form10qmay32008.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 May 3,
2008
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, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act):
Large
Accelerated Filer x
|
Accelerated
Filer o
|
Non-accelerated
Filer o
|
Smaller
Reporting Company 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 June 4, 2008 was 113,445,915 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
|
|
|
May
3, 2008 and February 2, 2008
|
2
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Income
|
|
|
Thirteen
weeks ended May 3, 2008 and May 5, 2007
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
Thirteen
weeks ended May 3, 2008 and May 5, 2007
|
4
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
5
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
|
|
|
|
Forward-looking
Statements
|
20
|
|
|
|
|
Critical
Accounting Policies
|
22
|
|
|
|
|
Recent
Developments
|
23
|
|
|
|
|
Overview
|
23
|
|
|
|
|
Results
of Operations
|
25
|
|
|
|
|
Liquidity
and Capital Resources
|
30
|
|
|
|
|
Financing
|
35
|
|
|
|
|
Market
Risk
|
36
|
|
|
|
|
Impact
of Recent Accounting Pronouncements
|
37
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
37
|
|
|
|
Item
4.
|
Controls
and Procedures
|
37
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
38
|
|
|
|
Item
1.
|
Legal
Proceedings
|
38
|
|
|
|
Item
1A.
|
Risk
Factors
|
38
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
|
|
|
Item
6.
|
Exhibits
|
40
|
|
|
|
|
SIGNATURES
|
42
|
|
|
|
|
Exhibit
Index
|
43
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
May
3,
|
|
|
February
2,
|
|
(In
thousands, except share amounts)
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
79,175 |
|
|
$ |
61,335 |
|
Available-for-sale
securities
|
|
|
6,456 |
|
|
|
13,364 |
|
Accounts
receivable, net of allowances of $6,762 and $6,262
|
|
|
8,190 |
|
|
|
33,535 |
|
Investment
in asset-backed securities
|
|
|
116,119 |
|
|
|
115,912 |
|
Merchandise
inventories
|
|
|
371,097 |
|
|
|
330,216 |
|
Deferred
advertising
|
|
|
8,177 |
|
|
|
5,546 |
|
Deferred
taxes
|
|
|
8,459 |
|
|
|
7,531 |
|
Prepayments
and other
|
|
|
140,432 |
|
|
|
151,716 |
|
Current
assets of discontinued operations
|
|
|
114,051 |
|
|
|
132,753 |
|
Total
current assets
|
|
|
852,156 |
|
|
|
851,908 |
|
|
|
|
|
|
|
|
|
|
Property,
equipment, and leasehold improvements – at cost
|
|
|
1,073,041 |
|
|
|
1,107,662 |
|
Less
accumulated depreciation and amortization
|
|
|
633,128 |
|
|
|
658,410 |
|
Net
property, equipment, and leasehold improvements
|
|
|
439,913 |
|
|
|
449,252 |
|
|
|
|
|
|
|
|
|
|
Trademarks
and other intangible assets
|
|
|
188,762 |
|
|
|
188,942 |
|
Goodwill
|
|
|
66,666 |
|
|
|
66,666 |
|
Other
assets
|
|
|
55,820 |
|
|
|
56,536 |
|
Total
assets
|
|
$ |
1,603,317 |
|
|
$ |
1,613,304 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
158,541 |
|
|
$ |
122,629 |
|
Accrued
expenses
|
|
|
163,879 |
|
|
|
167,002 |
|
Current
liabilities of discontinued operations
|
|
|
45,697 |
|
|
|
48,504 |
|
Current
portion – long-term debt
|
|
|
8,566 |
|
|
|
8,827 |
|
Total
current liabilities
|
|
|
376,683 |
|
|
|
346,962 |
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
37,394 |
|
|
|
37,275 |
|
Other
non-current liabilities
|
|
|
208,245 |
|
|
|
192,454 |
|
Long-term
debt
|
|
|
306,039 |
|
|
|
306,169 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
Stock $.10 par value:
|
|
|
|
|
|
|
|
|
Authorized
– 300,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
– 151,882,380 shares and 151,569,850 shares
|
|
|
15,188 |
|
|
|
15,157 |
|
Additional
paid-in capital
|
|
|
411,127 |
|
|
|
407,499 |
|
Treasury
stock at cost – 38,482,213 shares and 36,477,246 shares
|
|
|
(347,730 |
) |
|
|
(336,761 |
) |
Accumulated
other comprehensive income/(loss)
|
|
|
(3 |
) |
|
|
22 |
|
Retained
earnings
|
|
|
596,374 |
|
|
|
644,527 |
|
Total
stockholders’ equity
|
|
|
674,956 |
|
|
|
730,444 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,603,317 |
|
|
$ |
1,613,304 |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
641,346 |
|
|
$ |
696,614 |
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
447,183 |
|
|
|
473,151 |
|
Selling,
general, and administrative expenses
|
|
|
186,795 |
|
|
|
180,098 |
|
Restructuring
charges
|
|
|
3,611 |
|
|
|
0 |
|
Total
operating expenses
|
|
|
637,589 |
|
|
|
653,249 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,757 |
|
|
|
43,365 |
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
515 |
|
|
|
1,330 |
|
Interest
expense
|
|
|
(2,369 |
) |
|
|
(3,263 |
) |
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
1,903 |
|
|
|
41,432 |
|
Income
tax provision
|
|
|
1,246 |
|
|
|
14,966 |
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
657 |
|
|
|
26,466 |
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of income tax benefit of $20,854 in 2008
and $302 in 2007
|
|
|
(35,114 |
) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
|
(34,457 |
) |
|
|
26,298 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities, net of income tax
|
|
|
|
|
|
|
|
|
benefit of $15 in 2008 and $1 in
2007
|
|
|
(25 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss)
|
|
$ |
(34,482 |
) |
|
$ |
26,295 |
|
|
|
|
|
|
|
|
|
|
Basic
net income/(loss) per share:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.01 |
|
|
$ |
.22 |
|
Loss
from discontinued operations, net of tax
|
|
|
(.31 |
) |
|
|
.00 |
|
Net
income/(loss)(1)
|
|
$ |
(.30 |
) |
|
$ |
.21 |
|
|
|
|
|
|
|
|
|
|
Diluted
net income/(loss) per share:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.01 |
|
|
$ |
.20 |
|
Loss
from discontinued operations, net of tax
|
|
|
(.30 |
) |
|
|
.00 |
|
Net
income/(loss)(1)
|
|
$ |
(.30 |
) |
|
$ |
.20 |
|
|
|
Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
|
|
____________________
|
|
(1)
Results may not add due to rounding.
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Thirteen Weeks
Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
(34,457 |
) |
|
$ |
26,298 |
|
Adjustments
to reconcile net income/(loss) to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
27,188 |
|
|
|
22,744 |
|
Estimated
loss on disposition of discontinued
operations
|
|
|
45,251 |
|
|
|
0 |
|
Deferred
income
taxes
|
|
|
(1,036 |
) |
|
|
(395 |
) |
Stock-based
compensation
|
|
|
2,898 |
|
|
|
2,924 |
|
Excess
tax benefits related to stock-based
compensation
|
|
|
0 |
|
|
|
(636 |
) |
Write-down
of deferred taxes related to stock-based compensation
|
|
|
(263 |
) |
|
|
0 |
|
Write-down
of capital
assets
|
|
|
1,919 |
|
|
|
0 |
|
Net
loss from disposition of capital
assets
|
|
|
558 |
|
|
|
460 |
|
Net
gain from securitization
activities
|
|
|
(367 |
) |
|
|
(328 |
) |
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable,
net
|
|
|
25,345 |
|
|
|
26,535 |
|
Merchandise
inventories
|
|
|
(39,060 |
) |
|
|
(40,075 |
) |
Accounts
payable
|
|
|
30,864 |
|
|
|
18,496 |
|
Deferred
advertising
|
|
|
(5,142 |
) |
|
|
1,006 |
|
Prepayments
and
other
|
|
|
(8,952 |
) |
|
|
4,349 |
|
Income
taxes
payable
|
|
|
0 |
|
|
|
1,869 |
|
Accrued
expenses and
other
|
|
|
1,414 |
|
|
|
(4,318 |
) |
Net
cash provided by operating activities
|
|
|
46,160 |
|
|
|
58,929 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Investment
in capital assets
|
|
|
(22,014 |
) |
|
|
(37,511 |
) |
Gross
purchases of securities
|
|
|
(12,636 |
) |
|
|
(1,322 |
) |
Proceeds
from sales of securities
|
|
|
19,404 |
|
|
|
2,563 |
|
Increase
in other assets
|
|
|
(36 |
) |
|
|
(2,546 |
) |
Net
cash used by investing activities
|
|
|
(15,282 |
) |
|
|
(38,816 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of senior convertible notes
|
|
|
0 |
|
|
|
250,000 |
|
Proceeds
from long term borrowings
|
|
|
87 |
|
|
|
0 |
|
Repayments
of long-term borrowings
|
|
|
(2,271 |
) |
|
|
(2,749 |
) |
Payments
of deferred financing costs
|
|
|
(45 |
) |
|
|
(6,250 |
) |
Excess
tax benefits related to stock-based compensation
|
|
|
0 |
|
|
|
636 |
|
Purchase
of hedge on senior convertible notes
|
|
|
0 |
|
|
|
(82,250 |
) |
Sale
of common stock warrants
|
|
|
0 |
|
|
|
49,050 |
|
Purchases
of treasury stock
|
|
|
(10,969 |
) |
|
|
(131,102 |
) |
Net
proceeds/(payments) from shares issued under employee stock
plans
|
|
|
69 |
|
|
|
(373 |
) |
Net
cash provided/(used) by financing activities
|
|
|
(13,129 |
) |
|
|
76,962 |
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
17,749 |
|
|
|
97,075 |
|
Cash
and cash equivalents, beginning of period
|
|
|
61,842 |
|
|
|
143,838 |
|
Cash
and cash equivalents, end of period
|
|
$ |
79,591 |
|
|
$ |
240,913 |
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities
|
|
|
|
|
|
|
|
|
Assets
acquired through capital leases
|
|
$ |
1,793 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial
Statements
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Condensed Consolidated Financial Statements
The
accompanying interim unaudited condensed consolidated balance sheet as of May 3,
2008, condensed consolidated statements of operations and comprehensive income
for the thirteen weeks ended May 3, 2008 and May 5, 2007, and condensed
consolidated statements of cash flows for the thirteen weeks ended May 3, 2008
and May 5, 2007 have been prepared in accordance with the rules and
regulations of the United States Securities and Exchange Commission. 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 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 2, 2008 Annual Report on
Form 10-K. The results of operations for the thirteen weeks ended May 3,
2008 and May 5, 2007 are not necessarily indicative of operating results for the
full fiscal year.
As used
in these notes, the term “Fiscal 2009” refers to our fiscal year ending January
31, 2009 and the term “Fiscal 2008” refers to our fiscal year ended February 2,
2008. The term “Fiscal 2010” refers to our fiscal year ending January 30,
2010. The term “Fiscal 2009 First Quarter” refers to our fiscal
quarter ended May 3, 2008 and the term “Fiscal 2008 First Quarter” refers to our
fiscal quarter ended May 5, 2007. The term “Fiscal 2009 Second
Quarter” refers to our fiscal quarter ending August 2, 2008. The
terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and,
where applicable, our consolidated subsidiaries.
