Brands are on terms that represent the
proportionate share of the base rent payable in accordance with the underlying lease plus the
portion of any contingent rent payable in accordance with the underlying lease attributable to our
performance. Additionally, Limited Brands provides guarantees on certain leases and assesses a fee
based on stores sales exceeding defined levels. 
 Item 3. Legal Proceedings. There are various claims, lawsuits and other legal actions pending for and against us incident to
the operations of our business. It is the opinion of our management that the ultimate resolution
of these matters will not have a material adverse effect on our results of operations, cash flows
or financial position. 
 Item 4. Submission Of Matters To A Vote Of Security Holders. No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2004. 9




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PART II 
  Item 5.
    Market For The Registrants Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities.  (a)
    Too, Inc. shares are traded on the New York Stock Exchange under the trading symbol TOO.
The following is a summary of the high, low and close sales prices of our common stock as
reported on the New York Stock Exchange for the 2004 and 2003 fiscal years: Sales PriceHigh
    
    
    Low
    
    
    Close2004 Fiscal Year4th Quarter
    
    $
    27.84
    
    
    $
    21.67
    
    
    $
    26.653rd Quarter
    
    $
    22.11
    
    
    $
    13.28
    
    
    $
    22.022nd Quarter
    
    $
    17.90
    
    
    $
    13.92
    
    
    $
    14.981st Quarter
    
    $
    21.43
    
    
    $
    15.25
    
    
    $
    17.542003 Fiscal Year4th Quarter
    
    $
    20.75
    
    
    $
    14.90
    
    
    $
    15.303rd Quarter
    
    $
    18.07
    
    
    $
    13.80
    
    
    $
    16.502nd Quarter
    
    $
    21.95
    
    
    $
    15.70
    
    
    $
    17.901st Quarter
    
    $
    18.90
    
    
    $
    13.45
    
    
    $
    17.95
  We have never declared nor paid any dividends on our common stock. While we regularly assess
our dividend policy, we have no current plans to pay any dividends in the foreseeable future.
Earnings from our operations will be retained and reinvested to support the growth of our
business. At April 7, 2005, we had approximately 15,943 shareholders of record.(b)
    On November 17, 2004, we announced that our Board of Directors authorized the repurchase of
up to $125 million of our common stock as a means of further enhancing shareholder value. The
purchases will occur from time to time over the next two years beginning November 18, 2004,
subject to market conditions, in open market or in privately negotiated transactions, and in
accordance with Securities and Exchange Commission requirements. The following table
illustrates our purchases of equity securities during 2004: Total Number
    
    
    
    
    
    
    Total Number of
    
    
    Maximum Dollar Valueof
    
    
    Average
    
    
    Shares Purchased as
    
    
    of Shares that mayShares
    
    
    Price Paid
    
    
    Part of Publicly Announced
    
    
    yet be purchased underPeriod
    
    Purchased
    
    
    per Share
    
    
    Plans or Programs
    
    
    the Plans or ProgramsNovember (November 18, 2004
through November 27, 2004)
    
    
    136,000
    
    
    $
    24.94
    
    
    
    136,000
    
    
    $
    121,607,569
 10




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Item 6. Selected Financial Data. Due to the discontinuation of mishmash in 2003, its results are excluded for all periods presented
unless otherwise noted. The five-year selected consolidated financial data presented below has
been revised to reflect a restatement. For information with respect to the restatement, see Note 2
to the accompanying consolidated financial statements. The following data is in thousands, except per share data, number of stores and annual sales per
average gross square foot: Fiscal Year EndedJanuary 29,
    
    
    January 31,
    
    
    February 1,
    
    
    February 2,
    
    
    February 3,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001 (1)(Restated)
    
    (Restated)
    
    (Restated)
    
    (Restated)Statement of Income Data:Net sales
    
    $
    675,834
    
    
    $
    598,681
    
    
    $
    640,320
    
    
    $
    600,875
    
    
    $
    545,040Gross income (2)
    
    
    241,887
    
    
    
    200,626
    
    
    
    237,917
    
    
    
    217,307
    
    
    
    192,614General, administrative and store
operating expenses
    
    
    177,508
    
    
    
    154,275
    
    
    
    157,991
    
    
    
    150,278
    
    
    
    137,285Operating income
    
    
    64,379
    
    
    
    46,351
    
    
    
    79,926
    
    
    
    67,029
    
    
    
    55,329Income from continuing operations
    
    
    41,589
    
    
    
    29,114
    
    
    
    48,945
    
    
    
    39,876
    
    
    
    32,265Net income (3)
    
    
    41,589
    
    
    
    23,134
    
    
    
    47,759
    
    
    
    39,356
    
    
    
    32,265Earnings per share  basic (3)
    
    $
    1.21
    
    
    $
    0.68
    
    
    $
    1.44
    
    
    $
    1.27
    
    
    $
    1.05Earnings per share  diluted (3)
    
    $
    1.19
    
    
    $
    0.67
    
    
    $
    1.40
    
    
    $
    1.23
    
    
    $
    1.02Balance Sheet Data:Cash and equivalents
    
    $
    26,212
    
    
    $
    4,991
    
    
    $
    36,234
    
    
    $
    53,268
    
    
    $
    63,641Inventories
    
    
    62,441
    
    
    
    58,299
    
    
    
    61,405
    
    
    
    44,537
    
    
    
    45,715Total assets
    
    
    493,696
    
    
    
    441,253
    
    
    
    395,451
    
    
    
    313,785
    
    
    
    242,666Total debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    50,000Total shareholders equity
    
    
    322,524
    
    
    
    276,565
    
    
    
    247,889
    
    
    
    122,017
    
    
    
    73,726Selected Operating Data:Comparable store sales increase (decrease) (4) (7)
    
    
    4
    %
    
    
    -13
    %
    
    
    -3
    %
    
    
    0
    %
    
    
    4
    %Total net sales growth (decline)
    
    
    12.9
    %
    
    
    -6.5
    %
    
    
    6.6
    %
    
    
    10.2
    %
    
    
    21.0
    %Gross income rate (5)
    
    
    35.8
    %
    
    
    33.5
    %
    
    
    37.2
    %
    
    
    36.2
    %
    
    
    35.3
    %Operating income rate (5)
    
    
    9.5
    %
    
    
    7.7
    %
    
    
    12.5
    %
    
    
    11.2
    %
    
    
    10.2
    %Total number of stores open at
year end
    
    
    603
    
    
    
    558
    
    
    
    510
    
    
    
    459
    
    
    
    406Total gross square feet at year end
(thousands)
    
    
    2,495
    
    
    
    2,307
    
    
    
    2,091
    
    
    
    1,881
    
    
    
    1,669Annual sales per average gross square
foot (6)
    
    $
    271
    
    
    $
    260
    
    
    $
    319
    
    
    $
    336
    
    
    $
    341
   (1)
    
    Represents the 53-week fiscal year ended February 3, 2001.(2)
    
    Gross income equals net sales less costs of goods sold, buying and occupancy costs.(3)
    
    Includes the impact of the loss on discontinued operations of mishmash, net of tax, of
$6.0 million, $1.2 million and $0.5 million for fiscal 2003, 2002 and 2001, respectively.(4)
    
    A store is included in our comparable store sales calculation once it has completed 52
weeks of operation. Further, stores that have changed more than 20% in gross square feet
are treated as new stores for the purpose of this calculation.(5)
    
    Calculated as a percentage of net sales.(6)
    
    Annual sales per average square foot is the result of dividing net sales for the fiscal
year by average gross square feet, which reflects the impact of opening and closing stores
throughout the year.(7)
    
    Comparable store sales for fiscal 2000 are for the 52-weeks ended January 27, 2001.   11




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##### Table of Contents



Item 7. Managements Discussion And Analysis of Financial Condition And Results of Operation. You should read the following managements discussion and analysis of our financial condition and
results of operations in conjunction with our Consolidated Financial Statements and the related
notes to those Consolidated Financial Statements. For the purposes of the following discussion,
unless the context otherwise requires, Too, Inc., Too, we, our, the Company and us
refer to Too, Inc. and our wholly-owned subsidiaries. Restatement of Prior Financial Information In late 2004, we began a review of our accounting practices for leases. Based on our review, we
determined that certain adjustments were needed. As a result, we changed our lease accounting
practice in fiscal 2004 and restated selected historical financial information. The restatement
adjustments are non-cash and had no impact on revenues, comparable store sales, or net cash flows. Our historical accounting practice had been to recognize straight-line rent expense and certain
tenant allowances for operating leases beginning on the store opening date specified in the lease,
which had the effect of excluding the build-out period for our stores from the calculation of the
period over which we expensed rent. Based on our re-examination of the applicable accounting
literature, we determined that the proper accounting practice is to include the build-out period in
the amortization period for straight-line rent expense and tenant allowances on all operating
leases and we changed our lease accounting practice accordingly. In addition, tenant allowances
have been reclassified from a contra asset in property and equipment, net to deferred credits from
landlords and other in the Consolidated Balance Sheets. The amortization of those tenant
allowances has also been reclassified from a reduction of depreciation expense to a reduction of
rent expense in the Consolidated Statements of Operations and from a reduction of capital
expenditures to an increase in cash provided by operating activities in the Consolidated Statements
of Cash Flows. The restatement includes adjustments to costs of goods sold, buying and occupancy costs, gross
income, operating income, income from continuing operations before income taxes, provision for
income taxes, net income and earnings per share. These changes increased net income and earnings
per share by $22,000 and $0.00 per diluted share in the first three fiscal quarters of 2004. The
restatement adjustments increased our net income and earnings per share in fiscal 2003 by
approximately $583,000 or $0.02 per diluted share, and increased net income and earnings per share
in fiscal 2002 by approximately $421,000 or $0.01 per diluted share. Although the restatement did
not impact any net cash flows, it did have the effect of increasing operating cash flows and
increasing capital expenditures by a similar amount. These changes increased our operating cash
flows and increased our cash used in investing activities in fiscal 2003 and fiscal 2002 by $10.3
million and $8.6 million, respectively. The restatement also affects periods prior to fiscal 2002.
The impact of the restatement on such prior periods has been reflected as a $6.2 million reduction
to retained earnings, a change of less than 5% to total shareholders equity, as of February 2,
2002 in the accompanying consolidated statement of changes in shareholders equity. We have also
restated the applicable financial information for fiscal 2000, fiscal 2001, fiscal 2002, and fiscal
2003 in Item 6. Selected Financial Data. For information with respect to the restatement
adjustments, see Note 2 to the accompanying consolidated financial statements. In addition, during fiscal 2004, we corrected the classification of changes in cash overdrafts from
net cash provided by operating activities to net cash provided by financing activities in the
Consolidated Statements of Cash Flows. 12




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##### Table of Contents



Further, we have revised the classification of certain auction-rate marketable securities held by
us. Prior to this revision, these securities were included in cash and equivalents for two
reasons: (1) we use these securities to support operations, and (2) the interest rate on such
securities is reset periodically in an auction process that occurs at least as often as every three
months. During our year-end review of the applicable accounting literature, we determined that the
proper accounting practice is to classify these securities as investments, as the stated or
contractual maturities of the underlying security for these investments often exceed three months
from the date of purchase. These marketable securities are included in the Investments account on
our Consolidated Balance Sheet. Executive Overview Back on Track An improved apparel assortment at Limited Too and tighter expense management, specifically in
buying and occupancy expense, helped us deliver higher sales and improved earnings for 2004. Net
sales for 2004 increased by 13% to $675.8 million. Net income jumped 80%, to $41.6 million, or
$1.19 per diluted share, compared to $23.1 million, or $0.67 per diluted share for 2003. The 2003
results included a loss on our discontinued mishmash operations, net of tax, of $6.0 million, or
$0.17 per share. We generated over $77 million in cash from operations, enabling us to pursue our
strategic objectives, maintain a debt-free balance sheet, begin repurchasing stock and still
increase our position in cash and marketable securities by $55.8 million. Its the Merchandise A big part of our success last year was attributable to our improved apparel assortment. The
fashion missteps of 2003 were corrected and Limited Too resumed its role as the premier fashion
brand for the tween girl. We did a much better job of identifying the wants and needs of our
customers and their moms. For example, we resumed merchandising our apparel by color story and
edited the assortment, allowing tweens and moms to shop for complete outfits. We identified and
capitalized on many of the key fashion trends for the year  ponchos, skirts and skorts, western
shirts, velour, corduroy and other styles that made us the fashion leader for our customer. Limited Too also enjoyed huge growth in our non-apparel merchandise, with 2004 sales in this
category up 29% over the prior year. Offerings in the accessories and lifestyles categories were
widely popular, as we re-emphasized the fun element of shopping at our stores. Justice for Girls In January 2004, we opened the first Justice store, our off-the-mall specialty apparel retail
concept for tween girls. Justices mission is to provide value-conscious tweens with the latest
in fashion apparel and related accessories in a convenient and fun store environment. Justice
stores are located predominantly in power strip retail centers, to better compete with the
name-brand discounters and mass merchants. Price points are pegged at the moderate level to compete
with brands found at national chains such as Kohls and J C Penney. Store interiors are bright,
colorful, inviting spaces, with a breadth of assortment for tween girls comparable to that at
Limited Too. Everything about the store says Justice is just for girls. 13




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##### Table of Contents



We opened 30 Justice stores in 11 different states during fiscal 2004, with clusters of stores in
suburban Chicago, Dallas, Detroit and Philadelphia. This year we plan to open 50 to 60 stores in
prime power strip center locations, adding stores in 12 additional states. We have been very pleased with the quality of sales in Justices first year of operation. Key sales
metrics such as average dollar sale and units per transaction have met or exceeded our preliminary
expectations. This year we are developing a marketing plan centered on in-store promotion in order
to drive traffic to stores and encourage repeat business. Limited Too 2005 Growth Our 2005 growth plans include 12 to 15 new Limited Too stores and remodeling 35 to 45 existing
stores. More than 35 percent of the Limited Too store fleet is up for lease renewal over the next
three years, creating a special opportunity for upgrading our lease portfolio. We will close a
select number of under-performing stores and stores in outmoded malls, so there will be little or
no square footage growth for our 18-year-old core brand. All new stores and remodels in 2005 will
be done in our new Its a Girls Worldstore design format, introduced late last year. The new
design has cleaner architectural lines, more vivid lighting and incorporates unique fixtures that
better highlight our merchandise. There are music listening stations that encourage tweens to
spend more time in their favorite store. The new store design should stimulate remodeled store
sales, where we typically see a double-digit sales increase in the first year following remodeling. Its a Girls World During 2004, Limited Too revised many of its marketing strategies. We began by selecting
TBWA\Chiat\Day, an award-winning advertising agency, to provide us with break-through
communications that would resonate with tween girls. One result of that new relationship was the
production of the brands first national television advertising campaign. Separate fifteen- and
thirty-second spots with the Its a Girls Worldtheme aired on popular cable channels during the
all-important back-to-school shopping season. Based on independent survey results, our brand
message resonated positively with tween girls and their moms, and heightened brand awareness.
Accordingly, we are conducting a spring television advertising campaign and will most likely follow
that with back-to-school and holiday campaigns later in the year. A robust national television advertising campaign is not inexpensive, so we have modified our
marketing program to defray much of the cost. First, we are reducing our catazine circulation
substantially; an action that will lower production costs with little or no anticipated impact on
stores sales. Also, we are eliminating a number of our direct mail promotions and planned
markdowns, actions that will also improve our gross profit. We have expanded the Limited Too $10 Bonus Card, a customer loyalty reward that encourages the
customer who has earned the savings card to visit our store during slower selling periods in order
to redeem it. Brand Partnering Limited Too continues to develop important relationships with popular consumer brands that are
important to our customer and her family. Procter & Gamble collaborated with Limited Too to
introduce their new Secret Sparkle Collectionof personal care products to tweens. Educational
product developer LeapFrog is working with us to launch their pentop computer called Fly. Walt
Disney Records, representing popular tween recording artists such as Hillary Duff and
Raven-Symoné, are partnering with Limited Too. We continue to enjoy important business
relationships with candy maker Nestlé, game and toy maker Hasbro, online entertainment company
Neopets and Build-A-Bear Workshop. Hollywood has also recognized the power of this 14




