Edgar Filing: CHARMING SHOPPES INC

form10qaug22008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 2, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File No. 000-07258

CHARMING SHOPPES, INC.

(Exact name of registrant as specified in its charter)

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

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

NOT APPLICABLE

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):

Large Accelerated Filer x	Accelerated Filer o
Non-accelerated Filer o	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No x

The number of shares outstanding of the issuer’s Common Stock (par value $.10 per share) as of August 29, 2008 was 113,661,818 shares.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Balance Sheets
	August 2, 2008 and February 2, 2008	2

	Condensed Consolidated Statements of Operations and Comprehensive Income
	Thirteen weeks ended August 2, 2008 and August 4, 2007	3
	Twenty-six weeks ended August 2, 2008 and August 4, 2007	4

	Condensed Consolidated Statements of Cash Flows
	Twenty-six weeks ended August 2, 2008 and August 4, 2007	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Forward-looking Statements	23

	Critical Accounting Policies	26

	Recent Developments	26

	Overview	27

	Results of Operations	29

	Liquidity and Capital Resources	37

	Financing	42

	Market Risk	43

	Impact of Recent Accounting Pronouncements	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

PART II.	OTHER INFORMATION	45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 4.	Submission of Matters to a Vote of Security Holders	47

Item 6.	Exhibits	48

	SIGNATURES	50

	Exhibit Index	51

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	August 2,			February 2,
(In thousands, except share amounts)	2008			2008

ASSETS
Current assets
Cash and cash equivalents	$	131,319		$	61,335
Available-for-sale securities		6,380			13,364
Accounts receivable, net of allowances of $2,105 and $6,262		3,540			33,535
Investment in asset-backed securities		109,301			115,912
Merchandise inventories		337,330			330,216
Deferred advertising		11,269			5,546
Deferred taxes		10,437			9,773
Prepayments and other		179,621			151,716
Current assets of discontinued operations		65,650			119,994
Total current assets		854,847			841,391

Property, equipment, and leasehold improvements – at cost		1,069,830			1,117,559
Less accumulated depreciation and amortization		620,154			658,410
Net property, equipment, and leasehold improvements		449,676			459,149

Trademarks and other intangible assets		189,203			189,562
Goodwill		66,666			66,666
Other assets		40,343			56,536
Total assets	$	1,600,735		$	1,613,304

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	158,711		$	122,629
Accrued expenses		178,511			168,573
Current liabilities of discontinued operations		43,150			46,086
Current portion – long-term debt		8,155			8,827
Total current liabilities		388,527			346,115

Deferred taxes		38,746			38,122
Other non-current liabilities		196,643			192,454
Long-term debt		308,329			306,169

Stockholders’ equity
Common Stock $.10 par value:
Authorized – 300,000,000 shares
Issued – 152,144,426 shares and 151,569,850 shares		15,214			15,157
Additional paid-in capital		412,971			407,499
Treasury stock at cost – 38,482,213 shares and 36,477,246 shares		(347,730	)		(336,761	)
Accumulated other comprehensive income/(loss)		(2	)		22
Retained earnings		588,037			644,527
Total stockholders’ equity		668,490			730,444
Total liabilities and stockholders’ equity	$	1,600,735		$	1,613,304

Certain prior-year amounts have been reclassified to conform to the current-year presentation.

See Notes to Condensed Consolidated Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirteen Weeks Ended
	August 2,			August 4,
(In thousands, except per share amounts)	2008			2007

Net sales	$	648,616		$	694,359

Cost of goods sold, buying, catalog, and occupancy expenses		473,868			485,236
Selling, general, and administrative expenses		164,995			176,223
Restructuring and other charges		14,945			0
Total operating expenses		653,808			661,459

Income/(loss) from operations		(5,192	)		32,900

Other income		792			3,771
Interest expense		(2,201	)		(2,818	)

Income/(loss) from continuing operations before income taxes		(6,601	)		33,853
Income tax (benefit)/provision		(2,891	)		12,959

