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 February 3, 2007
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from _______________ to _____________
Commission
File Number: 000-07258
CHARMING
SHOPPES, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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PENNSYLVANIA
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23-1721355
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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450
WINKS LANE, BENSALEM, PA 19020
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(215)
245-9100
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(Address
of principal executive offices) (Zip Code)
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(Registrant’s
telephone number, including Area Code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock (par value $.10 per share)
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The
NASDAQ Stock Market LLC
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Stock
Purchase Rights
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
(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 or 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. x
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).
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Large
Accelerated Filer x
|
Accelerated
Filer o
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Non-accelerated
Filer o
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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 29, 2006 (the last day of the registrant’s most
recently completed second fiscal quarter), based on the closing price on July
28, 2006, was approximately $1,244,546,000.
As
of
March 27, 2007, 123,665,511 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Part III of this Form 10-K is incorporated by reference
herein from the registrant’s definitive proxy statement for its 2007 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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TABLE
OF
CONTENTS
(Continued)
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Item
8
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Financial
Statements and Supplementary Data (Continued)
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GENERAL
We
are a
leading multi-brand, multi-channel specialty apparel retailer with a leading
market share in women’s plus-size specialty apparel. Our Retail Stores segment
operates retail stores and related E-commerce websites through the following
distinct brands: LANE
BRYANT®,
FASHION
BUG®,
CATHERINES
PLUS SIZES®,
LANE
BRYANT OUTLETTM
and
PETITE
SOPHISTICATE OUTLETTM.
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 February 3,
2007
(“Fiscal 2007”), the sale of plus-size apparel represented approximately 74% 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 February 3, 2007, we
operated 2,378 stores in 48 states.
LANE
BRYANT®
is a
widely recognized name in plus-size fashion. Through private labels, such as
VENEZIA®,
CACIQUE®,
and
LANE BRYANT®,
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, which shops for fashionable merchandise in the moderate
price range. Primarily a mall-based destination store for the plus-size woman,
LANE BRYANT operates 777 stores in 46 states that average approximately 5,800
square feet. During Fiscal 2007, our LANE BRYANT website (lanebryant.com)
has
averaged more than 2.3 million unique visitors per month and has an established
on-line community.
During
Fiscal 2006, LANE
BRYANT
introduced and tested a new store concept, the LANE BRYANT®
intimate
apparel side-by-side store.
The new design pairs LANE
BRYANT’s
casual
and wear-to-work sportswear assortments with an expanded line of CACIQUE®
intimates as well as additional national brands, presented in a double
store-front. As a result of a successful testing period during Fiscal 2006,
many
of our LANE
BRYANT
retail
store openings and relocations for Fiscal 2007 were in the new side-by-side
format. This larger footprint of approximately 7,000 square feet per combined
store compares with the full-line LANE BRYANT store footprint of approximately
5,800 square feet.
During
Fiscal 2007, we operated 44 stores (which are included in the 777 stores
operated by LANE BRYANT) in the LANE BRYANT intimate apparel side-by-side
format.
In
December 2005, we announced plans to enter the outlet channel through the
assumption of outlet store leases from Retail Brand Alliance, and to operate
those locations under the name LANE BRYANT OUTLET. A majority of these locations
had been operated as side-by-side locations selling more than one brand.
Subsequently, in January 2006, we acquired the trademark and internet domain
rights to the PETITE SOPHISTICATE®
name.
During Fiscal 2007, we opened 82 LANE BRYANT OUTLET stores, including 76 stores
in locations that we assumed from Retail Brand Alliance and 3 existing LANE
BRYANT stores that we converted to LANE BRYANT OUTLET stores. During Fiscal
2007, we also opened 45 PETITE SOPHISTICATE OUTLET stores, the majority of
which
are operating with a LANE BRYANT OUTLET store in side-by-side locations assumed
from Retail Brand Alliance. These
combined outlet locations average approximately 9,400 square feet.
LANE
BRYANT OUTLETTM
is the
only national chain exclusively offering women’s plus-size apparel in the outlet
sales channel, with 82 outlet store locations in 32 states throughout the
country. Through our private labels, VENEZIA, CACIQUE, and LANE BRYANT, as
well
as selected national brands, we offer fashionable and sophisticated apparel
in
plus-sizes 14 -
28,
including intimate apparel, wear-to-work, casual sportswear, and accessories,
as
well as footwear and social occasion apparel. LANE BRYANT OUTLET stores average
approximately 6,000 square feet.
PETITE
SOPHISTICATE OUTLETTM
is the
only national chain exclusively offering women’s petite-size apparel in the
outlet sales channel, with 45 outlet store locations in 23 states throughout
the
country. PETITE
SOPHISTICATE OUTLET
targets
women 35 - 55 years old and offers traditional, updated classic, and
contemporary apparel in casual and career assortments. We offer clothing
tailored to women 4'11'' - 5'4'' who wear petite sizes 0 - 14. PETITE
SOPHISTICATE OUTLET stores average approximately 2,700 square feet. During
Fiscal 2007, we launched a marketing and informational website (petitesophisticate.com).
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 1,009 FASHION BUG stores are located in 44 states, primarily in
strip
shopping centers, and average approximately 8,800 square feet. During Fiscal
2007, our FASHION BUG website (fashionbug.com)
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 465 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. During Fiscal 2007, our CATHERINES website (catherines.com)
has
averaged more than 400,000 unique visitors per month.
CROSSTOWN
TRADERS
is a
direct marketer of women’s apparel, footwear, accessories, and specialty gifts.
Crosstown Traders markets women’s apparel through its
OLD
PUEBLO TRADERS®,
BEDFORD
FAIR LIFESTYLES®,
BEDFORD
FAIR SHOESTYLES®,
WILLOW
RIDGE®,
LEW
MAGRAM®,
BROWNSTONE STUDIO®,
REGALIA®,
INTIMATE APPEAL®,
MONTEREY BAY CLOTHING COMPANY®,
HOME
ETC®,
COWARD®
SHOE,
and
other catalog titles and related E-commerce sites, and markets food and
specialty gift products through its FIGI’S®
catalog
and related E-commerce site. During Fiscal 2007, our Crosstown Traders websites
have collectively averaged approximately 600,000 unique visitors per month.
Crosstown Traders also operates two outlet stores.
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
18. SEGMENT REPORTING”
below.
RETAIL
STORES SEGMENT
Stores
Our
2,378
retail stores (as of February 3, 2007) are primarily located in suburban areas
and small towns. Approximately 74% of these stores are located in strip shopping
centers, with the remainder located in community and regional malls. The
majority of our FASHION BUG, CATHERINES, and outlet 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 38% 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.
Our
store
openings, closings, and number of locations over the past three fiscal years
are
as follows:
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Year
Ended
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||||||||||
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Feb.
3,
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Jan.
28,
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Jan.
29,
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||||||||
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2007
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2006
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2005
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||||||||
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Store
Activity (1):
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||||||||||
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Number
of stores open at beginning of period
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2,236
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2,221
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2,227
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|||||||
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Opened
during period
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198
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(2)
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70
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51
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||||||
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Closed
during period
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(56
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)
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(55
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)
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(57
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)
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||||
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Number
of stores open at end of period
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2,378
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2,236
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2,221
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|||||||
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Number
of Stores Open at End of Period by Brand:
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||||||||||
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FASHION
BUG
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1,009
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1,025
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1,028
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|||||||
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LANE
BRYANT
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859
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(3)
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748
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722
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||||||
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CATHERINES
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465
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463
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471
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|||||||
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Other(4)
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45
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0
|
0
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|||||||
|
Number
of stores open at end of period
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2,378
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2,236
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2,221
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|||||||
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____________________
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(1) Does
not include 2 outlet stores in Fiscal 2007 and 3 outlet stores in
Fiscal
2006 operated by Crosstown Traders, Inc.
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(2) Includes
82 LANE BRYANT OUTLET stores and 45 PETITE SOPHISTICATE OUTLET
stores.
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||||||||||
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(3) Includes
82 LANE BRYANT OUTLET stores.
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||||||||||
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(4) Includes
PETITE SOPHISTICATE OUTLET
stores.
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||||||||||
We
continue to seek additional locations that meet our financial and operational
objectives. We plan to open approximately 95-107 stores and close approximately
40-50 stores during the year ended February 2, 2008 (“Fiscal 2008”). Planned
store activity by brand for Fiscal 2008 is as follows:
|
Openings
|
Closings
|
Relocations
|
|
|
FASHION
BUG
|
10
|
18-22
|
20-25
|
|
LANE
BRYANT
|
65-75(1)
|
15-18(2)
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45-50(3)
|
|
CATHERINES
|
10
|
7-10
|
10-15
|
|
Other(4)
|
10-12
|
0
|
0
|
|
Total
|
95-107
|
40-50
|
75-90
|
|
____________________
|
|||
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(1) Includes
approximately 35 LANE BRYANT intimate apparel side-by-side stores
and 15
LANE BRYANT OUTLET stores.
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(2) Includes
1 LANE BRYANT OUTLET store.
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(3) Includes
approximately 32 conversions to LANE BRYANT Intimate Apparel side-by-side
stores.
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(4) Includes
5 PETITE SOPHISTICATE OUTLET stores and 5-7 full-line PETITE SOPHISTICATE
stores.
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|||
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
core 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 and
E-commerce 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. 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.
LANE
BRYANT OUTLET features product developed exclusively for our outlet stores,
which includes updated key items and best-sellers from our full-line LANE BRYANT
brand. Selected national brands and expanded categories, such as footwear and
social occasion, are also offered at LANE BRYANT OUTLET. PETITE SOPHISTICATE
OUTLET offers career and casual sportswear in petite sizes 0 - 14.
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
2007, as a percent of annual Retail Stores segment sales, were 23.8%, 25.4%,
23.3%, and 27.5%, respectively.
Marketing
and Promotions
We
use
several types of advertising to stimulate retail store customer traffic.
Primarily, 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 who 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, CATHERINES, and PETITE SOPHISTICATE 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.
figure®
magazine, our periodic fashion and lifestyle magazine for women, features
clothing and fashions from our brands. The magazine covers topics such as:
beauty; health and fitness; home, food, and entertaining; relationships; and
social and community issues. The magazine also advertises our Crosstown Traders
catalogs. 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 in August 2003, the magazine has grown to a per-issue
circulation of more than 440,000 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 2007, we purchased
merchandise from approximately 760 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 2007, our overseas sourcing operations accounted for
approximately 36% of retail store merchandise purchases. Overseas sourcing
by
brand, as a percent of merchandise purchases, was approximately 34% for FASHION
BUG, 40% for LANE BRYANT, 26% for CATHERINES, and 54% for LANE BRYANT OUTLET
and
PETITE SOPHISTICATE OUTLET. In addition, during Fiscal 2007, 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 8% of our total retail store merchandise purchases and
approximately 23% of merchandise purchases for LANE BRYANT during Fiscal 2007.