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##### Table of Contents



brand with tweens as well. Paramount Pictures worked with Limited Too to promote its hit movie of
the 2004 holiday season, Lemony Snickets A Series of Unfortunate Events. International Expansion Since our founding, our goal has been to make Limited Too a world brand, one recognized as the #1
fashion provider for tweens everywhere. As a step toward making that goal a reality, we have an
agreement with M.H. Alshaya Company L.L.C., the retail division of Kuwait-based Alshaya Group,
founded in 1890. Alshaya operates North American and European franchise brands throughout the
Middle East, managing over 550 stores with more than one-half million square feet of floor space.
There are currently 12 Limited Too stores successfully operating in
very upscale malls in the Kingdom
of Saudi Arabia, Kuwait, United Arab Emirates, Qatar and Turkey, with annual sales projected at
over $12 million, on which we will collect merchandise handling and licensing fees. Stock Repurchase The Board of Directors authorized the repurchase of up to $125 million of our common stock as a
means of further enhancing shareholder value. The purchases will occur from time to time over the
next 20 months, subject to market conditions, in open market or in privately negotiated
transactions. The action on this repurchase plan demonstrates our ability to fund our growth
through internally generated funds, maintain a strong balance sheet, and return excess cash to our
shareholders. As of January 29, 2005, we had repurchased 136,000 shares of Too, Inc. stock, and as
of April 7, 2005, we had repurchased 1,250,500 shares of Too, Inc. stock. Where We Want to Be We believe Too Inc. is well positioned for future growth. Our core business, Limited Too, while a
mature brand, has good opportunity for profit improvement. Creative marketing initiatives are
designed to communicate our brand message to new customers while reminding regular customers why
its their favorite tween store. We expect Limited Too to continue generating internal cash flow
to fulfill the capital needs of all our businesses, including Justice. After its first full year of operations, we believe Justice is on track to be a successful
off-the-mall retail concept. Justice is our store growth vehicle going forward, giving us
approximately 9 to 10 percent square footage growth in 2005. However, growth should not diminish
our financial strength. We intend to maintain a debt-free balance sheet, generating sufficient
cash to support robust growth while returning excess cash to shareholders as prudent stock
repurchase opportunities occur. Most importantly, we will remain the tween girl expert. By anticipating and delivering the
leading fashion our customers have come to expect, we will continue to expand our market share and
grow shareholder value. Results of Operations On May 28, 2003, we announced the discontinuation of our mishmash retail concept, and all mishmash
stores were closed by November 25, 2003. Accordingly, mishmashs operating results have been
reflected as 15




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##### Table of Contents



discontinued operations in this Form 10-K. Unless otherwise indicated, the following discussion
relates only to our continuing operations. Net sales for the year-ended January 29, 2005 were $675.8 million, an increase of 13% from $598.7
for the 2003 fiscal year. Gross income increased 21% to $241.9 million in 2004 from $200.6 million
in 2003 and operating income increased 39% to $64.4 million in 2004 from $46.4 million in 2003.
Net income, which included the loss on discontinued operations in the prior year, increased 80% to
$41.6 million in 2004 from $23.1 million in 2003. Diluted earnings per share increased 78% to
$1.19 in 2004 from $0.67 in 2003. The following table represents the amounts shown in the our Consolidated Statements of Operations
for the last three fiscal years expressed as a percentage of net sales: Fiscal Year EndedJanuary 29,
    
    
    January 31,
    
    
    February 1,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs of goods sold, buying and
occupancy costs
    
    
    64.2
    
    
    
    66.5
    
    
    
    62.8Gross income
    
    
    35.8
    
    
    
    33.5
    
    
    
    37.2General, adminstrative and store
operating expenses
    
    
    26.3
    
    
    
    25.8
    
    
    
    24.7Operating income
    
    
    9.5
    
    
    
    7.7
    
    
    
    12.5Interest income (expense), net
    
    
    0.2
    
    
    
    0.1
    
    
    
    (0.1
    )Income from continuing operations
before income taxes
    
    
    9.7
    
    
    
    7.8
    
    
    
    12.4Provision for income taxes
    
    
    3.5
    
    
    
    2.9
    
    
    
    4.7Income from continuing operations
    
    
    6.2
    
    
    
    4.9
    
    
    
    7.7Discontinued operations:Loss from operations of mishmash, net of tax
    
    
    
    
    
    
    0.2
    
    
    
    0.2Loss on mishmash store closings and impairment
charges, net of tax
    
    
    
    
    
    
    0.8
    
    
    
    Loss on discontinued operations
    
    
    
    
    
    
    1.0
    
    
    
    0.2Net income
    
    
    6.2
    %
    
    
    3.9
    %
    
    
    7.5
    %
 16




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##### Table of Contents



Financial Summary Summarized annual financial data for the last three fiscal years is presented below: Fiscal Year Ended
    
    
    % ChangeJanuary 29,
    
    
    January 31,
    
    
    February 1,
    
    
    2003-
    
    
    2002-2005
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Limited Too and Justice:Net sales (millions)
    
    $
    676
    
    
    $
    599
    
    
    $
    640
    
    
    
    13
    %
    
    
    -7
    %Comparable store sales increase (decrease) (1)
    
    
    4
    %
    
    
    -13
    %
    
    
    -3
    %Annual sales per average gross square foot (2)
    
    $
    271
    
    
    $
    260
    
    
    $
    319
    
    
    
    4
    %
    
    
    -18
    %Annual sales per average store (thousands) (3)
    
    $
    1,147
    
    
    $
    1,121
    
    
    $
    1,302
    
    
    
    2
    %
    
    
    -14
    %Average store size at year end (square feet)
    
    
    4,138
    
    
    
    4,134
    
    
    
    4,100
    
    
    
    
    %
    
    
    1
    %Total square feet at year end (thousands)
    
    
    2,495
    
    
    
    2,307
    
    
    
    2,091
    
    
    
    8
    %
    
    
    10
    %Number of stores:Beginning of year
    
    
    558
    
    
    
    510
    
    
    
    459Opened
    
    
    55
    
    
    
    54
    
    
    
    56Closed
    
    
    (10
    )
    
    
    (6
    )
    
    
    (5
    )End of year
    
    
    603
    
    
    
    558
    
    
    
    510Stores remodeled
    
    
    20
    
    
    
    4
    
    
    
    9Number of mishmash stores
    
    
    
    
    
    
    
    
    
    
    12Number of Justice stores
    
    
    35
    
    
    
    5
    
    
    
    
   (1)
    
    A store is included in our comparable store sales calculation once it has completed 52 weeks
of operation. Further, stores that have changed more than 20% in gross square feet are
treated as new stores for purposes of this calculation.(2)
    
    Annual sales per average gross square foot is the result of dividing net sales for the fiscal
year by average gross square feet, which reflects the impact of opening and closing stores
throughout the year.(3)
    
    Annual sales per average store is the result of dividing net sales for the fiscal year by
average store count, which reflects the impact of opening and closing stores throughout the
year. 17




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##### Table of Contents



Analysis of Continuing Operations Net Sales Fiscal 2004 Net sales increased 13% to $675.8 million in fiscal 2004 from $598.7 million for 2003. The increase
was the result of a 4% same-store sales growth fueled by solid back-to-school and holiday
merchandise and the addition of new Limited Too and Justice stores. In 2004, we made great efforts to improve our merchandise and correct the fashion missteps from
2003. From a merchandising standpoint, the non-apparel portion of the business, introduced in the
prior year as the Fun Zone, continued to post strong sales increases and ended 2004 with 29%
sales growth over prior year results. This is primarily due to the popularity of the lifestyle and
accessory items offered therein. Looking at the apparel side of the business, the better
performing categories included girls skirts and skorts, dresses, sweaters, and ready-to-wear
including jackets and outerwear. Under-performing categories included cut & sewn casual tops,
casual bottoms, and active bottoms. Also disappointing was the performance of the third party
branded apparel and accessories, a merchandising test that has been phased out to better utilize
capital, as well as floor space, for higher-margin Limited Too merchandise. For Spring 2005, the apparel assortment will focus on two main fashion themes: Pretty, with
embellished tops and tiered skirts, and Preppie, featuring terry tracksuits. Additionally, tweens
will also see compelling presentations in denim and western shirts. We will also continue to
expand the Fun Zone concept, which highlights non-apparel items such as accessories, jewelry, room
décor, electronics, music, candy, and personal care products. Fiscal 2003 Net sales for 2003 decreased 7% to $598.7 million from $640.3 million for 2002. The decrease was
primarily a result of a 13% decline in comparable store sales, which was partially offset by the
net addition of 43 Limited Too stores. Within merchandise categories, virtually all of our apparel
categories experienced average store sales decreases, however, the non-apparel portion of the
business performed well as accessories, lifestyles, innerwear and athletic footwear continued to
perform well. The introduction of the Fun Zone area within the stores was a major factor in the
improvement of the non-apparel sales performance. Gross Income Fiscal 2004 Gross income for fiscal 2004 increased $41.3 million or 230 basis points, to 35.8% as a percentage
of net sales, over fiscal 2003. Markdown rates were greatly reduced from 2003 resulting in a 250
basis point increase in the gross income rate. Although buying and occupancy expenses, including
catazine production, increased $11.3 million, or 7.3%, over 2003, we were able to drive sales
growth of nearly 13%. This leveraging resulted in an additional 130 basis point improvement. (We
mailed approximately 23.3 million catazines in fiscal 2004, approximately 10 million fewer than
fiscal 2003.) Our initial mark-up (IMU) rate decreased 140 basis points from 2003 due to the
addition of the Justice concept and a shift in Limited Too mix away from apparel and into
accessories, which typically have a lower IMU rate. We are making concerted efforts to improve our
IMU rate 18




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##### Table of Contents



for 2005 in our Limited Too brand through increased cooperation with our vendors and enhanced
internal sourcing. Fiscal 2003 The gross income rate, expressed as a percentage of net sales, decreased to 33.5% in fiscal 2003
from 37.2% for 2002. The rate decrease was due to higher markdowns to clear slow-moving Spring and
Back-to-School merchandise resulting in a 180 basis point decline. The rate declined an additional
300 basis points due to the reduced coverage of our fixed buying and occupancy costs, such as rent
and depreciation, as a result of the negative comparable store sales. A further 30 basis point
decrease in gross income was due to increased catazine costs. (We mailed approximately 33.5
million catazines in fiscal 2003, approximately 2 million more than fiscal 2002). These declines
were partially offset by a 40 basis point improvement in buying payroll costs due to lower
incentive compensation costs, a 70 basis point improvement from increased partner revenue received
for advertising space allotted to third parties in our catazine, and a 30 basis point improvement
in IMU driven by our increased direct sourcing. General, Administrative and Store Operating Expenses Fiscal 2004 General, administrative and store operating expenses, as a percentage of net sales, increased
slightly to 26.3% in 2004 from 25.8% in 2003. This 50 basis point increase was driven by a $7.1
million increase in home office expenses in 2004, a slight increase in marketing expenses, and a
$13.3 million increase in store expenses. Home office expenses increased $7.1 million, or 50 basis points, due to a number of factors.
First, incentive compensation expense was $2.6 million higher in 2004 than 2003, due to the
financial performance of the business. Legal and professional fees increased $0.9 million while
compliance costs associated with the Sarbanes-Oxley Act of 2002 increased $1.3 million. Lastly,
payroll and relocation costs increased by $2.2 million due to increased headcount and other
personnel changes. Marketing expenses increased $1.2 million in 2004, however, as a percentage of net sales, remained
constant over 2003. The increase in expenses is primarily due to a television marketing campaign
in 2004, which did not occur in 2003. Although store-operating expenses increased $13.3 million over 2003 due largely to store payroll
increases related to 30 new Justice stores and 25 new Limited Too stores, as a percentage of net
sales they improved 10 basis points. Our distribution center costs continued to decline in 2004,
improving $0.3 million, or 20 basis points as a percentage of net sales. Other expenses in 2004
were unfavorable by 20 basis points from 2003 primarily due to a favorable brand litigation
settlement, which reduced expenses in 2003. Fiscal 2003 General, administrative and store operating expenses, expressed as a percentage of net sales,
increased to 25.8% in fiscal 2003 from 24.7% for 2002 despite a $3.7 million decline in dollars
from 2002. The 110 basis point increase was primarily caused by our inability to leverage certain
store operating expenses due to significantly negative comparable store sales performance. In
dollars, the decrease in expenses was primarily attributable to lower home office expenses, as well
as a decrease in distribution center costs. 19




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##### Table of Contents



Home office expenses decreased by $2.1 million due to several drivers. First, incentive
compensation expense was lower by $1.7 million due to our disappointing financial performance.
Second, the settlement of brand protection litigation and the elimination of one-time expenses
incurred in fiscal 2002, including tax consulting and start-up costs associated with the relocation
of our home office facility, resulted in $1.8 million in improvement. These decreases were
partially offset by $1.4 million in increased payroll expenses for home office personnel as a
result of annual increases and increased headcount. Distribution center costs have continued to decline since we opened our new facility in early
fiscal 2002. The expense improvement of $1.6 million was primarily a result of productivity gains,
as measured in core units processed per labor hour. Interest Income (Expense), net Fiscal 2004 Interest income, net, amounted to $1.3 million for fiscal 2004 versus $0.1 million for 2003.
Interest income is earned on investments in money market securities and short-term, highly rated
and insured municipal bonds. The increase in 2004 is primarily related to higher investment
balances as well as favorable interest rates driven by our Board of Directors approval of a new
investment policy that allowed the purchase of investments with maturities greater than ninety
days. Refer to Note 4 for a more complete analysis. Gross interest income was $2.3 million and
$1.6 million for fiscal years 2004 and 2003, respectively. Interest expense, which represents
facility and letters of credit fees, as well as net interest expense related to our nonqualified
benefit plans, was $1.0 million and $1.5 million for fiscal years 2004 and 2003, respectively. Fiscal 2003 Interest income, net of interest expense, was $0.1 million in fiscal 2003 compared to a net
interest expense of $0.5 million in 2002. Interest expense was for the long-term portion of
borrowings under our credit facility, while interest income was earned on the short-term investment
of cash balances. Interest expense was $1.5 million and $2.3 million for fiscal years 2003 and
2002, respectively. Interest income was $1.6 million and $1.8 million for fiscal years 2003 and
2002, respectively. The decrease in interest income was due to lower interest rates available on
short-term securities. Provision for Income Taxes Fiscal 2004 The total provision for income taxes increased to $24.1 million in fiscal 2004 from $13.6 million
for 2003. The income tax provision rate decreased to 36.7% in fiscal 2004 from 37.4% in 2003. The
rate decrease was primarily attributable to investments in certain short-term, tax-free municipal
bonds, the expansion of our direct sourcing initiatives, and the settlement of state tax
examinations. The 2003 provision included a $3.8 million tax benefit associated with the loss on
mishmash operations and impairment charges. 20




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##### Table of Contents



Fiscal 2003 Income tax expense amounted to $13.6 million for 2003 compared to $29.7 million for 2002. The
income tax provision rate decreased to 37.4% in 2003 from 38.3% in 2002 as a result of realigning
our corporate operations, including our direct sourcing initiatives and investment in certain
short-term, tax-free municipal bonds. The 2003 provision included a $3.8 million tax benefit
associated with the loss on mishmash operations and impairment charges, while the 2002 provision
included a $0.8 million tax benefit associated the operational loss on mishmash. Discontinued Operations Fiscal 2003 On May 28, 2003, we announced that we were ending the rollout of our mishmash retail concept in
favor of redirecting our resources to the development of a new concept, Justice, focused on
value-priced sportswear and accessories for tween girls, ages 7 to 14. All 18 of the mishmash
stores open at the time of the announcement were closed by the end of November 2003. Loss from discontinued operations increased to $6.0 million in fiscal 2003 from $1.2 million in
2002. The fiscal 2003 increase was primarily due to $4.6 million in charges, net of tax, for lease
termination costs and asset impairment charges. Financial Condition Our balance sheet remains strong due to positive cash flows from operations. We were able to
finance all capital expenditures with working capital generated from operations and ended the year
with approximately $26 million in cash and nearly $159 million in short-term investments. A more
detailed discussion of liquidity, capital resources and future capital expenditures follows. Liquidity and Capital Resources Cash generated from operating activities is the primary resource to support operations, including
projected growth, seasonal working capital requirements and capital expenditures. In an effort to
increase shareholder value, we also use our capital to repurchase our common stock as part of an
ongoing share repurchase program as authorized by our Board of Directors in 2004. Although we have
experienced solid growth in working capital over the past three years and expect that we will
continue to see improvement in our overall liquidity, we recognize that the specialty retail
industry can be highly volatile, where fashion missteps can quickly impact the ability to generate
operating cash. 21




