UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended October
29, 2005
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from ______________ to _______________
Commission
File No. 000-07258
CHARMING
SHOPPES, INC.
(Exact
name of registrant as specified in its charter)
|
PENNSYLVANIA
|
|
23-1721355
|
|
|
(State
or other jurisdiction of incorporation
or organization)
|
|
(I.R.S.
Employer Identification
No.)
|
|
|
450
WINKS LANE, BENSALEM, PA 19020
|
|
(215)
245-9100
|
|
|
(Address
of principal executive offices) (Zip Code)
|
|
(Registrant’s
telephone number, including Area Code)
|
|
NOT
APPLICABLE
(Former
name, former address, and former fiscal year, if
changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days:
Yes
x
No
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act):
Yes
x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
o
No
x
The
number of shares outstanding of the issuer’s Common Stock (par value $.10 per
share), as of December 1, 2005, was 121,344,205 shares.
TABLE
OF CONTENTS
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Page
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PART
I.
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Item
1.
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2
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2
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3
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4
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5
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6
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Item
2.
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20
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20
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22
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23
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24
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25
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32
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35
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36
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37
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Item
3.
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37
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Item
4.
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37
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PART
II.
|
|
|
|
|
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Item
1.
|
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38
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Item
2.
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38
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Item
6.
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39
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41
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
October
29,
|
|
January
29,
|
|
(Dollars
in thousands, except share amounts)
|
|
2005
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
151,676
|
|
$
|
273,049
|
|
Available-for-sale
securities
|
|
|
86,465
|
|
|
52,857
|
|
Merchandise
inventories
|
|
|
474,484
|
|
|
285,120
|
|
Deferred
advertising
|
|
|
29,128
|
|
|
0
|
|
Deferred
taxes
|
|
|
32,489
|
|
|
15,500
|
|
Prepayments
and other
|
|
|
93,934
|
|
|
86,382
|
|
Total
current assets
|
|
|
868,176
|
|
|
712,908
|
|
|
|
|
|
|
|
|
|
Property,
equipment, and leasehold improvements - at cost
|
|
|
863,287
|
|
|
786,028
|
|
Less
accumulated depreciation and amortization
|
|
|
511,885
|
|
|
465,365
|
|
Net
property, equipment, and leasehold improvements
|
|
|
351,402
|
|
|
320,663
|
|
|
|
|
|
|
|
|
|
Trademarks
and other intangible assets
|
|
|
248,908
|
|
|
169,818
|
|
Goodwill
|
|
|
153,651
|
|
|
66,666
|
|
Available-for-sale
securities
|
|
|
240
|
|
|
240
|
|
Other
assets
|
|
|
40,928
|
|
|
33,476
|
|
Total
assets
|
|
$
|
1,663,305
|
|
$
|
1,303,771
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
50,000
|
|
$
|
0
|
|
Accounts
payable
|
|
|
188,879
|
|
|
127,819
|
|
Accrued
expenses
|
|
|
210,823
|
|
|
154,681
|
|
Income
taxes payable
|
|
|
13,000
|
|
|
0
|
|
Current
portion - long-term debt
|
|
|
15,249
|
|
|
16,419
|
|
Total
current liabilities
|
|
|
477,951
|
|
|
298,919
|
|
|
|
|
|
|
|
|
|
Deferred
taxes and other non-current liabilities
|
|
|
152,443
|
|
|
101,743
|
|
Long-term
debt
|
|
|
245,227
|
|
|
208,645
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
Common
Stock $.10 par value:
|
|
|
|
|
|
|
|
Authorized
- 300,000,000 shares
|
|
|
|
|
|
|
|
Issued
- 133,177,902 shares and 132,063,290 shares, respectively
|
|
|
13,318
|
|
|
13,206
|
|
Additional
paid-in capital
|
|
|
269,059
|
|
|
249,485
|
|
Treasury
stock at cost - 12,265,993 shares
|
|
|
(84,136
|
)
|
|
(84,136
|
)
|
Deferred
employee compensation
|
|
|
(15,382
|
)
|
|
(8,715
|
)
|
Accumulated
other comprehensive loss
|
|
|
(2
|
)
|
|
0
|
|
Retained
earnings
|
|
|
604,827
|
|
|
524,624
|
|
Total
stockholders’ equity
|
|
|
787,684
|
|
|
694,464
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,663,305
|
|
$
|
1,303,771
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(Unaudited)
|
|
Thirteen
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
(In
thousands, except per share amounts)
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
663,322
|
|
$
|
541,759
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
461,451
|
|
|
378,533
|
|
Selling,
general, and administrative expenses
|
|
|
181,275
|
|
|
149,769
|
|
Expenses
related to cost reduction plan
|
|
|
0
|
|
|
605
|
|
Total
operating expenses
|
|
|
642,726
|
|
|
528,907
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
20,596
|
|
|
12,852
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
1,754
|
|
|
783
|
|
Interest
expense
|
|
|
(4,797
|
)
|
|
(3,876
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
17,553
|
|
|
9,759
|
|
Income
tax provision
|
|
|
6,791
|
|
|
3,406
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
10,762
|
|
|
6,353
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss)/income, net of tax
|
|
|
|
|
|
|
|
Unrealized
(losses)/gains on available-for-sale securities, net of income tax
benefit/(provision) of $1 in 2005 and ($49) in 2004
|
|
|
(2
|
)
|
|
77
|
|
Reclassification
of amortization of deferred loss on termination of derivative,
net of income tax benefit of $6 in 2004
|
|
|
0
|
|
|
11
|
|
Total
other comprehensive (loss)/income, net of tax
|
|
|
(2
|
)
|
|
88
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
10,760
|
|
$
|
6,441
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
.09
|
|
$
|
.05
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
.09
|
|
$
|
.05
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(Unaudited)
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
(In
thousands, except per share amounts)
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,954,937
|
|
$
|
1,746,234
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
1,331,761
|
|
|
1,211,820
|
|
Selling,
general, and administrative expenses
|
|
|
489,280
|
|
|
431,260
|
|
Expenses
related to cost reduction plan
|
|
|
0
|
|
|
605
|
|
Total
operating expenses
|
|
|
1,821,041
|
|
|
1,643,685
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
133,896
|
|
|
102,549
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
6,741
|
|
|
1,592
|
|
Interest
expense
|
|
|
(13,434
|
)
|
|
(11,639
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
127,203
|
|
|
92,502
|
|
Income
tax provision
|
|
|
47,000
|
|
|
32,841
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
80,203
|
|
|
59,661
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss)/income, net of tax
|
|
|
|
|
|
|
|
Unrealized
(losses)/gains on available-for-sale securities, net of income tax
benefit/(provision) of $1 in 2005 and ($147) in 2004
|
|
|
(2
|
)
|
|
230
|
|
Reclassification
of amortization of deferred loss on termination of derivative, net
of
income tax benefit of $69 in 2004
|
|
|
0
|
|
|
128
|
|
Total
other comprehensive (loss)/income, net of tax
|
|
|
(2
|
)
|
|
358
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
80,201
|
|
$
|
60,019
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
.67
|
|
$
|
.52
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
.61
|
|
$
|
.48
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated)
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
80,203
|
|
$
|
59,661
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
65,036
|
|
|
57,681
|
|
Deferred
income taxes
|
|
|
(4,420
|
)
|
|
3,536
|
|
Tax
benefit related to stock plans
|
|
|
2,365
|
|
|
4,187
|
|
Net
(gain)/loss from disposition of capital assets
|
|
|
(785
|
)
|
|
646
|
|
Gain
from securitization of Catherines portfolio
|
|
|
(759
|
)
|
|
0
|
|
Loss
on sales of available-for-sale securities
|
|
|
0
|
|
|
185
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Merchandise
inventories
|
|
|
(118,126
|
)
|
|
(68,960
|
)
|
Accounts
payable
|
|
|
48,691
|
|
|
31,467
|
|
Deferred
advertising
|
|
|
(17,249
|
)
|
|
0
|
|
Prepayments
and other
|
|
|
8,902
|
|
|
(19,649
|
)
|
Accrued
expenses and other
|
|
|
28,183
|
|
|
18,862
|
|
Income
taxes payable
|
|
|
8,963
|
|
|
828
|
|
Net
cash provided by operating activities
|
|
|
101,004
|
|
|
88,444
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Investment
in capital assets
|
|
|
(68,177
|
)
|
|
(42,078
|
)
|
Proceeds
from sales of capital assets
|
|
|
2,432
|
|
|
0
|
|
Proceeds
from sales of available-for-sale securities
|
|
|
17,714
|
|
|
45,571
|
|
Gross
purchases of available-for-sale securities
|
|
|
(51,325
|
)
|
|
(30,887
|
)
|
Acquisition
of Crosstown Traders, Inc., net of cash acquired
|
|
|
(256,702
|
)
|
|
0
|
|
Purchase
of Catherines
receivables portfolio
|
|
|
(56,582
|
)
|
|
0
|
|
Securitization
of Catherines
receivables portfolio
|
|
|
56,582
|
|
|
0
|
|
Securitization
of Crosstown apparel-related receivables
|
|
|
50,000
|
|
|
0
|
|
Increase
in other assets
|
|
|
(2,455
|
)
|
|
(5,610
|
)
|
Net
cash used by investing activities
|
|
|
(308,513
|
)
|
|
(33,004
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
261,311
|
|
|
150,298
|
|
Repayments
of short-term borrowings
|
|
|
(211,311
|
)
|
|
(150,298
|
)
|
Proceeds
from long-term borrowings
|
|
|
50,000
|
|
|
13,098
|
|
Repayments
of long-term borrowings
|
|
|
(18,480
|
)
|
|
(12,813
|
)
|
Payments
of deferred financing costs
|
|
|
(1,371
|
)
|
|
(350
|
)
|
Proceeds
from issuance of common stock
|
|
|
5,987
|
|
|
23,722
|
|
Net
cash provided by financing activities
|
|
|
86,136
|
|
|
23,657
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(121,373
|
)
|
|
79,097
|
|
Cash
and cash equivalents, beginning of period
|
|
|
273,049
|
|
|
123,781
|
|
Cash
and cash equivalents, end of period
|
|
$
|
151,676
|
|
$
|
202,878
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities
|
|
|
|
|
|
|
|
Equipment
acquired through capital leases
|
|
$
|
3,892
|
|
$
|
5,399
|
|
|
|
|
|
|
|
|
|
Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Condensed
Consolidated Financial Statements
We
have
prepared our condensed consolidated balance sheet as of October 29, 2005, our
condensed consolidated statements of operations and comprehensive income for
the
thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30,
2004, and our condensed consolidated statements of cash flows for the
thirty-nine weeks ended October 29, 2005 and October 30, 2004 without audit.
In
our opinion, we have made all adjustments (which, except for the restatement
discussed in Note 2 below, include only normal recurring adjustments) necessary
to present fairly our financial position, results of operations, and cash flows.
We have condensed or omitted certain information and footnote disclosures
normally included in financial statements prepared in accordance with United
States generally accepted accounting principles. These financial statements
and
related notes should be read in conjunction with our financial statements and
related notes included in our January 29, 2005 Annual Report on Form 10-K.
As a
result of our acquisition of Crosstown Traders, Inc. (“Crosstown”) (see
“Note
3. Acquisition of Crosstown Traders, Inc.”
below),
the following information on accounting policies related to segment reporting,
revenue recognition, inventories, and deferred advertising has been updated
to
reflect certain critical accounting policies followed by Crosstown. The results
of operations for the thirteen weeks and thirty-nine weeks ended October 29,
2005 and October 30, 2004 are not necessarily indicative of operating results
for the full fiscal year.
As
used
in these notes, the terms “Fiscal 2006” and “Fiscal 2005” refer to our fiscal
year ending January 28, 2006 and our fiscal year ended January 29, 2005,
respectively. The term “Fiscal 2007” refers to our fiscal year ending February
3, 2007. The terms “Fiscal 2006 Third Quarter” and “Fiscal 2005 Third Quarter”
refer to the thirteen weeks ended October 29, 2005 and October 30, 2004,
respectively. The terms “Fiscal 2006 Fourth Quarter” and “Fiscal 2005 Fourth
Quarter” refer to the thirteen weeks ending January 28, 2006 and the thirteen
weeks ended January 29, 2005, respectively. The terms “the Company,” “we,” “us,”
and “our” refer to Charming Shoppes, Inc. and, where applicable, its
consolidated subsidiaries.
Segment
Reporting
Effective
with our acquisition of Crosstown, we operate and report in two segments, Retail
Stores and Direct-to-Consumer, which are consistent with the way our chief
operating decision-makers review our results of operations. The Retail Stores
segment derives its revenues from sales through retail stores and E-commerce
under our LANE
BRYANT,
FASHION
BUG,
and
CATHERINES
PLUS SIZES
brands.
The Direct-to-Consumer segment derives its revenues from catalog sales and
catalog-related E-commerce sales under our Crosstown catalogs. See “Note
11. Segment Reporting”
below
for further information regarding our segment reporting.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101
(“SAB
101”), “Revenue
Recognition in the Financial Statements,”
as
amended. Our revenues from merchandise sales are net of returns and allowances
and exclude sales tax. We record a reserve for estimated future sales returns
based on an analysis of actual returns and we defer recognition of layaway
sales
to the date of delivery. A change in our actual rates of sales returns and
layaway sales experience would affect the level of revenue
recognized.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
Revenue
Recognition (Continued)
Catalog
and E-commerce revenues include shipping and handling fees billed to customers.
These revenues are recognized after the following have occurred: the customer’s
order has been executed; authorization of the customer’s credit card has been
received; and the product has been shipped to and received by the customer.
We
record a reserve for estimated future sales returns based on an analysis of
actual returns. In addition, we record a reserve for estimated sales shipped
but
not yet received by customers. A change in our actual rates of sales returns
and/or days it takes for customers to receive our products would affect the
level of revenue recognized.
Inventories
We
value
our merchandise inventories at the lower of cost or market, using the retail
inventory method (average cost basis) for our Retail Stores and our
Direct-to-Consumer segment inventories.
Deferred
Advertising (Catalog)
With
the
exception of direct-response advertising, we expense advertising costs when
the
related event takes place. In accordance with American Institute of Certified
Public Accountants (“AICPA”) Statement of Position (“SOP”) 93-7, “Reporting
on Advertising Costs,” we
accumulate all direct costs incurred in the development, production, and
circulation of our direct-mail catalogs on our consolidated balance sheet until
such time as the related catalog is mailed. These capitalized costs are
subsequently amortized as a component of cost of goods sold, buying, catalog,
and occupancy expenses over the expected sales realization cycle, generally
within one to six months. Our
initial estimation of the expected sales realization cycle for a particular
catalog merchandise offering is based on, among other possible considerations,
our historical sales and sell-through experience with similar catalog
merchandise offerings, our understanding of then-prevailing fashion trends
and
influences, our assessment of prevailing economic conditions, and various
competitive factors.