No other vendor accounted for more than 2% of total retail store merchandise
purchases during Fiscal 2007.
We
pay
for a majority of our merchandise purchases outside the United States on an
open
account basis. We pay for the remainder of our purchases outside the United
States through corporate-issued letters of credit and, to a lesser extent,
through bank-issued letters of credit 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, LANE BRYANT OUTLET, and PETITE SOPHISTICATE OUTLET 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 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.
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 store-related E-commerce operations are
handled by a third-party warehouse facility in Indianapolis, Indiana. We utilize
150,000 square feet of space that 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.
Our
distribution and logistics operations provide adequate current capacity, and
we
continually evaluate our overall long-term distribution and logistics
requirements for both our Retail Stores and our Direct-to-Consumer
segments.
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
December holiday season. In addition to catalog and catalog-related E-commerce
operations, Crosstown Traders operates two 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. Subsequent
to the acquisition, we launched additional catalog titles, including apparel,
home, and footwear titles under the FASHION BUG and CATHERINES brands. We will
continue to build infrastructure to prepare for the launch of the LANE BRYANT
catalog in late Fiscal 2008 when the LANE BRYANT catalog trademark, currently
licensed by a third party, reverts to us.
The
Direct-to-Consumer segment provides an additional channel to serve our
customers’ lifestyle needs with targeted marketing media and merchandise
offerings in a wide range of 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 December holiday 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 - 124 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 mailed approximately 235 million catalogs
during Fiscal 2007, which was below our original catalog circulation plans.
Our
circulation strategy is focused on mailing to existing customers 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 not
only for 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 analyze 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, answer
questions on merchandise and its availability, and identify opportunities for
cross-selling additional merchandise. 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
call-center 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 many orders
the
following business day.
Sourcing
We
primarily use the domestic wholesale markets for our Direct-to-Consumer
merchandise purchases. During Fiscal 2007, we purchased merchandise from
approximately 1,100 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 2007. During Fiscal 2007, we began shifting
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 E-commerce customers.
A
288,000 square foot leased facility in Tucson, Arizona ships approximately
2,800,000 packages per year to customers of our OLD
PUEBLO TRADERS, MONTEREY BAY CLOTHING COMPANY, INTIMATE APPEAL,
HOME
ETC, and REGALIA
catalogs. A separate 108,000 square foot leased facility in Tucson, which became
fully operational in the first quarter of Fiscal 2007, ships approximately
1,200,000 packages per year and services footwear for all catalogs and
catalog-related E-commerce sites. A 240,000 square foot leased facility in
Wilmington, North Carolina ships approximately 2,300,000 packages per year
to
customers of our BEDFORD
FAIR, WILLOW RIDGE, BROWNSTONE STUDIO,
and
LEW
MAGRAM
catalogs. We own 125,000 square-feet of automated distribution center space
in
Marshfield, Wisconsin which serves as the main distribution area for our FIGI’S
catalog and ships approximately 2,000,000 packages per year. A 122,000
square-foot leased facility in Stevens Point, Wisconsin 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 continually 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, PETITE SOPHISTICATE, and Crosstown Traders brands each offer our
customers the convenience of proprietary credit card programs.
Our
FASHION BUG credit card program accounted for approximately 31% of FASHION
BUG
retail sales in Fiscal 2007, and has approximately 2.1 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 29% of LANE BRYANT retail
sales in Fiscal 2007, and has approximately 1.3 million active accounts. During
Fiscal 2007, 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 33% of CATHERINES
retail sales in Fiscal 2007, and has approximately 0.6 million active accounts.
In
Fiscal
2006, we purchased the CATHERINES credit card portfolio from the third-party
bank that serviced the CATHERINES program. 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.
We
launched the PETITE SOPHISTICATE credit card during the third quarter of Fiscal
2007. This program accounted for approximately 14% of PETITE SOPHISTICATE OUTLET
retail sales in Fiscal 2007, and has approximately 10 thousand active accounts.
We control credit policies and service the PETITE SOPHISTICATE proprietary
credit card file, and, through various agreements, we securitize and sell the
credit card receivables generated by this program.
Our
Crosstown Traders credit card program accounted for approximately 38% of
Crosstown Traders apparel sales in Fiscal 2007, and has approximately 0.9
million active accounts. We control credit policies and service the Crosstown
Traders proprietary credit card file, and, through various agreements, we
securitize and sell the credit card receivables generated by this
program.
In
addition to our Crosstown Traders credit card 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 agreement for the LANE BRYANT credit
card
program 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
16. ASSET SECURITIZATION”
below.
The
women's specialty retail apparel and direct-to-consumer businesses are highly
competitive, with numerous competitors, including individual and chain fashion
specialty stores, department stores, discount stores, catalog retailers, and
Internet-based retailers. 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 our customers. For our Retail Stores segment, store location, design,
advertising, and promotion are also significant elements of
competition.
As
of the
end of Fiscal 2007, we employed approximately 30,000 associates, which included
approximately 19,000 part-time employees. In addition, we hire a number of
temporary employees during the December holiday season. Approximately 80 of
our
employees are represented by unions whose contracts are currently due to expire
in August 2009. 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®”,
“FASHION BUG PLUS®”,
“FIGURE®”,
“L.A.
BLUES®”,
“CATHERINES®”,
“CATHERINES PLUS SIZES®”,
“MAGGIE BARNES®”,
“ANNA
MAXWELL®”,
“LIZ&ME®”,
“SERENADA®”,
“LANE
BRYANT®”,
“LANE
BRYANT OUTLETTM”
“VENEZIA®”,
“CACIQUE®”,
“PETITE SOPHISTICATE®”,
“PETITE SOPHISTICATE OUTLETTM”,
“OLD
PUEBLO TRADERS®”,
“BEDFORD FAIR LIFESTYLES®”,
“BEDFORD FAIR SHOESTYLES®”,
“WILLOW RIDGE®”,
“LEW
MAGRAM®”,
“BROWNSTONE STUDIO®”,
“REGALIA®”,
“INTIMATE APPEAL®”,
“MONTEREY BAY CLOTHING COMPANY®”,
“HOME
ETC®”,
“COWARD®”,
“FIGI’S®”,
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, petitesophisticate.com,
figis.com, bedfordfair.com, brownstonestudio.com, cowardshoe.com,
intimateappeal.com, lewmagram.com, willowridgecatalog.com, oldpueblotraders.com,
regaliaonline.com, shoetrader.com, shopthebay.com 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.
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, Executive Officers, and Corporate
Governance”
below
for additional information that is available on our Internet website.
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.
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, fit, quality, display, price, attractive website/catalog
layout, efficient fulfillment of website and catalog mail orders, and
personalized service to our customers, as well as store location, design,
advertising, and promotion. 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, an uncertain economic outlook, and escalating energy costs
could
adversely affect consumer spending habits and customer 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
certain costs vital to catalog operations, such as postage, paper, and
acquisition of prospects, 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. We are
subject to the Fair Labor Standards Act and various state and Federal laws
and
regulations governing such matters as minimum wages, exempt status
classification, overtime, and employee benefits. Changes in Federal or state
laws or regulations regarding minimum wages or other employee benefits could
cause us to incur additional wage and benefit costs, which could adversely
affect our results of operations. In addition, we may be unable to obtain
adequate insurance coverage for our operations at a reasonable
cost.
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.
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
face challenges in managing our recent growth.
Our
operating challenges and management responsibilities are increasing as we
continue to grow and expand into new store formats and 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 for our Retail Stores segment 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. During Fiscal 2007, we entered the outlet distribution channel and
expanded the number of stores using a new double-store-front
format.
We
are
also completing the integration of Crosstown Traders and our Direct-to-Consumer
segment into our current operating structure. Growth in our Direct-to-Consumer
segment 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 segment to prepare
for the launch of new catalogs, including the launch of the LANE
BRYANT
catalog
in late Fiscal 2008 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 demands on
our
staff and on our operating systems. We cannot assure the successful
implementation of our business plan for our Retail Stores 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 centers 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.
In addition, we use third-party freight consolidators and service providers
in
Indianapolis, Indiana; Abingdon, Maryland; Los Angeles, California; Miami,
Florida; and North Bergen, New Jersey. Most of the merchandise we purchase
is
shipped directly to our distribution and fulfillment centers or freight
consolidators, where it is prepared for shipment to the appropriate stores
or to
the customer. If any of our distribution centers, fulfillment centers, or
freight consolidators were to shut down or lose significant capacity for any
reason, the other locations may not be able to adequately support the resulting
additional distribution demands, in part because of capacity constraints and
in
part because each location 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 center, fulfillment
center, or freight consolidator.
Natural
disasters, war, acts of terrorism or other armed conflict, or the threat of
either on the United States or international economies may negatively impact
the
availability of merchandise and otherwise adversely impact our
business.
In
the
event of a natural disaster, war, acts of terrorism or other armed conflict,
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
December 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):
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political
instability;
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increased
security requirements applicable to imported goods;
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trade
restrictions;
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imposition
of, or changes in, duties, quotas, taxes, and other charges on
imports;
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currency
and exchange risks;
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issues
relating to compliance with domestic or international labor
standards;
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concerns
over anti-dumping;
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delays
in shipping; or
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increased
costs of transportation.
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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 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. 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.
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 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
currently 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.
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 have an adverse
effect on our reported results of operations.
Changes
in estimates related to our property, plant, equipment, goodwill, or 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 would have an adverse
impact on our reported results of operations.
Not
applicable.
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. In addition, we lease
certain of our corporate office, distribution center, warehouse, and other
administrative facilities. Additional information with respect to our real
estate leases is included in “Item
8. Financial Statements and Supplementary Data: Notes to Consolidated Financial
Statements; NOTE
17. LEASES”
below.