Discontinued
Operations
On April
25, 2008 we announced that our Board of Directors began exploring a broad range
of operating and strategic alternatives for our non-core misses apparel catalog
titles in order to provide a greater focus on our core brands and to enhance
shareholder value. The non-core misses apparel catalog titles met the
requirements of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” to be accounted for as held for sale as
of May 3, 2008. The operations and cash flows will be eliminated from
our financial statements upon the sale and we will not have any significant
involvement in the operations after the sale. Accordingly, the
results of the non-core misses apparel catalog titles have been reported as
discontinued operations in our consolidated statements of operations and balance
sheets for all periods presented.
Results
from discontinued operations for the 13 weeks ended May 3, 2008 and May 5, 2007,
net of income tax benefit, were as follows:
|
|
Thirteen Weeks Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
64,679 |
|
|
$ |
88,098 |
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$ |
(55,968 |
)(1) |
|
$ |
(470 |
) |
Income
tax benefit
|
|
|
20,854 |
(1) |
|
|
302 |
|
Loss
from discontinued operations, net of income tax benefit
|
|
$ |
(35,114 |
)(1) |
|
$ |
(168 |
) |
____________________
|
|
(1)Includes
estimated loss on disposition of ($28,390), net of an income tax benefit
of $16,861 and loss from operations of ($6,724), net of an income tax
benefit of $3,993.
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
The
financial information included in these Notes to Condensed Consolidated
Financial Statements reflects only the results of our continuing
operations.
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 consider our retail stores and store-related E-commerce as
operating segments that are similar in terms of economic characteristics,
production processes, and operations. Accordingly, we have aggregated
our retail stores and store-related E-commerce 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, excluding discontinued operations,
derives its revenues from catalog sales and catalog-related E-commerce sales
under our LANE BRYANT WOMAN® and
FIGI’S®
titles. See “Discontinued
Operations” above and “Note 10. Segment Reporting” below for
further information regarding our discontinued operations and 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 2,
2008 Annual Report on Form 10-K.
Shares
available for future grants under our stock-based compensation plans as of May
3, 2008:
2004
Stock Award and Incentive Plan
|
|
|
735,591 |
|
2003
Non-Employee Directors Compensation Plan
|
|
|
186,324 |
|
1994
Employee Stock Purchase Plan
|
|
|
967,767 |
|
1988
Key Employee Stock Option Plan
|
|
|
111,224 |
|
Stock
option and stock appreciation right activity for the thirteen weeks ended May 3,
2008:
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Intrinsic
|
|
|
|
Option
|
|
|
Option
|
|
|
Option
Prices
|
|
|
Value(1)
|
|
|
|
Shares
|
|
|
Price
|
|
|
Per Share
|
|
|
(000’s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at February 2, 2008
|
|
|
1,894,874 |
|
|
$ |
5.95 |
|
|
$ |
1.00 |
|
|
|
–
|
|
|
$ |
13.84 |
|
|
$ |
1,777 |
|
Granted
– option price
equal to market price
|
|
|
2,572,176 |
|
|
|
5.00 |
|
|
|
5.00 |
|
|
|
–
|
|
|
|
5.00 |
|
|
|
|
|
Canceled/forfeited
|
|
|
(42,037 |
) |
|
|
6.81 |
|
|
|
1.00 |
|
|
|
–
|
|
|
|
12.48 |
|
|
|
|
|
Exercised
|
|
|
(80,863 |
) |
|
|
4.65 |
|
|
|
1.00 |
|
|
|
–
|
|
|
|
5.47 |
|
|
|
67 |
(2) |
Outstanding
at May 3, 2008
|
|
|
4,344,150 |
|
|
$ |
5.40 |
|
|
$ |
1.00 |
|
|
|
–
|
|
|
$ |
13.84 |
|
|
$ |
0 |
|
Exercisable
at May 3, 2008
|
|
|
1,722,564 |
|
|
$ |
6.13 |
|
|
$ |
1.00 |
|
|
|
–
|
|
|
$ |
13.84 |
|
|
$ |
0 |
|
____________________
|
|
(1)
Aggregate market value less aggregate exercise price.
|
|
(2)
As of date of exercise.
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
Stock-based
compensation expense for the thirteen weeks ended May 3, 2008 and May 5, 2007
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. 123(R)”), a revision of SFAS No. 123. Current grants of stock-based
compensation consist primarily of restricted stock, restricted stock
unit, and stock appreciation right awards.
|
|
Thirteen Weeks Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
$ |
2,898 |
|
|
$ |
2,924 |
|
We use
the Black-Scholes valuation model to estimate the fair value of stock options
and stock appreciation rights, and amortize stock-based compensation on a
straight-line basis over the requisite service period of an
award. 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 2, 2008 Annual Report on Form 10-K.
Total
stock-based compensation expense not yet recognized, related to the non-vested
portion of stock options, stock appreciation rights, and awards outstanding, was
$22,229,000 as of May 3, 2008. The weighted-average period over which
we expect to recognize this compensation expense is approximately 3
years.
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:
|
|
May
3,
|
|
|
February
2,
|
|
(In
thousands)
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Due
from customers
|
|
$ |
14,952 |
|
|
$ |
39,797 |
|
Allowance
for doubtful accounts
|
|
|
(6,762 |
) |
|
|
(6,262 |
) |
Net
accounts receivable
|
|
$ |
8,190 |
|
|
$ |
33,535 |
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
3. Trademarks and Other Intangible Assets
|
|
May
3,
|
|
|
February
2,
|
|
(In
thousands)
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Trademarks,
tradenames, and internet domain names
|
|
$ |
187,988 |
|
|
$ |
187,988 |
|
Customer
lists, customer relationships, and covenant not to compete
|
|
|
6,172 |
|
|
|
6,172 |
|
Total
at cost
|
|
|
194,160 |
|
|
|
194,160 |
|
Less
accumulated amortization of customer lists, customer
|
|
|
|
|
|
|
|
|
relationships, and covenant not
to compete
|
|
|
5,398 |
|
|
|
5,218 |
|
Net
trademarks and other intangible assets
|
|
$ |
188,762 |
|
|
$ |
188,942 |
|
Note
4. Long-term Debt
|
|
May
3,
|
|
|
February
2,
|
|
(In
thousands)
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
1.125%
Senior Convertible Notes, due May 2014
|
|
$ |
275,000 |
|
|
$ |
275,000 |
|
Capital
lease obligations
|
|
|
14,042 |
|
|
|
13,698 |
|
6.07%
mortgage note, due October 2014
|
|
|
10,913 |
|
|
|
11,078 |
|
6.53%
mortgage note, due November 2012
|
|
|
6,300 |
|
|
|
6,650 |
|
7.77%
mortgage note, due December 2011
|
|
|
7,739 |
|
|
|
7,897 |
|
Other
long-term debt
|
|
|
611 |
|
|
|
673 |
|
Total
long-term debt
|
|
|
314,605 |
|
|
|
314,996 |
|
Less
current portion
|
|
|
8,566 |
|
|
|
8,827 |
|
Long-term
debt
|
|
$ |
306,039 |
|
|
$ |
306,169 |
|
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 $810,000 incurred in connection
with the issuance of the 1.125% Notes, are included in “Other assets” on our
condensed consolidated balance sheets and are being amortized to interest
expense on an effective interest rate basis over the life of the notes (seven
years). The issuance of the 1.125% Notes is more fully described in
“Item 8. Financial
Statements and Supplementary Data; Note 8. Long-term Debt” in our
February 2, 2008 Annual Report on Form 10-K.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
On April
30, 2007 we called for the June 4, 2007 redemption 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
|
|
Thirteen
|
|
|
|
Weeks
Ended
|
|
|
|
May
3,
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
|
|
|
Total
stockholders’ equity, beginning of period
|
|
$ |
730,444 |
|
Cumulative
effect of adoption of EITF Issue No. 06-4(1)
|
|
|
(13,696 |
) |
Net
loss
|
|
|
(34,457 |
) |
Issuance
of common stock (312,530 shares), net of shares withheld for payroll
taxes
|
|
|
69 |
|
Purchase
of treasury shares (2,004,967 shares)
|
|
|
(10,969 |
) |
Stock-based
compensation expense
|
|
|
2,898 |
|
Tax
benefit related to call options
|
|
|
955 |
|
Write-down
of deferred taxes related to stock-based compensation
|
|
|
(263 |
) |
Unrealized
losses on available-for-sale securities, net of income tax
benefit
|
|
|
(25 |
) |
Total
stockholders’ equity, end of period
|
|
$ |
674,956 |
|
____________________
|
|
|
|
|
(1)
See “Note 13. Impact of
Recent Accounting Pronouncements” below.
|
|
|
|
|
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 join some of these
programs by paying an annual membership fee. For these programs, we
recognize revenue as a component of net 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 May 3, 2008 we recognized revenues of $5,098,000
and during the thirteen weeks ended May 5, 2007 we recognized revenues of
$5,702,000 in connection with our loyalty card programs.
During
Fiscal 2008 we began offering loyalty programs in connection with the issuance
of our LANE BRYANT and PETITE SOPHISTICATE proprietary credit
cards. Cardholders earn points for purchases using the credit card,
which may be redeemed for merchandise coupons upon the accumulation of a
specified number of points. We do not charge membership fees in
connection with these programs. Our FASHION BUG brand also offers a
loyalty card program that does not charge membership fees.
We
accrued $1,589,000 as of May 3, 2008 and $2,000,000 as of February 2, 2008 for
the estimated costs of discounts earned and coupons issued and not redeemed
under these programs.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
7. Net Income/(Loss) Per Share
|
|
Thirteen Weeks Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
114,588 |
|
|
|
123,003 |
|
Dilutive
effect of assumed conversion of 4.75% Senior Convertible Notes(1)
|
|
|
0 |
|
|
|
15,182 |
|
Dilutive
effect of stock options, stock appreciation rights, and
awards
|
|
|
754 |
|
|
|
1,753 |
|
Diluted
weighted average common shares and equivalents outstanding
|
|
|
115,342 |
|
|
|
139,938 |
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations
|
|
$ |
657 |
|
|
$ |
26,466 |
|
Decrease
in interest expense from assumed conversion of 4.75% Senior
Convertible
|
|
|
|
|
|
|
|
|
Notes, net of income tax
benefit(1)
|
|
|
0 |
|
|
|
1,128 |
|
Income
from continuing operations used to determine diluted net income per
share
|
|
|
657 |
|
|
|
27,594 |
|
Loss
from discontinued operations, net of income tax benefit
|
|
|
(35,114 |
) |
|
|
(168 |
) |
Net
income/(loss) used to determine diluted net income/(loss) per
share
|
|
$ |
(34,457 |
) |
|
$ |
27,426 |
|
|
|
|
|
|
|
|
|
|
Options
with weighted average exercise price greater than market price, excluded
from
|
|
|
|
|
|
|
|
|
computation
of net income/(loss) per share:
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
1,414 |
|
|
|
1 |
|
Weighted
average exercise price per share
|
|
$ |
6.66 |
|
|
$ |
13.84 |
|
____________________
|
|
(1)
The 4.75% Senior Convertible Notes were converted or redeemed on June 4,
2007 (see “Note 4.