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##### Table of Contents



The table below summarizes our working capital position and capitalization (in thousands): January 29,
    
    
    January 31,
    
    
    February 1,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)Net cash provided by operating activities
    
    $
    77,306
    
    
    $
    58,358
    
    
    $
    72,038Working capital, excluding restricted assets of
$1.0 million and $20.8 million at January 29, 2005
and January 31, 2004
    
    
    180,101
    
    
    
    114,808
    
    
    
    99,199Capitalization:Long-term debt
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    322,524
    
    
    
    276,565
    
    
    
    247,889Total capitalization
    
    $
    322,524
    
    
    $
    276,565
    
    
    $
    247,889Additional amounts available under the
credit facility
    
    $
    78,566
    
    
    $
    100,000
    
    
    $
    50,000
 In 2004, we collateralized our outstanding letters of credit using our credit facility,
thereby decreasing the amount available for borrowings. In 2003 and 2002, we collateralized our
outstanding letters of credit with restricted assets, thus allowing us to borrow the maximum amount
available under the facility. Operating Activities Net cash provided by operating activities was $77.3 million, $58.4 million and $72.0 million for
fiscal years 2004, 2003, and 2002, respectively. The increase in cash provided by operating activities in 2004 was primarily driven by an 80% rise
in net income, an increase in tax liabilities, and the timing of year-end rent payments. These
increases in operating cash were partially offset by an increased use of cash to purchase inventory
and the reduction of the amount of cash received from landlords in the form of tenant allowances. Income taxes generated $10.0 million more cash in 2004 than 2003 due to the receipt of an income
tax receivable in 2004 as well as the timing of our income tax payments. In 2004, as in 2003, we pre-paid our February rents prior to the end of our fiscal year to ensure
the timely arrival of our payments. Thus, there was little relative change in our pre-paid balance
between the years. In 2002, however, we did not pre-pay our year-end rents, causing the cash
associated with rent payments in 2003 to include both year-end 2002 as well as year-end 2003
amounts. This resulted in approximately $7.0 million more cash used in 2003 over 2004. The
remaining uses of cash from 2003 are associated with a $2.0 million increase in the tenant
allowance receivable from 2002 to 2003, and a $1.0 million reduction in that same balance from 2003
to 2004. Inventory levels at year-end 2004 rose 7% over the year-end 2003 levels. This was due primarily to
increased inventory on hand, driven by the 8.1% increase in store count resulting from the growth
of the Justice concept. Overall, at year-end 2004, inventory on a per store basis was down
slightly from 2003. The additional factors 22




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##### Table of Contents



that partially offset our increase in operating cash flow over 2003 were the relative slow down in
the growth of our tenant allowance liability driven by fewer receipts from landlords in 2004 than
2003. The decrease in cash provided by operating activities in 2003 from 2002 was primarily driven by a
42% decrease in net income from continuing operations which excludes the non-cash related mishmash
impairment charge. This was partially offset by reduced cash used to support inventory levels at
the end of 2003 versus 2002. Inventory levels were much lower due to the early receipt of spring
2003 goods. The decrease in operating cash was further exacerbated as a result of the timing of
rent payments in the respective years. Investing Activities Net cash used for investing activities amounted to $59.3 million, $98.9 million and $104.8 million
for fiscal years 2004, 2003, and 2002, respectively. Capital expenditures decreased to $23.8 million in fiscal 2004 from $32.8 million in fiscal 2003.
The decrease was primarily due to the timing of payments around the opening of Justice stores in
early fiscal 2004. Additionally, due to the amendments made to our credit facility, our restricted
asset requirement was eliminated, causing us to reduce previously restricted balances. Also in
2004, our net purchases of marketable securities and investments increased by approximately $13.4
million over 2003. Our cash used for funding of our non-qualified benefit plan decreased $3.2
million in 2004 due to life insurance purchased in 2003 but not in 2004. The decrease in cash used for investing activities in 2003 was due to a decrease in capital
expenditures, the reduced funding of our nonqualified benefit plans, and reduced net purchases of
investments. Those reductions in the use of cash were partially offset by a $20.8 million increase
in the required restricted cash balance. Capital expenditures in 2002 include $22.1 million of
expenditures for the construction of our new home office and distribution center, however, 2003
capital expenditures relate primarily to the construction of new Limited Too and Justice stores,
and the remodeling of existing stores. Financing Activities Net cash provided by financing activities amounted to $3.2 million, $9.3 million and $15.7 million
for fiscal years 2004, 2003, and 2002, respectively. The financing activities fluctuation in fiscal 2004 was primarily related to the purchase of
treasury stock during the year. During the fourth quarter, 136,000 shares were repurchased as
authorized by our Board of Directors. The remaining fluctuation in cash was primarily related to
stock option activity, offset by reductions in the change in our cash overdraft balance. Financing activities in fiscal 2003 generated approximately $6.5 million less cash than in 2002.
This was due to the net proceeds from a secondary issuance of common stock in 2002, a $50.0 million
loan pay down in 2002 and the change in the cash overdraft balance. Future Capital Expenditures We anticipate spending between $48 million and $52 million in fiscal 2005 for capital expenditures
primarily for new stores, remodeling or expansion of existing stores and upgrades to our
information technology systems. 23




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##### Table of Contents



We intend to add 300,000 to 330,000 square feet in 2005, primarily through the growth of Justice,
which will represent an 11% to 13% increase over year-end 2004. Although we expect to open
approximately 15 new Limited Too stores, we do not expect a significant increase in our total
square footage from this activity. Additionally, in March 2005, in conjunction with our increased
internal sourcing activities, we purchased office space and two parking spaces at a commercial
building in Hong Kong for $1.7 million. We estimate that the average cost for leasehold improvements, furniture and fixtures for Limited
Too stores to be opened in 2005 will be between $450,000 and $465,000 per store before any tenant
allowances we may receive. Average pre-opening costs per store, which will be expensed as incurred,
are expected to approximate $28,000 while inventory purchases are expected to average approximately
$95,000 per store. We anticipate remodeling between 35 and 45 Limited Too stores in fiscal 2005,
the cost of which is comparable to that of opening a new store. We plan to open 55 to 65 new Justice stores in fiscal 2005, and anticipate the cost for leasehold
improvements, furniture and fixtures for those stores to be between $260,000 and $270,000.
Pre-opening costs for Justice are similar to those of Limited Too, however inventory purchases for
Justice are slightly lower than Limited Too, averaging approximately $60,000 per store. We expect that cash on hand and generated from operating activities will fund substantially all
capital expenditures in fiscal 2005. Transitional Services and Separation Agreements In connection with the August 1999 spin-off, we entered into several Transitional Services and
Separation Agreements (the Transitional Services Agreements) with The Limited regarding certain
aspects of our ongoing relationship. We believe that the terms of these agreements are similar to
terms achievable through arms length negotiations with third parties. A summary of some of the remaining Transitional Services Agreements follows: Trademark and Service Mark Licensing Agreement At the time of the spin-off, we entered into an exclusive trademark and service mark licensing
agreement (the Trademark Agreement) with The Limited that allows us to operate under the Limited
Too brand name. The agreement had an initial term of five years after the spin-off, renewable
annually at our option. All licenses granted under the agreement will be granted free of charge. In
return, we are required to provide The Limited with the right to inspect our stores and
distribution facilities and an ability to review and approve our advertising. Under the Trademark
Agreement, we are only able to use the brand name Limited Too in connection with any business in
which we sell to our current target customer group or to infants and toddlers. In addition, we may
not use the Limited Too brand name or its derivative that competes with merchandise currently
offered by The Limited or its subsidiaries, unless it is for our current target customer group.
The Limited has the right to terminate the Trademark Agreement under certain limited conditions. Store Leases Agreement At January 29, 2005, 54 of our stores were adjacent to Limited Brands stores. In addition, many
of these aforementioned stores are part of 82 stores that are subject to sublease agreements (the
Store Leases 24




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##### Table of Contents



Agreement) with Limited Brands for stores where we occupy space that Limited Brands leases from
third-party landlords (the Direct Limited Leases). Under the terms of the Store Leases
Agreement, we are responsible for our proportionate share, based on the size of our selling space,
of all costs (principally rent, excess rent, if applicable, maintenance and utilities). All termination rights and other remedies under the Direct Limited Leases will remain with Limited
Brands. If Limited Brands decides to terminate any of the Direct Limited Leases early, Limited
Brands must first offer to assign such lease to us. If, as a result of such early termination by
Limited Brands, we are forced to remodel our store or relocate within the mall, Limited Brands will
compensate us with a combination of cash payments and loans. Since the end of 2001, Limited Brands
has compensated us $280,000 relating to early terminations for 3 stores. The table below lays out
the general guidelines for the compensation and loan structure with Limited Brands. Cash
    
    
    LoanRemaining Lease Term
    
    Payment
    
    
    AmountLess than one year
    
    $
    0
    
    
    $
    100,000One to two years
    
    
    50,000
    
    
    
    100,000Three to four years
    
    
    100,000
    
    
    
    100,000Greater than four years
    
    
    100,000
    
    
    
    150,000
 Approximately 10 of the Direct Limited Leases are scheduled to expire during 2008 or later.
We may not assign or sublet our interest in those premises, except to an affiliate, without Limited
Brands consent. If Limited Brands intends to sublet or assign its portion of the leased premises
under any of the Direct Limited Leases to any non-affiliate, it will be required to give us 60 days
notice, and we will be allowed to terminate our interest on that basis. Approximately 37 of our direct leases are guaranteed by Limited Brands. Pursuant to the Store
Leases Agreement, we are required to make additional payments to Limited Brands as consideration
for the guarantees that Limited Brands provides under such leases along with amounts for adjacent
stores based on those locations achieving certain performance targets. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements, such as variable interests in unconsolidated entities, as
of January 29, 2005. Contractual Obligations and Commercial Commitments We have entered into agreements that create contractual obligations and commercial commitments.
These obligations and commitments may have an impact on future liquidity and the availability of
capital resources. The following tables reflect these obligations and commitments as of January
29, 2005 (in thousands): 25




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##### Table of Contents



Contractual Obligations: Payments Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating lease obligations (1)
    
    $
    326,456
    
    
    $
    59,777
    
    
    $
    100,567
    
    
    $
    77,654
    
    
    $
    88,458Purchase obligations (2)
    
    
    64,983
    
    
    
    64,983
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    391,439
    
    
    $
    124,760
    
    
    $
    100,567
    
    
    $
    77,654
    
    
    $
    88,458
   (1)
    
    Primarily consists of future minimum lease payments under the Companys store operating leases.(2)
    
    Represents outstanding purchase orders for merchandise and store construction. Commercial Commitments: Commitments by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsOutstanding letters of credit (1)
    
    $
    20,911
    
    
    $
    20,911
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Standby letters of credit
    
    
    523
    
    
    
    523
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    21,434
    
    
    $
    21,434
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
   (1)
    
    Consists of outstanding letter of credit commitments for the purchase of
merchandise. Credit Facility On April 29, 2003, we entered into a credit facility (the Credit Facility) with a syndicate of
banks. The Facility consists of a $100 million unsecured revolving loan commitment. The Facilitys
interest rates and fees reflect matrix pricing. At our option, interest rates are based on the
London Inter-bank Offered Rate or Prime plus a spread as defined in the agreement. Under the terms
of the Credit Facility, we are required to comply with certain covenants, including financial
ratios such as leverage, coverage and tangible net worth. The Facility limits us from incurring
certain additional indebtedness, restricts substantial asset sales and provides for a springing
lien against certain assets in the event of default. On September 16, 2003, the Credit Facility was amended, and became retroactively effective as of
July 31, 2003. In exchange for the modification of certain financial covenants we agreed to
maintain a pledged investment account equal to 110% of any outstanding letters of credit or any
revolving commitment usage. On October 29, 2004, we amended two provisions of the Credit Facility. First, in exchange for
maintaining certain financial covenants, the pledge of an investment account has been eliminated.
In the event of a default, we now have the option of providing an investment account equal to 110%
of any outstanding letters of credit and any revolving commitment usage in lieu of the springing
lien against certain assets. The second provision amended the limitations on dividends and
restricted payments, which can include stock repurchases. The limits are eliminated as long as we
maintain an agreed upon cash and short-term investment balance. In the event the actual cash and
short-term investment balance for a previous 90-day period falls below $75 million, dividends 26




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##### Table of Contents



and restricted payments will be limited to 50% of prior year net earnings. As of January 29, 2005,
we are in compliance with all applicable terms of the amended Facility. Impact of Inflation Our results of operations and financial condition are presented based upon historical cost. While
it is difficult to accurately measure the impact of inflation due to the imprecise nature of the
estimates required, we believe that the effects of inflation, if any, on our results of operations
and financial condition have been minor. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that impact
the amounts reported in our consolidated financial statements and related notes. On an on-going
basis, management evaluates its estimates and judgments, including those related to inventories,
long-lived assets and sales returns. Management bases its estimates and judgments on historical
experience and various other factors that are believed to be reasonable under the circumstances.
Actual results may differ materially from managements estimates. Management believes the
following estimates and assumptions are most significant to reporting our results of operations and
financial position. Revenue Recognition Retail sales are recorded when the customer takes possession of merchandise. Markdowns associated
with our Too Bucks and bonus card programs are recognized upon redemption in conjunction with a
qualifying purchase. Direct sales, through our catazine and website, are recorded upon shipment of
merchandise to the customer, which approximates the amount of revenue that would be recognized if
sales were recorded upon receipt by the customer. A reserve is provided for projected merchandise
returns based on prior experience. Operating Leases Rent expense for our operating leases, which generally have escalating rents over the term of the
lease, is recorded on a straight-line basis over the initial lease term and those renewal periods
that are reasonably assured. The initial lease term includes the build-out period of our leases,
where no rent payments are typically due under the terms of the lease. The difference between rent
expense and rent paid is recorded as deferred credits from landlords in the Consolidated Balance
Sheets. Tenant Allowances Tenant allowances received from landlords, typically in the form of one time cash payments or
reduced rent charges for a specific length of time, are treated as lease incentives and are
amortized as a reduction of rent expense over the life of the initial lease term, including the
build-out period, and any renewal periods that are reasonably assured. The balance is recorded as
deferred credits from landlords in the Consolidated Balance Sheets. 27




