form10qmay22009.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 2,
2009
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.)
|
|
|
3750
STATE ROAD, 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files):
Yes o 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 May 29, 2009 was 115,411,047 shares.
TABLE
OF CONTENTS
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Page
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2
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2
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2
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3
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4
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5
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26
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26
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29
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30
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31
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33
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39
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41
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45
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46
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46
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46
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47
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47
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47
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49
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49
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51
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52
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CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
May
2,
|
|
|
January
31,
|
|
(In
thousands, except share amounts)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
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ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
123,885 |
|
|
$ |
93,759 |
|
Available-for-sale
securities
|
|
|
400 |
|
|
|
6,398 |
|
Accounts
receivable, net of allowances of $6,125 and $6,018
|
|
|
8,021 |
|
|
|
33,300 |
|
Investment
in asset-backed securities
|
|
|
86,998 |
|
|
|
94,453 |
|
Merchandise
inventories
|
|
|
300,214 |
|
|
|
268,142 |
|
Deferred
taxes
|
|
|
3,439 |
|
|
|
3,439 |
|
Prepayments
and other
|
|
|
173,485 |
|
|
|
155,430 |
|
Total
current
assets
|
|
|
696,442 |
|
|
|
654,921 |
|
|
|
|
|
|
|
|
|
|
Property,
equipment, and leasehold improvements – at cost
|
|
|
1,072,087 |
|
|
|
1,076,972 |
|
Less
accumulated depreciation and amortization
|
|
|
707,519 |
|
|
|
693,796 |
|
Net
property, equipment, and leasehold improvements
|
|
|
364,568 |
|
|
|
383,176 |
|
|
|
|
|
|
|
|
|
|
Trademarks
and other intangible assets
|
|
|
187,184 |
|
|
|
187,365 |
|
Goodwill
|
|
|
23,436 |
|
|
|
23,436 |
|
Other
assets
|
|
|
26,348 |
|
|
|
28,243 |
|
Total
assets
|
|
$ |
1,297,978 |
|
|
$ |
1,277,141 |
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
145,815 |
|
|
$ |
99,520 |
|
Accrued
expenses
|
|
|
155,293 |
|
|
|
166,631 |
|
Current
portion – long-term debt
|
|
|
6,463 |
|
|
|
6,746 |
|
Total
current
liabilities
|
|
|
307,571 |
|
|
|
272,897 |
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
47,440 |
|
|
|
46,197 |
|
Other
non-current liabilities
|
|
|
186,943 |
|
|
|
188,470 |
|
Long-term
debt, net of debt discount of $66,591 and $72,913
|
|
|
223,986 |
|
|
|
232,722 |
|
|
|
|
|
|
|
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Stockholders’
equity
|
|
|
|
|
|
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Common
Stock $.10 par value:
|
|
|
|
|
|
|
|
|
Authorized
– 300,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
– 153,890,388 shares and 153,482,368 shares
|
|
|
15,389 |
|
|
|
15,348 |
|
Additional
paid-in capital
|
|
|
500,258 |
|
|
|
498,551 |
|
Treasury
stock at cost – 38,482,213 shares
|
|
|
(347,730 |
) |
|
|
(347,730 |
) |
Accumulated
other comprehensive income
|
|
|
0 |
|
|
|
5 |
|
Retained
earnings
|
|
|
364,121 |
|
|
|
370,681 |
|
Total
stockholders’
equity
|
|
|
532,038 |
|
|
|
536,855 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,297,978 |
|
|
$ |
1,277,141 |
|
|
|
See
Notes to Condensed Consolidated Financial Statements
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(Unaudited)
|
|
Thirteen Weeks Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
538,136 |
|
|
$ |
641,346 |
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, buying, catalog, and occupancy expenses
|
|
|
372,599 |
|
|
|
447,183 |
|
Selling,
general, and administrative expenses
|
|
|
158,102 |
|
|
|
186,795 |
|
Restructuring
and other charges
|
|
|
8,705 |
|
|
|
3,611 |
|
Total
operating expenses
|
|
|
539,406 |
|
|
|
637,589 |
|
|
|
|
|
|
|
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|
Income/(loss)
from operations
|
|
|
(1,270 |
) |
|
|
3,757 |
|
|
|
|
|
|
|
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|
|
Other
income
|
|
|
198 |
|
|
|
515 |
|
Gain
on repurchase of 1.125% Senior Convertible Notes
|
|
|
4,251 |
|
|
|
0 |
|
Interest
expense
|
|
|
(5,020 |
) |
|
|
(4,961 |
) |
|
|
|
|
|
|
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|
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Loss from
continuing operations before income taxes
|
|
|
(1,841 |
) |
|
|
(689 |
) |
Income
tax provision
|
|
|
4,720 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(6,561 |
) |
|
|
(949 |
) |
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
of $10,074 in
2008
|
|
|
0 |
|
|
|
(45,894 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(6,561 |
) |
|
|
(46,843 |
) |
|
|
|
|
|
|
|
|
|
Other
comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities, net of income tax
|
|
|
|
|
|
|
|
|
benefit of $15 in
2008
|
|
|
(5 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(6,566 |
) |
|
$ |
(46,868 |
) |
|
|
|
|
|
|
|
|
|
Basic
net loss per share:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(.06 |
) |
|
$ |
(.01 |
) |
Loss
from discontinued operations
|
|
|
(.00 |
) |
|
|
(.40 |
) |
Net
loss
|
|
$ |
(.06 |
) |
|
$ |
(.41 |
) |
|
|
|
|
|
|
|
|
|
Diluted
net loss per share:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(.06 |
) |
|
$ |
(.01 |
) |
Loss
from discontinued operations
|
|
|
(.00 |
) |
|
|
(.40 |
) |
Net
loss
|
|
$ |
(.06 |
) |
|
$ |
(.41 |
) |
|
|
See
Notes to Condensed Consolidated Financial Statements
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Thirteen Weeks Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(6,561 |
) |
|
$ |
(46,843 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
20,524 |
|
|
|
27,096 |
|
Accretion
of discount on 1.125% Senior Convertible
Notes
|
|
|
2,884 |
|
|
|
2,684 |
|
Estimated
loss on disposition of discontinued
operations
|
|
|
0 |
|
|
|
45,251 |
|
Deferred
income
taxes
|
|
|
1,246 |
|
|
|
(2,022 |
) |
Stock-based
compensation
|
|
|
1,710 |
|
|
|
2,898 |
|
Gain
on repurchase of 1.125% Senior Convertible
Notes
|
|
|
(4,251 |
) |
|
|
0 |
|
Write-down
of deferred taxes related to stock-based compensation
|
|
|
0 |
|
|
|
(263 |
) |
Write-down
of capital
assets
|
|
|
3,828 |
|
|
|
1,919 |
|
Net
loss from disposition of capital
assets
|
|
|
143 |
|
|
|
558 |
|
Net
loss/(gain) from securitization
activities
|
|
|
1,225 |
|
|
|
(367 |
) |
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable,
net
|
|
|
25,279 |
|
|
|
25,345 |
|
Merchandise
inventories
|
|
|
(32,072 |
) |
|
|
(39,060 |
) |
Accounts
payable
|
|
|
46,295 |
|
|
|
30,864 |
|
Prepayments
and
other
|
|
|
(11,547 |
) |
|
|
(3,314 |
) |
Accrued
expenses and other
|
|
|
(13,464 |
) |
|
|
1,414 |
|
Net
cash provided by operating activities
|
|
|
35,239 |
|
|
|
46,160 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Investment
in capital assets
|
|
|
(4,702 |
) |
|
|
(22,014 |
) |
Gross
purchases of securities
|
|
|
0 |
|
|
|
(12,636 |
) |
Proceeds
from sales of securities
|
|
|
7,471 |
|
|
|
19,404 |
|
(Increase)/decrease
in other assets
|
|
|
(449 |
) |
|
|
(36 |
) |
Net
cash provided/(used) by investing activities
|
|
|
2,320 |
|
|
|
(15,282 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from long term borrowings
|
|
|
0 |
|
|
|
87 |
|
Repayments
of long-term borrowings
|
|
|
(1,841 |
) |
|
|
(2,271 |
) |
Repurchase
of 1.125% Senior Convertible Notes
|
|
|
(5,631 |
) |
|
|
0 |
|
Payments
of deferred financing costs
|
|
|
0 |
|
|
|
(45 |
) |
Purchases
of treasury stock
|
|
|
0 |
|
|
|
(10,969 |
) |
Net
proceeds from shares issued under employee stock
plans
|
|
|
39 |
|
|
|
69 |
|
Net
cash used by financing activities
|
|
|
(7,433 |
) |
|
|
(13,129 |
) |
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
30,126 |
|
|
|
17,749 |
|
Cash
and cash equivalents, beginning of period
|
|
|
93,759 |
|
|
|
61,842 |
|
Cash
and cash equivalents, end of period
|
|
$ |
123,885 |
|
|
$ |
79,591 |
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities
|
|
|
|
|
|
|
|
|
Assets
acquired through capital leases
|
|
$ |
0 |
|
|
$ |
1,793 |
|
|
|
See
Notes to Condensed Consolidated Financial Statements
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Condensed Consolidated Financial Statements
The
accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and regulations
of the United States Securities and Exchange Commission (“SEC”). In our
opinion, we have made all adjustments (which, except as otherwise disclosed in
these notes, 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 cash flows 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 January 31, 2009
Annual Report on Form 10-K. The results of operations for the thirteen
weeks ended May 2, 2009 and May 3, 2008 are not necessarily indicative of
operating results for the full fiscal year.
As used
in these notes, the term “Fiscal 2010” refers to our fiscal year ending January
30, 2010 and the term “Fiscal 2009” refers to our fiscal year ended January
31, 2009. The term “Fiscal 2010 First Quarter” refers to our fiscal
quarter ended May 2, 2009 and the term “Fiscal 2009 First Quarter” refers to our
fiscal quarter ended May 3, 2008. The term “Fiscal 2010 Second
Quarter” refers to our fiscal quarter ending August 1, 2009, the term “Fiscal
2009 Third Quarter” refers to our fiscal quarter ended November 1, 2008, and the
term “Fiscal 2009 Fourth Quarter” refers to our fiscal quarter ended January 31,
2009. The terms “the Company,” “we,” “us,” and “our” refer to
Charming Shoppes, Inc. and, where applicable, our consolidated
subsidiaries.
Change
in Accounting Principle
The
accompanying condensed consolidated balance sheet as of January 31, 2009 and the
condensed consolidated statement of operations and comprehensive income for the
thirteen weeks ended May 3, 2008 have been adjusted to reflect the retrospective
adoption as of February 1, 2009 of FASB Staff Position (“FSP”) APB 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlements).” Our 1.125%
Senior Convertible Notes due May 2014 (the “1.125% Notes”) are within the scope
of FSP APB 14-1. See “Note 4. Long-term Debt” below
for further information related to our adoption of FSP APB 14-1.
In
connection with the adoption of FSP APB 14-1 we identified an error related to
the accounting for deferred taxes for a purchased call option which was entered
into contemporaneously with the issuance of our 1.125% Notes in Fiscal
2008. Concurrent with the issuance of the Notes we also entered into
a series of hedge transactions, which included the purchase of a call option
with a cost of approximately $90,500,000. The cost of the call option
was accounted for as an equity transaction in our financial
statements. For income tax purposes the cost of the call option is
treated as original issue discount (“OID”) and amortized over the life of the
Notes. We were recording the resulting tax benefit in our financial
statements as an increase to additional paid-in capital, as the tax benefit was
reported in our annual income tax returns. However, the treatment of
the call option as OID for income tax purposes created a book-tax basis
difference on the issuance date of the debt for which a deferred tax asset of
approximately $33,000,000 should have been recognized, with a corresponding
increase to additional paid-in capital.
During
Fiscal 2009, based on our evaluation of the realization of deferred tax assets
and negative evidence provided by recent losses, we recognized a non-cash income
tax provision to establish a full valuation allowance against our net deferred
tax assets. Accordingly, the understatement of deferred tax assets
resulted in an understatement of the valuation allowance for deferred tax assets
and the income tax provision in Fiscal 2009 of approximately
$30,000,000.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
In
evaluating these errors we considered the requirements in FASB Statement of
Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error
Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3,”
SEC Staff Accounting Bulletin No. 99, “Materiality,” and Accounting
Principles Board (“APB”) Opinion No. 28, “Interim Financial
Reporting.” We considered both the quantitative and
qualitative factors in evaluating the materiality of the errors and concluded
that the errors are not material to the Fiscal 2008 and Fiscal 2009 financial
statements. Accordingly, we have not restated our previously issued
financial statements to correct these errors. However, as discussed
below, the correction of these errors has been considered when adjusting the
historical financial statements for the retrospective application of FSP APB
14-1.
In
accordance with FSP APB 14-1, which requires retrospective application in all
periods presented, the 1.125% Notes are separated into their debt and equity
components. The carrying amount of the liability component is
determined by measuring the fair value of a similar liability that does not have
an associated equity component. The carrying amount of the equity
component represented by the embedded conversion option is then determined by
deducting the fair value of the liability component from the initial proceeds
ascribed to the convertible debt instrument as a whole. Upon
measuring the liability in accordance with FSP APB 14-1, we determined that the
tax basis and book basis of the debt are substantially the same; therefore the
effects of the aforementioned financial statement errors in Fiscal 2008 and 2009
related to deferred income taxes and income tax expense were substantially
offset by the effects of adopting FSP APB 14-1.