Long-term Debt” above).
|
|
Our
1.125% Notes will not impact 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. Our call options are not considered for purposes of the
diluted net income per share calculation as their effect would be
anti-dilutive. Should the price of our common stock exceed $21.607
per share, we would include the dilutive effect of the additional potential
shares that may be issued related to our warrants, using the treasury stock
method. See “Note 4.
Long-term Debt” above and “Item 8. Financial
Statements and Supplementary Data; Note 8. Long-term Debt” in our
February 2, 2008 Annual Report on Form 10-K for further information regarding
our 1.125% Notes, our call options and warrants, and the conversion of our 4.75%
Notes.
Note
8. Income Taxes
Our
provision for income taxes for the Fiscal 2009 First Quarter was $1,246,000
on income from continuing operations before taxes of $1,903,000 as compared to a
provision for income taxes of $14,966,000 on income from continuing operations
before taxes of $41,432,000 for the Fiscal 2008 First
Quarter. The Fiscal 2009 First Quarter provision for income taxes was
impacted by an increase in our liability for unrecognized tax benefits,
interest, and penalties in accordance with FIN No. 48 as detailed
below.
We
adopted the provisions of FIN No. 48 effective as of February 4,
2007. See “Item
8. Financial Statements and Supplementary Data; Note 7. Income
Taxes” in our February 2, 2008 Annual Report on Form 10-K for further
information regarding our adoption of FIN No. 48.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
8. Income Taxes (Continued)
As of May
3, 2008 our gross unrecognized tax benefits were $26,867,000. 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
was $18,761,000. The accrued interest and penalties as of May 3, 2008
were $10,157,000. During the Fiscal 2009 First Quarter the gross
unrecognized tax benefits increased by $202,000 and the portion of the
liabilities for gross unrecognized tax benefits that, if recognized, would
decrease our provision for income taxes and increase our net income increased by
$173,000. Accrued interest and penalties increased during the Fiscal
2009 First Quarter by $343,000.
As of May
3, 2008 it is reasonably possible that the total amount of unrecognized tax
benefits will decrease within the next twelve months by as much as $682,000 due
to resolutions of audits or expirations of statutes of limitations related to
U.S. Federal and state tax positions.
Our U.S.
Federal income tax returns for Fiscal 2005 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 2004 and beyond,
depending upon the jurisdiction, generally remain subject to
examination. The statute of limitations on a limited number of
returns for years prior to Fiscal 2004 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.
Note
9. Asset Securitization
Our
FASHION BUG, LANE BRYANT, CATHERINES, PETITE SOPHISTICATE, and Crosstown Traders
proprietary credit card receivables are originated by Spirit of America National
Bank (the “Bank”), our wholly-owned credit card bank. The Bank
transfers its interest in all the receivables, including LANE BRYANT CATALOG
credit card receivables but excluding other Crosstown Traders receivables, to
the Charming Shoppes Master Trust (the “Trust”) through Charming Shoppes
Receivables Corp. (“CSRC”), 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 17. Asset Securitization” in our February 2, 2008
Annual Report on Form 10-K.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
9. Asset Securitization (Continued)
We
securitized $227,595,000 of private label credit card receivables during the
Fiscal 2009 First Quarter and had $596,081,000 of securitized credit card
receivables outstanding as of May 3, 2008. We held certificates and
retained interests in our securitizations of $116,119,000 as of May 3, 2008,
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.
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 May 3, 2008 our
investment in asset-backed securities included $50,935,000 of QSPE certificates,
an I/O strip of $23,667,000, and other retained interests of
$41,517,000. 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. does not meet certain financial performance standards, the Trust
is obligated to reallocate to third-party investors holding certain certificates
issued by the Trust, collections in an amount up to $9,450,000 that otherwise
would be available to CSRC. The result of this reallocation is to
increase CSRC’s retained interest in the Trust by the same amount, with the
third-party investor retaining an economic interest in the
certificates. Subsequent to such a transfer occurring, and upon
certain conditions being met, these same investors are required to repurchase
these interests when the financial performance standards are again
satisfied. Our net loss for the third quarter of Fiscal 2008 resulted
in the requirement to reallocate collections as discussed
above. Accordingly, $9,450,000 of collections were fully transferred
as of February 2, 2008. The requirement for the reallocation of these
collections will cease and such investors would be required to repurchase such
interests upon our announcement of a quarter with net income and the fulfillment
of such conditions. With the exception of the requirement to
reallocate collections of $9,450,000 that were fully transferred as of February
2, 2008, the Trust was in compliance with its financial performance standards as
of May 3, 2008.
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 or the QSPEs
do not 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. As of May 3, 2008 we and the QSPEs
were in compliance with the applicable financial performance standards referred
to in this paragraph.
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.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
10. 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 consider our retail stores and store-related
E-commerce as operating segments that are similar in terms of economic
characteristics, production processes, and operations. Accordingly,
we have aggregated our retail stores and store-related E-commerce into a single
reporting segment (the “Retail Stores” segment). Our catalog and
catalog-related E-commerce operations, excluding discontinued operations, are
separately reported under the Direct-to-Consumer segment.
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 2, 2008 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. Operating costs for our Retail Stores segment consist
primarily of store selling, buying, occupancy, and warehousing
costs. Operating costs for our Direct-to-Consumer segment 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 services 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. Operating assets for the Retail Stores segment consist
primarily of inventories; the net book value of store facilities; goodwill; and
intangible assets. Operating assets for the Direct-to-Consumer
segment consist primarily of trade receivables; inventories; deferred
advertising costs; the net book value of catalog operating facilities; 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 (excluding
discontinued operations) and a reconciliation of the information by segment to
our consolidated totals is as follows:
|
|
Retail
|
|
|
Direct-to-
|
|
|
Corporate
|
|
|
|
|
(In
thousands)
|
|
Stores
|
|
|
Consumer(1)
|
|
|
and Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 3, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
613,391 |
|
|
$ |
26,946 |
|
|
$ |
1,009 |
|
|
$ |
641,346 |
|
Depreciation
and amortization
|
|
|
11,927 |
|
|
|
38 |
|
|
|
15,121 |
|
|
|
27,086 |
(3) |
Income
before interest and taxes
|
|
|
43,028 |
|
|
|
(4,199 |
) |
|
|
(34,557 |
)(2) |
|
|
4,272 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(2,369 |
) |
|
|
(2,369 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(1,246 |
) |
|
|
(1,246 |
) |
Income
from continuing operations
|
|
|
43,028 |
|
|
|
(4,199 |
) |
|
|
(38,172 |
) |
|
|
657 |
|
Capital
expenditures
|
|
|
18,721 |
|
|
|
0 |
|
|
|
2,972 |
|
|
|
21,693 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 5, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
685,781 |
|
|
$ |
10,274 |
|
|
$ |
559 |
|
|
$ |
696,614 |
|
Depreciation
and amortization
|
|
|
12,361 |
|
|
|
22 |
|
|
|
10,327 |
|
|
|
22,710 |
(3) |
Income
before interest and taxes
|
|
|
75,285 |
|
|
|
(776 |
) |
|
|
(29,814 |
) |
|
|
44,695 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(3,263 |
) |
|
|
(3,263 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(14,966 |
) |
|
|
(14,966 |
) |
Income
from continuing operations
|
|
|
75,285 |
|
|
|
(776 |
) |
|
|
(48,043 |
) |
|
|
26,466 |
|
Capital
expenditures
|
|
|
29,834 |
|
|
|
8 |
|
|
|
7,550 |
|
|
|
37,392 |
(3) |
____________________
|
|
(1)
Fiscal 2009 First Quarter includes LANE BRYANT WOMAN
catalog.
|
|
(2)
Includes $3,611 of restructuring charges related to the Retail Stores
segment (see “NOTE
11. RESTRUCTURING CHARGES” below).
|
|
(3) Fiscal 2009 First Quarter excludes $102 of depreciation and
amortization and $321 of capital expenditures, and Fiscal 2008 First
Quarter excludes $34 of depreciation and amortization and $119 of capital
expenditures, related to our discontinued operations.
|
|
Note
11. Restructuring Charges
In
November 2007 we announced our plan to relocate our CATHERINES operations
located in Memphis, Tennessee to our corporate headquarters in Bensalem,
Pennsylvania in conjunction with the consolidation of a number of our operating
functions. The costs of this plan included accelerated depreciation,
severance and retention, and relocation costs.
The
accelerated depreciation represents the change in the estimated useful life of
the Memphis facility and was recognized over the period from the inception of
the plan to the closing date of the facility, which was the end of the Fiscal
2009 First Quarter. Severance and retention costs represent
involuntary termination benefits for approximately 80 employees who did not
relocate from the Memphis facility to our Bensalem
headquarters. Relocation costs represent estimated costs to relocate
approximately 30 employees from Memphis to Bensalem. The involuntary
terminations and relocations were completed during the Fiscal 2009 First
Quarter.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
11. Restructuring Charges (Continued)
In
February 2008 we announced additional initiatives and actions to: streamline our
business operations and further sharpen our focus on our core businesses; reduce
selling, general, and administrative expenses and capital expenditures; improve
cash flow; and enhance shareholder value. The initiatives and actions
include: the elimination of approximately 150 corporate and field management
positions; a decrease in the capital budget for Fiscal 2009, primarily through a
significant reduction in the number of planned store openings for Fiscal 2009;
the closing of approximately 150 under-performing stores; and the closing of our
full-line PETITE SOPHISTICATE stores. To date, we have completed the
elimination of corporate and field positions, closed 23 of the identified
under-performing stores, and expect to complete the remainder of these
initiatives by the end of Fiscal 2009.
We
accounted for the above plans in accordance with the provisions of SFAS No. 146,
“Accounting for Costs
Associated with Exit or Disposal Activities” and SFAS No. 112, “Employers’ Accounting for
Postemployment Benefits.”
The
following table summarizes the costs incurred to date and the total estimated
costs to be recognized under the plans:
|
|
Costs
|
|
|
Costs
Incurred
|
|
|
Estimated
|
|
|
Total
|
|
|
|
Incurred
|
|
|
for
Quarter
|
|
|
Remaining
|
|
|
Estimated
|
|
|
|
as
of
|
|
|
Ended
|
|
|
Costs
|
|
|
Costs
as of
|
|
|
|
February
2,
|
|
|
May
3,
|
|
|
to
be
|
|
|
May
3,
|
|
(In
thousands)
|
|
2008
|
|
|
2008
|
|
|
Incurred
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
retention, and related costs
|
|
$ |
2,792 |
|
|
$ |
389 |
|
|
$ |
2 |
|
|
$ |
3,183 |
|
Store
lease termination costs
|
|
|
0 |
|
|
|
572 |
|
|
|
9,089 |
|
|
|
9,661 |
|
Asset
writedowns and accelerated depreciation
|
|
|
11,325 |
|
|
|
1,919 |
|
|
|
101 |
|
|
|
13,345 |
|
Relocation
and other closing costs
|
|
|
241 |
|
|
|
731 |
|
|
|
528 |
|
|
|
1,500 |
|
Total
|
|
$ |
14,358 |
|
|
$ |
3,611 |
|
|
$ |
9,720 |
|
|
$ |
27,689 |
|
The
following table summarizes the severance, retention, and related costs accrued
in accordance with SFAS No. 146 and SFAS No. 112 and the payments/settlements
for the above plans as of May 3, 2008:
|
|
|
|
|
|
Costs
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
for
Quarter
|
|
|
|
|
|
Accrued
|
|
|
|
Balance
at
|
|
|
Ended
|
|
|
|
|
|
as
of
|
|
|
|
February
2,
|
|
|
May
3,
|
|
|
Payments/
|
|
|
May
3,
|
(In
thousands)
|
|
|
2008
|
|
|
2008
|
|
|
Settlements
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
retention, and related costs
|
|
$ |
2,688
|
|
$ |
389
|
|
$ |
(2,343)
|
|
$ |
734
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12. Fair Value Measurements
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.
