form10q080407.htm
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 August 4, 2007
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Exchange Act):
Large
Accelerated Filer x
|
Accelerated
Filer o
|
Non-accelerated
Filer 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 September 4, 2007 was 122,552,663 shares.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
2
|
|
|
|
Item
1.
|
Financial
Statements
(Unaudited)
|
2
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
August
4, 2007 and February 3,
2007
|
2
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Income
|
|
|
Thirteen
weeks ended August 4, 2007 and July 29,
2006
|
3
|
|
Twenty-six
weeks ended August 4, 2007 and July 29,
2006
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
Twenty-six
weeks ended August 4, 2007 and July 29,
2006
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial
Statements
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
|
|
|
|
Forward-looking
Statements
|
18
|
|
|
|
|
Critical
Accounting
Policies
|
20
|
|
|
|
|
Recent
Developments
|
21
|
|
|
|
|
Results
of
Operations
|
22
|
|
|
|
|
Liquidity
and Capital
Resources
|
29
|
|
|
|
|
Financing
|
33
|
|
|
|
|
Market
Risk
|
34
|
|
|
|
|
Impact
of Recent Accounting
Pronouncements
|
35
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
35
|
|
|
|
Item
4.
|
Controls
and
Procedures
|
35
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
36
|
|
|
|
Item
1.
|
Legal
Proceedings
|
36
|
|
|
|
Item
1A.
|
Risk
Factors
|
36
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
37
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
38
|
|
|
|
Item
6.
|
Exhibits
|
38
|
|
|
|
|
SIGNATURES
|
40
|
|
|
|
|
Exhibit
Index
|
41
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
August
4,
|
|
|
February
3,
|
|
(In
thousands, except share amounts)
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
233,274
|
|
|
$ |
143,838
|
|
Available-for-sale
securities
|
|
|
26,648
|
|
|
|
1,997
|
|
Accounts
receivable, net of allowances of $1,575 and $5,083
|
|
|
3,109
|
|
|
|
33,366
|
|
Investment
in asset-backed securities
|
|
|
64,846
|
|
|
|
60,643
|
|
Merchandise
inventories
|
|
|
405,633
|
|
|
|
429,433
|
|
Deferred
advertising
|
|
|
16,441
|
|
|
|
21,707
|
|
Deferred
taxes
|
|
|
5,573
|
|
|
|
4,469
|
|
Prepayments
and other
|
|
|
131,914
|
|
|
|
145,385
|
|
Total
current assets
|
|
|
887,438
|
|
|
|
840,838
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment, and leasehold improvements – at cost
|
|
|
1,064,424
|
|
|
|
996,430
|
|
Less
accumulated depreciation and amortization
|
|
|
612,824
|
|
|
|
573,984
|
|
Net
property, equipment, and leasehold improvements
|
|
|
451,600
|
|
|
|
422,446
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and other intangible assets
|
|
|
247,990
|
|
|
|
249,490
|
|
Goodwill
|
|
|
153,370
|
|
|
|
153,370
|
|
Other
assets
|
|
|
101,021
|
|
|
|
44,798
|
|
Total
assets
|
|
$ |
1,841,419
|
|
|
$ |
1,710,942
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
165,299
|
|
|
$ |
178,629
|
|
Accrued
expenses
|
|
|
191,722
|
|
|
|
190,702
|
|
Current
portion – long-term debt
|
|
|
10,035
|
|
|
|
10,887
|
|
Total
current liabilities
|
|
|
367,056
|
|
|
|
380,218
|
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
57,693
|
|
|
|
57,340
|
|
Other
non-current liabilities
|
|
|
151,233
|
|
|
|
144,722
|
|
Long-term
debt
|
|
|
306,227
|
|
|
|
181,124
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
Stock $.10 par value:
|
|
|
|
|
|
|
|
|
Authorized
– 300,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
– 151,281,918 shares and 135,762,531 shares
|
|
|
15,128
|
|
|
|
13,576
|
|
Additional
paid-in capital
|
|
|
405,114
|
|
|
|
285,159
|
|
Treasury
stock at cost – 24,247,572 shares and 12,265,993 shares
|
|
|
(233,552 |
) |
|
|
(84,136 |
) |
Accumulated
other comprehensive income
|
|
|
3
|
|
|
|
1
|
|
Retained
earnings
|
|
|
772,517
|
|
|
|
732,938
|
|
Total
stockholders’ equity
|
|
|
959,210
|
|
|
|
947,538
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,841,419
|
|
|
$ |
1,710,942
|
|
|
|
|
|
|
|
|
|
|
Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(Unaudited)
|
|
Thirteen
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
thousands, except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
770,925
|
|
|
$ |
763,353
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
551,332
|
|
|
|
534,600
|
|
Selling,
general, and administrative expenses
|
|
|
191,269
|
|
|
|
176,586
|
|
Total
operating expenses
|
|
|
742,601
|
|
|
|
711,186
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
28,324
|
|
|
|
52,167
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
3,771
|
|
|
|
2,867
|
|
Interest
expense
|
|
|
(2,818 |
) |
|
|
(3,811 |
) |
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
29,277
|
|
|
|
51,223
|
|
Income
tax provision
|
|
|
10,998
|
|
|
|
18,660
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
18,279
|
|
|
|
32,563
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Unrealized
gains on available-for-sale securities,
|
|
|
|
|
|
|
|
|
net
of income tax provision of $4
in 2007 and $1 in 2006
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
18,284
|
|
|
$ |
32,564
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
.15
|
|
|
$ |
.27
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$ |
.14
|
|
|
$ |
.24
|
|
|
|
Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(Unaudited)
|
|
Twenty-six
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
thousands, except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,555,637
|
|
|
$ |
1,498,275
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
1,097,529
|
|
|
|
1,035,672
|
|
Selling,
general, and administrative expenses
|
|
|
386,889
|
|
|
|
358,033
|
|
Total
operating expenses
|
|
|
1,484,418
|
|
|
|
1,393,705
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
71,219
|
|
|
|
104,570
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
5,101
|
|
|
|
4,414
|
|
Interest
expense
|
|
|
(6,081 |
) |
|
|
(7,935 |
) |
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
70,239
|
|
|
|
101,049
|
|
Income
tax provision
|
|
|
25,662
|
|
|
|
36,425
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
44,577
|
|
|
|
64,624
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Unrealized
gains on available-for-sale securities,
|
|
|
|
|
|
|
|
|
net
of income tax provision of $3
in 2007 and $3 in 2006
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
44,579
|
|
|
$ |
64,628
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
.36
|
|
|
$ |
.53
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$ |
.34
|
|
|
$ |
.48
|
|
|
|
Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Twenty-six
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
44,577
|
|
|
$ |
64,624
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
46,256
|
|
|
|
45,129
|
|
Deferred
income taxes
|
|
|
350
|
|
|
|
1,290
|
|
Stock-based
compensation
|
|
|
7,760
|
|
|
|
5,015
|
|
Excess
tax benefits related to stock-based compensation
|
|
|
(780 |
) |
|
|
(2,516 |
) |
Net
loss from disposition of capital assets
|
|
|
1,191
|
|
|
|
139
|
|
Net
gain from securitization activities
|
|
|
(1,006 |
) |
|
|
(451 |
) |
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
30,257
|
|
|
|
35,458
|
|
Merchandise
inventories
|
|
|
23,800
|
|
|
|
(5,124 |
) |
Accounts
payable
|
|
|
(13,330 |
) |
|
|
40,423
|
|
Deferred
advertising
|
|
|
5,266
|
|
|
|
4,511
|
|
Prepayments
and other
|
|
|
12,501
|
|
|
|
(10,888 |
) |
Income
taxes payable
|
|
|
0
|
|
|
|
9,301
|
|
Accrued
expenses and other
|
|
|
6,690
|
|
|
|
(11,273 |
) |
Net
cash provided by operating activities
|
|
|
163,532
|
|
|
|
175,638
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Investment
in capital assets
|
|
|
(74,016 |
) |
|
|
(54,971 |
) |
Gross
purchases of securities
|
|
|
(30,422 |
) |
|
|
(17,127 |
) |
Proceeds
from sales of securities
|
|
|
2,579
|
|
|
|
17,828
|
|
Increase
in other assets
|
|
|
(9,285 |
) |
|
|
(7,719 |
) |
Net
cash used by investing activities
|
|
|
(111,144 |
) |
|
|
(61,989 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
7,395
|
|
|
|
131,410
|
|
Repayments
of short-term borrowings
|
|
|
(7,395 |
) |
|
|
(161,410 |
) |
Proceeds
from issuance of senior convertible notes
|
|
|
275,000
|
|
|
|
0
|
|
Proceeds
from long-term borrowings
|
|
|
790
|
|
|
|
0
|
|
Repayments
of long-term borrowings
|
|
|
(5,968 |
) |
|
|
(7,600 |
) |
Payments
of deferred financing costs
|
|
|
(7,541 |
) |
|
|
0
|
|
Excess
tax benefits related to stock-based compensation
|
|
|
780
|
|
|
|
2,516
|
|
Purchase
of hedge on senior convertible notes
|
|
|
(90,475 |
) |
|
|
0
|
|
Sale
of Common Stock warrants
|
|
|
53,955
|
|
|
|
0
|
|
Purchases
of treasury stock
|
|
|
(149,416 |
) |
|
|
0
|
|
Funds
deposited with third-party for purchases of treasury stock
|
|
|
(40,000 |
) |
|
|
0
|
|
Net
proceeds/(payments) from shares issued under employee stock
plans
|
|
|
(77 |
) |
|
|
3,122
|
|
Net
cash provided/(used) by financing activities
|
|
|
37,048
|
|
|
|
(31,962 |
) |
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
89,436
|
|
|
|
81,687
|
|
Cash
and cash equivalents, beginning of period
|
|
|
143,838
|
|
|
|
130,132
|
|
Cash
and cash equivalents, end of period
|
|
$ |
233,274
|
|
|
$ |
211,819
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities
|
|
|
|
|
|
|
|
|
Common
Stock issued on redemption of convertible notes
|
|
$
|
149,564
|
|
|
$ |
0
|
|
Assets
acquired through capital leases
|
|
$ |
4,137
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
|
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements
We
have
prepared our condensed consolidated balance sheet as of August 4, 2007, our
condensed consolidated statements of operations and comprehensive income for
the
thirteen weeks and twenty-six weeks ended August 4, 2007 and July 29, 2006,
and
our condensed consolidated statements of cash flows for the twenty-six weeks
ended August 4, 2007 and July 29, 2006 without audit. In our opinion, we
have made all adjustments (which include only normal recurring adjustments)
necessary to present fairly our financial position, results of operations and
comprehensive income, and cash flows. Certain prior-year amounts in the
condensed consolidated balance sheets and condensed consolidated statements
of
operations and comprehensive income have been reclassified to conform to the
current-year presentation. 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
February 3, 2007 Annual Report on Form 10-K. The results of operations for
the thirteen weeks and twenty-six weeks ended August 4, 2007 and July 29, 2006
are not necessarily indicative of operating results for the full fiscal
year.
As
used
in these notes, “Fiscal 2008” refers to our fiscal year ending February 2, 2008
and “Fiscal 2007”refers to our fiscal year ended February 3, 2007. “Fiscal
2009” refers to our fiscal year ending January 31, 2009. “Fiscal 2008
Second Quarter” refers to our fiscal quarter ended August 4, 2007 and “Fiscal
2007 Second Quarter” refers to our fiscal quarter ended July 29,
2006. “Fiscal 2008 First Quarter” refers to our fiscal quarter ended
May 5, 2007 and “Fiscal 2008 Third Quarter” refers to our fiscal quarter ending
November 3, 2007. The terms “Charming Shoppes, Inc.,” “the Company,”
“we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated
subsidiaries, except where the context otherwise requires or as otherwise
indicated.
Segment
Reporting
We
operate and report in two segments: Retail Stores and
Direct-to-Consumer. We determine our operating segments based on the
way our chief operating decision-makers review our results of
operations. We also consider the similarity of economic
characteristics, production processes, and operations in aggregating our
operating segments. Accordingly, we have aggregated our retail stores
and store-related E-commerce operations into a single reporting segment (the
“Retail Stores” segment). Our catalog and catalog-related E-commerce
operations are reported under the Direct-to-Consumer segment. The
Retail Stores segment derives its revenues from sales through retail stores
and
store-related E-commerce sales under our LANE BRYANT® (including
LANE
BRYANT OUTLET™), FASHION BUG®,
CATHERINES PLUS
SIZES®, and
PETITE SOPHISTICATE® (including
PETITE
SOPHISTICATE OUTLET™) brands. The Direct-to-Consumer segment derives its
revenues from catalog sales and catalog-related E-commerce sales under our
Crosstown Traders catalogs. See “Note
10. Segment
Reporting” below for further information regarding our segment
reporting.