We
continually track our subsequent sales realization, compile customer feedback
for indications of future performance, reassess the marketplace, compare our
findings to our previous estimate, and adjust our amortization
accordingly.
Cash
Consideration Received from Vendors
We
account for cash consideration received from vendors in accordance with the
provisions of Financial Accounting Standards Board (“FASB”) Emerging Issues Task
Force (“EITF”) Issue 02-16, “Accounting
by a Customer (Including a Reseller) for Cash Consideration Received from a
Vendor.”
Accordingly, cash consideration received from vendors is recognized when the
related merchandise is sold.
Stock-based
Compensation
We
account for stock-based compensation using the intrinsic value method, in
accordance with Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting
for Stock Issued to Employees,”
and
its related interpretations. We amortize deferred compensation expense
attributable to stock awards and stock options having an exercise price less
than the market price on the date of grant on a straight-line basis over the
vesting period of the award or option. We do not recognize compensation expense
for options having an exercise price equal to the market price on the date
of
grant or for shares purchased under our Employee Stock Purchase
Plan.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
The
following table reconciles net income and net income per share as reported,
using the intrinsic value method under APB No. 25, to pro forma net income
and
net income per share using the fair value method under FASB Statement of
Financial Accounting Standards (“SFAS”) No. 123, “Accounting
for Stock-based Compensation:”
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
(In
thousands, except per share amounts)
|
|
October
29,
2005
|
|
October
30,
2004
|
|
October
29,
2005
|
|
October
30,
2004
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
10,762
|
|
$
|
6,353
|
|
$
|
80,203
|
|
$
|
59,661
|
|
Add
stock-based employee compensation using intrinsic value method,
net of
income taxes
|
|
|
1,140
|
|
|
317
|
|
|
3,033
|
|
|
1,081
|
|
Less
stock-based employee compensation using fair value method, net
of income
taxes
|
|
|
(1,159
|
)
|
|
(982
|
)
|
|
(3,323
|
)
|
|
(2,780
|
)
|
Pro
forma net income
|
|
$
|
10,743
|
|
$
|
5,688
|
|
$
|
79,913
|
|
$
|
57,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.09
|
|
$
|
.05
|
|
$
|
.67
|
|
$
|
.52
|
|
Pro
forma
|
|
|
.09
|
|
|
.05
|
|
|
.67
|
|
|
.50
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
.09
|
|
|
.05
|
|
|
.61
|
|
|
.48
|
|
Pro
forma
|
|
|
.09
|
|
|
.05
|
|
|
.61
|
|
|
.46
|
|
Note
2. Restatement of Financial Statements
In
the
Fiscal 2005 Fourth Quarter, we restated our financial statements for the prior
quarters of Fiscal 2005 to correct our accounting for landlord allowances,
calculation of straight-line rent expense, recognition of rent holiday periods,
and depreciation of leasehold improvements for our retail stores. See
“Item
8. Financial Statements and Supplementary Data; Note 2. Restatement of Financial
Statements”
of our
Report on Form 10-K for the fiscal year ended January 29, 2005 for additional
information.
Prior
to
the restatement, we classified construction allowances received from landlords
in connection with our store leases as a reduction of property, equipment,
and
leasehold improvements on our consolidated balance sheets and as a reduction
of
capital expenditures on our consolidated statements of cash flows. In addition,
when accounting for leases with renewal options, we historically recorded rent
expense on a straight-line basis over the initial non-cancelable lease term,
beginning with the lease commencement date. However, we depreciated leasehold
improvements over their estimated useful life of ten years, which, in many
cases, may have included both the initial non-cancelable lease term and option
renewal periods provided for in the lease. Also, we historically recognized
rent
holiday periods on a straight-line basis over the lease term commencing with
the
initial occupancy date instead of the date we took possession of the leased
space for construction purposes, which is generally two months prior to a store
opening date.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
2. Restatement of Financial Statements (Continued)
As
a
result of the restatement, we record construction allowances as a deferred
rent
liability on our consolidated balance sheets rather than as a reduction of
the
cost of leasehold improvements, and recognize construction allowances as an
operating activity on our consolidated statements of cash flows rather than
as a
reduction of our investment in capital assets. In addition, we amortize
construction allowances over the related lease term as a reduction of rent
expense rather than as a reduction of depreciation expense, commencing on the
date we take possession of the leased space for construction purposes.
The
lease
term we use to record straight-line rent expense and depreciation of leasehold
improvements includes lease option renewal periods only in instances in which
the exercise of the option period is reasonably assured and the failure to
exercise such an option would result in an economic penalty. We depreciate
leasehold improvements over the shorter of the lease term or the assets’
estimated useful lives. The lease terms we use to determine straight-line rent
expense include pre-opening store build-out periods (commonly referred to as
“rent holidays”), where applicable. These corrections resulted in the
accelerated recognition of certain annual rent expense and depreciation expense
on leasehold improvements, which are included in “cost of goods sold, buying,
catalog, and occupancy expenses” on the consolidated statements of operations
and comprehensive income.
The
effects of the restatement on our condensed consolidated financial statements,
as previously reported in our Fiscal 2005 Form 10-K, are summarized as
follows:
|
|
Thirteen
Weeks Ended October 30, 2004
|
|
|
|
As
Previously
|
|
|
|
As
|
|
(In
thousands, except per share amounts)
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
$
|
377,457
|
|
$
|
1,076
|
|
$
|
378,533
|
|
Income
tax provision
|
|
|
3,803
|
|
|
(397
|
)
|
|
3,406
|
|
Net
income
|
|
|
7,032
|
|
|
(679
|
)
|
|
6,353
|
|
Basic
net income per share
|
|
$
|
.06
|
|
$
|
(.01
|
)
|
$
|
.05
|
|
Diluted
net income per share
|
|
|
.06
|
|
|
(.01
|
)
|
|
.05
|
|
|
|
Thirty-nine
Weeks Ended October 30, 2004
|
|
|
|
As
Previously
|
|
|
|
As
|
|
(In
thousands, except per share amounts)
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
$
|
1,208,592
|
|
$
|
3,228
|
|
$
|
1,211,820
|
|
Income
tax provision
|
|
|
34,032
|
|
|
(1,191
|
)
|
|
32,841
|
|
Net
income
|
|
|
61,698
|
|
|
(2,037
|
)
|
|
59,661
|
|
Basic
net income per share
|
|
$
|
.53
|
|
$
|
(.01
|
)
|
$
|
.52
|
|
Diluted
net income per share
|
|
|
.49
|
|
|
(.01
|
)
|
|
.48
|
|
|
|
|
|
|
|
|
|
|
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
2. Restatement of Financial Statements (Continued)
|
|
Thirty-nine
Weeks Ended October 30, 2004
|
|
|
|
As
Previously
|
|
|
|
As
|
|
(In
thousands)
|
|
Reported(1)
|
|
Adjustments
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
61,698
|
|
$
|
(2,037
|
)
|
$
|
59,661
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
51,426
|
|
|
6,255
|
|
|
57,681
|
|
Deferred
income taxes
|
|
|
4,727
|
|
|
(1,191
|
)
|
|
3,536
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other
|
|
|
14,987
|
|
|
3,875
|
|
|
18,862
|
|
Net
cash provided by operating activities
|
|
|
81,542
|
|
|
6,902
|
|
|
88,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Investment
in capital assets
|
|
|
(35,176
|
)
|
|
(6,902
|
)
|
|
(42,078
|
)
|
Net
cash used by investing activities
|
|
|
(26,102
|
)
|
|
(6,902
|
)
|
|
(33,004
|
)
|
___________________
|
|
|
|
|
|
|
|
|
|
|
(1) Certain
amounts have been reclassified to conform to the current-year
presentation.
|
Note
3. Acquisition of Crosstown Traders, Inc.
On
June
2, 2005, we acquired 100% of the outstanding stock of Crosstown Traders, Inc.
("Crosstown"), a direct marketer of women’s apparel, footwear, accessories, and
specialty gifts, from JPMorgan Partners, the private equity arm of J.P. Morgan
Chase & Co.
Crosstown
Traders, Inc. operates multiple catalog titles and related websites, with
revenues of approximately $460 million for the fiscal year ended January 29,
2005. The majority of Crosstown’s revenues are derived from the catalog sales of
women’s apparel, footwear, and accessories, of which plus-sizes are an important
component. Crosstown
also derives revenues from the catalog sales of food and gifts, the majority
of
which occur during the fourth quarter of the fiscal year. The
acquisition of Crosstown provides us with an infrastructure for the development
and expansion of our Direct-to-Consumer segment, which will include our catalog
and catalog-related E-commerce sales distribution channels.
Under
the
terms of the agreement, we paid $218,015,000 in cash for Crosstown and assumed
Crosstown’s debt of $40,728,000. We also incurred direct costs related to the
acquisition (primarily advisory, legal, and statutory fees) of approximately
$3,774,000. Subsequent to the acquisition, we securitized Crosstown’s
apparel-related accounts receivable under a new conduit funding facility
established specifically for funding the Crosstown receivables. The majority
of
the proceeds of approximately $50,000,000 from the securitization were used
to
retire Crosstown’s debt.
We
financed the acquisition with $108,015,000 of our existing cash and cash
equivalents and $110,000,000 of borrowings under our then-existing revolving
credit facility. Subsequent to the acquisition, we amended our credit facility
(see "Note
5. Short-term Borrowings and Long-term Debt"
below).
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
3. Acquisition of Crosstown Traders, Inc. (Continued)
We
accounted for the acquisition under the purchase method of accounting, and
included the results of operations of Crosstown in our results of operations
from the date of acquisition. Prior-period results have not been restated for
the acquisition. Amounts recognized for assets acquired and liabilities assumed
are based on preliminary purchase price allocations and on certain management
judgments. These preliminary allocations are based on an analysis of the
estimated fair values of assets acquired and liabilities assumed, including
identifiable tangible and intangible assets, deferred tax assets and
liabilities, and estimates of the useful lives of tangible and amortizable
intangible assets. The final purchase price allocations will be completed after
we obtain third-party appraisals, review all available data, and complete our
own internal assessments. Any additional adjustments resulting from finalization
of the purchase price allocations for Crosstown will affect the amount assigned
to goodwill.
In
accordance with the provisions of SFAS No. 142, “Goodwill
and Other Intangible Assets,”
the
acquired trademarks, tradenames, and internet domain names will not be
amortized, but will be subject to annual reviews for impairment or for
indicators of a limited useful life. Other intangible assets acquired,
consisting of Crosstown customer relationships, are being amortized over their
estimated useful life of four years.
The
excess of the cost of the acquisition over the estimated fair value of the
identifiable net assets acquired will be allocated to goodwill. In accordance
with the requirements of SFAS No. 142, the goodwill will not be amortized,
but
will be subject to an annual review for impairment.
The
preliminary purchase price allocation for the identifiable tangible and
intangible assets and liabilities of Crosstown Traders is as
follows:
|
|
Purchase
|
|
|
|
Price
|
|
(In
thousands)
|
|
Allocation
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
177,256
|
|
Fair
value of liabilities acquired
|
|
|
(56,598
|
)
|
Intangible
assets subject to amortization
|
|
|
10,700
|
|
Intangible
assets not subject to amortization
|
|
|
70,000
|
|
Deferred
tax effect of acquisition
|
|
|
(25,826
|
)
|
Goodwill
|
|
|
86,985
|
|
Total
purchase price
|
|
$
|
262,517
|
|
Contemporaneous
with the completion of the acquisition, we started preparing a formal
integration plan. Management’s plans are preliminary, and may include exiting or
consolidating certain activities of Crosstown, lease terminations and
unfavorable contract costs, severance, and certain other exit costs. Upon
completion of our plans, we anticipate that expenses may total approximately
$5,000,000. As such, this amount has been recorded as a component of the
purchase price of the acquisition in accordance with EITF Issue 95-3,
“Recognition
of Liabilities in Connection with a Purchase Business
Combination.”
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
3. Acquisition of Crosstown Traders, Inc. (Continued)
The
following unaudited pro forma information is based on historical data, and
gives
effect to our acquisition of Crosstown as if the acquisition had occurred on
January 31, 2004. The pro forma information includes adjustments having a
continuing impact on our consolidated results of operations as a result of
using
the purchase method of accounting for the acquisition. These adjustments consist
of: additional depreciation of fair value adjustments for property, equipment,
and leasehold improvements; amortization of the fair value of customer
relationships acquired; additional interest expense from borrowings incurred
to
finance the acquisition and amortization of deferred financing costs related
to
amending our credit facility; reduced interest expense from the repayment of
Crosstown’s debt; and a reduction in interest income from the use of cash and
cash equivalents to fund a portion of the acquisition cost.
The
unaudited pro forma information has been prepared based on preliminary purchase
price allocations, using assumptions that our management believes are
reasonable. It is not necessarily indicative of the actual results of operations
that would have occurred if the acquisition had occurred as of January 31,
2004,
and is not necessarily indicative of the results that may be achieved in the
future. The unaudited pro forma information does not reflect adjustments for
the
effect of non-recurring items or for operating synergies that we may realize
as
a result of the acquisition.