In
February 2008 the FASB issued FSP FAS No. 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13.” The FSP amends SFAS No. 157 to exclude
SFAS No. 13, “Accounting for
Leases,” and certain related accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
SFAS No. 13. The scope exception of FSP FAS No. 157-1 does not apply
to assets acquired or liabilities assumed in a business combination that are
required to be measured at fair value under SFAS No. 141, “Business Combinations,” or
SFAS No. 141(R) (see “Note 13. Impact of Recent Accounting
Pronouncements”
below), regardless of whether those assets and liabilities are related to
leases. The scope exception also does not apply to fair value
measurements required by SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities,” or FASB Interpretation No. 21, “Accounting for Leases in a Business
Combination.” FSP FAS No. 157-1 is effective on the initial
adoption of SFAS No. 157. In February 2008 the FASB also
issued FSP FAS No. 157-2, “Effective Date of FASB Statement
No. 157,” which delays the effective date of SFAS 157 for non-financial
assets and non-financial liabilities that are not currently recognized or
disclosed at fair value on a recurring basis until fiscal years beginning after
November 15, 2008.
Under
SFAS No. 157, fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In determining fair value, we use
various methods, including discounted cash flow projections based on available
market interest rates and management estimates of future cash
payments. Financial assets and liabilities that are measured and
reported at fair value are classified and disclosed in one of the following
categories:
· Level
1 – Quoted market prices in active markets for identical assets or
liabilities.
· Level
2 – Observable market-based inputs or unobservable inputs that are corroborated
by market data.
· Level
3 – Unobservable inputs that are not corroborated by market data.
With the
exception of assets and liabilities included within the scope of FSP FAS No.
157-2, we adopted the provisions of SFAS No. 157 prospectively effective as of
the beginning of Fiscal 2009. For financial assets and liabilities
included within the scope of FSP FAS No. 157-2, we will be required to adopt the
provisions of SFAS No. 157 prospectively as of the beginning of Fiscal
2010. The adoption of SFAS No. 157 did not have a material impact on
our financial position or results of operations, and we do not believe that the
adoption of FSP FAS No. 157-2 will have a material impact on our financial
position or results of operations.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12. Fair Value Measurements (Continued)
Our
financial assets and liabilities subject to SFAS No. 157 as of May 3, 2008 were
as follows:
|
|
Balance
|
|
|
|
|
|
|
|
|
|
May
3,
|
|
|
Fair Value Method Used
|
|
(In
thousands)
|
|
2008
|
|
|
Level 2
|
|
|
Level 3(1)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities(2)
|
|
$ |
6,456 |
|
|
$ |
6,456 |
|
|
|
|
Certificates
and retained interests in securitized receivables
|
|
|
116,119 |
|
|
|
|
|
|
$ |
116,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
liability
|
|
|
3,079 |
|
|
|
|
|
|
|
3,079 |
|
____________________
|
|
(1) Fair
value is estimated based on internally-developed models or methodologies
utilizing significant inputs that are unobservable from objective
sources.
|
|
(2) Unrealized
gains and losses on our available-for-sale securities are included in
stockholders’ equity until realized and realized gains and losses are
recognized in income when the securities are sold.
|
|
We
estimate the fair value of our certificates and retained interests in our
securitized receivables based on the present value of future expected cash flows
using assumptions for the average life of the receivables sold, anticipated
credit losses, and the appropriate market discount rate commensurate with the
risks involved. This cash flow includes an “interest-only”
(“I/O”) strip, consisting of the present value of the finance charges and late
fees in excess of the amounts paid to certificate holders, credit losses, and
servicing fees.
The fair
value of our servicing liabilities represents the present value of the excess of
our cost of servicing over the servicing fees received. We determine
the fair value by calculating all costs associated with billing, collecting,
maintaining, and providing customer service during the expected life of the
securitized credit card receivable balances. We discount the amount
of these costs in excess of the servicing fees over the estimated life of the
receivables sold. The discount rate and estimated life assumptions
used for the present value calculation of the servicing liability are consistent
with those used to value the certificates and retained interests.
The table
below presents a reconciliation of the beginning and ending balances of
our certificates and retained interests and our servicing liability
during the three months ended May 3, 2008:
|
|
Retained
|
|
|
Servicing
|
|
(In
thousands)
|
|
Interests
|
|
|
Liability
|
|
|
|
|
|
|
|
|
Balance,
February 2,
2008
|
|
$ |
115,912 |
|
|
$ |
3,038 |
|
Additions
to I/O strip and servicing
liability
|
|
|
10,046 |
|
|
|
1,298 |
|
Net
additions to other retained
interests
|
|
|
549 |
|
|
|
|
|
Reductions
and maturities of QSPE
certificates
|
|
|
(750 |
) |
|
|
|
|
Amortization
and valuation adjustments to I/O strip and servicing
liability
|
|
|
(9,638 |
) |
|
|
(1,257 |
) |
Balance,
May 3,
2008
|
|
$ |
116,119 |
|
|
$ |
3,079 |
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
13. 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. We adopted the provisions of EITF
Issue No. 06-4 effective as of the beginning of Fiscal 2009 and recognized a
cumulative-effect adjustment of $13,696,000, increasing our liabilities related
to our split-dollar life insurance agreements with former executive employees
and reducing the February 3, 2008 balance of retained earnings.
In
February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities–Including an amendment of FASB Statement No.
115,” which permits an entity to measure certain financial assets and
financial liabilities at fair value. The intent of SFAS No. 159 is to
reduce volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes without the need for applying
hedge accounting. Entities that elect the fair value option will
report unrealized gains and losses in earnings as of each subsequent reporting
date. Generally, the fair value option may be elected on an
instrument-by-instrument basis as long as it is applied to the instrument in its
entirety. Election of the fair value option is irrevocable unless a
new election date occurs.
The
provisions of SFAS No. 159 were effective as of the beginning of Fiscal
2009. We did not elect the fair value option for any existing or new
financial assets or liabilities that were not previously accounted for at fair
value; therefore, SFAS No. 159 had no impact on our financial position or
results of operations.
In
December 2007 the FASB issued SFAS No. 141I, “Business Combinations,” and
SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51.” As compared to SFAS No. 141 and ARB No. 51, these
statements change the accounting for business combinations and non-controlling
interests in subsidiaries by requiring:
·
|
The
measurement of additional assets acquired and liabilities assumed at fair
value as of the acquisition date;
|
·
|
Re-measurement
of liabilities related to contingent consideration at fair value in
periods subsequent to acquisition;
|
·
|
The
expensing in pre-acquisition periods of acquisition-related costs incurred
by the acquirer; and
|
·
|
The
initial measurement of non-controlling interests in subsidiaries at fair
value and classification of the interest as a separate component of
equity.
|
We will
be required to adopt the provisions of SFAS No. 141I and SFAS No. 160
prospectively effective as of the beginning of Fiscal 2010.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
13. Impact of Recent Accounting Pronouncements (Continued)
In
February 2008 the FASB issued FSP FAS No. 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.” FSP
FAS No. 140-3 addresses whether there are circumstances that would permit a
transferor and a transferee to evaluate the accounting for the transfer of a
financial asset separately from a repurchase financing when the counterparties
to the two transactions are the same. The FSP presumes that the
initial transfer of a financial asset and a repurchase financing are considered
part of the same arrangement (a linked transaction) under SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities.” However, if certain criteria specified in FSP
FAS No. 140-3 are met, the initial transfer and repurchase financing may be
evaluated separately under SFAS No. 140.
The
provisions of FSP FAS No. 140-3 will be effective prospectively as of the
beginning of Fiscal 2010. We do not expect that the adoption of FSP
FAS No. 140-3 will have a material effect on our financial position or results
of operations.
In March
2008 the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133.” Under SFAS No. 161 entities are required to provide
enhanced disclosures about how and why an entity uses derivative instruments;
how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and how derivative instruments and
related hedged items affect an entity’s financial position, results of
operations, and cash flows.
We will
be required to adopt the provisions of SFAS No. 161 as of the beginning of
Fiscal 2010.
In
May 2008 the FASB issued FASB Staff Position (“FSP”) APB 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlements)” (previously FSP APB 14-a), which will change the accounting
treatment for convertible securities that the issuer may settle fully or
partially in cash. Under the final FSP, cash-settled convertible
securities will be separated into their debt and equity components. The
value assigned to the debt component will be the estimated fair value, as of the
issuance date, of a similar debt instrument without the conversion
feature. As a result, the debt will be recorded at a discount to
adjust its below-market coupon interest rate to the market coupon interest rate
for the similar debt instrument without the conversion feature. The
difference between the proceeds for the convertible debt and the amount
reflected as the debt component represents the value of the conversion feature
and will be recorded as additional paid-in capital. The debt will
subsequently be accreted to its par value over its expected life, with an
offsetting increase in interest expense on the income statement to reflect the
market rate for the debt component at the date of issuance.
FSP APB
14-1 is to be applied retrospectively to all past periods presented, and will
apply to our 1.125% Senior Convertible Notes due May 2014. As
compared to our current accounting for the 1.125% Notes, adoption of the
proposal will 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 will be required to adopt the provisions of
FSP APB 14-1 as of the beginning of Fiscal 2010. We are currently
evaluating the impact of the adoption of FSP APB 14-1 on our financial
statements.
Note
14. Subsequent Event
On May
23, 2008 we completed the sale of our Memphis, Tennessee distribution
center. We received $4,813,000 of cash in connection with the sale of
the facility and we will recognize a pre-tax gain on the sale of approximately
$1,835,000 in our Fiscal 2009 Second Quarter.