With
respect to leased stores open as of February 3, 2007, 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)
|
|
2007
|
174(2)
|
|
2008
- 2012
|
654
|
|
2013
- 2017
|
506
|
|
2018
- 2022
|
539
|
|
2023
- 2027
|
423
|
|
2028
- 2032
|
64
|
|
Thereafter
|
15
|
|
____________________
|
|
|
(1) Excludes
2 Crosstown Traders outlet stores.
|
|
|
(2) Includes
133 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, LANE BRYANT OUTLET, and PETITE SOPHISTICATE OUTLET distribution
center
|
|
393,000
|
White
Marsh, MD
|
Owned
|
LANE
BRYANT and CATHERINES distribution center
|
|
288,000
|
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, outlet operations, and corporate administrative
offices
|
|
142,000
|
Bensalem,
PA
|
Leased
|
Corporate
headquarters and FASHION BUG home office
|
|
135,000
|
Columbus,
OH
|
Leased
|
LANE
BRYANT home office
|
|
125,000
|
Marshfield,
WI
|
Owned
|
Crosstown
Traders distribution center
|
|
122,000
|
Stevens
Point, WI
|
Leased
|
Crosstown
Traders distribution and call centers
|
|
108,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders distribution center
|
|
71,000
|
Marshfield,
WI
|
Owned
|
Crosstown
Traders warehouse
|
|
64,000
|
Marshfield,
WI
|
Owned
|
Crosstown
Traders administrative offices and call center
|
|
63,000
|
Memphis,
TN
|
Owned
|
CATHERINES
home office
|
|
52,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders offices
|
|
46,000
|
Neillsville,
WI
|
Owned
|
Crosstown
Traders distribution center
|
|
40,000
|
Marshfield,
WI
|
Owned
|
Crosstown
Traders warehouse
|
|
36,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders offices
|
|
30,000
|
Miami
Township, OH
|
Leased
|
Spirit
of America National Bank (our wholly-owned credit card bank subsidiary)
and credit operations
|
|
23,000
|
Hong
Kong, PRC
|
Owned
|
International
sourcing offices
|
|
17,000
|
New
York, NY
|
Leased
|
E-commerce
operations
|
|
16,000
|
Marshfield,
WI
|
Owned
|
Crosstown
Traders manufacturing facility
|
|
15,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders offices
|
Other
than ordinary routine litigation incidental to our business, there are no
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.
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,
56, 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,
59, has
served as Executive Vice President and Chief Operating Officer since
2002.
James
G. Bloise,
63, 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 2002 to December 2005.
Michel
Bourlon,
47, 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,
58, 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,
49, has
served as Executive Vice President -
Chief
Financial Officer since January 1997, and he has been employed by us since
1983.
Colin
D. Stern,
58, 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,
56, 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.
John
J. Sullivan,
60, has
served as Vice President -
Corporate
Controller since October 1998.
PART
II
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
2007
|
Fiscal
2006
|
||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||
|
1st
Quarter
|
$
|
15.18
|
$
|
11.90
|
$
|
9.03
|
$
|
7.04
|
|||||
|
2nd
Quarter
|
14.90
|
9.97
|
12.25
|
7.00
|
|||||||||
|
3rd
Quarter
|
15.35
|
9.69
|
12.34
|
9.69
|
|||||||||
|
4th
Quarter
|
15.57
|
12.30
|
14.07
|
10.86
|
|||||||||
The
approximate number of holders of record of our common stock as of March 27,
2007
was 1,739. 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(1)
|
per
Share
|
or
Programs(2)
|
or
Programs(2)
|
|||||||||
|
October
29, 2006 through November 25, 2006
|
2,057
|
$
|
14.80
|
-
|
|||||||||
|
|
|||||||||||||
|
November
26, 2006 through December 30, 2006
|
0
|
00.00
|
-
|
||||||||||
|
|
|||||||||||||
|
December
31, 2006 through February 3, 2007
|
1,344
|
13.12
|
-
|
||||||||||
|
Total
|
3,401
|
$
|
14.14
|
-
|
|||||||||
|
____________________
|
|||||||||||||
|
(1) Shares
withheld for the payment of payroll taxes on employee stock awards
that
vested during the period.
|
|||||||||||||
|
(2(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 February
3, 2007,
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) for 30 days before and immediately
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 fourteen weeks ended February
3,
2007. The repurchase programs have no expiration
date.
|
|||||||||||||
The
following graph shows a five-year comparison of cumulative total returns on
our
Common Stock, the Russell 2000 Composite Index, and the Dow Jones U.S. Retailers
- Apparel Index:
The
above
chart was plotted using the following data:
|
2/2/02
|
2/1/03
|
1/31/04
|
1/29/05
|
1/28/06
|
2/3/07
|
||||||||||||||
|
Charming
Shoppes, Inc.
|
$
|
100
|
$
|
60
|
$
|
105
|
$
|
144
|
$
|
225
|
$
|
236
|
|||||||
|
Russell
2000 Composite Index
|
100
|
138
|
144
|
154
|
186
|
208
|
|||||||||||||
|
Dow
Jones U.S. Retailers - Apparel Index
|
100
|
87
|
116
|
140
|
160
|
193
|
|||||||||||||
Item
6. Selected Financial Data
The
following table presents selected financial data for each of our five fiscal
years ended as of February 1, 2003 through February 3, 2007. 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
|
||||||||||||||||
|
Feb.
3,
|
Jan.
28,
|
Jan.
29,
|
Jan.
31,
|
Feb.
1,
|
||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
2007(1)(2)
|
2006(1)(3)
|
2005
|
2004
|
2003
|
|||||||||||
|
Operating
Statement Data:
|
||||||||||||||||
|
Net
sales
|
$
|
3,067,517
|
$
|
2,755,725
|
$
|
2,334,736
|
$
|
2,288,363
|
$
|
2,413,356
|
||||||
|
Cost
of goods sold, buying, catalog, and
|
||||||||||||||||
|
occupancy
expenses
|
2,141,884
|
1,914,347
|
1,642,650
|
1,645,499
|
1,727,253
|
|||||||||||
|
Selling,
general, and administrative expenses
|
753,109
|
678,753
|
577,301
|
558,248
|
603,502
|
|||||||||||
|
Expenses
related to cost reduction plan
|
0
|
0
|
605
|
(4)
|
11,534
|
(4)
|
0
|
|||||||||
|
Restructuring
charge (credit)
|
0
|
0
|
0
|
0
|
(4,813
|
)(5)
|
||||||||||
|
Total
operating expenses
|
2,894,993
|
2,593,100
|
2,220,556
|
2,215,281
|
2,325,942
|
|||||||||||
|
Income
from operations
|
172,524
|
162,625
|
114,180
|
73,082
|
87,414
|
|||||||||||
|
Other
income
|
8,345
|
7,687
|
3,098
|
2,050
|
2,328
|
|||||||||||
|
Interest
expense
|
(14,746
|
)
|
(17,911
|
)
|
(15,610
|
)
|
(15,609
|
)
|
(20,292
|
)
|
||||||
|
Income
before income taxes, minority interest,
|
||||||||||||||||
|
and
cumulative effect of accounting changes
|
166,123
|
152,401
|
101,668
|
59,523
|
69,450
|
|||||||||||
|
Income
tax provision
|
57,200
|
53,010
|
37,142
|
21,623
|
27,117
|
|||||||||||
|
Income
before minority interest and cumulative
|
||||||||||||||||
|
effect
of accounting changes
|
108,923
|
99,391
|
64,526
|
37,900
|
42,333
|
|||||||||||
|
Minority
interest in net loss of consolidated subsidiary
|
0
|
0
|
0
|
142
|
679
|
|||||||||||
|
Cumulative
effect of accounting changes, net of tax
|
0
|
0
|
0
|
0
|
(49,098
|
)(6)
|
||||||||||
|
Net
income (loss)
|
$
|
108,923
|
$
|
99,391
|
$
|
64,526
|
$
|
38,042
|
$
|
(6,086
|
)
|
|||||
|
Basic
net income (loss) per share:
|
||||||||||||||||
|
Before
cumulative effect of accounting changes
|
$
|
.89
|
$
|
.83
|
$
|
.56
|
$
|
.34
|
$
|
.38
|
||||||
|
Net
income (loss)
|
.89
|
.83
|
.56
|
.34
|
(.05
|
)
|
||||||||||
|
Basic
weighted average common shares outstanding
|
122,388
|
119,831
|
116,196
|
112,491
|
113,810
|
|||||||||||
|
Diluted
net income (loss) per share:
|
||||||||||||||||
|
Before
cumulative effect of accounting changes
|
$
|
.81
|
$
|
.76
|
$
|
.52
|
$
|
.33
|
$
|
.36
|
||||||
|
Net
income (loss)
|
.81
|
.76
|
.52
|
.33
|
(.01
|
)
|
||||||||||
|
Diluted
weighted average common shares and
|
||||||||||||||||
|
equivalents
outstanding
|
139,763
|
137,064
|
133,174
|
128,558
|
130,937
|
|||||||||||
(Table
continued on next page)
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR
COMPARATIVE SUMMARY
(Continued)
|
Year
Ended
|
||||||||||||||||
|
(Dollars
in thousands)
|
Feb.
3,
|
Jan.
28,
|
Jan.
29,
|
Jan.
31,
|
Feb.
1,
|
|||||||||||
|
2007(1)(2)
|
2006(1)
|
2005
|
2004
|
2003
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
1,710,942
|
$
|
1,572,583
|
$
|
1,303,771
|
$
|
1,173,070
|
$
|
1,139,564
|
||||||
|
Current
portion - long-term debt
|
10,887
|
14,765
|
16,419
|
17,278
|
12,595
|
|||||||||||
|
Long-term
debt
|
181,124
|
191,979
|
208,645
|
202,819
|
203,045
|
|||||||||||
|
Working
capital
|
443,101
|
344,229
|
413,989
|
266,178
|
190,797
|
|||||||||||
|
Stockholders’
equity
|
947,538
|
814,348
|
694,464
|
587,409
|
546,555
|
|||||||||||
|
Performance
Data:
|
||||||||||||||||
|
Including
cumulative effect of accounting changes:
|
||||||||||||||||
|
Net
return on average stockholders’ equity
|
12.4
|
%
|
13.2
|
%
|
10.1
|
%
|
6.7
|
%
|
(1.1
|
)%
|
||||||
|
Net
return on average total assets
|
6.6
|
6.9
|
5.2
|
3.3
|
(0.5
|
)
|
||||||||||
|
Before
cumulative effect of accounting changes:
|
||||||||||||||||
|
Net
return on average stockholders’ equity
|
12.4
|
%
|
13.2
|
%
|
10.1
|
%
|
6.7
|
%
|
7.6
|
%
|
||||||
|
Net
return on average total assets
|
6.6
|
6.9
|
5.2
|
3.3
|
3.7
|
|||||||||||
|
____________________
|
||||||||||||||||
|
(1) Includes
the results of operations of Crosstown Traders, Inc. from the date
of
acquisition (June 2, 2005).
|
||||||||||||||||
|
(2) Fiscal
2007 consisted of 53 weeks.
|
||||||||||||||||
|
(3) Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
|
||||||||||||||||
|
(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. Costs
incurred in connection with the plan during Fiscal 2004 included
$2,980,000 of workforce reduction costs, $3,691,000 of lease termination
and related costs, $4,195,000 of accelerated depreciation (a non-cash
charge), and $668,000 of other facility closure costs. The cost reduction
plan was substantially completed during Fiscal 2004. During Fiscal
2005,
we revised the estimated sublease income on our Hollywood, Florida
credit
facility, which was closed in connection with the plan, and recognized
an
additional $605,000 of lease termination costs.