Stock-based
Compensation
We
have
various stock-based compensation plans under which we are currently granting
awards, which are more fully described in “Item
8. Financial Statements and
Supplementary Data; Note 11.
Stock-Based
Compensation Plans” in our February 3, 2007 Annual
Report on Form 10-K.
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
Shares
available for future grants under our stock-based compensation plans as of
August 4, 2007:
2004
Stock Award and Incentive Plan
|
|
|
3,983,062
|
|
2003
Non-Employee Directors Compensation Plan
|
|
|
122,968
|
|
1994
Employee Stock Purchase Plan
|
|
|
1,107,413
|
|
1988
Key Employee Stock Option Plan
|
|
|
103,521
|
|
Stock
option activity for the twenty-six weeks ended August 4, 2007:
|
|
|
|
|
Average
|
|
|
|
|
|
Aggregate
|
|
|
|
Option
|
|
|
Option
|
|
|
Option
Prices
|
|
|
Intrinsic
Value(1)
|
|
|
|
Shares
|
|
|
Price
|
|
|
Per
Share
|
|
|
|
(000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at February 3, 2007
|
|
|
2,217,790
|
|
|
$ |
5.82
|
|
|
$ |
1.00
|
|
|
|
–
|
|
|
$ |
13.84
|
|
|
$ |
16,473
|
|
Granted
– option price less than market price
|
|
|
18,000
|
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
–
|
|
|
|
1.00
|
|
|
|
|
|
Canceled/forfeited
|
|
|
(7,268 |
) |
|
|
6.19
|
|
|
|
1.00
|
|
|
|
–
|
|
|
|
11.28
|
|
|
|
|
|
Exercised
|
|
|
(98,148 |
) |
|
|
5.58
|
|
|
|
1.00
|
|
|
|
–
|
|
|
|
8.46
|
|
|
|
664 |
(2) |
Outstanding
at August 4, 2007
|
|
|
2,130,374
|
|
|
$ |
5.79
|
|
|
$ |
1.00
|
|
|
|
–
|
|
|
$ |
13.84
|
|
|
$ |
7,262
|
|
Exercisable
at August 4, 2007
|
|
|
2,064,612
|
|
|
$ |
5.94
|
|
|
$ |
1.00
|
|
|
|
–
|
|
|
$ |
13.84
|
|
|
$ |
6,722
|
|
____________________
|
|
(1)
Aggregate market value less aggregate exercise price.
|
|
(2)
As of date of exercise.
|
|
Stock-based
compensation expense for the thirteen weeks and twenty-six weeks ended August
4,
2007 and July 29, 2006 includes (i) compensation cost for all partially-vested
stock-based awards granted prior to the beginning of Fiscal 2007, based on
the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and
(ii) compensation cost for all stock-based awards granted subsequent to the
beginning of Fiscal 2007, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123R”), a revision of SFAS No. 123. Current
grants of stock-based compensation consist primarily of restricted stock and
restricted stock unit awards.
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-six
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
$ |
4,836
|
|
|
$ |
2,464
|
|
|
$ |
7,760
|
|
|
$ |
5,015
|
|
We
use
the Black-Scholes valuation model to estimate the fair value of stock options,
and amortize stock-based compensation on a straight-line basis over the
estimated life of a stock option or the vesting period of an
award. Stock-based compensation for performance-based awards is
initially determined using an estimate of performance levels expected to be
achieved and is periodically reviewed and adjusted as
required. Estimates or assumptions we used under the Black-Scholes
model are more fully described in “Item 8. Financial Statements and
Supplementary Data; Note 1. Summary of Significant Accounting Policies;
Stock-based Compensation” in
our February 3, 2007 Annual Report on Form 10-K.
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
Total
stock-based compensation not yet recognized, related to the non-vested portion
of stock options and awards outstanding, was $21,780,000 as of August 4,
2007. The weighted-average period over which we expect to recognize
this compensation is approximately 3 years.
Crosstown
Traders Integration Plan
Concurrent
with our acquisition of Crosstown Traders (see “Item 8. Financial
Statements and Supplementary Data; Note 2.
Acquisition of Crosstown
Traders, Inc.”
in our February 3, 2007 Annual Report on Form 10-K),
we prepared a
formal integration plan for Crosstown Traders’ operations that included exiting
and consolidating certain activities of Crosstown Traders, lease terminations,
severance, and certain other exit costs. As of January 28, 2006, we
finalized the plan and recorded a liability for the costs of the plan, which
we
recorded as a component of the purchase price of the acquisition in accordance
with FASB Emerging Issues Task Force (“EITF”) Issue 95-3, “Recognition of
Liabilities in Connection with a Purchase Business
Combination.”
Liabilities
recorded in connection with the integration plan outstanding as of February
3,
2007, payments or settlements of these liabilities for the twenty-six weeks
ended August 4, 2007, and the remaining accrual as of August 4, 2007 were as
follows:
|
|
Balance
at
|
|
|
Twenty-six
Weeks Ended
|
|
|
Balance
at
|
|
|
|
February
3,
|
|
|
August
4, 2007
|
|
|
August
4,
|
|
(In
thousands)
|
|
2007
|
|
|
Payments/Settlements
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Lease
termination and related costs
|
|
$ |
1,820
|
|
|
$ |
(403 |
) |
|
$ |
1,417
|
|
Other
costs
|
|
|
239
|
|
|
|
(82 |
) |
|
|
157
|
|
Total
|
|
$ |
2,059
|
|
|
$ |
(485 |
) |
|
$ |
1,574
|
|
Subsequent
to the Fiscal 2008 Second Quarter, we reached an agreement with the landlord
to
terminate the lease on Crosstown Traders’ manufacturing facility for
approximately $600,000. Accordingly, the lease termination liability,
goodwill, and deferred taxes will be adjusted in the Fiscal 2008 Third Quarter
to reflect the settlement and termination of the lease.
Note
2. Accounts Receivable
Accounts
receivable consist of trade receivables from sales through our FIGI’S® catalog.
Details of our accounts receivable are as follows:
|
|
August
4,
|
|
|
February
3,
|
|
(In
thousands)
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
Due
from customers
|
|
$ |
4,684
|
|
|
$ |
38,449
|
|
Allowance
for doubtful accounts
|
|
|
(1,575 |
) |
|
|
(5,083 |
) |
Net
accounts receivable
|
|
$ |
3,109
|
|
|
$ |
33,366
|
|
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
3. Trademarks and Other Intangible Assets
|
|
August
4,
|
|
|
February
3,
|
|
(In
thousands)
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
Trademarks,
tradenames, and internet domain names
|
|
$ |
241,988
|
|
|
$ |
241,850
|
|
Customer
lists, customer relationships, and covenant not to compete
|
|
|
16,400
|
|
|
|
16,400
|
|
Total
at cost
|
|
|
258,388
|
|
|
|
258,250
|
|
Less
accumulated amortization of customer lists, customer
|
|
|
|
|
|
|
|
|
relationships,
and covenant not
to compete
|
|
|
10,398
|
|
|
|
8,760
|
|
Net
trademarks and other intangible assets
|
|
$ |
247,990
|
|
|
$ |
249,490
|
|
Note
4. Long-term Debt
|
|
August
4,
|
|
|
February
3,
|
|
(In
thousands)
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
1.125%
Senior Convertible Notes, due May 2014
|
|
$ |
275,000
|
|
|
$ |
0
|
|
4.75%
Senior Convertible Notes, due June 2012(1)
|
|
|
0
|
|
|
|
149,999
|
|
Capital
lease obligations
|
|
|
13,524
|
|
|
|
12,853
|
|
6.07%
mortgage note, due October 2014
|
|
|
11,390
|
|
|
|
11,696
|
|
6.53%
mortgage note, due November 2012
|
|
|
7,350
|
|
|
|
8,050
|
|
7.77%
mortgage note, due December 2011
|
|
|
8,202
|
|
|
|
8,496
|
|
Other
long-term debt
|
|
|
796
|
|
|
|
917
|
|
Total
long-term debt
|
|
|
316,262
|
|
|
|
192,011
|
|
Less
current portion
|
|
|
10,035
|
|
|
|
10,887
|
|
Long-term
debt
|
|
$ |
306,227
|
|
|
$ |
181,124
|
|
____________________
|
|
(1)
On April 30, 2007, we called these notes for redemption on June 4,
2007
(see below).
|
|
On
April
30, 2007, we issued $250,000,000 in aggregate principal amount of 1.125% Senior
Convertible Notes due May 1, 2014 (the “1.125% Notes”) in a private offering for
resale to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended. On May 11, 2007, the initial
purchasers of the 1.125% Notes exercised their over-allotment option and
purchased an additional $25,000,000 in aggregate principal amount of the
notes. The 1.125% Notes were issued at par plus accrued interest, if
any, from April 30, 2007, and interest is payable semiannually in arrears on
May
1 and November 1, beginning November 1, 2007. The 1.125% Notes will
mature on May 1, 2014, unless earlier repurchased by us or
converted.
We
received combined proceeds of approximately $268,125,000 from the issuance,
net
of underwriting fees of approximately $6,875,000. The underwriting
fees, as well as additional transaction costs of $666,000 incurred in connection
with the issuance of the 1.125% Notes, are included in “Other assets” on our
condensed consolidated balance sheets, and amortized to interest expense on
an
effective interest rate basis over the life of the notes (seven
years).
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
Holders
of the 1.125% Notes may convert their notes based on a conversion rate of
65.0233 shares of our Common Stock per $1,000 principal amount of notes (the
equivalent of $15.379 per share), subject to adjustment upon certain events,
only under the following circumstances as described in the Indenture for the
1.125% Notes (the “Indenture”): (1) during specified periods, if the price of
our Common Stock reaches specified thresholds; (2) if the trading price of
the
1.125% Notes is below a specified threshold; (3) at any time after November
15,
2013; or (4) upon the occurrence of certain corporate transactions.
Upon
conversion, we intend to deliver an amount in cash equal to the lesser of the
aggregate principal amount of notes to be converted and our total conversion
obligation. If our conversion obligation exceeds the aggregate
principal amount of the 1.125% Notes, we will deliver shares of our Common
Stock
in respect of the excess. However, we have the option, subject to the
approval of our Board of Directors, to elect to satisfy our conversion
obligation entirely in shares of our Common Stock. In connection with
a “Fundamental Change” as defined in the Indenture, we also will deliver upon
conversion of the notes additional shares of Common Stock as described in the
Indenture. In addition, if we undergo a Fundamental Change before
maturity of the 1.125% Notes, we may be required to repurchase for cash all
or a
portion of the 1.125% Notes at a repurchase price of 100% of the principal
amount of the notes being repurchased, plus accrued and unpaid interest,
including additional amounts, if any, up to but excluding the date of purchase.
As of August 4, 2007, none of the conditions allowing holders of the 1.125%
Notes to convert had been met.
We
are
required to file a shelf registration statement with the Securities and Exchange
Commission (“SEC”) covering resales of the 1.125% Notes and the shares of our
Common Stock issuable on conversion of the notes. If we are not
eligible to use an automatic shelf registration statement, we are required
to
use our reasonable efforts to cause the shelf registration statement to become
effective no later than 210 days after the first date of original issuance
of
the notes. If we fail to meet these terms, we will be required to pay
additional interest on the 1.125% Notes in an amount of up to 0.50% per
annum. On August 24, 2007 (subsequent to the end of the Fiscal 2008
Second Quarter), we filed with the SEC an automatic shelf registration statement
covering resales of the 1.125% Notes and the shares issuable on conversion
of
the notes.
We
accounted for the issuance of the 1.125% Notes in accordance with the guidance
in EITF Issue 90-19, “Convertible Bonds with Issuer Option to Settle for
Cash upon Conversion” and EITF Issue 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.” Accordingly, we have recorded the 1.125% Notes as
long-term debt in our condensed consolidated balance sheet as of August 4,
2007.
Concurrently
with the issuance of the 1.125% Notes, we entered into privately negotiated
Common Stock call options with affiliates of the initial
purchasers. The call options allow us to purchase up to approximately
17,881,000 shares of our Common Stock at an initial strike price of $15.379
per
share. The call options expire on May 1, 2014 and must be net-share
settled. The cost of the call options was approximately
$90,475,000.
In
addition, we sold warrants to affiliates of certain of the initial purchasers
whereby they have the option to purchase up to approximately 18,775,000 shares
of our Common Stock at an initial strike price of $21.607 per
share. The warrants expire on various dates from July 30, 2014
through December 18, 2014 and must be net-share settled. We received
approximately $53,955,000 in cash proceeds from the sale of these
warrants.