Income/(loss) from continuing operations		(3,710	)		20,894

Loss from discontinued operations, net of income tax benefit of $3,150 in 2008 and $1,961 in 2007		(4,627	)		(2,615	)

Net income/(loss)		(8,337	)		18,279

Other comprehensive income, net of tax
Unrealized gains on available-for-sale securities, net of income tax
provision of $2 in 2008 and $4 in 2007		1			5

Comprehensive income/(loss)	$	(8,336	)	$	18,284

Basic net income/(loss) per share:
Income/(loss) from continuing operations	$	(.03	)	$	.17
Loss from discontinued operations, net of tax		(.04	)		(.02	)
Net income/(loss)	$	(.07	)	$	.15

Diluted net income/(loss) per share:
Income/(loss) from continuing operations	$	(.03	)	$	.16
Loss from discontinued operations, net of tax		(.04	)		(.02	)
Net income/(loss)	$	(.07	)	$	.14

Certain prior-year amounts have been reclassified to conform to the current-year presentation.

See Notes to Condensed Consolidated Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Twenty-six Weeks Ended
	August 2,			August 4,
(In thousands, except per share amounts)	2008			2007

Net sales	$	1,289,962		$	1,390,973

Cost of goods sold, buying, catalog, and occupancy expenses		921,051			958,387
Selling, general, and administrative expenses		351,790			356,321
Restructuring and other charges		18,556			0
Total operating expenses		1,291,397			1,314,708

Income/(loss) from operations		(1,435	)		76,265

Other income		1,307			5,101
Interest expense		(4,570	)		(6,081	)

Income/(loss) from continuing operations before income taxes		(4,698	)		75,285
Income tax (benefit)/provision		(1,645	)		27,925

Income/(loss) from continuing operations		(3,053	)		47,360

Loss from discontinued operations, net of income tax benefit of $24,004 in 2008 and $1,961 in 2007		(39,741	)		(2,783	)

Net income/(loss)		(42,794	)		44,577

Other comprehensive income/(loss), net of tax
Unrealized gains/(losses) on available-for-sale securities, net of income tax
(provision)/benefit of $13 in 2008 and ($4) in 2007		(24	)		2

Comprehensive income/(loss)	$	(42,818	)	$	44,579

Basic net income/(loss) per share:
Income/(loss) from continuing operations	$	(.03	)	$	.38
Loss from discontinued operations, net of tax		(.35	)		(.02	)
Net income/(loss)(1)	$	(.37	)	$	.36

Diluted net income/(loss) per share:
Income/(loss) from continuing operations	$	(.03	)	$	.36
Loss from discontinued operations, net of tax		(.35	)		(.02	)
Net income/(loss)(1)	$	(.37	)	$	.34

Certain prior-year amounts have been reclassified to conform to the current-year presentation.

See Notes to Condensed Consolidated Financial Statements
____________________
(1) Results may not add due to rounding.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Twenty-six Weeks Ended
	August 2,			August 4,
(In thousands)	2008			2007

Operating activities
Net income/(loss)	$	(42,794	)	$	44,577
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Depreciation and amortization		50,566			46,256
Estimated loss on disposition of discontinued operations		42,768			0
Deferred income taxes		(277	)		350
Stock-based compensation		5,014			7,760
Excess tax benefits related to stock-based compensation		0			(780	)
Write-down of deferred taxes related to stock-based compensation		(1,333	)		0
Write-down of capital assets		2,217			0
Net (gain)/loss from disposition of capital assets		(1,066	)		1,191
Net gain from securitization activities		(83	)		(1,170	)
Changes in operating assets and liabilities
Accounts receivable, net		29,995			30,257
Merchandise inventories		95			23,800
Accounts payable		32,242			(13,330	)
Deferred advertising		(1,957	)		5,266
Prepayments and other		(5,295	)		8,580
Accrued expenses and other		1,425			5,358
Net cash provided by operating activities		111,517			158,115

Investing activities
Investment in capital assets		(38,459	)		(74,016	)
Proceeds from sales of capital assets		4,813			0
Gross purchases of securities		(3,489	)		(26,501	)
Proceeds from sales of securities		10,719			2,579
(Increase)/decrease in other assets		459			(7,789	)
Net cash used by investing activities		(25,957	)		(105,727	)

