Form 10-K Year Ended January 28, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
 

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 28, 2006

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 Number: 000-07258

CHARMING SHOPPES, INC.
(Exact Name of Registrant as Specified in Its Charter)

 
PENNSYLVANIA
  
23-1721355
  
 
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
  

 
450 WINKS LANE, BENSALEM, PA 19020
  
(215) 245-9100
  
 
(Address of principal executive offices) (Zip Code)
  
(Registrant’s telephone number, including Area Code)
  

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock (par value $.10 per share)
(Title of Class)

Stock Purchase Rights
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes o No x
 
 
 


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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer x
Accelerated Filer o
Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the outstanding common stock of the registrant held by non-affiliates as of July 30, 2005 (the last day of the registrant’s most recently completed second fiscal quarter), based on the closing price on July 29, 2005, was approximately $1,394,970,000.

As of March 31, 2006, 122,228,707 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of Form 10-K is incorporated by reference herein from the registrant’s definitive proxy statement for its 2006 annual shareholders meeting, which is expected to be filed within 120 days after the end of the fiscal year covered by this Annual Report.



























CHARMING SHOPPES, INC.
2006 FORM 10-K ANNUAL REPORT

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PART I


Item 1. Business

GENERAL

We are a leading multi-channel, multi-brand specialty apparel retailer primarily focused on plus-size women’s apparel. Our Retail Stores segment operates retail stores and related E-commerce websites through our three distinct brands: LANE BRYANT(R), FASHION BUG(R), and CATHERINES PLUS SIZES(R). Our Direct-to-Consumer segment operates numerous apparel, accessories, footwear, and gift catalogs and related E-commerce websites through our Crosstown Traders business, which we acquired in June 2005. During the year ended January 28, 2006 (“Fiscal 2006”), the sale of plus-size apparel represented approximately 72% of our total net sales. Through our multiple channels, fashion content, and broad merchandise assortments, we seek to appeal to customers from a broad range of socioeconomic, demographic, and cultural groups. As of January 28, 2006, we operated 2,236 stores in 48 states.

LANE BRYANT is a widely recognized name in plus-size fashion. Through private labels, such as VENEZIA(R), CACIQUE(R), and LANE BRYANT(R), we offer fashionable and sophisticated apparel in plus-sizes 14 - 28, including intimate apparel, wear-to-work, and casual sportswear, as well as accessories. LANE BRYANT has a loyal customer base, generally ranging in age from 25 to 45 years old, who shops for fashionable merchandise in the moderate price range. Primarily a mall-based destination store for the plus-size woman, LANE BRYANT operates 748 stores in 46 states that average approximately 5,800 square feet. In March 2003, we began E-commerce operations on our lanebryant.com website. During Fiscal 2006, our LANE BRYANT website has averaged more than 1.8 million unique visitors per month and has an established on-line community.

FASHION BUG stores specialize in selling a wide variety of plus-size, misses and junior apparel, accessories, intimate apparel, and footwear. FASHION BUG customers generally range in age from 20 to 49 years old and shop in the low-to-moderate price range. Our 1,025 FASHION BUG stores are located in 45 states, primarily in strip shopping centers, and average approximately 8,800 square feet. In July 2004, we began E-commerce operations on our fashionbug.com website. During Fiscal 2006, our FASHION BUG website has averaged more than 800,000 unique visitors per month.

CATHERINES PLUS SIZES is particularly known for extended sizes (over size 28) and petite plus-sizes. CATHERINES offers classic apparel and accessories for wear-to-work and casual lifestyles. CATHERINES customers generally range in age from 40 to 65 years old, shop in the moderate price range, and are concerned with fit and value when purchasing clothes. Our 463 CATHERINES stores are located in 44 states, primarily in strip shopping centers in the Southeast, Mid-Atlantic, and Eastern Central regions of the United States, and average approximately 4,200 square feet. In March 2002, we began E-commerce operations on our catherines.com website. During Fiscal 2006, our CATHERINES website has averaged more than 400,000 unique visitors per month.

CROSSTOWN TRADERS is a direct marketer of women’s apparel, footwear, and specialty gifts. Crosstown Traders markets women’s apparel through its OLD PUEBLO TRADERS(R), BEDFORD FAIR LIFESTYLESTM, BEDFORD FAIR SHOESTYLESTM, WILLOW RIDGETM, LEW MAGRAM(R), BROWNSTONE STUDIO(R), REGALIA(R), INTIMATE APPEAL(R), MONTEREY BAY CLOTHING COMPANY(R), HOME ETC. TM, COWARD(R) SHOE, and other catalog titles and related E-commerce sites, and markets food and specialty gift products through its FIGI’S(R) catalog and related E-commerce site. During the eight months since our acquisition of Crosstown Traders, their websites have collectively averaged more than 400,000 unique visitors per month. Crosstown Traders also operates three outlet stores.



During Fiscal 2006, we signed an agreement to assume the leases on approximately 75-80 outlet store locations. These leases represent the majority of the outlet locations previously operated by Retail Brand Alliance, which ceased its outlet operations early in 2006. The agreement was effective on April 1, 2006, and provides an entry into many of the country’s leading outlet centers for our LANE BRYANT brand. The outlet stores will be operated under the LANE BRYANT OUTLET nameplate. The majority of the stores are expected to open during July and August of 2006, and these outlet locations will average 7,800 square feet.

Financial information by business segment for each of our last three fiscal years is included in “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements; NOTE 19. SEGMENT REPORTING” below.


RETAIL STORES SEGMENT

Stores

Our 2,236 retail stores (as of January 28, 2006) are primarily located in suburban areas and small towns. Approximately 70% of these stores are located in strip shopping centers, with the remainder located in community and regional malls. The majority of our FASHION BUG and CATHERINES stores are strip-center based. Most of our LANE BRYANT stores are in malls. Over the past few years, LANE BRYANT has expanded into strip and lifestyle centers, and has demonstrated success in such locations. Approximately 31% of our LANE BRYANT stores are currently located in strip and lifestyle shopping centers.

We believe that our customers visit strip shopping centers frequently as a result of the tenant mix and convenience of strip shopping centers. Our long-term retail store growth plans are to expand both LANE BRYANT and CATHERINES into additional strip and lifestyle center locations. Availability of strip and lifestyle center retail space significantly outpaces mall expansion. In addition, we benefit in strip and lifestyle centers from substantially lower occupancy costs as compared to occupancy costs in malls.

Our retail store merchandise displays enable our customers to assemble coordinated and complete outfits that satisfy many of their lifestyle needs. We relocate or remodel our stores as appropriate to convey a fresh and contemporary shopping environment. We frequently test and implement new store designs and fixture packages that are aimed at providing an effective merchandise presentation. We emphasize customer service, including the presence of helpful salespeople in the stores, layaway plans, and acceptance of merchandise returns for cash or credit within a reasonable time period. Typically, our stores are open seven days per week, eleven hours per day Monday through Saturday, and seven hours on Sunday.

During Fiscal 2006, LANE BRYANT introduced and tested a new store concept, the side-by-side CACIQUE store. The new design pairs LANE BRYANT’s casual and wear-to-work sportswear assortments with an expanded line of CACIQUE intimates, presented in a double store-front using the nameplates CACIQUE and LANE BRYANT. As a result of a successful testing period, the majority of LANE BRYANT retail store openings and relocations for Fiscal 2007 are expected to be in the CACIQUE side-by-side format. This larger footprint of approximately 7,000 square feet per combined store compares with the standard strip and lifestyle center store footprint of approximately 5,800 square feet.







Our store openings, closings, and number of locations over the past five fiscal years are as follows:

   
Year Ended
  
   
Jan. 28,
  
Jan. 29,
  
Jan. 31,
 
Feb. 1,
  
Feb. 2,
  
   
2006 (1)
  
2005
  
2004
  
2003
  
2002
  
Store Activity:
                                
Number of stores open at beginning of period
    
2,221
    
2,227
    
2,248
    
2,446
    
1,755
  
Opened during period
    
70
    
51
    
50
    
57
    
125
  
Acquired during period
    
0
    
0
    
0
    
0
    
651
  
Closed during period
    
(55
)
  
(57
)
  
(71
)
  
(255
)(2) 
  
(85
)
Number of stores open at end of period
    
2,236
    
2,221
    
2,227
    
2,248
    
2,446
  
                                 
Number of Stores by Brand:
                                
FASHION BUG
    
1,025
    
1,028
    
1,051
    
1,083
    
1,252
  
LANE BRYANT
    
748
    
722
    
710
    
689
    
647
  
CATHERINES
    
463
    
471
    
466
    
467
    
461
  
Discontinued brands (3)
    
0
    
0
    
0
    
9
    
86
  
Number of stores open at end of period
    
2,236
    
2,221
    
2,227
    
2,248
    
2,446
  
____________________
                                
(1) Does not include 3 outlet stores operated by Crosstown Traders, Inc.
(2) Includes 124 FASHION BUG stores and 68 ADDED DIMENSIONS(R) stores that were closed in connection with a restructuring plan announced on January 28, 2002.
(3) Includes THE ANSWER(R) and ADDED DIMENSIONS stores closed during Fiscal 2003, and MONSOON(R) and ACCESSORIZE(R) stores closed during Fiscal 2004.

We continue to seek additional locations that meet our financial and operational objectives. We plan to open approximately 155-160 stores and close approximately 50 stores during Fiscal 2007. Planned store openings by brand are approximately 60 LANE BRYANT stores, 75-80 LANE BRYANT OUTLET stores, 15 FASHION BUG stores, and 8 CATHERINES stores. Planned store closings by brand are approximately 15 LANE BRYANT stores, 20 FASHION BUG stores, and 8 CATHERINES stores. Additionally, we currently plan to relocate approximately 35 LANE BRYANT stores, 35 FASHION BUG stores, and 15 CATHERINES stores during Fiscal 2007.

All retail stores are operated under our direct management. Each store has a manager and an assistant manager or supervisor who is in daily operational control of the location. We also employ district managers, who travel to all stores in their district on a frequent basis, to supervise store operations. Each district manager has responsibility for an average of 12 stores. Regional managers, who report to a Vice President of Stores, supervise the district managers. Generally, we appoint store managers from the group of assistant managers and district managers from the group of store managers. We seek to motivate our store personnel through internal advancement and promotion, competitive wages, and various incentive, medical, and retirement plans. We centrally develop store operations, merchandising, and buying policies, and assign to individual store management the principal duties of display, selling, and reporting through point-of-sale terminals.










Merchandising and Buying

We employ a merchandising and buying strategy that is focused on providing an attractive selection of apparel and accessories that reflect the fashion preferences of the target customer for each of our Retail Store brands. Separate merchandise groups for each of our brands conduct merchandise purchasing using buyers supervised by one or more merchandise managers. We believe that specialization of buyers within our brands enhances the distinctiveness of our brands and their offerings. In addition, we use domestic and international fashion market guidance, fashion advisory services, proprietary design, and in-store testing to determine the optimal product assortments for each of our brands. We believe that this approach results in greater success in predicting customer preferences while reducing our inventory investment and risk. We also seek to maintain high quality standards with respect to merchandise fabrication, construction, and fit. Our merchandising and buying philosophy, coupled with enhancements in inventory management, helps facilitate the timely and orderly purchase and flow of merchandise. This enables our stores to offer fresh product assortments on a regular basis.

We continually refine our merchandise assortments to reflect the needs and demands of our diverse customer groups and the demographics of each store location. At LANE BRYANT, we offer a combination of fashion basics, seasonal fashions, and high fashion in casual and wear-to-work merchandise, intimate apparel, and accessories. We strive to translate current trends into plus-sizes and to be first to market with our styles. At FASHION BUG, we offer a broad assortment of both casual and wear-to-work apparel, in plus, misses, and junior sizes as well as girls, at low-to-moderate prices. FASHION BUG’s plus- and misses-size merchandise typically reflects established fashion trends and includes a broad offering of ready-to-wear apparel as well as footwear, accessories, intimate apparel, and seasonal items, such as outerwear. FASHION BUG’s junior merchandise reflects the latest fashion trends and includes a significant amount of well-recognized third-party national brands. At CATHERINES, we offer a broad assortment of plus-size merchandise in classic styles designed to provide “head-to-toe” dressing for our customers. CATHERINES features casual and career sportswear, dresses, intimate apparel, suits, and accessories in a variety of plus-sizes, including petites and extended sizes. CATHERINES has developed a unique expertise in the fit, design, and manufacturing of extended sizes, making it one of the few retailers to emphasize these sizes.

For stores that are identified as having certain attributes, we use our distribution capabilities to stock the stores with products specifically targeted to such attributes. Our merchandising staffs obtain store- and brand-wide inventory information generated by merchandise information systems that use point-of-sale terminals. Merchandise can be followed from the placement of our initial order for the merchandise to the actual sale to our customer. Based upon this data, our merchandise managers compare budgeted-to-actual sales and make merchandising decisions as needed, including re-order, markdowns, and changes in the buying plans for upcoming seasons. In addition, we continue to work to improve inventory turnover by better managing the flow of seasonal merchandise to our stores across all geographic regions.

We employ a realistic pricing strategy for our stores that is aimed at setting the initial price markup of fashion merchandise in order to increase the percentage of sales at the original ticketed price. We believe this strategy has resulted in a greater degree of credibility with the customer. However, our pricing strategy typically does allow sufficient margin to permit merchandise discounts in order to stimulate customer purchases when necessary.








Our stores experience a normal seasonal sales pattern for the retail apparel industry, with peak sales occurring during the spring and Christmas seasons. We generally build inventory levels before these peak sales periods. To maintain current and fashionable inventory, we reduce the price of slow-moving merchandise throughout the year. Much of our merchandise is developed for one or more of our six seasons: spring, summer, summer-fall transitional, fall, holiday, and holiday-spring transitional. End-of-season sales are conducted with the objective of carrying a minimal amount of seasonal merchandise over from one season to another. Retail Stores segment sales for the four quarters of Fiscal 2006, as a percent of annual Retail Stores segment sales, were 24.6%, 26.0%, 23.1%, and 26.3%, respectively.

Marketing and Promotions

We use several types of advertising to stimulate retail store customer traffic. We use targeted direct-mail advertising to preferred customers selected from a database of approximately 27.8 million proprietary credit card, third-party credit card, and cash customers that have purchased merchandise from us within the past three years. We may also use radio, television, and newspaper advertising and fashion shows to stimulate traffic at certain strategic times of the year. We also use pricing policies, displays, store promotions, and convenient store hours to attract customers. We maintain websites for our LANE BRYANT, FASHION BUG, and CATHERINES brands that provide information regarding current fashions and promotions. We believe that, with the planning and guidance of our specialized home-office personnel, each brand provides such displays and advertising as may be necessary to feature certain merchandise or certain promotional selling prices from time to time.