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Cash Equivalents Short-term investments with original maturities of three months or less are classified as cash
equivalents. We also consider credit card receivables as cash equivalents due to our policy of
liquidating those balances daily, so that ordinarily we do not have more than 4 days of outstanding
collections. Outstanding checks classified in Accounts Payable and in Accrued Expenses on the
Consolidated Balance Sheet totaled $13.7 million and $13.2 million as of January 29, 2005 and
January 31, 2004, respectively. Investments Investments in debt and auction rate securities are classified as available-for-sale and reported
at cost which approximates fair market value due to their variable interest rates, which typically
reset every 7 to 35 days. We classify these securities as current assets despite the long-term
nature of their stated contractual maturities because we have the ability to quickly liquidate them
to support current operations. Certain securities with long-term contractual maturities are classified as held -to-maturity and
are accounted for at amortized cost with any premium or discount amortized over the holding period.
We have classified these securities as held-to-maturity based on our intent and ability to hold
them to maturity as determined at the time of purchase. Investments are subject to the credit risk of the issuer and adverse developments in that credit
risk could restrict our ability to liquidate securities at their maturity or earlier. Inventories Inventories are valued at the lower of average cost or market, on a first-in, first-out basis,
utilizing the retail method. Under the retail method, the valuation of inventories at cost and the
resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of
inventories. The use of the retail method will result in valuing inventories at the lower of cost
or market when markdowns are currently taken as a reduction of the retail value and cost of
inventories. Inherent in the retail method are certain management judgments and estimates
including, among others, future sales, markdowns and shrinkage, which significantly impact the
ending inventory valuation at cost as well as the resulting gross margins. We calculate inventory
costs on an individual item basis to ensure a high degree of accuracy in arriving at the cost. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is
computed on a straight-line basis, using service lives for store assets ranging principally from 5
to 10 years for leasehold improvements and 3 to 10 years for other property and equipment.
Depreciation for fixed assets at the home office and distribution center are calculated using
services lives of 40 years for buildings, 7 to 10 years for furniture and fixtures and 5 to 7 years
for computers and other office equipment. The cost of assets sold or retired and the related
accumulated depreciation are removed from the accounts, with any resulting gain or loss included in
net income. Interest costs associated with the construction of certain long-term projects are
capitalized. Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments that extend service lives are capitalized. Assets are reviewed on an annual basis for
impairment, and based on managements judgment, are written down to the estimated fair value based
on anticipated future cash flows. 28




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Income Taxes Income taxes are calculated in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes, which requires the use of the liability method. Deferred
tax assets and liabilities are recognized based on the difference between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. Inherent in the
measurement of deferred balances are certain judgments and interpretations of enacted tax laws and
published guidance with respect to applicability to our operations. No valuation allowance has
been provided for deferred tax assets because management believes that it is reasonably certain
that the full amount of the net deferred tax assets will be realized in the future. Provision is
made for Federal income taxes which may be payable on foreign subsidiary earnings to the extent
that we anticipate they will be remitted. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Board
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, in January 2003. FIN
No. 46 establishes accounting and disclosure requirements for ownership interests in entities that
have certain financial or ownership characteristics (sometimes known as special purpose entities).
Subsequent to issuing FIN No. 46, the FASB continued to propose modifications and issue FASB Staff
Positions (FSPs) that changed and clarified FIN No. 46. These modifications and FSPs were
subsequently incorporated into FIN No. 46 (revised) (FIN No. 46R), which was issued in November
2003 and replaces FIN No. 46. Among other things, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to certain conditions, b) states the provisions of FIN No.
46R are not required to be applied if a company is unable to obtain the necessary information, c)
includes new definitions and examples of what variable interests are, d) clarifies and changes the
definition of a variable interest entity and e) clarifies and changes the definition and treatment
of de facto agents. FIN No. 46R is effective for companies that have interests in variable
interest entities or potential variable interest entities for periods ending after December 15,
2003. Application of FIN No. 46R for all other types of entities is required for periods ending
after March 15, 2004. The adoption of FIN No. 46R did not have a significant impact on our results
of operations, cash flows or our financial position. We continually evaluate the potential impact
of FIN No. 46R on all business relationships. In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (Revised
2004), Share-Based Payment, (FAS123(R)). This Statement requires companies to expense the
estimated fair value of stock options and similar equity instruments issued to employees.
Currently, under the provisions of FAS 123, companies are required to calculate the estimated fair
value of these share-based payments and can elect to either include the estimated cost in earnings
or disclose the pro forma effect in the footnotes to their financial statements. We have chosen to
disclose the pro forma effect. The fair value concepts were not changed significantly in FAS
123(R); however, in adopting this standard, companies must choose among alternative valuation
models and amortization assumptions. Although we have not quantified the valuation and transition
method, the adoption of the provisions of FAS 123(R) could have a significant impact on reported
net income and earnings per share. As such, the adoption may result in amounts that differ from
the current pro forma disclosures under FAS 123. Seasonality Historically, our operations have been seasonal, with a significant amount of net sales and net
income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end
holiday selling season and, to a 29




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##### Table of Contents



lesser extent, the third quarter, reflecting increased demand during the back-to-school selling
season. During fiscal 2004, the third and fourth fiscal quarters accounted for approximately 56.5%
of our sales. As a result of this seasonality, any factors negatively affecting us during the
third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic
conditions, could have a material adverse effect on our financial condition and results of
operations for the entire year. Our quarterly results of operations also may fluctuate based upon
such factors as the timing of certain holiday seasons, the number and timing of new store openings,
the amount of net sales contributed by new and existing stores, the timing and level of markdowns,
store closings, refurbishments and relocations, competitive factors, weather and general economic
conditions. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 We desire to take advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (the PSLRA). This Annual Report on Form 10-K contains various forwardlooking
statements within the meaning of the PSLRA and other applicable securities laws. Such statements
can be identified by the use of the forward-looking words anticipate, estimate, project,
believe, intend, expect, hope, risk, intend, could, pro forma potential or
similar words. These statements discuss future expectations, contain projections regarding future
developments, operations or financial conditions, or state other forward-looking information. These
forward-looking statements involve various important risks, uncertainties and other factors that
could cause our actual results for 2005 and beyond to differ materially from those expressed in the
forward-looking statements. The following factors, among others, could affect our future financial
performance and cause actual future results to differ materially from those expressed or implied in
any forward-looking statements included in this form 10-K:  
    Changes in consumer spending patterns, consumer preferences and overall economic conditions;
    Decline in the demand for our merchandise;
    The impact of competition and pricing;
    Effectiveness of our brand awareness and marketing programs;
    A significant change in the regulatory environment applicable to our business;
    Risks associated with our sourcing and logistics functions;
    Changes in existing or potential trade restrictions, duties, tariffs or quotas;
    Availability of suitable store locations at appropriate terms;
    Ability to develop new merchandise;
    Ability to hire and train associates;
    The potential impact of health concerns relating to severe infectious
diseases, particularly on manufacturing operations of our vendors in
Asia and elsewhere;
    Acts of terrorism in the U.S. or worldwide; and
    Other risks that may be described in other reports and filings we make
with the Securities and Exchange
Commission. 30




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##### Table of Contents



Future economic and industry trends that could potentially impact revenue and profitability are
difficult to predict. Therefore, there can be no assurance that the forward-looking statements
included in the 10-K will prove to be accurate. The inclusion of forward-looking statements should
not be regarded a representation by us, or any other person, that our objectives will be achieved.
The forward-looking statements made herein are based on information presently available to us, as
the management of the company. We assume no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear that any projected
results expressed or implied therein will not be realized. 
 Item 7A. Quantitative And Qualitative Disclosures About Market Risk To the extent we borrow under our Credit Facility, we will be exposed to market risk related to
changes in interest rates. At January 29, 2005, no borrowings were outstanding under the Credit
Facility. Additionally, we purchase investments with original maturities of 90 days or less. We
also hold investments with original maturities between 91 days but less than two years. These
financial instruments bear interest at fixed rates and are subject to interest rate risk should
interest rates fluctuate. We do not enter into financial instruments for trading purposes. 31




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Item 8. Financial Statements And Supplementary Data. TOO, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net sales
    
    $
    675,834
    
    
    $
    598,681
    
    
    $
    640,320Costs of goods sold, buying and
occupancy costs
    
    
    433,947
    
    
    
    398,055
    
    
    
    402,403Gross income
    
    
    241,887
    
    
    
    200,626
    
    
    
    237,917General, administrative and store
operating expenses
    
    
    177,508
    
    
    
    154,275
    
    
    
    157,991Operating income
    
    
    64,379
    
    
    
    46,351
    
    
    
    79,926Interest income (expense), net
    
    
    1,307
    
    
    
    128
    
    
    
    (517
    )Income from continuing operations
before income taxes
    
    
    65,686
    
    
    
    46,479
    
    
    
    79,409Provision for income taxes
    
    
    24,097
    
    
    
    17,365
    
    
    
    30,464Income from continuing operations
    
    
    41,589
    
    
    
    29,114
    
    
    
    48,945Discontinued operations:Loss from operations of mishmash, net of tax
    
    
    
    
    
    
    1,391
    
    
    
    1,186Loss on mishmash store closings and impairment
charges, net of tax
    
    
    
    
    
    
    4,589
    
    
    
    Loss on discontinued operations
    
    
    
    
    
    
    5,980
    
    
    
    1,186Net income
    
    $
    41,589
    
    
    $
    23,134
    
    
    $
    47,759Income (loss) per share  basic:Continuing operations
    
    $
    1.21
    
    
    $
    0.85
    
    
    $
    1.47Discontinued operations
    
    
    
    
    
    
    (0.17
    )
    
    
    (0.03
    )Net income per basic share
    
    $
    1.21
    
    
    $
    0.68
    
    
    $
    1.44Income (loss) per share  diluted:Continuing operations
    
    $
    1.19
    
    
    $
    0.84
    
    
    $
    1.43Discontinued operations
    
    
    
    
    
    
    (0.17
    )
    
    
    (0.03
    )Net income per diluted share
    
    $
    1.19
    
    
    $
    0.67
    
    
    $
    1.40Weighted average common shares:Basic
    
    
    34,512
    
    
    
    34,260
    
    
    
    33,241Diluted
    
    
    34,955
    
    
    
    34,684
    
    
    
    34,181
 The accompanying notes are an integral part of these Consolidated Financial Statements. 32




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TOO, INC. 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 January 29,
    
    
    January 31,2005
    
    
    2004(Restated)ASSETSCurrent assets:Cash and equivalents
    
    $
    26,212
    
    
    $
    4,991Investments
    
    
    158,630
    
    
    
    110,895Restricted assets
    
    
    954
    
    
    
    20,846Receivables
    
    
    10,476
    
    
    
    9,164Income taxes receivable
    
    
    368
    
    
    
    5,542Inventories
    
    
    62,441
    
    
    
    58,299Store supplies
    
    
    13,464
    
    
    
    13,285Prepaid assets and other
    
    
    10,082
    
    
    
    8,845Total current assets
    
    
    282,627
    
    
    
    231,867Property and equipment, net
    
    
    180,449
    
    
    
    184,924Long-term investments
    
    
    6,776
    
    
    
    Deferred income taxes
    
    
    9,046
    
    
    
    10,028Other assets
    
    
    14,798
    
    
    
    14,434Total assets
    
    $
    493,696
    
    
    $
    441,253LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,431

    
    
    $
    36,556Accrued expenses
    
    
    47,582
    
    
    
    42,193Income taxes payable
    
    
    24,559
    
    
    
    17,464Total current liabilities
    
    
    101,572
    
    
    
    96,213Deferred credits from landlords and other
    
    
    69,600
    
    
    
    68,475Commitments and contingenciesSHAREHOLDERS EQUITYPreferred stock, 50 million shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value, 100 million shares authorized,
34.9 million and 34.4 million shares issued,
34.7 million and 34.4 million outstanding
at January 29, 2005 and January 31, 2004, respectively
    
    
    349
    
    
    
    344Treasury stock, at cost, 165,709 and 29,709 shares, respectively
    
    
    (4,391
    )
    
    
    (998
    )Paid in capital
    
    
    127,718
    
    
    
    119,960Retained earnings
    
    
    198,848
    
    
    
    157,259Total shareholders equity
    
    
    322,524
    
    
    
    276,565Total liabilities and shareholders equity
    
    $
    493,696
    
    
    $
    441,253
 The accompanying notes are an integral part of these Consolidated Financial Statements. 33




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##### Table of Contents



TOO, INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
 (in thousands)
 TotalCommon Shares
    
    
    Treasury
    
    
    Paid in
    
    
    Retained
    
    

ShareholdersShares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    EquityBalances, February 2, 2002, as
previously reported
    
    
    31,341
    
    
    $
    313
    
    
    
    
    
    
    $
    35,338
    
    
    $
    92,558
    
    
    $
    128,209Adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,192
    )
    
    
    (6,192
    )Balances, February 2, 2002 (Restated)
    
    
    31,341
    
    
    
    313
    
    
    
    
    
    
    
    35,338
    
    
    
    86,366
    
    
    
    122,017Net income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,759
    
    
    
    47,759Issuance of common stock under
follow-on offering
    
    
    2,400
    
    
    
    24
    
    
    
    
    
    
    
    73,370
    
    
    
    
    
    
    
    73,394Issuance of common stock under stock
option and restricted stock plans
    
    
    350
    
    
    
    4
    
    
    
    
    
    
    
    5,128
    
    
    
    
    
    
    
    5,132Purchases of treasury stock
    
    
    (30
    )
    
    
    
    
    
    
    (998
    )
    
    
    
    
    
    
    
    
    
    
    (998
    )Other, including tax benefit related to
issuance of stock under stock option
and restricted stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    
    
    
    
    585Balances, February 1, 2003 (Restated)
    
    
    34,061
    
    
    
    341
    
    
    
    (998
    )
    
    
    114,421
    
    
    
    134,125
    
    
    
    247,889Net income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,134
    
    
    
    23,134Issuance of common stock under stock
option and restricted stock plans
    
    
    301
    
    
    
    3
    
    
    
    
    
    
    
    4,759
    
    
    
    
    
    
    
    4,762Other, including tax benefit related to
issuance of stock under stock option
and restricted stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780
    
    
    
    
    
    
    
    780Balances, January 31, 2004 (Restated)
    
    
    34,362
    
    
    
    344
    
    
    
    (998
    )
    
    
    119,960
    
    
    
    157,259
    
    
    
    276,565Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,589
    
    
    
    41,589Issuance of common stock under stock
option and restricted stock plans
    
    
    475
    
    
    
    5
    
    
    
    
    
    
    
    6,664
    
    
    
    
    
    
    
    6,669Purchases of treasury stock
    
    
    (136
    )
    
    
    
    
    
    
    (3,393
    )
    
    
    
    
    
    
    
    
    
    
    (3,393
    )Other, including tax benefit related to
issuance of stock under stock option
and restricted stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,094
    
    
    
    
    
    
    
    1,094Balances, January 29, 2005
    

    
    34,701
    
    
    $
    349
    
    
    
    ($4,391
    )
    
    $
    127,718
    
    
    $
    198,848
    
    
    $
    322,524
 The accompanying notes are an integral part of these Consolidated Financial Statements. 34




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##### Table of Contents



TOO, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Cash flows from operating activities:Net income
    
    $
    41,589
    
    
    $
    23,134
    
    
    $
    47,759Impact of other operating activities on cash flows:Depreciation and amortization
    
    
    25,814
    
    
    
    24,723
    
    
    
    22,102Loss on impairment of assets
    
    
    
    
    
    
    6,121
    
    
    
    Changes in assets and liabilities:Inventories
    
    
    (4,142
    )
    
    
    3,106
    
    
    
    (16,868
    )Accounts payable and accrued expenses
    
    
    849
    
    
    
    (257
    )
    
    
    11,423Income taxes receivable
    
    
    14,345
    
    
    
    4,375
    
    
    
    (1,603
    )Other assets
    
    
    (2,274
    )
    
    
    (11,899
    )
    
    
    136Deferred credits from landlords and other liabilities
    
    
    1,125
    
    
    
    9,055
    
    
    
    9,089Net cash provided by operating activities
    
    
    77,306
    
    
    
    58,358
    
    
    
    72,038Investing activities:Capital expenditures
    
    
    (23,823
    )
    
    
    (32,826
    )
    
    
    (48,315
    )Funding of nonqualified benefit plans
    
    
    (818
    )
    
    
    (4,059
    )
    
    
    (9,436
    )Purchase of investments
    
    
    (492,891
    )
    
    
    (401,444
    )
    
    
    (404,273
    )Sale of investments
    
    
    438,380
    
    
    
    360,319
    
    
    
    357,228Restricted assets
    
    
    19,892
    
    
    
    (20,846
    )
    
    
    Net cash used for investing activities
    
    
    (59,260
    )
    
    
    (98,856
    )
    
    
    (104,796
    )Financing activities:Net proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    73,394Repayment of term loan
    
    
    
    
    
    
    
    
    
    
    (50,000
    )Purchases of treasury stock
    
    
    (3,393
    )
    
    
    
    
    
    
    (998
    )Change in cash overdraft
    
    
    437
    
    
    
    8,538
    
    
    
    (7,750
    )Stock options and other equity changes
    
    
    6,131
    
    
    