Financing activities
Proceeds from issuance of senior convertible notes		0			275,000
Proceeds from long term borrowings		108			790
Repayments of long-term borrowings		(4,579	)		(5,968	)
Payments of deferred financing costs		(46	)		(7,541	)
Excess tax benefits related to stock-based compensation		0			780
Purchase of hedge on senior convertible notes		0			(90,475	)
Sale of common stock warrants		0			53,955
Purchases of treasury stock		(10,969	)		(149,416	)
Funds deposited with third party for purchases of treasury stock		0			(40,000	)
Net proceeds/(payments) from shares issued under employee stock plans		(62	)		(77	)
Net cash provided/(used) by financing activities		(15,548	)		37,048

Increase in cash and cash equivalents		70,012			89,436
Cash and cash equivalents, beginning of period		61,842			143,838
Cash and cash equivalents, end of period	$	131,854		$	233,274

Non-cash financing and investing activities
Common stock issued on redemption of convertible notes	$	0		$	149,564
Assets acquired through capital leases	$	5,959		$	4,137

See Notes to Condensed Consolidated Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated balance sheet as of August 2, 2008, condensed consolidated statements of operations and comprehensive income for the thirteen weeks and twenty-six weeks ended August 2, 2008 and August 4, 2007, and condensed consolidated statements of cash flows for the twenty-six weeks ended August 2, 2008 and August 4, 2007 have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission. In our opinion, we have made all adjustments (which, except as otherwise disclosed in these notes, include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and comprehensive income, and cash flows. Certain prior-year amounts in the condensed consolidated balance sheets and condensed consolidated statements of operations and comprehensive income have been reclassified to conform to the current-year presentation. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles. These financial statements and related notes should be read in conjunction with our financial statements and related notes included in our February 2, 2008 Annual Report on Form 10-K. The results of operations for the thirteen weeks and twenty-six weeks ended August 2, 2008 and August 4, 2007 are not necessarily indicative of operating results for the full fiscal year.

As used in these notes, the term “Fiscal 2009” refers to our fiscal year ending January 31, 2009 and the term “Fiscal 2008” refers to our fiscal year ended February 2, 2008. The term “Fiscal 2010” refers to our fiscal year ending January 30, 2010. The term “Fiscal 2009 Second Quarter” refers to our fiscal quarter ended August 2, 2008 and the term “Fiscal 2008 Second Quarter” refers to our fiscal quarter ended August 4, 2007. The term “Fiscal 2009 First Quarter” refers to our fiscal quarter ended May 3, 2008 and the term “Fiscal 2009 Third Quarter” refers to our fiscal quarter ending November 1, 2008. The terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and, where applicable, our consolidated subsidiaries.

Discontinued Operations

On April 25, 2008 we announced that our Board of Directors began exploring a broad range of operating and strategic alternatives for our non-core misses apparel catalog titles in order to provide a greater focus on our core brands and to enhance shareholder value. The non-core misses apparel catalog titles met the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) to be accounted for as held for sale. Accordingly, the results of the non-core misses apparel catalog titles have been reported as discontinued operations in our consolidated statements of operations and balance sheets for all periods presented. The operations and cash flows of the non-core misses apparel catalog titles will be eliminated from our financial statements upon the sale and we will not have any significant involvement in the operations after the sale.