Unaudited
pro forma results of operations:
|
|
Thirteen
|
|
|
|
|
|
Weeks
Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
30,
|
|
October
29,
|
|
October
30,
|
|
(In
thousands, except per share amounts)
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
628,702
|
|
$
|
2,103,952
|
|
$
|
2,032,800
|
|
Net
income
|
|
|
6,048
|
|
|
77,150
|
|
|
57,948
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.05
|
|
$
|
.65
|
|
$
|
.50
|
|
Diluted
|
|
|
.05
|
|
|
.59
|
|
|
.46
|
|
Note
4. Trademarks and Other Intangible Assets
|
|
October
29,
|
|
January
29,
|
|
(In
thousands)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
Trademarks,
tradenames, and internet domain names
|
|
$
|
238,800
|
|
$
|
168,800
|
|
Customer
lists, customer relationships, and covenant not to compete
|
|
|
14,000
|
|
|
3,300
|
|
Total
at cost
|
|
|
252,800
|
|
|
172,100
|
|
Less
accumulated amortization of customer lists, customer relationships,
and
covenant not to compete
|
|
|
3,892
|
|
|
2,282
|
|
Net
trademarks and other intangible assets
|
|
$
|
248,908
|
|
$
|
169,818
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
5. Short-term Borrowings and Long-term Debt
|
|
October
29,
|
|
January
29,
|
|
(In
thousands)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$
|
50,000
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
|
4.75%
Senior Convertible Notes, due June 2012
|
|
$
|
150,000
|
|
$
|
150,000
|
|
Revolving
credit facility
|
|
|
50,000
|
|
|
0
|
|
Capital
lease obligations
|
|
|
27,871
|
|
|
34,825
|
|
6.07%
mortgage note, due October 2014
|
|
|
12,404
|
|
|
12,821
|
|
6.53%
mortgage note, due November 2012
|
|
|
9,800
|
|
|
10,850
|
|
7.77%
mortgage note, due December 2011
|
|
|
9,183
|
|
|
9,564
|
|
Variable
rate mortgage note, due March 2006
|
|
|
0
|
|
|
5,605
|
|
Other
long-term debt
|
|
|
1,218
|
|
|
1,399
|
|
Total
long-term debt
|
|
|
260,476
|
|
|
225,064
|
|
Less
current portion
|
|
|
15,249
|
|
|
16,419
|
|
Long-term
debt
|
|
$
|
245,227
|
|
$
|
208,645
|
|
On
July
28, 2005, we amended our existing $300,000,000 revolving credit facility, which
was scheduled to expire on August 15, 2008. The amended facility agreement
provides for a revolving credit facility with a maximum availability of
$375,000,000, subject to certain limitations as defined in the facility
agreement, and provides that up to $300,000,000 of the facility may be used
for
letters of credit. In addition, we may request, subject to compliance with
certain conditions, additional revolving credit commitments up to an aggregate
of $500,000,000. The amended facility agreement expires on July 28, 2010. In
connection with the amendment, we capitalized approximately $1,371,000 of fees
that are being amortized on a straight-line basis over the life of the amended
facility agreement. Of the $110,000,000 borrowed under the facility in
connection with the acquisition of Crosstown Traders, Inc. (see “Note
3. Acquisition of Crosstown Traders, Inc.”
above),
$10,000,000 has been repaid and $50,000,000 of borrowings has been classified
as
short-term borrowings, as it is our intention to re-pay such borrowings within
12 months.
The
interest rate on borrowings under the facility is Prime for Prime Rate Loans,
and LIBOR as adjusted for the Reserve Percentage (as defined in the facility
agreement) plus 1.0% to 1.5% per annum for Eurodollar Rate Loans. The applicable
rate is determined monthly, based on our average excess availability, as defined
in the facility agreement. As of October 29, 2005, the applicable rates on
borrowings under the facility were 6.75% for Prime Rate Loans and 5.07% (LIBOR
plus 1%) for Eurodollar Rate Loans. All borrowings outstanding under the
facility as of October 29, 2005 were Eurodollar Rate Loans, with a
weighted-average interest rate of 4.81% (LIBOR plus 1%).
The
amended facility includes provisions for customary representations and
warranties and affirmative covenants, and includes customary negative covenants
providing for certain limitations on, among other things, sales of assets;
indebtedness; loans, advances and investments; acquisitions; guarantees; and
dividends and redemptions. Under certain circumstances involving a decrease
in
“Excess Availability” (as defined in the facility agreement), we may be required
to maintain a minimum “Fixed Charge Coverage Ratio” (as defined in the facility
agreement).
On
August
8, 2005, we repaid the variable rate mortgage note, due March
2006.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
6. Stockholders’ Equity
|
|
Thirty-nine
|
|
|
|
Weeks
Ended
|
|
|
|
October
29,
|
|
(Dollars
in thousands)
|
|
2005
|
|
|
|
|
|
|
Total
stockholders’ equity, beginning of period
|
|
$
|
694,464
|
|
Net
income
|
|
|
80,203
|
|
Issuance
of common stock (1,114,612 shares)
|
|
|
5,987
|
|
Tax
benefit related to stock plans
|
|
|
2,365
|
|
Unrealized
losses on available-for-sale securities, net of tax
|
|
|
(2
|
)
|
Amortization
of deferred compensation expense
|
|
|
4,667
|
|
Total
stockholders’ equity, end of period
|
|
$
|
787,684
|
|
Note
7. Customer Loyalty Card Programs
We
offer
various loyalty card programs to our Retail Stores segment customers. Customers
who join these programs are entitled to various benefits, including discounts
and rebates on purchases during the membership period. Customers generally
join
these programs by paying an annual membership fee. We recognize revenue from
these loyalty programs as sales over the life of the membership period based
on
when the customer earns the benefits and when the fee is no longer refundable.
We recognize costs
we
incur in connection with administering these programs as cost of goods sold
when
incurred. During the thirteen weeks and thirty-nine weeks ended October 29,
2005
we recognized revenues of $3,878,000 and $11,309,000, respectively, in
connection with our loyalty card programs. During the thirteen weeks and
thirty-nine weeks ended October 30, 2004 we recognized revenues of $3,722,000
and $11,168,000, respectively, in connection with our loyalty card programs.
Note
8. Net Income Per Share
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
October
29,
|
|
October
30,
|
|
(In
thousands)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
120,102
|
|
|
117,217
|
|
|
119,513
|
|
|
115,474
|
|
Dilutive
effect of assumed conversion of convertible notes
|
|
|
15,182
|
|
|
0
|
|
|
15,182
|
|
|
15,182
|
|
Dilutive
effect of stock options and awards
|
|
|
2,268
|
|
|
1,416
|
|
|
1,939
|
|
|
1,744
|
|
Diluted
weighted average common shares and equivalents outstanding
|
|
|
137,552
|
|
|
118,633
|
|
|
136,634
|
|
|
132,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,762
|
|
$
|
6,353
|
|
$
|
80,203
|
|
$
|
59,661
|
|
Decrease
in interest expense from assumed conversion of notes, net of income
taxes
|
|
|
1,128
|
|
|
0
|
|
|
3,385
|
|
|
3,404
|
|
Net
income used to determine diluted net income per share
|
|
$
|
11,890
|
|
$
|
6,353
|
|
$
|
83,588
|
|
$
|
63,065
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
8. Net Income Per Share (Continued)
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
October
29,
|
|
October
30,
|
|
(In
thousands, except per share amounts)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
with weighted average exercise price greater than market price, excluded
from computation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
0
|
|
|
446
|
|
|
0
|
|
|
432
|
|
Weighted
average exercise price per share
|
|
$
|
0.00
|
|
$
|
8.23
|
|
$
|
0.00
|
|
$
|
8.28
|
|
Note
9. Income Taxes
The
effective income tax rate was 36.9% for the thirty-nine weeks ended October
29,
2005, as compared to 35.5% for the thirty-nine weeks ended October 30, 2004.
The
tax rate for the thirty-nine weeks ended October 29, 2005 was unfavorably
affected by taxes on the repatriation of profits from international operations
on which incremental United States income taxes had not been previously accrued
(see below), and was favorably affected by charitable contributions of
inventories to hurricane relief efforts. The tax rate for the thirty-nine weeks
ended October 29, 2004 was favorably affected by the finalization of certain
prior-year tax audits.
On
October 22, 2004, the President of the United States of America signed into
law
H.R. 4250, “The American Jobs Creation Act of 2004” (the “Act”). The Act
includes among its provisions certain tax benefits related to the repatriation
to the United States of profits from a company’s international operations
provided that certain criteria are met, including the implementation of a
qualifying reinvestment plan for the repatriated earnings. The Act permits
the
repatriation of profits from international operations at a tax rate not to
exceed 5.25% for approximately a one-year period, subject to certain
limitations.
We
did
not previously record a provision for incremental United States income taxes
on
profits from our international operations, as it was our intention to
permanently reinvest such undistributed profits in our international operations.
Based on a preliminary evaluation approved by our Board of Directors during
the
Fiscal 2006 Third Quarter, it is reasonably possible that we will repatriate
profits from international operations in the range of $35,000,000 to
$45,000,000, which would result in the payment of income taxes in the range
of
$1,000,000 to $2,000,000, net of applicable foreign tax credits. Accordingly,
the tax provision for the thirty-nine weeks ended October 29, 2005 includes
$1,390,000 related to the planned repatriation of international profits. As
of
October 29, 2005, we have not finalized our formal plan for the reinvestment
of
any repatriated profits. We will finalize the repatriation of any such profits
and our formal plan for the reinvestment of such profits before the end of
Fiscal 2006.
Note
10. Asset Securitization
Our
FASHION BUG and CATHERINES proprietary credit card receivables are originated
by
Spirit of America National Bank (our wholly-owned credit card bank), which
transfers its interest in the receivables to the Charming Shoppes Master Trust
(the “Trust”) through a special-purpose entity. The Trust is an unconsolidated
qualified special-purpose entity (“QSPE”).
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
10. Asset Securitization (Continued)
In
March
2005, Spirit of America National Bank purchased the CATHERINES credit card
portfolio. The final purchase price for the portfolio was $54,600,000. The
purchase was funded through our securitization facilities, including a portion
of the proceeds from the sale of certificates under our Series 2004-1
securitization facility. Prior to purchasing the portfolio, we had a
non-recourse agreement, scheduled to expire in March 2005, under which a third
party provided an accounts receivable proprietary credit card sales accounts
receivable funding facility for the CATHERINES proprietary credit cards. In
accordance with the terms of the Merchant Services Agreement pursuant to which
the CATHERINES proprietary credit cards were issued, we gave the requisite
notice of our intent to exercise our option to purchase the CATHERINES portfolio
upon the expiration of the agreement. The Merchant Services Agreement provided
us with the ability to purchase the CATHERINES portfolio at par value. The
purchase of the portfolio at par value and the subsequent securitization of
the
purchased portfolio resulted in the recognition of a gain of approximately
$2,400,000, which is included in selling, general, and administrative expenses
for the thirty-nine weeks ended October 29, 2005.
Subsequent
to our acquisition of Crosstown Traders, Inc., we securitized Crosstown’s
apparel-related catalog proprietary credit card receivables under a new conduit
funding facility established with an initial term of one year specifically
for
funding the Crosstown accounts receivable. The majority of the $50,000,000
in
proceeds from the securitization was used to retire Crosstown’s debt.
Crosstown’s credit card receivables are originated in a non-bank program by
Crosstown, which transfers its interest in the receivables through a
special-purpose entity to an unconsolidated QSPE that is separate and distinct
from the Trust.
The
QSPEs
can sell interests in these receivables on a revolving basis for a specified
term. At the end of the revolving period, an amortization period begins during
which the QSPEs make principal payments to the parties that have entered into
the securitization agreements with the QSPEs.
Note
11. Segment Reporting
With
the
acquisition of Crosstown, we now operate in two segments, Retail Stores and
Direct-to-Consumer, which are consistent with the way our chief operating
decision-makers review our results of operations. The Retail Stores segment
derives its revenues from sales through retail stores and E-commerce under
our
LANE
BRYANT,
FASHION
BUG,
and
CATHERINES
PLUS SIZES
brands.
The Direct-to-Consumer segment derives its revenues from catalog sales and
catalog-related E-commerce sales under our Crosstown catalogs.
The
accounting policies of the segments are generally the same as those described
in
“Item
8. Financial Statements and Supplementary Data; Note 1. Summary of Significant
Accounting Policies” in
our
January 29, 2005 Annual Report on Form 10-K. Our direct-response advertising
production costs are expensed over the estimated revenue stream, generally
within one to six months. We use income before interest and taxes excluding
unallocated corporate costs to evaluate segment profitability. Corporate costs
that are currently allocated to the Retail Stores segment include shared service
center costs, information systems and support costs, and warehousing costs.
The
following financial information for the Direct-to-Consumer segment for Fiscal
2006 does not include allocations of corporate costs. We expect to include
corporate cost allocations for the Direct-to-Consumer segment in the future.
Unallocated costs include corporate general and administrative costs, corporate
depreciation and amortization, corporate occupancy costs, costs of administering
our proprietary credit card operations, interest, taxes, and other non-routine
charges. Unallocated assets include corporate cash and cash equivalents, the
net
book value of corporate facilities, deferred income taxes, and other corporate
long-lived assets.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
11. Segment Reporting (Continued)
Selected
financial information for our operations by reportable segments and a
reconciliation of the information by segment to our consolidated totals is
as
follows:
|
|
Retail
|
|
Direct-to-
|
|
Corporate
|
|
|
|
(in
thousands)
|
|
Stores
|
|
Consumer(1)
|
|
and
Other
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended October 29, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
568,922
|
|
$
|
93,613
|
|
$
|
787
|
|
$
|
663,322
|
|
Depreciation
and amortization
|
|
|
10,877
|
|
|
440
|
|
|
11,824
|
|
|
23,141
|
|
Income
before interest and taxes
|
|
|
30,213
|
|
|
2,444
|
|
|
(10,307
|
)
|
|
22,350
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
(4,797
|
)
|
|
(4,797
|
)
|
Income
tax provision
|
|
|
|
|
|
|
|
|
(6,791
|
)
|
|
(6,791
|
)
|
Net
income
|
|
|
30,213
|
|
|
2,444
|
|
|
(21,895
|
)
|
|
10,762
|
|
Capital
expenditures
|
|
|
23,398
|
|
|
1,048
|
|
|
6,338
|
|
|
30,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine
weeks ended October 29, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,810,907
|
|
$
|
143,052
|
|
$
|
978
|
|
$
|
1,954,937
|
|
Depreciation
and amortization
|
|
|
31,159
|
|
|
717
|
|
|
33,160
|
|
|
65,036
|
|
Income
before interest and taxes
|
|
|
162,455
|
|
|
2,510
|
|
|
(24,328
|
)
|
|
140,637
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
(13,434
|
)
|
|
(13,434
|
)
|
Income
tax provision
|
|
|
|
|
|
|
|
|
(47,000
|
)
|
|
(47,000
|
)
|
Net
income
|
|
|
162,455
|
|
|
2,510
|
|
|
(84,762
|
)
|
|
80,203
|
|
Capital
expenditures
|
|
|
51,249
|
|
|
1,345
|
|
|
15,583
|
|
|
68,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of October 29, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
852,798
|
|
$
|
316,061
|
|
$
|
494,446
|
|
$
|
1,663,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended October 30, 2004(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
540,825
|
|
|
|
|
$
|
934
|
|
$
|
541,759
|
|
Depreciation
and amortization
|
|
|
10,295
|
|
|
|
|
|
8,833
|
|
|
19,128
|
|
Income
before interest and taxes
|
|
|
25,181
|
|
|
|
|
|
(11,546
|
)
|
|
13,635
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
(3,876
|
)
|
|
(3,876
|
)
|
Income
tax provision
|
|
|
|
|
|
|
|
|
(3,406
|
)
|
|
(3,406
|
)
|
Net
income
|
|
|
25,181
|
|
|
|
|
|
(18,828
|
)
|
|
6,353
|
|
Capital
expenditures
|
|
|
12,269
|
|
|
|
|
|
5,924
|
|
|
18,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine
weeks ended October 30, 2004(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,744,948
|
|
|
|
|
$
|
1,286
|
|
$
|
1,746,234
|
|
Depreciation
and amortization
|
|
|
32,384
|
|
|
|
|
|
25,297
|
|
|
57,681
|
|
Income
before interest and taxes
|
|
|
132,439
|
|
|
|
|
|
(28,298
|
)
|
|
104,141
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
(11,639
|
)
|
|
(11,639
|
)
|
Income
tax provision
|
|
|
|
|
|
|
|
|
(32,841
|
)
|
|
(32,841
|
)
|
Net
income
|
|
|
132,439
|
|
|
|
|
|
(72,778
|
)
|
|
59,661
|
|
Capital
expenditures
|
|
|
23,537
|
|
|
|
|
|
18,541
|
|
|
42,078
|
|
____________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) From
date of acquisition of Crosstown Traders, Inc. on June 2,
2005.
|
(2) Results
have been restated - see“Note
2. Restatement of Financial Statements”
above.