The
call
options are intended to reduce the potential dilution to our Common Stock upon
conversion of the 1.125% Notes by effectively increasing the initial conversion
price of the notes to $21.607 per share, representing a 73.0% conversion premium
over the closing price of $12.49 per share for our Common Stock on April 30,
2007.
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
Paragraph
11(a) of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” provides that contracts issued or held by an entity that are
both (1) indexed to the entity’s own common stock and (2) classified in
stockholders’ equity in its statement of financial position are not considered
to be derivative instruments under SFAS No. 133 if the provisions of EITF Issue
00-19 are met.
We
accounted for the call options and warrants in accordance with the guidance
in
EITF Issue 00-19. The call options and warrants meet the requirements
of EITF Issue 00-19 to be accounted for as equity
instruments. Accordingly, the cost of the call options and the
proceeds from the sale of the warrants are included in additional paid-in
capital in our accompanying condensed consolidated balance sheet as of August
4,
2007. We used a portion of the net proceeds from the 1.125% Notes to
pay the $36,520,000 net cost of the call options and warrants.
During
the Fiscal 2008 First Quarter, we repurchased 10,315,000 shares of our Common
Stock with $131,102,000 of the proceeds from our issuance of the 1.125%
Notes. In May 2007, we announced that we intend to use an additional
$80 to $100 million of the proceeds to repurchase additional shares of Common
Stock through the remainder of Fiscal 2008. During the Fiscal 2008
Second Quarter, we repurchased 1,667,000 shares of Common Stock in the open
market for $18,314,000.
During
the Fiscal 2008 Second Quarter, we also deposited $40,000,000 with a third-party
financial institution under an agreement that provides the third party with
discretionary authority to purchase shares of our Common Stock on our
behalf. As of the end of the Fiscal 2008 Second Quarter, the $40,000,000
deposit with the third-party financial institution was recorded as a component
of “Other assets” on our condensed consolidated balance sheet and as cash used
by financing activities in our condensed consolidated statement of cash
flows. Subsequent to the end of the Fiscal 2008 Second Quarter, the
third-party financial institution completed the purchase of approximately 4
million shares of our Common Stock in accordance with the
agreement. During the remainder of Fiscal 2008, as market conditions
allow, we intend to repurchase additional shares of our Common Stock with an
aggregate market value of approximately $40,000,000 in the open market or in
privately negotiated transactions.
In
accordance with SFAS No. 128, “Earnings Per Share,” the 1.125% Notes
will have no impact on our diluted net income per share until the price of
our
Common Stock exceeds the conversion price of $15.379 per share because the
principal amount of the 1.125% Notes will be settled in cash upon
conversion. Prior to conversion, we will include the effect of the
additional shares that may be issued if our Common Stock price exceeds $15.379
per share using the treasury stock method. For the first $1.00 by
which the price of our Common Stock exceeds $15.379 per share, there would
be
dilution of approximately 1,093,000 shares. Further increases in the
share price would result in additional dilution at a declining rate, such that
a
price of $21.607 per share would result in cumulative dilution of approximately
5,156,000 shares. Should the stock price exceed $21.607 per share, we
would also include the dilutive effect of the additional potential shares that
may be issued related to the warrants, using the treasury stock
method. The 1.125% Notes and warrants would have a combined dilutive
effect such that, for the first $1.00 by which the stock price exceeds $21.607
per share, there would be cumulative dilution of approximately 6,552,000 shares
prior to conversion. Further increases in the share price would
result in additional dilution at a declining rate.
The
call
options are not included in the calculation of diluted net income per share
because their effect would be anti-dilutive. Upon conversion of the
1.125% Notes, the call options will serve to neutralize the dilutive effect
of
the notes up to a stock price of $21.607 per share. For the first
$1.00 by which the stock price exceeds $21.607 per share, the call options
would
reduce the cumulative dilution of approximately 6,552,000 shares in the example
above to approximately 833,000 shares.
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
The
preceding calculations assume that the average price of our Common Stock exceeds
the respective conversion prices during the period for which diluted net income
per share is calculated, and exclude any potential adjustments to the conversion
ratio provided under the terms of the 1.125% Notes.
On
April
30, 2007, we called for the redemption on June 4, 2007 of our $149,999,000
outstanding aggregate principal amount of 4.75% Senior Convertible Notes, due
June 2012 (the “4.75% Notes”). The holders of the 4.75% Notes had the
option to convert their notes into shares of our Common Stock at a conversion
price of $9.88 per share until the close of business on June 1,
2007. As of June 4, 2007, the holders of $149,956,000 principal
amount of the 4.75% Notes had exercised their right to convert their notes
into
an aggregate of 15,145,556 shares of our Common Stock and the remaining notes
were redeemed for $43,000. In addition, we paid $392,000 in lieu of
fractional shares.
Note
5. Stockholders’ Equity
|
|
Twenty-six
|
|
|
|
Weeks
Ended
|
|
|
|
August
4,
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
|
|
|
Total
stockholders’ equity, beginning of period
|
|
$ |
947,538
|
|
Cumulative
effect of adoption of FIN No. 48(1)
|
|
|
(4,998 |
) |
Net
income
|
|
|
44,577
|
|
Net
proceeds/(payments) from shares issued under employee stock
plans (373,831 shares)
|
|
|
(77 |
) |
Purchase
of treasury shares (11,981,579 shares)
(2)
|
|
|
(149,416 |
) |
Common
Stock issued (15,145,556 shares) on redemption of convertible
notes
|
|
|
149,564
|
|
Sale
of Common Stock warrants(2)
|
|
|
53,955
|
|
Purchase
of Common Stock call options(2)
|
|
|
(90,475 |
) |
Stock-based
compensation expense
|
|
|
7,760
|
|
Excess
tax benefits related to stock-based compensation
|
|
|
780
|
|
Unrealized
gains on available-for-sale securities, net of tax
|
|
|
2
|
|
Total
stockholders’ equity, end of period
|
|
$ |
959,210
|
|
____________________
|
|
(1)
See “Note
8. Income
Taxes” below.
|
|
(2)
See “Note
4. Long-term
Debt” above.
|
|
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
6. Customer Loyalty Card Programs
We
offer
our customers various loyalty card programs. Customers that 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 in connection with administering these programs as cost
of goods sold when incurred. During the thirteen weeks ended August 4,
2007 we recognized revenues of $5,309,000 and during the thirteen weeks
ended July 29, 2006 we recognized revenues of $5,101,000 in connection with
our
loyalty card programs. During the twenty-six weeks ended August 4, 2007 we
recognized revenues of $11,011,000 and during the twenty-six weeks ended July
29, 2006 we recognized revenues of $9,171,000 in connection with our
loyalty card programs.
Note
7. Net Income per Share
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-six
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
thousands, except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
123,865
|
|
|
|
122,125
|
|
|
|
123,434
|
|
|
|
121,969
|
|
Dilutive
effect of assumed conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.75%
Senior Convertible
Notes
|
|
|
4,838 |
(1) |
|
|
15,182
|
|
|
|
10,010 |
(1) |
|
|
15,182
|
|
Dilutive
effect of stock options and awards
|
|
|
1,533
|
|
|
|
2,047
|
|
|
|
1,643
|
|
|
|
2,240
|
|
Diluted
weighted average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equivalents outstanding
|
|
|
130,236
|
|
|
|
139,354
|
|
|
|
135,087
|
|
|
|
139,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,279
|
|
|
$ |
32,563
|
|
|
$ |
44,577
|
|
|
$ |
64,624
|
|
Decrease
in interest expense from assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
of 4.75% Senior
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes,
net of income
taxes
|
|
|
347 |
(1) |
|
|
1,128
|
|
|
|
1,476 |
(1) |
|
|
2,257
|
|
Net
income used to determine diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
income per
share
|
|
$ |
18,626
|
|
|
$ |
33,691
|
|
|
$ |
46,053
|
|
|
$ |
66,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
with weighted average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
greater
than market price, excluded from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
computation
of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
Weighted
average exercise price per share
|
|
$ |
12.17
|
|
|
$ |
12.87
|
|
|
$ |
12.87
|
|
|
$ |
13.84
|
|
____________________
|
|
(1)
The notes were converted or redeemed on June 4, 2007 (see “Note 4.
Long-term Debt” above).
|
|
Our
1.125% Notes have no impact on our diluted net income per share until the price
of our Common Stock exceeds the conversion price of $15.379 per share because
we
expect to settle the principal amount of the 1.125% Notes in cash upon
conversion. The call options are not included in the calculation of
diluted net income per share because their effect would be
anti-dilutive. Should the price of our Common Stock exceed $21.607
per share, we would also include the dilutive effect of the additional potential
shares that may be issued related to the warrants, using the treasury stock
method. See “Note 4. Long-term Debt” above for
further information regarding the 1.125% Notes, related call options and
warrants, and the conversion of our 4.75% Notes.
See
“Note 4. Long-term Debt” above for further information
regarding repurchases of our Common Stock.
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
8. Income Taxes
The
effective income tax rate was 36.5% for the twenty-six weeks ended August 4,
2007, as compared to 36.0% for the twenty-six weeks ended July 29,
2006.
In
July
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109.” FIN No. 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to
meet
before being recognized in the financial statements. FIN No. 48 also
provides guidance on de-recognition, measurement, classification, interest
and
penalties, accounting in interim periods, expanded disclosures regarding tax
uncertainties, and transition.
FIN
No.
48 applies to all tax positions related to income taxes subject to SFAS No.
109,
“Accounting for Income Taxes.” Under FIN No. 48, recognition
of a tax benefit occurs when a tax position is more-likely-than-not to be
sustained upon examination, based solely on its technical merits. The
recognized benefit is measured as the largest amount of benefit which is
more-likely-than-not to be realized on ultimate settlement, based on a
cumulative probability basis. A tax position failing to qualify for
initial recognition is recognized in the first interim period in which it meets
the FIN No. 48 recognition standard, or is resolved through negotiation,
litigation, or upon expiration of the statute of
limitations. De-recognition of a previously recognized tax position
would occur if it is subsequently determined that the tax position no longer
meets the more-likely-than-not threshold of being
sustained. Differences between amounts recognized in balance sheets
prior to the adoption of FIN No. 48 and amounts reported after adoption (except
for items not recognized in earnings) are accounted for as a cumulative-effect
adjustment to retained earnings as of the date of adoption of FIN No. 48, if
material.
We
adopted the provisions of FIN No. 48 effective as of February 4,
2007. In accordance with FIN No. 48, we recognized a
cumulative-effect adjustment of $4,998,000, increasing our liability for
unrecognized tax benefits, interest, and penalties and reducing the February
4,
2007 balance of retained earnings.
As
of
February 4, 2007, we had $44,203,000 of gross unrecognized tax
benefits. If recognized, the portion of the liabilities for gross
unrecognized tax benefits that would decrease our provision for income taxes
and
increase our net income is $15,106,000. We record interest and
penalties related to unrecognized tax benefits in income tax
expense. As of the date of adoption of FIN No. 48, we had accrued
interest and penalties of $7,412,000. During the twenty-six weeks
ended August 4, 2007, there was no material change in either the unrecognized
tax benefits or accrued interest and penalties. We expect that the
amount of unrecognized tax benefits will change within the next 12
months. Although we cannot determine the amount of the change at this
time, based on currently available information we do not expect the change
to
have a material impact on our financial position or results of
operations.
Our
U.S.
Federal income tax returns for Fiscal 2004 and beyond remain subject to
examination by the U.S. Internal Revenue Service (“IRS”). The IRS is
not currently examining any of our tax returns. We file returns in
numerous state jurisdictions, with varying statutes of
limitations. Our state tax returns for Fiscal 2003 and beyond,
depending upon the jurisdiction, remain subject to examination. The
statute of limitations on a limited number of returns for years prior to Fiscal
2003 has been extended by agreement between us and the particular state
jurisdiction. The earliest year still subject to examination by state
tax authorities is Fiscal 1999.
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
9. Asset Securitization
Our
FASHION BUG, CATHERINES, and PETITE SOPHISTICATE proprietary credit card
receivables are originated by Spirit of America National Bank (the “Bank”), our
wholly-owned credit card bank, which transfers its interest in the receivables
to the Charming Shoppes Master Trust (the “Trust”) through a separate and
distinct special-purpose entity. The Trust is an unconsolidated qualified
special-purpose entity (“QSPE”). Through Fiscal 2007, our Crosstown
Traders apparel-related catalog proprietary credit card receivables, which
we
securitized subsequent to our acquisition of Crosstown Traders, were
originated in a non-bank program by Crosstown Traders. Crosstown
Traders transferred its interest in the receivables to Catalog Receivables
LLC,
a separate and distinct unconsolidated QSPE, through a separate and distinct
special-purpose entity. On February 5, 2007, the Bank acquired the
account relationships of the Crosstown Traders catalog proprietary credit cards
and all subsequent new receivables are originations of the Bank. This
acquisition did not cause a change in the securitization entities used by the
Crosstown Traders proprietary credit card program.