|
||||||||||||||||
|
(5) In
January 2002, our Board of Directors approved a restructuring plan
that
included the closing of our 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.
|
||||||||||||||||
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 2007,” “Fiscal 2006,” and “Fiscal 2005,” refer to
our fiscal years ended February 3, 2007, January 28, 2006, and January 29,
2005,
respectively. Fiscal 2007 consisted of 53 weeks, while Fiscal 2006 and Fiscal
2005 each consisted of 52 weeks. The term “Fiscal 2008” refers to our fiscal
year which will end on February 2, 2008. The terms “the Company,” “we,” “us,”
and “our” refer to Charming Shoppes, Inc. and, where applicable, our
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. (“Crosstown Traders”) with the operations of Charming
Shoppes, Inc. In addition, we cannot assure the successful implementation
of our business plan for Crosstown Traders, including the successful
launch of our LANE BRYANT catalog.
|
|
●
|
We
cannot assure the successful implementation of our business plans
for
entry into the outlet store distribution channel and expansion of
our
CACIQUE product line through new store formats.
|
|
●
|
We
cannot assure the successful implementation of our business plan
for
increased profitability and growth in our Retail Stores or
Direct-to-Consumer segments.
|
|
●
|
Our
business plan is largely dependent upon continued growth in the plus-size
women’s apparel market, which may not occur.
|
|
●
|
We
depend on key personnel, particularly our Chief Executive Officer,
Dorrit
J. Bern, and we may not be able to retain or replace these employees
or
recruit additional qualified personnel.
|
|
●
|
We
depend on our distribution and fulfillment centers and third-party
freight
consolidators and service providers, and could incur significantly
higher
costs and longer lead times associated with distributing our products
to
our stores and shipping our products to our E-commerce and catalog
customers if operations at any of these locations were to be disrupted
for
any reason.
|
|
●
|
We
depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents,
and on
our credit card securitization facilities. If we were unable to obtain
sufficient financing at an affordable cost, our ability to merchandise
our
stores, E-commerce, or catalog businesses would be adversely
affected.
|
|
●
|
Natural
disasters, as well as war, acts of terrorism, or other armed conflict,
or
the threat of either may negatively impact availability of merchandise
and
customer traffic to our stores, or otherwise adversely affect our
business.
|
|
●
|
We
rely significantly on foreign sources of production and face a variety
of
risks generally associated with doing business in foreign markets
and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability; imposition of, or
changes
in, duties or quotas; trade restrictions; increased security requirements
applicable to imports; delays in shipping; increased costs of
transportation; and issues relating to compliance with domestic or
international labor standards.
|
|
●
|
Our
Retail Stores and Direct-to-Consumer segments experience seasonal
fluctuations in net sales and operating income. Any decrease in sales
or
margins during our peak sales periods, or in the availability of
working
capital during the months preceding such periods, could have a material
adverse effect on our business. In addition, extreme or unseasonable
weather conditions may have a negative impact on our sales.
|
|
●
|
We
may be unable to obtain adequate insurance for our operations at
a
reasonable cost.
|
|
●
|
We
may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
|
|
●
|
We
may be unable to hire and retain a sufficient number of suitable
sales
associates at our stores. In addition, we are subject to the Fair
Labor
Standards Act and various state and Federal laws and regulations
governing
such matters as minimum wages, exempt status classification, overtime,
and
employee benefits. Changes in Federal or state laws or regulations
regarding minimum wages or other employee benefits could cause us
to incur
additional wage and benefit costs, which could adversely affect our
results of operations.
|
|
●
|
Our
manufacturers may be unable to manufacture and deliver merchandise
to us
in a timely manner or to meet our quality standards.
|
|
●
|
Our
Retail Stores segment sales are dependent upon a high volume of traffic
in
the strip centers and malls in which our stores are located, and
our
future retail store growth is dependent upon the availability of
suitable
locations for new stores.
|
|
●
|
Inadequate
systems capacity, a disruption or slowdown in telecommunications
services,
changes in technology, changes in government regulations, systems
issues,
security breaches, a failure to integrate order management systems,
or
customer privacy issues could result in reduced sales or increases
in
operating expenses as a result of our efforts or our inability to
remedy
such issues.
|
|
●
|
Successful
operation of our E-commerce websites and our catalog business is
dependent
on our ability to maintain efficient and uninterrupted customer service
and fulfillment operations.
|
|
●
|
We
may be unable to manage significant increases in certain costs vital
to
catalog operations, including postage, paper, and acquisition of
prospects, which could adversely affect our results of
operations.
|
|
●
|
Response
rates to our catalogs and access to new customers could decline,
which
would adversely affect our net sales and results of
operations.
|
|
●
|
We
may be unable to successfully implement our plan to improve merchandise
assortments in our Retail Stores or Direct-to-Consumer
segments.
|
|
●
|
We
make certain significant assumptions, estimates, and projections
related
to the useful lives of our property, plant, and equipment and the
valuation of intangible assets related to acquisitions. The carrying
amount and/or useful life of these assets are subject to periodic
valuation tests for impairment. Impairment results when the carrying
value
of an asset exceeds the undiscounted (or for goodwill and indefinite-lived
intangible assets the discounted) future cash flows associated with
the
asset. If actual experience were to differ materially from the
assumptions, estimates, and projections used to determine useful
lives or
the valuation of property, plant, equipment, or intangible assets,
a
write-down for impairment of the carrying value of the assets, or
acceleration of depreciation or amortization of the assets, could
result.
Such a write-down or acceleration of depreciation or amortization
would
have an adverse impact on our reported results of operations.
|
|
●
|
Changes
to existing accounting rules or the adoption of new rules could have
an
adverse impact on our reported results of operations.
|
|
●
|
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to
include our assessment of the effectiveness of our internal control
over
financial reporting in our annual reports. Our independent registered
public accounting firm is also currently required to attest to whether
or
not our assessment is fairly stated in all material respects and
to
separately report on whether or not they believe that we maintained,
in
all material respects, effective internal control over financial
reporting. If we are unable to maintain effective internal control
over
financial reporting, or if our independent registered public accounting
firm is unable to timely attest to our assessment, we could be subject
to
regulatory sanctions and a possible loss of public confidence in
the
reliability of our financial reporting. Such a failure could result
in our
inability to provide timely and/or reliable financial information
and
could adversely affect our
business.
|
In
Fiscal
2007, our diluted earnings per share increased by 7% to $0.81 and our
consolidated net sales increased by 11% to $3.068 billion from $2.756 billion
in
Fiscal 2006. The increase in consolidated net sales was driven by (i) the
inclusion of the sales of Crosstown Traders, Inc. (“Crosstown Traders”), which
we acquired on June 2, 2005, for the entire Fiscal 2007 period, (ii) sales
from
new LANE BRYANT, LANE BRYANT OUTLET, and PETITE SOPHISTICATE OUTLET stores
opened during Fiscal 2007, (iii) an increase in comparable store sales at our
LANE BRYANT and CATHERINES brands, (iv) increases in store-related E-commerce
sales at all of our retail store brands, and (v) an additional week of
operations in Fiscal 2007. With the acquisition of Crosstown Traders, we operate
in two segments: Retail Stores and Direct-to-Consumer. Our Retail Stores segment
operates through our LANE BRYANT (including LANE BRYANT OUTLET), FASHION BUG,
CATHERINES PLUS SIZES, and PETITE SOPHISTICATE OUTLET stores and store-related
E-commerce. Our Direct-to-Consumer segment includes catalog and catalog-related
E-commerce.
In
our
Retail Stores segment, net sales increased 7.5% during Fiscal 2007 as compared
to Fiscal 2006. Sales from new stores (including outlet store sales), an
increase in comparable store sales, increased E-commerce sales at all brands,
and an additional week of operations in Fiscal 2007 contributed to the increase
in consolidated Retail Stores segment net sales. Comparable store sales are
based on equivalent 52-week and 13-week periods and are not affected by the
additional week of operations in Fiscal 2007.
For
Fiscal 2007, LANE BRYANT achieved a 1% increase in comparable store sales as
compared to a 4% increase in Fiscal 2006. For the Fiscal 2007 fourth quarter,
LANE BRYANT experienced a 3% decrease in comparable store sales, as compared
to
an increase of 10% in the Fiscal 2006 fourth quarter. Compared to a strong
performance in the Fiscal 2006 fourth quarter, LANE BRYANT experienced decreases
in both average dollar sale per transaction and traffic levels in the Fiscal
2007 fourth quarter. In addition, LANE BRYANT experienced a sharp downtrend
in
sales of premium denim products in response to changing fashion trends in the
Fiscal 2007 fourth quarter as compared to the prior-year period. The decrease
in
comparable store sales was offset by new store sales (including outlet store
sales), as well as an increase in E-commerce sales.
Our
CATHERINES stores achieved a 4% comparable store sales increase in Fiscal 2007
as compared to a 10% increase in Fiscal 2006. For the Fiscal 2007 fourth
quarter, CATHERINES achieved a 2% increase in comparable store sales, as
compared to an increase of 19% for the Fiscal 2006 fourth quarter. CATHERINES’
strong performance during Fiscal 2006 continued into Fiscal 2007, with
significant increases in traffic, the number of transactions per store, and
E-commerce sales as compared to the prior-year period.
At
FASHION BUG, comparable store sales decreased 1% in Fiscal 2007, as compared
to
flat comparable store sales in Fiscal 2006. FASHION BUG experienced a 1%
decrease in comparable store sales in the Fiscal 2007 fourth quarter, as
compared to a 1% increase in the Fiscal 2006 fourth quarter. Sales from the
additional week of operations in Fiscal 2007 and an increase in E-commerce
sales
were partially offset by the decrease in comparable store sales and a decrease
in the number of open stores.
Store-related
E-commerce sales for our three brands increased from approximately 2.0% of
total
sales in Fiscal 2006 to approximately 3.0% of total sales in Fiscal 2007. Demand
in the E-commerce channel continues to outpace the growth in our retail stores.
We have dedicated, and will continue to dedicate, more of our resources to
meet
the growth in this channel. For Fiscal 2008, we expect our store-related
E-commerce sales to increase to more than 4.0 percent of consolidated net sales,
and we see opportunities to continue to 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.