We offer our Retail Store customers various loyalty card programs. Customers who join these programs are entitled to various benefits, including discounts and rebates on purchases during the membership period. Customers generally join these programs by paying an annual membership fee. Additional information on our loyalty card programs is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; CRITICAL ACCOUNTING POLICIES; Revenue Recognition” below.

In August 2003, we launched FIGURE(R) magazine, a periodic fashion and lifestyle magazine for women. The magazine features clothing and fashions from our LANE BRYANT, FASHION BUG, and CATHERINES brands, and also covers topics such as: beauty; health and fitness; home, food, and entertaining; relationships; and social and community issues. FIGURE magazine is available by subscription, and is also sold in all of our stores and at selected newsstands and supermarkets, including certain national booksellers. Since its inception, the magazine has grown to a per-issue circulation of more than 400,000 copies.

Sourcing

To meet the demands of our customers, we access both the domestic wholesale and overseas markets for our Retail Store merchandise purchases. This allows us to maintain flexible lead times, respond quickly to current fashion trends, and quickly replenish merchandise inventory as necessary. During Fiscal 2006, we purchased merchandise from approximately 1,000 suppliers and factories located throughout the world. We use our overseas sourcing operations, which generally require longer lead times, primarily to purchase fashion-basic merchandise for our stores. In Fiscal 2006, our overseas sourcing operations accounted for approximately 27% of Retail Store merchandise purchases. Overseas sourcing by brand, as a percent of merchandise purchases, was approximately 29% for FASHION BUG, 27% for LANE BRYANT, and 20% for CATHERINES. In addition, during Fiscal 2006, we purchased a portion of LANE BRYANT merchandise from Mast Industries, Inc. (“Mast”). Mast, a contract manufacturer and apparel importer, is a wholly-owned subsidiary of Limited Brands, Inc. (“Limited Brands”). These purchases from Mast accounted for approximately 12% of our total Retail Store merchandise purchases and approximately 32% of merchandise purchases for LANE BRYANT during Fiscal 2006. No other vendor accounted for more than 4% of total Retail Store merchandise purchases during Fiscal 2006.


We pay for a majority of our merchandise purchases outside the United States using letters of credit with third-party vendors where we are the importer of record. To date, we have not experienced difficulties in purchasing merchandise overseas or importing such merchandise into the United States. Should events such as political instability or a natural disaster result in a disruption of normal activities in any single country with which we do business, we believe that we would have adequate alternative sources of supply.

Distribution and Logistics

We currently operate two distribution centers for our Retail Stores segment. For our FASHION BUG stores, we operate a distribution center in Greencastle, Indiana. Located on a 150-acre tract of land, this facility contains a building of approximately 1,000,000 square feet. We estimate that this facility has the capacity to service up to approximately 1,800 stores. For our LANE BRYANT stores and CATHERINES stores, we operate a distribution center in White Marsh, Maryland. Located on 29 acres of land, the White Marsh facility contains a building of approximately 393,000 square feet, which is currently designed to service up to approximately 1,600 stores. Beginning in Fiscal 2007, we also expect to use the Greencastle facility to service our LANE BRYANT OUTLET stores. Our distribution and logistics operations provide adequate current capacity, and we are currently evaluating our overall long-term distribution and logistics requirements for both our Retail Stores and our Direct-to-Consumer segments.

Substantially all of our merchandise purchases are received at these distribution facilities, where they are prepared for distribution to our stores. Automated sorting systems in the distribution centers enhance the flow of merchandise from receipt to quality control inspection, receiving, ticketing, packing, and final shipment. Merchandise is shipped to each store principally by common carriers. We use computerized automated distribution attributes to combine shipments when possible and improve the efficiency of the distribution operations.

Inventory and fulfillment activities for our Retail Stores segment E-commerce operations are handled by a third-party warehouse facility in Indianapolis, Indiana. We have 150,000 square feet of space which is used for merchandise receipt, storage, picking, packing, shipping, and returns processing. A majority of the merchandise is received from our Greencastle and White Marsh distribution centers. This facility, which shipped approximately 2,900,000 units in Fiscal 2006, has a current capacity of approximately 7,500,000 units per year.

DIRECT-TO-CONSUMER SEGMENT

We established our Direct-to-Consumer segment in June 2005 with the acquisition of Crosstown Traders, Inc. Crosstown Traders operates multiple catalog titles and related websites, with the majority of revenues derived from the catalog sales of women's apparel, footwear, and accessories, of which plus-sizes are an important component. Crosstown Traders also derives revenues from the catalog sales of food and gifts, a substantial majority of which occur during the Christmas holiday season. In addition to catalog and catalog-related E-commerce operations, Crosstown Traders operates three catalog outlet stores.

The acquisition of Crosstown Traders provides us with an infrastructure for the development and expansion of our Direct-to-Consumer segment, which includes our catalog and catalog-related E-commerce sales distribution channels. We will continue to build infrastructure to prepare for the launch of new catalog offerings, including the launch of the LANE BRYANT catalog in 2007. The LANE BRYANT catalog trademark, which is currently licensed by a third party, will revert to us in late Fiscal 2008. We also plan to launch additional catalog titles in the future, including apparel, home, and footwear titles under the FASHION BUG and CATHERINES brands, and plan to develop cross-channel selling tools with our Retail Stores segment.



The Direct-to-Customer segment complements the Retail Stores segment by providing a different channel to serve our customers’ lifestyle needs with targeted merchandise offerings and marketing media. This channel allows us to offer to our customers targeted merchandise assortments in wide color and size selections not generally available in our retail stores. In addition, we believe that the mail order catalogs and catalog-related E-commerce serve as a cost efficient means of building brand awareness as well as testing market acceptance of new products and new brands.

Merchandising and Buying

Generally, the initial sourcing of new merchandise for a catalog begins six to nine months before the catalog is mailed. We target each of our catalogs to its particular market by offering a focused assortment of merchandise designed to meet the needs and preferences of each catalog’s customers. Through market research and ongoing testing of new products and concepts, we develop a separate merchandise strategy for each catalog, including appropriate merchandise assortments, price points, mailing plans, and product presentation. We seek to develop exclusive or private label products for a number of our catalogs on an ongoing basis to further differentiate each catalog’s identity.

Our FIGI’S food and specialty gift catalog experiences a peak sales period during the Christmas season, with approximately 80% of its annual sales occurring during our fourth quarter. We generally build inventory before this peak sales period.

Marketing and Promotions

Our catalogs range in size from approximately 32 - 132 pages, with 4 - 12 editions per year depending on the seasonality and fashion content of the products offered. We may mail each edition several times each season with slight variations in format and content. We have mailed approximately 145 million catalogs since our acquisition of Crosstown Traders on June 2, 2005, which was in line with our catalog circulation plans. Our circulation strategy was focused on mailing to customers who had already purchased from us and acquiring new customers through targeted prospecting.

We use outside creative agencies or our own creative staff to develop the designs, layout, copy, feel, and theme of our catalogs. We have created E-commerce-enabled websites for each of our catalogs, which offer all of a particular catalog’s merchandise and more extensive offerings than any single issue of a print catalog. Customers can request catalogs and place orders for not only website merchandise, but also for merchandise from any current print catalog already mailed. The website for each catalog is prominently promoted within each catalog.

We maintain all of our catalog, internet, retail customer, and transaction data in multi-channel customer databases. This cross-channel customer database contains detailed purchasing information and certain demographic information about our customers, E-mail addresses, and the names and addresses of individuals who have requested catalogs from us. This database enables us to see how our customers use our various channels to shop.

We continuously analyze our customers’ responses to our catalog mailings and E-commerce promotions in order to understand our customers’ profit contribution. We have developed our own customer selection criteria to segment our customer list according to many variables, allowing our marketing department to analyze each segment's buying patterns. We review the results of each of our catalog mailings. The results are used to further refine the frequency and selectivity of our catalog mailings in an effort to maximize response rates and profitability. We also analyze historical purchasing patterns of existing customers, including recency, frequency, and monetary activity, to assist in merchandising and customer targeting and to increase sales to existing customers.



We acquire lists of prospective customers by renting or exchanging lists with database cooperatives and other sources, including direct competitors. Our most productive prospects tend to come from customer lists of other women's apparel catalogs. We also rent our customer list to others, including direct competitors. In order to determine which prospective customers will receive a particular catalog mailing, we analyze available information concerning such prospects, including historical profit contribution for comparable customer segments and, to the extent possible, use the same type of statistical modeling techniques used to target mailings to our own customers.

We strive to develop promotional formats that will stimulate customer purchases from our catalogs and websites. Successful promotional formats include different catalog wraps, multiple-unit purchase discounts, free shipping, and promotional tag lines such as “last chance” offers. We also market our E-commerce websites in our catalogs. This marketing channel has been the principal marketing mechanism to reach our E-commerce target audience.

Leveraging its experience in handling direct-to-consumer transactions, Crosstown Traders continues to refine its technology infrastructure and customer service processes to make catalog shopping as convenient as possible. We maintain toll free numbers, accessible 24 hours a day, seven days a week (except for major holidays) to accept orders and catalog requests, and to answer order and credit-account-related questions. We utilize an 850-seat call center network in multiple locations supported by integrated system platforms designed to provide uninterrupted services to our customers. Telephone calls are answered by knowledgeable call-center associates, who process customer orders and answer questions on merchandise and its availability. These customer service associates also assist customers in the selection of merchandise and can provide detailed information regarding size, color, fit, and other merchandise features. Many order taking, order status, and other service inquiry functions can also be conducted on Crosstown’s E-commerce sites, allowing customers to browse and shop at their own pace.
 
Our sales associates enter order data into an online computerized system, which systematically updates its customer database and permits us to measure customer responses to our individual merchandise and catalog mailings. Much of the sales and inventory information is available to our buying staff on a real-time basis throughout the business day. We have achieved efficiencies in order processing and fulfillment, which permit the shipment of most orders the following business day.

Sourcing

We use primarily the domestic wholesale markets for our Direct-to-Consumer merchandise purchases. During Fiscal 2006, we purchased merchandise from approximately 900 suppliers and factories located throughout the United States. No single vendor accounted for more than 3% of total Direct-to-Consumer merchandise purchases during Fiscal 2006. We are beginning to shift a portion of the sourcing for our Direct-to-Consumer segment from domestic markets to our international sourcing network, using third-party suppliers.














Distribution and Logistics

We operate several distribution centers and an 850-seat call center network supported by integrated systems platforms for our Direct-to-Consumer segment, which handle receiving, quality control inspection, and distribution directly to our Direct-to-Consumer catalog and catalog-related E-commerce customers. A 240,000 square foot leased facility in Tucson, Arizona ships approximately 3,500,000 packages per year to customers of our OLD PUEBLO TRADERS, MONTEREY BAY CLOTHING COMPANY, INTIMATE APPEAL, and REGALIA catalogs. A separate 100,000 square foot leased facility in Tucson, which became fully operational in the first quarter of Fiscal 2007, will service footwear for all catalogs and E-commerce sites (including Retail Store E-commerce sites commencing in Fiscal 2007). A 240,000 square foot leased facility in Wilmington, North Carolina ships approximately 2,900,000 packages per year to customers of our BEDFORD FAIR, WILLOW RIDGE, BROWNSTONE STUDIO, and LEW MAGRAM catalogs. We own a 130,000 square-foot automated distribution center in Marshfield, Wisconsin which serves as the main distribution center for our FIGI’S catalog and ships approximately 2,000,000 packages per year. Two additional warehouses (a 122,000 square-foot leased facility in Stevens Point, Wisconsin, which services our HOME ETC. catalog, and a 46,000 square-foot owned facility in Neillsville, Wisconsin) also service FIGI’S. Our distribution and logistics operations provide adequate current capacity, and we are currently evaluating our overall long-term distribution and logistics requirements for both our Retail Stores and our Direct-to-Consumer segments.


Proprietary Credit Programs

We seek to encourage sales through the promotion of our proprietary credit cards. We believe that our credit cards act as promotional vehicles by engendering customer loyalty, creating a substantial base for targeted direct-mail promotion, and encouraging incremental sales. Our FASHION BUG, LANE BRYANT, CATHERINES, and Crosstown Traders brands each offer our customers the convenience of proprietary credit card programs.

Our FASHION BUG credit card program accounted for approximately 29% of FASHION BUG retail sales in Fiscal 2006, and has approximately 1.9 million active accounts. We control credit policies and service the FASHION BUG proprietary credit card file, and, through various agreements, we securitize and sell the credit card receivables generated by this program.

The LANE BRYANT credit card program accounted for approximately 30% of LANE BRYANT retail sales in Fiscal 2006, and has approximately 1.2 million active accounts. During Fiscal 2006, we used a third-party bank to finance and service the LANE BRYANT credit card program. This third-party bank provides new account approval, credit authorization, billing, and account collection services. Under a non-recourse agreement with the third-party bank, we are reimbursed with respect to sales generated by the credit cards. Our agreement with the third-party bank expires in October 2007. Upon termination of the agreement, we have the right to purchase the receivables allocated to the Lane Bryant retail stores under the agreement at book value from the third party.

Our CATHERINES credit card program accounted for approximately 32% of CATHERINES retail sales in Fiscal 2006, and has approximately 0.7 million active accounts. Prior to March 2005, we had a non-recourse agreement with a third-party bank for our CATHERINES brand that was similar to the LANE BRYANT program. In March 2005, we purchased the CATHERINES credit card portfolio for approximately $54.6 million. Subsequent to this acquisition, we control credit policies and service the CATHERINES proprietary credit card file, and, through various agreements, we securitize and sell the credit card receivables generated by this program.





The credit card receivables from the Crosstown Traders apparel program, which we securitized subsequent to our acquisition of Crosstown Traders, are originated in a non-bank program by Crosstown Traders. Our Crosstown Traders credit card program accounted for approximately 36% of Crosstown Traders apparel retail sales in Fiscal 2006, and has approximately 0.9 million active accounts. We control credit policies and service the Crosstown Traders proprietary credit card file. In addition to this program, FIGI’S, one of Crosstown Traders’ non-apparel catalog brands, offers interest-free, three-payment credit terms over three months to its customers, with the first payment due on a defined date 30 to 60 days after a stated holiday.

A more comprehensive description of our asset securitization process and our commitments under the third-party bank agreements is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; FINANCIAL CONDITION; Off-Balance-Sheet Arrangements” and “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements; NOTE 17. ASSET SECURITIZATION” below.