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 (collectively, “Crosstown Traders”) in order to provide a greater focus
on our core brands and to enhance shareholder value. Crosstown
Traders 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. Accordingly, the results of operations of Crosstown Traders
were reported as discontinued operations in our consolidated statements of
operations as of the beginning of the Fiscal 2009 First Quarter. In
August 2008 we entered into a definitive agreement to sell the Crosstown Traders
non-core misses apparel catalogs and the sale was completed in September
2008. Crosstown Traders’ operations have been eliminated from our
financial statements as of the date of sale.
We have
also announced our plans to explore the sale of our FIGI’S® Gifts in
Good Taste catalog business based in Wisconsin. The results of
operations of FIGI’S are not reported as discontinued operations as they have
not met the requirements of SFAS No. 144.
Results
from discontinued operations for the thirteen weeks ended May 3, 2008 (as
restated) were as follows:
(In
thousands)
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
64,679 |
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$ |
(55,968 |
) |
Income
tax benefit
|
|
|
10,074 |
|
Loss
from discontinued operations, net of income tax benefit
|
|
$ |
(45,894 |
) |
The loss
from discontinued operations includes an estimated loss on disposition of
$39,170,000 ($(.34) per diluted share), net of a tax benefit of
$6,081,000.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
The
financial information for the Fiscal 2009 First Quarter 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 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 OUTLET® brands. We
include sales and operating profit by brand in our Management’s Discussion and
Analysis of Results of Operations in order to provide additional information for
our Retail Stores segment.
Our
catalog and catalog-related e-commerce operations, excluding discontinued
operations, are separately reported under the Direct-to-Consumer
segment. The Direct-to-Consumer segment derives its revenues from
catalog sales and catalog-related e-commerce sales under our LANE BRYANT
WOMAN® and
FIGI’S titles and e-commerce sales under our SHOETRADER.COM®
website. During Fiscal 2009 we decided to discontinue our LANE BRYANT
WOMAN catalog and SHOETRADER.COM website, which we expect to complete by the end
of the Fiscal 2010 Second Quarter. 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 January 31,
2009 Annual Report on Form 10-K.
Shares
available for future grants under our stock-based compensation plans as of May
2, 2009:
2004
Stock Award and Incentive Plan
|
|
|
2,248,752 |
|
2003
Non-Employee Directors Compensation Plan
|
|
|
100,397 |
|
1994
Employee Stock Purchase Plan
|
|
|
712,512 |
|
1988
Key Employee Stock Option Plan
|
|
|
113,269 |
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
Stock
option and stock appreciation rights activity for the thirteen weeks ended May
2, 2009:
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Intrinsic
|
|
|
|
Option
|
|
|
Option
|
|
|
Option
Prices
|
|
|
Value(1)
|
|
|
|
Shares
|
|
|
Price
|
|
|
Per Share
|
|
|
|
(000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 31, 2009
|
|
|
3,292,385 |
|
|
$ |
5.09 |
|
|
$ |
1.00 |
|
|
|
–
|
|
|
$ |
13.84 |
|
|
$ |
0 |
|
Granted
– option price
equal to market price
|
|
|
4,652,300 |
|
|
|
1.66 |
|
|
|
0.99 |
|
|
|
–
|
|
|
|
2.15 |
|
|
|
|
|
Canceled/forfeited
|
|
|
(301,544 |
) |
|
|
4.53 |
|
|
|
1.00 |
|
|
|
–
|
|
|
|
6.81 |
|
|
|
|
|
Exercised
|
|
|
(434 |
) |
|
|
1.00 |
|
|
|
1.00 |
|
|
|
–
|
|
|
|
1.00 |
|
|
|
0 |
(2) |
Outstanding
at May 2, 2009
|
|
|
7,642,707 |
|
|
$ |
3.03 |
|
|
$ |
0.99 |
|
|
|
–
|
|
|
$ |
13.84 |
|
|
$ |
3,397 |
|
Exercisable
at May 2, 2009
|
|
|
1,493,339 |
|
|
$ |
6.40 |
|
|
$ |
1.00 |
|
|
|
–
|
|
|
$ |
13.84 |
|
|
$ |
0 |
|
____________________
|
|
(1)
Aggregate market value less aggregate exercise price.
|
|
(2)
As of date of exercise.
|
|
Stock-based
compensation expense includes compensation cost for (i) 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,” and (ii) 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 unit and stock
appreciation right awards.
|
|
Thirteen Weeks Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
$ |
1,710 |
|
|
$ |
2,898 |
|
During
the Fiscal 2009 Second Quarter we granted cash-settled restricted stock units
(“RSUs”) under our 2003 Non-Employee Directors Compensation
Plan. These cash-settled RSUs have been accounted for as liabilities
in accordance with SFAS No. 123(R). Excluded from the above
compensation expense for the thirteen weeks ended May 2, 2009 is $282,000 of
compensation expense related to these cash-settled RSUs.
We use
the Black-Scholes valuation model to estimate the fair value of stock options
and stock appreciation rights. We amortize stock-based
compensation on a straight-line basis over the requisite service period of an
award except for awards that include a market condition, which are amortized on
a graded vesting basis. Estimates or assumptions we use 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 January 31, 2009 Annual Report on Form 10-K.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
1. Condensed Consolidated Financial Statements (Continued)
Total
stock-based compensation expense not yet recognized, related to the non-vested
portion of stock options, stock appreciation rights, and awards outstanding was
$12,408,000 as of May 2, 2009. 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
2,
|
|
|
January
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Due
from customers
|
|
$ |
14,146 |
|
|
$ |
39,318 |
|
Allowance
for doubtful accounts
|
|
|
(6,125 |
) |
|
|
(6,018 |
) |
Net
accounts receivable
|
|
$ |
8,021 |
|
|
$ |
33,300 |
|
Note
3. Trademarks and Other Intangible Assets
|
|
May
2,
|
|
|
January
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Trademarks,
tradenames, and internet domain names
|
|
$ |
187,132 |
|
|
$ |
187,132 |
|
Customer
relationships
|
|
|
2,872 |
|
|
|
2,872 |
|
Total
at cost
|
|
|
190,004 |
|
|
|
190,004 |
|
Less
accumulated amortization of customer relationships
|
|
|
2,820 |
|
|
|
2,639 |
|
Net
trademarks and other intangible assets
|
|
$ |
187,184 |
|
|
$ |
187,365 |
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4. Long-term Debt
|
|
May
2,
|
|
|
January
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
1.125%
Senior Convertible Notes, due May 2014
|
|
$ |
261,500 |
|
|
$ |
275,000 |
|
Capital
lease obligations
|
|
|
12,959 |
|
|
|
14,041 |
|
6.07%
mortgage note, due October 2014
|
|
|
10,244 |
|
|
|
10,419 |
|
6.53%
mortgage note, due November 2012
|
|
|
4,900 |
|
|
|
5,250 |
|
7.77%
mortgage note, due December 2011
|
|
|
7,079 |
|
|
|
7,249 |
|
Other
long-term debt
|
|
|
358 |
|
|
|
422 |
|
Total
long-term debt principal
|
|
|
297,040 |
|
|
|
312,381 |
|
Less
unamortized discount on 1.125% Senior Convertible Notes
|
|
|
(66,591 |
) |
|
|
(72,913 |
) |
Long-term
debt – carrying value
|
|
|
230,449 |
|
|
|
239,468 |
|
Current
portion
|
|
|
(6,463 |
) |
|
|
(6,746 |
) |
Net
long-term debt
|
|
$ |
223,986 |
|
|
$ |
232,722 |
|
In May
2008 the FASB issued 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 changes the accounting
treatment for convertible securities that the issuer may settle fully or
partially in cash. We adopted the provisions of FSP APB 14-1 for our
1.125% Senior Convertible Notes due May 2014 (the “1.125% Notes”), which were
issued in Fiscal 2008, and applied the provisions retrospectively to all past
periods presented. Additional details regarding the 1.125% Notes are
included in “Item 8. Financial
Statements and Supplementary Data; Note 8. Long-term Debt” in our January 31, 2009
Annual Report on Form 10-K.
Prior to
the adoption of FSP APB 14-1, we recorded the liability for our 1.125% Notes at
their principal value and recognized the contractual interest on the notes as
interest expense. Under FSP APB 14-1, cash-settled convertible
securities are separated into their debt and equity components. The
value assigned to the debt component is the estimated fair value, as of the
issuance date, of a similar debt instrument without the conversion
feature. As a result, the debt is 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 fair value of the conversion
feature and has been recognized as additional paid-in capital. We
will accrete the debt to its principal value over its expected life using the
effective interest method, with an offsetting increase in interest expense on
our statements of operations to reflect the market rate for the debt
component at the date of issuance. Upon maturity of the 1.125% Notes
we will be obligated to repay to holders of the notes the $275,000,000 principal
value of the notes less the principal value of any notes that we repurchase
prior to maturity.
Our
adoption of the proposal resulted in an initial reduction in long-term debt and
increase in stockholders’ equity of $91,715,000 as of the date of issuance of
the debt (May 2007). The non-cash amortization of this discount
component increases interest expense and long-term debt over the life of the
1.125% Notes (60 months as of May 2, 2009). The pre-tax amortization
to interest expense and increase to long-term debt recognized retrospectively
was $7,770,000 for Fiscal 2008 (from the date of original issuance) and
$11,032,000 for Fiscal 2009. Adoption of the FSP does not affect our
cash flows.
Our
adoption of FSP APB 14-1 also resulted in the reclassification of $2,564,000 of
debt issuance costs from other assets to equity to allocate a proportionate
share of the issuance costs related to the 1.125% Notes to the equity component
recognized.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
The
carrying amount of the equity component of the 1.125% Notes and the principal
value, unamortized discount, and net carrying amount of the liability component
of the 1.125% Notes were as follows:
|
|
May
2,
|
|
|
January
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Equity
component of 1.125% Senior Convertible Notes
|
|
$ |
91,715 |
|
|
$ |
91,715 |
|
|
|
|
|
|
|
|
|
|
Principal
amount of 1.125% Senior Convertible Notes
|
|
$ |
261,500 |
|
|
$ |
275,000 |
|
Unamortized
discount
|
|
|
(66,591 |
) |
|
|
(72,913 |
) |
Liability
component of 1.125% Senior Convertible Notes
|
|
$ |
194,909 |
|
|
$ |
202,087 |
|
Our
retrospective adoption of FSP APB 14-1 resulted in the following adjustments to
our condensed consolidated balance sheet as of January 31, 2009:
|
|
As
Previously
|
|
|
Other
|
|
|
FSP
APB 14-1
|
|
|
As
|
|
(In
thousands)
|
|
Reported
|
|
|
Adjustments(1)
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
$ |
30,167 |
|
|
|
|
|
$ |
(1,924 |
)(2) |
|
$ |
28,243 |
|
Deferred
taxes
|
|
|
4,066 |
|
|
|
|
|
|
(627 |
)(3) |
|
|
3,439 |
|
Total
assets
|
|
|
1,279,692 |
|
|
|
|
|
|
(2,551 |
) |
|
|
1,277,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
46,824 |
|
|
|
|
|
|
(627 |
)(3) |
|
|
46,197 |
|
Long-term
debt
|
|
|
305,635 |
|
|
|
|
|
|
(72,913 |
)(4) |
|
|
232,722 |
|
Additional
paid-in capital
|
|
|
411,623 |
|
|
$ |
30,208 |
|
|
|
56,720 |
(5) |
|
|
498,551 |
|
Retained
earnings
|
|
|
386,620 |
|
|
|
(30,208 |
) |
|
|
14,269 |
(6) |
|
|
370,681 |
|
Total
stockholders’ equity
|
|
|
465,866 |
|
|
|
|
|
|
|
70,989 |
|
|
|
536,855 |
|
Total
liabilities and stockholders’ equity
|
|
|
1,279,692 |
|
|
|
|
|
|
|
(2,551 |
) |
|
|
1,277,141 |
|
____________________
|
|
(1)
Correction of accounting for deferred taxes related to purchased call
option (see “Note 1.
Condensed Consolidated Financial Statements; Adjustment of Prior-Year
Amounts for Change in Accounting Principle” above).
|
|
(2)
Cumulative adjustment to debt issuance costs related to 1.125%
Notes.
|
|
(3)
Reallocation of deferred taxes.
|
|
(4)
Unamortized discount as of January 31, 2009.
|
|
(5)
Equity component of 1.125% Notes and debt issuance costs.
|
|
(6)
Cumulative impact of amortization of debt discount and amortization of
equity component of debt issuance costs, net of tax benefit.