Total
net
sales for the Direct-to-Consumer segment were $428 million for Fiscal 2007,
as
compared to $299 million for Fiscal 2006 from the date of acquisition of
Crosstown Traders on June 2, 2005. The Direct-to-Consumer segment performed
below our sales plan for Fiscal 2007 as a result of reduced response rates
from
our core customers to our apparel catalog offerings. The disruption caused
by
the consolidation of our catalog merchandise operations into Tucson, Arizona
during Fiscal 2007 had a greater-than-anticipated negative impact on Crosstown’s
apparel catalog operations. As a result, we reduced our catalog prospecting
and
circulation levels in order to reduce advertising expenditures during the
period. We expect to maintain or slightly increase our prospecting and
circulation levels in Fiscal 2008.
For
the
fourth quarter of Fiscal 2007, total net sales for the Direct-to-Consumer
segment were $148 million, as compared to total net sales of $156 million for
the fourth quarter of Fiscal 2006. A significant amount of fourth quarter sales
were derived from our FIGI’S catalog, which markets food and specialty gift
products and does a substantial portion of its business during the December
holiday season. Sales from the FIGI’S catalog for the Fiscal 2007 fourth quarter
were in line with our sales plan, while sales from our apparel catalogs were
below plan for the reasons discussed above.
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 Stores 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
(Source:
American Obesity Association: Obesity in the U.S. Fact Sheet)
and half
of American women wearing size 14 or larger
(Source: NPD Group).
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. In addition to allowing us to expand our
multi-channel strategy for our retail store brands, the acquisition of Crosstown
Traders 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.
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
(a 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:
|
·
|
Continued
expansion of our side-by-side LANE BRYANT intimate apparel store
concept,
which we successfully tested during Fiscal 2006 and implemented in
Fiscal
2007. This concept pairs LANE BRYANT’s casual and wear-to-work sportswear
assortments with an expanded line of CACIQUE
intimates, as well as additional national brands, presented in a
double
store-front. During Fiscal 2007, we operated 44 stores in the side-by-side
format, including 18 stores that were relocated or remodeled. During
Fiscal 2008, we plan to open approximately 60 new LANE BRYANT stores,
including 35 stores in the new side-by-side
format.
|
|
|
·
|
In
Fiscal 2007, we entered the outlet store channel through the assumption
of
outlet store leases from Retail Brand Alliance and the opening of
82 LANE
BRYANT OUTLET stores and 45 PETITE SOPHISTICATE OUTLET stores, many
of
which are operating as side-by-side stores with LANE BRYANT OUTLET
stores.
This channel, which we expected would incur an operating loss during
Fiscal 2007, performed above-plan, was profitable during the fourth
quarter, and broke even for Fiscal 2007. During Fiscal 2008, we plan
to
open approximately 15 new LANE BRYANT OUTLET stores (including 3
conversions from LANE BRYANT stores), 5 new PETITE SOPHISTICATE OUTLET
stores, and 5-7 new full-line PETITE SOPHISTICATE
stores.
|
|
·
|
In
our Direct-to-Consumer segment, we
will focus on building infrastructure to prepare for the launch of
the
LANE BRYANT catalog, as well as improving the performance of our
core
apparel group catalogs. The LANE BRYANT catalog trademark, currently
licensed by a third party, will revert to us in late Fiscal
2008.
|
|
·
|
In
addition, we are planning for continued growth in E-commerce and
cross-channel selling tools, and exploring opportunities for international
expansion.
|
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, and defer recognition of revenue for product shipped but not
yet
received by the customer based on an estimate of the number of days the
shipments are in-transit. 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,
store-related websites, and through a third party. We recognize revenue from
gift cards when the gift card is redeemed by the customer. Our gift cards do
not
currently 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. A change in the historical pattern of gift card redemptions would
affect the level of revenue recognized.
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 December 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,
we
adjust the valuation of inventories at cost, and the resulting gross margins,
in
proportion to markdowns and shrinkage on our retail inventories. Our use of
the
retail inventory method results in valuing inventories at the lower of cost
or
market if markdowns are currently taken as a reduction of the retail value
of
inventories. Our 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. Our failure to properly estimate
markdowns currently could result in an overstatement or understatement of
inventory cost under the lower of cost or market principle.
At
the
end of Fiscal 2007, Fiscal 2006, and Fiscal 2005, in addition to markdowns
that
had been recorded in inventory, an additional $9.9 million, $8.6 million, and
$9.5 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 February 3, 2007, January 28, 2006, and January 29, 2005, $8.8 million,
$9.3 million, and $6.5 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 2007, Fiscal
2006, and Fiscal 2005 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 separate and distinct qualified special-purpose entity (“QSPE”). The QSPE’s
assets and liabilities are not consolidated in our balance sheet and the
receivables transferred to the QSPEs are isolated for purposes of the
securitization program. We use asset securitization to fund the credit card
receivables generated by our FASHION BUG, CATHERINES, PETITE SOPHISTICATE,
and
CROSSTOWN TRADERS proprietary credit card programs.
See
“Item
8. Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; NOTE
16. 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 a beneficial 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
|
$
|
1.1
|
$
|
2.1
|
|||
|
Residual
cash flows discount rate
|
0.1
|
0.1
|
|||||
|
Credit
loss percentage
|
0.9
|
1.7
|
|||||
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.
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 February 3, 2007 and January 28 2006 we deferred $8.8 million and $9.3
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, we accounted for stock-based compensation using the intrinsic
value
method in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting
for Stock Issued to Employees,”
as
permitted by SFAS No. 123, “Accounting
for Stock-Based Compensation.”
We
recorded compensation expense for restricted stock and restricted stock unit
awards and for stock options 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 at the date of grant. The
compensation expense was recognized on a straight-line basis over the vesting
period of each award or option. 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,
restricted stock awards, and restricted stock unit awards based on an estimated
fair value of the option or award. In accordance with SFAS No. 123, we used
the
Black-Scholes pricing model to estimate the fair value of stock options. The
Black-Scholes model required estimates or assumptions as to the dividend yield
and price volatility of the underlying stock, the expected life of the option,
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. Under SFAS No. 123R, we are required to
recognize the fair value of stock-based payments as compensation expense in
our
financial statements beginning in Fiscal 2007. Pro forma disclosures are no
longer permitted.
We
elected to adopt SFAS No. 123R on the modified prospective method and,
accordingly, prior periods have not been restated. We have provided pro forma
disclosure of stock-based compensation determined in accordance with SFAS No.
123, as previously disclosed, for the comparable prior-year periods. Stock-based
compensation cost recognized in Fiscal 2007 includes (i) compensation cost
for
all stock-based awards granted prior to the beginning of Fiscal 2007 but not
fully vested as of the beginning of Fiscal 2007, based on the grant-date fair
value estimated in accordance with the provisions of SFAS No. 123, and (ii)
compensation cost for all stock-based awards granted subsequent to the beginning
of Fiscal 2007, based on the grant-date fair value estimated in accordance
with
the provisions of SFAS No. 123R. The impact of the change from using actual
forfeitures to determine compensation expense under the intrinsic value method
to using estimated forfeitures in accordance with the provisions of SFAS No.
123R was immaterial. Current grants of stock-based compensation consist
primarily of restricted stock and restricted stock unit awards.
Under
SFAS No. 123R, we will continue to use the Black-Scholes valuation model to
estimate the fair value of stock options, using assumptions consistent with
our
pro forma disclosures under SFAS No. 123, and straight-line amortization of
stock-based compensation. We elected to calculate the initial pool of excess
tax
benefits related to stock-based compensation and the related presentation of
excess tax benefits in our consolidated statements of cash flows in accordance
with the provisions of paragraph 81 of SFAS No. 123R.
Adoption
of SFAS No. 123R generally results in the recognition of additional stock-based
compensation in the financial statements as compared to use of the intrinsic
value method. However, beginning in Fiscal 2005, we changed the composition
of
our stock-based compensation awards to include primarily restricted stock and
restricted stock unit awards, which generally yield the same compensation
expense under both the intrinsic value method and SFAS No. 123R. In addition,
we
did not have significant unvested stock options as of the beginning of Fiscal
2007. Accordingly, the adoption of SFAS No. 123R did not have a material
incremental impact on our income before taxes and net income, or on our basic
or
diluted net income per share.
Under
the
provisions of SFAS No. 123R, we are required to present gross excess tax
benefits related to stock-based compensation as cash flows from financing
activities in our statements of cash flows instead of as cash flows from
operating activities as previously required. Write-offs of deferred tax assets
related to an excess of stock-based compensation recognized in the financial
statements over amounts deductible for tax purposes will continue to be
reflected as cash flows used by operating activities. Net cash used by financing
activities for Fiscal 2007 includes $5.1 million of excess tax benefits related
to stock-based compensation that would have been classified as a cash inflow
in
net cash provided by operating activities if we had not adopted the provisions
of SFAS No. 123R.
See
“Item
8. Financial Statements and Supplementary Data; Note 1. Summary of Significant
Accounting Policies; Stock-based
Compensation”
below
for further information on our stock-based compensation expense for Fiscal
2007
and for pro forma disclosures under SFAS No. 123 for the comparable prior-year
periods.
Total
stock-based compensation not yet recognized, related to the non-vested portion
of stock options and awards outstanding, was $16.0 million as of February 3,
2007. The weighted-average period over which we expect to recognize this
compensation is approximately 2.7 years.
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.