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. All assets of the
QSPEs (including the receivables) are isolated and support the securities issued
by those entities. Our asset securitization program is more fully
described in “Item 8. Financial Statements and Supplementary Data; Note
16. Asset
Securitization” in our February 3, 2007 Annual Report
on Form 10-K.
Note
10. Segment Reporting
We
operate and report in two segments: Retail Stores and Direct-to-Consumer (see
“Note 1. Condensed Consolidated Financial
Statements; Segment
Reporting” above). 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 February 3, 2007 Annual Report on Form
10-K. Our chief operating decision-makers evaluate the performance of
our operating segments based on a measure of their contribution to operations,
which consists of net sales less the cost of merchandise sold and certain
directly identifiable and allocable operating costs. We do not
allocate certain corporate costs, such as shared service costs, information
systems support costs, and insurance costs to our Retail Stores or
Direct-to-Consumer segments. For our Retail Stores segment, operating
costs consist primarily of store selling, buying, and occupancy costs; and
warehousing costs. For our Direct-to-Consumer segment, operating
costs consist primarily of catalog development, production, and circulation
costs; E-commerce advertising costs; warehousing costs; and order processing
costs.
“Corporate
and Other” includes unallocated general and administrative
costs; shared service center costs; insurance costs; information systems
support costs; corporate depreciation and amortization; corporate occupancy
costs; the results of our proprietary credit card operations; and other
non-routine charges. Operating contribution for the Retail Stores and
Direct-to-Consumer segments less Corporate and Other net expenses equals income
before interest and taxes.
Operating
segment assets are those directly used in, or allocable to, that segment’s
operations. For the Retail Stores segment, operating assets consist
primarily of inventories; the net book value of store facilities; and goodwill
and intangible assets. For the Direct-to-Consumer segment, operating
assets consist primarily of trade receivables; inventories; deferred advertising
costs; the net book value of catalog operating facilities; and goodwill and
intangible assets. Corporate and Other 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
10. Segment Reporting (Continued)
Selected
financial information for our operations by reportable segment and a
reconciliation of the information by segment to our consolidated totals is
as
follows:
|
|
Retail
|
|
|
Direct-to-
|
|
|
Corporate
|
|
|
|
|
(In
thousands)
|
|
Stores
|
|
|
Consumer
|
|
|
and
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended August 4, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
686,455
|
|
|
$ |
81,693
|
|
|
$ |
2,777
|
|
|
$ |
770,925
|
|
Depreciation
and amortization
|
|
|
14,420
|
|
|
|
366
|
|
|
|
8,726
|
|
|
|
23,512
|
|
Income
before interest and taxes
|
|
|
70,814
|
|
|
|
(4,401 |
) |
|
|
(34,318 |
) |
|
|
32,095
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(2,818 |
) |
|
|
(2,818 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(10,998 |
) |
|
|
(10,998 |
) |
Net
income
|
|
|
70,814
|
|
|
|
(4,401 |
) |
|
|
(48,134 |
) |
|
|
18,279
|
|
Capital
expenditures
|
|
|
25,758
|
|
|
|
683
|
|
|
|
10,064
|
|
|
|
36,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six
weeks ended August 4, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,371,977
|
|
|
$ |
180,065
|
|
|
$ |
3,595
|
|
|
$ |
1,555,637
|
|
Depreciation
and amortization
|
|
|
26,781
|
|
|
|
724
|
|
|
|
18,751
|
|
|
|
46,256
|
|
Income
before interest and taxes
|
|
|
144,844
|
|
|
|
(2,911 |
) |
|
|
(65,613 |
) |
|
|
76,320
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(6,081 |
) |
|
|
(6,081 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(25,662 |
) |
|
|
(25,662 |
) |
Net
income
|
|
|
144,844
|
|
|
|
(2,911 |
) |
|
|
(97,356 |
) |
|
|
44,577
|
|
Capital
expenditures
|
|
|
55,592
|
|
|
|
810
|
|
|
|
17,614
|
|
|
|
74,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended July 29, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
669,808
|
|
|
$ |
92,348
|
|
|
$ |
1,197
|
|
|
$ |
763,353
|
|
Depreciation
and amortization
|
|
|
15,383
|
|
|
|
299
|
|
|
|
9,289
|
|
|
|
24,971
|
|
Income
before interest and taxes
|
|
|
72,455
|
|
|
|
5,064
|
|
|
|
(22,485 |
) |
|
|
55,034
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(3,811 |
) |
|
|
(3,811 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(18,660 |
) |
|
|
(18,660 |
) |
Net
income
|
|
|
72,455
|
|
|
|
5,064
|
|
|
|
(44,956 |
) |
|
|
32,563
|
|
Capital
expenditures
|
|
|
22,698
|
|
|
|
1,160
|
|
|
|
7,259
|
|
|
|
31,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six
weeks ended July 29, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,297,212
|
|
|
$ |
199,753
|
|
|
$ |
1,310
|
|
|
$ |
1,498,275
|
|
Depreciation
and amortization
|
|
|
26,477
|
|
|
|
567
|
|
|
|
18,085
|
|
|
|
45,129
|
|
Income
before interest and taxes
|
|
|
147,668
|
|
|
|
10,174
|
|
|
|
(48,858 |
) |
|
|
108,984
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(7,935 |
) |
|
|
(7,935 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(36,425 |
) |
|
|
(36,425 |
) |
Net
income
|
|
|
147,668
|
|
|
|
10,174
|
|
|
|
(93,218 |
) |
|
|
64,624
|
|
Capital
expenditures
|
|
|
38,111
|
|
|
|
1,188
|
|
|
|
15,672
|
|
|
|
54,971
|
|
CHARMING
SHOPPES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Note
11. Impact of Recent Accounting Pronouncements
In
September 2006, the FASB ratified the consensus of EITF Issue No. 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects
of
Endorsement Split-Dollar Life Insurance Agreements.” EITF Issue
No. 06-4 addresses accounting for separate agreements that split life insurance
policy benefits between an employer and an employee. EITF Issue No.
06-4 requires employers to recognize a liability for future benefits payable
to
the employee under such agreements. The effect of applying the
provisions of Issue No. 06-4 should be recognized either through a change in
accounting principle by a cumulative-effect adjustment to equity or through
the
retrospective application to all prior periods. The provisions of
EITF Issue No. 06-4 will be effective as of the beginning of Fiscal 2009, with
earlier application permitted. We have not yet determined the impact
of adoption on our consolidated financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 provides a single definition of fair
value, along with a framework for measuring it, and requires additional
disclosure about using fair value to measure assets and
liabilities. SFAS No. 157 emphasizes that fair value measurement is
market-based, not entity-specific, and establishes a fair value hierarchy which
places the highest priority on the use of quoted prices in active markets to
determine fair value. It also requires, among other things, that
entities are to include their own credit standing when measuring their
liabilities at fair value.
We
will
be required to adopt the provisions of SFAS No. 157 prospectively, effective
as
of the beginning of Fiscal 2009. We are evaluating the impact that
adoption of SFAS No. 157 would have on our financial condition or results of
operations.
In
May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1,
“Definition of Settlement in FASB Interpretation No. 48,”
which clarifies when a tax position is considered to be “settled” under FIN No.
48. Under FSP FIN 48-1, a tax position can be “effectively settled”
upon completion of an examination by a taxing authority without being legally
extinguished. For tax positions considered effectively settled, we
would recognize the full amount of the tax benefit, even if (1) the tax position
is not considered more-likely-than-not to be sustained solely on the basis
of
its technical merits, and (2) the statute of limitations remains
open. In applying the provisions of the FSP, we are required to
document our analyses and conclusions. The provisions of FSP FIN 48-1
are effective upon adoption of FIN No. 48. The adoption of FSP FIN
48-1 did not have a material effect on our financial condition or results of
operations.
Item
2. Management’s Discussion and Analysis of Financial Condition and 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
February 3, 2007. As used in this management’s discussion and analysis,
“Fiscal 2008” refers to our fiscal year ending February 2, 2008 and “Fiscal
2007” refers to our fiscal year ended February 3, 2007. “Fiscal
2008 Second Quarter” refers to our thirteen week fiscal period ended
August 4, 2007 and “Fiscal 2007 Second Quarter” refers to our thirteen week
fiscal period ended July 29, 2006. “Fiscal 2008 First Quarter” refers
to our thirteen week fiscal period ended May 5, 2007. “Fiscal 2008
Third Quarter” refers to our thirteen-week fiscal period ending November 3, 2007
and “Fiscal 2008 Fourth Quarter” refers to our thirteen-week fiscal period
ending February 2, 2008. “Fiscal 2008 First Half” refers to our
twenty-six week fiscal period ended August 4, 2007 and “Fiscal 2007 First Half”
refers to our twenty-six week fiscal period ended July 29, 2006. The
terms “Charming Shoppes, Inc.,” “the Company,” “we,” “us,” and “our” refer to
Charming Shoppes, Inc. and its consolidated subsidiaries, except where the
context otherwise requires or as otherwise indicated.
FORWARD-LOOKING
STATEMENTS
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,” “could,” “should,” “project,” “estimate,”
“predict,” “anticipate,” “plan,” “intend,” “believes,” and similar expressions
are also intended to identify forward-looking statements.
We
operate in a rapidly changing and competitive environment. New risk
factors emerge from time to time and it is not possible for us to predict all
risk factors that may affect us. 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, which speak only as of the date
on
which they were made. 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. Given
those risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
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 ability 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 and direct-to-consumer markets are highly
competitive and we may be unable to compete successfully against
existing
or future competitors.
|
·
|
We
cannot assure the successful implementation of our business plan
for
Crosstown Traders, including the successful launch of our LANE BRYANT
catalog.
|
·
|
We
cannot assure the successful implementation of our business plans
for
entry into the outlet store distribution channel and expansion of
our
CACIQUE®
product line through new store
formats.
|
·
|
We
cannot assure the successful implementation of our business plan
for
increased profitability and growth in our Retail Stores or
Direct-to-Consumer segments. Recent changes in management may fail to
achieve improvement in our operating
results.
|
·
|
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 third-party
freight
consolidators and service providers, 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 locations 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. As a result of
investor concerns regarding current disruptions in the securitization
market, we cannot assure you that we will be able to enter into financing
arrangements on terms and conditions that are favorable to
us. An inability to enter into a favorable securitization
series or satisfactory alternative financing arrangements could adversely
affect our financial condition.
|
·
|
Natural
disasters, as well as war, acts of terrorism, or other armed conflict,
or
the threat of either may negatively impact availability of merchandise
and
customer traffic to our stores, or otherwise adversely affect our
business.
|
·
|
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.
|
·
|
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. In addition, we are subject to the
Fair Labor Standards Act and various state and Federal laws and
regulations governing such matters as minimum wages, exempt status
classification, overtime, and employee benefits. Changes in
Federal or state laws or regulations regarding minimum wages or other
employee benefits could cause us to incur additional wage and benefit
costs, which could adversely affect our results of
operations.
|
·
|
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.
|
·
|
Inadequate
systems capacity, a disruption or slowdown in telecommunications
services,
changes in technology, changes in government regulations, systems
issues,
security breaches, a failure to integrate order management systems,
or
customer privacy issues could result in reduced sales or increases
in
operating expenses as a result of our efforts or our inability to
remedy
such issues.
|
·
|
Successful
operation of our E-commerce websites and our catalog business is
dependent
on our ability to maintain efficient and uninterrupted customer service
and fulfillment operations.
|
·
|
We
may be unable to manage significant increases in certain costs vital
to
catalog operations, including postage, paper, and acquisition of
prospects, 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.
|
·
|
We
may be unable to successfully implement our plan to improve merchandise
assortments in our Retail Stores or Direct-to-Consumer
segments.
|
·
|
We
make certain significant assumptions, estimates, and projections
related
to the useful lives of our property, plant, and equipment and the
valuation of intangible assets related to acquisitions. The carrying
amount and/or useful life of these assets are subject to periodic
valuation tests for impairment. Impairment results when the carrying
value of an asset exceeds the undiscounted (or for goodwill and
indefinite-lived intangible assets the discounted) future cash flows
associated with the asset. If actual experience were to differ
materially from the assumptions, estimates, and projections used
to
determine useful lives or the valuation of property, plant, equipment,
or
intangible assets, a write-down for impairment of the carrying value
of
the assets, or acceleration of depreciation or amortization of the
assets,
could result. Such a write-down or acceleration of depreciation or
amortization would have an adverse impact on our reported results
of
operations.
|
·
|
Changes
to existing accounting rules or the adoption of new rules could have
an
adverse impact on our reported 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 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
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.
|
·
|
The
holders of our 1.125% Senior Convertible Notes due May 1, 2014 (the
“1.125% Notes”) could require us to repurchase the principal amount of the
notes for cash before maturity of the notes upon the occurrence of
a
“Fundamental Change,” as defined in the indenture relating to the 1.125%
Notes. Such a repurchase would require significant amounts of
cash and could adversely affect our financial
condition.
|
·
|
The
Financial Accounting Standards Board (“FASB”) has issued a proposed Staff
Position (“FSP”) that, if adopted, would apply to any convertible debt
instrument that may be settled in whole or in part with cash upon
conversion, which would include our 1.125% Notes. We would be
required to adopt the proposal as of February 3, 2008 (the beginning
of
Fiscal 2009), with retrospective application to financial statements
for
periods prior to the date of adoption. As compared to our
current accounting for the 1.125% Notes, adoption of the proposal
would
reduce long-term debt, increase stockholders’ equity, and reduce net
income and earnings per share. Adoption of the proposal would
not affect our cash flows.
|
CRITICAL
ACCOUNTING POLICIES
We
have
prepared the financial statements and accompanying notes included in Item 1
of
this report in conformity with United States generally accepted accounting
principles. This requires us to make estimates and assumptions that affect
the amounts reported in our financial statements and accompanying notes.