    717
    
    
    
    1,078Net cash provided by financing activities
    
    
    3,175
    
    
    
    9,255
    
    
    
    15,724Net increase (decrease) in cash and equivalents
    
    
    21,221
    
    
    
    (31,243
    )
    
    
    (17,034
    )Cash and equivalents, beginning of year
    
    
    4,991
    
    
    
    36,234
    
    
    
    53,268Cash and equivalents, end of year
    
    $
    26,212
    
    
    $
    4,991
    
    
    $
    36,234Supplemental disclosures of cash flow informationCash paid for income taxes
    
    $
    14,700
    
    
    $
    8,600
    
    
    $
    29,900Cash paid for interest
    
    
    900
    
    
    
    2,100
    
    
    
    1,600Supplemental disclosures of non-cash items:Accrual for point of sale operating lease buyout
    
    
    
    
    
    
    3,068
    
    
    
    Issuance of restricted stock
    
    $
    538
    
    
    $
    4,797
    
    
    $
    2,755
 The accompanying notes are an integral part of these Consolidated Financial Statements. 35




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary Of Significant Accounting Policies Nature of Business Too, Inc., (referred to herein as Too, the Company, we or us) is the operator of two
specialty retailing businesses, Limited Too and Justice. Limited Too sells apparel, underwear,
sleepwear, swimwear, footwear, lifestyle and personal care products for fashion-aware,
trend-setting young girls ages seven to fourteen years. Justice, launched by us in January 2004,
sells value-priced sportswear and accessories for girls ages seven to fourteen years. We were
established in 1987 and, prior to the August 1999 spin-off, were a wholly-owned subsidiary of The
Limited, Inc. (The Limited or Limited Brands). Effective August 23, 1999, The Limited
distributed to its shareholders of record as of August 11, 1999, all of its interest in Too on the
basis of one share of Too common stock for each seven shares of The Limited common stock (the
spin-off). The spin-off resulted in 30.7 million shares of Too common stock outstanding as of
August 23, 1999. As a result of the spin-off, we became an independent, separately traded, public
company. Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts of Too, Inc. and all
subsidiaries that are more than 50% owned and reflect our assets, liabilities, results of
operations and cash flows on a historical cost basis. These statements have been prepared in
accordance with accounting principles generally accepted in the United States of America. All
significant intercompany balances and transactions have been eliminated in consolidation. We have
one reportable segment that includes all of our products. Discontinued Operations On May 28, 2003, we announced the discontinuation of our mishmash retail concept in favor of
redirecting our resources to the Justice concept. See Note 13 for further information regarding
our discontinued operations. Also on that date, we announced we were ending our involvement in the
Goldmark joint venture. Fiscal Year Our fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the
financial statements and notes by the calendar year in which the fiscal year commences. The
results for fiscal years 2004, 2003 and 2002 represent the 52-week periods ended January 29, 2005,
January 31, 2004, and February 1, 2003. Cash Equivalents Short-term investments with original maturities of three months or less are classified as cash
equivalents. We also consider credit card receivables as cash equivalents due to our policy of
liquidating those balances daily, so that ordinarily we do not have more than 4 days of outstanding
collections. Outstanding checks classified in Accounts Payable and in Accrued Expenses on the
Consolidated Balance Sheet totaled $13.7 million and $13.2 million as of January 29, 2005 and
January 31, 2004, respectively. 36




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##### Table of Contents



Revision in the Classification of Certain Securities In connection with the preparation of this report, we concluded that it was appropriate to classify
our auction rate municipal bonds, variable rate municipal demand notes and preferred shares of
tax-exempt closed-end mutual funds as current investments. Previously, such investments had been
classified as cash and cash equivalents. Accordingly, we have revised our prior classification to
report these securities as current investments in our Consolidated Balance Sheet as of January 31,
2004. We have also made corresponding adjustments to our Consolidated Statement of Cash Flows for
the years ended January 31, 2004 and February 1, 2003, to reflect the gross purchases and sales of
these securities as investing activities rather than as a component of cash and cash equivalents.
This change in classification does not affect previously reported cash flows from operations or
from financing activities in our previously reported Consolidated Statements of Cash Flows, or our
previously reported Consolidated Statements of Operations for any period. As of January 31, 2004, before this revision in classification, $110.9 million of these current
investments were classified as cash and cash equivalents on our Consolidated Balance Sheet. For the fiscal years ended January 31, 2004 and February 1, 2003, before this revision in
classification, net cash used in investing activities related to these current investments of $41.1
million and $47.0 million, respectively, were included in cash and cash equivalents in our
Consolidated Statement of Cash Flows. Investments Current investments in our Consolidated Balance Sheets include the current portion of securities
classified as held-to-maturity and available-for-sale securities. Investments in variable rate
municipal demand notes, auction rate municipal bonds and preferred shares of tax-exempt closed-end
mutual funds are classified as available-for-sale and reported at fair market value, which
approximates cost. We classify these securities as available-for-sale as their intended use is to
support current operations. Certain securities with long-term contractual maturities are
classified as held-to-maturity and accounted for at amortized cost with any premium or discount
amortized over the holding period. We have classified these securities as held-to-maturity based
on our intent and ability to hold them to maturity as determined at the time of purchase. Restricted Assets Restricted assets represent investments held in an insurance trust for the benefit of our workers
compensation insurance carriers. In previous years, restricted assets also included the restriction
from withdrawal of cash that backed our outstanding letter of credit agreements, however, this
requirement was eliminated due to the second amendment of the credit facility. See Note 8, Credit
Facility. Inventories Inventories are principally valued at the lower of average cost or market, on a first-in, first-out
basis, utilizing the retail method. Store Supplies The initial inventory of supplies for new stores including, but not limited to, hangers, signage,
security tags, packaging and point-of-sale supplies is capitalized at the store opening date. In
lieu of amortizing the initial 37




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##### Table of Contents



balance, subsequent shipments are expensed, except for new merchandise presentation programs, which
are capitalized. Store supply balances are periodically reviewed and adjusted as appropriate for
changes in supply levels and costs. Catazine and Advertising Costs Catazine costs, principally catazine production and mailing costs, are expensed as buying and
occupancy expense when the catazine is mailed. All other advertising costs, including costs
associated with in-store photographs and television and direct mail campaigns, are expensed at the
time the promotion first appears in media or in the store as a component of general, administrative
and store operating expenses. Advertising costs amounted to $19.3 million, $21.7 million, and
$21.5 million for fiscal years 2004, 2003 and 2002, respectively. Advertising Barter Transactions We account for barter transactions in accordance with EITF 99-17, Accounting for Advertising
Barter Transactions. EITF 99-17 requires that barter transactions be recorded at the fair value
of advertising surrendered only if the fair value is determinable based on the entitys own
historical practice of receiving cash for similar advertising. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is
computed on a straight-line basis, using service lives for store assets ranging principally from
the shorter of the lease term or 5 to 10 years for leasehold improvements, and 3 to 10 years for
other property and equipment. Depreciation for fixed assets at the home office and distribution
center are calculated using services lives of 40 years for buildings, 7 to 10 years for furniture
and fixtures and 5 to 7 years for computers and other office equipment. The cost of assets sold or
retired and the related accumulated depreciation are removed from the accounts, with any resulting
gain or loss included in net income. Interest costs associated with the construction of certain
long-term projects are capitalized. Maintenance and repairs are charged to expense as incurred.
Major renewals and betterments that extend service lives are capitalized. Long-lived assets are reviewed on an annual basis for impairment, and based on managements
judgment, are written down to the estimated fair value based on anticipated future cash flows.
Store assets are reviewed using factors including, but not limited to, managements plans for
future operations, recent operating results and projected cash flows. Impaired assets are written
down to estimated fair value with fair value generally being determined based on discounted
expected future cash flows. Income Taxes We account for income taxes using the liability method. Under this method, deferred tax assets and
liabilities are recognized based on the difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect in the years when those temporary
differences are expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. 38




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##### Table of Contents



Revenue Recognition Store sales are recorded when the customer takes possession of merchandise. We classify associate
discounts as a reduction of revenue. Revenue from gift cards, gift certificates and store
merchandise credits is recognized at the time of redemption. A reserve is carried for projected
merchandise returns based on prior experience. Revenues also include licensing revenues and
certain sales of advertising space in our catazine, recognized when the catazine is mailed. Direct Sales, through our catazine and website, are recorded upon shipment of merchandise to the
customer, which approximates the amount of revenue that would be recognized if sales were recorded
upon receipt by the customer. Amounts relating to shipping and handling billed to customers in a
sale transaction are classified as revenue. Related shipping and handling costs are considered to
be the direct shipping charges associated with direct sales and are reflected in cost of goods
sold, buying and occupancy costs. Costs of Goods Sold, Buying and Occupancy Costs The following is a list of the major components of Costs of goods sold, buying and occupancy
costs in our Consolidated Statements of Operations:  §
    Cost of merchandise§
    Inventory shrink§
    Freight (includes outbound freight from the distribution center to our stores, as well
as store-to-store transfers)§
    Payroll and related costs associated with merchandise procurement§
    Store rents and other real estate costs (including store pre-opening rents expensed as incurred)§
    Store asset depreciation§
    Amortization of tenant allowances§
    Catazine production and mailing costs, net of partner revenue Operating Leases Rent expense for our operating leases, which generally have escalating rents over the term of the
lease, is recorded on a straight-line basis over the initial lease term and those renewal periods
that are reasonably assured. The initial lease term includes the build-out period of our leases,
where no rent payments are typically due under the terms of the lease. The difference between rent
expense and rent paid is recorded as Deferred credits from
landlords and otherand amounted to $10,826 and $11,018 at
January 29, 2005 and January 31, 2004, respectively. Tenant allowances received from landlords, typically in the form of one time cash payments or
reduced rent charges for a specific length of time, are treated as lease incentives and are
amortized as a reduction of rent expense over the life of the initial lease term, including the
build-out period, and any renewal periods that are reasonably assured. The balance is recorded as
Deferred credits from landlords and otherand amounted to $44,530
and $43,501 at January 29, 2005 and January 31, 2004, respectively. 39




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##### Table of Contents



General, Administrative and Store Operating Expenses The following is a list of the major components of General, administrative and store operating
expenses in our Consolidated Statements of Operations:  §
    Store payroll and expenses§
    Home office payroll and expenses (not related to merchandise procurement)§
    Marketing§
    Distribution center costs including receiving and warehouse costs Distribution center costs amounted to $7.6 million , $7.9 million, and $9.5 million for fiscal
years 2004, 2003 and 2002, respectively. Stock-Based Compensation We account for stock-based compensation under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No compensation expense for stock options has been recognized as all
options granted had an exercise price equal to the market value of the underlying common stock on
the date of the grant. We recognize compensation expense related to restricted stock awards on the
basis of the fair value of the stock at the date of grant, amortized over the vesting period. The following table illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, to stock-based employee compensation (in
millions, except per share amounts): 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net income, as reported
    
    $
    41.6
    
    
    $
    23.1
    
    
    $
    47.8Stock-based compensation expense recorded
under APB Opinion No. 25, net of tax
    
    
    0.8
    
    
    
    0.6
    
    
    
    1.5Stock-based compensation expense
determined under fair value based
method, net of tax
    
    
    (4.2
    )
    
    
    (4.5
    )
    
    
    (4.8
    )Pro forma net income
    
    $
    38.2
    
    
    $
    19.2
    
    
    $
    44.5Earnings per share:Basic  as reported
    
    $
    1.21
    
    
    $
    0.68
    
    
    $
    1.44Basic  pro forma
    
    $
    1.11
    
    
    $
    0.56
    
    
    $
    1.34Diluted  as reported
    
    $
    1.19
    
    
    $
    0.67
    
    
    $
    1.40Diluted  pro forma
    
    $
    1.09
    
    
    $
    0.55
    
    
    $
    1.30
 40




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The weighted average fair value per share of options granted is estimated using the
Black-Scholes option-pricing model and the following weighted average assumptions: 2004
    
    
    2003
    
    
    2002Expected life
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Forfeiture rate
    
    
    20
    %
    
    
    20
    %
    
    
    20
    %Dividend rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Price volatility
    
    
    50
    %
    
    
    52
    %
    
    
    50
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    2.9
    %
    
    
    3.5
    %
 The weighted average fair value of options granted was $7.89, $7.36 and $12.35 for fiscal
2004, 2003 and 2002, respectively. Stock Options and Restricted Shares We have stock option and restricted stock plans which provide incentive stock options,
non-qualified stock options and restricted stock to officers, directors and key associates. Stock
options are granted at the fair market value of our common shares on the date of grant and
generally have 10-year terms. Option grants generally vest ratably over the first four
anniversaries from the grant date. Shares reserved under the various plans amounted to 5.4 million
as of January 29, 2005, January 31, 2004 and February 1, 2003, respectively. In fiscal 2004, 87,000 restricted shares were granted with a total market value of $1.4 million.
Of the shares granted, 52,000 are subject to a performance requirement that has not been met. The
remaining 35,000 shares are subject to a performance requirement, which has been met and the share
price has been fixed. These shares will be distributed ratably over the four-year vesting period.
Of the original shares granted in fiscal 2004, approximately 16,000 have been cancelled as of
January 29, 2005. In fiscal 2003, 100,000 restricted shares were granted with a total market value at the grant date
of $1.6 million. This grant was subject to a performance requirement, which has been met, and the
shares will be issued ratably over a four-year vesting period. Of the shares granted in 2003,
50,000 have been cancelled as of January 29, 2005. In fiscal 2002, 100,000 restricted shares were
granted with a total market value at the grant date of $2.6 million. This grant was subject to a
performance requirement, which has been met, and the shares are to be issued ratably over a
five-year vesting period. Compensation expense related to restricted shares amounted to $1.3
million, $1.0 million, and $2.5 million for fiscal years 2004, 2003 and 2002, respectively. 41




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A summary of changes in our stock option plans for fiscal 2004, 2003 and 2002 is presented below: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average Option
    
    
    Number of
    
    
    Average Option
    
    
    Number of
    
    
    Average OptionShares
    
    
    Price/Share
    
    
    Shares
    
    
    Price/Share
    
    
    Shares
    
    
    Price/ShareOutstanding at beginning of year
    
    
    3,253,177
    
    
    $
    18
    
    
    
    2,950,167
    
    
    $
    19
    
    
    
    2,407,733
    
    
    $
    16Granted
    
    
    373,970
    
    
    $
    17
    
    
    
    446,000
    
    
    $
    15
    
    
    
    798,600
    
    
    $
    26Exercised
    
    
    (454,602
    )
    
    $
    13
    
    
    
    (61,140
    )
    
    $
    12
    
    
    
    (191,766
    )
    
    $
    12Canceled
    
    
    (405,123
    )
    
    $
    22
    
    
    
    (81,850
    )
    
    $
    22
    
    
    
    (64,400
    )
    
    $
    24Outstanding at end of year
    
    
    2,767,422
    
    
    $
    18
    
    
    
    3,253,177
    
    
    $
    18
    
    
    
    2,950,167
    
    
    $
    19Options exercisable at end of year
    
    
    1,724,630
    
    
    $
    18
    
    
    
    1,686,595
    
    
    $
    16
    
    
    
    961,623
    
    
    $
    16
 The following table summarizes information about stock options outstanding at January 29,
2005: Options OutstandingWeighted
    
    
    
    
    
    

    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    Number
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageExercise Price
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$5 - $10
    
    
    433,414
    
    
    
    2.3
    
    
    $
    7
    
    
    
    433,414
    
    
    $
    7$10 - $15
    
    
    235,648
    
    
    
    3.4
    
    
    $
    11
    
    
    
    225,398
    
    
    $
    11$15 - $20
    
    
    1,046,859
    
    
    
    7.4
    
    
    $
    16
    
    
    
    339,650
    
    
    $
    16$20 - $25
    
    
    69,225
    
    
    
    6.3
    
    
    $
    23
    
    
    
    55,750
    
    
    $
    23$25 - $35
    
    
    957,276
    
    
    
    6.4
    
    
    $
    27
    
    
    