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)(2)
|
From
Prior Year(2)
|
|||||||||||||||
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||
|
2007(3)
|
2006
|
2005
|
2007-2006(3)
|
2006-2005
|
||||||||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
11.3
|
%
|
18.0
|
%
|
||||||
|
|
||||||||||||||||
|
Cost
of goods sold, buying, catalog, and occupancy
expenses
|
69.8
|
69.5
|
70.4
|
11.9
|
16.5
|
|||||||||||
|
Selling,
general, and administrative expenses
|
24.6
|
24.6
|
24.7
|
11.0
|
17.6
|
|||||||||||
|
Income
from operations
|
5.6
|
5.9
|
4.9
|
6.1
|
42.4
|
|||||||||||
|
Other
income
|
0.3
|
0.3
|
0.1
|
8.6
|
148.1
|
|||||||||||
|
Interest
expense
|
0.5
|
0.6
|
0.7
|
(17.7
|
)
|
14.7
|
||||||||||
|
Income
tax provision
|
1.9
|
1.9
|
1.6
|
7.9
|
42.7
|
|||||||||||
|
Net
income
|
3.6
|
3.6
|
2.8
|
9.6
|
54.0
|
|||||||||||
|
____________________
|
||||||||||||||||
|
(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.
|
||||||||||||||||
|
(3) Fiscal
2007 consisted of 53 weeks.
|
||||||||||||||||
The
following table shows our net sales by store brand:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||||||||
|
February
3, 2007(1)
|
January
28, 2006
|
January
29, 2005
|
|||||||||||||||||
|
Fiscal
|
Fourth
|
Fiscal
|
Fourth
|
Fiscal
|
Fourth
|
||||||||||||||
|
(In
millions)
|
Year
|
Quarter
|
Year
|
Quarter
|
Year
|
Quarter
|
|||||||||||||
|
FASHION
BUG
|
$
|
1,058.3
|
$
|
269.1
|
$
|
1,049.0
|
$
|
258.6
|
$
|
1,043.8
|
$
|
255.0
|
|||||||
|
LANE
BRYANT(2)
|
1,202.3
|
357.1
|
1,057.4
|
299.8
|
974.6
|
260.1
|
|||||||||||||
|
CATHERINES
|
367.7
|
91.5
|
346.2
|
83.0
|
312.1
|
70.4
|
|||||||||||||
|
Other
retail stores(3)
|
8.1
|
6.2
|
0.0
|
0.0
|
0.0
|
0.0
|
|||||||||||||
|
Total
Retail Stores segment sales
|
2,636.4
|
723.9
|
2,452.6
|
641.4
|
2,330.5
|
585.5
|
|||||||||||||
|
Total
Direct-to-Consumer segment sales(4)
|
427.8
|
148.2
|
298.9
|
155.8
|
0.0
|
0.0
|
|||||||||||||
|
Corporate
and other(5)
|
3.3
|
1.9
|
4.2
|
2.4
|
4.2
|
2.5
|
|||||||||||||
|
Total
net sales
|
$
|
3,067.5
|
$
|
874.0
|
$
|
2,755.7
|
$
|
799.6
|
$
|
2,334.7
|
$
|
588.0
|
|||||||
|
____________________
|
|||||||||||||||||||
|
(1) Fiscal
Year 2007 and Fourth Quarter 2007 consisted of 53 weeks and 14 weeks,
respectively.
|
|||||||||||||||||||
|
(2) Fiscal
2007 includes LANE BRYANT OUTLET stores.
|
|||||||||||||||||||
|
(3) Includes
PETITE SOPHISTICATE OUTLET stores.
|
|||||||||||||||||||
|
(4) Includes
the results of operations of Crosstown Traders, Inc. from the date
of
acquisition on June 2, 2005.
|
|||||||||||||||||||
|
(5) Revenue
related to loyalty card fees.
|
|||||||||||||||||||
The
following table shows additional information related to changes in our net
sales:
|
Year
Ended
|
Year
Ended
|
|||
|
February
3, 2007(1)
|
January
28, 2006
|
|||
|
Fiscal
|
Fourth
|
Fiscal
|
Fourth
|
|
|
Year
|
Quarter
|
Year
|
Quarter
|
|
|
Retail
Stores segment
|
||||
|
Increase
(decrease) in comparable store sales:(2)
|
||||
|
Consolidated
retail stores
|
1%
|
(1)%
|
3%
|
7%
|
|
FASHION
BUG
|
(1)
|
(1)
|
0
|
1
|
|
LANE
BRYANT
|
1
|
(3)
|
4
|
10
|
|
CATHERINES
|
4
|
2
|
10
|
19
|
|
Sales
from new stores as a percentage of
|
||||
|
consolidated
prior-period net sales:(3)
|
||||
|
FASHION
BUG
|
1
|
1
|
1
|
2
|
|
LANE
BRYANT(4)
|
6
|
7
|
3
|
4
|
|
CATHERINES
|
1
|
0
|
1
|
1
|
|
Other
retail stores(5)
|
0
|
1
|
--
|
--
|
|
Prior-period
sales from closed stores as a percentage
|
||||
|
of
consolidated prior-period net sales:
|
||||
|
FASHION
BUG
|
(1)
|
(1)
|
(1)
|
(1)
|
|
LANE
BRYANT
|
(2)
|
(2)
|
(1)
|
(1)
|
|
CATHERINES
|
(0)
|
(0)
|
(1)
|
(1)
|
|
Increase
in Retail Stores segment sales
|
7
|
13
|
5
|
10
|
|
Direct-to-Consumer
segment
|
||||
|
Increase
(decrease) in Direct-to-Consumer segment sales
|
-- (6)
|
(5)
|
--
|
--
|
|
Increase
in consolidated net sales
|
11%
|
9%
|
18%
|
36%
|
|
____________________
|
||||
|
(1) Fiscal
Year 2007 and Fourth Quarter 2007 consisted of 53 weeks and 14 weeks,
respectively. Comparable store sales and changes in sales from new
stores
and closed stores are based on equivalent 52-week and 13-week periods.
The
increase in Retail Stores segment sales, increase (decrease) in
Direct-to-Consumer segment sales, and increase in consolidated net
sales
are based on the 53-week and 14-week periods for Fiscal 2007 and
the
52-week and 13-week periods for Fiscal 2006.
|
||||
|
(2) “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 E-commerce sales, are
excluded
from the calculation of comparable store sales.
|
||||
|
(3) Includes
incremental Retail Stores segment E-commerce
sales.
|
||||
|
(4) Includes
LANE BRYANT OUTLET stores.
|
||||
|
(5) Includes
PETITE SOPHISTICATE OUTLET stores.
|
||||
|
(6) Comparison
is not meaningful, as prior-year period includes sales from Crosstown
Traders, Inc. from the date of acquisition on June 2, 2005 (approximately
34 weeks).
|
||||
The
following table sets forth information with respect to store activity for Fiscal
2007 and planned store activity for Fiscal 2008:
|
FASHION
|
LANE
|
|||||||||||||||
|
BUG
|
BRYANT
|
CATHERINES
|
Other(1)
|
Total
|
||||||||||||
|
Fiscal
2007:(2)
|
||||||||||||||||
|
Stores
at January 28, 2006
|
1,025
|
748
|
463
|
0
|
2,236
|
|||||||||||
|
Stores
opened
|
10
|
135
|
(3)
|
8
|
45
|
198
|
||||||||||
|
Stores
closed
|
(26
|
)
|
(24
|
)
|
(6
|
)
|
(0
|
)
|
(56
|
)
|
||||||
|
Net
change in stores
|
(16
|
)
|
111
|
2
|
45
|
142
|
||||||||||
|
Stores
at February 3, 2007
|
1,009
|
859
|
465
|
45
|
2,378
|
|||||||||||
|
Stores
relocated during period
|
27
|
24
|
11
|
0
|
62
|
|||||||||||
|
Fiscal
2008
|
||||||||||||||||
|
Planned
store openings
|
10
|
65-75
|
(4)
|
10
|
10-12
|
(5)
|
95-107
|
|||||||||
|
Planned
store closings
|
18-22
|
15-18
|
(6)
|
7-10
|
0
|
40-50
|
||||||||||
|
Planned
store relocations
|
20-25
|
45-50
|
(7)
|
10-15
|
0
|
75-90
|
||||||||||
|
____________________
|
||||||||||||||||
|
(1) Includes
PETITE SOPHISTICATE OUTLET stores.
|
||||||||||||||||
|
(2) Excludes
2 Crosstown Traders outlet stores.
|
||||||||||||||||
|
(3) Includes
82 LANE BRYANT OUTLET stores.
|
||||||||||||||||
|
(4) Includes
approximately 35 LANE BRYANT intimate apparel side-by-side stores
and 15
LANE BRYANT OUTLET stores.
|
||||||||||||||||
|
(5) Includes
5 PETITE SOPHISTICATE OUTLET stores and 5-7 full-line PETITE SOPHISTICATE
stores.
|
||||||||||||||||
|
(6) Includes
1 LANE BRYANT OUTLET store.
|
||||||||||||||||
|
(7) Includes
approximately 32 conversions to LANE BRYANT intimate apparel side-by-side
stores.
|
||||||||||||||||
Comparison
of Fiscal 2007 to Fiscal 2006
Net
Sales
Consolidated
net sales increased in Fiscal 2007 as compared to Fiscal 2006, primarily as
a
result of the inclusion of Crosstown Traders for the entire Fiscal 2007 period,
as well as increased net sales from our Retail Stores segment and the inclusion
of an additional week of operations in Fiscal 2007. Consolidated net sales
for
Fiscal 2006 include net sales from Crosstown Traders from the date of
acquisition on June 2, 2005. The increase in consolidated Retail Stores segment
net sales was a result of sales from new LANE BRYANT, LANE BRYANT OUTLET, and
PETITE SOPHISTICATE OUTLET stores opened in Fiscal 2007, an increase in
comparable retail store sales at our LANE BRYANT and CATHERINES brands,
increases in E-commerce sales at all of our retail store brands, and the
additional week of operations. The increases in consolidated net sales and
consolidated Retail Stores segment net sales were below our plan for the
period.
Total
net
sales for the LANE BRYANT brand increased as a result of sales from new stores
(including LANE BRYANT OUTLET stores), an increase in comparable retail store
sales, an increase in E-commerce sales, and inclusion of the additional week
in
Fiscal 2007. The increase in LANE BRYANT net sales was below our plan for the
period. As compared to the prior-year period, a decrease in the average dollar
sale per transaction was offset by an increase in the number of transactions
per
store, while traffic levels were relatively flat.
Total
net
sales for the FASHION BUG brand increased slightly as a result of the inclusion
of an additional week in Fiscal 2007 and an increase in store-related E-commerce
sales, partially offset by slight decreases in both comparable retail store
sales and the number of open stores. The increase in FASHION BUG net sales
was
below our plan for the period. The number of transactions per store decreased
during the current-year period while the average dollar sale per transaction
was
flat as compared to the prior-year period.
Total
net
sales for the CATHERINES brand increased as a result of increases in comparable
retail store sales and store-related E-commerce sales and inclusion of the
additional week in Fiscal 2007. CATHERINES’ strong performance during Fiscal
2006 continued into Fiscal 2007, with significant increases in traffic levels,
the number of transactions per store, and E-commerce sales as compared to the
prior-year period. The increase in CATHERINES net sales was above our plan
for
the period.
Total
net
sales for the Direct-to-Consumer segment for Fiscal 2007 were below our sales
plan for Fiscal 2007 as a result of reduced response rates from our core
customers to our apparel catalog offerings. The disruption caused by the
consolidation of our catalog merchandise operations into Tucson, Arizona during
Fiscal 2007 had a greater-than-anticipated negative impact on apparel catalog
sales. As a result, we reduced our catalog prospecting and circulation levels
in
order to reduce advertising expenditures during the period. The average order
value for the current-year period was above plan, while actual circulation
and
customer response rates were below plan. Sales from our FIGI’S food and gift
catalog performed on plan for the year.