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
The
contractual interest expense, amortization of debt discount, and effective
interest rate for the 1.125% Notes were as follows:
|
|
Thirteen Weeks Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Contractual
interest expense
|
|
$ |
774 |
|
|
$ |
774 |
|
Amortization
of debt discount
|
|
|
2,884 |
|
|
|
2,684 |
|
Total
interest expense
|
|
$ |
3,658 |
|
|
$ |
3,458 |
|
|
|
|
|
|
|
|
|
|
Effective
interest rate
|
|
|
7.4% |
|
|
|
7.4% |
|
Our
adoption of FSP APB 14-1 resulted in the following adjustments to our condensed
consolidated statements of operations for the thirteen weeks ended May 2, 2009
and May 3, 2008:
|
|
Before
|
|
|
Adoption
of
|
|
|
After
|
|
(In
thousands, except per share amounts)
|
|
Adoption
|
|
|
FSP APB 14-1
|
|
|
Adoption
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 2, 2009
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
2,228 |
|
|
$ |
2,792 |
(1) |
|
$ |
5,020 |
|
Income
tax provision
|
|
|
4,720 |
|
|
|
0 |
|
|
|
4,720 |
|
Loss
from continuing operations
|
|
|
(3,769 |
) |
|
|
(2,792 |
) |
|
|
(6,561 |
) |
Net
loss
|
|
|
(3,769 |
) |
|
|
(2,792 |
) |
|
|
(6,561 |
) |
Basic
net loss per share(3)
|
|
|
(0.03 |
) |
|
|
(0.02 |
) |
|
|
(0.06 |
) |
Diluted
net loss per share(3)
|
|
|
(0.03 |
) |
|
|
(0.02 |
) |
|
|
(0.06 |
) |
|
|
As
Previously
|
|
|
Adoption
of
|
|
|
As
|
|
|
|
Reported
|
|
|
FSP APB 14-1
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 3, 2008
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
2,369 |
|
|
$ |
2,592 |
(1) |
|
$ |
4,961 |
|
Income
tax provision
|
|
|
1,246 |
|
|
|
(986 |
)(2) |
|
|
260 |
|
Income/(loss)
from continuing operations
|
|
|
657 |
|
|
|
(1,606 |
) |
|
|
(949 |
) |
Net
loss
|
|
|
(45,237 |
) |
|
|
(1,606 |
) |
|
|
(46,843 |
) |
Basic
net income/(loss) per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
Net loss
|
|
|
(0.39 |
) |
|
|
(0.01 |
) |
|
|
(0.41 |
) |
Diluted
net income/(loss) per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
(0.01 |
) |
Net loss
|
|
|
(0.39 |
) |
|
|
(0.01 |
) |
|
|
(0.41 |
) |
____________________
|
|
(1)
Amortization of the debt discount related to the 1.125% Notes less
amortization of debt issue costs related to the equity
component.
|
|
(2)
Tax effect of adoption of FSP APB 14-1.
|
|
(3)
Results do not add across due to rounding.
|
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4. Long-term Debt (Continued)
During
the Fiscal 2010 First Quarter we repurchased 1.125% Notes with an aggregate
principal amount of $13,500,000 and an aggregate unamortized discount of
$3,438,000 for an aggregate purchase price of $5,631,000, and recognized a
gain on the repurchase of $4,251,000 net of unamortized issue costs of
$180,000. See “Note
14. Subsequent Event” below for information regarding additional
repurchases of our 1.125% Notes subsequent to the end of the Fiscal 2010 First
Quarter.
The 6.07%
mortgage note is secured by a mortgage on real property at our distribution
center in Greencastle, Indiana and an Assignment of Lease and Rents and Security
Agreement related to the Greencastle facility. The 6.53% mortgage
note is secured by a mortgage on land, a building, and certain fixtures we own
at our distribution center in White Marsh, Maryland. The 7.77%
mortgage note is secured by a mortgage on land, buildings, and fixtures we own
at our offices in Bensalem, Pennsylvania and by leases we own or rents we
receive, if any, from tenants of the Bensalem facility.
Note
5. Stockholders’ Equity
|
|
Thirteen
|
|
|
|
Weeks
Ended
|
|
|
|
May
2,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
|
|
|
Total
stockholders’ equity, beginning of period (as adjusted)
|
|
$ |
536,855 |
(1) |
Net
loss
|
|
|
(6,561 |
) |
Issuance
of common stock (408,020 shares), net of shares withheld for payroll
taxes
|
|
|
39 |
|
Stock-based
compensation
|
|
|
1,710 |
|
Unrealized
losses on available-for-sale securities
|
|
|
(5 |
) |
Total
stockholders’ equity, end of period
|
|
$ |
532,038 |
|
____________________
|
|
(1)
We adopted the provisions of FSP APB 14-1 retrospectively as of the
beginning of Fiscal 2010 and recognized a net increase in stockholders’
equity of $70,989,000 as of January 31, 2009 (see “Note 4. Long-term Debt”
above).
|
|
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 2, 2009 we recognized revenues of
$5,019,000 and during the thirteen weeks ended May 3, 2008 we recognized
revenues of $5,098,000 in connection with our loyalty card
programs. We accrued $2,898,000 as of May 2, 2009 and $3,597,000 as
of January 31, 2009 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 Loss Per Share
|
|
Thirteen Weeks
Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
115,180 |
|
|
|
114,588 |
|
Dilutive effect of stock options, stock
appreciation rights, and awards(1)
|
|
|
0 |
|
|
|
0 |
|
Diluted
weighted average common shares and equivalents outstanding
|
|
|
115,180 |
|
|
|
114,588 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(6,561 |
) |
|
$ |
(949 |
) |
Loss
from discontinued operations, net of income tax benefit
|
|
|
0 |
|
|
|
(45,894 |
) |
Net
loss used to determine diluted net loss per share
|
|
$ |
(6,561 |
) |
|
$ |
(46,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
with weighted average exercise price greater than market
price,
|
|
|
|
|
|
|
|
|
excluded from
computation of net loss per
share:
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
– |
(1) |
|
|
– |
(1) |
Weighted
average exercise price per share
|
|
|
– |
(1) |
|
|
– |
(1) |
____________________
|
|
(1)
Stock options, stock appreciation rights, and awards are excluded from the
computation of diluted net loss per share as their effect would have been
anti-dilutive.
|
|
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 January
31, 2009 Annual Report on Form 10-K for further information regarding our 1.125%
Notes, call options and warrants.
Note
8. Income Taxes
We
calculate our interim tax provision in accordance with the provisions of APB
Opinion No. 28, “Interim
Financial Reporting,” and FASB Interpretation No. 18, “Accounting for Income Taxes in
Interim Periods.” For each interim period we estimate our
annual effective income tax rate and apply the estimated rate to our
year-to-date income or loss before income taxes. We also compute the
tax provision or benefit related to items separately reported, such as
discontinued operations, and recognize the items net of their related tax effect
in the interim periods in which they occur. We also recognize the
effect of changes in enacted tax laws or rates in the interim periods in which
the changes occur.
In
computing the annual estimated effective tax rate we make certain estimates and
management judgments, such as estimated annual taxable income or loss, the
nature and timing of permanent and temporary differences between taxable income
for financial reporting and tax reporting, and the recoverability of deferred
tax assets. Our estimates and assumptions may change as new events
occur, additional information is obtained, or as the tax environment
changes.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
8. Income Taxes (Continued)
In
accordance with SFAS No. 109, “Accounting for Income Taxes,”
we recognize deferred tax assets for temporary differences that will result in
deductible amounts in future years and for net operating loss and credit
carryforwards. SFAS No. 109 requires recognition of a valuation
allowance to reduce deferred tax assets if, based on existing facts and
circumstances, it is more-likely-than-not that some portion or all of the
deferred tax assets will not be realized. During the Fiscal 2009
Third Quarter we evaluated our assumptions regarding the recoverability of our
deferred tax assets. Based on all available evidence we determined
that the recoverability of our deferred tax assets is more-likely-than-not
limited to our available tax loss carrybacks. Accordingly, we
established a valuation allowance against our net deferred tax
assets. We continue to provide a valuation allowance against our net
deferred tax assets. During the thirteen weeks ended May 2, 2009 the
valuation allowance increased by $3,647,000 to reflect the generation of
additional net operating losses and other tax benefits. In future
periods we will continue to record a valuation allowance until such time as the
certainty of future tax benefits can be reasonably assured. Pursuant
to SFAS No. 109, when our results of operations demonstrate a pattern of future
profitability the valuation allowance may be adjusted, which would result in the
reinstatement of all or a part of the net deferred tax assets.
Income
tax receivables, including net operating loss carrybacks for Fiscal 2009,
amended return receivables, and prepaid income taxes, of $45,981,000 as of May
2, 2009 and $47,303,000 as of January 31, 2009 are included in “prepayments and
other” on our condensed consolidated balance sheets.
As of May
2, 2009 our gross unrecognized tax benefits were $30,954,000. 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 $19,673,000. The accrued interest and penalties as of May 2, 2009
were $13,647,000. During the thirteen weeks ended May 2, 2009 the
gross unrecognized tax benefits increased by $1,775,000 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
$826,000. Accrued interest and penalties increased by $916,000 during
the thirteen weeks ended May 2, 2009.
As of May
2, 2009 it is reasonably possible that the total amount of unrecognized tax
benefits will decrease within the next twelve months by as much as $3,704,000 as
a result of resolutions of audits related to U.S. Federal and state tax
positions.
Our U.S.
Federal income tax returns for Fiscal 2006 and beyond remain subject to
examination by the U.S. Internal Revenue Service (“IRS”) and the IRS is
currently examining our amended return for Fiscal 2005. 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 2005 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, and PETITE SOPHISTICATE 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 associated with these programs 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”).
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
9. Asset Securitization (Continued)
Prior to
our November 14, 2008 sale of our misses apparel catalog credit card receivables
in connection with the sale of the related Crosstown Traders catalog titles (see
“Note 1. Condensed Consolidated
Financial Statements; Discontinued
Operations” above), our Crosstown Traders apparel-related catalog credit
card receivables were also originated by the Bank. On December 31,
2008 we finalized the sale price of the receivables. In connection
with the sale we paid off and terminated the related Series 2005-RPA conduit
securitization facility that was dedicated to these receivables.
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 January 31, 2009
Annual Report on Form 10-K.
We
securitized $175,720,000 of private label credit card receivables during the
thirteen weeks ended May 2, 2009 and had $499,220,000 of securitized credit card
receivables outstanding as of May 2, 2009. We held certificates and
retained interests in our securitizations of $86,998,000 as of May 2, 2009,
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.
We record
gains or losses on the securitization of our proprietary credit card receivables
based on the estimated fair value of the assets retained and liabilities
incurred in the sale. Gains represent the present value of the
estimated cash flows that we have retained over the estimated outstanding period
of the receivables. This excess cash flow essentially represents an
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.
Our
management uses various valuation assumptions in determining the fair value of
our I/O strip. We estimate the values for these assumptions using
historical data, the impact of the current economic environment on the
performance of the receivables sold, and the impact of the potential volatility
of the current market for similar instruments in assessing the fair value of the
retained interests.
In
addition, we recognize a servicing liability because the servicing fees we
expect to receive from the securitizations do not provide adequate compensation
for servicing the receivables. The servicing liability represents the
present value of the excess of our cost of servicing over the servicing fees
received and is recorded at its estimated fair value. Because quoted
market prices are generally not available for the servicing of proprietary
credit card portfolios of comparable credit quality, we determine the fair value
of the cost of servicing 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 for the I/O
strip.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
9. Asset Securitization (Continued)
The key
assumptions used to value our retained interest were as follows:
|
May
2,
|
|
January
31,
|
|
2009
|
|
2009
|
|
|
|
|
Payment
rate
|
11.8
– 14.3%
|
|
12.1
– 14.6%
|
Residual
cash flows discount
rate
|
15.5
– 16.5%
|
|
15.5
– 16.5%
|
Net
credit loss
percentage
|
7.25
– 12.06%
|
|
6.75
– 11.75%
|
Average
life of receivables
sold
|
0.6
– 0.7 years
|
|
0.6
– 0.7
years
|
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, which 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, consisted of the
following:
|
|
May
2,
|
|
|
January
31,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
|
|
|
|
I/O
Strip
|
|
$ |
17,971 |
|
|
$ |
19,298 |
|
Retained
interest (primarily collateralized
cash)
|
|
|
19,107 |
|
|
|
23,755 |
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
Ownership
interest
|
|
|
49,920 |
|
|
|
51,400 |
|
|
|
|
|
|
|
|
|
|
Investment
in asset-backed
securities
|
|
$ |
86,998 |
|
|
$ |
94,453 |
|
See “Note 12. Fair Value
Measurements” below for further information related to our certificates
and retained interests in our securitized receivables, including activity
related to our I/O strip and servicing liability.
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 was 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 2, 2009, including all financial performance standards related to the
performance of the underlying receivables.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
9. Asset Securitization (Continued)
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 2, 2009 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.
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 January 31, 2009 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 services, information systems support, and insurance 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. Operating costs for our Direct-to-Consumer segment
consist primarily of catalog development, production, and circulation;
e-commerce advertising; warehousing; and order processing.
“Corporate
and Other” net sales consist primarily of revenue related to loyalty card
fees. Corporate and Other operating costs include unallocated general
and administrative expenses; shared services; insurance; information
systems support; corporate depreciation and amortization; corporate occupancy;
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 income taxes.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
10. Segment Reporting (Continued)
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.