COMPETITION

The women's specialty retail apparel and direct-to-consumer businesses are highly competitive, with numerous competitors, including department stores, specialty apparel stores, discount stores, and mail-order and E-commerce companies. We cannot reasonably estimate the number of our competitors due to the large number of women’s apparel and direct-to-consumer retailers. The primary elements of competition common to both our Retail Stores segment and our Direct-to-Consumer segment are merchandise style, size, selection, fit, quality, display, price, attractive website/catalog layout, efficient fulfillment of website and catalog mail orders, and personalized service to the customer. For our Retail Stores segment, store location, design, advertising, and promotion are also significant elements of competition.


EMPLOYEES

As of the end of Fiscal 2006, we employed approximately 28,000 associates, which included approximately 17,500 part-time employees. In addition, we hire a number of temporary employees during the Christmas season. Approximately 100 of our employees are represented by unions whose contracts are currently due to expire in August 2006. We expect to negotiate new agreements with these unions by the end of August 2006. We believe that overall our relationship with these unions, and our employees in general, is satisfactory.


TRADEMARKS AND SERVICEMARKS

We own, or are in the process of obtaining, all rights to the trademarks and trade names we believe are necessary to conduct our business as presently operated. “FASHION BUG(R)”, “FASHION BUG PLUS(R)”, “BUNDLE OF JOY(R)”, “FIGURE(R)”, “L.A. BLUES(R)”, “CATHERINES(R)”, “CATHERINES PLUS SIZES(R)”, “C.S.T. STUDIO(R)”, “C.S.T. SPORT(R)”, “MAGGIE BARNES(R)”, “ANNA MAXWELL(R)”, “LIZ & ME(R)”, “SERENADA(R)”, “LANE BRYANT(R)”, “LANE BRYANT OUTLETTM” “VENEZIA(R)”, “CACIQUE(R)”, “PETITE SOPHISTICATE(R)”, “OLD PUEBLO TRADERS(R)”, “BEDFORD FAIR LIFESTYLESTM”, “BEDFORD FAIR SHOESTYLESTM”, “WILLOW RIDGETM”, “LEW MAGRAM(R)”, “BROWNSTONE STUDIO(R)”, “REGALIA(R)”, “INTIMATE APPEAL(R)”, “MONTEREY BAY CLOTHING COMPANY(R)”, “HOME ETC. TM”, “COWARD(R) SHOE”, “FIGI’S(R)”, and several other trademarks and servicemarks of lesser importance to us have been registered or are in the process of being registered with the United States Patent and Trademark Office and in other countries.



We also own the following Internet domain name registrations: catherines.com, charming.com, charmingshoppes.com, fashionbug.com, fashionbugcard.com, fashionbugplus.com, figuremag.com, lanebryant.com, figis.com, bedfordfair.com, brownstonestudio.com, cowardshoe.com, intimateappeal.com, lewmagram.com, willowridgecatalog,com, oldpueblotraders.com, regaliaonline.com, shoetrader.com, shopthebay.us, and others of lesser importance.


EXECUTIVE OFFICES

Charming Shoppes, Inc., was incorporated in Pennsylvania in 1969. Our principal offices are located at 450 Winks Lane, Bensalem, Pennsylvania 19020. Our telephone number is (215) 245-9100.


AVAILABLE INFORMATION

Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our website at www.charmingshoppes.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our historical filings can also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or can be accessed directly from the SEC’s website at www.sec.gov. Information on the operation of the Public Reference Room can be obtained by calling the SEC at (800) 732-0330. See “PART III; Item 10. Directors and Executive Officers of the Registrant” below for additional information that is available on our Internet website.


Item 1A. Risk Factors

You should carefully consider and evaluate all of the information in this annual report on Form 10-K and the documents incorporated by reference into this report, including the risk factors listed below. Any of these risks could materially and adversely affect our business, financial condition and operating results, and could cause our actual results to differ materially from our plans, projections, or other forward-looking statements included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and elsewhere in this Report on Form 10-K and in our other public filings. The occurrence of one or more of these risks could also materially and adversely affect the price of our common stock.


RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Our business is dependent upon our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors.

Customer tastes and fashion trends are volatile and tend to change rapidly, particularly for women's apparel. Our success depends in part on our ability to effectively predict and respond to quickly changing fashion tastes and consumer demands, and to translate market trends into appropriate, saleable product offerings. If we are unable to successfully predict or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales will be lower and we may be faced with a substantial amount of unsold inventory or missed sales opportunities. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.


Existing and increased competition in the women's retail apparel and direct-to-consumer markets may reduce our net revenues, profits, and market share.

The women's specialty retail apparel and direct-to-consumer markets are highly competitive. Our competitors include individual and chain fashion specialty stores, department stores, discount stores, catalog retailers, and Internet-based retailers. As a result of this competition, we are required to effectively market and competitively price our products to consumers in diverse markets, and we may experience pricing pressures, increased marketing expenditures, and loss of market share, which could have a material adverse effect on our business, financial condition, and results of operations. We believe that the principal bases upon which we compete are merchandise style, size, selection, quality, and price, as well as store location, design, advertising, promotion, and personalized service to our customers. Other women's apparel and direct-to-consumer companies with greater financial resources, marketing capabilities, or brand recognition may enter the plus-size business. We cannot give assurance that we will be able to compete successfully against existing or future competitors.

A slowdown in the United States economy, an uncertain economic outlook, and escalating energy costs could lead to reduced consumer demand for our products in the future.

Consumer spending habits, including spending for our products, are affected by, among other things, prevailing economic conditions, levels of employment, salary levels, wage rates, availability of consumer credit, consumer confidence, and consumer perception of economic conditions. A general slowdown in the United States economy and an uncertain economic outlook could adversely affect consumer spending habits and mall traffic, which could result in a reduction in our net sales. A prolonged economic downturn could have a material adverse effect on our business, financial condition, and results of operations.

Maintaining and improving our operating margins is dependent on our ability to successfully control our operating costs.

In order to maintain or improve our operating margins, we need to successfully manage our operating costs. Our inability to successfully manage labor costs, increases in costs such as postage and paper, occupancy costs, or other operating costs, or our inability to take advantage of opportunities to reduce operating costs, would adversely affect our operating margins and our results of operations. In addition, we may be unable to obtain adequate insurance coverage for our operations at a reasonable cost.

Our operating results fluctuate from season to season.

Our retail store and direct-to-consumer operations experience seasonal fluctuations in net sales and consequently in operating income, with peak sales occurring during the Easter, Labor Day, and Christmas seasons. In addition, extreme or unseasonable weather can affect our sales. Any decrease in net sales or margins during our peak selling periods, or in the availability of working capital needed in the months before these periods, could have a material adverse effect on our business, financial condition, and results of operations. We usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, including perishable products in certain of our direct-to-consumer businesses, before the peak selling periods. If we are not successful in selling our inventory, especially during our peak selling periods, we may be forced to rely on markdowns or promotional sales to dispose of the inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business, financial condition, and results of operations.





We may not be able to obtain sufficient working capital financing.

Our business requires substantial investment in our inventory for a long period before sales occur. Consequently, we require significant amounts of working capital financing. We depend on the availability of credit to fund our working capital, including credit we receive from our suppliers and their agents, on our credit card securitization program, and on our revolving credit facility. If we are unable to obtain sufficient financing at an affordable cost, we might be unable to adequately merchandise our stores, E-commerce, or catalog businesses, which could have a material adverse effect on our business, financial condition, and results of operations.

We face challenges in managing our recent growth.

Our operating challenges and management responsibilities are increasing as we continue to grow and expand into additional distribution channels. Successful growth will require that we continue to expand and improve our internal systems and our operations, including our distribution infrastructure. Our business plan depends on our ability to open and operate new retail stores and to convert, where applicable, the formats of existing stores on a profitable basis. In addition, we will need to identify, hire and retain a sufficient number of qualified personnel to work in our stores. We are also seeking to complete the integration of Crosstown Traders and our Direct-to-Consumer channel into our current operating structure. Growth in our Direct-to-Consumer channel is dependent on sufficient response rates to our catalogs and Internet websites and access to new customers, which may not occur. In addition, we plan to continue to build infrastructure in our Direct to Consumer channel to prepare for the launch of new catalogs, including the launch of the LANE BRYANT catalog in calendar 2007 when the LANE BRYANT catalog trademark, currently licensed by a third party, reverts to us. These objectives have created, and may continue to create, additional pressure on our staff and on our operating systems. We cannot assure the successful implementation of our business plan for our Retail Store and Direct-to-Consumer segments, or that we will achieve our objectives as quickly or as effectively as we hope.

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 Chief Executive Officer, Dorrit J. Bern, and her management team. The loss of services of one or more of our key personnel could have a material adverse effect on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. We do not maintain key-person life insurance policies with respect to any of our employees.

Our business plan is largely dependent upon continued growth in the plus-size women’s apparel market.

Our business is primarily focused on sales of plus-size women’s apparel, which represents a majority of our total net sales. Our operating results could be adversely affected by a lack of continued growth in the plus-size women’s apparel market.











We could be materially and adversely affected if any of our distribution or fulfillment centers are shut down.

We operate distribution facilities in Greencastle, Indiana, and Baltimore County, Maryland, and we operate catalog fulfillment centers in Tucson, Arizona, Marshfield, Wisconsin, Stevens Point, Wisconsin, and Wilmington, North Carolina. Most of the merchandise we purchase is shipped directly to our distribution and fulfillment centers, where it is prepared for shipment to the appropriate stores or to the customer. If any of our distribution or fulfillment centers were to shut down or lose significant capacity for any reason, the other distribution or fulfillment centers may not be able to adequately support the resulting additional distribution demands, in part because of capacity constraints and in part because each distribution or fulfillment center services a particular brand or brands. As a result, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores or customers during the time it takes for us to reopen or replace the affected distribution or fulfillment center.

Natural disasters, war, acts of terrorism, or the threat of either may negatively impact the availability of merchandise and otherwise adversely impact our business.

In the event of a natural disaster, war, or acts of terrorism, or if either are threatened, our ability to obtain merchandise for sale in our stores or through our direct-to-consumer business may be negatively impacted. A significant portion of our merchandise is imported from other countries. If imported goods become difficult or impossible to bring into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our net sales and profit margins may be adversely affected. If commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers, fulfillment centers, stores, or our direct-to-consumer customers. In the event of a natural disaster or acts of terrorism in the United States, or the threat of either, we may be required to suspend operations in some or all of our stores, which could have a material adverse impact on our business, financial condition, and results of operations.

Our inability to successfully manage customer service or fulfillment for our E-commerce websites or our catalog business could adversely impact our operating results.

Successful management of our E-commerce and catalog operations is dependent on our ability to maintain efficient and uninterrupted customer service and order fulfillment. 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. In addition, we may not be able to hire sufficient qualified associates to support our E-commerce or catalog operations during peak periods, especially during the Christmas holiday season. The occurrence of one or more of these events could adversely affect our E-commerce or catalog businesses.













We rely on foreign sources of production.

We purchase a significant portion of our apparel directly in foreign markets and indirectly through domestic vendors with foreign sources. We 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;
 
●
increased security requirements applicable to imported goods;
 
●
trade restrictions;
 
●
imposition of, or changes in, duties, quotas, taxes, and other charges on imports;
 
●
currency and exchange risks;
 
●
issues relating to compliance with domestic or international labor standards;
 
●
concerns over anti-dumping,
 
●
delays in shipping; or
 
●
increased costs of transportation.
 
New initiatives could be proposed that would have an impact on the trading status of certain countries, and could include retaliatory duties or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries. The future performance of our business will depend on our foreign suppliers and may be adversely affected by the factors listed above, all of which are beyond our control.

Issues of global workplace conditions may adversely affect our business.

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. Current global workplace concerns of the public include perceived low wages, poor working conditions, age of employees, and various other employment standards. These globalization issues may affect the available supply of certain manufacturers' products, which may result in increased costs to us. Furthermore, a negative customer perception of any of our key vendors or their products may result in a lower customer demand for our apparel.

We depend on strip shopping center and mall traffic and our ability to identify suitable store locations for our Retail Stores segment.

Our sales are dependent in part on a high volume of strip shopping center and mall traffic. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor stores or changes in customer shopping preferences. A decline in the popularity of strip shopping center or mall shopping among our target customers could have a material adverse effect on our business. To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations. We cannot assure you that desirable store locations will continue to be available. Acquisition of additional store locations is also dependent on our ability to successfully negotiate lease terms for such locations. In addition, the timely opening of new store locations could be adversely affected by delays in obtaining necessary permits and approvals, lack of availability of construction materials and labor, or work stoppages.




We may be unable to protect our trademarks and other intellectual property rights.

We believe that our trademarks and servicemarks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and servicemarks on a worldwide basis. We are not aware of any claims of infringement or challenges to our right to use any of our trademarks and servicemarks in the United States. Nevertheless, there can be no assurance that the actions we have taken to establish and protect our trademarks and servicemarks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks, servicemarks and proprietary rights of others. Also, others may assert rights in, or ownership of, our trademarks and other proprietary rights, and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States.


OTHER RISKS

Anti-takeover provisions in our governing documents and Pennsylvania law may discourage other companies from attempting to acquire us.

Some provisions of our articles of incorporation and bylaws and of Pennsylvania law may discourage some transactions where we would otherwise experience a change in control. For example, our articles of incorporation and bylaws contain provisions that:
 
●
 
classify our board into three classes, with one class being elected each year;
 
●
do not permit cumulative voting;
 
●
permit our board to issue "blank check" preferred stock without shareholder approval;
 
●
require certain advance notice procedures with regard to the nomination of candidates for election as directors, other than nominations by or at the direction of our board;
 
●
prohibit us from engaging in some types of business combinations with a holder of 10% or more of our voting securities without super-majority shareholder or board approval;
 
●
prevent our directors from being removed without cause except upon super-majority shareholder approval; and
 
●
prevent a holder of 20% or more of our common stock from taking certain actions without certain approvals.
 

We also have adopted a Shareholder Rights Plan. This plan may make it more difficult and more expensive to acquire us, and may discourage open market purchases of our common stock or a non-negotiated tender or exchange offer for such stock, and, accordingly, may limit a shareholder's ability to realize a premium over the market price of our common stock in connection with any such transaction.