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 2007 and Fiscal 2006, we recognized
revenues of $19.1 million and $15.6 million, respectively, in connection with
our loyalty card programs.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
The
increase in consolidated cost of goods sold, buying, catalog, and occupancy
expenses as a percentage of consolidated net sales from Fiscal 2006 to Fiscal
2007 was primarily a result of the inclusion of catalog costs for our
Direct-to-Consumer segment for all of Fiscal 2007 as compared to eight months
of
Fiscal 2006 as a result of the acquisition of Crosstown Traders in June 2005.
Consolidated cost of goods sold increased 0.7% as a percentage of consolidated
net sales, while consolidated buying and occupancy expenses decreased 0.3%
as a
percentage of consolidated net sales.
For
our
Retail Stores segment, cost of goods sold, buying, and occupancy expenses as
a
percentage of net sales were 0.3% lower in Fiscal 2007 as compared to Fiscal
2006. Buying and occupancy expenses for the Retail Stores segment, as a
percentage of net sales, were 0.1% lower in Fiscal 2007 as compared to Fiscal
2006. The Retail Stores segment experienced a modest improvement in merchandise
margins while also benefiting from leverage on buying and occupancy costs from
the increase in retail store net sales. Occupancy expenses for the Retail Stores
segment for the first half of Fiscal 2007 included approximately $4.5 million
of
pre-opening expenses related to the LANE BRYANT OUTLET stores that began
operations in July 2006.
Cost
of
goods sold for our Direct-to-Consumer segment includes catalog advertising
and
fulfillment costs, which are significant expenses for catalog operations, and
are therefore generally higher as a percentage of net sales than cost of goods
sold for our Retail Stores segment. Catalog advertising and fulfillment costs
as
a percentage of net sales increased significantly in Fiscal 2007 as compared
to
Fiscal 2006, and were the primary cause of the increase in consolidated cost
of
goods sold. Conversely, the Direct-to-Consumer segment incurs lower levels
of
buying and occupancy costs, which resulted in a favorable impact on consolidated
buying and occupancy expenses as a percentage of consolidated net sales in
the
current-year period.
Cost
of
goods sold includes merchandise costs net of discounts and allowances; freight;
inventory shrinkage; shipping and handling costs associated with our
Direct-to-Consumer and E-commerce businesses; and amortization of
direct-response advertising costs for our Direct-to-Consumer business for
periods subsequent to the Crosstown acquisition. Net merchandise costs and
freight are capitalized as inventory costs.
Buying
expenses include payroll, payroll-related costs, and operating expenses for
our
buying departments, warehouses, and fulfillment centers. Occupancy expenses
include rent; real estate taxes; insurance; common area maintenance; utilities;
maintenance; and depreciation for our stores, warehouse and fulfillment center
facilities, and equipment. Buying, catalog, and occupancy costs are treated
as
period costs and are not capitalized as part of inventory.
Selling,
General, and Administrative
Consolidated
selling, general, and administrative expenses for Fiscal 2007 were flat as
a
percentage of consolidated net sales as compared to Fiscal 2006 , reflecting
the
benefit of our continued focus on controlling expenses and an improvement in
the
contribution from our proprietary credit card operations. Selling, general,
and
administrative expenses for the first half of Fiscal 2007 included approximately
$3.3 million of pre-opening operating expenses related to the LANE BRYANT OUTLET
stores that began operations in July 2006. The current-year period was also
negatively impacted by a $3.6 million increase in stock-based compensation
as
compared to the prior-year period, and by inclusion of the Direct-to-Consumer
segment for all of Fiscal 2007 as compared to eight months of Fiscal 2006 as
a
result of the acquisition of Crosstown Traders. Consolidated selling, general,
and administrative expenses for the prior-year period included a gain of
approximately $3.4 million from the purchase and subsequent securitization
of
our CATHERINES and Crosstown Traders credit card portfolios and a gain of $1.3
million recognized in connection with our expected share of the VISA/MasterCard
antitrust settlement.
Interest
Expense
Interest
expense decreased by $3.2 million from Fiscal 2006 to Fiscal 2007 as a result
of
the repayment of borrowings under our revolving line of credit during Fiscal
2007. These borrowings, which were incurred in connection with the acquisition
of Crosstown Traders, were fully repaid ahead of our plan.
Income
Tax Provision
The
effective income tax rate was 34.4% for Fiscal 2007 as compared to 34.8% for
Fiscal 2006. The Fiscal 2007 tax rate was favorably affected by non-taxable
insurance proceeds that were included in pre-tax income for the period and
by
adjustments related to the final reconciliation of our Federal tax
return.
The
Fiscal 2007 tax rate was unfavorably affected by the reconciliation of our
state
tax provision to our filed state tax returns. The Fiscal 2006 tax rate was
unfavorably affected by $1.5 million of taxes, net of foreign tax credits,
on
the planned repatriation of profits from international operations (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 relief efforts.
Comparison
of Fiscal 2006 to Fiscal 2005
Net
Sales
The
increase in consolidated net sales in Fiscal 2006 as compared to Fiscal 2005
was
primarily a result of sales from Crosstown Traders, Inc. (our Direct-to-Consumer
segment), which we acquired on June 2, 2005, 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 store 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 during Fiscal 2006 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 in Fiscal 2006 of products, such as premium denim, fashion knits,
and
intimate apparel, with higher price points. Traffic levels in LANE BRYANT retail
stores were slightly higher in Fiscal 2006 as compared to Fiscal
2005.
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 Fiscal 2006.
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 Fiscal 2005.
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. Actual orders, catalog circulation, and
response rates were consistent with plan.
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
The
decrease in consolidated cost of goods sold, buying, catalog, and occupancy
expenses as a percentage of consolidated net sales in Fiscal 2006 as compared
to
Fiscal 2005 reflected improved merchandise margins at our LANE BRYANT and
CATHERINES brands and leverage on relatively fixed buying and occupancy costs.
Fiscal 2006 included 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, while consolidated buying and occupancy
expenses decreased 2.2% as a percentage of consolidated net sales, 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, 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 Fiscal 2006. 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. Buying
and occupancy expenses for the Retail Stores segment, as a percentage of segment
net sales, were 0.6% lower in Fiscal 2006 as compared to Fiscal
2005.
Cost
of
goods sold for our Direct-to-Consumer segment includes catalog advertising
and
fulfillment costs, which are significant expenses for catalog operations.
Therefore, cost of goods sold for the Direct-to-Consumer segment is generally
higher as a percentage of net sales than cost of goods sold for our Retail
Stores segment, resulting in the increase in consolidated cost of goods sold
as
a percentage of consolidated net sales. Conversely, the Direct-to-Consumer
segment, which operated only three outlet stores in Fiscal 2006, incurs
relatively lower levels of occupancy costs, which resulted in a favorable impact
on consolidated buying and occupancy expenses as a percentage of consolidated
net sales.
Cost
of
goods sold includes merchandise costs net of discounts and allowances; freight;
inventory shrinkage; shipping and handling costs associated with our E-commerce
business; and, in Fiscal 2006, shipping and handling costs and amortization
of
direct-response advertising costs for our Direct-to-Consumer businesses from
the
date of acquisition of Crosstown Traders. Net merchandise costs and freight
are
capitalized as inventory costs.
Buying
expenses include payroll, payroll-related costs, and operating expenses for
our
buying departments, warehouses, and fulfillment centers. Occupancy expenses
include rent, real estate taxes, insurance, common area maintenance, utilities,
maintenance, and depreciation for our stores, warehouse and fulfillment center
facilities, and equipment. Buying, catalog, and occupancy costs are treated
as
period costs and are not capitalized as part of inventory.
Selling,
General, and Administrative
Consolidated
selling, general, and administrative expenses for Fiscal 2006 were affected
by
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), which were offset by improvements in selling expenses. Selling
expenses for Fiscal 2006 were 2.2% lower as a percentage of sales as compared
to
Fiscal 2005, while general and administrative expenses were 2.1% higher as
a
percentage of net sales.
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. Selling
expenses for Fiscal 2006 included a gain of approximately $3.4 million from
the
purchase and subsequent securitization of our CATHERINES and Crosstown Traders
credit card portfolios.
The
increase in general and administrative expenses as a percentage of net sales
primarily reflected 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.
General
and administrative expenses for Fiscal 2005 were affected by costs related
to
the purchase 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
fund
the premiums for replacement life insurance policies through bonuses to the
affected executive officers, payable in five equal annual amounts on a
grossed-up basis to account for taxes on the bonuses incurred by the affected
executive officers.
Other
Income
The
increase in other income was primarily a result of a $3.7 million increase
in
interest income.
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 Fourth Quarter 2007
to Fourth Quarter 2006
Net
Sales
Consolidated
net sales increased in the Fiscal 2007 fourth quarter as compared to the Fiscal
2006 fourth quarter, primarily as a result of an increase in net sales from
our
Retail Stores segment and the inclusion of an extra week in the Fiscal 2007
fourth quarter, partially offset by a decrease in net sales from our
Direct-to-Consumer segment. The
increase in consolidated Retail Stores segment net sales was a result of sales
from new LANE BRYANT, LANE BRYANT OUTLET, and PETITE SOPHISTICATE OUTLET stores
opened in Fiscal 2007, an increase in comparable retail store sales at our
CATHERINES brand, and increases in E-commerce sales at all of our retail store
brands. The increases in consolidated net sales and consolidated Retail Stores
segment net sales were below our plan for the period.
Total
net
sales for the LANE BRYANT brand increased primarily as a result of sales from
new stores
(including LANE BRYANT OUTLET stores),
an
increase in E-commerce sales, and inclusion of the additional week in the Fiscal
2007 fourth quarter, partially offset by a decrease in comparable store sales.
Compared to a strong performance in the Fiscal 2006 fourth quarter, LANE BRYANT
experienced decreases in both the average dollar sale per transaction and
traffic levels in the Fiscal 2007 fourth quarter. LANE BRYANT experienced a
sharp downtrend in sales of premium denim products in response to changing
fashion trends in the Fiscal 2007 fourth quarter as compared to the Fiscal
2006
fourth quarter. The increase in LANE BRYANT net sales was below our plan for
the
period.
Total
net
sales for the FASHION BUG brand increased as a result of inclusion of the
additional week in Fiscal 2007 and an increase in store-related E-commerce
sales, partially offset by a decrease in retail store sales as a result of
store
closures and a slight decrease in comparable store sales. The increase in
FASHION BUG net sales was below our plan for the period. Store traffic levels
and the average dollar sale per transaction decreased slightly as compared
to
the prior-year quarter.
Total
net
sales for the CATHERINES brand increased as a result of increases in comparable
retail store sales and store-related E-commerce sales and the inclusion of
an
additional week in Fiscal 2007. The increase in CATHERINES net sales was in
line
with our plan for a low-single-digit increase for the period. Traffic levels
decreased slightly as compared to the prior-year quarter, while the average
dollar sale per transaction increased as compared to the prior-year
quarter.