These estimates and assumptions are based on historical experience,
analysis of current trends, and various other factors that we believe to be
reasonable under the circumstances. Actual results could differ from those
estimates under different assumptions or conditions.
We
periodically reevaluate our accounting policies, assumptions, and estimates
and
make adjustments when facts and circumstances warrant. Historically,
actual results have not differed materially from those determined using required
estimates. 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 February
3,
2007. Except as disclosed below and in the financial statements and
accompanying notes included in Item 1 of 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.
Senior
Convertible Notes
On
April
30, 2007, we issued $250.0 million in aggregate principal amount of our 1.125%
Notes in a private offering for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as
amended. On May 11, 2007, the initial purchasers of the 1.125% Notes
exercised their over-allotment option and purchased an additional $25.0 million
in aggregate principal amount of the notes. See “Notes to
Condensed Consolidated Financial Statements; Note 4. Long-term Debt”
above for further details of the transaction.
We
will
be required to monitor the 1.125% Notes, call options, and warrants for
compliance with the provisions of EITF Issue 00-19 and paragraph 11(a) of SFAS
No. 133 on a quarterly basis. Should the issuance of the 1.125%
Notes, the purchase of the call options, or the sale of the warrants fail to
qualify under the provisions of EITF Issue 00-19 or paragraph 11(a) of SFAS
No.
133, we would be required to recognize derivative instruments in connection
with
the transaction, include the effects of the transaction in assets or liabilities
instead of equity, and recognize changes in the fair values of the assets or
liabilities in consolidated net income as they occur until the provisions of
EITF Issue 00-19 and paragraph 11(a) of SFAS No. 133 are met.
Income
Taxes
We
adopted the provisions of FASB Interpretation (“FIN”) No. 48, “Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109” effective as of February 4, 2007 (see “Notes to Condensed
Consolidated Financial Statements; Note
8. Income Taxes”
above).
RECENT
DEVELOPMENTS
During
the Fiscal 2008 Second Quarter, we deposited $40.0 million with a third-party
financial institution under an agreement that provides the third party with
discretionary authority to purchase shares of our Common Stock on our
behalf. Subsequent to the end of the Fiscal 2008 Second Quarter, the
third-party financial institution completed the purchase of approximately 4.0
million shares of our Common Stock in accordance with the
agreement. During the remainder of Fiscal 2008, as market conditions
allow, we intend to repurchase additional shares of our Common Stock with an
aggregate market value of approximately $40.0 million in the open market or
in
privately negotiated transactions.
See
“Notes to Condensed Consolidated Financial Statements; Note 4. Long-term
Debt” above and “FINANCING; Long-term
Debt” below for further details of the transactions.
RESULTS
OF OPERATIONS
Overview
Throughout
the Fiscal 2008 Second Quarter, we experienced downward trending store traffic
levels at our Retail Store segment, with accelerating weakness in
July. As a result, we experienced a lower sell-through of our spring
and summer merchandise. Therefore, we were more aggressive in
clearing seasonal Retail Stores inventory, leading to deeper-than-planned
markdowns and pressure on our merchandise margins. At our
Direct-to-Consumer segment, we continued to experience declining response rates
to our apparel catalogs. In response to our performance during the
Fiscal 2008 Second-Quarter, we are reducing selling, general, and administrative
expenses and managing to lower inventory levels for the second half of Fiscal
2008. Additionally, we have reassessed our capital spending plans,
and have decreased our capital budget by approximately $12 – $15 million through
the reduction of certain store development and non-critical infrastructure
projects during the remainder of the year.
Our
consolidated net sales for the Fiscal 2008 Second Quarter were $770.9 million,
as compared to net sales for the Fiscal 2007 Second Quarter of $763.3 million,
an increase of 1.0%. Diluted net income per share for the Fiscal 2008
Second Quarter was $0.14, as compared to diluted net income per share for the
Fiscal 2007 Second Quarter of $0.24, a decrease of 41.7%. Fiscal 2007
Second Quarter results included pre-opening operating expenses of approximately
$5.6 million pre-tax, ($3.6 million after tax, or $0.03 per diluted share)
relating to our opening of 76 LANE BRYANT OUTLET stores. For the
Fiscal 2008 First Half, our consolidated net sales were $1,555.6 million, as
compared to net sales for the Fiscal 2007 First Half of $1,498.3 million, an
increase of 3.8%. Diluted net income per share for the Fiscal 2008
First Half was $0.35, as compared to diluted net income per share of $0.48
for
the Fiscal 2007 First Half, a decrease of 27.1%. Fiscal
2007 First Half results included pre-opening operating expenses of approximately
$7.8 million pre-tax, ($5.0 million after tax, or $0.04 per diluted share)
relating to our opening of the LANE BRYANT OUTLET stores.
We
are
executing on a number of new product and marketing initiatives for our fall
season to be better positioned to improve traffic and sales trends during the
second half of Fiscal 2008. During the Fiscal 2008 Second Quarter,
the President of our CATHERINES brand was promoted to President for the LANE
BRYANT brand. In addition to the new leadership at LANE BRYANT, we are
encouraged by our new "Right Fit by Lane Bryant™" campaign, which supports our
launch of new core denim and career pant assortments using new fit
technology. Also, our FASHION BUG brand has signed a licensing
agreement for the exclusive use of the Gitano® brand
name. We expect the Gitano product, which will include fashionable
casual merchandise offerings in Plus and Misses Sportswear and Footwear, to
arrive at our stores during the Fiscal 2008 Third Quarter.
We
continue to strengthen and support our Direct-to-Consumer segment’s management
team and have improved visual creative and merchandise offerings for a number
of
our fall catalog titles. We expect these changes to lead to a
moderation of our downward trending catalog sales results for the remainder
of
Fiscal 2008. Additionally, we are finalizing our preparations for the
launch of our LANE BRYANT catalog, which is scheduled for distribution in
November, 2007. We plan to invest approximately $10 million for the
launch of the catalog during the Fiscal 2008 Fourth Quarter.
In
view
of uncertain credit market conditions, we remain cautious for the second half
of
Fiscal 2008, based on our perception of pressure on consumers’ disposable income
and spending levels.
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
|
|
|
Twenty-six
Weeks Ended(1)
|
|
|
Change
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
From
Prior
|
|
|
August
4,
|
|
|
July
29,
|
|
|
From
Prior
|
|
|
|
2007
|
|
|
2006
|
|
|
Period
|
|
|
2007
|
|
|
2006
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
1.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
3.8 |
% |
Cost
of goods sold, buying,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
catalog, and
occupancy
expenses
|
|
|
71.5
|
|
|
|
70.0
|
|
|
|
3.1
|
|
|
|
70.6
|
|
|
|
69.1
|
|
|
|
6.0
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
24.8
|
|
|
|
23.1
|
|
|
|
8.3
|
|
|
|
24.9
|
|
|
|
23.9
|
|
|
|
8.1
|
|
Income
from operations
|
|
|
3.7
|
|
|
|
6.8
|
|
|
|
(45.7 |
) |
|
|
4.6
|
|
|
|
7.0
|
|
|
|
(31.9 |
) |
Other
income
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
31.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
15.6
|
|
Interest
expense
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
(26.1 |
) |
|
|
0.4
|
|
|
|
0.5
|
|
|
|
(23.4 |
) |
Income
tax provision
|
|
|
1.4
|
|
|
|
2.4
|
|
|
|
(41.1 |
) |
|
|
1.6
|
|
|
|
2.4
|
|
|
|
(29.5 |
) |
Net
income
|
|
|
2.4
|
|
|
|
4.3
|
|
|
|
(43.9 |
) |
|
|
2.9
|
|
|
|
4.3
|
|
|
|
(31.0 |
) |
____________________
|
|
(1)
Results may not add due to rounding.
|
|
The
following table shows details of our consolidated total net sales:
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-six
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
$ |
282.4
|
|
|
$ |
292.7
|
|
|
$ |
540.2
|
|
|
$ |
548.5
|
|
LANE
BRYANT(1)
|
|
|
305.6
|
|
|
|
281.2
|
|
|
|
627.9
|
|
|
|
558.3
|
|
CATHERINES
|
|
|
93.5
|
|
|
|
95.9
|
|
|
|
194.1
|
|
|
|
190.4
|
|
Other
retail stores(2)
|
|
|
5.0
|
|
|
|
0.0
|
|
|
|
9.8
|
|
|
|
0.0
|
|
Total
Retail Stores segment
sales
|
|
|
686.5
|
|
|
|
669.8
|
|
|
|
1,372.0
|
|
|
|
1,297.2
|
|
Total
Direct-to-Consumer segment sales
|
|
|
81.7
|
|
|
|
92.3
|
|
|
|
180.1
|
|
|
|
199.8
|
|
Corporate
and other(3)
|
|
|
2.7
|
|
|
|
1.3
|
|
|
|
3.5
|
|
|
|
1.3
|
|
Total
net
sales
|
|
$ |
770.9
|
|
|
$ |
763.4
|
|
|
$ |
1,555.6
|
|
|
$ |
1,498.3
|
|
____________________
|
|
(1)
Includes LANE BRYANT OUTLET stores, which began operations in July
2006.
|
|
(2)
PETITE SOPHISTICATE OUTLET stores.
|
|
(3)
Primarily revenue related to loyalty card fees.
|
|
The
following table shows information related to the change in our consolidated
total net sales:
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-six
Weeks Ended
|
|
|
|
August
4,
|
|
|
July
29,
|
|
|
August
4,
|
|
|
July
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Stores segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in comparable store sales(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
retail stores
|
|
|
(3 |
)% |
|
|
2 |
% |
|
|
(2 |
)% |
|
|
1 |
% |
FASHION
BUG
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
LANE
BRYANT
|
|
|
(5 |
) |
|
|
4
|
|
|
|
(3 |
) |
|
|
3
|
|
CATHERINES
|
|
|
(2 |
) |
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
from new stores as a percentage of total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
prior-period
sales(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
LANE
BRYANT(3)
|
|
|
8
|
|
|
|
4
|
|
|
|
8
|
|
|
|
4
|
|
CATHERINES
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Other
retail stores(4)
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior-period
sales from closed stores as a percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
total consolidated
prior-period sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
LANE
BRYANT
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
CATHERINES
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in Retail Stores segment sales
|
|
|
2
|
|
|
|
5
|
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer
segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in Direct-to-Consumer segment sales
|
|
|
(12 |
) |
|
|
—
|
|
|
|
(10 |
) |
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in consolidated total net sales
|
|
|
1
|
|
|
|
11 |
(5) |
|
|
4
|
|
|
|
16 |
(5) |
____________________
|
|
(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 incremental Retail Stores segment E-commerce
sales.
|
|
(3)
Includes LANE BRYANT OUTLET stores.
|
|
(4)
Includes PETITE SOPHISTICATE OUTLET stores.
|
|
(5)
The increase in consolidated total net sales includes increases of
6% for
the thirteen weeks ended July 29, 2006 and 12% for the twenty-six
weeks
ended July 29, 2006 as a result of the acquisition of Crosstown
Traders, Inc. on June 2, 2005.