Selected
financial information for our operations by reportable segments and a
reconciliation of the information by segment to our consolidated totals is as
follows:
|
|
Retail
|
|
|
Direct-to-
|
|
|
Corporate
|
|
|
|
|
(In
thousands)
|
|
Stores
|
|
|
Consumer
|
|
|
and
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 2, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
515,630 |
|
|
$ |
19,455 |
|
|
$ |
3,051 |
|
|
$ |
538,136 |
|
Depreciation
and amortization
|
|
|
12,690 |
|
|
|
41 |
|
|
|
7,793 |
|
|
|
20,524 |
|
Income
before interest and taxes
|
|
|
38,551 |
|
|
|
(3,437 |
) |
|
|
(31,935 |
)(1) |
|
|
3,179 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(5,020 |
) |
|
|
(5,020 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(4,720 |
) |
|
|
(4,720 |
) |
Net
loss
|
|
|
38,551 |
|
|
|
(3,437 |
) |
|
|
(41,675 |
) |
|
|
(6,561 |
) |
Capital
expenditures
|
|
|
3,607 |
|
|
|
0 |
|
|
|
1,095 |
|
|
|
4,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 3, 2008 (As adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
611,291 |
|
|
$ |
26,946 |
|
|
$ |
3,109 |
|
|
$ |
641,346 |
|
Depreciation
and amortization
|
|
|
13,846 |
|
|
|
38 |
|
|
|
12,471 |
|
|
|
26,355 |
(3) |
Income
before interest and taxes
|
|
|
43,404 |
|
|
|
(4,199 |
) |
|
|
(34,933 |
)(2) |
|
|
4,272 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(4,961 |
) |
|
|
(4,961 |
) |
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
(260 |
) |
|
|
(260 |
) |
Loss
from continuing operations
|
|
|
43,404 |
|
|
|
(4,199 |
) |
|
|
(40,154 |
) |
|
|
(949 |
) |
Capital
expenditures
|
|
|
18,721 |
|
|
|
0 |
|
|
|
2,972 |
|
|
|
21,693 |
(3) |
____________________
|
|
(1)
Includes restructuring and other charges of $8,705 (see “Note 11. Restructuring and
Other Charges” below) and a gain on repurchase of 1.125% Senior
Convertible Notes of $4,251 (see “Note 4. Long-term Debt”
above).
|
|
(2)
Includes restructuring and other charges of $3,611 (see “Note 11. Restructuring
and Other Charges” below).
|
|
(3)
Excludes $741 of depreciation and amortization and $321 of capital
expenditures related to our discontinued operations.
|
|
Note
11. Restructuring and Other Charges
During
the Fiscal 2010 First Quarter we continued to close the remaining
under-performing stores identified in Fiscal 2008 and continued to execute our
cost-saving and streamlining initiatives announced during Fiscal
2009. These initiatives include the closing of under-performing
stores, discontinuation of the LANE BRYANT WOMAN catalog, and the transformation
of our operations into a vertical specialty store model. See “Item 8. Financial Statements and
Supplementary Data; Note 14. Restructuring and Other Charges” in our
January 31, 2009 Annual Report on Form 10-K for further discussion on these
initiatives.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
11. Restructuring and Other Charges (Continued)
The
following two tables summarize our restructuring and other costs:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Costs
|
|
|
Costs
Incurred
|
|
|
Estimated
|
|
|
Estimated/
|
|
|
|
Incurred
|
|
|
for
Thirteen
|
|
|
Remaining
|
|
|
Actual
|
|
|
|
as
of
|
|
|
Weeks
Ended
|
|
|
Costs
|
|
|
Costs
as of
|
|
|
|
January
31,
|
|
|
May
2,
|
|
|
to
be
|
|
|
May
2,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
Incurred
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008 Announcements
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocation
of CATHERINES operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention costs
|
|
$ |
2,079 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
2,079 |
|
Non-cash
write down and accelerated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,808 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,808 |
|
Relocation
and other charges
|
|
|
1,166 |
|
|
|
37 |
|
|
|
0 |
|
|
|
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing
of under-performing and PETITE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOPHISTICATE
full line stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
accelerated depreciation
|
|
|
691 |
|
|
|
0 |
|
|
|
0 |
|
|
|
691 |
|
Store
lease termination charges
|
|
|
6,909 |
|
|
|
486 |
|
|
|
672 |
|
|
|
8,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention costs related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
elimination of
positions
|
|
|
1,244 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009 Announcements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
for departure of former CEO
|
|
|
9,446 |
|
|
|
42 |
|
|
|
100 |
|
|
|
9,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shutdown
of LANE BRYANT WOMAN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention
costs
|
|
|
1,557 |
|
|
|
251 |
|
|
|
369 |
|
|
|
2,177 |
|
Non-cash
accelerated depreciation
|
|
|
934 |
|
|
|
936 |
|
|
|
0 |
|
|
|
1,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention costs related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
elimination of
positions
|
|
|
3,873 |
|
|
|
148 |
|
|
|
0 |
|
|
|
4,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core
misses apparel assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
accelerated depreciation
|
|
|
2,968 |
|
|
|
2,892 |
|
|
|
1,882 |
|
|
|
7,742 |
|
Other
costs
|
|
|
420 |
|
|
|
0 |
|
|
|
7,000 |
|
|
|
7,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformational
initiatives
|
|
|
2,563 |
|
|
|
3,913 |
|
|
|
2,925 |
|
|
|
9,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
figure
magazine shutdown costs
|
|
|
819 |
|
|
|
0 |
|
|
|
0 |
|
|
|
819 |
|
Total
|
|
$ |
38,477 |
|
|
$ |
8,705 |
|
|
$ |
12,948 |
|
|
$ |
60,130 |
|
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
11. Restructuring and Other Charges (Continued)
|
|
|
|
|
Costs
Incurred
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
for
Thirteen
|
|
|
|
|
|
Accrued
|
|
|
|
as
of
|
|
|
Weeks
Ended
|
|
|
|
|
|
as
of
|
|
|
|
January
31
|
|
|
May
2,
|
|
|
Payments/
|
|
|
May
2,
|
|
(In
thousands)
|
|
2009(1)
|
|
|
2009
|
|
|
Settlements
|
|
|
2009(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008 Announcements
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocation
of CATHERINES operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocation
and other charges
|
|
$ |
0 |
|
|
$ |
37 |
|
|
$ |
37 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing
of under-performing and PETITE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOPHISTICATE
full line stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
lease termination charges
|
|
|
1,687 |
|
|
|
486 |
|
|
|
187 |
|
|
|
1,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009 Announcements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
for departure of former CEO
|
|
|
5,453 |
|
|
|
42 |
|
|
|
0 |
|
|
|
5,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shutdown
of LANE BRYANT WOMAN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention costs
|
|
|
1,490 |
|
|
|
251 |
|
|
|
175 |
|
|
|
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention costs related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
elimination of
positions
|
|
|
2,948 |
|
|
|
148 |
|
|
|
1,573 |
|
|
|
1,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core
misses apparel assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
costs
|
|
|
420 |
|
|
|
0 |
|
|
|
0 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformational
initiatives
|
|
|
1,379 |
|
|
|
3,913 |
|
|
|
1,917 |
|
|
|
3,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
figure
magazine shutdown costs
|
|
|
819 |
|
|
|
0 |
|
|
|
613 |
|
|
|
206 |
|
Total
|
|
$ |
14,196 |
|
|
$ |
4,877 |
|
|
$ |
4,502 |
|
|
$ |
14,571 |
|
____________________
|
|
(1)
Included in “Accrued expenses” in the accompanying consolidated balance
sheets.
|
|
Note
12. Fair Value Measurements
SFAS No.
157, “Fair Value
Measurements,” defines fair value as 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. We use various methods
to determine fair value, including discounted cash flow projections based on
available market interest rates and management estimates of future cash
payments.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12. Fair Value Measurements (Continued)
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.
|
Our
financial assets and liabilities subject to SFAS No. 157 as of May 2, 2009 were
as follows:
|
|
Balance
|
|
|
|
|
|
|
|
|
|
May
2,
|
|
|
Fair Value Method Used
|
|
(In
thousands)
|
|
2009
|
|
|
Level 2
|
|
|
Level 3(1)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities(2)
|
|
$ |
400 |
|
|
$ |
400 |
|
|
|
|
Certificates
and retained interests in securitized receivables
|
|
|
86,998 |
|
|
|
|
|
|
$ |
86,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
liability
|
|
|
2,944 |
|
|
|
|
|
|
|
2,944 |
|
____________________
|
|
(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 liability 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.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
12. Fair Value Measurements (Continued)
The table
below presents a reconciliation of the beginning and ending balances of
our certificates and retained interests and our servicing liability
during the thirteen weeks ended May 2, 2009:
|
|
Retained
|
|
|
Servicing
|
|
(In
thousands)
|
|
Interests
|
|
|
Liability
|
|
|
|
|
|
|
|
|
Balance,
January 31, 2009
|
|
$ |
94,453 |
|
|
$ |
3,046 |
|
Additions
to I/O strip and servicing liability
|
|
|
5,979 |
|
|
|
1,051 |
|
Net
reductions to other retained interests
|
|
|
(4,647 |
) |
|
|
|
|
Reductions
and maturities of QSPE certificates
|
|
|
(1,481 |
) |
|
|
|
|
Amortization
of the I/O strip and servicing liability
|
|
|
(7,383 |
) |
|
|
(1,174 |
) |
Valuation
adjustments to the I/O strip and servicing liability
|
|
|
77 |
|
|
|
21 |
|
Balance,
May 2, 2009
|
|
$ |
86,998 |
|
|
$ |
2,944 |
|
Note
13. Impact of Recent Accounting Pronouncements
In
December 2007 the FASB issued SFAS No. 141(R), “Business Combinations,” and
SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51.” SFAS No. 141(R) establishes principles and requirements
for the recognition and measurement of identifiable assets acquired and
liabilities assumed by an acquirer in a business combination. SFAS
No. 160 amends ARB No. 51 to establish accounting and reporting standards for a
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The provisions of SFAS No. 141(R) and SFAS No. 160 are
effective prospectively as of the beginning of Fiscal 2010. The
adoption of SFAS No. 141(R) and SFAS No. 160 did not have an impact on our
financial position or results of operations.
In April
2009 the FASB issued FSP FAS No. 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that Arise from
Contingencies.” The FSP amends SFAS No. 141(R) to require that
assets acquired and liabilities assumed in a business combination that arise
from contingencies (“pre-acquisition contingencies”) be recognized at fair value
in accordance with SFAS No. 157 if the fair value can be determined during the
measurement period. If the fair value of a pre-acquisition
contingency cannot be determined during the measurement period, the FSP requires
that the contingency be recognized at the acquisition date in accordance with
SFAS No. 5, “Accounting for
Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount
of a Loss” if it meets the criteria for recognition in that
guidance. The provisions of FSP FAS No. 141(R)-1 are effective upon
adoption of SFAS No. 141(R). The adoption of FSP FAS No. 141(R)-1 did
not have an impact on our financial position or results of
operations.
In
February 2008 the FASB issued FSP FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.” FSP
FAS 140-3 provides implementation guidance on accounting for a transfer of a
financial asset and repurchase financing. 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 140-3 are met, the initial transfer and repurchase financing may be
evaluated separately and not as a linked transaction under SFAS No.
140. We adopted the provisions of FSP FAS No. 140-3 prospectively as
of the beginning of Fiscal 2010. The adoption of FSP FAS No. 140-3
had no effect on our financial position or results of operations.
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 also issued FSP FAS No. 157-2, “Effective Date of FASB Statement
No. 157,” which delays the effective date of SFAS 157 until fiscal years
beginning after November 15, 2008 for non-financial assets and non-financial
liabilities that are not currently being recognized or disclosed at fair value
on a recurring basis. We adopted the provisions of SFAS No. 157,
“Fair Value Measurements,”
prospectively as of the beginning of Fiscal 2010 for assets included
within the scope of FSP FAS No. 157-2 (such as goodwill, intangible assets, and
fixed assets related to evaluation of potential impairment). Adoption of
FSP FAS No. 157-2 had no 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 adopted the provisions of SFAS No. 161
prospectively as of the beginning of Fiscal 2010. The adoption of
SFAS No. 161 had no effect on our financial position or results of
operations.
In May
2008 the FASB issued 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 changes the accounting
treatment for convertible securities that the issuer may settle fully or
partially in cash. FSP APB 14-1 is to be applied retrospectively to
all past periods presented, and applies to our 1.125% Senior Convertible Notes
due May 2014. We adopted the provisions of FSP APB 14-1 as of the
beginning of Fiscal 2010 (see “Note 1. Condensed Consolidated
Financial Statements” and “Note 4. Long-term Debt”
above).
In June
2008 the FASB ratified the consensus of EITF Issue 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own
Stock.” EITF Issue 07-5 addresses the scope exception in
paragraph 11(a) of SFAS No. 133 that specifies that a contract that is both
indexed to its own stock and classified in stockholders’ equity is not a
derivative under SFAS No. 133. The objective of EITF Issue 07-5 is to
provide guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entity’s own stock.
We
adopted the provisions of EITF Issue 07-5 as of the beginning of Fiscal
2010. The adoption of EITF Issue 07-5 had no effect on our financial
position or results of operations.
In April
2009 the FASB contemporaneously issued three FASB Staff Positions as
follows:
FSP FAS
No. 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly,” amends SFAS No. 157 to provide additional guidance on
estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for
the asset or liability. FSP FAS No. 157-4 also provides additional
guidance on circumstances that may indicate that a transaction is not orderly
and requires additional disclosures about fair value measurements in annual and
interim reporting periods.
FSP FAS
No. 107-1/APB 28-1, “Interim
Disclosures About Fair Value of Financial Instruments,” extends the
disclosure requirements of SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” to interim financial statements of publicly
traded companies.
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
13. Impact of Recent Accounting Pronouncements (Continued)
FSP FAS
No. 115-2/FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” provides new guidance on the
recognition and presentation of other-than-temporary impairments of debt
securities classified as available-for-sale or held-to-maturity that
are subject to SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” and FSP FAS No. 115-1/FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.” In
addition, FSP FAS No. 115-2/FAS 124-2 requires additional disclosures for both
debt and equity securities within the scope of SFAS No. 115 and FSP FAS No.
115-1/124-1.
FSP FAS
No. 157-4, FSP FAS No. 107-1/APB 28-1, and FSP FAS No. 115-2/FAS 124-2 are
effective prospectively for annual and/or interim periods beginning with our
Fiscal 2010 Second Quarter. We do not expect that the adoption of
these pronouncements will have a material impact on our financial position or
results of operations.