Subsequent to August 2, 2008 we announced that we have entered into a definitive agreement to sell our non-core misses apparel catalogs (see “Note 14. Subsequent Event” below). We evaluated the impact of the retained cash flows with regards to the transitional service agreements in accordance with EITF 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations,” and determined that the cash outflows over the transition period are not expected to be significant and accordingly, the reporting of discontinued operations was deemed appropriate in accordance with SFAS 144.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Results from discontinued operations for the thirteen weeks and twenty-six weeks ended August 2, 2008 and August 4, 2007 were as follows:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 2,			August 4,			August 2,			August 4,
(In thousands)	2008			2007			2008			2007

Net sales	$	56,569		$	76,566		$	121,248		$	164,664

Loss from discontinued operations	$	(7,777	)(1)	$	(4,576	)	$	(63,745	)(2)	$	(5,046	)
Income tax benefit		3,150	(1)		1,961			24,004	(2)		2,263
Loss from discontinued operations, net of income tax benefit	$	(4,627	)(1)	$	(2,615	)	$	(39,741	)(2)	$	(2,783	)
____________________
(1) Includes reduction of estimated loss on disposition of $1,506, net of a reduction in income tax benefit of $977 and loss from operations of ($6,133), net of an income tax benefit of $4,127.
(2) Includes estimated loss on disposition of ($26,884), net of an income tax benefit of $15,884 and loss from operations of ($12,857), net of an income tax benefit of $8,120.

Current assets and liabilities of discontinued operations as of August 2, 2008 and February 2, 2008 were as follows:

	August 2,			February 2,
(In thousands)	2008			2008

Current assets:
Merchandise inventories	$	54,102		$	61,311
Deferred advertising		11,962			15,728
Intangible assets		44,758			45,397
Deferred taxes and other, net		(2,404	)		(2,442	)
Loss on disposal of discontinued operations		(42,768	)		–
Current assets of discontinued operations	$	65,650		$	119,994

Current liabilities:
Accounts payable	$	14,084		$	17,924
Accrued expenses		12,038			10,884
Other liabilities		17,028			17,278
Current liabilities of discontinued operations	$	43,150		$	46,086

The financial information included in these Notes to Condensed Consolidated Financial Statements reflects only the results of our continuing operations.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Segment Reporting

We operate and report in two segments: Retail Stores and Direct-to-Consumer. We determine our operating segments based on the way our chief operating decision-makers review our results of operations. We consider our retail stores and store-related E-commerce as operating segments that are similar in terms of economic characteristics, production processes, and operations. Accordingly, we have aggregated our retail stores and store-related E-commerce into a single reporting segment (the “Retail Stores” segment). Our catalog and catalog-related E-commerce operations are reported under the Direct-to-Consumer segment. The Retail Stores segment derives its revenues from sales through retail stores and store-related E-commerce sales under our LANE BRYANT® (including LANE BRYANT OUTLET®), FASHION BUG®, CATHERINES PLUS SIZES®, and PETITE SOPHISTICATE® (including PETITE SOPHISTICATE OUTLET®) brands. The Direct-to-Consumer segment, excluding discontinued operations, derives its revenues from catalog sales and catalog-related E-commerce sales under our LANE BRYANT WOMAN® and FIGI’S® titles and E-commerce sales under our SHOETRADER.COM website. See “Discontinued Operations” above and “Note 10. Segment Reporting” and “Note 14. Subsequent Event” below for further information regarding our discontinued operations and segment reporting.

Stock-based Compensation

We have various stock-based compensation plans under which we are currently granting awards, which are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 11. Stock-Based Compensation Plans” in our February 2, 2008 Annual Report on Form 10-K.

Shares available for future grants under our stock-based compensation plans as of August 2, 2008:

2004 Stock Award and Incentive Plan			3,420,785
2003 Non-Employee Directors Compensation Plan			155,924
1994 Employee Stock Purchase Plan			923,155
1988 Key Employee Stock Option Plan			99,358

Stock option and stock appreciation rights activity for the twenty-six weeks ended August 2, 2008:

											Aggregate
				Average							Intrinsic
	Option			Option		Option Prices					Value(1)
	Shares			Price		Per Share					(000’s)