|
|
The
following table sets forth information with respect to our year-to-date retail
store activity for Fiscal 2008 and planned store activity for all of Fiscal
2008:
|
|
FASHION
|
|
|
LANE
|
|
|
|
|
|
|
|
|
|
|
|
|
BUG
|
|
|
BRYANT
|
|
|
CATHERINES
|
|
|
Other(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008 Year-to-Date(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at February 3, 2007
|
|
|
1,009
|
|
|
|
859
|
|
|
|
465
|
|
|
|
45
|
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
opened
|
|
|
7
|
|
|
|
43 |
(3) |
|
|
4
|
|
|
|
1
|
|
|
|
55
|
|
Stores
closed
|
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(3 |
) |
|
|
(0 |
) |
|
|
(22 |
) |
Net
change in stores
|
|
|
(3 |
) |
|
|
34
|
|
|
|
1
|
|
|
|
1
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at August 4, 2007
|
|
|
1,006
|
|
|
|
893
|
|
|
|
466
|
|
|
|
46
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
relocated during period
|
|
|
8
|
|
|
|
20
|
|
|
|
6
|
|
|
|
0
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned
store openings(4)
|
|
|
7
|
|
|
|
67 |
(5) |
|
|
8
|
|
|
|
11 |
(6) |
|
|
93
|
|
Planned
store closings
|
|
|
19
|
|
|
|
30-35
|
|
|
|
5
|
|
|
|
0
|
|
|
|
54-59
|
|
Planned
store relocations(4)
|
|
|
16
|
|
|
|
45-50 |
(7) |
|
|
9
|
|
|
|
0
|
|
|
|
70-75
|
|
____________________
|
|
(1)
Includes PETITE SOPHISTICATE OUTLET stores.
|
|
(2)
Excludes 2 Crosstown Traders outlet stores that are included in our
Direct-to-Consumer segment.
|
|
(3)
Includes 10 LANE BRYANT OUTLET stores.
|
|
(4)
Revised to reflect reduced capital expenditures forecast (see
“LIQUIDITY AND CAPITAL RESOURCES; Capital Expenditures”
below).
|
|
(5)
Includes approximately 35 LANE BRYANT intimate apparel side-by-side
stores
and 12 LANE BRYANT OUTLET stores.
|
|
(6)
Includes 7 PETITE SOPHISTICATE OUTLET stores and 4 full-line PETITE
SOPHISTICATE stores.
|
|
(7)
Includes approximately 32 conversions to LANE BRYANT intimate apparel
side-by-side stores.
|
|
Comparison
of Thirteen Weeks Ended August 4, 2007 and July 29, 2006
Net
Sales
The
increase in consolidated net sales in our Fiscal 2008 Second Quarter as
compared to our Fiscal 2007 Second Quarter was driven primarily by our
outlet business, as well as increases at each of our brands’ E-commerce business
in our Retail Stores segment. The increase in our Retail Stores
segment net sales was partially offset by a decrease in net sales from our
Direct-to-Consumer segment.
Retail
Stores Segment Net Sales
Comparable
store sales for our Fiscal 2008 Second Quarter decreased as compared to our
Fiscal 2007 Second Quarter, and were below our plan for the
quarter. Net sales were negatively affected by decreased traffic
levels at each of our brands, which resulted in increased markdowns of spring
merchandise as compared to our plan for the quarter. We operated
2,411 stores as of August 4, 2007, as compared to 2,317 stores as of July 29,
2006.
Total
net
sales for the LANE BRYANT brand increased primarily as a result of sales from
LANE BRYANT OUTLET stores and an increase in store-related E-commerce
sales. Sales from new LANE BRYANT stores were substantially offset by
a decrease in comparable store sales. The increase in LANE BRYANT net
sales was below our plan for the period. LANE BRYANT experienced a
decrease in the average number of transactions per store and the average dollar
sale per transaction in the current-year quarter as compared to the prior-year
quarter. Traffic levels decreased as compared to the prior-year
quarter.
Total
net
sales for the FASHION BUG brand decreased as compared to the prior-year quarter
and were below our plan for the period. The decrease in FASHION BUG
store net sales was offset slightly by an increase in store-related E-commerce
sales. Store traffic levels and the average number of transactions
per store decreased from the prior-year quarter, while the average dollar sale
per transaction increased as compared to the prior-year quarter.
Total
net
sales for the CATHERINES brand decreased as compared to the prior-year quarter
and were below our plan for the period. This decrease was partially
offset by an increase in store-related E-commerce sales. Store
traffic levels and the average number of transactions per store decreased from
the prior-year quarter, while the average dollar sale per transaction increased
as compared to the prior-year quarter.
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 2008 Second Quarter we recognized revenues of $5.3 million and
during the Fiscal 2007 Second Quarter we recognized revenues of $5.1
million in connection with our loyalty card programs.
Direct-to-Consumer
Segment Net Sales
The
decrease in net sales from our Direct-to-Consumer segment was primarily
attributable to below-plan performance in our apparel-related catalogs, which
resulted from a continuing decline in response rates from both our core customer
and prospecting mailing lists. We have made a series of management
changes, including the appointment of a new president for Crosstown
Traders. We are also improving visual creative and merchandise
offerings for several of our fall catalogs. We expect these changes
to moderate the rate of decline in response rates for the remainder of Fiscal
2008.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
Consolidated
cost of goods sold, buying, catalog, and occupancy expenses increased as a
percentage of consolidated net sales in the Fiscal 2008 Second Quarter as
compared to the Fiscal 2007 Second Quarter, primarily as a result of reduced
merchandise margins for our Direct-to-Consumer segment. The
merchandise margin in our Retail Stores segment was relatively flat as compared
to the prior-year period, and was affected by increased markdowns of Spring
merchandise during the Fiscal 2008 Second Quarter in response to reduced traffic
levels. The reduced merchandise margin in our Direct-to-Consumer
segment was primarily as a result of the lack of leverage on catalog advertising
costs from reduced sales due to low response rates to our apparel
catalogs. Consolidated cost of goods sold increased 0.7% as a
percentage of consolidated net sales, while consolidated buying and occupancy
expenses increased 0.8% as a percentage of consolidated net sales.
For
our
Retail Stores segment, cost of goods sold, buying, and occupancy expenses as
a
percentage of net sales were 0.4% higher in the Fiscal 2008 Second Quarter
as
compared to the Fiscal 2007 Second Quarter. Buying and occupancy
expenses for the Retail Stores segment, as a percentage of net sales, were
0.6%
higher in the Fiscal 2008 Second Quarter as compared to the Fiscal 2007
Second Quarter. The increase in buying and occupancy expenses is
attributable to the lack of leverage as a result of the decrease in comparable
store sales.
Cost
of
goods sold for our Direct-to-Consumer segment includes catalog advertising
and
fulfillment costs, which are significant expenses for catalog operations, and
are therefore generally higher as a percentage of net sales than cost of goods
sold for our Retail Stores segment. Catalog advertising and
fulfillment costs as a percentage of net sales increased in the Fiscal 2008
Second Quarter as compared to the Fiscal 2007 Second Quarter as a result of
the
lack of leverage from reduced sales from this segment. Conversely,
the Direct-to-Consumer segment incurs lower levels of buying and occupancy
costs, which resulted in a favorable impact on consolidated buying and occupancy
expenses as a percentage of consolidated net sales in the current-year
period.
Cost
of
goods sold includes merchandise costs net of discounts and allowances; freight;
inventory shrinkage; shipping and handling costs associated with our
Direct-to-Consumer and E-commerce businesses; and amortization of
direct-response advertising costs for our Direct-to-Consumer business. Net
merchandise costs and freight are capitalized as inventory costs.
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, catalog, 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 increased 1.7% as a percentage
of
consolidated net sales, primarily as a result of negative expense leverage
at
both the Retail Stores and Direct-to-Consumer segments. Additionally,
corporate expenses increased primarily as a result of increases in compensation
and compensation-related expenses, as well as other corporate
expenses.
Income
Tax Provision
The
effective income tax rate was 37.6% for the Fiscal 2008 Second Quarter as
compared to 36.4% for the Fiscal 2007 Second Quarter. We adopted the
provisions of FASB Interpretation No. 48 as of the beginning of Fiscal 2008
(see
“Notes to Condensed Consolidated Financial Statements; Note
8. Income Taxes”
above).
Comparison
of Twenty-six Weeks Ended August 4, 2007 and July 29, 2006
Net
Sales
The
increase in consolidated net sales for our Fiscal 2008 First Half as
compared to our Fiscal 2007 First Half was driven primarily by our
outlet business, as well as increases at each of our brands’ E-Commerce business
in our Retail Stores segment. The increase in our Retail Stores
segment net sales was partially offset by a decrease in net sales from our
Direct-to-Consumer segment.
Retail
Stores Segment Net Sales
Comparable
store sales for our Fiscal 2008 First Half decreased as compared to our Fiscal
2007 First Half. Net sales for all of the brands were negatively impacted
by unseasonably cold weather during the Fiscal 2008 First Quarter and by reduced
traffic levels during our Fiscal 2008 Second Quarter.
Total
net
sales for the LANE BRYANT brand increased primarily as a result of sales from
LANE BRYANT OUTLET stores and an increase in store-related E-commerce sales.
The increase in LANE BRYANT net sales was below our plan for the
period. LANE BRYANT experienced a decrease in the average number of
transactions per store and the average dollar sale per transaction in the
current-year period as compared to the prior-year period. Traffic
levels decreased as compared to the prior-year period.
Total
net
sales for the FASHION BUG brand decreased compared to the prior-year period
and
were below plan for the period. The decrease in FASHION BUG net sales
was offset slightly by increases in store-related E-commerce
sales. Store traffic levels and the average number of transactions
per store decreased from the prior-year period, while the average dollar sale
per transaction increased as compared to the prior-year period.
Total
net
sales for the CATHERINES brand increased as a result of increases in comparable
retail store sales and store-related E-commerce sales, and were below our plan
for the period. CATHERINES’ strong performance during Fiscal 2007
continued into the Fiscal 2008 First Half, with an increase in the average
dollar sale per transaction partially offset by a decrease in traffic levels
and
a slight decrease in the average number of transactions per store as compared
to
the prior-year period.
During
the Fiscal 2008 First Half we recognized revenues of $11.0 million and
during the Fiscal 2007 First Half we recognized revenues of $9.2
million in connection with our loyalty card programs.
Direct-to-Consumer
Segment Net Sales
The
decrease in net sales from our Direct-to-Consumer segment was primarily
attributable to below-plan performance in our apparel-related catalogs, which
resulted from a continuing decline in response rates from both our core customer
and prospecting mailing lists. As discussed in the quarter-to-quarter
comparison above, we made a series of management changes, including the
appointment of a new president for Crosstown Traders. We are also
improving visual creative and merchandise offerings for several of our fall
catalogs. We expect these changes to moderate the rate of decline in
response rates for the remainder of Fiscal 2008.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
Consolidated
cost of goods sold, buying, and occupancy expenses increased as a percentage
of
consolidated net sales in the Fiscal 2008 First Half as compared to the Fiscal
2007 First Half, primarily as a result of reduced merchandise margins for both
our Retail Stores and Direct-to-Consumer segments. The reduced
merchandise margin in our Retail Stores segment was primarily as a result of
increased promotional pricing related to unseasonable weather during the Fiscal
2008 First Quarter and increased markdowns of Spring merchandise during the
Fiscal 2008 Second Quarter. The reduced merchandise margin in our
Direct-to-Consumer segment was primarily as a result of the lack of leverage
on
catalog advertising costs from reduced sales for our apparel-related catalogs
due to a continuing decline in response rates to our apparel
catalogs. Consolidated cost of goods sold increased 1.0% as a
percentage of consolidated net sales, while consolidated buying and occupancy
expenses increased 0.4% as a percentage of consolidated net sales.
For
our
Retail Stores segment, cost of goods sold, buying, and occupancy expenses as
a
percentage of net sales were 0.9% higher in the Fiscal 2008 First Half as
compared to the Fiscal 2007 First Half. Merchandise margins were
negatively affected by increased promotional activities as noted
above. In addition, our LANE BRYANT brand entered Fiscal 2008 with
excess holiday inventories, and experienced a higher-than-planned level of
markdowns to exit the season. Buying and occupancy expenses for the
Retail Stores segment, as a percentage of net sales, were 0.3% higher in the
Fiscal 2008 First Half as compared to the Fiscal 2007 First Half,
reflecting the lack of leverage as a result of the decrease in comparable store
sales.