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12. Impact of Recent Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory
Costs - an Amendment of Accounting Research Bulletin No. 43, Chapter
4.”
SFAS No.
151 clarifies, among other things, that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials costs should be
recognized as current-period expenses rather than being capitalized into
inventory. SFAS No. 151 will be effective as of the beginning of Fiscal 2007.
We
do not expect the adoption of SFAS No. 151 to have a material effect on our
financial condition or results of operations.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment”
(“SFAS
No. 123R” or the “Statement”), a revision of SFAS No. 123. SFAS No. 123R
supersedes APB Opinion No. 25, and amends SFAS No. 95, “Statement
of Cash Flows.”
The
accounting for share-based payments under SFAS No. 123R is similar to the fair
value method in SFAS No. 123, except that we will be required to recognize
the
fair value of share-based payments as compensation expense in our financial
statements (pro forma disclosure will no longer be allowed). See “Item
8. Financial Statements and Supplementary Data; Note 1. Summary of Significant
Accounting Policies”
in our
January 29, 2005 Annual Report on Form 10-K.
In
March
2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin (“SAB”) No. 107, “Share-Based
Payment,”
which
provides guidance regarding the interaction between SFAS No. 123R and certain
SEC rules and regulations, and may simplify some of the more complex
implementation requirements of SFAS No. 123R. In addition, on April 15, 2005,
the SEC issued a rule entitled “Amendment
to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment”
(the
“Rule”). The Rule amends the dates by which SEC registrants are required to
comply with the provisions of SFAS No. 123R. Under the provisions of SFAS No.
123R, we would have been required to adopt SFAS No. 123R as of the beginning
of
the Fiscal 2006 Third Quarter for options and awards granted after the date
of
adoption. As a result of the issuance of the Rule, we will be required to adopt
the provisions of SFAS No. 123R as of the beginning of Fiscal 2007.
In
November, 2005, the FASB issued FASB Staff Position (“FSP”) FAS 123(R)-3,
“Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards.”
FSP FAS
123(R)-3 provides a practical alternative transition election related to
accounting for the tax effects of share-based payment awards to
employees.
Our
adoption of SFAS No. 123R will result in the recognition of additional
compensation expense for stock-based compensation in periods subsequent to
January 28, 2006. However, beginning in Fiscal 2005, we changed the composition
of our stock-based compensation awards to include more restricted stock awards
and fewer stock options. This change has resulted in the recognition of
additional compensation expense under our current accounting policies (APB
Opinion No. 25 “intrinsic value” method), and will reduce the incremental impact
of adopting SFAS No. 123R. In addition, as a result of the increased use of
restricted stock awards, we expect to continue using the Black-Scholes valuation
model and straight-line amortization of compensation expense, which we currently
use for our pro forma disclosures under SFAS No. 123, upon adoption of SFAS
No.
123R.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12. Impact of Recent Accounting Pronouncements (Continued)
Although
we are not able to reliably estimate the nature and amounts of stock-based
awards to be issued in future periods, we believe the future impact of adoption
of SFAS No. 123R will not be materially different from the pro forma results
disclosed in accordance with the provisions of SFAS No. 123. See “Note
1. Condensed Consolidated Financial Statements” above
for
pro forma disclosure of stock-based compensation expense determined in
accordance with the provisions of SFAS No. 123 for the thirteen weeks and
thirty-nine weeks ended October 29, 2005 and October 30, 2004. We have not
yet
determined whether we will adopt the modified-prospective-transition method
or
the modified-retrospective-transition method.
In
May
2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS
No.
154 replaces APB Opinion No. 20, “Accounting
Changes,”
and
supersedes SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements - an amendment of APB Opinion
No. 28.”
SFAS No.
154 generally requires retrospective application to prior-period financial
statements of a change in accounting principle unless it is impracticable to
determine either the period-specific effects or cumulative effects of the
change. SFAS No. 154 will be effective as of the beginning of Fiscal 2007.
We do
not expect the adoption of SFAS No. 154 to have a material effect on our
financial position or results of operations.
In
June
2005, the FASB ratified EITF Issue 05-6, “Determining
the Amortization Period for Leasehold Improvements.”
EITF
Issue 05-6 requires that leasehold improvements purchased subsequent to the
inception of the lease or acquired in a business combination be amortized over
the lesser of the useful life of the assets or a lease term that includes
renewals that are reasonably assured at the date of the purchase or business
combination. The guidance in Issue 05-6 is effective as of the beginning of
our
Fiscal 2006 Third Quarter. Adoption of EITF Issue 05-6 has not had a material
effect on our financial position or results of operations.
In
October 2005, the FASB issued FSP FAS 13-1, “Accounting
for Rental Costs Incurred during a Construction Period.”
FSP FAS
13-1 concludes that rental costs incurred during and after a construction period
are for the right to control the use of a leased asset during and after
construction of a lessee asset. There is no distinction between the right to
use
a leased asset during the construction period and the right to use that asset
after the construction period. Therefore, rental costs associated with ground
or
building operating leases that are incurred during a construction period shall
be recognized as rental expense and included in income from continuing
operations. FSP FAS 13-1 is effective as of the beginning of Fiscal 2007, with
early adoption permitted for financial statements that have not yet been issued.
We do not expect the adoption of FSP FAS 13-1 to have a material effect on
our
financial position or results of operations.
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes included in Item 1 of this report. It should also be read
in
conjunction with the management’s discussion and analysis of financial condition
and results of operations, financial statements, and accompanying notes
appearing in our Annual Report on Form 10-K for the fiscal year ended January
29, 2005. Information on certain critical accounting policies related to segment
reporting, revenue recognition, inventories, and deferred advertising followed
by Crosstown Traders, Inc. (“Crosstown”) (see “RECENT
DEVELOPMENTS”
below)
is included under the caption “CRITICAL
ACCOUNTING POLICIES”
below.
As used in this management’s discussion and analysis, the terms “Fiscal 2006”
and “Fiscal 2005” refer to our fiscal year ending January 28, 2006 and our
fiscal year ended January 29, 2005, respectively. The terms “Fiscal 2006 Third
Quarter” and “Fiscal 2005 Third Quarter” refer to the thirteen weeks ended
October 29, 2005 and October 30, 2004, respectively. The terms “Fiscal 2006
Fourth Quarter” and “Fiscal 2005 Fourth Quarter” refer to the thirteen weeks
ending January 28, 2006 and the thirteen weeks ended January 29, 2005,
respectively. The term “Fiscal 2006 First Quarter” refers to the thirteen weeks
ended April 30, 2005. The terms “the Company,” “we,” “us,” and “our” refer to
Charming Shoppes, Inc. and, where applicable, its consolidated
subsidiaries.
With
the
exception of historical information, the matters contained in the following
analysis and elsewhere in this report are “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, cost reductions, capital expenditures, liquidity, financing needs
or
plans, and plans for future operations, as well as assumptions relating to
the
foregoing. The words “expect,” “should,” “project,” “estimate,” “predict,”
“anticipate,” “plan,” “believes,” and similar expressions are also intended to
identify forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, some of which we cannot predict or quantify.
Future events and actual results, performance, and achievements could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. We assume no obligation to update or revise any
forward-looking statement to reflect actual results or changes in, or additions
to, the factors affecting such forward-looking statements.
Factors
that could cause our actual results of operations or financial condition to
differ from those described in this report include, but are not necessarily
limited to, the following:
· |
Our
business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the
future.
|
· |
A
slowdown in the United States economy, an uncertain economic outlook,
and
escalating energy costs could lead to reduced consumer demand for
our
products in the future.
|
· |
The
women’s specialty retail apparel industry is highly competitive and we
may
be unable to compete successfully against existing or future
competitors.
|
· |
We
may be unable to successfully integrate the operations of Crosstown
Traders, Inc. with the operations of Charming Shoppes, Inc. In addition,
we cannot assure the successful implementation of our business plan
for
Crosstown Traders, Inc.
|
· |
We
cannot assure the successful implementation of our business plan
for
increased profitability and growth in our Retail Stores or
Direct-to-Consumer segments.
|
· |
Our
business plan is largely dependent upon continued growth in the plus-size
women’s apparel market, which may not
occur.
|
· |
We
depend on key personnel, particularly our Chief Executive Officer,
Dorrit
J. Bern, and we may not be able to retain or replace these employees
or
recruit additional qualified
personnel.
|
· |
We
depend on our distribution and fulfillment centers, and could incur
significantly higher costs and longer lead times associated with
distributing our products to our stores and shipping our products
to our
E-commerce and catalog customers if operations at any of these
distribution and fulfillment centers were to be disrupted for any
reason.
|
· |
We
depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents,
and on
our credit card securitization facilities. If we were unable to obtain
sufficient financing at an affordable cost, our ability to merchandise
our
stores and catalogs would be adversely
affected.
|
· |
We
rely significantly on foreign sources of production and face a variety
of
risks generally associated with doing business in foreign markets
and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability; imposition of, or
changes
in, duties or quotas; trade restrictions; increased security requirements
applicable to imports; delays in shipping; increased costs of
transportation; and issues relating to compliance with domestic or
international labor standards.
|
· |
Our
Retail Stores and Direct-to-Consumer segments experience seasonal
fluctuations in net sales and operating income. Any decrease in sales
or
margins during our peak sales periods, or in the availability of
working
capital during the months preceding such periods, could have a material
adverse effect on our business. In addition, extreme or unseasonable
weather conditions may have a negative impact on our
sales.
|
· |
Natural
disasters, as well as war, acts of terrorism, or the threat of either
may
negatively impact availability of merchandise and customer traffic
to our
stores, or otherwise adversely affect our
business.
|
· |
We
may be unable to obtain adequate insurance for our operations at
a
reasonable cost.
|
· |
We
may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
|
· |
We
may be unable to hire and retain a sufficient number of suitable
sales
associates at our stores.
|
· |
Our
manufacturers may be unable to manufacture and deliver merchandise
to us
in a timely manner or to meet our quality
standards.
|
· |
Our
Retail Stores segment sales are dependent upon a high volume of traffic
in
the strip centers and malls in which our stores are located, and
our
future retail store growth is dependent upon the availability of
suitable
locations for new stores.
|
· |
We
may be unable to successfully implement our plan to improve merchandise
assortments in our Retail Stores or Direct-to-Consumer
segments.
|
· |
The
carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse
change in
interest rates or other factors could have a significant impact on
the
results of the valuation tests, resulting in a write-down of the
carrying
value or acceleration of amortization of acquired intangible assets.
|
· |
We
may be unable to manage significant increases in certain costs, including
postage and paper, which could adversely affect our results of
operations.
|
· |
Response
rates to our catalogs and access to new customers could decline,
which
would adversely affect our net sales and results of
operations.
|
· |
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to
include our assessment of the effectiveness of our internal control
over
financial reporting in our annual reports. Our independent registered
public accounting firm is also required to attest to whether or not
our
assessment is fairly stated in all material respects and to separately
report on whether or not they believe that we maintained, in all
material
respects, effective internal control over financial reporting. If
we are
unable to maintain effective internal control over financial reporting,
or
if our independent registered public accounting firm is unable to
timely
attest to our assessment, we could be subject to regulatory sanctions
and
a possible loss of public confidence in the reliability of our financial
reporting. Such a failure could result in our inability to provide
timely
and/or reliable financial information and could adversely affect
our
business.
|
In
the
Fiscal 2005 Fourth Quarter, we restated our financial statements for the prior
quarters of Fiscal 2005 to correct our accounting for landlord allowances,
calculation of straight-line rent expense, recognition of rent holiday periods,
and depreciation of leasehold improvements for our retail stores. See
“Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations; RESTATEMENT OF FINANCIAL STATEMENTS”
of our
Report on Form 10-K for the fiscal year ended January 29, 2005 for additional
details regarding the restatement.
Prior
to
the restatement, we classified construction allowances received from landlords
in connection with our store leases as a reduction of property, equipment,
and
leasehold improvements on our consolidated balance sheets and as a reduction
of
capital expenditures on our consolidated statements of cash flows. In addition,
when accounting for leases with renewal options, we historically recorded rent
expense on a straight-line basis over the initial non-cancelable lease term,
beginning with the lease commencement date. However, we depreciated leasehold
improvements over their estimated useful life of ten years, which, in many
cases, may have included both the initial non-cancelable lease term and option
renewal periods provided for in the lease. Also, we historically recognized
rent
holiday periods on a straight-line basis over the lease term commencing with
the
initial occupancy date instead of the date we took possession of the leased
space for construction purposes, which is generally two months prior to a store
opening date.
As
a
result of the restatement, we record construction allowances as a deferred
rent
liability on our consolidated balance sheets rather than as a reduction of
the
cost of leasehold improvements, and recognize construction allowances as an
operating activity in our consolidated statements of cash flows rather than
as a
reduction of our investment in capital assets. In addition, we amortize
construction allowances over the related lease term as a reduction of rent
expense rather than as a reduction of depreciation expense, commencing on the
date we take possession of the leased space for construction purposes.
The
lease
term we use to record straight-line rent expense and depreciation of leasehold
improvements includes lease option renewal periods only in instances in which
the exercise of the option period is reasonably assured and the failure to
exercise such an option would result in an economic penalty. We depreciate
leasehold improvements over the shorter of the lease term or their estimated
useful lives. The lease terms we use to determine straight-line rent expense
include pre-opening store build-out periods (commonly referred to as “rent
holidays”), where applicable. These corrections resulted in the accelerated
recognition of certain annual rent expense and depreciation expense on leasehold
improvements, which are included in “cost of goods sold, buying, catalog, and
occupancy expenses” on the consolidated statements of operations and
comprehensive income.
See
“Item
1. Financial Statements; NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited); Note 2. Restatement of Financial Statements”
above
for the effect of the restatement on our condensed consolidated financial
statements for the thirteen and thirty-nine weeks ended October 30,
2004.
Our
critical accounting policies are discussed in the management’s discussion and
analysis of financial condition and results of operations and notes accompanying
the consolidated financial statements that appear in our Annual Report on Form
10-K for the fiscal year ended January 29, 2005. Except as indicated below
or
otherwise disclosed in the financial statements and accompanying notes included
in this report, there were no material changes in, or additions to, our critical
accounting policies or in the assumptions or estimates we used to prepare the
financial information appearing in this report.