Failure to comply with the provisions of the Sarbanes-Oxley Act of 2002 could adversely affect our business.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to perform periodic assessments of the effectiveness of our internal control over financial reporting, and to report on the results of our assessments in our quarterly and annual reports to the Securities and Exchange Commission. Our independent registered public accounting firm is required on an annual basis to attest to whether or not our assessment is fairly stated in all material respects and to separately report on whether or not they believe that we maintained, in all material respects, effective internal control over financial reporting. If we are unable to maintain effective internal control over financial reporting, or if our independent registered public accounting firm is unable to timely attest to our assessment, we could be subject to regulatory sanctions and a possible loss of public confidence in the reliability of our financial reporting. Such a failure could result in our inability to provide timely and/or reliable financial information and could adversely affect our business.

New accounting rules or regulations or changes in existing rules or regulations could adversely impact our reported results of operations.

Changes to existing accounting rules or the adoption of new rules could require us to recognize financial statement effects which could have an adverse effect on our reported results of operations.

Changes in estimates related to our property, plant, equipment, or our intangible assets could adversely affect our reported results of operations.

We make certain significant assumptions, estimates, and projections related to the useful lives of our property, plant, and equipment and the valuation of intangible assets related to acquisitions. The carrying amount and/or useful life of these assets are subject to periodic valuation tests for impairment. Impairment results when the carrying value of an asset exceeds the undiscounted (or for goodwill and indefinite-lived intangible assets the discounted) future cash flows associated with the asset. If actual experience were to differ materially from the assumptions, estimates, and projections used to determine useful lives or the valuation of property, plant, equipment or intangible assets, a write-down for impairment of the carrying value of the assets, or acceleration of depreciation or amortization of the assets, could result. Such a write-down or acceleration of depreciation or amortization could have an adverse impact on our reported results of operations.


Item 1B. Unresolved Staff Comments

Not applicable.


Item 2. Properties

We lease all our stores, with the exception of three stores that we own. Typically, store leases have initial terms of 5 to 20 years and generally contain provisions for co-tenancies, renewal options, additional rents based on a percentage of sales, and payment of real estate taxes and common area charges.







With respect to leased stores open as of January 28, 2006, the following table shows the number of store leases expiring during the calendar periods indicated, assuming the exercise of our renewal options:

Period
Number of
Leases Expiring(1)
   
2006         
205(2) 
2007 - 2011         
652
2012 - 2016         
439
2017 - 2021         
445
2022 - 2026         
422
2027 - 2031         
56
Thereafter         
17
____________________
(1) Excludes 3 Crosstown Traders outlet stores
(2) Includes 142 stores on month-to-month leases

Additional information with respect to facilities that we own or lease is as follows:

Size in
  
Leased/
  
Sq. Feet
Location
Owned
Description
       
1,000,000
Greencastle, IN
Owned
FASHION BUG distribution center
393,000
White Marsh, MD
Owned
LANE BRYANT and CATHERINES distribution center
240,000
Tucson, AZ
Leased
Crosstown Traders distribution center
240,000
Wilmington, NC
Leased
Crosstown Traders distribution center
213,000
Memphis, TN
Owned
Warehouse facility (currently leased to a third party)
145,000
Bensalem, PA
Owned
Corporate technology center, LANE BRYANT OUTLET operations, and corporate administrative offices
142,000
Bensalem, PA
Leased
Corporate headquarters/FASHION BUG operations
135,000
Columbus, OH
Leased
LANE BRYANT home office(1)
130,000
Marshfield, WI
Owned
Crosstown Traders distribution center
129,000
Stevens Point, WI
Leased
Crosstown Traders distribution and call centers
100,000
Tucson, AZ
Leased
Crosstown Traders distribution center
63,000
Memphis, TN
Owned
CATHERINES home office
63,000
Marshfield, WI
Owned
Crosstown Traders administrative offices and call center
60,000
Phoenix, AZ
Leased
Crosstown Traders manufacturing facility
46,000
Neillsville, WI
Owned
Crosstown Traders distribution center
45,000
Tucson, AZ
Leased
Crosstown Traders offices
40,000
Greenwich, CT
Leased
Crosstown Traders offices
23,000
Hong Kong, PRC
Owned
International sourcing offices
13,000
Hong Kong, PRC
Leased
International sourcing warehouse and offices
30,000
Miami Township, OH
Leased
Spirit of America National Bank (our wholly-owned credit card bank subsidiary) and credit operations
22,000
Carlsbad, CA
Leased
Crosstown Traders offices
17,000
New York, NY
Leased
E-commerce operations
____________________
(1) During Fiscal 2006, we relocated our LANE BRYANT home office from a 130,000 square-foot leased facility in Reynoldsburg, Ohio to the facility in Columbus, Ohio.


Item 3. Legal Proceedings

Other than ordinary routine litigation incidental to our business, there are no other pending material legal proceedings that we or any of our subsidiaries are a party to, or of which any of their property is the subject. There are no proceedings that are expected to have a material adverse effect on our financial condition or results of operations.


Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.


Additional Part I Information - Our Executive Officers

The following list contains certain information relative to our executive officers. There are no family relationships among any of our executive officers.

Dorrit J. Bern, 55, has served as Chairman of the Board of Directors since January 1997. She has also served as President and Chief Executive Officer since September 1995. Ms. Bern’s term as a Director expires in 2008.

Joseph M. Baron, 58, has served as Executive Vice President and Chief Operating Officer since March 2002. Before that, he served as President and Chief Executive Officer of Homelife Corporation from February 1999 to October 2001. Homelife Corporation filed a bankruptcy petition under Chapter 11 of the U. S. Bankruptcy Code during July 2001.

James G. Bloise, 62, has served as Executive Vice President - Supply Chain Management, Information Technology, and Shared Business Services since December 2005 and as Senior Vice President - Supply Chain Management from March 2002 to December 2005. Before that, he served as an executive management consultant. From May 1996 to July 1999, Mr. Bloise served as Chief Operating Officer for the Calvin Klein Jeanswear Division of Warnaco, Inc. (formerly Design Holdings, Ltd., a NYSE-listed company).

Michel Bourlon, 46, has served as Executive Vice President - Sourcing since March 2004. Before that, he served as Managing Director of Eddie Bauer International (Hong Kong) Ltd., from September 1997 to February 2004.

Anthony A. DeSabato, 57, has served as Executive Vice President - Corporate and Labor Relations, and Business Ethics since July 2003. Before that, he served as Executive Vice President and Corporate Director of Human Resources since 1990, and he has been employed by us since 1987.

Eric M. Specter, 48, has served as Executive Vice President - Chief Financial Officer since January 1997, and he has been employed by us since 1983.

Colin D. Stern, 57, has served as Executive Vice President and General Counsel since 1990, and he has been employed by us since 1989. He has also served as Secretary since February 1998.



Gale H. Varma, 55, has served as Executive Vice President - Human Resources since July 2003. Before that, she served as Division Vice President - Human Resources and Ethics Officer for the Prudential Institutional Employee Benefits division of Prudential Financial Services, a division of Prudential Insurance Company of America, from September 1997 to April 2003.

Jonathon Graub, 47, has served as Senior Vice President - Real Estate, since December 1999, and he has been employed by us since 1981.

John J. Sullivan, 59, has served as Vice President - Corporate Controller since October 1998.










































PART II


Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock is traded on the over-the-counter market and quoted on the NASDAQ National Market (“NASDAQ”) under the symbol “CHRS,” and is listed and traded on the Chicago Board Options Exchange (“CBOE”) and Pacific Stock Exchange (“PCX”) under the symbol “QSR.” The following table sets forth the high and low sale prices for our common stock during the indicated periods, as reported by NASDAQ.

   
Fiscal 2006
  
Fiscal 2005
  
   
High
  
Low
  
High
  
Low
  
                           
1st Quarter
  
$
9.03
  
$
7.04
  
$
8.22
  
$
5.70
  
2nd Quarter
    
12.25
    
7.00
    
9.19
    
6.48
  
3rd Quarter
    
12.34
    
9.69
    
7.73
    
6.23
  
4th Quarter
    
14.07
    
10.86
    
9.64
    
7.55
  

The approximate number of holders of record of our common stock as of March 31, 2006 was 1,823. This number excludes individual stockholders holding stock under nominee security position listings.

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 near 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. (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; FINANCIAL CONDITION; Financing; Long-term Debt and Equity Financing” and “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT” below).

Information regarding our equity compensation plans appears in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below.
















Purchases of Equity Securities by the Issuer and Affiliated Purchasers:

           
Total
  
Maximum
  
           
Number
  
Number of
  
           
of Shares
  
Shares that
  
   
Total
      
Purchased as
  
May Yet be
  
   
Number
  
Average
  
Part of Publicly
  
Purchased
  
   
of Shares
  
Price Paid
  
Announced Plans
  
Under the Plans
  
Period
  
Purchased
  
per Share
  
or Programs(2)
  
or Programs(2)
  
                   
 
                          
October 30, 2005 through November 26, 2005
    
550(1)
 
$
11.20(1)
 
  
-
        
 
                          
November 27, 2005 through December 31, 2005
    
-
    
-
    
-
        
 
                          
January 1, 2006 through January 28, 2006
    
696(1)
 
  
12.65(1)
 
  
-
        
Total 
    
1,246    
  
$
12.01    
   
-
        
____________________
                          
      (1) Shares withheld for the payment of payroll taxes on employee stock awards that vested during the period.
  (2) In Fiscal 1998, we publicly announced that our Board of Directors granted authority to repurchase up to 10,000,000 shares of our common stock. In Fiscal 2000, we publicly announced that our Board of Directors granted authority to repurchase up to an additional 10,000,000 shares of our common stock. In Fiscal 2003, the Board of Directors granted an additional authorization to repurchase 6,350,662 shares of common stock issued to Limited Brands in connection with our acquisition of LANE BRYANT. From Fiscal 1998 through Fiscal 2003, we repurchased a total of 21,370,993 shares of common stock, which included shares purchased on the open market as well as shares repurchased from Limited Brands. As of January 28 2006 4,979,669 shares of our common stock remain available for repurchase under these programs. Our revolving credit facility allows the repurchase of our common stock subject to maintaining a minimum level of Excess Availability (as defined in the facility agreement) immediately before and after such repurchase. As conditions may allow, we may from time to time acquire additional shares of our common stock under these programs. Such shares, if purchased, would be held as treasury shares. No shares were acquired under these programs during the thirteen weeks ended January 28, 2006. The repurchase programs have no expiration date.




















Item 6. Selected Financial Data

The following table presents selected financial data for each of our five fiscal years ended as of February 2, 2002 through January 28, 2006. The selected financial data is taken from our audited financial statements and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and accompanying notes included under “Item 8. Financial Statements and Supplementary Data.”

CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY

   
Year Ended
  
   
Jan. 28,
  
Jan. 29,
  
Jan. 31,
  
Feb. 1,
  
Feb. 2,
  
(Dollars in thousands, except per share amounts)
  
2006(1)
  
2005(2)
  
2004(2)
  
2003(2)
  
2002(2) (3)
  
                                 
Operating Statement Data:
                                
Net sales 
  
$
2,755,725
  
$
2,334,736
  
$
2,288,363
  
$
2,413,356
  
$
1,995,785
  
                                 
Cost of goods sold, buying, catalog, and
                                
occupancy expenses
    
1,911,275
    
1,642,650
    
1,645,499
    
1,727,253
    
1,462,198
  
Selling, general, and administrative expenses 
    
683,231
    
577,301
    
558,248
    
603,502
    
486,204
  
Amortization of goodwill 
    
0
    
0
    
0
    
0
    
4,885
  
Expenses related to cost reduction plan 
    
0
    
605
(4)
  
11,534
(4)
  
0
    
0
  
Restructuring charge (credit) 
    
0
    
0
    
0
    
(4,813
)(5)
  
37,708
(5)
Total operating expenses 
    
2,594,506
    
2,220,556
    
2,215,281
    
2,325,942
    
1,990,995
  
Income from operations 
    
161,219
    
114,180
    
73,082
    
87,414
    
4,790
  
Other income 
    
9,093
    
3,098
    
2,050
    
2,328
    
4,730
  
Interest expense 
    
(17,911
)
  
(15,610
)
  
(15,609
)
  
(20,292
)
  
(18,701
)
Income (loss) before income taxes, minority interest,
                                
and cumulative effect of accounting changes
    
152,401
    
101,668
    
59,523
    
69,450
   
(9,181
)
Income tax provision (benefit) 
    
53,010
    
37,142
    
21,623
    
27,117
    
(1,838
)
Income (loss) before minority interest and cumulative
                                
effect of accounting changes
    
99,391
    
64,526
    
37,900
    
42,333
    
(7,343
)
Minority interest in net loss of consolidated subsidiary 
    
0
    
0
    
142
    
679
    
0
  
Cumulative effect of accounting changes, net of tax 
    
0
    
0
    
0
    
(49,098
)(6)
  
0
  
Net income (loss) 
  
$
99,391
  
$
64,526
  
$
38,042
  
$
(6,086
)
$
(7,343
)
                                 
Basic net income (loss) per share:
                                
Before cumulative effect of accounting changes
  
$
.83
  
$
.56
  
$
.34
  
$
.38
  
$
(.07
)
Net income (loss)
    
.83
    
.56
    
.34
    
(.05
)
  
(.07
)
Basic weighted average common shares outstanding 
    
119,831
    
116,196
    
112,491
    
113,810
    
105,842
  
                                 
Diluted net income (loss) per share:
                                
Before cumulative effect of accounting changes
  
$
.76
  
$
.52
  
$
.33
  
$
.36
  
$
(.07
)
Net income (loss)
    
.76
    
.52
    
.33
    
(.01
)
  
(.07
)
Diluted weighted average common shares and
                                
equivalents outstanding
    
137,064
    
133,174
    
128,558
    
130,937
    
105,842
  
                                 

(Table continued on next page)








CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)

   
Year Ended
  
(Dollars in thousands)
  
Jan. 28,
  
Jan. 29,
  
Jan. 31,
  
Feb. 1,
  
Feb. 2,
  
   
2006(1)
  
2005
  
2004
  
2003
  
2002(3)
  
Balance Sheet Data:
                                
Total assets 
  
$
1,566,995
  
$
1,303,771
  
$
1,173,070
  
$
1,139,564
  
$
1,147,911
  
Current portion - long-term debt 
    
14,765
    
16,419
    
17,278
    
12,595
    
9,379
  
Long-term debt 
    
191,979
    
208,645
    
202,819
    
203,045
    
208,491
  
Working capital 
    
338,641
    
413,989
    
266,178
    
190,797
    
119,873
  
Stockholders’ equity 
    
814,348
    
694,464
    
587,409
    
546,555
    
538,039
  
                                 
Performance Data:
                                
Including cumulative effect of accounting changes:
                                