Note
14. Subsequent Event
Subsequent
to the end of the Fiscal 2010 First Quarter we repurchased 1.125% Senior
Convertible Notes with an aggregate principal amount of $16,500,000 for an
aggregate purchase price of $8,227,000 (see “Note 4. Long-term Debt”
above). We expect to recognize a gain on the repurchase of
approximately $4,000,000 net of unamortized issue costs during the Fiscal
2010 Second Quarter. Including the 1.125% Notes repurchased during
the Fiscal 2010 First Quarter we have repurchased notes with an aggregate
principal amount of $30,000,000 for an aggregate purchase price of $13,858,000,
and will recognize an aggregate gain on the repurchases of approximately
$8,000,000 net of unamortized issue costs.
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes included in Item 1 of this report. It should also be
read in conjunction with the management’s discussion and analysis of financial
condition and results of operations, financial statements, and accompanying
notes appearing in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2009. As used in this management’s discussion and
analysis, “Fiscal 2010” refers to our fiscal year ending January 30, 2010
and “Fiscal 2009” refers to our fiscal year ended January 31, 2009.
“Fiscal 2010 First Quarter” refers to our fiscal quarter ended May 2,
2009 and “Fiscal 2009 First Quarter” refers to our fiscal quarter ended May
3, 2008. “Fiscal 2010 Second Quarter” refers to our fiscal quarter
ending July 1, 2009 and “Fiscal 2010 Third Quarter refers to our fiscal quarter
ending October 31, 2009. “Fiscal 2009 Third Quarter” refers to our
fiscal quarter ended November 1, 2008. The terms “Charming Shoppes,”
“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.
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, divestitures,
financing needs or plans, store closings, merchandise strategy, 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
January 31, 2009 and in “PART
II. OTHER INFORMATION; Item 1A. Risk Factors” below:
●
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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.
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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.
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We
cannot assure the successful implementation of our business plan for
increased profitability and growth in our Retail Stores or
Direct-to-Consumer segments and we may be unable to successfully implement
our plan to improve merchandise assortments. Recent changes in
management may fail to achieve improvement in our operating
results.
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A
continuing slowdown in the United States economy, an uncertain economic
outlook, and fluctuating energy costs could lead to reduced consumer
demand for our products in the future.
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Our
inability to successfully manage labor costs, occupancy costs, or other
operating costs, or our inability to take advantage of opportunities to
reduce operating costs, could adversely affect our operating margins and
our results of operations. We cannot assure the successful
implementation of our planned cost reduction and capital budget reduction
plans or the realization of our anticipated annualized expense savings
from our restructuring programs. We may be unable to obtain
adequate insurance for our operations at a reasonable
cost.
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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,
unionization, or other employee benefits could cause us to incur
additional wage and benefit costs, which could adversely affect our
results of operations. Changes in legislation limiting interest
rates and other credit card charges that can be billed on credit card
accounts could negatively impact the operating margins of our credit
operation.
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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. The current global
financial crisis could adversely affect our ability or the ability of our
vendors to secure adequate credit financing. If we or our
vendors are unable to obtain sufficient financing at an affordable cost,
our ability to merchandise our retail stores or e-commerce businesses
could be adversely affected.
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We
plan to refinance our maturing credit card term securitization series with
our credit conduit facilities, which are renewed annually, or through the
issuance of a new term series. To the extent that our conduit
facilities are not renewed they would begin to amortize and we would
finance this amortization using our committed revolving credit facilities
to the extent available. There is no assurance that we can
refinance or renew our conduit facilities on terms comparable to our
existing facilities or that there would be sufficient availability under
our revolving credit facilities for such financing. Without
adequate liquidity, our ability to offer our credit program to our
customers and consequently our financial condition and results of
operations, would be adversely affected.
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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.
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We
cannot assure the successful implementation of our business plan for the
development of our core brands and transformation to a vertical store
model, that we will realize increased profitability through operating
under a vertical store model, or that we will achieve our objectives as
quickly or as effectively as we hope. We cannot assure the
successful sale of our FIGI’S catalog.
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We
depend on the efforts and abilities of our executive officers and their
management teams and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
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Our
business plan is largely dependent upon continued growth in the plus-size
women’s apparel market, which may not occur.
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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.
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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.
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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 cannot assure the successful
implementation of our new and upgraded e-commerce
platform.
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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.
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Our
manufacturers may be unable to manufacture and deliver merchandise to us
in a timely manner or to meet our quality standards. In
addition, if any one of our manufacturers or vendors fails to operate in
compliance with applicable laws and regulations, is perceived by the
public as failing to meet certain labor standards in the United States, or
employs unfair labor practices, our business could be adversely
affected.
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Our
long-term growth plan depends on our ability to open and profitably
operate new retail stores, to convert, where applicable, the formats of
existing stores on a profitable basis, and continue to expand our outlet
distribution channel. Our retail stores depend 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. In addition,
we will need to identify, hire, and retain a sufficient number of
qualified personnel to work in our stores. We cannot assure
that desirable store locations will continue to be available, or that we
will be able to hire and retain a sufficient number of suitable sales
associates at our stores.
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We
may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive
position.
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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.
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We
continually evaluate our portfolio of businesses and may decide to acquire
or divest businesses or enter into joint venture or strategic
alliances. If we fail to integrate and manage acquired
businesses successfully or fail to manage the risks associated with
divestitures, joint ventures, or other alliances, our business, financial
condition, and operating results could be materially and adversely
affected.
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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.
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The
holders of our 1.125% Senior Convertible Notes due May 1, 2014 (the 1.125%
Notes) could require us to repurchase the principal amount of the notes
for cash before maturity of the notes upon the occurrence of a
“fundamental change” as defined in the prospectus filed in connection with
the 1.125% Notes. Such a repurchase would require significant
amounts of cash, would be subject to important limitations on our ability
to repurchase, such as the risk of our inability to obtain funds for such
repurchase, and could adversely affect our financial
condition.
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Changes
to existing accounting rules or the adoption of new rules could have an
adverse impact on our reported results of operations.
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We
make certain significant assumptions, estimates, and projections related
to the useful lives and valuation 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.
|
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. Our significant
accounting policies are described in the notes accompanying the consolidated
financial statements that appear in our Annual Report on Form 10-K for the
fiscal year ended January 31, 2009.
Except as
otherwise disclosed in this section and in the financial statements and
accompanying notes included in Item 1 of this report, there were no material
changes in, or additions to, our critical accounting policies or in the
assumptions or estimates we used to prepare the financial information appearing
in this report.
Senior
Convertible Notes
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 changes the accounting treatment for convertible
securities that an issuer may settle fully or partially in
cash. Under FSP APB 14-1 cash-settled convertible securities are
separated into their debt and equity components. The value assigned
to the debt component is the estimated fair value, as of the issuance date, of a
similar debt instrument without the conversion feature. As a result,
the debt is recorded at a discount to adjust its below-market coupon interest
rate to the market coupon interest rate for a 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 is recorded as additional paid-in
capital. The debt is subsequently accreted to its par value over its
expected life with an offsetting increase in interest expense on the income
statement to reflect interest expense at the market rate for the debt component
at the date of issuance.
We
adopted the provisions of FSP APB 14-1 for our 1.125% Senior Convertible Notes
and applied the provisions retrospectively to all past periods
presented. Our adoption of FSP APB 14-1 resulted in an initial
reduction in long-term debt and increase in stockholders’ equity of $91.7
million as of the date of issuance of the debt (May 2007). The
non-cash amortization of the discount component increases interest expense and
long-term debt over the life of the 1.125% Notes (60 months as of May 2,
2009). The pre-tax amortization to interest expense and increase to
long-term debt recognized retrospectively was $7.8 million for Fiscal 2008 (from
the date of original issuance), $2.7 million for the Fiscal 2009 First Quarter,
and $11.0 million for Fiscal 2009. The pre-tax amortization for the
Fiscal 2010 First Quarter was $2.9 million and will be $10.9 million for Fiscal
2010 (less amortization related to any additional notes that we
repurchase). Our adoption of FSP APB 14-1 also resulted in the
reclassification of $2.6 million of debt issuance costs from other assets to
equity to allocate a proportionate share of the issuance costs related to the
1.125% Notes to the equity component recognized. Adoption of the FSP
does not affect our cash flows. Upon maturity of the 1.125% Notes we
will be obligated to repay to holders of the notes the $275.0 million principal
value of the notes less the principal value of any notes that we repurchase
prior to maturity.
On April
3, 2009 we announced the appointment of James P. Fogarty as President and Chief
Executive Officer and a member of our Board of Directors. Mr. Fogarty
most recently was a Managing Director with Alvarez & Marsal (“A&M”), a
premier independent global professional services firm providing leadership,
problem-solving, and value-creation services across the industry spectrum.
He was also a member of the firm’s Executive Committee for North America
Restructuring. In his almost 15 years with A&M he provided performance
improvement, crisis management, and restructuring advisory services to numerous
companies in various sectors.
During
his tenure at A&M Mr. Fogarty most recently served as President and Chief
Operating Officer of Lehman Brothers Holdings from September 2008 to the
present. From September 2005 through February 2008 he was President and
Chief Executive Officer of American Italian Pasta Company, the largest producer
of dry pasta in North America. He served as the Chief Financial
Officer at Levi Strauss & Co. from 2003 to 2005. From December
2001 through September 2003 he served as Senior Vice President and Chief
Financial Officer of The Warnaco Group.
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.
Results
of Operations
Net sales
for the Fiscal 2010 First Quarter were $538.1 million, a decrease of 16.1% from
the Fiscal 2009 First Quarter. Net sales for our Retail Stores
segment decreased $95.7 million or 16%, primarily as a result of a comparable
store sales decrease of 13% and the impact to sales from store closings since
the Fiscal 2009 First Quarter, which included 162 stores closed during the
preceding 12-month period. The comparable store sales decrease is due
primarily to weakened consumer demand as a result of the downturn in the economy
and partially due to our year-over-year reduction in inefficient promotional
spending, as well as our conservative inventory planning and a lack of balanced
assortments in inventory. Net sales for our Direct-to-Consumer
segment, which excludes discontinued businesses, decreased $7.5 million
primarily as a result of the planned shutdown of our LANE BRYANT WOMAN catalog
announced in Fiscal 2009, which we expect to complete by the end of the Fiscal
2010 Second Quarter.
Our gross
margin as a percentage of sales increased 1.9% during the Fiscal 2010 First
Quarter compared with the Fiscal 2009 First Quarter. This increase
reflects our efforts to tightly manage our inventories in response to the
challenging retail environment to limit the level of promotional
activity. Our inventories as of the end of the Fiscal 2010 First
Quarter have decreased approximately 21% as compared to the end of the Fiscal
2009 First Quarter on a comparable store basis.
Our
operating expenses as a percentage of sales increased 1.7% during the Fiscal
2010 First Quarter compared with the Fiscal 2009 First Quarter primarily due to
the lack of leverage on the decrease in net sales. Our expenses
de-leveraged as a percentage of net sales despite our expense management
initiatives.
Financial
Position
Our
balance sheet continued to remain strong, with ample liquidity through our
$124.3 million of cash and available-for-sale securities as of the end of the
Fiscal 2010 First Quarter as compared to $100.2 million as of the end
of Fiscal 2009. We continued to generate positive operating cash flow
during the Fiscal 2010 First Quarter and ended the quarter with no borrowings
against our committed $375.0 million revolving credit facility. As of
May 2, 2009 our available borrowing capacity under the facility was $207.3
million.
During
the Fiscal 2010 First Quarter we renewed our $50.0 million Series 1999-2 conduit
credit card securitization facility through March 30, 2010. Combined
with our other existing conduit and term credit card secutitization facilities,
our current receivables funding structure provides an availability of $640.6
million. In April 2009 our $180.0 million Series 2004-1 term facility
began amortizing at a rate of approximately $14.4 million per
month. We are meeting this amortization requirement through our
$155.0 million of available conduit facilities. We believe that the
availability of our combined securitization facilities will continue to exceed
our funding requirements during Fiscal 2010.
Management
Initiatives
The
following are our key initiatives:
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We
are working to improve our marketing. We believe we can better
succeed by focusing on the basics of efficiently driving traffic both to
our stores and online, and by focusing on increasing the conversion rate
for customers in our stores and on our websites.
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We
are focused on assortments planning and selling outfits. We
believe we can better succeed by improving our buying and in-store
merchandising of appropriate assortments of bottoms, tops, accessories,
intimates, and related products.
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We
are working to complete the process of transforming into a vertical
specialty store model, increasing the percentage of internally designed
and developed fashion product and transforming each of our core brands
into more independent, distinct brands.
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We
are focused on increasing our internet business across all of our
brands. We are partnering with a third party technology
provider to outsource the development and hosting of our new e-commerce
platform. We anticipate that all of our core brands will
convert from the existing platform infrastructure to the new platform by
the beginning of the Fiscal 2010 Third Quarter, with the objective of
providing an improved on-line customer experience and increased sales
conversion rates, resulting in an increase in our e-commerce
penetration.
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We
are divesting certain non-core assets, including the shutdown of our LANE
BRYANT WOMAN catalog and SHOETRADER.COM website, which we expect to
complete by the end of the Fiscal 2010 second quarter. In
addition, we continue to explore the sale of our FIGI’S Gifts in Good
Taste catalog business.
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We
have significantly reduced our capital expenditures and have eliminated
non-essential capital expenditures. Our capital expenditures
for the Fiscal 2010 First Quarter were $4.7 million as compared to $22.0
million for the Fiscal 2009 First Quarter. We expect our
capital expenditures for Fiscal 2010 to be approximately half of our
Fiscal 2009 expenditures.