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 2, 2008. As used in this management’s discussion and analysis,
“Fiscal 2009” refers to our fiscal year ending January 31, 2009 and “Fiscal
2008” refers to our fiscal year ended February 2, 2008. “Fiscal
2009 First Quarter” refers to the thirteen weeks ended May 3, 2008 and
“Fiscal 2008 First Quarter” refers to the thirteen weeks ended May 5,
2007. “Fiscal 2009 Second Quarter” refers to the thirteen weeks
ending August 2, 2008. “Fiscal 2008 Fourth Quarter” refers to the
thirteen weeks ended February 2, 2008. 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, which are discussed in more detail in “PART I; Item 1A. Risk
Factors” of our annual report on Form 10-K for the fiscal year ended
February 2, 2008 and in “PART
II. OTHER INFORMATION; Item 1A. Risk Factors” below:
·
|
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
continuing 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 consummation of our expected sale of our
non-core misses apparel catalog
titles.
|
·
|
We
cannot assure the successful implementation of our business plan for our
LANE BRYANT WOMAN catalog or the realization of our anticipated benefits
from our re-launch of the LANE BRYANT credit card
program.
|
·
|
We
cannot assure the successful implementation of our business plans for our
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.
|
·
|
We
cannot assure the successful implementation of our planned cost reduction
and capital budget reduction plans; the effective implementation of our
plans for consolidation of our CATHERINES brand, a new organizational
structure; and enhancements in our merchandise and marketing; and we
cannot assure the realization of our anticipated annualized expense
savings from our restructuring announced in February
2008.
|
·
|
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. If we were unable to
obtain sufficient financing at an affordable cost, our ability to
merchandise our stores, E-commerce, or catalog businesses would be
adversely affected.
|
·
|
Natural
disasters, as well as war, acts of terrorism, or other armed conflict, or
the threat of any such event 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 goodwill and other intangible assets related to
acquisitions. The carrying amount and/or useful life of these
assets are subject to periodic and/or annual 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 could 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 under certain
circumstances. Such a repurchase would require significant
amounts of cash and could adversely affect our financial
condition.
|
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 2,
2008.
Except as
disclosed 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.
RECENT
DEVELOPMENTS
On April
25, 2008 we announced that our Board of Directors began exploring a broad range
of operating and strategic alternatives for our non-core misses apparel catalog
titles in order to provide a greater focus on our core brands and to enhance
shareholder value. The non-core misses apparel catalog titles met the
requirements of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” to be accounted for as held for sale as
of May 3, 2008. The operations and cash flows will be eliminated from
our financial statements upon the sale and we will not have any significant
involvement in the operations after the sale. Accordingly, the
results of the non-core misses apparel catalog titles have been presented as
discontinued operations in our consolidated statements of operations and balance
sheets for all periods presented. The financial information included
in this Management’s Discussion and Analysis of Financial Condition and Results
of Operations reflects only the results of our continuing operations (see “Notes to Condensed Consolidated
Financial Statements; Note 1. Condensed Consolidated Financial Statements;
Discontinued
Operations”
above).
On May
23, 2008 we completed the sale of our Memphis, Tennessee distribution
center. We received $4.8 million of cash in connection with the sale
of the facility and we will recognize a pre-tax gain on the sale of
approximately $1.8 million in our Fiscal 2009 Second Quarter.
This
overview of our Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) presents a high-level summary of more
detailed information contained elsewhere in this Report on Form
10-Q. The intent of this overview is to put this detailed information
into perspective and to introduce the discussion and analysis contained in this
MD&A. Accordingly, this overview should be read in conjunction
with the remainder of this MD&A and with the financial statements and other
detailed information included in this Report on Form 10-Q and should not be
separately relied upon.
During
the Fiscal 2009 First Quarter we continued to experience downward traffic trends
in our stores. We believe these negative trends are influenced by a
challenging retail and economic environment, resulting in a reduced demand for
core seasonal and casual merchandise offerings as consumers have become more
selective with their purchases. The reduced demand in our core seasonal
and casual merchandise offerings more than offset favorable responses to our
other merchandise offerings, such as intimate apparel and our Right Fit pant
programs. Although our comparable store sales are 13% lower for the
quarter, our strategy to operate with much leaner inventories, which were down
13% on a comparable basis to the prior year, allowed us to be less aggressive in
our promotional strategy. As a result, our merchandise margins
improved as compared to the Fiscal 2008 First Quarter.
Given the
continuing uncertain economic climate, we anticipate continued weak traffic
trends for the Fiscal 2009 Second Quarter. We will continue to work
diligently to mitigate our same store sales decreases and continue to address
our merchandise offerings in order to meet our customers’ needs.
During
the Fiscal 2009 First Quarter we continued to reduce our
expenses. Although our expenses increased as a percentage of sales as
a result of negative leverage from the decrease in comparable store sales, we
were able to hold expense dollars flat as compared to the Fiscal 2008 First
Quarter. We expect to continue to benefit from our expense control
initiatives during the remainder of the year. One of these
initiatives is the relocation of our CATHERINES operations from Memphis,
Tennessee to our corporate headquarters in Bensalem, Pennsylvania that we
announced in November 2007 and completed during March 2008. We
anticipate the consolidation will result in additional pre-tax expense savings,
primarily in payroll and occupancy costs, during the remainder of the
year.
We also
began to implement our initiative announced in February 2008 to close
approximately 150 under-performing stores, which will result in the elimination
of losses from the under-performing stores upon closing. During the
Fiscal 2009 First Quarter we closed 23 under-performing stores and expect to
complete the remaining store closures during the remainder of Fiscal
2009.
During
the Fiscal 2009 First Quarter we announced that we were exploring a broad range
of operating and strategic alternatives that are expected to result in the sale
of our non-core misses apparel catalog titles. Accordingly, the
results of the non-core misses apparel catalog titles within our
Direct-to-Consumer segment have been classified as a discontinued
operation. Our Direct-to-Consumer segment results, excluding these
discontinued operations, include primarily our LANE BRYANT WOMAN and FIGI’S
catalogs and related websites.
While we
are committed to executing our long-term growth strategy as a multi-brand,
multi-channel retailer, we are taking a conservative operating approach given
the continuing uncertain economic climate and our expectations for continuing
weak traffic trends. We expect the difficult retail apparel
environment to continue and, in response, we will maintain lean inventories and
carefully control operating expenses in an effort to continue to generate
positive free cash flow.
Our
balance sheet remains strong, with ample liquidity through our $85.6 million of
cash and available-for-sale securities (an increase of $10.9 million from the
end of Fiscal 2008) and our committed $375.0 million revolving credit facility
that had no outstanding borrowings at the end of the Fiscal 2009 First
Quarter.
The
following discussion of our results of operations and liquidity and capital
resources is based on our continuing operations, and excludes the impact of our
discontinued operations (see “Note 1. Condensed Consolidated
Financial Statements; Discontinued
Operations” and “RECENT
DEVELOPMENTS” above).
RESULTS
OF OPERATIONS
The
following table shows our results of operations expressed as a percentage of net
sales and on a comparative basis:
|
|
|
|
|
Percentage
|
|
|
|
Thirteen Weeks Ended(1)
|
|
|
Change
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
From
Prior
|
|
|
|
2008
|
|
|
2007
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(7.9 |
)% |
Cost
of goods sold, buying, catalog, and occupancy
expenses
|
|
|
69.7 |
|
|
|
67.9 |
|
|
|
(5.5 |
) |
Selling,
general, and administrative expenses
|
|
|
29.1 |
|
|
|
25.9 |
|
|
|
3.7 |
|
Restructuring
charges
|
|
|
0.6 |
|
|
|
0.0 |
|
|
|
– |
|
Income
from operations
|
|
|
0.6 |
|
|
|
6.2 |
|
|
|
(91.3 |
) |
Other
income
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(61.3 |
) |
Interest
expense
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
(27.4 |
) |
Income
tax provision
|
|
|
0.2 |
|
|
|
2.1 |
|
|
|
(91.7 |
) |
Income
from continuing operations
|
|
|
0.1 |
|
|
|
3.8 |
|
|
|
(97.5 |
) |
Loss
from discontinued operations, net of tax
|
|
|
(5.5 |
) |
|
|
0.0 |
|
|
|
– |
|
Net
income (loss)
|
|
|
(5.4 |
) |
|
|
3.8 |
|
|
|
(231.0 |
) |
____________________
|
|
(1)
Results may not add due to rounding.
|
|
The
following table shows details of our consolidated total net sales and income
from operations:
|
|
Thirteen Weeks Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
FASHION
BUG
|
|
$ |
222.3 |
|
|
$ |
257.0 |
|
LANE
BRYANT
|
|
|
298.3 |
|
|
|
323.2 |
|
CATHERINES
|
|
|
86.8 |
|
|
|
100.8 |
|
Other
retail stores(1)
|
|
|
6.0 |
|
|
|
4.8 |
|
Total
Retail Stores
segment
|
|
|
613.4 |
|
|
|
685.8 |
|
Total
Direct-to-Consumer
segment
|
|
|
26.9 |
|
|
|
10.3 |
|
Corporate
and other(2)
|
|
|
1.0 |
|
|
|
0.5 |
|
Total
net
sales
|
|
$ |
641.3 |
|
|
$ |
696.6 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
$ |
6.9 |
|
|
$ |
19.1 |
|
LANE
BRYANT
|
|
|
29.6 |
|
|
|
39.5 |
|
CATHERINES
|
|
|
7.1 |
|
|
|
16.9 |
|
Other
retail stores(1)
|
|
|
(0.6 |
) |
|
|
(0.1 |
) |
Total
Retail Stores
segment
|
|
|
43.0 |
|
|
|
75.4 |
|
Total
Direct-to-Consumer
segment
|
|
|
(4.2 |
) |
|
|
(0.8 |
) |
Corporate
and
other
|
|
|
(35.0 |
) |
|
|
(31.2 |
) |
Total
income from
operations
|
|
$ |
3.8 |
|
|
$ |
43.4 |
|
____________________
|
|
(1)
Includes PETITE SOPHISTICATE stores, which began operations in October
2007, and PETITE SOPHISTICATE OUTLET stores, which began operations in
September 2006.
|
|
(2)
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
|
|
|
|
May
3,
|
|
|
May
5,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Retail
Stores segment
|
|
|
|
|
|
|
Increase
(decrease) in comparable store sales(1)
:
|
|
|
|
|
|
|
Consolidated
retail stores
|
|
|
(13 |
)% |
|
|
0 |
% |
FASHION
BUG
|
|
|
(12 |
) |
|
|
(2 |
) |
LANE
BRYANT
|
|
|
(12 |
) |
|
|
0 |
|
CATHERINES
|
|
|
(16 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Sales
from new stores as a percentage of total
|
|
|
|
|
|
|
|
|
consolidated prior-period
sales(2):
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
|
1 |
|
|
|
1 |
|
LANE
BRYANT(3)
|
|
|
4 |
|
|
|
10 |
|
CATHERINES
|
|
|
1 |
|
|
|
1 |
|
Other
retail stores(4)
|
|
|
0 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Prior-period
sales from closed stores as a percentage
|
|
|
|
|
|
|
|
|
of total consolidated
prior-period sales:
|
|
|
|
|
|
|
|
|
FASHION
BUG
|
|
|
(1 |
) |
|
|
(1 |
) |
LANE
BRYANT
|
|
|
(3 |
) |
|
|
(3 |
) |
CATHERINES
|
|
|
(0 |
) |
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in Retail Stores segment sales
|
|
|
(11 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer
segment
|
|
|
|
|
|
|
|
|
Increase
in Direct-to-Consumer segment sales
|
|
|
162 |
(5) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in consolidated total net sales
|
|
|
(8 |
) |
|
|
9 |
|
____________________
|
|
(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 and PETITE SOPHISTICATE OUTLET
stores.