Segment
Reporting
With
our
acquisition of Crosstown Traders, Inc. (see “RECENT
DEVELOPMENTS”
below),
we now operate in two segments, Retail Stores and Direct-to-Consumer, which
are
consistent with the way our chief operating decision-makers review our results
of operations. The Retail Stores segment derives its revenues from sales through
retail stores and E-commerce under our LANE
BRYANT,
FASHION
BUG,
and
CATHERINES
PLUS SIZES
brands.
The Direct-to-Consumer segment derives its revenues from catalog sales and
catalog-related E-commerce sales under our Crosstown catalogs. See “Item
1. Notes To Condensed Consolidated Financial Statements (Unaudited); Note 11.
Segment Reporting”
above
for further information regarding our segment reporting.
Inventories
We
value
our merchandise inventories at the lower of cost or market, using the retail
inventory method (average cost basis) for our Retail Stores and
Direct-to-Consumer segment inventories.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101
(“SAB
101”), “Revenue
Recognition in the Financial Statements,”
as
amended. Our revenues from merchandise sales are net of returns and allowances
and exclude sales tax. We record a reserve for estimated future sales returns
based on an analysis of actual returns and we defer recognition of layaway
sales
to the date of delivery. A change in our actual rates of sales returns and
layaway sales experience would affect the level of revenue
recognized.
Catalog
and E-commerce revenues include shipping and handling fees billed to customers.
These revenues are recognized after the following have occurred: execution
of
the customer’s order, authorization of the customer’s credit card has been
received, and the product has been shipped to and received by the customer.
We
record a reserve for estimated future sales returns based on an analysis of
actual returns. In addition, we record a reserve for estimated sales shipped
but
not yet received by customers. A change in our actual rates of sales returns
and/or days it takes for customers to receive our products would affect the
level of revenue recognized.
Deferred
Advertising Costs
We
accumulate all direct costs incurred in the development, production, and
circulation of our direct-mail catalogs on our consolidated balance sheet until
such time as the related catalog
is
mailed. These capitalized costs are subsequently amortized as a component of
cost of goods sold, buying, catalog, and occupancy expenses over the expected
sales realization cycle, generally within one to six months. Our initial
estimation of the expected sales realization cycle for a particular
catalog
merchandise offering is based on, among other possible considerations, our
historical sales and sell-through experience with similar catalog
merchandise offerings, our understanding of then-prevailing fashion trends
and
influences, our assessment of prevailing economic conditions, and various
competitive factors. We continually track our subsequent sales realization,
compile customer feedback for indications of future performance, reassess the
marketplace, compare our findings to our previous estimate, and adjust our
amortization accordingly.
Acquisition
of Crosstown Traders, Inc.
On
June
2, 2005, we completed our acquisition of Crosstown Traders, Inc. (“Crosstown”),
a direct marketer of women’s apparel, footwear, accessories, and specialty
gifts, from JPMorgan Partners, the private equity arm of J.P. Morgan Chase
&
Co.
Crosstown
Traders, Inc. operates multiple catalog titles and related websites, with
revenues of approximately $460 million for the fiscal year ended January 29,
2005. The majority of Crosstown’s revenues are derived from the catalog sales of
women’s apparel, footwear, and accessories, of which plus-sizes are an important
component. Crosstown also derives revenues from the catalog sales of food and
gifts, the majority of which occur during the fourth quarter of the fiscal
year.
As a result of the acquisition, our operations will consist of two business
segments: the Retail Stores segment and the Direct-to-Consumer segment. This
acquisition is a major step in our long-term growth strategy of becoming a
multi-channel retailer, and we expect it to be accretive to our earnings per
share beginning in Fiscal 2006. The
acquisition of Crosstown provides us with an infrastructure for the development
and expansion of our Direct-to-Consumer segment, which will include our catalog
and catalog-related E-commerce sales distribution channels. The development
of
our Direct-to-Consumer segment is a key step in the preparation for the planned
launch of our own catalog for the LANE
BRYANT
brand in
the fall of 2007, when the LANE
BRYANT
catalog
trademark reverts to us.
Under
the
terms of the agreement, we paid approximately $218.0 million in cash for
Crosstown and assumed Crosstown’s debt of approximately $40.7 million. We also
incurred direct costs related to the acquisition (primarily advisory, legal,
and
statutory fees) of approximately $3.8 million. Subsequent to the acquisition,
we
securitized Crosstown’s apparel-related accounts receivable under a new conduit
funding facility established specifically for funding the Crosstown receivables.
The majority of the proceeds of approximately $50.0 million from the
securitization were used to retire Crosstown’s debt.
We
financed the acquisition with approximately $108 million of our existing cash
and cash equivalents and $110 million of borrowings under our then-existing
revolving credit facility. Subsequent to this transaction, we amended our credit
facility (see "FINANCING;
Revolving
Credit Facility"
below).
Hurricane
Katrina
Hurricane
Katrina, which struck on August 29, 2005, caused extensive damage to portions
of
the southeast United States where certain of our retail stores are located.
Following the hurricane, four CATHERINES PLUS SIZES stores and four LANE BRYANT
stores sustained considerable damage and remain closed until further notice.
We
carry property and casualty insurance on our leasehold improvements, fixtures,
and inventory at our retail store locations. As a result of insurance claims
related to damages caused by Hurricane Katrina, we recognized a net gain of
$1.8
million in the Fiscal 2006 Third Quarter.
VISA/MasterCard
Antitrust Litigation
We
expect
to receive a share of the proceeds from the $3 billion VISA/MasterCard antitrust
settlement. We recognized a gain of approximately $1.3 million in the Fiscal
2006 Third Quarter in connection with our receipt of a notification of an
initial payment to us related to the settlement.
The
following table shows our results of operations expressed as a percentage of
net
sales and on a comparative basis:
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
|
|
Thirteen
Weeks Ended(1)
|
|
Change
|
|
Thirty-nine
Weeks Ended(1)
|
|
Change
|
|
|
|
October
29,
|
|
October
30,
|
|
From
Prior
|
|
October
29,
|
|
October
30,
|
|
From
Prior
|
|
|
|
2005(2)
|
|
2004
|
|
Period
|
|
2005(2)
|
|
2004
|
|
Period
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
22.4
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
12.0
|
%
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
69.6
|
|
|
69.9
|
|
|
21.9
|
|
|
68.1
|
|
|
69.4
|
|
|
9.9
|
|
Selling,
general, and administrative expenses
|
|
|
27.3
|
|
|
27.6
|
|
|
21.0
|
|
|
25.0
|
|
|
24.7
|
|
|
13.5
|
|
Income
from operations
|
|
|
3.1
|
|
|
2.4
|
|
|
60.3
|
|
|
6.8
|
|
|
5.9
|
|
|
30.6
|
|
Other
income
|
|
|
0.3
|
|
|
0.1
|
|
|
124.0
|
|
|
0.3
|
|
|
0.1
|
|
|
323.4
|
|
Interest
expense
|
|
|
0.7
|
|
|
0.7
|
|
|
23.8
|
|
|
0.7
|
|
|
0.7
|
|
|
15.4
|
|
Income
tax provision
|
|
|
1.0
|
|
|
0.6
|
|
|
99.4
|
|
|
2.4
|
|
|
1.9
|
|
|
43.1
|
|
Net
income
|
|
|
1.6
|
|
|
1.2
|
|
|
69.4
|
|
|
4.1
|
|
|
3.4
|
|
|
34.4
|
|
____________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Results
may not add due to rounding.
|
(2) Includes
the results of operations of Crosstown Traders, Inc. from the date
of
acquisition on June 2, 2005.
|
The
following table shows details of our consolidated total net sales:
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
October
29,
|
|
October
30,
|
|
(In
millions)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASHION
BUG®
|
|
$
|
240.9
|
|
$
|
236.7
|
|
$
|
790.6
|
|
$
|
787.9
|
|
LANE
BRYANT®
|
|
|
247.1
|
|
|
229.9
|
|
|
757.2
|
|
|
715.6
|
|
CATHERINES®
|
|
|
80.9
|
|
|
74.3
|
|
|
263.1
|
|
|
241.4
|
|
Total
Retail Stores segment sales
|
|
|
568.9
|
|
|
540.9
|
|
|
1,810.9
|
|
|
1,744.9
|
|
Total
direct-to-consumer segment sales(1)
|
|
|
93.6
|
|
|
0.0
|
|
|
143.0
|
|
|
0.0
|
|
Corporate
and other(2)
|
|
|
0.8
|
|
|
0.9
|
|
|
1.0
|
|
|
1.3
|
|
Total
net sales
|
|
$
|
663.3
|
|
$
|
541.8
|
|
$
|
1,954.9
|
|
$
|
1,746.2
|
|
____________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
the results of operations of Crosstown Traders, Inc. from the date
of
acquisition on June 2, 2005.
|
(2) Revenue
related to loyalty card
fees.
|
The
following table shows information related to the change in our consolidated
total net sales:
|
|
Thirteen
Weeks Ended
|
|
Thirty-nine
Weeks Ended
|
|
|
|
October
29,
|
|
October
30,
|
|
October
29,
|
|
October
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Stores segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in comparable store sales(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
retail stores
|
|
|
3
|
%
|
|
1
|
%
|
|
2
|
%
|
|
2
|
%
|
FASHION
BUG
|
|
|
1
|
|
|
(3
|
)
|
|
0
|
|
|
2
|
|
CATHERINES
|
|
|
9
|
|
|
(5
|
)
|
|
8
|
|
|
(5
|
)
|
LANE
BRYANT
|
|
|
4
|
|
|
7
|
|
|
2
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
from new stores and E-commerce as a percentage of total consolidated
prior-period sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
1
|
|
CATHERINES
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
LANE
BRYANT
|
|
|
4
|
|
|
3
|
|
|
4
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior-period
sales from closed stores as a percentage of total consolidated
prior-period sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(2
|
)
|
CATHERINES
|
|
|
(1
|
)
|
|
(0
|
)
|
|
(1
|
)
|
|
(0
|
)
|
LANE
BRYANT
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in Retail Stores segment sales
|
|
|
5
|
|
|
2
|
|
|
4
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer
segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
as a percentage of total consolidated prior-period sales(2)
|
|
|
17
|
|
|
-
|
|
|
8
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in total net sales
|
|
|
22
|
|
|
2
|
|
|
12
|
|
|
3
|
|
____________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) “Comparable
store sales” is not a measure that has been defined under generally
accepted accounting principles. The method of calculating comparable
store
sales varies across the retail industry and, therefore, our calculation
of
comparable store sales is not necessarily comparable to similarly-titled
measures reported by other companies. We define comparable store
sales as
sales from stores operating in both the current and prior-year periods.
New stores are added to the comparable store sales base 13 months
after
their open date. Sales from stores that are relocated within the
same mall
or strip-center, remodeled, or have a legal square footage change
of less
than 20% are included in the calculation of comparable store sales.
Sales
from stores that are relocated outside the existing mall or strip-center,
or have a legal square footage change of 20% or more, are excluded
from
the calculation of comparable store sales until 13 months after the
relocated store is opened. Stores that are temporarily closed for
a period
of 4 weeks or more are excluded from the calculation of comparable
store
sales for the applicable periods in the year of closure and the subsequent
year. Non-store sales, such as catalog and internet sales, are excluded
from the calculation of comparable store sales.
|
(2) Includes
catalog sales and catalog-related E-commerce sales from Crosstown
Traders,
Inc. from the date of acquisition on June 2,
2005.
|
The
following
table sets forth information with respect to our year-to-date retail store
activity for Fiscal 2006 and planned store activity for all of Fiscal
2006:
|
|
FASHION
|
|
LANE
|
|
|
|
|
|
|
|
BUG
|
|
BRYANT
|
|
CATHERINES
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006 Year-to-Date(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at January 29, 2005
|
|
|
1,028
|
|
|
722
|
|
|
471
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
opened
|
|
|
12
|
|
|
29
|
|
|
6
|
|
|
47
|
|
Stores
closed
|
|
|
(6
|
)
|
|
(6
|
)
|
|
(10
|
)
|
|
(22
|
)
|
Net
change in stores
|
|
|
6
|
|
|
23
|
|
|
(4
|
)
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at October 29, 2005
|
|
|
1,034
|
|
|
745
|
|
|
467
|
|
|
2,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
relocated during period
|
|
|
17
|
|
|
25
|
|
|
13
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned
store openings
|
|
|
19
|
|
|
45
|
|
|
6
|
|
|
70
|
|
Planned
store closings
|
|
|
22
|
|
|
20
|
|
|
14
|
|
|
56
|
|
Planned
store relocations
|
|
|
20
|
|
|
30
|
|
|
16
|
|
|
66
|
|
____________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Does
not include 3 outlet stores operated by Crosstown Traders,
Inc.
|
Comparison
of Thirteen Weeks Ended October 29, 2005 and October 30,
2004
Net
Sales
Consolidated
net sales increased in the Fiscal 2006 Third Quarter as compared to the Fiscal
2005 Third Quarter as a result of increased sales across all brands in our
Retail Stores segment and sales from Crosstown Traders, Inc. (our
Direct-to-Consumer segment), which was acquired on June 2, 2005 (see
“RECENT
DEVELOPMENTS”
above).
The increase in Retail Stores segment sales was primarily a result of sales
from
new LANE BRYANT stores, an increase in comparable retail store sales at our
LANE
BRYANT and CATHERINES brands, and increases in E-commerce sales at all of our
Retail Stores brands. The 3% increase in the Retail Stores segment’s comparable
store sales met our plan for a positive low-single-digit increase for the
quarter. Hurricanes Katrina, Rita, and Wilma did not have a significant impact
on our net sales for the Fiscal 2006 Third Quarter. We operated 2,246 stores
in
our Retail Stores segment as of October 29, 2005, as compared to 2,241 stores
as
of October 30, 2004. Additionally, Crosstown Traders operated three outlet
stores that are included in our Direct-to-Consumer segment.
Total
net
sales for the LANE BRYANT brand increased as a result of sales from new stores,
an increase in comparable retail store sales, and an increase in E-commerce
sales. The average dollar sale per transaction increased as a result of a
combination of reduced levels of promotional activity and the addition of
products with higher price points, such as premium denim, fashion knits, and
intimate apparel, in the current-year period. Traffic levels in LANE BRYANT
retail stores increased slightly as compared to the prior-year
period.
FASHION
BUG comparable retail store sales increased slightly, while sales from new
stores were offset by reduced sales from closed stores. Results for FASHION
BUG
included a slight increase in store traffic levels during the current-year
quarter and an average dollar sale per transaction that was consistent with
the
prior-year period. Fiscal 2006 Third Quarter sales also benefited from an
increase in sales from E-commerce operations, which commenced in July 2004.