Net return on average stockholders’ equity
    
13.2
%
  
10.1
%
  
6.7
%
  
(1.1
)%
  
(1.4
)%
Net return on average total assets
    
6.9
    
5.2
    
3.3
    
(0.5
)
  
(0.7
)
                                 
Before cumulative effect of accounting changes:
                                
Net return on average stockholders’ equity
    
13.2
%
  
10.1
%
  
6.7
%
  
7.6
%
  
(1.4
)%
Net return on average total assets
    
6.9
    
5.2
    
3.3
    
3.7
    
(0.7
)
____________________
                                
(1) Includes the results of operations of Crosstown Traders, Inc. from the date of acquisition (June 2, 2005).
(2) Certain prior-year amounts have been reclassified to conform to the current-year presentation.
(3) Includes the results of operations of Lane Bryant, Inc., from the date of acquisition (August 16, 2001).
(4) In March 2003, we announced a cost reduction plan designed to take advantage of the centralization of corporate administrative services and to realize certain efficiencies, in order to improve profitability. For details of the program, see “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 15. EXPENSES RELATED TO COST REDUCTION PLAN” below.
(5) In January 2002, our Board of Directors approved a restructuring plan that included the closing of THE ANSWER/ADDED DIMENSIONS chain of 77 stores; the conversion of approximately 20% of the ADDED DIMENSIONS stores to CATHERINES stores; the closing of 130 under-performing FASHION BUG stores; and the conversion of 44 FASHION BUG stores to LANE BRYANT stores. This restructuring plan resulted in a pre-tax charge of $37,708,000 in Fiscal 2002. We completed the restructuring plan by the end of Fiscal 2003, and recognized a pre-tax restructuring credit of $4,813,000, primarily as a result of favorable negotiations of lease terminations.
(6) In Fiscal 2003, we fully adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with the transition provisions of SFAS No. 142, we tested goodwill related to our CATHERINES acquisition for impairment, and recorded a write-down of $43,975,000 to reduce the carrying value of the goodwill to its estimated fair value. In addition, we recognized a charge of $5,123,000, net of income taxes of $2,758,000, in connection with the adoption of FASB Emerging Issues Task Force (“EITF”) Issue 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”  This charge represents a reduction in inventory cost for the cumulative effect of cash received from vendors as of the beginning of Fiscal 2003. Pro forma net loss, basic net loss per share, and diluted net loss per share for the fiscal year ended February 2, 2002, as if we had applied the provisions of EITF Issue 02-16, were ($8,126), ($.08), and ($.08), respectively.











Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the financial statements and accompanying notes appearing elsewhere in this report. As used in this report, the terms “Fiscal 2006,” “Fiscal 2005,” and “Fiscal 2004” refer to our fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004, respectively. The terms “Fiscal 2007” and “Fiscal 2008” refer to our fiscal years which will end on February 3, 2007 and February 2, 2008, respectively. The terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

With the exception of historical information, the matters contained in the following analysis and elsewhere in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of revenues, income or loss, cost reductions, capital expenditures, liquidity, financing needs or plans, and plans for future operations, as well as assumptions relating to the foregoing. The words “expect,” “should,” “project,” “estimate,” “predict,” “anticipate,” “plan,” “believes,” and similar expressions are also intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which we cannot predict or quantify. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. We assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements.

Factors that could cause our actual results of operations or financial condition to differ from those described in this report include, but are not necessarily limited to, the following, which are discussed in more detail in “Item 1A. Risk Factors,” above
 
●
 
Our business is dependent upon our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors, which we may not be able to successfully accomplish in the future.
 
●
A slowdown in the United States economy, an uncertain economic outlook, and escalating energy costs could lead to reduced consumer demand for our products in the future.
 
●
The women’s specialty retail apparel and direct-to-consumer markets are highly competitive and we may be unable to compete successfully against existing or future competitors.
 
●
We may be unable to successfully integrate the operations of Crosstown Traders, Inc. with the operations of Charming Shoppes, Inc. In addition, we cannot assure the successful implementation of our business plan for Crosstown Traders, Inc.
 
●
We cannot assure the successful implementation of our business plan for increased profitability and growth in our Retail Stores or Direct-to-Consumer segments.
 
●
Our business plan is largely dependent upon continued growth in the plus-size women’s apparel market, which may not occur.
 
●
We depend on key personnel, particularly our Chief Executive Officer, Dorrit J. Bern, and we may not be able to retain or replace these employees or recruit additional qualified personnel.
 





●
We depend on our distribution and fulfillment centers, and could incur significantly higher costs and longer lead times associated with distributing our products to our stores and shipping our products to our E-commerce and catalog customers if operations at any of these distribution and fulfillment centers were to be disrupted for any reason.
 
●
We depend on the availability of credit for our working capital needs, including credit we receive from our suppliers and their agents, and on our credit card securitization facilities. If we were unable to obtain sufficient financing at an affordable cost, our ability to merchandise our stores, E-commerce, or catalog businesses would be adversely affected.
 
●
Natural disasters, as well as war, acts of terrorism, or the threat of either may negatively impact availability of merchandise and customer traffic to our stores, or otherwise adversely affect our business.
 
●
We rely significantly on foreign sources of production and face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad. Such risks include (but are not necessarily limited to) political instability; imposition of, or changes in, duties or quotas; trade restrictions; increased security requirements applicable to imports; delays in shipping; increased costs of transportation; and issues relating to compliance with domestic or international labor standards.
 
●
Our Retail Stores and Direct-to-Consumer segments experience seasonal fluctuations in net sales and operating income. Any decrease in sales or margins during our peak sales periods, or in the availability of working capital during the months preceding such periods, could have a material adverse effect on our business. In addition, extreme or unseasonable weather conditions may have a negative impact on our sales.
 
●
We may be unable to obtain adequate insurance for our operations at a reasonable cost.
 
●
We may be unable to protect our trademarks and other intellectual property rights, which are important to our success and our competitive position.
 
●
We may be unable to hire and retain a sufficient number of suitable sales associates at our stores.
 
●
Our manufacturers may be unable to manufacture and deliver merchandise to us in a timely manner or to meet our quality standards.
 
●
Our Retail Stores segment sales are dependent upon a high volume of traffic in the strip centers and malls in which our stores are located, and our future retail store growth is dependent upon the availability of suitable locations for new stores.
 
●
Successful operation of our E-Commerce websites and our catalog business is dependent on our ability to maintain efficient and uninterrupted customer service and fulfillment operations.
 
●
We may be unable to manage significant increases in certain costs, including postage and paper, which could adversely affect our results of operations.
 
●
Response rates to our catalogs and access to new customers could decline, which would adversely affect our net sales and results of operations.
 
●
We may be unable to successfully implement our plan to improve merchandise assortments in our Retail Stores or Direct-to-Consumer segments.
 





●
We make certain significant assumptions, estimates, and projections related to the useful lives of our property, plant, and equipment and the valuation of intangible assets related to acquisitions. The carrying amount and/or useful life of these assets are subject to periodic valuation tests for impairment. Impairment results when the carrying value of an asset exceeds the undiscounted (or for goodwill and indefinite-lived intangible assets the discounted) future cash flows associated with the asset. If actual experience were to differ materially from the assumptions, estimates, and projections used to determine useful lives or the valuation of property, plant, equipment, or intangible assets, a write-down for impairment of the carrying value of the assets, or acceleration of depreciation or amortization of the assets, could result. Such a write-down or acceleration of depreciation or amortization would have an adverse impact on our reported results of operations.
 
●
Changes to existing accounting rules or the adoption of new rules could have an adverse impact on our reported results of operations.
 
●
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include our assessment of the effectiveness of our internal control over financial reporting in our annual reports. Our independent registered public accounting firm is also required to attest to whether or not our assessment is fairly stated in all material respects and to separately report on whether or not they believe that we maintained, in all material respects, effective internal control over financial reporting. If we are unable to maintain effective internal control over financial reporting, or if our independent registered public accounting firm is unable to timely attest to our assessment, we could be subject to regulatory sanctions and a possible loss of public confidence in the reliability of our financial reporting. Such a failure could result in our inability to provide timely and/or reliable financial information and could adversely affect our business.


OVERVIEW

In Fiscal 2006, our diluted earnings per share increased by 46% to $0.76 and our net sales increased by 18% to $2.756 billion from $2.335 billion in Fiscal 2005. The increase in net sales was primarily driven by the acquisition of Crosstown Traders, Inc. (“Crosstown Traders”) on June 2, 2005 (see “RECENT DEVELOPMENTS” below) and continued progress at our LANE BRYANT and CATHERINES brands. With the acquisition of Crosstown Traders, the Company now operates in two segments: Retail Stores and Direct-to-Consumer. The Retail Stores segment operates through three distinct brands: LANE BRYANT, FASHION BUG, and CATHERINES PLUS SIZES, and includes stores and related E-commerce. Our Direct-to-Consumer segment includes catalog and catalog-related E-commerce.

In our Retail Stores segment, net sales increased 5.3% during Fiscal 2006 as compared to Fiscal 2005. The increase was primarily driven by increased sales at our LANE BRYANT and CATHERINES brands. LANE BRYANT achieved a 4% increase in comparable store sales in Fiscal 2006 as compared to a 3% increase in Fiscal 2005, and for the first time, had sales exceeding $1 billion. At CATHERINES stores, Fiscal 2006 was a turn-around year with a 10% comparable store sales increase as compared to a 6% decrease in Fiscal 2005. At FASHION BUG, comparable store sales were flat in Fiscal 2006 as compared to a 1% increase in Fiscal 2005. In addition to growth in our store sales, E-commerce sales for our three brands increased from 1.4% of total sales in Fiscal 2005 to over 2.0% in Fiscal 2006. We expect our E-commerce sales in Fiscal 2007 to increase to more than 3.0 percent of consolidated net sales, and we see opportunities to further expand our product offerings into additional categories, such as hard-to-find sizes. This will allow us to offer a greater variety of merchandise categories than those currently offered in our stores.



For the fourth quarter of Fiscal 2006, LANE BRYANT and CATHERINES achieved 10% and 19% increases in comparable store sales, respectively, as compared to decreases of 1% and 9%, respectively, for the fourth quarter of Fiscal 2005. FASHION BUG experienced a 1% increase in comparable store sales in the fourth quarter of Fiscal 2006, as compared to a decrease of 1% in the fourth quarter of Fiscal 2005. The fourth quarter of Fiscal 2005 was negatively impacted by disappointing sales performances at each of our brands, primarily as a result of our lack of a timely response to the competitive promotional environment that developed during the 2004 Christmas holiday season.

In our Direct-to-Consumer segment, net sales from the date of acquisition of Crosstown Traders on June 2, 2005 were $299 million. Approximately $91 million of total Direct-to-Consumer segment sales were derived from the FIGI’S catalog, which markets food and specialty gift products, and does a substantial portion of its business during the Christmas holiday season. The acquisition of Crosstown Traders not only allows us to expand our multi-channel focus on the plus-size woman by entering into the catalog business, but also provides us with the expertise and infrastructure necessary to service the LANE BRYANT catalog business when the LANE BRYANT catalog trademark reverts back to us in late Fiscal 2008.

The apparel industry is highly competitive and is continuously faced with new and existing competitors seeking areas of growth to expand their businesses. Our strategy focuses on increasing our market share in the growing plus-size women’s apparel market through our Retail Store and Direct-to-Consumer segments. Americans continue to gain weight in all age groups, with an estimate of more than 60% of American adults being overweight and half of American women wearing size 14 or larger. We offer plus-size women’s apparel through multiple channels to a broad range of age groups, with varied fashion tastes and income levels. By continuing to focus on the plus-size market, we believe that we are well-positioned to meet the demands of this growing demographic.

We view the growth in our store base and direct-to-consumer channels as an opportunity for us to maintain and increase our market share. We continue to pursue ways to increase our relevance to our customer, and believe that through offering multiple shopping channels for our customers and other factors such as our expertise in plus-size fit and our Figure magazine (America’s leading plus-size fashion and lifestyle magazine) we continue to differentiate ourselves from our competitors.

We plan to continue the expansion of our market position in the women’s plus-size specialty apparel market. These plans include several strategic initiatives, which are described below:
 
 
·
Acceleration of our new store opening plan, primarily in the LANE BRYANT brand. Plans for LANE BRYANT include expansion of the CACIQUE intimate apparel brand through a new, larger side-by-side store concept, which we successfully tested during Fiscal 2006. This new concept pairs LANE BRYANT’s casual and wear-to-work sportswear assortments with an expanded line of CACIQUE intimates, presented in a double store-front using the names CACIQUE and LANE BRYANT. We plan to open approximately 60 new LANE BRYANT stores during Fiscal 2007, one-third of which will be in the CACIQUE side-by-side format.
 
 
·
In Fiscal 2007, we will enter the outlet store channel through LANE BRYANT OUTLET, with the opening of approximately 75-80 outlet stores in locations acquired through the assumption of store leases from Retail Brand Alliance.
 
 
·
In our Direct-to-Consumer segment, we will continue to build infrastructure to prepare for the launch of new catalog offerings, including the launch of the LANE BRYANT catalog. The LANE BRYANT catalog trademark, which is currently licensed to a third party, will revert to us in late Fiscal 2008.
 
 
·
In addition, we are planning for continued growth in E-commerce, international expansion, and the addition of cross-channel selling tools.


In addition to the above initiatives, our challenge in Fiscal 2007 will be to improve the performance of our FASHION BUG brand while continuing to enhance the performance of our LANE BRYANT and CATHERINES brands as well as the integration and expansion of our Direct-to-Consumer segment.


CRITICAL ACCOUNTING POLICIES

We have prepared the financial statements and accompanying notes included elsewhere in this report in conformity with accounting principles generally accepted in the United States. This requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates and assumptions are based on historical experience, analysis of current trends, and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions.

We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Historically, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies and related assumptions to be more critical to, and involve the most significant management judgments and estimates in, the preparation of our financial statements and accompanying notes.

Revenue Recognition

We recognize revenue in accordance with SEC Codification of Staff Accounting Bulletins Topic 13, “Revenue Recognition.” Our revenues from merchandise sales are net of sales discounts, returns and allowances and exclude sales tax. We record a reserve for estimated future sales returns based on an analysis of actual returns and we defer recognition of layaway sales to the date of delivery. A change in our actual rates of sales returns and layaway sales experience would affect the level of revenue recognized.

Catalog and E-commerce revenues include shipping and handling fees billed to customers. These revenues are recognized after the following have occurred: execution of the customer’s order, authorization of the customer’s credit card has been received, and the product has been shipped to and received by the customer. We record a reserve for estimated future sales returns based on an analysis of actual returns. A change in our actual rates of sales returns and/or the time it takes for customers to receive our products would affect the level of revenue recognized.

