Net sales increased by $151.0 million, to $1,308.7 million, or 13.0% over 1998. Operating income was $101.6 million in 1999 compared to $66.9 million in 1998.

Retail store sales in 1999 increased by $126.9 million, to $1,099.9 million, or 13.0% over 1998. The percentage of the Company’s net sales derived from its retail stores in 1999 remained consistent with 1998 at 84.0%. The increase in retail store sales was attributable to the 35 net new stores opened in 1999, the first full year of operation of the 35 non-comparable stores that opened in 1998, and a $74.9 million, or 8.7%, increase in comparable store sales from the previous year. The Company believes the increase in comparable store sales can be attributed to improvements in its merchandise offerings which more accurately reflected the styling, fit and colors that appeal to its customer.

Catalog sales in 1999 increased by $24.1 million, to $208.8 million, or 13.0% over 1998. The percentage of the Company’s total sales derived from its catalog in 1999 remained consistent with 1998 at 16.0%. Catalog productivity, as measured by both sales per catalog and sales per page distributed, improved over 1998. Sales per catalog distributed increased 4.7%, from $3.22 in 1998 to $3.37 in 1999, on circulation of approximately 56.7 million catalogs in 1999 versus 52.6 million catalogs in 1998. Sales per page distributed improved 17.6%, from $3.58 per hundred in 1998 to $4.21 per hundred in 1999. In November 1999, the Company launched its e-commerce website, www.talbots.com.

The Company believes that the increase in catalog sales was primarily due to continued improvements in its merchandise offerings, which had a stronger appeal to its customers and more closely met their expectations. The Company attributes the improvement in catalog productivity to its strategy of reducing catalog pages, eliminating certain unproductive mailings and more focused customer targeting.

Cost of sales, buying and occupancy expenses decreased as a percentage of net sales to 63.8% in 1999 from 66.0% in 1998 due to improved merchandise margins which resulted from stronger full price selling and reduced markdowns resulting from more effective inventory management. Additionally, strong full price selling created increased leverage on occupancy costs.

Selling, general and administrative expenses increased slightly as a percentage of net sales to 28.4% in 1999 from 28.2% in 1998. The increase in selling, general and administrative expenses as a percentage of net sales was mainly due to higher marketing expenses related to the Company’s advertising campaign and higher information services expenses, including its Year 2000 remediation efforts. This was substantially offset by leverage improvements on catalog production expenses, including a planned reduction in page count, matched with increased overall circulation designed to maximize sales productivity per page, as a percentage of sales.

Interest expense, net, decreased by $0.8 million, to $6.5 million in 1999, due to lower average debt levels and borrowing rates. Interest expense decreased from $8.3 million in 1998 to $7.4 million in 1999 due to a combination of lower debt levels and interest rates. The average total debt, including short-term and long-term bank borrowings, was $117.9 million in 1999 compared to $125.9 million in 1998. The decrease in borrowings was mainly due to improved operating cash flows resulting from an increase in net income and improvements in inventory management. The average interest rate, including interest on short-term and long-term bank borrowings, was 6.28% in 1999 compared to 6.58% in 1998.

The effective tax rate for the Company remained at 38.5% in 1999.

The nature of the Company’s business is to have two distinct selling seasons, spring and fall. The first and second quarters make up the spring season and the third and fourth quarters make up the fall season. Within the spring season, catalog sales are stronger in the first quarter while retail store sales are slightly stronger in the second quarter. Within the fall season, catalog sales and retail store sales are the strongest in the fourth quarter.

The following table sets forth certain items in the Company’s unaudited quarterly consolidated statements of earnings as a percentage of net sales. The information as to any one quarter is not necessarily indicative of results for any future period.

The Company’s merchandising strategy focuses on liquidating seasonal inventory at the end of each selling season. Generally, the Company achieves this goal by conducting major sale events at the end of the second and fourth quarters. These events produce an increase in sales volume; however, since marking down the value of inventory increases expense, the Company’s cost of sales, buying and occupancy expenses as a percentage of net sales is increased. Merchandise inventories typically peak in the third quarter.

The Company’s selling, general and administrative expenses are strongly affected by the seasonality of sales. The two key elements of this seasonality are (1) the catalog circulation strategy, which affects catalog sales volume and produces commensurately high catalog production costs, and (2) the major semiannual sale events in the second quarter and the fourth quarter, which require additional store payroll and supplies. Another factor is the store expansion program, which results in having more stores open in the fall than at the beginning of the year and, therefore, results in higher store payroll and operations-related expenses.

The combined effect of the patterns of net sales, cost of sales, buying and occupancy expenses and selling, general and administrative expenses, described above, has produced higher operating income margins, as a percentage of sales, in the first and third quarters.