CATHERINES
comparable retail store sales for the Fiscal 2006 Third Quarter benefited from
improved customer response to the brand’s current merchandise offerings and
expansion of the brand’s intimate apparel offerings. Traffic levels increased
significantly during the Fiscal 2006 Third Quarter while the average dollar
sale
per transaction was consistent with the prior-year period.
Net
sales
from Crosstown Traders were $93.6 million, or 14% of consolidated net sales
for
the Fiscal 2006 Third Quarter, which met our sales objective for the quarter.
Actual orders, catalog circulation, and response rates were consistent with
plan. Crosstown Traders launched two new catalog titles during the quarter
(Catherines Footwear and Home Etc. home fashions).
We
offer
various loyalty card programs to our Retail Stores segment customers. Customers
who join these programs are entitled to various benefits, including discounts
and rebates on purchases during the membership period. Customers generally
join
these programs by paying an annual membership fee. We recognize revenue on
these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in
cost
of goods sold as incurred. During the Fiscal 2006 Third Quarter and Fiscal
2005
Third Quarter, we recognized revenues of $3.9 million and $3.7 million,
respectively, in connection with our loyalty card programs.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
Consolidated
cost of goods sold, buying, catalog, and occupancy expenses decreased 0.3%
as a
percentage of consolidated net sales in the Fiscal 2006 Third Quarter as
compared to the Fiscal 2005 Third Quarter, reflecting improved merchandise
margins for our Retail Stores segment and leverage on relatively fixed buying
and occupancy costs. Consolidated cost of goods sold increased 3.1% as a
percentage of consolidated net sales. For the Retail Stores segment, cost of
goods sold as a percentage of net sales was 0.6% lower in the Fiscal 2006 Third
Quarter as compared to the Fiscal 2005 Third Quarter. The improvement was a
result of lower levels of promotional pricing and well-controlled inventory
levels in the current-year period. Cost of goods sold for the Retail Stores
Segment for the Fiscal 2006 Third Quarter also included a net gain of $1.8
million from settlements of hurricane-related insurance claims. Cost of goods
sold for our Direct-to-Consumer segment includes catalog advertising and
fulfillment costs, which are significant expenses for catalog operations.
Therefore, cost of goods sold for the Direct-to-Consumer segment is generally
higher as a percentage of net sales than cost of goods sold for our Retail
Stores segment, resulting in the increase in consolidated cost of goods sold
as
a percentage of consolidated net sales. Cost of goods sold includes merchandise
costs net of discounts and allowances; freight; inventory shrinkage; and
shipping and handling costs associated with our E-commerce business and, in
the
Fiscal 2006 Third Quarter, our direct-to-consumer business. Fiscal 2006 Third
Quarter cost of goods sold includes amortization of direct-response advertising
costs. Net merchandise costs and freight are capitalized as inventory
costs.
Consolidated
buying and occupancy expenses as a percentage of consolidated net sales were
3.4% lower in the Fiscal 2006 Third Quarter as compared to the Fiscal 2005
Third
Quarter, primarily as a result of lower levels of buying and occupancy costs
associated with our Direct-to-Consumer segment and leverage from increased
net
sales on relatively fixed occupancy costs. For our Retail Stores segment, buying
and occupancy expenses as a percentage of net sales were 0.7% lower in the
Fiscal 2006 Third Quarter as compared to the Fiscal 2005 Third Quarter. The
Direct-to-Consumer segment, which does not operate retail stores, incurs lower
levels of buying and occupancy costs and has a favorable impact on consolidated
buying and occupancy expenses as a percentage of consolidated net sales. Buying
expenses include payroll, payroll-related costs, and operating expenses for
our
buying departments, warehouses, and fulfillment centers. Occupancy expenses
include rent, real estate taxes, insurance, common area maintenance, utilities,
maintenance, and depreciation for our stores, warehouse and fulfillment center
facilities, and equipment. Buying and occupancy costs are treated as period
costs and are not capitalized as part of inventory.
Selling,
General, and Administrative
Consolidated
selling, general, and administrative expenses decreased 0.3% as a percentage
of
consolidated net sales, primarily as a result of leverage on the increase in
net
sales. The Fiscal 2006 Third Quarter was affected by higher expenses related
to
incentive-based employee compensation and employee benefit programs and the
addition of the Direct-to-Consumer segment. Selling expenses for the Fiscal
2006
Third Quarter were 2.7% lower as a percentage of net sales, while general and
administrative expenses were 2.4% higher as a percentage of net sales,
reflecting lower levels of selling expenses and higher levels of general and
administrative expenses in the Direct-to-Consumer segment as compared to the
Retail Stores segment. General and administrative expenses for the Fiscal 2006
Third Quarter include a gain of $1.3 million recognized in connection with
the
VISA/MasterCard antitrust settlement (see “RECENT
DEVELOPMENTS: VISA/MasterCard
Antitrust Litigation”
above).
General and administrative expenses for the Fiscal 2005 Third Quarter were
affected by costs related to the purchase of life insurance policies for certain
executives to replace split-dollar life insurance policies that were terminated
as a result of the Sarbanes-Oxley Act of 2002, which prohibits loans to
executive officers.
Other
Income
Interest
income increased $0.8 million in the Fiscal 2006 Third Quarter as compared
to
the Fiscal 2005 Third Quarter as a result of higher interest rates in the Fiscal
2006 Third Quarter.
Income
Tax Provision
The
effective income tax rate was 38.7% in the Fiscal 2006 Third Quarter, as
compared to 34.9% in the Fiscal 2005 Third Quarter. The tax rate for the Fiscal
2006 Third Quarter was unfavorably affected by $1.4 million of taxes, net of
foreign tax credits, on the planned repatriation of profits from international
operations on which incremental United State income taxes had not been
previously accrued (see “Item
1. Notes To Condensed Consolidated Financial Statements (Unaudited); Note 9.
Income Taxes”
above),
and was favorably affected by charitable contributions of inventories to
hurricane relief efforts.
Comparison
of Thirty-nine Weeks Ended October 29, 2005 and October 30,
2004
Net
Sales
Consolidated
net sales increased in the first three quarters of Fiscal 2006 as compared
to
the first three quarters of Fiscal 2005 as a result of both an increase in
Retail Stores segment sales and the addition of the Direct-to-Consumer segment
in Fiscal 2006.
For
our
Retail Stores segment, the increase in net sales for the first three quarters
of
Fiscal 2006 as compared to the first three quarters of Fiscal 2005 was primarily
the result of sales from new stores and increases in comparable retail store
sales at our LANE BRYANT and CATHERINES brands, and increases in E-commerce
sales across all Retail Stores brands. Direct-to-Consumer segment net sales
in
the first three quarters of Fiscal 2006 resulted from our acquisition of
Crosstown Traders on June 2, 2005 (see “RECENT
DEVELOPMENTS”
above).
Total
net
sales for the LANE BRYANT brand increased as the result of sales from new retail
stores, a significant increase in E-commerce sales, and a 2% increase in
comparable retail store sales. The average dollar sale per transaction increased
as a result of a combination of reduced levels of promotional activity and
the
addition of products, such as premium denim, fashion knits, and intimate
apparel, with higher price points in the current-year period. Traffic levels
in
LANE BRYANT retail stores were flat as compared to the prior-year
period.
FASHION
BUG comparable retail store sales were flat, while reduced sales from closed
stores offset sales from new stores. A higher average dollar sale per
transaction, resulting from reduced levels of promotional activity, was offset
by reduced traffic levels. FASHION BUG sales for the first three quarters of
Fiscal 2006 benefited from increased sales from E-commerce operations, which
commenced in July 2004.
CATHERINES
comparable retail store sales for the first three quarters of Fiscal 2006
benefited from improved customer response to the brand’s current merchandise
offerings and increased E-Commerce sales. Significantly increased traffic levels
during the current-year period were partially offset by a slight decrease in
the
average dollar sale per transaction, as customers purchased slightly fewer
items
per transaction as compared to the prior-year period.
Net
sales
from Crosstown Traders were $143.0 million, or 7% of consolidated net sales
for
the first three quarters of Fiscal 2006 (from the date of acquisition on June
2,
2005), and met our sales objectives for the period.
During
the first three quarters of Fiscal 2006 and Fiscal 2005, we recognized revenues
of $11.3 million and $11.1 million, respectively, in connection with our loyalty
card programs.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
Consolidated
cost of goods sold, buying, catalog, and occupancy expenses decreased 1.3%
as a
percentage of consolidated net sales in the first three quarters of Fiscal
2006
as compared to the first three quarters of Fiscal 2005, reflecting improved
merchandise margins at all brands in our Retail Stores segment and particularly
at our LANE BRYANT and CATHERINES brands, and leverage on relatively fixed
buying and occupancy costs. Consolidated cost of goods sold increased 0.5%
as a
percentage of consolidated net sales. For our Retail Stores segment, cost of
goods sold as a percentage of net sales was 1.1% lower in the first three
quarters of Fiscal 2006 as compared to the first three quarters of Fiscal 2005.
Cost of goods sold for the Retail Stores segment for the first three quarters
of
Fiscal 2006 included a net gain of $1.8 million from settlements of
hurricane-related insurance claims. Cost of goods sold for our
Direct-to-Consumer segment includes catalog advertising and fulfillment costs,
which are significant expenses for catalog operations. Therefore, cost of goods
sold for the Direct-to-Consumer segment is generally higher as a percentage
of
net sales than cost of goods sold for our Retail Stores segment, resulting
in
the increase in consolidated cost of goods sold as a percentage of consolidated
net sales. Cost of goods sold includes merchandise costs net of discounts and
allowances; freight; inventory shrinkage; and shipping and handling costs
associated with our E-commerce and, in the first three quarters of Fiscal 2006
(from the date of acquisition of Crosstown Traders on June 2, 2005), our
direct-to-consumer business. Cost of goods sold for the first three quarters
of
Fiscal 2006 includes amortization of direct-response advertising costs. Net
merchandise costs and freight are capitalized as inventory
costs.
Consolidated
buying and occupancy expenses as a percentage of consolidated net sales were
1.8% lower in the first three quarters of Fiscal 2006 as compared to the first
three quarters of Fiscal 2005, primarily as a result of leverage from increased
net sales on relatively fixed occupancy costs and lower levels of buying and
occupancy costs associated with our Direct-to-Consumer segment. For our Retail
Stores segment, buying and occupancy expenses as a percentage of net sales
were
0.6% lower in the first three quarters of Fiscal 2006 as compared to the first
three quarters of Fiscal 2005. The Direct-to-Consumer segment, which does not
operate retail stores, incurs lower levels of buying and occupancy costs and
has
a favorable impact on consolidated buying and occupancy expenses as a percentage
of consolidated net sales. Buying expenses include payroll, payroll-related
costs, and operating expenses for our buying departments, warehouses, and
fulfillment centers. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities, maintenance, and depreciation
for
our stores, warehouse and fulfillment center facilities, and equipment. Buying
and occupancy costs are treated as period costs and are not capitalized as
part
of inventory.
Selling,
General, and Administrative
Consolidated
selling, general, and administrative expenses were 0.3% higher as a percentage
of net sales for the first three quarters of Fiscal 2006. The increase was
primarily a result of higher expenses related to incentive-based employee
compensation and employee benefit programs, additional investments in marketing
programs, and the inclusion of Crosstown in Fiscal 2006 (from the date of
acquisition on June 2, 2005). Selling expenses were positively affected by
leverage on the increase in consolidated net sales and improved performance
of
our proprietary credit card operations, which benefited from the acquisition
of
the CATHERINES credit card portfolio in the Fiscal 2006 First Quarter as well
as
favorable experience in credit losses during Fiscal 2006. Our previous Merchant
Services Agreement provided us with the ability to purchase the CATHERINES
portfolio at par value, and the subsequent securitization of the purchased
portfolio resulted in the recognition of a benefit of approximately $2.4
million, which is included in selling expenses for the first three quarters
of
Fiscal 2006. Selling expenses for the first three quarters of Fiscal 2006 were
1.7% lower as a percentage of sales, while general and administrative expenses
were 2.0% higher as a percentage of net sales, reflecting lower levels of
selling expenses and higher levels of general and administrative expenses in
the
Direct-to-Consumer segment as compared to the Retail Stores segment. General
and
administrative expenses for the first three quarters of Fiscal 2006 include
a
gain of $1.3 million recognized in connection with the VISA/MasterCard antitrust
settlement (see “RECENT
DEVELOP-MENTS: VISA/MasterCard
Antitrust Litigation”
above).
General and administrative expenses for the first three quarters of Fiscal
2005
were affected by costs related to the purchase of life insurance policies for
certain executives to replace split-dollar life insurance policies that were
terminated as a result of the Sarbanes-Oxley Act of 2002, which prohibits loans
to executive officers.
Other
Income
Interest
income increased $3.5 million in the first three quarters of Fiscal 2006 as
compared to the first three quarters of Fiscal 2005 as a result of both higher
interest rates and higher levels of invested cash and cash equivalents in the
current-year period. Other income for the first three quarters of Fiscal 2006
also included a pre-tax gain of $1.4 million from the sales of certain
facilities owned by our Hong Kong sourcing operations.
Income
Tax Provision
The
effective income tax rate was 36.9% in the first three quarters of Fiscal 2006,
as compared to 35.5% in the first three quarters of Fiscal 2005. The tax rate
for the first three quarters of Fiscal 2006 was unfavorably affected by $1.4
million of taxes, net of foreign tax credits, on the planned repatriation of
profits from international operations on which incremental United States income
taxes had not been previously accrued (see “Item
1. Notes To Condensed Consolidated Financial Statements (Unaudited); Note 9.
Income Taxes”
above),
and was favorably affected by charitable contributions of inventories to
hurricane relief efforts. The lower effective tax rate for the first three
quarters of Fiscal 2005 was primarily a result of finalizing certain prior-year
tax audits.
Our
primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our revolving credit facility. The following table highlights
certain information related to our liquidity and capital resources:
|
|
October
29,
|
|
January
29,
|
|
(Dollars
in millions)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
151.7
|
|
$
|
273.0
|
|
Working
capital
|
|
$
|
390.2
|
|
$
|
414.0
|
|
Current
ratio
|
|
|
1.8
|
|
|
2.4
|
|
Long-term
debt to equity ratio
|
|
|
31.1
|
%
|
|
30.0
|
%
|
Our
net
cash provided by operating activities increased to $101.0 million for the first
three quarters of Fiscal 2006 from $88.4 million for the first three quarters
of
Fiscal 2005. The $12.6 million increase was primarily attributable to a $20.5
million increase in net income, which was partially offset by a $3.2 million
decrease in net cash provided by operating assets and liabilities and a $1.8
million decrease in tax benefits related to our stock plans. The $3.2 million
decrease in net cash provided by operating assets and liabilities consisted
of a
$31.9 million increase in our net investment in inventories offset by a $28.7
million decrease in cash used for deferred, prepaid, and accrued expenses.