We offer our customers various loyalty card programs. Customers that join these programs are entitled to various benefits, including discounts and rebates on purchases during the membership period. Customers generally join these programs by paying an annual membership fee. We recognize revenue from these loyalty programs as 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. Costs we incur in connection with administering these programs are recognized in cost of goods sold as incurred.

We sell gift cards to our Retail Stores segment customers through our stores, retail-store-related websites, and through a third party. We recognize income from gift cards when the gift card is redeemed by the customer. Our gift cards do not contain expiration dates or inactivity fees. We recognize gift card breakage (unused gift card balances for which we believe the likelihood of redemption is remote) as net sales based on an analysis of historical redemption patterns.



Accounts Receivable

Our FIGI’S catalog offers credit to its customers using interest-free, three-payment credit terms over three months, with the first payment due on a defined date 30 to 60 days after a stated holiday. A substantial portion of the FIGI’S catalog business is conducted during the Christmas holiday season. We evaluate the collectibility of our accounts receivable based on a combination of factors, including analysis of historical trends, aging of accounts receivable, write-off experience, past history of recoveries, and expectations of future performance. Significant changes in our historical write-off or recovery experience could have a material impact on the levels of our accounts receivable valuation reserves.

Inventories

We value our merchandise inventories at the lower of cost or market, using the retail inventory method (average cost basis), for our Retail Stores and Direct-to-Consumer segment inventories. Under the retail inventory method (“RIM”), the valuation of inventories at cost, and the resulting gross margins, are adjusted in proportion to markdowns and shrinkage on our retail inventories. The use of the RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. The estimation of markdowns involves certain management judgments and estimates which significantly affect the ending inventory valuation at cost, as well as the resulting gross margins. The failure to properly estimate markdowns currently can result in an overstatement or understatement of inventory cost under the lower of cost or market principle. At the end of Fiscal 2006, Fiscal 2005, and Fiscal 2004, in addition to markdowns that had been recorded in inventory, an additional $8.6 million, $9.5 million, and $10.1 million, respectively, of markdowns, representing markdowns not yet taken on aged inventory, were recorded in order to properly reflect inventory at the lower of cost or market.

In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) Issue No. 02-16 (see “Accounting for Cash Consideration Received From a Vendor” below), as of January 28, 2006, January 29, 2005, and January 31, 2004, $9.3 million, $6.5 million, and $9.5 million, respectively, of cash received from vendors was deferred into inventory to be recognized as inventory is sold.

Deferred Catalog Advertising Costs

We accumulate all direct costs incurred in the development, production, and circulation of our direct-mail catalogs on our consolidated balance sheet until such time as the related catalog is mailed. These capitalized costs are subsequently amortized as a component of cost of goods sold, buying, catalog, and occupancy expenses over the expected sales realization cycle, generally within one to six months. Our initial estimation of the expected sales realization cycle for a particular catalog merchandise offering is based on, among other possible considerations, our historical sales and sell-through experience with similar catalog merchandise offerings, our understanding of then-prevailing fashion trends and influences, our assessment of prevailing economic conditions, and various competitive factors. We continually track our subsequent sales realization, compile customer feedback for indications of future performance, reassess the marketplace, compare our findings to our previous estimate, and adjust our amortization accordingly. A significant change in our expected sales and sell-through experience could have a material impact on the rate of amortization of deferred catalog advertising costs.








Impairment of Property, Plant, and Equipment, Goodwill, and Intangible Assets

We evaluate the recoverability of our property, plant, and equipment and amortizable intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, we are required to assess our long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets may not be recoverable. We consider historical performance and estimated future results in our evaluation of potential impairment, and compare the carrying amount of the asset to the estimated future undiscounted cash flows expected to result from the use of the asset. If the estimated future undiscounted cash flows are less than the carrying amount of the asset, we write down the asset to its estimated fair value and recognize an impairment loss. Our estimate of fair value is generally based on either appraised value or the present value of future cash flows, based on a number of assumptions and estimates.

We test our goodwill and our indefinite-lived intangible assets in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” We re-evaluate goodwill and other intangible assets for impairment at least annually or more frequently if there is an indication of possible impairment. We performed this annual review during the fourth quarters of Fiscal 2006, Fiscal 2005, and Fiscal 2004 and determined that there has been no impairment of these assets.

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.

Acquisitions - Purchase Price Allocation

We account for acquisitions in accordance with the provisions of SFAS No. 141, “Business Combinations.” We assign to all identifiable assets acquired (including intangible assets), and to all identifiable liabilities assumed, a portion of the cost of the acquired company equal to the estimated fair value of such assets and liabilities at the date of acquisition. We record the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed, if any, as goodwill. We make the initial purchase price allocation based on the evaluation of information and estimates available at the date of the financial statements. As final information regarding the fair value of assets acquired and liabilities assumed is evaluated and estimates are refined, we make appropriate adjustments to the amounts allocated to those assets and liabilities and make corresponding changes to the amount allocated to goodwill. We use all available information to make these fair value determinations and, for major business acquisitions, typically engage an outside appraisal firm to assist in the fair value determination of the acquired long-lived assets. We have, if necessary, up to one year after the closing date of an acquisition to finish these fair value determinations and finalize the purchase price allocation.

Asset Securitization

Asset securitization primarily involves the sale of proprietary credit card receivables to a special-purpose entity, which in turn transfers the receivables to a qualified special-purpose entity (“QSPE”). The QSPE’s assets and liabilities are not consolidated in our balance sheet. We use asset securitization to fund the credit card receivables generated by our FASHION BUG, CATHERINES, and Crosstown Traders proprietary credit card programs. See “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 17. ASSET SECURITIZATION” below for additional discussion of our asset securitization facility.


In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” we record an interest, referred to as the interest-only strip (“I/O strip”), in the estimated present value of cash flows we expect to receive over the period the receivables are outstanding. In addition to the I/O strip, we recognize a servicing liability, since 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 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.

We use certain key valuation assumptions related to the average life of the receivables sold and anticipated credit losses, as well as an appropriate market discount rate in determining the estimated value of the I/O strip and the servicing liability. 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. Changes in the average life of the receivables sold, discount rate, and credit-loss percentage could cause actual results to differ materially from the estimates, and changes in circumstances could result in significant future changes to the assumptions currently being used.

The following table presents the decrease in our I/O strip receivable that would result from hypothetical adverse changes of 10% and 20% in the assumptions used to determine the fair value of the I/O strip:

(In millions)
  
10% Change
  
20% Change
  
               
Assumption:
              
Payment rate
  
$
1.0
  
$
1.9
  
Residual cash flows discount rate
    
0.1
    
0.1
  
Credit loss percentage
    
0.9
    
1.8
  

Costs Associated With Exit or Disposal Activities

In accordance with the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we recognize liabilities for costs associated with an exit or disposal activity when the liabilities are incurred. Commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. We recognize severance pay over time rather than “up front” if the benefit arrangement requires employees to render future service beyond a “minimum retention period.” The liability for severance pay is recognized as employees render service over the future service period, even if the benefit formula used to calculate an employee’s termination benefit is based on length of service. We use fair value for the initial measurement of liabilities associated with exit or disposal activities. The provisions of SFAS No. 146 result in the deferral of recognition of certain costs for restructuring plans from the date of commitment to such a plan to the date that costs are incurred under the plan. In Fiscal 2004, we announced the implementation of a cost reduction plan (see “Item 8. Financial Statements and Supplementary Data; Notes To Consolidated Financial Statements; NOTE 15. EXPENSES RELATED TO COST REDUCTION PLAN” below). We accounted for costs incurred in connection with the implementation of this plan in accordance with the provisions of SFAS No. 146.







Accounting for Cash Consideration Received From a Vendor

EITF Issue 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor,” addresses the accounting for cash consideration received from a vendor, including both a reseller of the vendor’s products and an entity that purchases the vendor’s products from a reseller. In accordance with the provisions of EITF Issue 02-16, as of January 28, 2006 and January 29, 2005, we deferred $9.3 million and $6.5 million, respectively, of cash received from vendors into inventory. We will recognize these amounts as a reduction of cost of goods sold as the inventory is sold. We defer the recognition of cash received from vendors during interim periods in order to better match the recognition of the cash consideration to the period the inventory is sold.

Stock-Based Compensation

Through Fiscal 2006, SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” allowed two alternatives for accounting for stock-based compensation: the “intrinsic value method” in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” or the “fair value” method in accordance with SFAS No. 123. Companies electing to adopt the intrinsic value method were required to provide pro forma disclosures of the effect of adopting the fair value method. We accounted for stock-based compensation using the intrinsic value method. We recorded compensation expense for stock options and stock awards with an exercise price less than the market price of our common stock at the date of grant based on the difference between the market price and the exercise price of the option or award at the date of grant. The compensation expense was recognized on a straight-line basis over the vesting period of each option or award. We did not recognize compensation expense for options having an exercise price equal to the market price on the date of grant or for shares purchased under our Employee Stock Purchase Plan.

We disclosed as pro forma information compensation expense for all stock options and stock awards based on an estimated fair value of the option or award, using the Black-Scholes pricing model. This model required estimates or assumptions as to the dividend yield and price volatility of the underlying stock, the expected life of the option or award, and a relevant risk-free interest rate. Our use of different option-pricing models and different estimates or assumptions could have resulted in materially different estimates of compensation expense under the fair value method.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), a revision of SFAS No. 123. SFAS No. 123R will require us to recognize the fair value of share-based payments as compensation expense in our financial statements beginning in Fiscal 2007. SFAS No. 123R will also require additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based compensation. SFAS No. 123R will result in the recognition of additional stock-based compensation as compared to our historical stock-based compensation. However, beginning in Fiscal 2005, we changed the composition of our stock-based compensation awards to include more restricted stock awards and fewer stock options, which resulted in the recognition of additional compensation expense. Although we cannot reliably estimate the nature and amounts of future stock-based awards, we believe that, as a result of this change, the incremental impact of adopting SFAS No. 123R will be lower than the amounts reflected in our historical pro forma disclosures.

See “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies,” below for further information on the estimates and assumptions used for our pro forma disclosures under SFAS No. 123 and our adoption of SFAS No. 123R.




Insurance Liabilities

We use a combination of third-party insurance and/or self-insurance for certain risks, including workers’ compensation, medical, dental, automobile, and general liability claims. Our insurance liabilities are a component of “Accrued expenses” on our consolidated balance sheet, and represent our estimate of the ultimate cost of uninsured claims incurred as of the balance sheet date. In estimating our self-insurance liabilities, we use independent actuarial estimates of expected losses, which are based on statistical analyses of historical data. Loss estimates are adjusted based upon actual claim settlements and reported claims. Although we do not expect the amounts ultimately paid to differ significantly from our estimates, self-insurance liabilities could be affected if future claim experience differs significantly from the historical trends and the actuarial assumptions. We evaluate the adequacy of these liabilities on a regular basis, modifying our assumptions as necessary, updating our records of historical experience, and adjusting our liabilities as appropriate.

Operating Leases

We lease substantially all of our store properties as well as certain of our other facilities, and account for our store leases in accordance with SFAS No. 13, “Accounting for Leases.” A majority of our store leases contain lease options that we can unilaterally exercise. The lease term we use for such operating leases includes lease option renewal periods only in instances in which the failure to exercise such options would result in an economic penalty for us and exercise of the renewal option is therefore reasonably assured at the lease inception date.

Store leasehold improvement assets are depreciated over the shorter of their useful life or the lease term, as determined above.

For leases that contain rent escalations, the lease term for recognition of straight-line rent expense commences on the date we take possession of the leased property for construction purposes, which for stores is generally two months prior to a store opening date. Similarly, landlord incentives or allowances under operating leases (tenant improvement allowances) are recorded as a deferred rent liability and recognized as a reduction of rent expense on a straight-line basis over the lease term, commencing on the date we take possession of the leased property for construction purposes.





















RECENT DEVELOPMENTS

Acquisition of Crosstown Traders, Inc.

On June 2, 2005, we completed our acquisition of Crosstown Traders, Inc. (“Crosstown Traders”), a direct marketer of women’s apparel, footwear, accessories, and specialty gifts, from JPMorgan Partners, the private equity arm of J.P. Morgan Chase & Co.

Crosstown Traders, Inc. operates multiple catalog titles and related websites, with revenues of approximately $452 million for the fiscal year ended January 29, 2005. The majority of Crosstown Traders’ revenues are derived from the catalog sales of women’s apparel, footwear, and accessories, of which plus-sizes are an important component. Crosstown Traders also derives revenues from the catalog sales of food and gifts, the majority of which occur during the fourth quarter of our fiscal year. As a result of the acquisition, our operations now consist of two business segments: the Retail Stores segment and the Direct-to-Consumer segment. This acquisition is a major step in our long-term growth strategy as a multi-channel retailer, and it has been accretive to our earnings per share in Fiscal 2006. The acquisition of Crosstown traders provides us with an infrastructure for the development and expansion of our Direct-to-Consumer segment, which will include our catalog and catalog-related E-commerce sales distribution channels. The development of our Direct-to-Consumer segment is a key step in the preparation for the planned launch of our own catalog for the LANE BRYANT brand in the fall of 2007, when the LANE BRYANT catalog trademark reverts to us.
 
We paid approximately $218.0 million in cash for Crosstown Traders and assumed Crosstown Traders’ debt of approximately $40.7 million. We also incurred direct costs related to the acquisition (primarily advisory, legal, and statutory fees) of approximately $3.8 million. Subsequent to the acquisition, we securitized Crosstown Traders’ apparel-related accounts receivable under a new conduit funding facility established specifically for funding the Crosstown Traders receivables. The majority of the proceeds of approximately $50.0 million from the securitization were used to retire Crosstown Traders’ debt.

We financed the acquisition with approximately $102.2 million of our existing cash and cash equivalents (net of $5.8 million of cash acquired) and $110.0 million of borrowings under our then-existing revolving credit facility. Subsequent to this transaction, we amended our credit facility (see "FINANCING; Revolving Credit Facility" below).

Hurricane Katrina

Hurricane Katrina, which struck on August 29, 2005, caused extensive damage to portions of the southeast United States where certain of our retail stores are located. Following the hurricane, four CATHERINES PLUS SIZES stores and four LANE BRYANT stores sustained considerable damage and all but one of the CATHERINES stores remain closed. We carry property and casualty insurance on our leasehold improvements, fixtures, and inventory at our retail store locations. As a result of insurance claims for damages to inventory caused by Hurricane Katrina, we recognized a net gain of $1.8 million in cost of goods sold in Fiscal 2006. The insurance proceeds received were reported as a component of cash flows from operations.