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We will
continue to take a conservative operating approach given the current uncertain
economic climate and our expectations for continued weak traffic trends and we
will continue to maintain appropriate inventory levels and proactively control
our operating expenses.
The
following discussion of our results of operations, liquidity, and capital
resources is based on our continuing operations, and excludes the impact of our
discontinued operations (see “Item 1. Financial
Statements (Unaudited); “Note 1. Condensed Consolidated
Financial Statements; Discontinued
Operations”
above).
The
following table shows our results of operations expressed as a percentage of net
sales and on a comparative basis:
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Percentage
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Thirteen Weeks Ended(1)
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Change
|
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May
2,
|
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|
May
3,
|
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|
From
Prior
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|
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|
2009
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|
2008
|
|
|
Period
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|
|
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|
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|
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Net
sales
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100.0 |
% |
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100.0 |
% |
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(16.1 |
)% |
Cost
of goods sold, buying, catalog, and occupancy expenses
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69.2 |
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|
69.7 |
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|
|
(16.7 |
) |
Selling,
general, and administrative expenses
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|
|
29.4 |
|
|
|
29.1 |
|
|
|
(15.4 |
) |
Restructuring
and other charges
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|
|
1.6 |
|
|
|
0.6 |
|
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|
141.1 |
|
Income/(loss)
from operations
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|
|
(0.2 |
) |
|
|
0.6 |
|
|
|
(133.8 |
) |
Other
income
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|
|
0.0 |
|
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|
0.1 |
|
|
|
(61.6 |
) |
Gain
on repurchase of 1.125% Senior Convertible Notes
|
|
|
0.8 |
|
|
|
– |
|
|
|
– |
|
Interest
expense
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
1.2 |
|
Income
tax provision
|
|
|
0.9 |
|
|
|
0.0 |
|
|
|
** |
|
Loss
from continuing operations
|
|
|
(1.2 |
) |
|
|
(0.1 |
) |
|
|
591.4 |
|
Loss
from discontinued operations, net of tax
|
|
|
– |
|
|
|
(7.2 |
) |
|
|
– |
|
Net
loss
|
|
|
(1.2 |
) |
|
|
(7.3 |
) |
|
|
(86.0 |
) |
____________________
|
|
(1)
Results may not add due to rounding.
|
|
**
Not meaningful.
|
|
The
following table shows information related to the change in our consolidated
total net sales:
|
|
Thirteen Weeks Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Retail
Stores segment
|
|
|
|
|
|
|
Increase
(decrease) in comparable store sales(1)
:
|
|
|
|
|
|
|
Consolidated
retail stores
|
|
|
(13 |
)% |
|
|
(13 |
)% |
LANE
BRYANT(3)
|
|
|
(15 |
) |
|
|
(12 |
) |
FASHION
BUG
|
|
|
(13 |
) |
|
|
(12 |
) |
CATHERINES
|
|
|
(9 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
Sales
from new stores as a percentage of total
|
|
|
|
|
|
|
|
|
Consolidated prior-period
sales(2):
|
|
|
|
|
|
|
|
|
LANE
BRYANT(3)
|
|
|
2 |
|
|
|
4 |
|
FASHION
BUG
|
|
|
0 |
|
|
|
1 |
|
CATHERINES
|
|
|
0 |
|
|
|
1 |
|
Other
retail stores(4)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
Prior-period
sales from closed stores as a percentage
|
|
|
|
|
|
|
|
|
of total consolidated
prior-period sales:
|
|
|
|
|
|
|
|
|
LANE
BRYANT(3)
|
|
|
(2 |
) |
|
|
(3 |
) |
FASHION
BUG
|
|
|
(3 |
) |
|
|
(1 |
) |
CATHERINES
|
|
|
0 |
|
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
Decrease
in Retail Stores segment sales
|
|
|
(16 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
Direct-to-Consumer
segment
|
|
|
|
|
|
|
|
|
(Decrease)/Increase
in Direct-to-Consumer segment sales
|
|
|
(28 |
) |
|
|
162 |
(5) |
|
|
|
|
|
|
|
|
|
Decrease
in consolidated total net sales
|
|
|
(16 |
) |
|
|
(8 |
) |
____________________
|
|
(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 stores, which were closed in August 2008, and
PETITE SOPHISTICATE OUTLET stores.
|
|
(5)
Primarily due to LANE BRYANT WOMAN catalog which began operations in the
Fiscal 2008 Fourth Quarter.
|
|
The
following table shows details of our consolidated results of
operations:
|
|
|
|
|
Depreciation
|
|
|
Income
|
|
|
|
Net
|
|
|
and
|
|
|
Before
Interest
|
|
(In
millions)
|
|
Sales
|
|
|
Amortization
|
|
|
and
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 2, 2009
|
|
|
|
|
|
|
|
|
|
LANE
BRYANT(1)
|
|
$ |
253.8 |
|
|
$ |
8.0 |
|
|
$ |
30.8 |
|
FASHION
BUG
|
|
|
178.7 |
|
|
|
3.0 |
|
|
|
(0.2 |
) |
CATHERINES
|
|
|
78.7 |
|
|
|
1.7 |
|
|
|
7.7 |
|
Other
retail stores(2)
|
|
|
4.4 |
|
|
|
0.0 |
|
|
|
0.2 |
|
Total
Retail Stores segment
|
|
|
515.6 |
|
|
|
12.7 |
|
|
|
38.5 |
|
Total
Direct-to-Consumer segment
|
|
|
19.5 |
|
|
|
0.0 |
|
|
|
(3.4 |
) |
Corporate
and other
|
|
|
3.0 |
(3) |
|
|
7.8 |
|
|
|
(31.9 |
)(4) |
Total
consolidated
|
|
$ |
538.1 |
|
|
$ |
20.5 |
|
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
weeks ended May 3, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
LANE
BRYANT(1)
|
|
$ |
297.0 |
|
|
$ |
8.1 |
|
|
$ |
29.7 |
|
FASHION
BUG
|
|
|
221.8 |
|
|
|
5.2 |
|
|
|
7.1 |
|
CATHERINES
|
|
|
86.5 |
|
|
|
0.4 |
|
|
|
7.2 |
|
Other
retail stores(2)
|
|
|
6.0 |
|
|
|
0.1 |
|
|
|
(0.6 |
) |
Total
Retail Stores segment
|
|
|
611.3 |
|
|
|
13.8 |
|
|
|
43.4 |
|
Total
Direct-to-Consumer segment
|
|
|
26.9 |
|
|
|
0.0 |
|
|
|
(4.2 |
) |
Corporate
and other
|
|
|
3.1 |
(3) |
|
|
12.5 |
|
|
|
(34.9 |
)(4) |
Total
consolidated
|
|
$ |
641.3 |
|
|
$ |
26.3 |
|
|
$ |
4.3 |
|
____________________
|
|
(1)
Includes LANE BRYANT OUTLET stores.
|
|
(2)
Includes PETITE SOPHISTICATE stores, which began operations in October
2007 and were closed in August 2008, and PETITE SOPHISTICATE OUTLET
stores, which began operations in September 2006.
|
|
(3)
Primarily revenue related to loyalty card fees.
|
|
(4)
Includes restructuring and other charges of $8.7 million in 2009 and $3.6
million in 2008.
|
|
The
following table sets forth information with respect to our year-to-date retail
store activity for Fiscal 2010 and planned store activity for all of Fiscal
2010:
|
|
|
|
|
|
|
|
|
|
|
PETITE
|
|
|
|
|
|
|
LANE
|
|
|
FASHION
|
|
|
|
|
|
SOPHISTICATE
|
|
|
|
|
|
|
BRYANT
|
|
|
BUG
|
|
|
CATHERINES
|
|
|
OUTLET
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2010 Year-to-Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at January 31, 2009
|
|
|
892 |
|
|
|
897 |
|
|
|
463 |
|
|
|
49 |
|
|
|
2,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
opened
|
|
|
3 |
|
|
|
0 |
|
|
|
3 |
|
|
|
0 |
|
|
|
6 |
|
Stores
closed(1)
|
|
|
(11 |
) |
|
|
(18 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(35 |
) |
Net
change in stores
|
|
|
( 8 |
) |
|
|
(18 |
) |
|
|
2 |
|
|
|
(5 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
at May 2, 2009
|
|
|
884 |
|
|
|
879 |
|
|
|
465 |
|
|
|
44 |
|
|
|
2,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
relocated during period
|
|
|
5 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Planned
store openings
|
|
|
6 |
|
|
|
0 |
|
|
|
5 |
|
|
|
0 |
|
|
|
11 |
|
Planned
store closings
|
|
|
30 |
(2) |
|
|
45 |
|
|
|
13 |
|
|
|
17 |
|
|
|
105 |
|
Planned
store relocations
|
|
|
9 |
|
|
|
3 |
|
|
|
0 |
|
|
|
0 |
|
|
|
12 |
|
____________________
|
(1)
Includes 6 FASHION BUG and 4 LANE BRYANT stores closed as part of the
store closing initiatives announced in February 2008 and
November 2008.
|
(2)
Includes 1 LANE BRYANT OUTLET
store.
|
Comparison
of Thirteen Weeks Ended May 2, 2009 and May 3, 2008
Consolidated
Results of Operations
Net
Sales
Fiscal
2010 First Quarter consolidated net sales decreased as compared to the Fiscal
2009 First Quarter primarily as a result of decreases in net sales from each of
the brands in our Retail Stores segment driven by negative comparable store
sales and the impact to sales from store closings since the Fiscal 2009 First
Quarter, which included 162 stores closed during the preceding 12-month
period. In addition, net sales from our Direct-to-Consumer segment
decreased primarily as a result of the planned shutdown of our Lane Bryant Woman
catalog business which we announced in the third quarter of Fiscal
2009.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
Consolidated
cost of goods sold, buying, catalog, and occupancy expenses decreased 0.5% as a
percentage of consolidated net sales in the Fiscal 2010 First Quarter as
compared to the prior-year period. The decrease is primarily
attributable to improvements in gross margins from reduced promotional activity
during the current-year period. The improvements in gross margins
were substantially offset by negative leverage on occupancy expenses from the
decrease in consolidated net sales. Although occupancy expenses as a
percentage of consolidated net sales de-leveraged as compared to the prior year,
occupancy expenses decreased in dollar amount primarily as a result of the
closing of under-performing stores, as well as other store-related occupancy
savings. Catalog advertising expenses decreased as compared to the
prior-year period primarily as a result of the discontinuance of our LANE BRYANT
WOMAN catalog.
Selling,
General, and Administrative
Although
consolidated selling, general, and administrative expenses increased 0.3% as a
percentage of consolidated net sales, primarily as a result of negative leverage
from the decrease in consolidated net sales, they decreased in dollar amount
from the prior-year period. The decrease in expense dollars was
primarily attributable to the closing of under-performing stores and our expense
reduction initiatives. During the Fiscal 2009 First Quarter we
recognized $3.8 million of expenses in connection with advisory and legal fees
relating to a proxy contest which was settled in May 2008.
Retail
Stores Segment Results of Operations
Net
Sales
Comparable
store sales for the Fiscal 2010 First Quarter decreased at each of our Retail
Stores brands as compared to the Fiscal 2009 First Quarter. Net sales
for all of our brands continued to be negatively impacted by reduced traffic
levels and weak consumer spending due to the current economic
environment. Additionally, the closing of 162 stores during the
preceding 12-month period contributed to the decrease in net sales at our Retail
Stores brands. The average number of transactions per store decreased
for each of our brands, while the average dollar sale per transaction increased
for our all of our brands except for FASHION BUG.
During
the Fiscal 2010 First Quarter we recognized revenues of $5.0 million in
connection with our loyalty card programs as compared to revenues of $5.1
million during the Fiscal 2009 First Quarter.
Cost
of Goods Sold, Buying, and Occupancy
Cost of
goods sold, buying, and occupancy expenses for the Retail Stores segment as a
percentage of net sales decreased 0.5%, which was primarily attributable to
improved gross margins from reduced promotional activity during the current-year
period as a result of our proactive management of inventory in response to
reduced consumer demand. The improved gross margins were
substantially offset by negative leverage on occupancy expenses from the
decrease in Retail Stores net sales. Buying and occupancy expenses
increased 1.6% as a percentage of net sales in the current-year period as
compared to the prior-year period, primarily as a result of negative leverage
from the decrease in Retail Stores net sales. However, expense
dollars decreased as a result of the closing of under-performing stores and
other expense reduction initiatives.
Cost of
goods sold, buying, and occupancy expenses as a percentage of net sales
increased 3.5% for FASHION BUG and decreased 2.9% for CATHERINES and 2.3% for
LANE BRYANT. Merchandise margins at FASHION BUG decreased compared to
prior year as a result of increased promotional activity in response to reduced
traffic, while CATHERINES and LANE BRYANT experienced increased merchandise
margins due to reduced promotional activity.
Selling,
General, and Administrative
Selling,
general, and administrative expenses for the Retail Stores segment as a
percentage of net sales increased 0.1% primarily as a result of negative
leverage from the decrease in Retail Stores net sales. However,
selling, general, and administrative expenses decreased in dollar amount from
the prior-year period at each of our brands, particularly at FASHION BUG and
LANE BRYANT, where the closing of under-performing stores and other store
expense reduction initiatives resulted in reductions to selling, general, and
administrative expenses. Selling, general, and administrative
expenses as a percentage of net sales decreased 0.2% for FASHION BUG, increased
1.4% for CATHERINES, and increased 0.4% for LANE BRYANT.