The
net investment in inventories increased as a result of growth in new stores,
growth in Direct-to-Consumer inventories, and the introduction of new premium
apparel at our LANE BRYANT brand, as well as a normal seasonal build-up. During
the first three quarters of Fiscal 2005, increases in certain advances related
to our securitization program resulted in an increase in cash used for prepaid
expenses.
Acquisition
During
the Fiscal 2006 Second Quarter, we completed the acquisition of
Crosstown Traders, Inc. (see “RECENT
DEVELOPMENTS”
above
for further details of the acquisition).
Under
terms of the agreement, we paid approximately $218 million in cash for Crosstown
and assumed Crosstown’s debt of approximately $40.7 million. We also incurred
direct costs related to the acquisition (primarily advisory, legal, and
statutory fees) of approximately $3.8 million. Subsequent to the acquisition,
we
securitized Crosstown’s apparel-related accounts receivable under a new conduit
funding facility established specifically for funding the Crosstown receivables.
The majority of the proceeds of approximately $50 million from the
securitization were used to retire Crosstown’s debt.
We
financed the acquisition with approximately $108 million of existing cash and
cash equivalents and $110 million of borrowings under our then-existing
revolving credit facility. Of the $110 million of borrowings, $10 million has
been repaid and $50 million has been classified as short-term borrowings, as
it
is our intention to re-pay such borrowings within 12 months. Subsequent to
this
transaction, we amended our credit facility (see "FINANCING;
Revolving
Credit Facility"
below).
Capital
Expenditures
Our
capital expenditures were $68.2 million during the first three quarters of
Fiscal 2006. During the Fiscal 2006 Fourth Quarter, we anticipate incurring
additional capital expenditures of approximately $20 - $30 million, primarily
for the construction and fixturing of new stores, remodeling and fixturing
of
existing stores, and improvements in information technology. We expect to
finance these additional capital expenditures primarily through
internally-generated funds.
Dividends
We
have
not paid any dividends since 1995, and we do not expect to declare or pay any
dividends on our common stock in the foreseeable future. The payment of future
dividends is within the discretion of our Board of Directors and will depend
upon our future earnings, if any, our capital requirements, our financial
condition, and other relevant factors. Our existing revolving credit facility
allows the payment of dividends on our common stock subject to maintaining
a
minimum level of Excess Availability (as defined in the facility agreement)
immediately before and after the payment of such dividends.
Off-Balance-Sheet
Financing
Our
FASHION BUG and CATHERINES proprietary credit card receivables are originated
by
Spirit of America National Bank (our wholly-owned credit card bank), which
transfers its interest in the receivables to the Charming Shoppes Master Trust
(the “Trust”) through a special-purpose entity. The Trust is an unconsolidated
qualified special purpose entity (“QSPE”). Our Crosstown Traders catalog
proprietary credit card receivables, which we securitized subsequent to our
acquisition of Crosstown, are originated in a non-bank program by Crosstown,
which transfers its interest in the receivables through a special-purpose entity
to a separate and distinct unconsolidated QSPE. The QSPEs can sell interests
in
these receivables on a revolving basis for a specified term. At the end of
the
revolving period, an amortization period begins during which the QSPEs make
principal payments to the parties that have entered into the securitization
agreement with the QSPEs.
As
of
October 29, 2005, the QSPEs had the following securitization facilities
outstanding:
(Dollars
in millions)
|
Series
1999-2
|
|
Series
2002-1
|
|
Series
2004
|
|
Series
2004-1
|
|
2005-RPA(1)
|
|
|
|
|
|
|
|
|
|
|
Date
of facility
|
May
1999
|
|
November
2002
|
|
January
2004
|
|
August
2004
|
|
May
2005
|
Type
of facility
|
Conduit
|
|
Term
|
|
Conduit
|
|
Term
|
|
Conduit
|
Maximum
funding
|
$50.0
|
|
$100.0
|
|
$50.0
|
|
$180.0
|
|
$55.0
|
Funding
as of October 29, 2005
|
$19.5
|
|
$100.0
|
|
$
0.0
|
|
$180.0
|
|
$50.0
|
First
scheduled principal payment
|
Not
applicable
|
|
August
2007
|
|
Not
applicable
|
|
April
2009
|
|
Not
applicable
|
Expected
final principal payment
|
Not
applicable(2)
|
|
May
2008
|
|
Not
applicable(2)
|
|
March
2010
|
|
Not
applicable(2)
|
Renewal
|
Annual
|
|
Not
applicable
|
|
Annual
|
|
Not
applicable
|
|
Annual
|
____________________
|
|
|
|
|
|
|
|
|
(1) Receivables
Purchase Agreement
|
(2) Series
1999-2 and Series 2004 have scheduled final payment dates that
occur in
the twelfth month following the month in which the series begins
amortizing. These series and 2005-RPA generally begin amortizing
364 days
after the start of the purchase commitment by the series purchaser
currently in effect.
|
We
used
$54.6 million of funds from our securitization facilities, including a portion
of the proceeds available from Series 2004-1, to fund the acquisition of the
CATHERINES proprietary credit card portfolio in March 2005 (see
below).
As
these
credit card receivables securitizations reach maturity, we plan to obtain
funding for the proprietary credit card programs through additional
securitizations. However, we can give no assurance that we will be successful
in
securing financing through either replacement securitizations or other sources
of replacement financing.
We
securitized $139.4 million of private label credit card receivables in the
Fiscal 2006 Third Quarter and had $354.0 million of securitized credit card
receivables outstanding as of October 29, 2005. We held certificates and
retained interests in our securitizations of $64.7 million as of October 29,
2005, which were generally subordinated in right of payment to certificates
issued by the QSPEs to third-party investors. Our obligation to repurchase
receivables sold to the QSPEs is limited to those receivables that, at the
time
of their transfer, fail to meet the QSPE’s eligibility standards under normal
representations and warranties. To date, our repurchases of receivables pursuant
to this obligation have been insignificant.
Charming
Shoppes Receivables Corp. (“CSRC”), Charming Shoppes Seller, Inc., and Catalog
Seller LLC, our consolidated wholly-owned indirect subsidiaries, are separate
special-purpose entities (“SPEs”) created for the securitization program. As of
October 29, 2005, the SPEs held $10.4 million of QSPE certificates, an I/O
strip
of $14.8 million, and other retained interests of $39.5 million (which are
included in the $86.5 million of short-term available-for-sale securities we
held at October 29, 2005). These assets are first and foremost available to
satisfy the claims of the respective creditors of these separate corporate
entities, including certain claims of investors in the QSPEs. Additionally,
with
respect to certain Trust Certificates, if either the Trust or Charming Shoppes,
Inc. fails to meet certain financial performance standards, the Trust would
be
obligated to reallocate to third-party investors holding certain certificates
issued by the Trust, collections in an amount up to $9.5 million that otherwise
would be available to CSRC. The result of this reallocation would be to increase
CSRC’s retained interest in the Trust by the same amount. Subsequent to such a
transfer occurring, and upon certain conditions being met, these same investors
would be required to repurchase these interests. As of October 29, 2005, we
were
in compliance with these performance standards and as a result there were no
reallocated collections.
In
addition to the above, we could be affected by certain other events that would
cause the QSPEs to hold proceeds of receivables, which would otherwise be
available to be paid to us with respect to our subordinated interests, within
the QSPEs as additional enhancement. For example, if we fail or the QSPEs fail
to meet certain financial performance standards, a credit enhancement condition
would occur, and the QSPEs would be required to retain amounts otherwise payable
to us. In
addition, the failure to satisfy certain financial performance standards could
further cause the QSPEs to stop using collections on QSPE assets to purchase
new
receivables, and would require such collections to be used to repay investors
on
a prescribed basis, as provided in the securitization agreements. If this were
to occur, it could result in our having insufficient liquidity; however, we
believe we would have sufficient notice to seek alternative forms of financing
through other third-party providers. As of October 29, 2005, the QSPEs were
in
compliance with all applicable financial performance standards.
Amounts
placed into enhancement accounts, if any, that are not required for payment
to
other certificate holders will be available to us at the termination of the
securitization series. We have no obligation to directly fund the enhancement
account of the QSPEs, other than for breaches of customary representations,
warranties, and covenants and for customary indemnities. These representations,
warranties, covenants, and indemnities do not protect the QSPEs or investors
in
the QSPEs against credit-related losses on the receivables. The providers of
the
credit enhancements and Trust investors have no other recourse to
us.
These
securitization agreements are intended to improve our overall liquidity by
providing short-term sources of funding. The agreements provide that we will
continue to service the credit card receivables and control credit policies.
This control allows us, absent certain adverse events, to fund continued credit
card receivable growth and to provide the appropriate customer service and
collection activities. Accordingly, our relationship with our credit card
customers is not affected by these agreements. Additional information regarding
our asset securitization facility is included in “Part
II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and
“Part
II, Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 16. Asset Securitization”
of our
Annual Report on Form 10-K for the fiscal year ended January 29,
2005.
We
have a
non-recourse agreement under which a third party provides a proprietary credit
card sales accounts receivable funding facility for our LANE BRYANT brand.
The
facility expires in October 2007. Under this agreement, the third party
reimburses us daily for sales generated by LANE BRYANT’s proprietary credit card
accounts. Upon termination of this agreement, we have the right to purchase
the
receivables portfolio at book value from the third party.
As
of
January 29, 2005, we also had a similar non-recourse agreement, which was
scheduled to expire in March 2005, for our CATHERINES brand. In accordance
with
the terms of the Merchant Services Agreement pursuant to which the CATHERINES
proprietary credit cards were issued, we gave the requisite notice of our intent
to exercise our option to purchase the CATHERINES portfolio upon the expiration
of the agreement. In March 2005, Spirit of America National Bank purchased
the
CATHERINES credit card portfolio for a final purchase price of $54.6 million.
The purchase was funded through our securitization facilities, including a
portion of the proceeds from the sale of certificates under our Series 2004-1
securitization facility.
Additional
information regarding the LANE BRYANT and CATHERINES agreements is included
in
“Part
II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations”
and
“Part
II, Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 16. Asset Securitization”
of our
Annual Report on Form 10-K for the fiscal year ended January 29,
2005.
We
lease
substantially all of our operating stores under non-cancelable operating lease
agreements. Additional details on these leases, including minimum lease
commitments, are included in “Item
8. Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 17. Leases”
of our
Annual Report on Form 10-K for the fiscal year ended January 29,
2005.
Revolving
Credit Facility
On
July
28, 2005, we amended our existing $300 million revolving credit facility, which
was scheduled to expire on August 15, 2008. The amended facility provides for
a
revolving credit facility with a maximum availability of $375 million, subject
to certain limitations as defined in the facility agreement, and provides that
up to $300 million of the facility may be used for letters of credit. In
addition, we may request, subject to compliance with certain conditions,
additional revolving credit commitments up to an aggregate of $500 million.
The
amended facility expires on July 28, 2010. As of October 29, 2005, we had an
aggregate total of $4.0 million of unamortized deferred debt acquisition costs
related to the facility, which we are amortizing on a straight-line basis over
the life of the facility as interest expense.
The
amended facility includes provisions for customary representations and
warranties and affirmative covenants, and includes customary negative covenants
providing for certain limitations on, among other things, sales of assets;
indebtedness; loans, advances and investments; acquisitions; guarantees; and
dividends and redemptions. Under certain circumstances involving a decrease
in
“Excess Availability” (as defined in the facility agreement), we may be required
to maintain a minimum “Fixed Charge Coverage Ratio” (as defined in the facility
agreement). As of October 29, 2005, we were not in violation of any of the
covenants included in the facility.
The
interest rate on borrowings under the facility is Prime for Prime Rate Loans,
and LIBOR as adjusted for the Reserve Percentage (as defined in the facility
agreement) plus 1.0% to 1.5% per annum for Eurodollar Rate Loans. The applicable
rate is determined monthly, based on our average excess availability, as defined
in the facility agreement. As of October 29, 2005, the applicable rates on
borrowings under the facility were 6.75% for Prime Rate Loans and 5.07% (LIBOR
plus 1%) for Eurodollar Rate Loans. All borrowings outstanding under the
facility as of October 29, 2005 were Eurodollar Rate Loans, with a
weighted-average interest rate of 4.81% (LIBOR plus 1%).
During
the Fiscal 2006 Third Quarter, we repaid a variable rate mortgage note, due
March 2006, for $5.4 million plus accrued interest.
Additional
information regarding our long-term borrowings is included in “Part
II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations”
and
“Part
II, Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 7. Debt”
of our
Annual Report on Form 10-K for the fiscal year ended January 29,
2005.
We
believe that our capital resources and liquidity position are sufficient to
support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
We
manage
our FASHION BUG, CATHERINES, and catalog proprietary credit card programs
through various operating entities that we own. The primary activity of these
entities is to service the balances of our proprietary credit card receivables
portfolio that we sell under credit card securitization facilities. Under the
securitization facilities, we can be exposed to fluctuations in interest rates
to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the QSPEs.
The
finance charges on most of our FASHION BUG proprietary credit card accounts
are
billed using a floating-rate index (the Prime rate), subject to a floor and
limited by legal maximums. The finance charges on most of our CATHERINES and
catalog proprietary credit card accounts are billed at a fixed rate of interest.
The certificates issued under the securitization facilities include both
floating- and fixed-interest-rate certificates. The floating-rate certificates
are based on an index of either one-month LIBOR or the commercial paper rate,
depending on the issuance. Consequently, we have basis risk exposure with
respect to credit cards billed using a floating-rate index to the extent that
the movement of the floating-rate index on the certificates varies from the
movement of the Prime rate. Additionally, as of October 29, 2005, the floating
finance charge rate on the floating-rate indexed credit cards was below the
contractual floor rate, thus exposing us to interest-rate risk with respect
to
these credit cards as well as the fixed-rate credit cards for the portion of
certificates that are funded at floating rates. However, as a result of the
Trust entering into a series of fixed-rate interest rate hedge agreements with
respect to $161.1 million of Series 2004-1certificates and $89.5 million of
Series 2002-1 fixed-rate certificates, we have significantly reduced the
exposure of floating-rate certificates outstanding to interest-rate risk. To
the
extent that short-term interest rates were to increase by one percentage point
by the end of Fiscal 2006, an increase of approximately $149 thousand in
selling, general, and administrative expenses would result.
As
of
October 29, 2005, there were $100 million of borrowings outstanding under our
revolving credit facility. Such borrowings are exposed to variable interest
rates. A one percentage point change in market interest rates would result
in a
corresponding change of approximately $1.0 million per annum in our interest
expense and cash flows.