VISA/MasterCard Antitrust Litigation

We expect to receive a share of the proceeds from the $3 billion VISA/MasterCard antitrust settlement. We recognized a gain of approximately $1.3 million in Fiscal 2006 in connection with our receipt of a notification of an initial payment to us related to the settlement.



RESULTS OF OPERATIONS

Financial Summary

The following table shows our results of operations expressed as a percentage of net sales and on a comparative basis:

               
Percentage Increase
  
               
(Decrease)
  
   
Percentage of Net Sales(1)
  
From Prior Year
  
   
Fiscal
  
Fiscal
  
Fiscal
  
Fiscal
  
Fiscal
  
   
2006(2)
  
2005
  
2004
  
2006-2005
  
2005-2004
  
                                 
Net sales
    
100.0
%
  
100.0
%
  
100.0
%
  
18.0
%
  
2.0
%
Cost of goods sold, buying, catalog, and occupancy
    
69.4
    
70.4
    
71.9
    
16.4
    
(0.2
)
Selling, general, and administrative
    
24.8
    
24.7
    
24.4
    
18.3
    
3.4
  
Expenses related to cost reduction plan
    
0.0
    
0.0
    
0.5
    
(100.0
)
  
(94.8
)
Income from operations
    
5.9
    
4.9
    
3.2
    
41.2
    
56.2
  
Other income
    
0.3
    
0.1
    
0.1
    
193.5
    
51.1
  
Interest expense
    
0.6
    
0.7
    
0.7
    
14.7
    
0.0
  
Income tax provision
    
1.9
    
1.6
    
0.9
    
42.7
    
71.8
  
Net income
    
3.6
    
2.8
    
1.7
    
54.0
    
69.6
  
____________________
                                
(1) Results may not add due to rounding.
(2) Includes the results of operations of Crosstown Traders, Inc. from the date of acquisition on June 2, 2005.

The following table shows our net sales by store brand:

   
Year Ended
  
Year Ended
  
Year Ended
  
   
January 28, 2006
  
January 29, 2005
  
January 31, 2004
  
   
Fiscal
  
Fourth
  
Fiscal
  
Fourth
  
Fiscal
  
Fourth
  
(In millions)
  
Year
  
Quarter
  
Year
  
Quarter
  
Year
  
Quarter
  
                                       
FASHION BUG
  
$
1,049.4
  
$
258.6
  
$
1,043.8
  
$
255.0
  
$
1,056.6
  
$
257.9
  
LANE BRYANT
    
1,057.4
    
299.8
    
974.6
    
260.1
    
903.4
    
249.9
  
CATHERINES
    
346.2
    
83.0
    
312.1
    
70.4
    
323.3
    
75.2
  
Other(1)
    
0.0
    
0.0
    
0.0
    
0.0
    
1.7
    
0.0
  
Total Retail Stores segment sales
    
2,453.0
    
641.4
    
2,330.5
    
585.5
    
2,285.0
    
583.0
  
Total Direct-to-Consumer segment sales(2)
    
298.9
    
155.8
    
0.0
    
0.0
    
0.0
    
0.0
  
Corporate and other(3)
    
3.8
    
2.4
    
4.2
    
2.5
    
3.4
    
0.9
  
Total net sales
  
$
2,755.7
  
$
799.6
  
$
2,334.7
  
$
588.0
  
$
2,288.4
  
$
583.9
  
____________________
                                      
(1) Sales attributable to MONSOON/ACCESSORIZE stores, which were closed during the first half of Fiscal 2004.
(2) Includes the results of operations of Crosstown Traders, Inc. from the date of acquisition on June 2, 2005.
(3) Primarily revenue related to loyalty card fees.







The following table shows additional information related to changes in our net sales:

   
Year Ended
  
Year Ended
  
   
January 28, 2006
  
January 29, 2005
  
   
Fiscal
  
Fourth
  
Fiscal
  
Fourth
  
   
Year
  
Quarter
  
Year
  
Quarter
  
                           
Retail Stores segment
                          
Increase (decrease) in comparable store sales(1):
                          
Consolidated retail stores
    
3
%
  
7
%
  
1
%
  
(2
)%
FASHION BUG
    
0
    
1
    
1
    
(1
)
LANE BRYANT
    
4
    
10
    
3
    
(1
)
CATHERINES
    
10
    
19
    
(6
)
  
(9
)
                           
Sales from new stores and E-commerce as a percentage
                          
of total consolidated prior-period sales:
                          
FASHION BUG
    
1
    
1
    
1
    
1
  
LANE BRYANT
    
2
    
3
    
2
    
2
  
CATHERINES
    
1
    
1
    
1
    
0
  
                           
Prior-period sales from closed stores as a percentage
                          
of total consolidated prior-period sales:
                          
FASHION BUG
    
(1
)
  
(1
)
  
(2
)
  
(2
)
LANE BRYANT
    
(1
)
  
(1
)
  
(1
)
  
(1
)
CATHERINES
    
(1
)
  
(1
)
  
0
    
0
  
                           
Increase in Retail Stores segment sales 
    
5
    
9
    
2
    
0
  
                           
Direct-to-Consumer segment
                          
Sales as a percentage of total consolidated
                         
prior-period sales(2)
    
13
    
27
    
-
    
-
  
                           
Increase in consolidated total net sales 
    
18
%
  
36
%
  
2
%
  
0
%
____________________
                          
(1) “Comparable store sales” is not a measure that has been defined under generally accepted accounting principles. The method of calculating comparable store sales varies across the retail industry and, therefore, our calculation of comparable store sales is not necessarily comparable to similarly-titled measures reported by other companies. We define comparable store sales as sales from stores operating in both the current and prior-year periods. New stores are added to the comparable store sales base 13 months after their open date. Sales from stores that are relocated within the same mall or strip-center, remodeled, or have a legal square footage change of less than 20% are included in the calculation of comparable store sales. Sales from stores that are relocated outside the existing mall or strip-center, or have a legal square footage change of 20% or more, are excluded from the calculation of comparable store sales until 13 months after the relocated store is opened. Stores that are temporarily closed for a period of 4 weeks or more are excluded from the calculation of comparable store sales for the applicable periods in the year of closure and the subsequent year. Non-store sales, such as catalog and Internet sales, are excluded from the calculation of comparable store sales.
 
(2) Includes catalog sales and catalog-related E-commerce sales from Crosstown Traders, Inc. from the date of acquisition on June 2, 2005.










The following table sets forth information with respect to store activity for Fiscal 2006 and planned store activity for Fiscal 2007:

   
FASHION
BUG
  
LANE
BRYANT
  
CATHERINES
  
Total
  
                           
Fiscal 2006(1)
                          
Stores at January 29, 2005
    
1,028
    
722
    
471
    
2,221
  
                           
Stores opened
    
19
    
45
    
6
    
70
  
Stores closed
    
(22
)
  
(19
)
  
(14
)
  
(55
)
 
Net changes in stores
    
(3
)
  
26
    
(8
)
  
15
  
                           
Stores at January 28, 2006
    
1,025
    
748
    
463
    
2,236
  
                           
Stores relocated during period
    
20
    
30
    
16
    
66
  
                           
Fiscal 2007:
                          
Planned store openings
    
15
    
135-140
(2)
  
8
    
158-163
  
Planned store closings
    
20
    
15
    
8
    
43
  
Planned store relocations
    
35
    
35
    
15
    
85
  
____________________
                          
(1) Does not include 3 outlet stores operated by Crosstown Traders, Inc.
(2) Includes 75-80 LANE BRYANT OUTLET stores under leases assumed from Retail Brand Alliance under an agreement effective April 1, 2006.


Comparison of Fiscal 2006 to Fiscal 2005

Net Sales

Consolidated net sales increased in Fiscal 2006 as compared to Fiscal 2005 primarily as a result of sales from Crosstown Traders, Inc. (our Direct-to-Consumer segment), which we acquired on June 2, 2005 (see “RECENT DEVELOPMENTS” above), and increased sales across all brands in our Retail Stores segment. The increase in Retail Stores segment sales was primarily a result of an increase in comparable retail store sales at our LANE BRYANT and CATHERINES brands, increases in E-commerce sales at all of our Retail Stores brands, and sales from new LANE BRYANT stores. We operated 2,236 stores in our Retail Stores segment as of January 28, 2006 as compared to 2,221 stores as of January 29, 2005. Additionally, Crosstown Traders operated three outlet stores that are included in our Direct-to-Consumer segment.

Total net sales for the LANE BRYANT brand increased as the result of a 4% increase in comparable retail store sales, a significant increase in E-commerce sales, and sales from new retail stores. The average dollar sale per transaction increased as a result of a combination of reduced levels of promotional activity and the addition of products, such as premium denim, fashion knits, and intimate apparel, with higher price points in the current-year period. Traffic levels in LANE BRYANT retail stores were slightly higher as compared to the prior-year period.






Total net sales for the FASHION BUG brand increased primarily as the result of an increase in E-commerce sales. FASHION BUG comparable retail store sales were flat, while reduced sales from closed stores offset sales from new stores. FASHION BUG experienced a higher average dollar sale per transaction that was offset by slightly reduced traffic levels. FASHION BUG commenced E-commerce operations in July 2004.

Total net sales for the CATHERINES brand increased primarily as the result of a 10% increase in comparable retail store sales and to a lesser extent as the result of an increase in E-commerce sales. CATHERINES comparable retail store sales benefited from improved customer response to the brand’s merchandise offerings, which resulted in significantly increased traffic levels during the current-year period. The average dollar sale per transaction was relatively flat, as reduced levels of promotional activity were offset by a slight decrease in the number of units sold per transaction as compared to the prior-year period.

Net sales from Crosstown Traders (from the date of acquisition on June 2, 2005) were $298.9 million, or 11% of consolidated net sales for Fiscal 2006, and met our sales objectives for the period. Approximately $91.0 million of total sales were derived from the FIGI’S catalog, which markets food and specialty gift products. Actual orders, catalog circulation, and response rates were consistent with plan.

We offer various loyalty card programs to our Retail Stores segment customers. Customers who join these programs are entitled to various benefits, including discounts and rebates on purchases during the membership period. Customers generally join these programs by paying an annual membership fee. We recognize revenue on these loyalty programs as sales over the life of the membership period based on when the customer earns the benefits and when the fee is no longer refundable. Costs we incur in connection with administering these programs are recognized in cost of goods sold as incurred. During Fiscal 2006 and Fiscal 2005, we recognized revenues of $15.6 million and $15.1 million, respectively, in connection with our loyalty card programs.

Cost of Goods Sold, Buying, Catalog, and Occupancy

Consolidated cost of goods sold, buying, catalog, and occupancy expenses decreased 1.0% as a percentage of consolidated net sales in Fiscal 2006 as compared to Fiscal 2005, reflecting improved merchandise margins at our LANE BRYANT and CATHERINES brands, and leverage on relatively fixed buying and occupancy costs. Fiscal 2006 includes catalog costs from the date of our acquisition of Crosstown Traders in June 2005. Consolidated cost of goods sold increased 1.3% as a percentage of consolidated net sales.

Cost of goods sold for Crosstown Traders includes catalog advertising and fulfillment costs, which are significant expenses for catalog operations. Therefore, cost of goods sold for the Direct-to-Consumer segment is generally higher as a percentage of net sales than cost of goods sold for our Retail Stores segment, resulting in the increase in consolidated cost of goods sold as a percentage of consolidated net sales.

For our Retail Stores segment, cost of goods sold as a percentage of segment net sales was 1.4% lower in Fiscal 2006 as compared to Fiscal 2005, reflecting improved customer acceptance of our merchandise offerings and lower levels of promotional activity in the current year. In addition, cost of goods sold for the Retail Stores segment for Fiscal 2006 included a net gain of $1.8 million from settlements of hurricane-related insurance claims for damaged inventory.

Cost of goods sold includes merchandise costs net of discounts and allowances; freight; inventory shrinkage; and shipping and handling costs associated with our E-commerce and in Fiscal 2006 our Direct-to-Consumer businesses from the date of acquisition of Crosstown Traders. Cost of goods sold for Fiscal 2006 includes our Direct-to-Consumer segment and amortization of direct-response advertising costs from the date of acquisition of Crosstown Traders. Net merchandise costs and freight are capitalized as inventory costs.


Consolidated buying and occupancy expenses as a percentage of consolidated net sales were 2.3% lower in Fiscal 2006 as compared to Fiscal 2005, primarily as a result of leverage from increased net sales on relatively fixed occupancy costs and lower levels of occupancy costs associated with our Direct-to-Consumer segment. For our Retail Stores segment, buying and occupancy expenses as a percentage of segment net sales were 0.6% lower in Fiscal 2006 as compared to Fiscal 2005. The Direct-to-Consumer segment, which operates only three outlet stores, incurs relatively lower levels of occupancy costs, which result in a favorable impact on consolidated buying and occupancy expenses as a percentage of consolidated net sales.

Buying expenses include payroll, payroll-related costs, and operating expenses for our buying departments, warehouses, and fulfillment centers. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities, maintenance, and depreciation for our stores, warehouse and fulfillment center facilities, and equipment. Buying, catalog, and occupancy costs are treated as period costs and are not capitalized as part of inventory.

Selling, General, and Administrative

Consolidated selling, general, and administrative expenses were 0.1% higher as a percentage of net sales for Fiscal 2006. The increase was primarily a result of higher expenses related to incentive-based employee compensation and employee benefit programs, additional investments in marketing programs, and the inclusion of Crosstown Traders in Fiscal 2006 (from the date of acquisition on June 2, 2005).

Selling expenses were positively affected by leverage on the increase in consolidated net sales and improved performance of our proprietary credit card operations, which benefited from the acquisition of the CATHERINES and Crosstown Traders credit card portfolios in Fiscal 2006, as well as favorable experience in credit losses during Fiscal 2006. Our purchase and subsequent securitization of the CATHERINES and Crosstown Traders portfolios resulted in the recognition of a benefit of approximately $3.4 million, which is included in selling expenses for Fiscal 2006. Selling expenses for Fiscal 2006 were 2.2% lower as a percentage of sales as compared to Fiscal 2005, reflecting relatively lower levels of selling expenses in the Direct-to-Consumer segment.