|
|
(5)
Primarily due to LANE BRYANT CATALOG which began operations in the Fiscal
2008 Fourth Quarter.
|
|
The
following table sets forth information with respect to our year-to-date retail
store activity for Fiscal 2009 and planned store activity for all of Fiscal
2009:
|
|
FASHION
|
|
|
LANE
|
|
|
|
|
|
|
|
|
|
|
|
|
BUG
|
|
|
BRYANT
|
|
|
CATHERINES
|
|
|
Other(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009 Year-to-Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at February 2, 2008
|
|
|
989 |
|
|
|
896 |
|
|
|
468 |
|
|
|
56 |
|
|
|
2,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
opened
|
|
|
5 |
|
|
|
15 |
(2) |
|
|
5 |
|
|
|
2 |
|
|
|
27 |
|
Stores
closed(3)
|
|
|
(20 |
) |
|
|
(6 |
) |
|
|
(3 |
) |
|
|
(0 |
) |
|
|
(29 |
) |
Net
change in stores
|
|
|
(15 |
) |
|
|
9 |
|
|
|
2 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at May 3, 2008
|
|
|
974 |
|
|
|
905 |
|
|
|
470 |
|
|
|
58 |
|
|
|
2,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
relocated during period
|
|
|
7 |
|
|
|
13 |
|
|
|
5 |
|
|
|
0 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned
store openings
|
|
|
6 |
|
|
|
31-35 |
(4) |
|
|
6-7 |
|
|
|
4 |
(5) |
|
|
47-52 |
|
Planned
store closings(6)
|
|
|
105-108 |
|
|
|
39-46 |
|
|
|
12 |
|
|
|
4 |
(7) |
|
|
160-170 |
|
Planned
store relocations
|
|
|
9-12 |
|
|
|
38-41 |
(8) |
|
|
4-5 |
|
|
|
0 |
|
|
|
51-58 |
|
____________________
|
|
(1)
Includes PETITE SOPHISTICATE OUTLET stores.
|
|
(2)
Includes 2 LANE BRYANT OUTLET stores.
|
|
(3)
Includes 15 FASHION BUG, 3 CATHERINES and 5 LANE BRYANT stores closed as
part of the streamlining initiatives announced in February
2008.
|
|
(4)
Includes approximately 11-13 LANE BRYANT intimate apparel side-by-side
stores and 6-8 LANE BRYANT OUTLET stores.
|
|
(5)
PETITE SOPHISTICATE OUTLET stores.
|
|
(6)
Includes approximately 150 under-performing stores to be closed as part of
the streamlining initiatives announced in February 2008.
|
|
(7)
PETITE SOPHISTICATE stores.
|
|
(8)
Includes approximately 13-16 conversions to LANE BRYANT intimate apparel
side-by-side stores.
|
|
Comparison
of Thirteen Weeks Ended May 3, 2008 and May 5, 2007
Net
Sales
Consolidated
Net Sales
The
decrease in consolidated net sales in the Fiscal 2009 First Quarter as compared
to the Fiscal 2008 First Quarter was primarily a result of decreases in net
sales from each of the brands in our Retail Stores segment driven by negative
comparable store sales. These decreases were partially offset by net
sales from our new LANE BRYANT WOMAN catalog, launched during the latter half of
Fiscal 2008, which is included in our Direct-to-Consumer segment.
Retail
Store Segment Net Sales
Comparable
store sales for the Fiscal 2009 First Quarter decreased at each of our Retail
Stores brands as compared to the Fiscal 2008 First Quarter. Net sales
for all of our brands continued to be negatively impacted by reduced traffic
levels and weak consumer spending, that we began to experience during the latter
half of Fiscal 2008. The average number of transactions per store
decreased for each of our brands, while the average dollar sale per transaction
decreased for FASHION BUG and CATHERINES stores, were flat for LANE BRYANT
stores, and increased for our outlet stores. We operated 2,407 stores
as of May 3, 2008 as compared to 2,396 stores as of May 5, 2007.
We offer
various loyalty card programs to our Retail Stores segment customers (see “Notes to Condensed Consolidated
Financial Statements; Note 6. Customer Loyalty Card
Programs”
above). During the Fiscal 2009 First Quarter we recognized revenues
of $5.1 million and during the Fiscal 2008 First Quarter we recognized
revenues of $5.7 million in connection with our loyalty card programs. As
of November 2007 we began offering a loyalty program in connection with the
issuance of our new LANE BRYANT proprietary credit card. Cardholders
earn points for purchases using the credit card, which may be redeemed for
merchandise coupons upon the accumulation of a specified number of
points. No membership fees are charged in connection with this
program.
Direct-to-Consumer
Segment Net Sales
The
increase in net sales from our Direct-to-Consumer segment was primarily
attributable to sales from our LANE BRYANT WOMAN catalog and website launched in
the latter half of Fiscal 2008 and an increase in sales from our FIGI’S
catalog.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
Consolidated 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 2009 First Quarter as
compared to the Fiscal 2008 First Quarter primarily as a result of negative
leverage on buying and occupancy expenses from the decrease in comparable store
sales and an increase in catalog advertising expenses. Consolidated
cost of goods sold decreased 1.4% as a percentage of consolidated net sales as a
result of our strong inventory management and reduced promotional activity
during the current-year period. Consolidated buying, catalog, and
occupancy expenses increased 3.2% as a percentage of consolidated net sales
primarily as a result of negative leverage from the decrease in comparable store
sales.
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. 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. Conversely, the Direct-to-Consumer segment incurs lower
levels of buying and occupancy 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.
Retail
Stores Segment Cost of Goods Sold, Buying, and Occupancy
For our
Retail Stores segment, cost of goods sold, buying, and occupancy expenses as a
percentage of net sales were 1.4% higher in the Fiscal 2009 First Quarter as
compared to the Fiscal 2008 First Quarter. The merchandise margin in our
Retail Stores segment improved in the Fiscal 2009 First Quarter as compared to
the Fiscal 2008 First Quarter as a result of our strong inventory management and
reduced promotional activity during the current-year period. Buying
and occupancy expenses for our Retail Stores segment were 2.2% higher in the
Fiscal 2009 First Quarter as compared to the Fiscal 2008 First Quarter,
primarily as a result of negative leverage from the decrease in comparable store
sales.
Direct-to-Consumer
Segment Cost of Goods Sold, Buying, Catalog, and Occupancy
The 23.6%
increase in cost of goods sold, buying, catalog, and occupancy expenses as a
percentage of net sales for our Direct-to-Consumer segment resulted
primarily from higher-than-normal catalog advertising expenses incurred in
connection with the start-up of our LANE BRYANT WOMAN catalog which was launched
in October 2007.
Selling,
General, and Administrative
Consolidated
Selling, General, and Administrative
Consolidated
selling, general, and administrative expenses increased 2.7% as a percentage of
consolidated net sales, primarily as a result of negative leverage on selling
costs from the decrease in consolidated net sales. Additionally, we
recognized $3.8 million of expenses during the Fiscal 2009 First Quarter in
connection with advisory and legal fees relating to a proxy contest which was
settled in May 2008.
Retail
Stores Segment Selling, General, and Administrative
Selling,
general and administrative expenses as a percentage of net sales increased 2.9%
for FASHION BUG, 3.5% for CATHERINES, and 1.7% for LANE BRYANT. The
increases primarily reflect the lack of leverage on selling expenses at each of
the brands as a result of the decrease in comparable store
sales. General and administrative expenses as a percentage of sales
were essentially flat at each brand reflecting efforts to control and reduce
such expenses.
Direct-to-Consumer
Segment Selling, General, and Administrative
Selling,
general, and administrative expenses as a percentage of net sales decreased
15.6% for our Direct-to-Consumer segment, primarily as a result of sales from
our LANE BRYANT WOMAN catalog and related E-commerce website, which began
operations during the latter half of Fiscal 2008.
Restructuring
Charges
In
November 2007 we announced our plan to relocate our CATHERINES operations
located in Memphis, Tennessee to our corporate headquarters in Bensalem,
Pennsylvania in conjunction with the consolidation of a number of our operating
functions and in February 2008 we announced additional cost-saving and
streamlining initiatives as discussed in the overview above. During
the Fiscal 2009 First Quarter we recognized pre-tax charges of approximately
$1.7 million for severance, retention, relocation, and lease termination costs
related to these programs and approximately $1.9 million of non-cash pre-tax
charges for write-downs of assets related to under-performing stores we expect
to close and accelerated depreciation related to the closing of the Memphis
facility. We anticipate that the execution of the new organizational
structure and cost-saving initiatives will result in approximately $28 million
of annualized expense savings, primarily in the areas of non-store payroll,
elimination of losses from under-performing stores, and occupancy
costs.
Income
Tax Provision
Our
income tax provision for the Fiscal 2009 First Quarter was $1.2 million on
income from continuing operations before taxes of $1.9 million as compared to a
tax provision of $15.0 million on income from continuing operations before taxes
of $41.4 million for the Fiscal 2008 First Quarter. The Fiscal 2009
First Quarter provision for income taxes was impacted by an increase in our
liability for unrecognized tax benefits, interest, and penalties in accordance
with FIN No. 48. We adopted the provisions of FASB Interpretation No.
48 as of the beginning of the Fiscal 2008 First Quarter.
Discontinued
Operations
Discontinued
operations consist of the results of operations of the non-core misses catalog
titles operated under our Crosstown Traders brand. Discontinued
operations for the Fiscal 2009 First Quarter includes an estimated after-tax
loss from the planned disposal of the discontinued operations of $28.4
million. See “RECENT
DEVELOPMENTS” and “Notes
to Condensed Consolidated Financial Statements; Note 1. Condensed Consolidated
Financial Statements; Discontinued
Operations” above
for further information.
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. The following table
highlights certain information related to our liquidity and capital
resources:
|
|
May
3,
|
|
|
February
2,
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
79.2 |
|
|
$ |
61.3 |
|
Available-for-sale
securities
|
|
|
6.5 |
|
|
|
13.4 |
|
Working
capital
|
|
$ |
475.5 |
|
|
$ |
504.9 |
|
Current
ratio
|
|
|
2.3 |
|
|
|
2.5 |
|
Long-term
debt to equity ratio
|
|
|
45.3 |
% |
|
|
41.9 |
% |
Our net
cash provided by operating activities decreased to $46.2 million for the Fiscal
2009 First Quarter from $58.9 million for the Fiscal 2008 First Quarter,
primarily as a result of a $25.8 million decrease in income from continuing
operations. Our net investment in inventories decreased $13.4 million
in the Fiscal 2009 First Quarter as compared to the Fiscal 2008 First
Quarter as a result of our continued efforts to reduce inventory
levels. On a same-store basis, inventories decreased 13% as of the
end of the Fiscal 2009 First Quarter as compared to the end of the Fiscal 2008
First Quarter.