Total
net
sales for the Direct-to-Consumer segment decreased as compared to the prior-year
quarter as a result of reduced response rates from our core customers to our
apparel catalog offerings, as discussed in the full-year comparison above.
A
significant amount of fourth quarter sales were derived from our FIGI’S catalog,
which markets food and specialty gift products and does a substantial portion
of
its business during the December holiday season. Sales from the FIGI’S catalog
were
$81.2 million in the Fiscal 2007 fourth quarter, as compared to $82.1 million
in
the Fiscal 2006 fourth quarter. Sales
from the FIGI’S catalog for the Fiscal 2007 fourth quarter were in line with our
sales plan, while sales from our apparel catalogs were below our sales plan
for
the reasons discussed in the full-year comparison above.
During
the Fiscal 2007 fourth quarter and Fiscal 2006 fourth quarter, we recognized
revenues of $5.1 million and $4.3 million, respectively, in connection with
our
loyalty card programs.
Cost
of Goods Sold, Buying, Catalog, and Occupancy
The
decrease in consolidated cost of goods sold, buying, catalog, and occupancy
expenses as a percentage of consolidated net sales from the Fiscal 2006 fourth
quarter to the Fiscal 2007 fourth quarter was primarily as a result of improved
merchandise margins for our Retail Stores segment. Consolidated cost of goods
sold decreased 1.0% as a percentage of consolidated net sales, while
consolidated buying and occupancy expenses were flat as a percentage of
consolidated net sales.
For
our
Retail Stores segment, cost of goods sold, buying, and occupancy expenses as
a
percentage of net sales decreased 1.8% in the Fiscal 2007 fourth quarter as
compared to the Fiscal 2006 fourth quarter. The decrease resulted from a
combination of higher merchandise margins in all of our brands despite
below-plan sales, and lower buying and occupancy expenses as a percentage of
sales as a result of leverage from the increase in net sales. The Fiscal 2007
fourth quarter also included the results of operations of our outlet business,
which was profitable during the quarter. Buying and occupancy expenses for
the
Retail Stores segment, as a percentage of net sales, were 0.9% lower in the
Fiscal 2007 fourth quarter as compared to the Fiscal 2006 fourth
quarter.
For
our
Direct-to-Consumer segment, cost of goods sold, buying, catalog, and occupancy
expenses as a percentage of sales were 1.8% higher in the Fiscal 2007 fourth
quarter as compared to the Fiscal 2006 fourth quarter. The increase was
primarily a result of the impact of higher catalog advertising and fulfillment
costs, which were partially offset by improved merchandise margins. Cost of
goods sold for our Direct-to-Consumer segment includes catalog advertising
and
fulfillment costs, which are significant expenses for catalog operations, and
are therefore generally higher as a percentage of net sales than cost of goods
sold for our Retail Stores segment. Conversely, the Direct-to-Consumer segment
incurs lower levels of buying and occupancy costs as compared to the Retail
Stores segment.
Selling,
General, and Administrative
Consolidated
selling, general, and administrative expenses for the fourth quarter of Fiscal
2007, as a percentage of consolidated net sales, increased 0.2% as compared
to
the fourth quarter of Fiscal 2006, primarily as a result of a
lack of
leverage from reduced sales in our Direct-to-Consumer segment.
General
and administrative expenses for the Fiscal 2007 fourth quarter were negatively
impacted by a $0.6 million increase in stock-based compensation as compared
to
the prior-year period.
Income
Tax Provision
The
effective income tax rate was 29.8% for the Fiscal 2007 fourth quarter as
compared to 23.9% for the Fiscal 2006 fourth quarter. The
tax
rates for the Fiscal 2007 and Fiscal 2006 fourth quarters 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 favorably affected by charitable contributions of inventories
to hurricane 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)
|
2007
|
2006
|
2005
|
|||||||
|
Cash
and cash equivalents
|
$
|
143,838
|
$
|
130,132
|
$
|
273,049
|
||||
|
Available-for-sale
securities
|
1,997
|
20,150
|
0
|
|||||||
|
Cash
provided by operating activities
|
186,954
|
164,812
|
165,940
|
|||||||
|
Working
capital
|
443,101
|
344,229
|
413,989
|
|||||||
|
Current
ratio
|
2.1
|
1.8
|
2.4
|
|||||||
|
Long-term
debt to equity ratio
|
19.1
|
%
|
23.6
|
%
|
30.0
|
%
|
||||
Cash
Provided by Operating Activities
As
of
February 3, 2007, we held $145.8 million in cash, cash equivalents, and
available-for-sale securities. As is consistent with our industry, our cash
balances are seasonal in nature. During Fiscal 2007, we used our cash balances
to build our inventory levels in connection with new store openings
(particularly in our LANE BRYANT, LANE BRYANT OUTLET, and PETITE SOPHISTICATE
OUTLET stores), as well as in preparation for our holiday sales. Excluding
inventory purchased for our outlet business, inventories increased 10%
year-over-year. On a same-store basis, inventories increased 15% as compared
to
the end of Fiscal 2006 as a result of increases in Spring and transitional
merchandise to accommodate an earlier Easter.
In
Fiscal
2007, net cash provided by operating activities was $187.0 million, as compared
to $164.8 million in Fiscal 2006 and $165.9 million in Fiscal 2005. The cash
provided by operating activities in Fiscal 2007 was primarily attributable
to an
increase in net income before depreciation and amortization, an increase in
deferred rent and landlord allowances due to an increase in retail store
openings, improved payment terms from certain of our vendors, and an increase
in
accrued expenses and other current liabilities. These factors were offset
primarily by increased investments in merchandise inventories (as discussed
above), an increase in deferred advertising related to our Direct-to-Consumer
segment, and the timing of certain prepaid expenses, particularly prepaid income
taxes.
Net
cash
provided by operating activities in Fiscal 2006 was primarily attributable
to an
increase in net income before depreciation and amortization; an increase in
deferred rent and landlord allowances due to an increase in retail store
openings; an increase in accrued expenses due to the increase in
allowance-related accruals; and the timing of expenditures. These factors were
offset primarily by increased investments in merchandise inventories, accounts
receivable, and deferred advertising related to our Direct-to-Consumer segment.
Our merchandise inventories increased in Fiscal 2006 in order to support the
increase in sales in our Retail Stores segment and as a result of our
acquisition on June 2, 2005 of Crosstown Traders. The increases in accounts
receivable and deferred advertising relate to our Direct-to-Consumer segment
and
result from the acquisition of Crosstown Traders.
As
a
result of the adoption of SFAS No. 123R in Fiscal 2007 (see “CRITICAL
ACCOUNTING POLICIES”
above),
we are reporting certain tax benefits related to stock-based compensation as
cash provided by financing activities in Fiscal 2007 instead of as cash provided
by operating activities as permitted in prior-year periods. This change in
reporting classification had a $5.1 million negative impact on cash provided
by
operating activities for Fiscal 2007, which was offset by a corresponding
positive impact on cash used by financing activities.
Capital
Expenditures
Our
gross
capital expenditures, excluding construction allowances received from landlords,
were $133.2 million, $103.8 million, and $60.6 million in Fiscal 2007, Fiscal
2006, and Fiscal 2005, respectively. Construction allowances received from
landlords were $26.1 million, $22.6 million, and $9.3 million in Fiscal 2007,
Fiscal 2006, and Fiscal 2005, respectively. Total gross investments in property,
equipment, and leasehold improvements, including cash expenditures and capital
lease financing and excluding construction allowances, were $133.2 million,
$107.7 million, and $66.0 million in Fiscal 2007, Fiscal 2006, and Fiscal 2005,
respectively. Our capital expenditures in each year were primarily for the
construction, remodeling, and fixturing of new and existing retail stores,
corporate systems technology, and improvements to our corporate and brand home
offices and distribution centers. Capital expenditures for Fiscal 2006 also
included the relocation of our LANE BRYANT home office from a 130,000
square-foot leased facility in Reynoldsburg, Ohio to a new 135,000 square-foot
leased facility in Columbus, Ohio.
During
Fiscal 2006, we acquired $3.9 million of data warehousing and information
technology equipment under capital leases with initial terms ranging from 36
months to 48 months and containing a bargain-purchase or
fair-market-value-purchase option. Pursuant to a program to replace
point-of-sale (“POS”) equipment in our stores, we acquired $3.9 million of POS
equipment under capital leases in Fiscal 2005. We also acquired $1.5 million
of
material handling systems and related equipment and software for our White
Marsh, Maryland distribution center under capital leases in Fiscal 2005. These
capital leases generally have an initial lease term of 60 months and contain
a
bargain purchase option. During
Fiscal 2005, we entered
into an agreement to lease our Memphis, Tennessee distribution center facility
to a third party for a three-year period. In December 2004, we refinanced
certain material handling equipment at our Greencastle distribution center.
The
lease obligation of $5.0 million is payable over a term of 48 months at an
interest rate of 6.86% and contains a bargain purchase option.
During
Fiscal 2008, we plan to continue our new store opening plan, primarily for
our
LANE BRYANT brand, which includes new side-by-side stores and outlet stores.
We
also plan to continue to build our infrastructure for the launch of new catalog
offerings, including the launch of the LANE BRYANT catalog in late Fiscal 2008,
as well as further expansion of our E-commerce operations. We plan to open
approximately 95-107 new stores in Fiscal 2008, and anticipate that our Fiscal
2008 gross capital expenditures will be approximately $160-$165 million before
construction allowances received from landlords. We expect that approximately
80% of our Fiscal 2008 capital expenditures will support store development,
including openings, relocations, and store improvements, with the remainder
of
the expenditures to be primarily for improvements to our information technology,
distribution centers, and corporate infrastructure. We expect to finance these
capital expenditures principally through internally-generated
funds.
Dividends
We
have
not paid any dividends since 1995, and we do not expect to declare or pay any
dividends on our common stock in the foreseeable future. The payment of future
dividends is within the discretion of our Board of Directors and will depend
upon our future earnings, if any, our capital requirements, our financial
condition, and other relevant factors. Our existing revolving credit facility
allows the payment of dividends on our common stock subject to maintaining
a
minimum level of Excess Availability (as defined in the facility agreement)
for
30 days before and immediately after the payment of such dividends.
Debt,
Lease, and Purchase Commitments
At
February 3, 2007, our commitments for future payments under our long-term debt
obligations, minimum lease payments under our capital leases and operating
leases, and payments due under our revolving credit facility, letters of credit,
long-term deferred compensation plans, and purchase obligations were as
follows:
|
Payments
Due by Period
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||||||||||||||||
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One
to
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Three
|
More
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Less
Than
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