General and administrative expenses were 2.3% higher as a percentage of net sales as compared to Fiscal 2005, primarily reflecting relatively higher levels of general and administrative expenses in the Direct-to-Consumer segment. General and administrative expenses for Fiscal 2006 also included a gain of $1.3 million recognized in connection with the VISA/MasterCard antitrust settlement (see “RECENT DEVELOPMENTS: VISA/ MasterCard Antitrust Litigation” above). General and administrative expenses for Fiscal 2005 were affected by costs related to the purchase of life insurance policies for certain executives (see “Comparison of Fiscal 2005 to Fiscal 2004; Selling, General, and Administrative” below).

Other Income

Interest income increased $3.7 million in Fiscal 2006 as compared to Fiscal 2005 as a result of both higher interest rates and higher levels of invested cash and cash equivalents in Fiscal 2006. Other income for Fiscal 2006 also included a pre-tax gain of $1.9 million from the sales of certain facilities owned by our Hong Kong sourcing operations and the sale of one of our owned-store properties.






Income Tax Provision

The effective income tax rate was 34.8% in Fiscal 2006, as compared to 36.5% in Fiscal 2005. The tax rate for Fiscal 2006 was unfavorably affected by $1.5 million of taxes, net of foreign tax credits, on the repatriation of profits from international operations for which incremental United States income taxes had not been previously accrued (see “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES; Income Taxes” below), and was favorably affected by the reconciliation of our state tax provision to our filed state tax returns and by charitable contributions of inventories to hurricane Katrina relief efforts.


Comparison of Fiscal 2005 to Fiscal 2004

Net Sales

Net sales increased in Fiscal 2005 as compared to Fiscal 2004 primarily as a result of sales from new retail stores, positive comparable retail store sales at our LANE BRYANT and FASHION BUG brands, and increased E-commerce sales. These increases were partially offset by negative comparable retail store sales results at our CATHERINES brand.

LANE BRYANT retail stores experienced an increase in the average dollar sale per transaction as a result of both an increase in the average number of units sold per customer (“UPC”) and reduced levels of promotional activity, which was partially offset by a decrease in retail store traffic levels. LANE BRYANT experienced comparable retail store sales increases in all major merchandise categories except for casual wear. During Fiscal 2004, LANE BRYANT experienced poor customer acceptance of, and fit and quality issues with, its product offering and had to maintain higher levels of promotional pricing. Improvements in the merchandise assortments offered at LANE BRYANT during Fiscal 2005 resulted in the brand’s improved sales performance during Fiscal 2005.

For FASHION BUG retail stores, increased traffic levels during Fiscal 2005 were partially offset by a slightly lower average dollar sale per transaction. For Fiscal 2005, an increase in the average UPC was offset by an increase in the level of promotional activity. FASHION BUG retail stores experienced comparable store sales increases in plus-size sportswear and accessories, which were offset by decreases in other categories. FASHION BUG net sales for Fiscal 2005 also benefited from sales of maternity and girls, two new categories added to the brand at the end of Fiscal 2004.

CATHERINES retail stores experienced a decrease in both traffic levels and the average dollar sale per transaction during Fiscal 2005. An increase in the average UPC was more than offset by higher levels of promotional pricing during Fiscal 2005. The decrease in net sales at CATHERINES was primarily a result of disappointing performance in the dress and wear-to-work categories.

During Fiscal 2005, we recognized revenues of $7.6 million in connection with the FASHION BUG customer loyalty card program that we introduced during Fiscal 2004, as compared to Fiscal 2004 revenues of $7.8 million. During Fiscal 2005 and Fiscal 2004, we also recognized revenues of $7.5 million in each year in connection with our CATHERINES loyalty card program. In addition, during Fiscal 2004, we recognized revenues of $6.4 million in connection with a previous FASHION BUG loyalty card program that we terminated during Fiscal 2004.




Cost of Goods Sold, Buying, Catalog, and Occupancy

Cost of goods sold, buying, and occupancy expenses for Fiscal 2005 were approximately equal to Fiscal 2004, and were 1.5% lower as a percentage of sales in Fiscal 2005 as compared to Fiscal 2004. Cost of goods sold as a percentage of net sales was 0.9% lower in Fiscal 2005 as compared to Fiscal 2004. Improved merchandise margins, primarily at our LANE BRYANT brand and, to a lesser extent, at our FASHION BUG brand, were partially offset by a decrease in merchandise margins at our CATHERINES brand. Margins at the CATHERINES brand for Fiscal 2005 were negatively affected by increased promotional activity that resulted from reduced traffic levels and poor customer acceptance of CATHERINES product offerings. As discussed above, Fiscal 2004 margins at our LANE BRYANT brand were negatively affected by higher levels of promotional activity. Cost of goods sold includes merchandise costs net of discounts and allowances, freight, inventory shrinkage, and shipping and handling costs associated with our E-commerce business. Net merchandise costs and freight are capitalized as inventory costs.

Buying and occupancy expenses as a percentage of net sales were 0.6% lower in Fiscal 2005 as compared to Fiscal 2004, primarily a result of leverage on increased sales at LANE BRYANT and cost savings from the consolidation of our LANE BRYANT and CATHERINES distribution operations into our White Marsh, Maryland facility. Buying expenses include payroll, payroll-related costs, and operating expenses for our buying departments and warehouses. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities, maintenance, and depreciation for our stores and warehouse facilities and equipment. Buying and occupancy costs are treated as period costs and are not capitalized as part of inventory.

Selling, General, and Administrative

Selling, general, and administrative expenses increased in Fiscal 2005 as compared to Fiscal 2004, and were 0.3% higher as a percentage of net sales. Selling expenses for Fiscal 2005 were 0.3 % lower as a percentage of net sales, while general and administrative expenses were 0.6% higher as a percentage of net sales. The increase in selling, general, and administrative expenses was primarily a result of higher expenses related to incentive-based employee compensation programs and the purchase during Fiscal 2005 of life insurance policies for certain executives. We purchased these policies to replace split-dollar life insurance policies that were terminated as a result of the Sarbanes-Oxley Act of 2002, which prohibits loans to executive officers. As a result of terminating the split-dollar program, we received the cash surrender value of the policies. In return, we agreed to provide each of the affected executives with an unconditional bonus to enable them to purchase a replacement life insurance policy. This bonus is payable in five equal annual installments in an amount equal to the annual insurance premiums paid by the executive for the new policy, plus a tax gross-up amount. These increases in selling, general, and administrative expenses were partially offset by improved performance of our FASHION BUG credit card operations, including favorable trends in delinquencies during Fiscal 2005. General and administrative expenses for Fiscal 2004 benefited from reduced medical benefits costs as a result of reduced medical claims by employees covered by our self-insured employee benefit program.

Expenses Related to Cost Reduction Plan

In March 2003, we announced a cost reduction plan designed to take advantage of the centralization of all of our corporate administrative services and to realize certain efficiencies, in order to improve profitability. The cost reduction plan was substantially completed during Fiscal 2004. We did not experience a material after-tax cash impact from execution of this plan. At the time we announced the plan, we expected this cost reduction plan to improve our annualized pre-tax earnings by a total of approximately $45 million. During Fiscal 2004, we realized cost reductions of more than $30 million as a result of this plan. During Fiscal 2005, we realized the remaining benefits of the plan.


As of January 31, 2004, there was $2.6 million of accrued lease termination costs related to the closing of our Hollywood, Florida credit facility. In October 2004, in accordance with SFAS No. 146, we revised our estimated sublease income on the remaining lease obligation for the Hollywood facility and recognized an additional expense of $0.6 million. During the fourth quarter of Fiscal 2005, we settled our remaining lease obligation for the Hollywood facility for approximately $3.2 million. Also, during the fourth quarter of Fiscal 2005, we entered into an agreement to lease the Memphis, Tennessee distribution center to a third party for a three-year period.

Income Tax Provision

The effective income tax rate was 36.5% in Fiscal 2005, as compared to 36.3% in Fiscal 2004. On October 22, 2004, the President of the United States of America signed into law H.R. 4250, “The American Jobs Creation Act of 2004,” which includes among its provisions certain tax benefits related to the repatriation to the United States of profits from a company’s international operations (see “Comparison of Fiscal 2006 to Fiscal 2005; Income Tax Provision” above).


Comparison of Fourth Quarter 2006 to Fourth Quarter 2005

Net Sales

Consolidated net sales for the Fiscal 2006 fourth quarter were $799.6 million, an increase of 36.0% from consolidated net sales of $588.0 million in the Fiscal 2005 fourth quarter. The increase was primarily a result of the acquisition of Crosstown Traders in June 2005 (see “RECENT DEVELOPMENTS” above), as well as the strong performance of our LANE BRYANT and CATHERINES retail store brands during the 2005 Christmas season. Overall, comparable retail store sales increased 7% in the Fiscal 2006 fourth quarter as compared to a decrease of 2% in the Fiscal 2005 fourth quarter. The decrease in comparable retail store sales in the Fiscal 2005 fourth quarter was primarily attributable to our lack of a timely response to the competitive promotional environment that developed during the 2004 Christmas holiday season.

Total net sales for the LANE BRYANT brand increased in the Fiscal 2006 fourth quarter as a result of a combination of a 10% increase in comparable retail store sales, sales from new stores, and an increase in E-commerce sales. The average dollar sale per transaction increased as a result of a combination of reduced levels of promotional activity and the addition of products with higher price points, such as premium denim, fashion knits, and intimate apparel, in the current-year period. Traffic levels in LANE BRYANT retail stores increased significantly as compared to the prior-year period.

FASHION BUG comparable retail store sales increased 1%, while sales from new stores were substantially offset by reduced sales from closed stores. FASHION BUG retail stores experienced a slight increase in store traffic levels during the Fiscal 2006 fourth quarter and a flat average dollar sale per transaction. Fiscal 2006 fourth quarter sales also benefited from an increase in E-commerce sales.

CATHERINES comparable retail store sales increased 19% in the Fiscal 2006 fourth quarter as compared to a 9% decrease in the Fiscal 2005 fourth quarter as a result of improved customer response to the brand’s current merchandise offerings, which resulted in a lower level of promotional activity, and expansion of the brand’s intimate apparel offerings. Traffic levels increased significantly during the Fiscal 2006 fourth quarter.





Net sales from Crosstown Traders (our Direct-to-Consumer segment) were $155.8 million, or 19% of consolidated net sales for the Fiscal 2006 fourth quarter. Approximately $82.0 million of total sales were derived from the FIGI’S catalog, which markets food and specialty gift products, and does a substantial portion of its business during the Christmas holiday season. Actual orders, catalog circulation, and response rates were consistent with plan.

Cost of Goods Sold, Buying, Catalog, and Occupancy

Cost of goods sold, buying, catalog, and occupancy expenses were $578.3 million in the Fiscal 2006 fourth quarter, an increase of 34.4% from $430.3 million in the Fiscal 2005 fourth quarter. The increase resulted from the acquisition of Crosstown Traders. As a percentage of consolidated net sales, these costs decreased by 0.9% in the Fiscal 2006 fourth quarter as compared to the Fiscal 2005 fourth quarter. Consolidated cost of goods sold, as a percentage of net sales, increased 2.9% in the Fiscal 2006 fourth quarter as compared to the Fiscal 2005 fourth quarter. The increase in consolidated cost of goods sold as a percentage of consolidated net sales is primarily a result of inclusion of Crosstown Traders in the Fiscal 2006 fourth quarter. Cost of goods sold for Crosstown Traders includes catalog advertising and fulfillment costs, which are significant costs for catalog operations and result in relatively higher levels of costs in relation to sales in our Direct-to-Consumer segment as compared to our Retail Stores segment.

For the Retail Stores segment, cost of goods sold as a percentage of net sales was 0.5% lower in the Fiscal 2006 fourth quarter as compared to the Fiscal 2005 fourth quarter. The improvement for the Retail Stores segment reflected well-controlled inventory levels in the Fiscal 2006 fourth quarter, which resulted in reduced levels of promotional activity.

Buying and occupancy expenses, expressed as a percentage of net sales, decreased 3.8% in the Fiscal 2006 fourth quarter as compared to the Fiscal 2005 fourth quarter. For our Retail Stores segment, buying and occupancy expenses as a percentage of segment net sales were 0.6% lower in Fiscal 2006 fourth quarter as compared to Fiscal 2005 fourth quarter. The decrease in buying and occupancy expenses as a percent of sales was primarily attributable to lower levels of buying and occupancy costs associated with our Direct-to-Consumer segment, which operates only three outlet stores, and leverage from increased net sales on relatively fixed occupancy costs in our Retail Stores segment.

Selling, General, and Administrative

Consolidated selling, general, and administrative expenses were $194.0 million in the Fiscal 2006 fourth quarter, an increase of 32.8% from $146.0 million in the Fiscal 2005 fourth quarter. The increase was primarily a result of higher expenses related to incentive-based employee compensation and employee benefit programs, additional investments in marketing programs, and the inclusion of Crosstown Traders in Fiscal 2006. As a percentage of consolidated net sales, these costs decreased by 0.5% in the Fiscal 2006 fourth quarter as compared to the Fiscal 2005 fourth quarter.

Selling expenses were positively affected by leverage on the increase in consolidated net sales, relatively lower levels of selling expenses in the Direct-to-Consumer segment, and improved performance of our proprietary credit card operations, which benefited from the acquisition of the CATHERINES credit card portfolio in Fiscal 2006 as well as favorable experience in credit losses during Fiscal 2006. Selling expenses for the Fiscal 2006 fourth quarter were 3.7% lower as a percentage of sales.





General and administrative expenses were 3.2% higher as a percentage of net sales, reflecting relatively higher levels of general and administrative expenses in the Direct-to-Consumer segment as compared to the Retail Stores segment.

Income Tax Provision

The effective income tax rate was 23.9% in the Fiscal 2006 fourth quarter as compared to 46.9% in the Fiscal 2005 fourth quarter. The Fiscal 2006 fourth quarter and Fiscal 2005 fourth quarter tax rates were affected by the reconciliation of our state tax provision to our filed state tax returns, which we normally complete during the fourth quarter. The Fiscal 2006 fourth quarter tax rate was also affected by charitable contributions of inventories to Hurricane Katrina relief efforts.


FINANCIAL CONDITION

Liquidity and Capital Resources

Our primary sources of working capital are cash flow from operations, our proprietary credit card receivables securitization agreements, our investment portfolio, and our revolving credit facility described below. The following table highlights certain information related to our liquidity and capital resources:

   
Fiscal
  
Fiscal
  
Fiscal
  
(Dollars in thousands)
  
2006
  
2005
  
2004
  
                     
Cash and cash equivalents
  
$
130,132
  
$
273,049
  
$
123,781
  
U.S. Treasury bills and government agency securities
    
19,781
    
0
    
14,281
  
Cash provided by operating activities
    
164,812
    
165,940