Cost
of
goods sold for our Direct-to-Consumer segment includes catalog advertising
and
fulfillment costs, which are significant expenses for catalog operations, and
are therefore generally higher as a percentage of net sales than cost of goods
sold for our Retail Stores segment. Catalog advertising and
fulfillment costs as a percentage of net sales increased in the Fiscal 2008
First Half as compared to the Fiscal 2007 First Half as a result of the lack
of
leverage from reduced sales from this segment. Conversely, the
Direct-to-Consumer segment incurs lower levels of buying and occupancy costs,
which resulted in a favorable impact on consolidated buying and occupancy
expenses as a percentage of consolidated net sales in the current-year
period.
Cost
of
goods sold includes merchandise costs net of discounts and allowances; freight;
inventory shrinkage; shipping and handling costs associated with our
Direct-to-Consumer and E-commerce businesses; and amortization of
direct-response advertising costs for our Direct-to-Consumer business. Net
merchandise costs and freight are capitalized as inventory costs.
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, catalog, 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 increased 1.0% as a percentage
of
consolidated net sales, primarily as a result of negative expense leverage
at
both the Retail Stores and Direct-to-Consumer segments. Additionally,
corporate expenses increased primarily as a result of increases in compensation
and compensation-related expenses, as well as other corporate
expenses.
Income
Tax Provision
The
effective income tax rate was 36.5% for the Fiscal 2008 First Half as
compared to 36.0% for the Fiscal 2007 First Half. We adopted the
provisions of FASB Interpretation No. 48 as of the beginning of Fiscal 2008
(see
“Notes to Condensed Consolidated Financial Statements; Note
8. Income Taxes”
above).
LIQUIDITY
AND CAPITAL RESOURCES
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. In addition to cash
provided by operating activities, our cash and cash equivalents increased during
the Fiscal 2008 First Half as a result of long-term debt financing, as discussed
further in “FINANCING; Long-term
Debt” below and in “Notes to Condensed Consolidated
Financial Statements; Note 4. Long-term Debt”
above). The following table highlights certain information related to
our liquidity and capital resources:
|
|
August
4,
|
|
|
February
3,
|
|
(Dollars
in millions)
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
233.3
|
|
|
$ |
143.8
|
|
Available-for-sale
securities
|
|
$ |
26.6
|
|
|
$ |
2.0
|
|
Working
capital
|
|
$ |
520.4
|
|
|
$ |
460.6
|
|
Current
ratio
|
|
|
2.4
|
|
|
|
2.2
|
|
Long-term
debt to equity ratio
|
|
|
31.9 |
% |
|
|
19.1 |
% |
Our
net
cash provided by operating activities decreased to $163.5 million for the Fiscal
2008 First Half from $175.6 million for the Fiscal 2007 First
Half. The decrease was primarily attributable to a $20.0 million
decrease in net income. Additionally, our net investment in
inventories decreased in the Fiscal 2008 First Half as compared to the Fiscal
2007 First Half. Excluding incremental inventory purchased for our
outlet business, inventories at the end of the Fiscal 2008 First Half were
consistent with the end of the Fiscal 2007 First Half. On a
same-store basis, inventories increased 6% as of the end of the Fiscal 2008
First Half as compared to the end of the Fiscal 2007 First Half as a result
of
slightly higher seasonal inventory, as well as an increase in year-round
inventory.
Capital
Expenditures
Our
gross
capital expenditures, excluding construction allowances received from landlords,
were $74.0 million during the Fiscal 2008 First Half. Construction
allowances received from landlords for the Fiscal 2008 First Half were
$26.9 million. During Fiscal 2008, we continued our new store opening
plan, primarily in our LANE BRYANT brand, which included our LANE
BRYANT/CACIQUE side-by-side retail store concept, and in our outlet store
channel. We also plan to invest approximately $10 million during the
Fiscal 2008 Fourth Quarter in connection with the launch of the LANE BRYANT
catalog in November 2007.
For
all
of Fiscal 2008, we have reduced our previously forecasted capital expenditures
from approximately $160 – $165 million to approximately $145 – $150 million
before construction allowances received from landlords. The $15
million decrease in forecasted capital expenditures resulted primarily from
a
reduction in planned store openings, relocations, and improvements for the
remainder of Fiscal 2008 and a reduction in planned spending on certain
non-critical information technology projects. We expect that the
majority of our planned capital expenditures for the remainder of Fiscal 2008
will support store development, with the remainder of the expenditures primarily
for improvements to our information technology and corporate
infrastructure. We expect to finance these additional capital expenditures
primarily through internally-generated funds and capital lease
financing.
Debt,
Lease, and Purchase Commitments
The
financial table in “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations; FINANCIAL CONDITION;
Debt, Lease, and Purchase
Commitments” on page 50 of our Annual Report on
Form 10-K for the fiscal year ended February 3, 2007 does not include our
liability for unrecognized tax benefits that we have recorded in accordance
with
our adoption of FIN No. 48 (see “CRITICAL ACCOUNTING POLICIES;
Income Taxes” above) as
of
the beginning of Fiscal 2008. As a result of the adoption of FIN No.
48, we had $44.2 million of unrecognized tax benefits and $7.4 million of
accrued interest and penalties. During the Fiscal 2008 First Half,
there was no material change in either the unrecognized tax benefits or accrued
interest and penalties. We expect that the amount of unrecognized tax
benefits will change within the next 12 months. Although we cannot
determine the amount of the change at this time, based on currently available
information we do not expect the change to have a material impact on our
financial position or results of operations.
Repurchases
of Common Stock
During
the Fiscal 2008 First Quarter, we used $131.1 million of the proceeds from
our
issuance of our 1.125% Senior Convertible Notes due May 1, 2014 to repurchase
10.3 million shares of our Common Stock (see “FINANCING;
Long-term Debt”
below). In May 2007, we announced that we intend to use an additional
$80 to $100 million of the proceeds to repurchase additional shares of Common
Stock through the remainder of Fiscal 2008. During the Fiscal 2008
Second Quarter, we repurchased 1.7 million shares of Common Stock in the open
market for $18.3 million.
During
the Fiscal 2008 Second Quarter, we also deposited $40.0 million of the proceeds
from the issuance of the 1.125% Notes with a third-party financial institution
under an agreement that provides the third party with discretionary authority
to
purchase shares of our Common Stock on our behalf. As of the end of the
Fiscal 2008 Second Quarter, the $40.0 million deposit with the third-party
financial institution was recorded as a component of “Other assets” in our
condensed consolidated balance sheet and as cash used by financing activities
in
our condensed consolidated statement of cash flows.Subsequent to the end of
the
Fiscal 2008 Second Quarter, the third-party financial institution completed
the
purchase of approximately 4.0 million shares of our Common Stock in accordance
with the agreement. During the remainder of Fiscal 2008, as market
conditions allow, we intend to repurchase additional shares of our Common Stock
with an aggregate market value of approximately $40.0 million through a
combination of open-market purchases and privately negotiated
transactions.
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) for 30 days before and immediately after the payment of such
dividends.
Off-Balance-Sheet
Financing
Asset
securitization primarily involves the sale of proprietary credit card
receivables to a special-purpose entity, which in turn transfers the receivables
to a separate and distinct qualified special-purpose entity
(“QSPE”). The QSPE’s assets and liabilities are not consolidated in
our balance sheet and the receivables transferred to the QSPEs are isolated
for
purposes of the securitization program. We use asset securitization
to fund the credit card receivables generated by our FASHION BUG, CATHERINES,
PETITE SOPHISTICATE, and CROSSTOWN TRADERS proprietary credit card
programs. Additional information regarding our asset securitization
facility is included in “Note 9. Asset Securitization” above;
“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 February 3, 2007; and under the caption “MARKET RISK’
below.
As
of
August 4, 2007, we 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 August 4, 2007
|
$40.0
|
$100.0
|
$0.0
|
$180.0
|
$43.0
|
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 (for the Crosstown Traders catalog
proprietary credit card receivables program).
|
(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 start of the purchase commitment by the
series
purchaser currently in effect.
|
As
these
credit card receivables securitizations reach maturity, we plan to obtain
funding for the proprietary credit card programs through additional
securitizations, including annual renewal of our conduit facilities.
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 $272.5 million of private label credit card receivables in the
Fiscal 2008 First Half and had $364.9 million of securitized credit card
receivables outstanding as of August 4, 2007. We held certificates and
retained interests in our securitizations of $64.8 million as of August 4,
2007,
which are 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 August 4, 2007, our investment in asset-backed securities included
$11.5 million of QSPE certificates, an I/O strip of $16.9 million, and other
retained interests of $36.4 million. 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 August 4, 2007, 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 August 4, 2007, 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 QSPE investors
have no other recourse to us.
These
securitization agreements are intended to improve our overall liquidity by
providing sources of funding for our proprietary credit card receivables.
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.
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 retail
and
outlet stores. 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 allocated to the LANE
BRYANT stores under such agreement at book value from the third
party.
We
currently plan to exercise our option to purchase the LANE BRYANT receivables
upon the termination of the agreement. We estimate that the
apportionment of receivables allocated to the accounts with respect to the
LANE
BRYANT retail stores will be approximately $220 million at
termination. We intend to finance the purchase of the LANE BRYANT
receivables with a new securitization series that we expect to complete during
the Fiscal 2008 Third Quarter. However, the availability of liquidity
may be limited due to recent investor concerns surrounding sub-prime mortgage
credit risk, hedge fund losses, unsuccessful leveraged loan syndications, and
the related impact on the overall credit markets. These concerns have
adversely affected liquidity in the debt markets, making financing terms for
borrowers less attractive. A prolonged downturn in this market may
cause us to seek alternative sources of potentially less-attractive
financing.
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 February 3, 2007.
FINANCING
Revolving
Credit Facility
Our
revolving credit facility agreement 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 maximum availability of $500 million. The
agreement expires on July 28, 2010. As of August 4, 2007, we had an
aggregate total of $2.5 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
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). The facility is secured by our general assets, except for (i)
assets related to our credit card securitization facilities, (ii) real property,
(iii) equipment, (iv) the assets of our non-U.S. subsidiaries, and (v) certain
other assets. As of August 4, 2007, 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 August 4, 2007, the applicable
rates under the facility were 8.25% for Prime Rate Loans and 6.32% (LIBOR plus
1%) for Eurodollar Rate Loans. There were no borrowings outstanding
under the facility as of August 4, 2007.
Long-term
Debt
On
April
30, 2007, we issued $250.0 million principal amount of our 1.125% Notes in
a
private offering for resale to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933, as amended. On May 11, 2007,
the initial purchasers of the 1.125% Notes exercised their over-allotment option
and purchased an additional $25.0 million in principal amount of
notes. The 1.125% Notes were issued at par, and interest is payable
semiannually in arrears on May 1 and November 1, beginning November 1,
2007. The 1.125% Notes will mature on May 1, 2014, unless earlier
repurchased by us or converted.
We
received proceeds of approximately $268.1 million from the issuance, net of
underwriting fees of approximately $6.9 million. The underwriting
fees, as well as additional transaction costs of $0.7 million incurred in
connection with the issuance of the 1.125% Notes, are included in “Other
assets,” and amortized to interest expense on an effective interest rate basis
over the remaining life of the notes (seven years).
See
“Notes to Condensed Consolidated Financial Statements; Note
4. Long-term
Debt” above for additional details of the issuance of
the notes.
On
April
30, 2007, we called for the redemption on June 4, 2007 of our $149.999 million
outstanding aggregate principal amount of 4.75% Notes. The holders of
the 4.75% Notes had the option to convert their notes into shares of our Common
Stock at a conversion price of $9.88 per share until the close of business
on
June 1, 2007. As of June 4, 2007, the holders of $149.956 million
principal amount of the 4.75% Notes had exercised their right to convert their
notes into an aggregate of 15.146 million shares of our Common Stock and the
remaining notes were redeemed for $43 thousand. In addition, we paid
$392 thousand in lieu of fractional shares.
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 8.
Short-term Borrowings and Long-term Debt” of our Annual Report on Form
10-K for the fiscal year ended February 3, 2007.
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.
MARKET
RISK
We
manage
our FASHION BUG, CATHERINES, PETITE SOPHISTICATE, and Crosstown Traders
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 proprietary credit card accounts are billed
using
a floating rate index (the Prime Rate), subject to a floor and limited by legal
maximums. 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 August 4, 2007, 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 swap agreements with respect to $161.1
million of Series 2004-1 certificates, and $89.5 million of Series
2002-1 being issued at fixed rates, 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 2008, an increase of approximately $300 thousand in
selling, general, and administrative expenses would result.
See
“PART II. OTHER INFORMATION; Item 1A. Risk Factors” for a
further discussion of other market risks related to our securitization
facilities.
As
of
August 4, 2007, there were no borrowings outstanding under our revolving credit
facility. Future borrowings made under the facility, if any, could be
exposed to variable interest rates.
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.