Capital
Expenditures
Our gross
capital expenditures, excluding construction allowances received from landlords,
were $22.0 million during the Fiscal 2009 First Quarter as compared to $37.5
million for the Fiscal 2008 First Quarter. Construction allowances
received from landlords for the Fiscal 2009 First Quarter were $17.4
million as compared to $18.7 million for the Fiscal 2008 First
Quarter.
As part
of our streamlining initiatives announced in February 2008, we plan to
significantly reduce capital expenditures for new store development, store
relocations, and corporate technology in response to the current difficult
economic environment. We plan to open approximately 45-50 new stores
in Fiscal 2009 as compared to 103 new stores in Fiscal 2008, and anticipate that
our Fiscal 2009 gross capital expenditures will be approximately $75 million
before construction allowances received from landlords as compared to gross
capital expenditures of $137.7 million for Fiscal 2008. We expect
that approximately 80% of our Fiscal 2009 gross capital expenditures before
construction allowances will support store development, including openings,
relocations, and store improvements, with the remainder of the expenditures to
be primarily for improvements to our information technology, distribution
centers, and corporate infrastructure. We expect to finance these
capital expenditures principally 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” in our Annual Report on
Form 10-K for the fiscal year ended February 2, 2008 does not include an
increase in our liability for future benefits payable to former executive
employees under split-dollar life insurance agreements that we have recorded in
accordance with our adoption of EITF Issue No. 06-4 (see “Notes to Condensed Consolidated
Financial Statements; Note 13. Impact of Recent Accounting
Pronouncements”
above). As a result of the adoption of EITF Issue No. 06-4, we
recognized a $13.7 million increase in our split-dollar life insurance
benefits payable through a cumulative effect adjustment as of February 3,
2008. We recognized $1.6 million of the increase as a current
liability (due in less than 1 year) and the remaining $12.1 million as a
long-term liability.
Repurchases
of Common Stock
During
the Fiscal 2009 First Quarter we repurchased an aggregate total of 0.5
million shares of common stock for $2.6 million under a $200 million share
repurchase program announced in November 2007 and 1.5 million shares of common
stock for $8.3 million under a prior authorization from our Board of
Directors. Our revolving credit facility allows the repurchase of our
common stock subject to maintaining a minimum level of “Excess Availability” (as
defined in the facility agreement) for 30 days before and immediately after such
repurchase. See “PART II, Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds” below for additional
information related to our repurchases of common stock.
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 Program
Our asset
securitization program 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, LANE BRYANT,
CATHERINES, PETITE SOPHISTICATE, and Crosstown Traders proprietary credit card
programs. Additional information regarding our asset securitization
facility is included in “Notes
to Condensed Consolidated Financial Statements; Note 9. Asset
Securitization” above; under the caption “MARKET RISK” below; and in
“Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations;
CRITICAL ACCOUNTING POLICIES; Asset
Securitization” and “Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; NOTE 17. ASSET
SECURITIZATION” of our February 2, 2008
Annual Report on Form 10-K.
As of May
3, 2008, we had the following securitization facilities
outstanding:
(Dollars
in millions)
|
Series 1999-2
|
Series 2002-1
|
Series 2004-VFC
|
Series 2004-1
|
2005-RPA(1)
|
Series 2007-1
|
|
|
|
|
|
|
|
Date
of
facility
|
May
1999
|
November
2002
|
January
2004
|
August
2004
|
May
2005
|
October
2007
|
Type
of
facility
|
Conduit
|
Term
|
Conduit
|
Term
|
Conduit
|
Term
|
Maximum
funding
|
$50.0
|
$100.0
|
$50.0
|
$180.0
|
$55.0
|
$320.0
|
Funding
as of
|
|
|
|
|
|
|
May 3,
2008
|
$32.7
|
$10.5
|
$0.0
|
$180.0
|
$41.5
|
$320.0
|
First
scheduled
|
|
|
|
|
|
|
principal
payment
|
Not
applicable
|
August
2007
|
Not
applicable
|
April
2009
|
Not
applicable
|
April
2012
|
Expected
final
|
|
|
|
|
|
|
principal
payment
|
Not
applicable(2)
|
May
2008
|
Not
applicable(2)
|
March
2010
|
Not
applicable(2)
|
March
2013
|
Next
renewal
date
|
July
2008
|
Not
applicable
|
January
2009
|
Not
applicable
|
May
2009
|
Not
applicable
|
____________________
|
(1)
Receivables Purchase Agreement (for the Crosstown Traders catalog
proprietary credit card receivables program).
|
(2)
Series 1999-2 and Series 2004-VFC have scheduled final payment dates that
occur in the twelfth month following the month in which the series begins
amortizing. These series and 2005-RPA generally begin
amortizing 364 days after the start of the purchase commitment by the
series purchaser currently in effect after giving effect to any
renewal.
|
We
securitized $227.6 million of private label credit card receivables in the
Fiscal 2009 First Quarter and had $596.1 million of securitized credit card
receivables outstanding as of May 3, 2008. We held certificates and
retained interests in our securitizations of $116.1 million as of May 3, 2008
that 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.
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. Our investment in
asset-backed securities as of May 3, 2008 included $50.9 million of QSPE
certificates, an interest-only (“I/O”) strip of $23.7 million, and other
retained interests of $41.5 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. does not meet certain financial performance standards, the Trust
is obligated to reallocate to third-party investors holding certain certificates
issued by the Trust, collections in an amount up to $9.45 million that otherwise
would be available to CSRC. The result of this reallocation is to
increase CSRC’s retained interest in the Trust by the same amount, with the
third-party investor retaining an economic interest in the
certificates. Subsequent to such a transfer occurring, and upon
certain conditions being met, these same investors are required to repurchase
these interests when the financial performance standards are again
satisfied. Our net loss for the third quarter of Fiscal 2008 resulted
in the requirement to begin the reallocation of collections as discussed above
and $9.45 million of collections were fully transferred as of February 2,
2008. The requirement for the reallocation of these collections will
cease and such investors would be required to repurchase such interests upon our
announcement of a quarter with net income and the fulfillment of such
conditions. With the exception of the requirement to reallocate
collections of $9.45 million that were fully transferred as of February 2, 2008,
the Trust was in compliance with its financial performance standards as of May
3, 2008.
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 or the QSPEs
do not 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 although we cannot provide assurance in that
regard. As of May 3, 2008 we and the QSPEs were in compliance with
the applicable financial performance standards referred to in this
paragraph.
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.
As these
credit card receivables securitizations reach maturity, we plan to obtain
funding for our 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.
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.
Benefits
from Operating Our Proprietary Credit Card Programs
We manage
our proprietary credit card programs primarily to engender customer loyalty and
to allow us to integrate our direct-mail marketing strategy when communicating
with our core customers. We also earn revenue from operating the
credit card programs. As discussed above, we utilize asset
securitization as the primary funding source for our proprietary credit card
receivables programs. As a result, our primary source of benefits is
derived from the distribution of net excess spread revenue from our
QSPEs.
The
transfer of credit card receivables under our asset securitization program is
without recourse and we account for the program in accordance with SFAS No. 140,
“Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.” Under
SFAS No. 140, our benefit from the credit card receivables represents primarily
the net excess spread revenues we receive from monthly securitization
distributions associated with the collections on managed outstanding
receivables. We recognize on an accrual basis these net excess spread
revenues, which generally represent finance charge revenues in excess of
securitization funding costs, net credit card charge-offs, and the
securitization servicing fee. Finance charge revenues include finance
charges and fees assessed to the credit card customers. Net credit
card charge-offs represent gross monthly charge-offs on customer accounts less
recoveries on accounts previously charged-off. For purposes of the
table provided below, we also include any collection agency costs associated
with recoveries as part of the net excess spread revenues from credit card
receivables.
In
addition to the actual net excess spread revenues described above we record our
beneficial interest in the Trust as an “interest-only strip” (“I/O strip”),
which represents the estimated present value of cash flows we expect to receive
over the estimated period the receivables are outstanding. In
addition to the I/O strip we recognize a servicing liability, which represents
the present value of the excess of the costs of servicing over the servicing
fees we expect to receive, and is recorded at estimated fair
value. We use the same discount rate and estimated life assumptions
in valuing the I/O strip and the servicing liability. We amortize the
I/O strip and the servicing liability on a straight-line basis over the expected
life of the credit card receivables.
The
benefits from operating our proprietary credit card programs also include other
revenues generated from the programs. These other net revenues
include revenue from additional products and services that customers may
purchase with their credit cards, including debt cancellation protection,
fee-based loyalty program revenues, and net commissions from third-party
products that customers may buy through their credit cards. Other
credit card revenues also include interest income earned on funds invested in
the credit entities. The credit contribution is net of expenses
associated with operating the program. These expenses include the
costs to originate, bill, collect, and operate the credit card
programs. Except for net fees associated with the fee-based loyalty
programs that we include in net sales, we include the net credit contribution as
a reduction of selling, general, and administrative expenses in our consolidated
statements of operations and comprehensive income.
Further
details of our net credit contribution are as follows:
|
|
Thirteen
Weeks Ended
|
|
|
|
May
3,
|
|
|
May
5,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
securitization excess spread
revenues
|
|
$ |
23.3 |
|
|
$ |
15.5 |
|
Net
additions to the I/O strip and servicing
liability
|
|
|
0.3 |
|
|
|
0.3 |
|
Other
credit card revenues, net(1)
|
|
|
3.3 |
|
|
|
3.3 |
|
Total
credit card
revenues
|
|
|
26.9 |
|
|
|
19.1 |
|
Less
total credit card program
expenses
|
|
|
17.9 |
|
|
|
11.9 |
|
Total
credit
contribution
|
|
$ |
9.0 |
|
|
$ |
7.2 |
|
|
|
|
|
|
|
|
|
|
Average
managed receivables
outstanding
|
|
$ |
585.4 |
|
|
$ |
356.3 |
|
Ending
managed receivables
outstanding
|
|
$ |
596.1 |
|
|
$ |
366.8 |
|
____________________
|
|
(1) Excludes inter-company merchant fees between our credit
entities and our retail entities.
|
|
Operating
Leases
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
18. Leases” of our Annual Report
on Form 10-K for the fiscal year ended February 2, 2008.
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. We had an aggregate total of $1.9
million of unamortized deferred debt acquisition costs related to the facility
as of May 3, 2008, 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. In addition, the facility agreement provides that if
“Excess Availability” falls below 10% of the “Borrowing Base,” through high
levels of borrowing or letter of credit issuance for example, we may be required
to maintain a minimum “Fixed Charge Coverage Ratio” (terms in quotation marks in
this paragraph and the following paragraph are defined in the facility
agreement). The facility is secured by our general assets, except for
assets related to our credit card securitization facilities, real property,
equipment, the assets of our non-U.S. subsidiaries, and certain other
assets. As of May 3, 2008 the “Excess Availability” under the
facility was $328.0 million, or 96.4% of the “Borrowing Base.” As of
May 3, 2008, 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” 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 of May 3, 2008, the
applicable rates under the facility were 5.00% for Prime Rate Loans and 3.97%
(LIBOR plus 1%) for Eurodollar Rate Loans. There were no borrowings
outstanding under the facility as of May 3, 2008.
Long-term
Debt
On April
30, 2007 we issued $250.0 million 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 $25.0 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 $0.8 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.