Direct-to-Consumer
Segment Results of Operations
Net
Sales
The
decrease in net sales from our Direct-to-Consumer segment was primarily
attributable to reduced sales from our LANE BRYANT WOMAN catalogs and related
websites. As noted above, we decided in Fiscal 2009 to discontinue
the LANE BRYANT WOMAN catalog and SHOETRADER.COM website, which we expect to
complete by the end of the Fiscal 2010 Second Quarter.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
The 11.9%
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 liquidation of inventories as a result of our decision to shut down the
LANE BRYANT WOMAN catalog business.
Selling,
General, and Administrative
Selling,
general, and administrative expenses for our Direct-to-Consumer segment
decreased as a percentage of sales and in dollar amount compared to the
prior-year period primarily as a result of the decision to shut down the LANE
BRYANT WOMAN catalog business.
Restructuring
and Other Charges
During
the Fiscal 2010 First Quarter we continued to implement cost-saving and
streamlining initiatives announced during Fiscal 2009. During the
Fiscal 2009 First Quarter we substantially completed the relocation of our
CATHERINES operations in Memphis, Tennessee to our corporate headquarters in
Bensalem, Pennsylvania and began to execute on the closing of 150
under-performing stores, which was substantially completed during Fiscal
2009.
During
the Fiscal 2010 First Quarter we recognized the following pre-tax charges
recorded as restructuring and other charges:
●
|
$4.1
million for costs related to our multi-year business transformation
initiatives.
|
|
|
●
|
$1.2
million for retention and non-cash accelerated depreciation for the
planned shutdown of the LANE BRYANT WOMAN catalog operations, which we
expect to complete by the end of the Fiscal 2010 Second
Quarter.
|
|
|
●
|
$2.9
million for accelerated depreciation related to fixed assets retained from
the sale of the non-core misses apparel catalog business, which will be
fully depreciated by the Fiscal 2010 Third Quarter.
|
|
|
●
|
$0.5
million for lease termination costs related to the closing of
under-performing stores.
|
|
|
During
the Fiscal 2009 First Quarter we recognized pre-tax charges of $1.7 million for
severance, retention, and relocation costs related to the consolidation of a
number of our operating functions. We also recognized $1.9 million of
non-cash pre-tax charges for write-downs of assets related to under-performing
stores to be closed and accelerated depreciation related to the closing of the
Memphis facility.
Income
Tax Provision
Our
income tax provision for the Fiscal 2010 First Quarter was $4.7 million on a
loss from continuing operations before taxes of $1.8 million as compared to a
tax provision of $0.3 million on a loss from continuing operations before taxes
of $0.7 million for the Fiscal 2009 First Quarter. The income tax
provision for the Fiscal 2010 First Quarter was a result of a non-cash provision
to establish a valuation allowance against our net operating loss and other tax
benefits, an increase in our liability for unrecognized tax benefits, interest
and penalties in accordance with FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109,” and state
and foreign income taxes payable. The Fiscal 2009 First Quarter
provision was unfavorably impacted by an increase in our liability for
unrecognized tax benefits, interest, and penalties in accordance with FIN No. 48
and by state and foreign income taxes payable.
During
the Fiscal 2009 Third Quarter we evaluated our assumptions regarding the
recoverability of our net deferred tax assets. Based on all available
evidence we determined that the recoverability of our deferred tax assets is
more-likely-than-not limited to our available tax loss
carrybacks. Accordingly, we established a valuation allowance against
our net deferred tax assets. We continue to provide a valuation
allowance against our net deferred tax assets and accordingly, during the
thirteen weeks ended May 2, 2009, we recognized a non-cash provision of $3.6
million to reflect the generation of additional net operating losses and other
tax benefits. In future periods we will continue to record a
valuation allowance until such time as the certainty of future tax benefits can
be reasonably assured.
The
recognition of a tax valuation allowance does not have any impact on cash, nor
does such an allowance preclude us from using the underlying tax net operating
loss and credit carryforwards or other deferred tax assets in the future when
results are profitable. Pursuant to SFAS No. 109, when our results
demonstrate a pattern of future profitability the valuation allowance may be
adjusted, which would result in the reinstatement of all or a portion of the net
deferred tax assets.
Discontinued
Operations
Discontinued
operations consist of the results of operations of the non-core misses catalog
titles operated under our Crosstown Traders brand, which were sold during the
third quarter of Fiscal 2009 (see “Item 1. Financial
Statements (Unaudited); “Note 1. Condensed Consolidated
Financial Statements;
Discontinued
Operations”
above). During the Fiscal 2009 First Quarter we recognized a net loss
from discontinued operations of $6.7 million and an estimated loss on
disposition of the discontinued operations of $39.2 million.
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
2,
|
|
|
January
31,
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
123.9 |
|
|
$ |
93.8 |
|
Available-for-sale
securities
|
|
$ |
0.4 |
|
|
$ |
6.4 |
|
Working
capital
|
|
$ |
388.9 |
|
|
$ |
382.0 |
|
Current
ratio
|
|
|
2.3 |
|
|
|
2.4 |
|
Long-term
debt to equity ratio
|
|
|
42.1 |
% |
|
|
43.3 |
% |
The
following discussion of cash flows is based on our consolidated statements of
cash flows included in “Item 1.
Financial Statements (Unaudited)” above, which includes the results of
both our continuing operations and our discontinued operations for the Fiscal
2009 First Quarter.
Our net
cash provided by operating activities decreased to $35.2 million for the Fiscal
2010 First Quarter from $46.2 million for the Fiscal 2009 First
Quarter. The decrease was primarily a result of the timing of
payments for prepaid and accrued expenses and a $5.6 million increase in the
loss from continuing operations, which were substantially offset by a $22.4
million decrease in our investment in inventories, net of accounts
payable, as compared to the prior-year period as a result of our continued
efforts to reduce inventory levels. On a comparable-store basis,
inventories decreased 21% as of May 2, 2009 as compared to May 3,
2008. We supplemented cash flow from operations with proceeds from
net sales of available-for-sale securities of $7.5 million during the
Fiscal 2010 First Quarter and $6.8 million during the Fiscal 2009 First
Quarter.
During
the Fiscal 2010 First Quarter we repurchased 1.125% Senior Convertible Notes
with an aggregate principal amount of $13.5 million and a carrying value (net of
unamortized discount) of $10.0 million for an aggregate purchase price of $5.6
million. Subsequent to the Fiscal 2010 First Quarter, we repurchased
additional notes with an aggregate principal amount of $16.5 million for an
aggregate purchase price of $8.2 million. During the Fiscal 2009
First Quarter we used $2.3 million of cash for repayments of long-term debt and
$11.0 million of cash to purchase 2.0 million shares of common
stock.
Capital
Expenditures
Our gross
capital expenditures, excluding construction allowances received from landlords,
were $4.7 million during the Fiscal 2010 First Quarter as compared to $22.0
million for the Fiscal 2009 First Quarter. Construction allowances
received from landlords were $3.4 million for the current-year period as
compared to $17.4 million for the prior-year period. We also acquired
equipment through capital leases of $1.8 million during the Fiscal 2009 First
Quarter.
As part
of our previously announced streamlining initiatives and in response to the
current difficult economic environment, we are significantly reducing capital
expenditures during Fiscal 2010. We plan to open approximately 11 new
stores in Fiscal 2010 as compared to 48 new stores in Fiscal 2009, and
anticipate that our Fiscal 2010 gross capital expenditures will be approximately
$29.6 million before construction allowances received from landlords as compared
to gross capital expenditures of $55.8 million for Fiscal 2009. We
expect to finance these capital expenditures primarily through
internally-generated funds and to a lesser extent through capital lease
financing.
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. We have not repurchased any shares of common stock
subsequent to the Fiscal 2009 First Quarter. 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 regarding the share-repurchase program announced in November
2007.
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
facilities to fund the credit card receivables generated by our FASHION BUG,
LANE BRYANT, CATHERINES, and PETITE SOPHISTICATE proprietary credit card
programs. Additional information regarding our asset securitization
facilities 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 January 31, 2009
Annual Report on Form 10-K.
As of May
2, 2009, we had the following securitization facilities
outstanding:
(Dollars in millions)
|
Series
1999-2
|
|
Series
2004-VFC
|
|
Series
2004-1
|
|
Series
2007-1
|
|
|
|
|
|
|
|
|
|
|
Date
of facility
|
May
1999
|
|
January
2004
|
|
August
2004
|
|
October
2007
|
|
Type
of facility
|
Conduit
|
|
Conduit
|
|
Term
|
|
Term
|
|
Maximum
funding
|
$50.0
|
|
$105.0
|
|
$180.0
|
|
$320.0
|
|
Funding
as of May 2, 2009
|
$11.0
|
|
$ 3.5
|
|
$165.6
|
|
$320.0
|
|
First
scheduled principal payment
|
Not
applicable
|
|
Not
applicable
|
|
April
2009
|
|
April
2012
|
|
Expected
final principal payment
|
Not applicable(1)
|
|
Not applicable(1)
|
|
March
2010
|
|
March
2013
|
|
Next
renewal date
|
March
2010
|
|
January
2010
|
|
Not
applicable
|
|
Not
applicable
|
|
____________________
|
(1)
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 begin amortizing on the next renewal
date subject to the further extension of the renewal date as a result of
renewal of the purchase
commitment.
|
During
the Fiscal 2010 First Quarter we renewed our Series 1999-2 conduit facility
through March 30, 2010 and Series 2004-1 began its scheduled principal
amortization, which will be completed in March 2010.
We
securitized $175.7 million of private label credit card receivables in the
Fiscal 2010 First Quarter and had $499.2 million of securitized credit card
receivables outstanding as of May 2, 2009. We held certificates and
retained interests in our securitizations of $87.0 million as of May 2, 2009
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 2, 2009 included $49.9 million of QSPE
certificates, an interest-only (“I/O”) strip of $18.0 million, and other
retained interests of $19.1 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. As of May 2, 2009 the Trust was in compliance with its
financial performance standards, including all financial performance standards
related to the performance of the underlying receivables.
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 2, 2009 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.
We plan
to refinance our maturing securitization series with our credit conduit
facilities totaling $155.0 million, which are renewed annually. To
the extent that these conduit facilities are not renewed they would begin to
amortize and we would finance this amortization using our $375.0 million
committed revolving credit facilities to the extent available. During
the Fiscal 2010 First Quarter we renewed our Series 1999-2 conduit facility
through March 30, 2010. There is no assurance that we can refinance
or renew our conduit facilities on terms comparable to our existing facilities
or that there would be sufficient availability under our revolving credit
facilities for such financing. Without adequate liquidity our ability
to offer our credit program to our customers, and consequently our financial
condition and results of operations, would be adversely affected.
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 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 enhance 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
2,
|
|
|
May
3,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
securitization excess spread revenues
|
|
$ |
16.9 |
|
|
$ |
23.3 |
|
Net
additions to the I/O strip and servicing liability
|
|
|
(1.2 |
) |
|
|
0.3 |
|
Other
credit card revenues, net(1)
|
|
|
3.2 |
|
|
|
3.3 |
|
Total
credit card revenues
|
|
|
18.9 |
|
|
|
26.9 |
|
Less
total credit card program expenses
|
|
|
14.9 |
|
|
|
17.9 |
|
Total
credit contribution
|
|
$ |
4.0 |
|
|
$ |
9.0 |
|
____________________
|
|
(1)
Excludes inter-company merchant fees between our credit entities and
our retail entities.
|
|
The
primary reason for the decline in the total credit contribution for the thirteen
weeks ended May 2, 2009 as compared to the thirteen weeks ended May 3, 2008 is
the reduction in net securitization excess spread revenues associated with the
decrease in outstanding balances due to the sale of the Crosstown Traders
apparel-related catalog credit card receivables as well as receivables declines
in the other brand credit card portfolios due primarily to reduced
sales.
Further
details of our outstanding receivables are as follows:
|
|
Thirteen Weeks Ended
|
|
|
|
May
2,
|
|
|
May
3,
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Average
managed receivables outstanding
|
|
$ |
504.4 |
|
|
$ |
585.4 |
|
Ending
managed receivables outstanding
|
|
$ |
499.2 |
|
|
$ |
596.1 |
|
Operating
Leases
We lease
substantially all of our operating stores and certain administrative facilities
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 January 31, 2009.
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 $1.1
million of unamortized deferred debt acquisition costs related to the facility
as of May 2, 2009, 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 2, 2009 the “Excess Availability” under the
facility was $267.6 million, or 94.1% of the “Borrowing Base.” As of
May 2, 2009, we were not in violation of any of the covenants included in the
facility.
The
interest rate on borrowings under the facility is Prime for Prime Rate Loans,
and LIBOR as adjusted for the “Reserve Percentage” (as defined in the facility
agreement) plus 1.0% to 1.5% per annum for Eurodollar Rate Loans. The
applicable rate is determined monthly, based on our average “Excess
Availability.” As of May 2, 2009, the applicable rates under the
facility were 3.25% for Prime Rate Loans and 1.67% (LIBOR plus 1.25%) for
Eurodollar Rate Loans. There were no borrowings outstanding under the
facility as of May 2, 2009.
Long-term
Debt
During
the Fiscal 2010 First Quarter we repurchased 1.125% Senior Convertible Notes
with an aggregate principal amount of $13.5 million and a carrying value (net of
unamortized discount) of $10.0 million for an aggregate purchase price of $5.6
million. Subsequent to the end of the Fiscal 2010 First Quarter we
repurchased additional notes with an aggregate principal amount of $16.5 million
for an aggregate purchase price of $8.2 million (see “Note 4. Long-term Debt”
and “Note 14. Subsequent
Event” above). We may elect to repurchase additional
notes in privately negotiated transactions or in the open market under
circumstances that we believe to be favorable to us as circumstances may
allow.