We
are
not subject to material foreign exchange risk, as our foreign transactions
are
primarily U.S. Dollar-denominated and our foreign operations do not constitute
a
material part of our business.
See
“Item
1. Notes To Condensed Consolidated Financial Statements (Unaudited); Note 12.
Impact of Recent Accounting Pronouncements”
above.
See
“Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations; MARKET RISK,”
above.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have a Disclosure
Committee, which is made up of several key management employees and reports
directly to the CEO and CFO, to centralize and enhance these controls and
procedures and assist our management, including our CEO and CFO, in fulfilling
their responsibilities for establishing and maintaining such controls and
procedures and providing accurate, timely, and complete disclosure.
As
of the
end of the period covered by this report on Form 10-Q (the “Evaluation Date”),
our Disclosure Committee, under the supervision and with the participation
of
management, including our CEO and CFO, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our management, including our CEO and
CFO,
has concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective.
As
a
result of our June 2005 acquisition of Crosstown Traders, Inc. (“Crosstown”), we
expanded our disclosure controls and procedures, including certain of our
internal controls over financial reporting, to include the consolidation of
Crosstown’s financial position and results of operations, as well as
acquisition-related accounting and disclosures. As we continue with the
integration of Crosstown and the migration of certain Crosstown processes to
our
existing processes, we are evaluating and modifying, as necessary, their
internal control over financial reporting. Other than changes arising out of
this acquisition, there has been no change in our internal control over
financial reporting that occurred during the period covered by this report
on
Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Other
than ordinary routine litigation incidental to our business, there are no other
pending material legal proceedings that we or any of our subsidiaries are a
party to, or of which any of their property is the subject. There are no
proceedings that are expected to have a material adverse effect on our financial
condition or results of operations.
(a)
Not
Applicable
(b)
Not
Applicable
(c)
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
|
|
|
|
|
|
Total
|
|
Maximum
|
|
|
|
|
|
|
|
Number
|
|
Number
of
|
|
|
|
|
|
|
|
of
Shares
|
|
Shares
that
|
|
|
|
|
|
|
|
Purchased
as
|
|
May
Yet be
|
|
|
|
Total
|
|
|
|
Part
of Publicly
|
|
Purchased
|
|
|
|
Number
|
|
Average
|
|
Announced
|
|
Under
the
|
|
|
|
of
Shares
|
|
Price
Paid
|
|
Plans
or
|
|
Plans
or
|
|
Period
|
|
Purchased
|
|
per
Share
|
|
Programs(2)
|
|
Programs(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2005 through August 27, 2005
|
|
|
1,422(1)
|
|
$
|
11.31
|
|
|
-
|
|
|
-
|
|
August
28, 2005 through October 1, 2005
|
|
|
58(1)
|
|
|
10.89
|
|
|
-
|
|
|
-
|
|
October
2, 2005 through October 29, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
1,480
|
|
$
|
11.29
|
|
|
-
|
|
|
-
|
|
____________________
|
(1)
Shares
withheld for the payment of payroll taxes on employee stock awards
that
vested during the period.
|
(2)
In
Fiscal 1998, we publicly announced that
our Board of Directors granted authority to repurchase up to 10,000,000
shares of our common stock. In Fiscal 2000, we publicly announced
that our
Board of Directors granted authority to repurchase up to an additional
10,000,000 shares of our common stock. In Fiscal 2003, the Board
of
Directors granted an additional authorization to repurchase 6,350,662
shares of common stock issued to Limited Brands in connection with
our
acquisition of LANE BRYANT. From Fiscal 1998 through Fiscal 2003,
we
repurchased a total of 21,370,993 shares of common stock, which
included
shares purchased on the open market as well as shares repurchased
from
Limited Brands. As of July 30, 2005, 4,979,669 shares of our common
stock
remain available for repurchase under these programs. Our revolving
credit
facility allows the repurchase of our common stock subject to maintaining
a minimum level of Excess Availability (as defined in the facility
agreement) immediately before and after such repurchase. As conditions
may
allow, we may from time to time acquire additional shares of our
common
stock under these programs. Such shares, if purchased, would be
held as
treasury shares. No shares were acquired under these programs during
the
thirteen weeks ended October 29, 2005. The repurchase programs
have no
expiration date.
|
The
following is a list of Exhibits filed as part of this Quarterly Report on Form
10-Q. Where so indicated, Exhibits that were previously filed are incorporated
by reference. For Exhibits incorporated by reference, the location of the
Exhibit in the previous filing is indicated in parenthesis.
2.1
|
Stock
Purchase Agreement dated May 19, 2005 by and among Chestnut Acquisition
Sub, Inc., Crosstown Traders, Inc., the Securityholders of Crosstown
Traders, Inc. whose names are set forth on the signature pages thereto,
and J.P. Morgan Partners (BHCA), L.P., as the Sellers’ Representative,
incorporated by reference to Form 8-K of the Registrant dated June
2,
2005, filed on June 8, 2005. (Exhibit 2.1).
|
3.1
|
Restated
Articles of Incorporation, incorporated by reference to Form 10-K
of the
Registrant for the fiscal year ended January 29, 1994 (File No. 000-07258,
Exhibit 3.1).
|
3.2
|
Bylaws,
as Amended and Restated, incorporated by reference to Form 10-Q of
the
Registrant for the quarter ended July 31, 1999 (File No. 000-07258,
Exhibit 3.2).
|
10.1
|
The
Charming Shoppes, Inc. 2003 Non-Employee Directors Compensation Plan,
incorporated by reference to Appendix B of the Registrant’s Proxy
Statement Pursuant to Section 14 of the Securities Exchange Act of
1934,
filed on May 22, 2003.
|
10.2
|
Form
of Charming Shoppes, Inc. 2003 Non-Employee Directors Compensation
Plan
Stock Option Agreement, incorporated by reference to Form 8-K of
the
Registrant dated June 23, 2005, filed on June 29, 2005. (Exhibit
10.1).
|
10.3
|
Form
of Charming Shoppes, Inc. 2003 Non-Employee Directors Compensation
Plan
Restricted Share Units Agreement, incorporated by reference to Form
8-K of
the Registrant dated June 23, 2005, filed on June 29, 2005. (Exhibit
10.2).
|
10.4
|
Charming
Shoppes, Inc. Performance Share Agreement dated as of June 2, 2005,
between Charming Shoppes, Inc. and Steven A. Lightman, incorporated
by
reference to Form 10-Q of the Registrant for the quarter ended July
30,
2005 (File No. 000-07258, Exhibit 10.4).
|
10.5
|
Charming
Shoppes, Inc. Restricted Stock Agreement dated as of June 2, 2005,
between
Charming Shoppes, Inc. and Steven A Lightman, incorporated by reference
to
Form 10-Q of the Registrant for the quarter ended July 30, 2005 (File
No.
000-07258, Exhibit 10.5).
|
10.6
|
Form
of Charming Shoppes, Inc. Restricted Stock Agreement dated as of
June 2,
2005, between Charming Shoppes, Inc. and certain employees of Crosstown
Traders, Inc., incorporated by reference to Form 10-Q of the Registrant
for the quarter ended July 30, 2005 (File No. 000-07258, Exhibit
10.6).
|
10.7
|
Purchase
Agreement dated as of March 14, 2005 between Citibank USA, N.A.,
Spirit of
America National Bank, and Catherines, Inc., incorporated by reference
to
Form 8-K of the Registrant dated March 18, 2005, filed on March 22,
2005.
(Exhibit 99).
|
10.8
|
Amended
and Restated Receivables Purchase Agreement dated as of June 2, 2005
among
Catalog Receivables LLC as Seller, Spirit of America, Inc. as Servicer,
Sheffield Receivables Corporation as Purchaser, and Barclay’s Bank PLC as
Administrator, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended July 30, 2005 (File No. 000-07258, Exhibit
10.8).
|
10.9
|
Letter
Agreement dated as of May 18, 2005 amending the Certificate Purchase
Agreement dated as of January 21, 2004 among Charming Shoppes Receivables
Corp. as Seller and Class B Purchaser, Spirit of America, Inc. as
Servicer, Sheffield Receivables Corporation as Conduit Purchaser,
and
Barclays Bank PLC as Administrator, incorporated by reference to
Form 10-Q
of the Registrant for the quarter ended July 30, 2005 (File No. 000-07258,
Exhibit 10.9).
|
10.10
|
Amendment
and Joinder Agreement, dated as of June 2, 2005, by Crosstown Traders,
Inc. and Other Crosstown Companies in favor of Wachovia Bank National
Association as Agent for Lenders and financial institutions from
time to
time parties to the Amended and Restated Loan and Security Agreement,
dated January 29, 2004, incorporated by reference to Form 10-Q of
the
Registrant for the quarter ended July 30, 2005 (File No. 000-07258,
Exhibit 10.10).
|
10.11
|
Second
Amended and Restated Loan and Security Agreement, dated July 28,
2005, by
and among Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc.,
CSI
Industries, Inc., FB Apparel, Inc., Catherines Stores Corporation,
Lane
Bryant, Inc., and Crosstown Traders, Inc. as borrowers; a syndicate
of
banks and other financial institutions as lenders, including Wachovia
Bank, National Association as agent for the lenders; and certain
of the
Company’s subsidiaries as guarantors, incorporated by reference to Form
8-K of the Registrant dated July 28, 2005, filed on August 3, 2005.
(Exhibit 10.1).
|
31.1
|
|
31.2
|
|
32
|
|
Pursuant
to the requirements 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.
|
CHARMING
SHOPPES, INC.
|
|
(Registrant)
|
|
|
|
|
|
|
Date: December
5, 2005
|
/S/
DORRIT J. BERN
|
|
Dorrit
J. Bern
|
|
Chairman
of the Board
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
Date: December
5, 2005
|
/S/
ERIC M. SPECTER
|
|
Eric
M. Specter
|
|
Executive
Vice President
|
|
Chief
Financial Officer
|
Exhibit
Index
Exhibit
No.
|
Item
|
2.1
|
Stock
Purchase Agreement dated May 19, 2005 by and among Chestnut Acquisition
Sub, Inc., Crosstown Traders, Inc., the Securityholders of Crosstown
Traders, Inc. whose names are set forth on the signature pages thereto
and
J.P. Morgan Partners (BHCA), L.P., as the Sellers’ Representative,
incorporated by reference to Form 8-K of the Registrant dated June
2,
2005, filed on June 8, 2005. (Exhibit 2.1).
|
3.1
|
Restated
Articles of Incorporation, incorporated by reference to Form 10-K
of the
Registrant for the fiscal year ended January 29, 1994 (File No. 000-07258,
Exhibit 3.1).
|
3.2
|
Bylaws,
as Amended and Restated, incorporated by reference to Form 10-Q of
the
Registrant for the quarter ended July 31, 1999 (File No. 000-07258,
Exhibit 3.2).
|
10.1
|
The
Charming Shoppes, Inc. 2003 Non-Employee Directors Compensation Plan,
incorporated by reference to Appendix B of the Registrant’s Proxy
Statement Pursuant to Section 14 of the Securities Exchange Act of
1934,
filed on May 22, 2003.
|
10.2
|
Form
of Charming Shoppes, Inc. 2003 Non-Employee Directors Compensation
Plan
Stock Option Agreement, incorporated by reference to Form 8-K of
the
Registrant dated June 23, 2005, filed on June 29, 2005. (Exhibit
10.1).
|
10.3
|
Form
of Charming Shoppes, Inc. 2003 Non-Employee Directors Compensation
Plan
Restricted Share Units Agreement, incorporated by reference to Form
8-K of
the Registrant dated June 23, 2005, filed on June 29, 2005. (Exhibit
10.2).
|
10.4
|
Charming
Shoppes, Inc. Performance Share Agreement dated as of June 2, 2005,
between Charming Shoppes, Inc. and Steven A. Lightman, incorporated
by
reference to Form 10-Q of the Registrant for the quarter ended July
30,
2005 (File No. 000-07258, Exhibit 10.4).
|
10.5
|
Charming
Shoppes, Inc. Restricted Stock Agreement dated as of June 2, 2005,
between
Charming Shoppes, Inc. and Steven A Lightman, incorporated by reference
to
Form 10-Q of the Registrant for the quarter ended July 30, 2005 (File
No.
000-07258, Exhibit 10.5).
|
10.6
|
Form
of Charming Shoppes, Inc. Restricted Stock Agreement dated as of
June 2,
2005, between Charming Shoppes, Inc. and certain employees of Crosstown
Traders, Inc., incorporated by reference to Form 10-Q of the Registrant
for the quarter ended July 30, 2005 (File No. 000-07258, Exhibit
10.6).
|
10.7
|
Purchase
Agreement dated as of March 14, 2005 between Citibank USA, N.A.,
Spirit of
America National Bank, and Catherines, Inc., incorporated by reference
to
Form 8-K of the Registrant dated March 18, 2005, filed on March 22,
2005.
(Exhibit 99).
|
10.8
|
Amended
and Restated Receivables Purchase Agreement dated as of June 2, 2005
among
Catalog Receivables LLC as Seller, Spirit of America, Inc. as Servicer,
Sheffield Receivables Corporation as Purchaser, and Barclay’s Bank PLC as
Administrator, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended July 30, 2005 (File No. 000-07258, Exhibit
10.8).
|
10.9
|
Letter
Agreement dated as of May 18, 2005 amending the Certificate Purchase
Agreement dated as of January 21, 2004 among Charming Shoppes Receivables
Corp. as Seller and Class B Purchaser, Spirit of America, Inc. as
Servicer, Sheffield Receivables Corporation as Conduit Purchaser,
and
Barclays Bank PLC as Administrator, incorporated by reference to
Form 10-Q
of the Registrant for the quarter ended July 30, 2005 (File No. 000-07258,
Exhibit 10.9).
|
10.10
|
Amendment
and Joinder Agreement, dated as of June 2, 2005, by Crosstown Traders,
Inc. and Other Crosstown Companies in favor of Wachovia Bank National
Association as Agent for Lenders and financial institutions from
time to
time parties to the Amended and Restated Loan and Security Agreement,
dated January 29, 2004, incorporated by reference to Form 10-Q of
the
Registrant for the quarter ended July 30, 2005 (File No. 000-07258,
Exhibit 10.10).
|
10.11
|
Second
Amended and Restated Loan and Security Agreement, dated July 28,
2005, by
and among Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc.,
CSI
Industries, Inc., FB Apparel, Inc., Catherines Stores Corporation,
Lane
Bryant, Inc., and Crosstown Traders, Inc. as borrowers; a syndicate
of
banks and other financial institutions as lenders, including Wachovia
Bank, National Association as agent for the lenders; and certain
of the
Company’s subsidiaries as guarantors, incorporated by reference to Form
8-K of the Registrant dated July 28, 2005, filed on August 3, 2005.
(Exhibit 10.1).
|
31.1
|
|
31.2
|
|
32
|
|