IMPACT
OF RECENT ACCOUNTING PRONOUNCEMENTS
See
“Item 1. Notes to Condensed Consolidated Financial Statements
(Unaudited); Note 11. Impact of Recent
Accounting Pronouncements” above.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
See
“Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations; MARKET RISK,” above.
Item
4. Controls and Procedures
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. Our disclosure
Committee, which is made up of several key management employees and reports
directly to the CEO and CFO, assists 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. Furthermore, 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.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
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.
Item
1A. Risk Factors
On
April
30, 2007, we issued $250.0 million principal amount of 1.125% Senior Convertible
Notes due May 1, 2014 (the “1.125% Notes) in a private offering for resale to
qualified institutional buyers pursuant to Rule 144A under The Securities Act
of
1933. On May 11, 2007, the initial purchasers of the 1.125% Notes
exercised their over-allotment option and purchased an additional $25.0 million
in principal amount of the notes. The holders of the 1.125% Notes
could require us to repurchase the principal amount of the notes for cash before
maturity of the notes upon the occurrence of a “Fundamental Change,” as defined
in the indenture relating to the 1.125% Notes. Such a repurchase
would require significant amounts of cash and could adversely affect our
financial condition.
The
Financial Accounting Standards Board (“FASB”) has issued a proposed Staff
Position (“FSP”) that, if adopted, would apply to any convertible debt
instrument that may be settled in whole or in part with cash upon conversion,
which would include our 1.125% Senior Convertible Notes due May
2014. We would be required to adopt the proposal as of February 3,
2008 (the beginning of Fiscal 2009), with retrospective application to financial
statements for periods prior to the date of adoption. As compared to
our current accounting for the 1.125% Notes, adoption of the proposal would
reduce long-term debt, increase stockholders’ equity, and reduce net income and
earnings per share. Adoption of the proposal would not affect our
cash flows.
We
have
traditionally relied upon the securitization market to finance our proprietary
credit card receivables. In addition, we intend to finance the
anticipated purchase of our LANE BRYANT receivables with a new securitization
series that we expect to complete during the Fiscal 2008 Third Quarter (see
“PART I. Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations: LIQUIDITY AND CAPITAL RESOURCES;
Off-Balance-Sheet Financing”
above). The current disruption in the securitization market caused
by, among other things, an increased default rate on residential mortgage loans,
an increase in the number of rating downgrades with respect to bonds issued
in
connection with the securitization of loans, the lack of liquidity in the bond
market, and the financial condition of many companies that typically participate
in this market may negatively affect our ability to access the securitization
market. As a result, we cannot assure you that we will be able to
enter into financing arrangements on terms and conditions that are favorable
to
us. An inability to enter into a favorable securitization series or
satisfactory alternative financing arrangements could adversely affect our
financial condition.
We
have
made recent changes in management as part of an effort to improve our
competitive position. We cannot assure that these changes in
management will achieve an improvement in our competitive position;
Other
than the above, we have not become aware of any material changes since February
3, 2007 in the risk factors previously disclosed in “Part I; Item 1A.
Risk Factors” of our annual report on Form 10-K for the fiscal year
ended February 3, 2007. See also “Part I; Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations;
FORWARD-LOOKING STATEMENTS” above.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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(4)(5)
|
|
|
Programs(4)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
6, 2007 through June 2, 2007
|
|
|
193 |
(1) |
|
$ |
12.24
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
3, 2007 through July 7, 2007
|
|
|
547,213 |
(2) |
|
|
11.13
|
|
|
|
545,236 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
8, 2007 through August 4, 2007
|
|
|
1,123,122 |
(3) |
|
|
10.92
|
|
|
|
1,121,443 |
(5) |
|
|
|
Total
|
|
|
1,670,528
|
|
|
$ |
10.99
|
|
|
|
1,666,679 |
(5) |
|
|
13,286,507 |
(6) |
____________________
|
|
(1)
Shares withheld for the payment of payroll taxes on employee stock
awards
that vested during the period.
|
|
(2)
Includes 1,977 shares ($10.97 average price paid per share) withheld
for
the payment of payroll taxes on employee stock awards that vested
during
the period and 545,236 shares ($11.13 average price paid per share)
purchased in the open market (see “Note (5)”
below).
|
|
(3)
Includes 1,679 shares ($9.80 average price paid per share) withheld
for
the payment of payroll taxes on employee stock awards that vested
during
the period and 1,121,443 shares ($10.92 average price paid per share)
purchased in the open market (see “Note (5)”
below).
|
|
(4)
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, pursuant to
these authorizations, 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 August 4, 2007,
4,979,669 shares of our Common Stock remain available for repurchase
under
these programs. No shares were acquired under these programs during
the thirteen weeks ended August 4, 2007. The repurchase programs have
no expiration date.
|
|
(5)
In
May 2007, we announced our intention to use $80 to $100 million of
the
proceeds from our issuance of 1.125% Senior Convertible Notes due
May 1,
2014 to repurchase shares of Common Stock through the remainder of
our
fiscal year ended February 2, 2008 (see “Part I, Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations; LIQUIDITY AND CAPITAL RESOURCES; Repurchases of Common
Stock” above). During the quarter ended August 4, 2007, we
repurchased 1,666,679 shares of Common Stock in the open market under
this
plan. We also deposited $40,000,000 with a third-party financial
institution under an agreement providing the third party with
discretionary authority to purchase shares of our Common Stock on
our
behalf. Subsequent to August 4, 2007, the third-party financial
institution completed such purchases and delivered 3,958,838 shares
of our
common stock to our transfer agent on our behalf under this
plan. Through February 2, 2008, as market conditions allow, we intend
to repurchase additional shares of our Common Stock with an aggregate
market value of approximately $40,000,000 (approximately 4,348,000
shares based on the closing price of $9.20 for our Common Stock as
of
August 4, 2007) under this plan through a combination of open-market
purchases and privately negotiated transactions.
|
|
(6)
Includes
3,958,838 shares purchased subsequent to August 4, 2007 and 4,348,000
estimated shares projected to be purchased under our plan announced
in May
2007 (see “Note (5)” above). Also includes 4,979,669
shares authorized under plans announced in Fiscal 1998, Fiscal 2000,
and
Fiscal 2003 (see “Note (4)” above).
|
|
Item
4. Submission of Matters to a Vote of Security Holders
Our
Annual Meeting of Shareholders was held on June 21, 2007.
Pamela
Davies and Katherine M. Hudson were nominated for reelection, in our Proxy
Statement, to serve three-year terms as Class B Directors. The
holders of 113,892,207 shares of our Common Stock, representing 92.0% of the
total number of shares outstanding as of the close of business on April 13,
2007
(the record date fixed by our Board of Directors), were present in person or
by
proxy at the Annual Meeting. The following table indicates the number
of votes cast in favor of election and the number of votes withheld with respect
to each of the Directors nominated:
Name
|
Votes
For
|
Votes
Withheld
|
Pamela
Davies
|
113,431,214
|
460,993
|
Katherine
M. Hudson
|
102,114,601
|
11,777,606
|
A
proposal to ratify the appointment of Ernst & Young LLP as our independent
auditors for our fiscal year ending February 2, 2008 was approved, with
113,699,936 votes for, 179,656 votes against, and 12,615
abstentions.
Item
6. Exhibits
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
parentheses.
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).
|
|
|
4.1
|
Indenture
between the Company and Wells Fargo Bank, National Association, dated
as
of April 30, 2007, incorporated by reference to Form 8-K of the Registrant
dated April 30, 2007, filed on May 3, 2007. (Exhibit
4.1).
|
|
|
4.2
|
Form
of 1.125% Senior Convertible Note due 2012 (included in Exhibit
4.1)
|
|
|
10.1
|
Registration
Rights Agreement among the Company and Banc of America Securities
LLC and
J.P. Morgan Securities Inc., dated as of April 30, 2007, incorporated
by
reference to Form 8-K of the Registrant dated April 30, 2007, filed
on May
3, 2007. (Exhibit 10.1).
|
|
|
10.2
|
Convertible
Bond Hedge Transaction Confirmation entered into by and between the
Company and Bank of America, N.A., dated April 24, 2007, incorporated
by
reference to Form 8-K of the Registrant dated April 25, 2007, filed
on May
1, 2007. (Exhibit 10.1).
|
10.3
|
Convertible
Bond Hedge Transaction Confirmation entered into by and between the
Company and JPMorgan Chase Bank, National Association, dated April
24,
2007, incorporated by reference to Form 8-K of the Registrant dated
April
25, 2007, filed on May 1, 2007. (Exhibit
10.2).
|
|
|
10.4
|
Convertible
Bond Hedge Transaction Confirmation entered into by and between the
Company and Wachovia Bank, National Association, dated April 24,
2007,
incorporated by reference to Form 8-K of the Registrant dated April
25,
2007, filed on May 1, 2007. (Exhibit 10.3).
|
|
|
10.5
|
Issuer
Warrant Transaction Confirmation entered into by and between the
Company
and Bank of America, N.A., dated April 24, 2007, incorporated by
reference
to Form 8-K of the Registrant dated April 25, 2007, filed on May
1,
2007. (Exhibit 10.4).
|
|
|
10.6
|
Issuer
Warrant Transaction Confirmation entered into by and between the
Company
and JPMorgan Chase Bank, National Association, dated April 24, 2007,
incorporated by reference to Form 8-K of the Registrant dated April
25,
2007, filed on May 1, 2007. (Exhibit 10.5).
|
|
|
10.7
|
Issuer
Warrant Transaction Confirmation entered into by and between the
Company
and Wachovia Bank, National Association, dated April 24, 2007,
incorporated by reference to Form 8-K of the Registrant dated April
25,
2007, filed on May 1, 2007. (Exhibit 10.6).
|
|
|
10.8
|
Charming
Shoppes, Inc. 2003 Non-Employee Directors Compensation Plan, amended
and
restated effective June 21, 2007.
|
|
|
31.1
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
SIGNATURES
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:
September 7, 2007
|
/S/
DORRIT J. BERN
|
|
Dorrit
J. Bern
|
|
Chairman
of the Board
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
Date:
September 7, 2007
|
/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).
|
|
|
4.1
|
Indenture
between the Company and Wells Fargo Bank, National Association, dated
as
of April 30, 2007, incorporated by reference to Form 8-K of the Registrant
dated April 30, 2007, filed on May 3, 2007. (Exhibit
4.1).
|
|
|
4.2
|
Form
of 1.125% Senior Convertible Note due 2012 (included in Exhibit
4.1)
|
|
|
10.1
|
Registration
Rights Agreement among the Company and Banc of America Securities
LLC and
J.P. Morgan Securities Inc., dated as of April 30, 2007, incorporated
by
reference to Form 8-K of the Registrant dated April 30, 2007, filed
on May
3, 2007. (Exhibit 10.1).
|
|
|
10.2
|
Convertible
Bond Hedge Transaction Confirmation entered into by and between the
Company and Bank of America, N.A., dated April 24, 2007, incorporated
by
reference to Form 8-K of the Registrant dated April 25, 2007, filed
on May
1, 2007. (Exhibit 10.1).
|
|
|
10.3
|
Convertible
Bond Hedge Transaction Confirmation entered into by and between the
Company and JPMorgan Chase Bank, National Association, dated April
24,
2007, incorporated by reference to Form 8-K of the Registrant dated
April
25, 2007, filed on May 1, 2007. (Exhibit
10.2).
|
|
|
10.4
|
Convertible
Bond Hedge Transaction Confirmation entered into by and between the
Company and Wachovia Bank, National Association, dated April 24,
2007,
incorporated by reference to Form 8-K of the Registrant dated April
25,
2007, filed on May 1, 2007. (Exhibit 10.3).
|
|
|
10.5
|
Issuer
Warrant Transaction Confirmation entered into by and between the
Company
and Bank of America, N.A., dated April 24, 2007, incorporated by
reference
to Form 8-K of the Registrant dated April 25, 2007, filed on May
1,
2007. (Exhibit 10.4).
|
|
|
10.6
|
Issuer
Warrant Transaction Confirmation entered into by and between the
Company
and JPMorgan Chase Bank, National Association, dated April 24, 2007,
incorporated by reference to Form 8-K of the Registrant dated April
25,
2007, filed on May 1, 2007. (Exhibit 10.5).
|
|
|
10.7
|
Issuer
Warrant Transaction Confirmation entered into by and between the
Company
and Wachovia Bank, National Association, dated April 24, 2007,
incorporated by reference to Form 8-K of the Registrant dated April
25,
2007, filed on May 1, 2007. (Exhibit
10.6).
|
10.8
|
Charming
Shoppes, Inc. 2003 Non-Employee Directors Compensation Plan, amended
and
restated effective June 21, 2007.
|
|
|
31.1
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|