See “FORWARD-LOOKING STATEMENTS”
above and “PART I; Item 1A.
Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended
January 31, 2009 for a discussion of the potential impact to our liquidity as a
result of the occurrence of a “fundamental change” as defined in the prospectus
filed in connection with the 1.125% Notes.
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 January 31, 2009.
In Fiscal
2010 we plan to continue to utilize our combined financial resources to fund our
inventory and inventory-related purchases, advertising and marketing
initiatives, and our store development and infrastructure
strategies. We believe our cash and available-for-sale securities,
securitization facilities, and borrowing facilities will provide adequate
liquidity for our business operations and growth opportunities during Fiscal
2010. 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. We may also elect to redeem
debt financing prior to maturity or to purchase additional 1.125% Senior
Convertible Notes under circumstances that we believe to be favorable to
us. 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 market value of our outstanding debt, the condition of financial markets,
and the nature and size of strategic business opportunities that we may elect to
pursue.
We manage
our 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-interest-rate 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 2, 2009 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 $321.4 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 2010, an increase of approximately $180
thousand in selling, general, and administrative expenses would
result.
See “PART I; Item 1A. Risk
Factors” of our Annual Report on Form 10-K for the fiscal year ended
January 31, 2009 for a further discussion of other market risks related to our
securitization facilities.
As of May
2, 2009, 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.
See “Item 1. Notes To Condensed
Consolidated Financial Statements (Unaudited); Note 13. Impact of Recent Accounting
Pronouncements” above.
See “Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations; MARKET RISK,”
above.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports we file under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. 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.
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.
“Part I. Item 1A. Risk
Factors” of our Form 10-K for the fiscal year ended January 31, 2009
included disclosure of the following risk factor:
We depend on key
personnel and may not be able to retain or replace these employees or recruit
additional qualified personnel.
Our
success and our ability to execute our business strategy depend largely on the
efforts and abilities of our executive officers and their management
teams. We also must motivate employees to remain focused on our
strategies and goals, particularly during a period of changing executive
leadership at both our corporate level and our operating division
level. The inability to find a suitable permanent replacement for our
Interim Chief Executive Officer within a reasonable time period could have a
material adverse effect on our business. We do not maintain
key-person life insurance policies with respect to any of our
employees.
On April
3, 2009 we announced the appointment of James P. Fogarty as President and Chief
Executive Officer and a member of our Board of Directors, replacing Alan
Rosskamm, our then Interim Chief Executive Officer. Mr. Rosskamm
continues to serve as Chairman of our Board of
Directors. Nevertheless, we remain largely dependent on our executive
officers and their management team to execute our business
strategy.
“Part I. Item 1A. Risk
Factors” of our Form 10-K for the fiscal year ended January 31, 2009 also
included disclosure of the following risk factor:
If
we are unable to maintain the standards necessary for continued listing on the
NASDAQ Global Select Market our common stock could be de-listed. Such
de-listing could have an adverse effect on the market liquidity of our common
stock and could harm our business.
Our
common stock is currently listed on the NASDAQ Global Select
Market. NASDAQ rules require, among other things, that the minimum
closing bid price of our common stock be at least $1.00. Recently,
our common stock has traded below $1.00 per share. If the minimum
closing bid price of our common stock fails to meet NASDAQ’s minimum bid price
requirement for a period of 30 consecutive business days, NASDAQ may take steps
to de-list our common stock. However, before any de-listing could
occur, we would have an initial 180-day cure period in which to achieve
compliance with the minimum closing bid price. If we were unable to
achieve compliance within this 180-day period, we could transfer to the NASDAQ
Capital Market if we then meet its initial listing criteria (other than the
minimum bid price). Following such transfer, we would have an
additional 180-day period in which to achieve compliance with the minimum bid
price.
On March
23, 2009, NASDAQ suspended the $1.00 per share minimum closing bid price
requirement through at least July 20, 2009. Consequently, for as long
as NASDAQ’s rule suspension remains in effect, NASDAQ will not take steps to
de-list our common stock if the minimum closing bid price for our common stock
trades below $1.00 per share during the rule suspension period. We
can provide no assurance, however, that NASDAQ will extend this rule suspension
period beyond July 20, 2009.
Any
de-listing would likely have an adverse impact on the liquidity of our common
stock and, as a result, the market price for our common stock could become more
volatile and significantly decline. We may seek to avoid de-listing
by requesting shareholder approval for a reverse stock
split. However, we can give no assurance that such action would
stabilize the market price, improve the liquidity of our common stock, or would
prevent our common stock from dropping below the NASDAQ minimum closing bid
price requirement in the future. Such consequences may however be
mitigated by our dual-listing on the Chicago Stock Exchange.
Holders
of our 1.125% Notes have the right to require us to repurchase their notes for
cash prior to maturity upon a “fundamental change,” which is deemed to have
occurred if, among other events, our common stock at any time is not listed for
trading on a U.S. national or regional securities exchange. Due to
the above risk that we could be subject to de-listing from the NASDAQ Global
Select Market, we applied for dual-listing on the Chicago Stock Exchange (“CHX”)
and began trading on March 26, 2009. The CHX does not have a $1.00
minimum stock price requirement for listing.
Subsequent
to our filing on April 1, 2009 of our Form 10-K for the fiscal year ended
January 31, 2009 our common stock has traded in a price range between $1.33 and
$3.99 (through June 1, 2009). We believe that our dual listing on the
Chicago Stock Exchange and the recent trading prices of our common stock have
mitigated this risk factor.
Other
than the above, we have not become aware of any material changes 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
January 31, 2009. 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.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers:
|
|
|
|
|
|
|
|
Total
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
of
Shares
|
|
|
Shares
that
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|
|
|
|
|
|
|
|
|
Purchased
as
|
|
|
May
Yet be
|
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|
|
Total
|
|
|
|
|
|
Part
of Publicly
|
|
|
Purchased
|
|
|
|
Number
|
|
|
Average
|
|
|
Announced
|
|
|
Under
the
|
|
|
|
of
Shares
|
|
|
Price
Paid
|
|
|
Plans
or
|
|
|
Plans
or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs(2)
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|
|
Programs(2)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1, 2009 through
|
|
|
|
|
|
|
|
|
|
|
|
|
February
28, 2009
|
|
|
26,905 |
(1) |
|
$ |
1.12 |
|
|
|
– |
|
|
|
|
March
1, 2009 through
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
4, 2009
|
|
|
61,938 |
(1) |
|
|
1.33 |
|
|
|
– |
|
|
|
|
April
5, 2009 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
2, 2009
|
|
|
0 |
|
|
|
0.00 |
|
|
|
– |
|
|
|
|
Total
|
|
|
88,843 |
|
|
$ |
1.27 |
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|
|
– |
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|
|
(2) |
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____________________
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(1)
Shares withheld for the payment of payroll taxes on employee stock
awards that vested during the period.
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(2)
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. 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. No shares have been
purchased under this plan subsequent to May 3, 2008. As of May 2,
2009, $197,364,592 was available for future repurchases under this
program. This repurchase program has no expiration date.
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|
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 (File No. 000-07258, Exhibit
2.1).
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|
|
2.2
|
Stock
Purchase Agreement dated as of August 25, 2008 by and between Crosstown
Traders, Inc., Norm Thompson Outfitters, Inc., Charming Shoppes, Inc. and
the other persons listed on the signature page thereto, incorporated by
reference to Form 8-K of the Registrant dated August 25, 2008, filed on
August 28, 2008 (File No. 000-07258, Exhibit 10.1).
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|
|
2.3
|
Amendment
No. 1 to Stock Purchase Agreement dated as of September 18, 2008 by and
among Crosstown Traders, Inc. and Norm Thompson Outfitters, Inc.,
incorporated by reference to Form 8-K of the Registrant dated September
18, 2008, filed on September 19, 2008 (File No. 000-07258, Exhibit
10.2).
|
|
|
2.4
|
Transition
Services Agreement dated as of September 18, 2008 by and between Charming
Shoppes of Delaware, Inc. and Arizona Mail Order Company, incorporated by
reference to Form 8-K of the Registrant dated September 18, 2008, filed on
September 19, 2008 (File No. 000-07258, Exhibit 10.3).
|
|
|
3.1
|
Restated
Articles of Incorporation, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended August 2, 2008 (File No. 000-07258,
Exhibit 3.1).
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|
|
3.2
|
Bylaws,
as Amended and Restated, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 31, 2009 (File No. 000-07258,
Exhibit 3.2).
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|
|
10.1
|
Offer
Letter dated as of April 2, 2009 by and between Charming Shoppes, Inc. and
James P. Fogarty, incorporated by reference to Form 8-K of the Registrant
dated April 2, 2009, filed on April 7, 2009 (File No. 000-07258, Exhibit
10.1).
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|
|
10.2
|
Severance
Agreement dated as of April 2, 2009 by and between Charming Shoppes, Inc.
and James P. Fogarty, incorporated by reference to Form 8-K of the
Registrant dated April 2, 2009, filed on April 7, 2009 (File No.
000-07258, Exhibit 10.2).
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|
|
10.3
|
Stock
Appreciation Rights Agreement dated as of April 2, 2009 by and between
Charming Shoppes, Inc. and James B. Fogarty (Inducement Grant),
incorporated by reference to Form 8-K of the Registrant dated April 2,
2009, filed on April 7, 2009 (File No. 000-07258, Exhibit
10.3).
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|
|
10.4
|
Stock
Appreciation Rights Agreement dated as of April 2, 2009 by and between
Charming Shoppes, Inc. and James B. Fogarty (Time-Based Grant),
incorporated by reference to Form 8-K of the Registrant dated April 2,
2009, filed on April 7, 2009 (File No. 000-07258, Exhibit
10.4).
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|
|
10.5
|
Form
of Amendment to the Severance Agreements between certain executive vice
presidents and the Company, including the following named executive
officers: Eric M. Specter, Joseph M. Baron, James G. Bloise and Colin D.
Stern, incorporated by reference to Form 8-K of the Registrant dated May
1, 2009, filed on May 5, 2009 (File No. 000-07258, Exhibit
10.1).
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|
|
|
|
|
|
|
|
|
|
|
|
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.
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|
(Registrant)
|
|
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|
|
|
|
Date:
June 10, 2009
|
/S/
JAMES P.
FOGARTY
|
|
James
P. Fogarty
|
|
President
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
Date:
June 10, 2009
|
/S/ ERIC M. SPECTER
|
|
Eric
M. Specter
|
|
Executive
Vice President
|
|
Chief
Financial Officer
|
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 (File No. 000-07258, Exhibit
2.1).
|
|
|
2.2
|
Stock
Purchase Agreement dated as of August 25, 2008 by and between Crosstown
Traders, Inc., Norm Thompson Outfitters, Inc., Charming Shoppes, Inc. and
the other persons listed on the signature page thereto, incorporated by
reference to Form 8-K of the Registrant dated August 25, 2008, filed on
August 28, 2008 (File No. 000-07258, Exhibit 10.1).
|
|
|
2.3
|
Amendment
No. 1 to Stock Purchase Agreement dated as of September 18, 2008 by and
among Crosstown Traders, Inc. and Norm Thompson Outfitters, Inc.,
incorporated by reference to Form 8-K of the Registrant dated September
18, 2008, filed on September 19, 2008 (File No. 000-07258, Exhibit
10.2).
|
|
|
2.4
|
Transition
Services Agreement dated as of September 18, 2008 by and between Charming
Shoppes of Delaware, Inc. and Arizona Mail Order Company, incorporated by
reference to Form 8-K of the Registrant dated September 18, 2008, filed on
September 19, 2008 (File No. 000-07258, Exhibit 10.3).
|
|
|
3.1
|
Restated
Articles of Incorporation, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended August 2, 2008 (File No. 000-07258,
Exhibit 3.1).
|
|
|
3.2
|
Bylaws,
as Amended and Restated, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 31, 2009 (File No. 000-07258,
Exhibit 3.2).
|
|
|
10.1
|
Offer
Letter dated as of April 2, 2009 by and between Charming Shoppes, Inc. and
James P. Fogarty, incorporated by reference to Form 8-K of the Registrant
dated April 2, 2009, filed on April 7, 2009 (File No. 000-07258, Exhibit
10.1).
|
|
|
10.2
|
Severance
Agreement dated as of April 2, 2009 by and between Charming Shoppes, Inc.
and James P. Fogarty, incorporated by reference to Form 8-K of the
Registrant dated April 2, 2009, filed on April 7, 2009 (File No.
000-07258, Exhibit 10.2).
|
|
|
10.3
|
Stock
Appreciation Rights Agreement dated as of April 2, 2009 by and between
Charming Shoppes, Inc. and James B. Fogarty (Inducement Grant),
incorporated by reference to Form 8-K of the Registrant dated April 2,
2009, filed on April 7, 2009 (File No. 000-07258, Exhibit
10.3).
|
|
|
10.4
|
Stock
Appreciation Rights Agreement dated as of April 2, 2009 by and between
Charming Shoppes, Inc. and James B. Fogarty (Time-Based Grant),
incorporated by reference to Form 8-K of the Registrant dated April 2,
2009, filed on April 7, 2009 (File No. 000-07258, Exhibit
10.4).
|
|
|
10.5
|
Form
of Amendment to the Severance Agreements between certain executive vice
presidents and the Company, including the following named executive
officers: Eric M. Specter, Joseph M. Baron, James G. Bloise and Colin D.
Stern, incorporated by reference to Form 8-K of the Registrant dated May
1, 2009, filed on May 5, 2009 (File No. 000-07258, Exhibit
10.1).
|