    645,418
    
    
    $
    27$35 - $45
    
    
    25,000
    
    
    
    4.6
    
    
    $
    36
    
    
    
    25,000
    
    
    $
    362,767,422
    
    
    
    5.9
    
    
    $
    18
    
    
    
    1,724,630
    
    
    $
    18
 Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if stock options or restricted stock were converted into common stock
using the treasury stock method. 42




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##### Table of Contents



The following table shows the amounts used in the computation of basic and diluted earnings per
share (in thousands): 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Net income as reported
    
    $
    41,589
    
    
    $
    23,134
    
    
    $
    47,759Weighted average common shares  basic
    
    
    34,512
    
    
    
    34,260
    
    
    
    33,241Dilutive effect of stock options
and restricted stock
    
    
    443
    
    
    
    424
    
    
    
    940Weighted average common shares  diluted
    
    
    34,955
    
    
    
    34,684
    
    
    
    34,181
 Due to the options strike price exceeding the average market price of the common shares for
the reporting periods, options to purchase 1,056,800, 1,349,200 and 507,900 common shares were not
included in the computation of weighted average common shares  diluted for fiscal years 2004, 2003
and 2002, respectively. Use of Estimates in the Preparation of the Consolidated Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Because actual results may differ from those
estimates, we revise our estimates and assumptions as new information becomes available. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Board
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, in January 2003. FIN
No. 46 establishes accounting and disclosure requirements for ownership interests in entities that
have certain financial or ownership characteristics (sometimes known as special purpose entities).
Subsequent to issuing FIN No. 46, the FASB continued to propose modifications and issue FASB Staff
Positions (FSPs) that changed and clarified FIN No. 46. These modifications and FSPs were
subsequently incorporated into FIN No. 46 (revised) (FIN No. 46R), which was issued in November
2003 and replaces FIN No. 46. Among other things, FIN No. 46R a) essentially excludes operating
businesses from its provisions subject to certain conditions, b) states the provisions of FIN No.
46R are not required to be applied if a company is unable to obtain the necessary information, c)
includes new definitions and examples of what variable interests are, d) clarifies and changes the
definition of a variable interest entity and e) clarifies and changes the definition and treatment
of de facto agents. FIN No. 46R is effective for companies that have interests in variable
interest entities or potential variable interest entities for periods ending after December 15,
2003. Application of FIN No. 46R for all other types of entities is required for periods ending
after March 15, 2004. The adoption of FIN No. 46R did not have a significant impact on our results
of operations, cash flows or financial position. We continually evaluate the potential impact of
FIN No. 46R on all business relationships. In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (Revised
2004), Share-Based Payment, (FAS123(R)). This Statement requires companies to expense the
estimated fair 43




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value of stock options and similar equity instruments issued to employees.
Currently, companies are required to calculate the estimated fair value of these share-based
payments and can elect to either include the estimated cost in earnings or disclose the pro forma
effect in the footnotes to their financial statements. We have chosen to disclose the pro-forma
effect. The fair value concepts were not changed significantly in FAS
123(R); however, in adopting
this Standard, companies must choose among alternative valuation models and amortization
assumptions. Although we have not quantified the valuation and transition method, the adoption of
the provisions of FAS 123(R) could have a significant impact on reported net income and earnings
per share. As such, the adoption may result in amounts that differ from the current pro forma
disclosures under FAS 123. 2. Restatement Of Prior Financial Information In late 2004 we began a review of lease accounting and the applicable accounting literature, (FASB
issued Statement No. 13 (SFAS 13), Accounting for Leases, FASB issued Technical Bulletin No.
88-1 (FTB 88-1), Issues Relating to Accounting for Leases, and FASB issued Technical Bulletin
No. 85-3 (FTB 85-3), Accounting for Operating Leases with Scheduled Rent Increases). As a
result of that review, we have identified areas where our historical accounting practices required
correction to conform to GAAP. Our historical accounting practice had been to recognize straight-line rent expense and certain
tenant allowances for operating leases beginning on the store opening date specified in the lease,
which had the effect of excluding the build-out period for our stores from the calculation of the
period over which we expensed rent. We determined that the proper accounting practice is to
include the build-out period in the amortization period for straight-line rent expense and tenant
allowances on all operating leases and we changed our lease accounting
practice accordingly. In addition, tenant allowances have been reclassified from a contra asset in
property and equipment, net to deferred credits from landlords and
other in the Consolidated Balance Sheets. The
amortization of those tenant allowances has also been reclassified from a reduction of depreciation
expense to a reduction of rent expense in the Consolidated Statements of Operations and from a
reduction of capital expenditures to an increase in cash provided by operating activities in the
Consolidated Statements of Cash Flows. The restatement includes adjustments to costs of goods sold, buying and occupancy costs, gross
income, operating income, income from continuing operations before income taxes, provision for
income taxes, income from continuing operations, net income and earnings per share. These changes increased net income and earnings
per share by $22,000 and $0.00 per diluted share in the first three fiscal quarters of 2004. The
restatement adjustments increased our net income and earnings per share in fiscal 2003 by
approximately $583,000 or $0.02 per diluted share, and increased net income and earnings per share
in fiscal 2002 by approximately $421,000 or $0.01 per diluted share. Although the restatement did
not impact any net cash flows, it did have the effect of increasing operating cash flows and
increasing capital expenditures by a similar amount. These changes increased our operating cash
flows and increased our cash used in investing activities in fiscal 2003 and fiscal 2002 by $10.3
million and $8.6 million, respectively. The restatement also affects periods prior to fiscal 2002.
The impact of the restatement on such prior periods has been reflected as a $6.2 million reduction
to retained earnings, a change of less than 5% to total shareholders equity, as of February 2,
2002 in the accompanying consolidated statement of changes in shareholders equity. While the net dollar amounts are not material to net earnings, financial position or net cash flows
for the periods presented, we felt the cumulative impact was material if it had been made as a
one-time correcting entry in the fourth fiscal quarter of 2004. As such, we believe it is
appropriate to restate historical results presented herein to preserve comparability of all
reported results. In addition, during 2004 we corrected the classification of 44




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changes in cash
overdrafts from net cash provided by operating activities to net cash provided by financing
activities in the Consolidated Statements of Cash Flows. The restated amounts and line items impacted by these restatements are provided below. January 31, 2004As Previously(In thousands, except per share data)
    
    Reported
    
    
    As RestatedConsolidated Balance Sheets:Receivables
    
    
    6,802
    
    
    
    9,164Property and equipment, net
    
    
    147,038
    
    
    
    184,924Deferred income taxes
    
    
    6,780
    
    
    
    10,028Accrued expenses
    
    
    41,725
    
    
    
    42,193Deferred credits from landlords and other
    
    
    13,956
    
    
    
    68,475Total shareholders equity
    
    
    281,753
    
    
    
    276,565
 Year Ended January 31, 2004
    
    
    Year Ended February 1, 2003As Previously
    
    
    
    
    
    
    As PreviouslyReported
    
    
    As Restated
    
    
    Reported
    
    
    As RestatedConsolidated Statements of Operations:Costs of
goods sold, buying and occupancy costs
    
    $
    399,003
    
    
    $
    398,055
    
    
    $
    403,088
    
    
    $
    402,403Gross income
    
    
    199,678
    
    
    
    200,626
    
    
    
    237,232
    
    
    
    237,917Operating income
    
    
    45,403
    
    
    
    46,351
    
    
    
    79,241
    
    
    
    79,926Income from continuing operations before income taxes
    
    
    45,531
    
    
    
    46,479
    
    
    
    78,724
    
    
    
    79,409Provision for income taxes
    
    
    17,000
    
    
    
    17,365
    
    
    
    30,200
    
    
    
    30,464Income from continuing operations
    
    
    28,531
    
    
    
    29,114
    
    
    
    48,524
    
    
    
    48,945Net income
    
    
    22,551
    
    
    
    23,134
    
    
    
    47,338
    
    
    
    47,759Net income per share:Basic
    
    $
    0.66
    
    
    $
    0.68
    
    
    $
    1.43
    
    
    $
    1.44Diluted
    
    $
    0.65
    
    
    $
    0.67
    
    
    $
    1.39
    
    
    $
    1.40
 Year Ended January 31, 2004
    
    
    Year Ended February 1, 2003As Previously
    
    
    
    
    
    
    As PreviouslyReported
    
    
    As Restated
    
    
    Reported
    
    
    As RestatedConsolidated Statements of Cash Flows:Net cash provided by operating activities
    
    $
    56,584
    
    
    $
    58,358
    
    
    $
    55,712
    
    
    $
    72,038Net cash used for investing activities (1)
    
    
    (88,544
    )
    
    
    (98,856
    )
    
    
    (96,220
    )
    
    
    (104,796
    )Net cash provided by financing activities
    
    
    717
    
    
    
    9,255
    
    
    
    23,474
    
    
    
    15,724
   (1)
    
    As previously reported, after impact of revision in the classification of certain
securities as discussed in Note 1. We did not amend our previously filed Annual Report on Form 10-K or Quarterly Reports on Form
10-Q for the restatement, and the financial statements and related financial information contained
in such reports should no longer be relied upon. All referenced amounts for prior periods in these financial statements and the notes thereto
reflect the balances and amounts on a restated basis. 45




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3. New Financial Statement Captions During the third fiscal quarter of 2004, our Board of Directors approved a new investment policy. This new
investment policy necessitated two new account categories on our Consolidated Balance Sheet and two
new categories on our Consolidated Statements of Cash Flows. Investments, classified as a current
asset, is used for investment in debt securities with maturities less
than 1 year from the balance sheet date, as well as available-for-sale securities. Long-term
investments, shown in non-current assets, is used for investments in debt securities with
maturities greater than one year from the balance sheet date. The first new classification on our
Consolidated Statements of Cash Flows is in the investing activities section and is titled Purchase
of investments. This represents the cash used to purchase investment instruments. The second new
classification on our Consolidated Statements of Cash Flows is in the investing activities section
and is titled Sale of investments. This represents the cash generated by the sale of investment
instruments. We have also renamed items previously classified as Other liabilitiesto Deferred
credits from landlords and other. 4. Investments At January 29, 2005, we held investments in securities that were classified as held-to-maturity
based of our intent and ability to hold the securities to maturity. We determined the appropriate
classification at the time of purchase. All such securities held by us at January 29, 2005 were
municipal debt securities issued by states of the United States or political subdivisions of the
states. The table below details the investments classified as held-to-maturity owned by us at
January 29, 2005 (in thousands): MaturityLess than 1Year
    
    
    1 to 5 YearsAggregate fair value
    
    $
    19,521
    
    
    $
    6,726Gross unrecognized holding gains
    
    
    
    
    
    
    Gross unrecognized holding losses
    
    
    (44
    )
    
    
    (50
    )Net carrying amount
    
    $
    19,565
    
    
    $
    6,776
 At January 29, 2005 and January 31, 2004, we held $158.6 million and $110.9 million,
respectively, of current investments, consisting of auction rate municipal bonds, variable rate
municipal demand notes and preferred shares of tax-exempt closed-end mutual funds classified as
available-for-sale securities. Our investments in these securities are recorded at cost, which
approximates fair value due to their variable interest rates, which typically reset every 7 to 35
days, and, despite the long-term nature of their stated contractual maturities, we have the ability
to quickly liquidate these securities to support current operations. As a result, we had no
cumulative gross unrealized holding gains (losses) or gross realized gain (losses) from these
current investments. All income generated from these current investments was recorded as interest
income. 46




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The table below details the marketable securities classified as available-for-sale owned by us at
January 29, 2005 (in thousands): 2004
    
    
    2003Maturity
    
    
    MaturityLess than 1
    
    
    Less than 1Year
    
    
    YearAggregate fair value
    
    $
    139,065
    
    
    $
    110,895Gross unrecognized holding gains
    
    
    
    
    
    
    Gross unrecognized holding losses
    
    
    
    
    
    
    Net carrying amount
    
    $
    139,065
    
    
    $
    110,895
 Interest income (expense), net, consisted of the following (in thousands): 2004
    
    
    2003
    
    
    2002Interest income
    
    $
    2,263
    
    
    $
    1,610
    
    
    $
    1,830Interest expense
    
    
    (956
    )
    
    
    (1,482
    )
    
    
    (2,347
    )Interest income (expense), net
    
    $
    1,307
    
    
    $
    128
    
    
    ($
    517
    )
 5. Property And Equipment Property and equipment, at cost, consisted of (in thousands): January 29,
    
    
    January 31,2005
    
    
    2004(Restated)Land
    
    $
    8,105
    
    
    $
    8,103Buildings
    
    
    42,049
    
    
    
    42,045Furniture, fixtures and equipment
    
    
    176,973
    
    
    
    163,748Leaseholds improvements
    
    
    108,136
    
    
    
    104,441Construction-in-progress
    
    
    2,058
    
    
    
    4,378Total
    
    
    337,321
    
    
    
    322,715Less: accumulated depreciation
    
    
    (156,872
    )
    
    
    (137,791
    )Property and equipment, net
    
    $
    180,449
    
    
    $
    184,924
 6. Leased Facilities And Commitments We operate stores under lease agreements expiring on various dates through 2016. The initial terms
of leases are generally 10 years. Annual store rent is generally composed of a fixed minimum
amount, plus contingent rent based on a percentage of sales exceeding a stipulated amount. Many
of the leases provide for future rent escalations and renewal options. Most leases require that we
pay taxes, common area costs and certain other expenses. At January 29, 2005, we operated 82 stores under sublease agreements with Limited Brands. These
sublease agreements require that we pay a proportionate share, based on selling space, of all
costs, principally rent, 47




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##### Table of Contents



maintenance, taxes and utilities. Pursuant to the sublease agreements, we are required to pay
contingent rent to Limited Brands if stores sales exceed a stipulated amount. Limited Brands also
provides guarantees on 37 store leases and assesses a fee based on stores sales exceeding defined
levels. In addition, we lease certain equipment under operating lease agreements that expire at various
dates through 2008. A summary of rent expense for fiscal 2004, 2003 and 2002 follows (in thousands): 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Fixed minimum
    
    $
    57,390
    
    
    $
    54,036
    
    
    $
    49,426Contingent
    
    
    2,411
    
    
    
    1,801
    
    
    
    1,439Amortization of tenant allowances
    
    
    (439
    )
    
    
    (1,058
    )
    
    
    (869
    )Total store rent
    
    
    59,362
    
    
    
    54,779
    
    
    
    49,996Equipment and other
    
    
    2,380
    
    
    
    3,523
    
    
    
    4,427Total rent expense
    
    $
    61,742
    
    
    $
    58,302
    
    
    $
    54,423
 A summary of rent commitments under non-cancelable operating leases as of January 29, 2005
follows (in thousands): 2005
    
    $
    59,7772006
    
    
    54,1262007
    
    
    46,4412008
    
    
    40,4962009
    
    
    37,158Thereafter
    
    
    88,458
 7. Accrued Expenses Accrued expenses consisted of (in thousands): January 29,
    
    
    January 31,2005
    
    
    2004(Restated)Compensation, payroll taxes and benefits
    
    $
    14,739
    
    
    $
    6,750Rent and store expenses
    
    
    12,131
    
    
    
    11,846Deferred revenue
    
    
    9,913
    
    
    
    8,329Taxes, other than income and payroll
    
    
    5,531
    
    
    
    5,346Point of sale operating lease buy out
    
    
    
    
    
    
    3,068mishmash store closing and impairment
charges and other
    
    
    5,268
    
    
    