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% Senior Convertible Notes due
June 1, 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 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. Long-term Debt” of our Annual Report on Form 10-K for the fiscal
year ended February 2, 2008.
In Fiscal
2009 we plan to continue to utilize our combined financial resources to fund our
inventory and inventory-related purchases, catalog advertising and marketing
initiatives, and our store development and infrastructure
strategies. We believe our cash on-hand, securitization facilities,
and borrowing facilities will provide adequate liquidity for our business
operations and growth opportunities during Fiscal 2009. However, our
liquidity is affected by many factors, including some that are based on normal
operations and some that are related to our industry and the
economy. We may seek, as we believe appropriate, additional debt or
equity financing to provide capital for corporate purposes or to fund strategic
business opportunities. At this time, we cannot determine the timing
or amount of such potential capital requirements, which will depend on a number
of factors, including demand for our merchandise, industry conditions,
competitive factors, the condition of financial markets, and the nature and size
of strategic business opportunities that we may elect to pursue.
MARKET
RISK
We manage
our FASHION BUG, LANE BRYANT, 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 May 3, 2008 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
for the portion of certificates that are funded at floating rates.
As a
result of the Trust entering into a series of fixed-rate interest rate swap
agreements with respect to $335.8 million of floating-rate certificates,
entering into an interest-rate cap with respect to an additional $28.8 million
of floating-rate certificates, and $86.1 million of certificates 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 on a
pro-rated basis by the end of Fiscal 2009, an increase of approximately $473
thousand in selling, general, and administrative expenses would
result.
As of May
3, 2008, 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 13. 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
25, 2008 we announced that our Board of Directors began exploring a broad range
of operating and strategic alternatives for our non-core misses apparel catalog
titles in order to provide a greater focus on our core brands and to enhance
shareholder value. Accordingly, we are holding our non-core misses
apparel catalog titles for sale. We cannot assure the successful
consummation of our expected sale of our non-core misses apparel catalog
titles.
Our Form
10-K for the fiscal year ended February 2, 2008 included disclosure of the
following risk factor:
Changes
to existing accounting rules or the adoption of new rules could have an adverse
effect on our reported results of operations. The Financial
Accounting Standards Board (“FASB”) has issued a proposed FASB 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. If the
proposed FSP is approved in 2008 we would be required to adopt the proposal as
of February 1, 2009 (the beginning of Fiscal 2010), 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.
In
May 2008 the FASB issued FASB Staff Position (“FSP”) APB 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlements),” which will change the accounting treatment for convertible
securities that the issuer may settle fully or partially in cash. See
“Part I Item 1. Notes To Condensed
Consolidated Financial Statements (Unaudited); Note 13. Impact of Recent Accounting
Pronouncements” above for further information with respect to FSP APB
14-1.
Other
than the above, we have not become aware of any material changes since February
2, 2008 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 2, 2008. See also “Part I; Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations;
FORWARD-LOOKING STATEMENTS” and “RECENT DEVELOPMENTS”
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(3)(4)
|
|
|
Programs(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
3, 2008 through
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1, 2008
|
|
|
683,235 |
(1) |
|
$ |
5.83 |
|
|
|
648,600 |
(3) |
|
|
|
March
2, 2008 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
5, 2008
|
|
|
1,419,475 |
(2) |
|
|
5.28 |
|
|
|
1,356,367 |
(3)(4) |
|
|
|
April
6, 2008 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
3, 2008
|
|
|
0 |
|
|
|
– |
|
|
|
0 |
|
|
|
|
Total
|
|
|
2,102,710 |
|
|
$ |
5.47 |
|
|
|
2,004,967 |
|
|
|
(3)(4) |
|
____________________
|
|
(1)
Includes 34,635 shares ($5.99 average price paid per share) withheld for
the payment of payroll taxes on employee stock awards that vested during
the period and 648,600 shares ($5.82 average price paid per share)
purchased in the open market (see Note (3) below).
|
|
(2)
Includes 63,108 shares ($4.71 average price paid per share) withheld for
the payment of payroll taxes on employee stock awards that vested during
the period and 1,356,367 shares ($5.30 average price paid per share)
purchased in the open market (see Notes (3) and (4)
below).
|
|
(3) 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, Inc. (“Limited Brands”) in
connection with our acquisition of LANE BRYANT. From Fiscal 1998
through February 2, 2008 we repurchased a total of 24,851,101 shares of
stock, which included shares purchased on the open market as well as
shares repurchased from Limited Brands. During the period from
February 3, 2008 through May 3, 2008 we repurchased a total of 1,499,561
shares of stock ($5.56 average price paid per share) in the open market
under these programs. As of May 3, 2008, no shares remain available
for repurchase under these programs.
|
|
(4) On November 8, 2007 we publicly announced that our Board of
Directors granted authority to repurchase shares of our common stock up to
an aggregate value of $200 million. Shares may be purchased in the
open market or through privately-negotiated transactions, as market
conditions allow. As of February 2, 2008 no shares had been purchased
under this plan. During the period from February 3, 2008 through May
3, 2008 we repurchased a total of 505,406 shares of stock ($5.21 average
price paid per share) in the open market under this program. As of
May 3, 2008, $197,364,592 was available for future repurchases under this
program. This repurchase program has no expiration
date.
|
|
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.
|
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
|
Form
of Time-Based Restricted Stock Units Agreement for Dorrit J. Bern,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit 10.1).
|
10.2
|
Form
of Time-Based Stock Appreciation Rights Agreement for Dorrit J. Bern,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit 10.2).
|
10.3
|
Form
of Time-Based Restricted Stock Units Agreement for Other Executive
Officers, incorporated by reference to Form 8-K of the Registrant dated
April 1, 2008, filed on April 7, 2008. (Exhibit
10.3).
|
10.4
|
Form
of Time-Based Stock Appreciation Rights Agreement for Other Executive
Officers, incorporated by reference to Form 8-K of the Registrant dated
April 1, 2008, filed on April 7, 2008. (Exhibit
10.4).
|
10.5
|
Form
of Performance-Based Restricted Stock Units Agreement for Dorrit J. Bern,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit 10.5).
|
10.6
|
Form
of Performance-Based Stock Appreciation Rights Agreement for Dorrit J.
Bern, incorporated by reference to Form 8-K of the Registrant dated April
1, 2008, filed on April 7, 2008. (Exhibit 10.6).
|
10.7
|
Form
of Additional Time-Based Restricted Stock Units Agreement for Other
Executive Officers, incorporated by reference to Form 8-K of the
Registrant dated April 1, 2008, filed on April 7,
2008. (Exhibit 10.7).
|
10.8
|
Form
of Additional Time-Based Stock Appreciation Rights Agreement for Other
Executive Officers, incorporated by reference to Form 8-K of the
Registrant dated April 1, 2008, filed on April 7,
2008. (Exhibit 10.8).
|
10.9
|
Form
of Performance-Based EBITDA Stock Appreciation Rights Agreement,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit
10.9).
|
10.10
|
Amendment,
dated as of May 15, 2008, to Amended and Restated Receivables Purchase
Agreement dated as of June 2, 2005, by and among Catalog Receivables LLC
as seller; Spirit of America, Inc. as servicer; Sheffield Receivables
Corporation as Purchaser; and Barclays Bank PLC as administrator for the
Purchaser.
|
10.11
|
Letter
Agreement, dated as of May 16, 2008, to Certificate Purchase Agreement,
dated as of May 28, 1999, as amended, among Charming Shoppes Receivables
Corp., as Seller and Class B Purchaser; Spirit of America, Inc., as
Servicer; Clipper Receivables Company, LLC, as Class A Purchaser; and
State Street Global Markets, LLC, as Administrator for the Class A
Purchaser.
|
10.12
|
Charming
Shoppes, Inc. 2003 Non-Employee Directors Compensation Plan, Amended and
Restated, Effective May 7, 2008.
|
10.13
|
Charming
Shoppes, Inc. Annual Incentive Program – Fiscal 2009, as amended and
restated March 27, 2008.
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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:
June 6, 2008
|
/S/ DORRIT J.
BERN
|
|
Dorrit
J. Bern
|
|
Chairman
of the Board
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
Date:
June 6, 2008
|
/S/ ERIC M.
SPECTER
|
|
Eric
M. Specter
|
|
Executive
Vice President
|
|
Chief
Financial Officer
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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.
|
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
|
Form
of Time-Based Restricted Stock Units Agreement for Dorrit J. Bern,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit 10.1).
|
10.2
|
Form
of Time-Based Stock Appreciation Rights Agreement for Dorrit J. Bern,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit 10.2).
|
10.3
|
Form
of Time-Based Restricted Stock Units Agreement for Other Executive
Officers, incorporated by reference to Form 8-K of the Registrant dated
April 1, 2008, filed on April 7, 2008. (Exhibit
10.3).
|
10.4
|
Form
of Time-Based Stock Appreciation Rights Agreement for Other Executive
Officers, incorporated by reference to Form 8-K of the Registrant dated
April 1, 2008, filed on April 7, 2008. (Exhibit
10.4).
|
10.5
|
Form
of Performance-Based Restricted Stock Units Agreement for Dorrit J. Bern,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit 10.5).
|
10.6
|
Form
of Performance-Based Stock Appreciation Rights Agreement for Dorrit J.
Bern, incorporated by reference to Form 8-K of the Registrant dated April
1, 2008, filed on April 7, 2008. (Exhibit 10.6).
|
10.7
|
Form
of Additional Time-Based Restricted Stock Units Agreement for Other
Executive Officers, incorporated by reference to Form 8-K of the
Registrant dated April 1, 2008, filed on April 7,
2008. (Exhibit 10.7).
|
10.8
|
Form
of Additional Time-Based Stock Appreciation Rights Agreement for Other
Executive Officers, incorporated by reference to Form 8-K of the
Registrant dated April 1, 2008, filed on April 7,
2008. (Exhibit 10.8).
|
10.9
|
Form
of Performance-Based EBITDA Stock Appreciation Rights Agreement,
incorporated by reference to Form 8-K of the Registrant dated April 1,
2008, filed on April 7, 2008. (Exhibit
10.9).
|
10.10
|
Amendment,
dated as of May 15, 2008, to Amended and Restated Receivables Purchase
Agreement dated as of June 2, 2005, by and among Catalog Receivables LLC
as seller; Spirit of America, Inc. as servicer; Sheffield Receivables
Corporation as Purchaser; and Barclays Bank PLC as administrator for the
Purchaser.
|
10.11
|
Letter
Agreement, dated as of May 16, 2008, to Certificate Purchase Agreement,
dated as of May 28, 1999, as amended, among Charming Shoppes Receivables
Corp., as Seller and Class B Purchaser; Spirit of America, Inc., as
Servicer; Clipper Receivables Company, LLC, as Class A Purchaser; and
State Street Global Markets, LLC, as Administrator for the Class A
Purchaser.
|
10.12
|
Charming
Shoppes, Inc. 2003 Non-Employee Directors Compensation Plan, Amended and
Restated, Effective May 7, 2008.
|
10.13
|
Charming
Shoppes, Inc. Annual Incentive Program – Fiscal 2009, as amended and
restated March 27, 2008.
|
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.
|