    6,854Total
    
    $
    47,582
    
    
    $
    42,193
 48




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##### Table of Contents



8. Credit Facility On April 29, 2003, we entered into a credit facility (the Credit Facility) with a syndicate of
banks. The Credit Facility consists of a $100 million unsecured revolving loan commitment. The
Credit Facilitys interest rates and fees reflect matrix pricing. At our option, interest rates
are based on the London Inter-bank Offered Rate or Prime plus a spread as defined in the agreement.
Under the terms of the Credit Facility, we are required to comply with certain covenants,
including financial ratios such as leverage, coverage and tangible net worth. The Credit Facility
limits us from incurring certain additional indebtedness, restricts substantial asset sales and
provides for a springing lien against certain assets in the event of default. On September 16, 2003, the Credit Facility was amended, and became retroactively effective as of
July 31, 2003. In exchange for the modification of certain financial covenants we agreed to
maintain a pledged investment account equal to 110% of any outstanding letters of credit or any
revolving commitment usage. On October 29, 2004, we amended two provisions of the Credit Facility. First, in exchange for
maintaining certain financial covenants, the pledge of an investment account has been eliminated.
In the event of a default, we now have the option of providing an investment account equal to 110%
of any outstanding letters of credit and any revolving commitment usage in lieu of the springing
lien against certain assets. The second provision amended the limitations on dividends and
restricted payments, which can include stock repurchases. The limits are eliminated as long as we
maintain an agreed upon cash balance. In the event the actual cash balance for a previous 90-day
period falls below $75 million, dividends and restricted payments will be limited to 50% of prior
year net earnings. As of January 29, 2005, we are in compliance with all applicable terms of the
amended Credit Facility. At the end of fiscal 2004, 2003 and 2002, amounts available under the
credit facility were $78.6 million, $100 million and $50 million, respectively. 9. Income Taxes The provision for income taxes consisted of the following (in thousands): 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Current:Federal
    
    $
    18,158
    
    
    $
    8,917
    
    
    $
    24,348State
    
    
    2,736
    
    
    
    1,948
    
    
    
    3,847Foreign
    
    
    162
    
    
    
    19
    
    
    
    10Total current
    
    
    21,056
    
    
    
    10,884
    
    
    
    28,205Deferred:Federal
    
    
    3,216
    
    
    
    6,123
    
    
    
    2,021State
    
    
    (175
    )
    
    
    358
    
    
    
    238Total deferred
    
    
    3,041
    
    
    
    6,481
    
    
    
    2,259Income tax expense
for continuing operations
    
    
    24,097
    
    
    
    17,365
    
    
    
    30,464Income tax benefit for discontinued
operations
    
    
    
    
    
    
    (3,800
    )
    
    
    (800
    )Total income tax provision
    
    $
    24,097
    
    
    $
    13,565
    
    
    $
    29,664
 49




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The foreign component of pretax income, arising principally from overseas sourcing operations,
was $922,000 in 2004, $100,000 in 2003 and $57,000 in 2002. A reconciliation between the statutory federal income tax rate and the effective income tax rate
follows: 2004
    
    
    2003
    
    
    2002(Restated)
    
    
    (Restated)Federal income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, net of federal benefit
    
    
    3.3
    
    
    
    3.2
    
    
    
    3.5Concluding state tax examinations
    
    
    (0.8
    )
    
    
    0.0
    
    
    
    0.0Other items, net
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (0.2
    )Total effective income tax rate
for continuing operations
    
    
    36.7
    %
    
    
    37.4
    %
    
    
    38.3
    %
 During 2004, we favorably concluded a number of state tax examinations. The effect of the
favorable conclusions was to reduce the liability representing exposures for these issues. The effect of temporary differences, which give rise to net deferred tax balances, was as follows
(in thousands): January 29, 2005
    
    
    January 31, 2004Assets
    
    
    Liabilities
    
    
    Total
    
    
    Assets
    
    
    Liabilities
    
    
    Total(Restated)
    
    
    
    
    
    
    (Restated)Tax depreciation in excess of book
    
    $
    
    
    
    $
    (4,767
    )
    
    $
    (4,767
    )
    
    $
    
    
    
    $
    (3,203
    )
    
    $
    (3,203
    )Rent
    
    
    4,148
    
    
    
    
    
    
    
    4,148
    
    
    
    4,229
    
    
    
    
    
    
    
    4,229Inventory
    
    
    1,272
    
    
    
    
    
    
    
    1,272
    
    
    
    1,362
    
    
    
    
    
    
    
    1,362Accrued expenses
    
    
    6,840
    
    
    
    
    
    
    
    6,840
    
    
    
    7,599
    
    
    
    
    
    
    
    7,599Store
supplies - basis differential
    
    
    
    
    
    
    (4,857
    )
    
    
    (4,857
    )
    
    
    
    
    
    
    (4,703
    )
    
    
    (4,703
    )Other, net
    
    
    3,229
    
    
    
    
    
    
    
    3,229
    
    
    
    3,622
    
    
    
    
    
    
    
    3,622Total deferred income taxes
    
    $
    15,489
    
    
    $
    (9,624
    )
    
    $
    5,865
    
    
    $
    16,812
    
    
    $
    (7,906
    )
    
    $
    8,906
 No valuation allowance has been provided for deferred tax assets because we believe that it is
reasonably certain that the full amount of the net deferred tax assets will be realized in the
future. Income taxes payable included net current deferred tax liabilities of $3.2 million and $1.1 million
as of January 29, 2005 and January 31, 2004, respectively. 10. Retirement Benefits We sponsor a qualified defined contribution retirement plan. Our contributions to this plan are
based on a percentage of the associates eligible annual compensation. Participation in the
qualified plan is available to all associates who have completed 1,000 or more hours of service
during certain 12-month periods and attained the age of 21. We also sponsor a nonqualified supplemental retirement plan and a nonqualified alternate savings
plan. Our contributions to the supplemental retirement plan are based on a percentage of the
associates eligible annual compensation. In the case of the alternate savings plan, our
contributions are based on a match of the associates contribution up to a pre-determined
percentage. Participation in the nonqualified plan is subject to 50




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service and compensation
requirements. At January 29, 2005 and January 31, 2004, we had accrued $14.2 million and $14.0
million, respectively, for our obligations under these plans. Beginning in 2002, we purchased
corporate-owned life insurance policies in connection with the nonqualified plans. The cash value
of these policies included in other long-term assets was $14.3 million and $13.5 million at January
29, 2005 and January 31, 2004, respectively. The cost of all three plans was $4.8 million, $4.0 million, and $5.4 million in fiscal years 2004,
2003 and 2002, respectively. 11. Common Stock Financing On May 24, 2002, we sold 2.4 million shares of our common stock, resulting in net proceeds of $73.4
million. Concurrently, we paid off the $50 million term loan outstanding at that time and the
remaining proceeds from the sale of common stock were used for general corporate purposes. 12. Legal Matters There are various claims, lawsuits and other legal actions pending for and against Too, Inc.
incident to the operations of its business. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on Toos results of operations,
cash flows or financial position. 13. Discontinued Operations On May 28, 2003, we announced the discontinuation of the mishmash retail concept in favor of
redirecting our resources to the development of Justice, our new concept focused on value-priced
sportswear and accessories for tween girls, ages 7 to 14. All 18 of the mishmash stores open at
the time of the announcement were closed by the end of November 2003. Four of the former mishmash
locations have been converted to the Justice format and have since reopened. In accordance with
the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
we have reclassified our Consolidated Statements of Operations to segregate the revenues and
expenses of our mishmash operations. The net operating results of mishmash are shown in the
Discontinued Operations section of the Consolidated Statements of Operations. As a result, a loss
on discontinued operations, net of tax, of $6.0 million and $1.2 million for fiscal 2003 and 2002,
respectively, has been reflected in our Consolidated Statements of Operations. The loss in fiscal
2003 is comprised of an after-tax loss from operations of mishmash of $1.4 million and an after-tax
loss on mishmash store closings and impairment charges of $4.6 million. The tax benefit related to
discontinued operations was $3.8 million and $0.8 million for 2003 and 2002, respectively. The
loss from operations of mishmash includes net sales of $8.3 million and $7.1 million for fiscal
2003 and 2002, respectively. 51




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The store closing costs were recorded in accordance with the provisions of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. The following table provides a
detail of each major type of cost associated with the store closings (in thousands): 2003One-time termination benefits
    
    $
    41Contract termination costs
    
    
    1,704Other associated costs
    
    
    245Store closing costs
    
    
    1,990Income tax benefit
    
    
    (780
    )Store closing costs, net of tax
    
    $
    1,210
 The following tables provide a reconciliation of the liability balances during fiscal years
2003 and 2004, which are included in the Accrued Expenses line of the Consolidated Balance Sheets
(in thousands): Beginning
    
    
    
    
    
    
    
    
    
    
    EndingAccrual
    
    
    
    
    
    
    
    
    
    
    AccrualBalance
    
    
    Current
    
    
    Costs
    
    
    BalanceFebruary 1,
    
    
    Period
    
    
    Paid or
    
    
    January 31,2003
    
    
    Expense
    
    
    Settled
    
    
    2004One-time termination benefits
    
    $
    
    
    
    $
    41
    
    
    ($
    41
    )
    
    $
    Contract termination costs
    
    
    
    
    
    
    1,704
    
    
    
    (512
    )
    
    
    1,192Other associated costs
    
    
    
    
    
    
    245
    
    
    
    (245
    )
    
    
    Store closing costs liability
    
    $
    
    
    
    $
    1,990
    
    
    ($
    798
    )
    
    $
    1,192
 Beginning
    
    
    
    
    
    
    
    
    
    
    EndingAccrual
    
    
    
    
    
    
    
    
    
    
    AccrualBalance
    
    
    Current
    
    
    Costs
    
    
    BalanceFebruary 1,
    
    
    Period
    
    
    Paid or
    
    
    January 29,2004
    
    
    Expense
    
    
    Settled
    
    
    2005Contract termination costs
    
    $
    1,192
    
    
    $
    
    
    
    ($
    949
    )
    
    $
    243Store closing costs liability
    
    $
    1,192
    
    
    $
    
    
    
    ($
    949
    )
    
    $
    243
 In accordance with SFAS No. 144, an impairment charge of $5.5 million ($3.4 million, net of
tax), was incurred in 2003. The impairment charge reflects the difference between the carrying
value and fair value of mishmashs store assets. 52




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14. Quarterly Financial Data (unaudited, in thousands, except per share amounts) The financial data below has been restated as described in Note 2: 2004
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(Restated)
    
    
    (Restated)
    
    
    (Restated)Net sales
    
    $
    154,145
    
    
    $
    139,940
    
    
    $
    174,987
    
    
    $
    206,762Gross income
    
    
    50,742
    
    
    
    44,299
    
    
    
    65,782
    
    
    
    81,064General, administrative and
store operating expenses
    
    
    42,923
    
    
    
    42,166
    
    
    
    47,802
    
    
    
    44,617Income from continuing operations
    
    
    5,051
    
    
    
    1,576
    
    
    
    11,411
    
    
    
    23,551Net income
    
    
    5,051
    
    
    
    1,576
    
    
    
    11,411
    
    
    
    23,551Earnings per share  basic
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.33
    
    
    $
    0.69Earnings per share  diluted
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.33
    
    
    $
    0.67
 2003
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net sales
    
    $
    137,971
    
    
    $
    131,704
    
    
    $
    146,020
    
    
    $
    182,986Gross income
    
    
    42,791
    
    
    
    40,264
    
    
    
    48,084
    
    
    
    69,487General, administrative and
store operating expenses
    
    
    35,555
    
    
    
    38,835
    
    
    
    39,797
    
    
    
    40,088Income from continuing operations
    
    
    4,697
    
    
    
    918
    
    
    
    5,055
    
    
    
    18,444Net income (loss)
    
    
    4,260
    
    
    
    (3,550
    )
    
    
    4,372
    
    
    
    18,052Earnings (loss) per share  basic
    
    $
    0.12
    
    
    ($
    0.10
    )
    
    $
    0.13
    
    
    $
    0.53Earnings (loss) per share  diluted
    
    $
    0.12
    
    
    ($
    0.10
    )
    
    $
    0.13
    
    
    $
    0.52
 53




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The following tables contain selected quarterly financial data for fiscal 2003 and the first
three quarters of fiscal 2004 as previously reported in our filed Quarterly Reports on Form 10-Q: 2004
    
    First
    
    
    Second
    
    
    Third(As Previously
    
    
    (As Previously
    
    
    (As PreviouslyReported)
    
    
    Reported)
    
    
    Reported)Net sales
    
    $
    154,145
    
    
    $
    139,940
    
    
    $
    174,987Gross income
    
    
    51,053
    
    
    
    43,999
    
    
    
    65,733General, administrative and
store operating expenses
    
    
    42,923
    
    
    
    42,166
    
    
    
    47,802Income from continuing operations
    
    
    5,243
    
    
    
    1,392
    
    
    
    11,381Net income
    
    
    5,243
    
    
    
    1,392
    
    
    
    11,381Earnings per share  basic
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.33Earnings per share  diluted
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.33
 2003
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(As Previously
    
    
    (As Previously
    
    
    (As Previously
    
    
    (As PreviouslyReported)
    
    
    Reported)
    
    
    Reported)
    
    
    Reported)Net sales
    
    $
    137,971
    
    
    $
    131,704
    
    
    $
    146,020
    
    
    $
    182,986Gross income
    
    
    42,627
    
    
    
    39,808
    
    
    
    48,326
    
    
    
    68,917General, administrative and
store operating expenses
    
    
    35,555
    
    
    
    38,835
    
    
    
    39,797
    
    
    
    40,088Income from continuing operations
    
    
    4,596
    
    
    
    638
    
    
    
    5,204
    
    
    
    18,093Net income (loss)
    
    
    4,159
    
    
    
    (3,830
    )
    
    
    4,521
    
    
    
    17,701Earnings (loss) per share  basic
    
    $
    0.12
    
    
    ($
    0.11
    )
    
    $
    0.13
    
    
    $
    0.52Earnings (loss) per share  diluted
    
    $
    0.12
    
    
    ($
    0.11
    )
    
    $
    0.13
    
    
    $
    0.51
 
  Item 9.
    Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. None. 54




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Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders
of Too, Inc.: We have completed an integrated audit of Too, Inc.s fiscal 2004 consolidated financial statements
and of its internal control over financial reporting as of January 29, 2005 and audits of its
fiscal 2003 and fiscal 2002 consolidated financial statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, changes in shareholders equity and cash flows present fairly, in all
material respects, the financial position of Too, Inc. and its subsidiaries at January 29, 2005 and
January 31, 2004, and the results of their operations and their cash flows for each of the three
years in the period ended January 29, 2005 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company has restated its
fiscal 2003 and fiscal 2002 consolidated financial statements. Internal control over financial reporting Also, we have audited managements assessment, included in Managements Report on Internal Control
Over Financial Reporting appearing under Item 9A, that Too, Inc. did not maintain effective
internal control over financial reporting as of January 29, 2005, because the Company did not
maintain effective controls over its selection and application of lease accounting policies related
to tenant allowances and the recording of rent during construction periods based on criteria
established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and 55




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perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over
financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we consider necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weakness has been identified
and included in managements assessment. As of January 29, 2005, management has concluded that the
Companys controls over the selection and application of its lease accounting policies related to
tenant allowances and the recording of rent during construction periods were ineffective to ensure
that such leasing transactions were recorded in accordance with accounting principles generally
accepted in the United States of America. Specifically, the deficiency in the Companys controls
over the selection and application of its lease accounting policies failed to identify
misstatements in property and equipment, deferred credits from landlords, rent expense,
depreciation expense and the related impact of these items on cash provided by operating activities
and cash used for investing activities in the consolidated statements of cash flows, which resulted
in restatements of the Companys 2003 and 2002 annual consolidated financial statements and the
2004 and 2003 interim consolidated financial statements. Additionally, this control deficiency
could result in a misstatement of property and equipment, deferred credits from landlords, rent
expense, depreciation expense, and cash provided by operating activities and cash used in investing
activities, that would result in a material misstatement to annual or interim financial statements
that would not be prevented or detected. Accordingly, management has concluded that this control
deficiency constitutes a material weakness. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our audit of the January 29, 2005
consolidated financial statements, and our opinion regarding the effectiveness of the Companys
internal control over financial reporting does not affect our opinion on those consolidated
financial statements. In our opinion, managements assessment that Too, Inc. did not maintain effective internal control
over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based
on criteria established in Internal Control  Integrated Frameworkissued by the COSO. Also, in
our opinion, because of the effect of the 56




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material weakness described above on the achievement of the objectives of the control criteria,
Too, Inc. has not maintained effective internal control over financial reporting as of January 29,
2005, based on criteria established in Internal Control  Integrated Frameworkissued by the COSO. /s/ PricewaterhouseCoopers LLP Columbus, Ohio
April 12, 2005 57




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Item 9A. Controls And Procedures. Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act)) designed to provide reasonable
assurance that the information required to be reported in our Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified and pursuant to Securities and
Exchange Commission rules and forms, including controls and procedures designed to ensure that this
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Operating Officer (our Principal Financial Officer), as appropriate, to allow
timely decisions regarding required disclosure. It should be noted that, because of inherent
limitations, our disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls
and procedures are met. As described below, our testing of internal control over financial reporting indicated a material
weakness in our application of lease accounting principles generally accepted in the United States
of America as of January 29, 2005. We began a review of our accounting policies and practices with
respect to leases in late 2004 based on an emerging retail industry focus on the application of
FASB Technical Bulletin 88-1, Issues Related to Accounting for Leases. As a result of this
review, we identified errors in our accounting for tenant allowances and our practice of recording
rent expense on a straight-line basis beginning with the store opening date as opposed to an
earlier possession date. Accordingly, we have restated our consolidated financial statements for
the years ended January 31, 2004 and February 1, 2003 and the 2004 and 2003 interim consolidated
financial statements. We have performed an evaluation of our disclosure controls and procedures as
of January 29, 2005 and as a result of the material weakness discussed below and corresponding
restatement, our Chief Executive Officer and Chief Operating Officer have concluded that our
disclosure controls and procedures were not effective at a reasonable level of assurance, based on
the evaluation of these controls and procedures as required by Exchange Act Rules 13a-15(b) or
15d-15(b) as of January 29, 2005. This material weakness was considered in the preparation of the
consolidated financial statements and we performed additional analysis and other post-closing
procedures to ensure our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. Notwithstanding the material weakness
discussed below, we have concluded that the consolidated financial statements included in this
report present fairly, in all material respects, our financial position and results of operations
and cash flows for the periods presented in conformity with accounting principles generally
accepted in the United States of America. No other material weaknesses were identified as a result
of our managements assessment. Managements Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over
financial reporting is a process that is designed under the supervision of our Chief Executive
Officer and Chief Operating Officer (our Principal Financial Officer) to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. Our internal control over financial reporting includes those policies and
procedures that:  i.
    Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the 58




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transactions and dispositions of our
assets;ii.
    Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America, and that receipts and expenditures recorded by us are being
made only in accordance with authorizations of our management and
board of directors of the Company; andiii.
    Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. Our management performed an assessment of the effectiveness of our internal control over financial
reporting as of January 29, 2005. In making this assessment, we used the criteria established in
Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. As of January 29, 2005, our management has concluded
that our controls over the selection and application of our lease accounting policies related to
tenant allowances and the recording of rent during construction periods were ineffective to ensure
that such leasing transactions were recorded in accordance with accounting principles generally
accepted in the United States of America. Specifically, the deficiency in our controls over the
selection and application of our lease accounting policies failed to identify misstatements in
property and equipment, deferred credits from landlords, rent expense, depreciation expense and the
related impact of these items on cash provided by operating activities and cash used for investing
activities in the consolidated statements of cash flows, which resulted in restatements of our 2003
and 2002 annual consolidated financial statements and the 2004 and 2003 interim consolidated
financial statements. Additionally, this control deficiency could result in a misstatement of
property and equipment, deferred credits from landlords, rent
expense, depreciation expense, and cash
provided by operating activities and cash used for investing activities that would result in a material misstatement to annual or interim
financial statements that would not be prevented or detected. Accordingly, our management has
concluded that this control deficiency constitutes a material weakness. Because of this material
weakness, we have concluded that we did not maintain effective internal control over financial
reporting as of January 29, 2005 based on the criteria established in Internal Control-Integrated
Frameworkissued by the COSO. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited our
assessment of the effectiveness of our internal control over financial reporting as of January 29,
2005 as stated in their report, which is included herein. Changes in Internal Control Over Financial Reporting No changes in our internal control over financial reporting occurred during the last fiscal quarter
except as otherwise disclosed herein that have materially affected, or are reasonably likely to
materially affect, our 59




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internal control over financial reporting. In first quarter of fiscal 2005,
we will enhance our controls to ensure that the selection and application of our lease accounting
policies is in accordance with generally accepted accounting principles in the United States of
America and revise our lease accounting policies. 
 Item 9B. Other Information. None. 60




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PART III 
 Item 10. Directors and Executive Officers of the Registrant. The information required by this Item is set forth under the captions ELECTION OF DIRECTORS and
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in our proxy statement for the Annual
Meeting of Stockholders to be held May 19, 2005 (the Proxy Statement) and is incorporated herein
by reference. We have adopted a Code of Ethics for Senior Financial Officers that applies to our principal
executive officer, principal financial officer, principal accounting officer or controller, and
persons performing similar functions. The Code of Ethics for Senior Financial Officers may be
obtained free of charge by writing to Too, Inc., Attn: Investor Relations, 8323 Walton Parkway,
New Albany, Ohio 43054. 
 Item 11. Executive Compensation. The information required by this Item is set forth under the caption EXECUTIVE COMPENSATION in
the Proxy Statement and is incorporated herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is set forth under the captions ELECTION OF DIRECTORS 
Security Ownership of Directors and Management, SHARE OWNERSHIP OF PRINCIPAL STOCKHOLDERS and
EXECUTIVE COMPENSATION  Equity Compensation Plan Information in the Proxy Statement and is
incorporated herein by reference. 
 Item 13. Certain Relationships And Related Transactions. The information required by this Item is set forth under the caption ELECTION OF DIRECTORS -
Nominees and Directors in the Proxy Statement and is incorporated herein by reference. 
 Item 14. Principal Accounting Fees And Services. The information required by this Item is set forth under the caption FEES OF THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM in the Proxy Statement and is incorporated herein by reference. 61




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PART IV 
 Item 15. Exhibits, Financial Statement Schedules. (a) (1) List of Financial Statements. The following consolidated financial statements of Too, Inc. and Subsidiaries and the related notes
are filed as a part of this report pursuant to Item 8: 
    
    Consolidated Statements of Operations for the fiscal years ended January 29, 2005,
January 31, 2004 (Restated), and February 1, 2003 (Restated).
    
    Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004 (Restated).
    
    Consolidated Statements of Changes in Shareholders Equity for the fiscal years ended
January 29, 2005, January 31, 2004 (Restated), and February 1, 2003 (Restated).
    
    Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2005,
January 31, 2004 (Restated), and February 1, 2003 (Restated).
    
    Notes to Consolidated Financial Statements.
    
    Report of Independent Registered Public Accounting Firm.
 (a) (2) List of Financial Statement Schedules. All financial statement schedules are omitted because they are not required or are not applicable
or the required information is included in the Companys Consolidated Financial Statements and
Notes thereto, described in Item 15(a)(1) above. (a) (3) List of Exhibits.  2.1
    Distribution Agreement dated as of August 23, 1999 between The Limited, Inc. and
Too, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed October 1, 1999).3.1
    Amended and Restated Certificate of Incorporation of Too, Inc. (incorporated by
reference to Exhibit 3.1 to the Current Report on Form 8-K filed October 1, 1999).3.2
    Amended and Restated Bylaws of Too, Inc. (incorporated by reference to Exhibit
3.2 to the Current Report on Form 8-K filed October 1, 1999).3.3
    Certificate of Designations of Series A Junior Participating Cumulative Preferred
Stock of Too, Inc. as filed with the Delaware Secretary of State on August 27, 2001 62




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(incorporated by reference to Exhibit 4.1 to Registration Statement on Form 8-A
filed August 27, 2001).4.1
    Specimen Certificate of Common Stock of Too, Inc. (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K filed October 1, 1999).4.2
    Rights Agreement, dated as of August 14, 2001, by and between the Company and
EquiServe Trust Company, N.A., as Rights Agent, and which includes as Exhibit A thereto
the form of Certificate of Designations of Series A Junior Participating Cumulative
Preferred Stock, as Exhibit B thereto the form of Right Certificate and as Exhibit C
thereto the Summary of Rights (incorporated by reference to Exhibit 4.1 to Registration
Statement on Form 8-A filed August 27, 2001).4.3
    Agreement of Substitution and Amendment of Rights Agreement, dated as of November
11, 2003, to be effective as of October 20, 2003, between the Company and American Stock
Transfer & Trust Company, a New York banking corporation, as Rights Agent (incorporated
by reference to Exhibit 4.2 to Registration Statement on Form 8-A/A No.1 filed December
17, 2003).10.2
    Store Leases Agreement dated as of August 23, 1999 by and among The Limited
Stores, Inc., Victorias Secret Stores, Inc., Lerner New York, Inc., Express, LLC,
Structure, Inc., The Limited, Inc. and Too, Inc. (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed October 1, 1999).10.3
    Trademark and Service Mark Licensing Agreement dated as of August 23, 1999
between Limco, Inc. and LimToo, Inc. (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K filed October 1, 1999).10.5
    Tax Separation Agreement dated August 23, 1999 between The Limited, Inc., on
behalf of itself and the members of The Limited Group, and Too, Inc., on behalf of
itself and the members of the Too Group. (incorporated by reference to Exhibit 10.5 to
the Current Report on Form 8-K filed October 1, 1999).10.9
    Too, Inc. Second Amended and Restated 1999 Stock Option and Performance Incentive
Plan (incorporated by reference to Exhibit 10.23 to the Quarterly Report on Form 10-Q
filed on June 14, 2001).10.10
    Too, Inc. Third Amended and Restated 1999 Stock Option Plan for Non-Associate
Directors (incorporated by reference to Exhibit 10.24 to the Quarterly Report on Form
10-Q filed on June 14, 2001).10.11
    Too, Inc. Second Amended and Restated Savings and Retirement Plan.*10.12
    Too, Inc. First Amended and Restated Supplemental Retirement and Deferred
Compensation Plan. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q filed on September 11, 2000). 63




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10.13
    Employment Agreement, dated as of September 15, 2003, between the Company and
Michael W. Rayden (incorporated by reference to Exhibit 10.13 to the Annual Report on
Form 10-K filed on April 7, 2004).10.14
    Executive Agreement, dated as of September 15, 2000, between the Company and
Michael W. Rayden (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q filed on December 14, 2000).10.15
    Employment Agreement, dated as of September 15, 2003, between the Company and
Kent A. Kleeberger (incorporated by reference to Exhibit 10.15 to the Annual Report on
Form 10-K filed on April 7, 2004).10.16
    Employment Agreement, dated as of September 15, 2003, between the Company and
James C. Petty (incorporated by reference to Exhibit 10.16 to the Annual Report on Form
10-K filed on April 7, 2004).10.17
    Employment Agreement, dated as of September 15, 2003, between the Company and
Ronald Sykes (incorporated by reference to Exhibit 10.17 to the Annual Report on Form
10-K filed on April 7, 2004).10.18
    Executive Agreement, dated as of October 30, 2000, between the Company and
Ronald Sykes (incorporated by reference to Exhibit 10.20 to the Annual Report on Form
10-K filed on May 2, 2001).10.19
    Employment Agreement, dated as of September 15, 2003, between the Company and
Sally A. Boyer (incorporated by reference to Exhibit 10.21 to the Quarterly Report on
Form 10-Q filed on September 8, 2004).10.20
    Executive Agreement, dated as of September 15, 2000, between the Company and
Sally A. Boyer (incorporated by reference to Exhibit 10.22 to the Quarterly Report on
Form 10-Q filed on December 14, 2000).10.21
    Employment Agreement, dated as of September 15, 2003, between the Company and
Scott M. Bracale (incorporated by reference to Exhibit 10.21 to the Annual Report on
Form 10-K filed on April 7, 2004).10.22
    Executive Agreement, dated as of September 15, 2000, between the Company and
Scott M. Bracale (incorporated by reference to Exhibit 10.25 to the Annual Report on
Form 10-K filed on April 9, 2003).10.23
    Employment Agreement, dated as of September 15, 2003, between the Company and
Joan E. Munnelly (incorporated by reference to Exhibit 10.23 to the Annual Report on
Form 10-K filed on April 7, 2004).10.24
    Executive Agreement, dated as of September 15, 2000, between the Company and
Joan E. Munnelly (incorporated by reference to Exhibit 10.27 to the Annual Report on
Form 10-K filed on April 9, 2003). 64




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10.25
    Employment Agreement, dated as of February 23, 2004, between the Company and
William E. May, Jr. (incorporated by reference to Exhibit 10.25 to the Annual Report on
Form 10-K filed on April 7, 2004).10.26
    Executive Agreement, dated as of February 23, 2004, between the Company and
William E. May, Jr. (incorporated by reference to Exhibit 10.21 to the Annual Report on
Form 10-K filed on April 7, 2004).10.27
    Credit Agreement, dated as of April 29, 2003, among the Company, as Borrower,
each of the Guarantors (as defined in the Credit Agreement), the Lenders (as defined in
the Credit Agreement), National City Bank, as Administrative Agent (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed May 7, 2003).10.28
    First Amendment to Credit Agreement among the Company, as Borrower, each of the
Guarantors (as defined in the Credit Agreement), the Lenders (as defined in the Credit
Agreement), National City Bank, as Agent, Fifth Third Bank, as co-syndication agent,
LaSalle Bank National Association, as co-syndication agent, Bank of America, N.A., as
co-documentation agent, and The Huntington National Bank, as co-documentation agent
(incorporated by reference to Exhibit 10.29 to the Quarterly Report on Form 10-Q filed
on September 16, 2003).10.29
    Second Amendment to Credit Agreement, dated as of October 29, 2004, among the
Company, as Borrower, each of the Guarantors (as defined in the Credit Agreement), the
Lenders (as defined in the Credit Agreement), National City Bank, as Agent, Fifth Third
Bank, as co-syndication agent, LaSalle Bank National Association, as co-syndication
agent, Bank of America, N.A., as co-documentation agent, and The Huntington National
Bank, as co-documentation agent (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on November 3, 2004).10.30
    Too, Inc. Incentive Compensation Plan (incorporated by reference to the
Companys Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders filed
on April 7, 2004).10.31
    Form of Notice of Grant of Stock Options (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed on February 11, 2005).10.32
    Form of Notice of Grant of Restricted Stock (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed on February 11, 2005).21
    Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the
Annual Report on Form 10-K filed on April 7, 2004).23
    Consent of Independent Registered Public Accounting Firm. *24
    Powers of Attorney.* 65




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31.1
    Certification of Periodic Report by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    Certification of Periodic Report by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    Certification of Periodic Report by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    Certification of Periodic Report by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**   *
    
    Filed with this report.**
    
    Furnished with this report.  (b)
    Exhibits.The exhibits to this report are listed in section (a) (3) of Item 15 above.(c)
    Financial Statement Schedules.None. 66




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SIGNATURES Pursuant to the requirements of Section 13 or l5(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Date: April 12, 2005
    
    TOO, INC.(registrant)By /s/ William E. MayWilliam E. MayExecutive Vice President and Chief Operating Officer(Principal Financial Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on April
12, 2005: Signature
    
    Title/s/ MICHAEL W. RAYDEN*
    
    Chairman of the Board of Directors,Michael W. Rayden
    
    President and Chief Executive Officer/s/ WILLIAM E. MAY
    
    Executive Vice President andChief Operating OfficerWilliam E. May
    
    (Principal Financial Officer)/s/ ELIZABETH M. EVEILLARD*
    
    DirectorElizabeth M. Eveillard/s/ NANCY J. KRAMER*
    
    DirectorNancy J. Kramer/s/ DAVID A. KRINSKY*
    
    DirectorDavid A. Krinsky/s/ PHILIP E. MALLOTT*
    
    DirectorPhilip E. Mallott
 67




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/s/ FREDRIC M. ROBERTS*
    
    DirectorFredric M. Roberts/s/ KENNETH JAMES STROTTMAN*
    
    DirectorKenneth James Strottman
   *
    
    The undersigned, by signing his name hereto, does hereby sign this report on behalf of each
of the above-indicated directors of the registrant pursuant to powers of attorney executed by
such directors. By /s/ William E. MayWilliam E. MayAttorney-in-fact
 68