Outstanding at February 2, 2008		1,894,874		$	5.95	$	1.00	–	$	13.84	$	1,777
Granted – option price equal to market price		2,822,957			4.97		4.60	–		5.64
Granted – option price less than market price		14,000			1.00		1.00	–		1.00
Canceled/forfeited		(753,093	)		5.16		1.00	–		12.48
Exercised		(108,931	)		4.42		1.00	–		5.47		124	(2)
Outstanding at August 2, 2008		3,869,807		$	5.42	$	1.00	–	$	13.84	$	122
Exercisable at August 2, 2008		1,619,496		$	6.20	$	1.00	–	$	13.84	$	0
____________________
(1) Aggregate market value less aggregate exercise price.
(2) As of date of exercise.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Stock-based compensation expense includes compensation cost for (i) all partially-vested stock-based awards granted prior to the beginning of Fiscal 2007, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and (ii) all stock-based awards granted subsequent to the beginning of Fiscal 2007, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), a revision of SFAS No. 123. Current grants of stock-based compensation consist primarily of restricted stock, restricted stock unit, and stock appreciation right awards.

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 2,		August 4,		August 2,		August 4,
(In thousands)	2008		2007		2008		2007

Total stock-based compensation expense	$	2,116	$	4,836	$	5,014	$	7,760

During the Fiscal 2009 Second Quarter we granted cash-settled restricted stock units (“RSUs”) under the 2003 Non-Employee Directors Compensation Plan. These cash-settled RSUs have been accounted for as liabilities in accordance with SFAS No. 123(R). Excluded from the $2,116,000 and $5,014,000 of compensation expense in the above table is $481,000 of compensation expense related to these cash-settled RSUs. A liability of $359,000 related to these RSUs is included in accrued expenses in the accompanying condensed consolidated balance sheet as of August 2, 2008. Total compensation expense for unvested cash-settled RSUs not yet recognized as of August 2, 2008 was $1,080,000, which will be recognized over a one-year period from the date of grant.

We use the Black-Scholes valuation model to estimate the fair value of stock options and stock appreciation rights, and amortize stock-based compensation on a straight-line basis over the requisite service period of an award. Estimates or assumptions we used under the Black-Scholes model are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies; Stock-based Compensation” in our February 2, 2008 Annual Report on Form 10-K.

Total stock-based compensation expense not yet recognized, related to the non-vested portion of stock options, stock appreciation rights, and awards outstanding (excluding cash-settled RSUs), was $14,325,000 as of August 2, 2008. The weighted-average period over which we expect to recognize this compensation expense is approximately 3 years.

Note 2. Accounts Receivable

Accounts receivable consist of trade receivables from sales through our FIGI’S catalog. Details of our accounts receivable are as follows:

	August 2,			February 2,
(In thousands)	2008			2008

Due from customers	$	5,645		$	39,797
Allowance for doubtful accounts		(2,105	)		(6,262	)
Net accounts receivable	$	3,540		$	33,535

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3. Trademarks and Other Intangible Assets

	August 2,		February 2,
(In thousands)	2008		2008

Trademarks, tradenames, and internet domain names	$	188,608	$	188,608
Customer lists, customer relationships, and covenant not to compete		6,172		6,172
Total at cost		194,780		194,780
Less accumulated amortization of customer lists, customer
relationships, and covenant not to compete		5,577		5,218
Net trademarks and other intangible assets	$	189,203	$	189,562

Note 4. Long-term Debt

	August 2,		February 2,
(In thousands)	2008		2008

Long-term debt
1.125% Senior Convertible Notes, due May 2014	$	275,000	$	275,000
Capital lease obligations		16,656		13,698
6.07% mortgage note, due October 2014		10,750		11,078
6.53% mortgage note, due November 2012		5,950		6,650
7.77% mortgage note, due December 2011		7,579		7,897
Other long-term debt		549		673
Total long-term debt		316,484		314,996
Less current portion		8,155		8,827
Long-term debt	$	308,329	$	306,169

On April 30, 2007 we issued $250,000,000 in aggregate principal amount of 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125% Notes”) in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On May 11, 2007 the initial purchasers of the 1.125% Notes exercised their over-allotment option and purchased an additional $25,000,000 in aggregate principal amount of the notes. The 1.125% Notes were issued at par plus accrued interest, if any, from April 30, 2007 and interest is payable semiannually in arrears on May 1 and November 1, beginning November 1, 2007. The 1.125% Notes will mature on May 1, 2014 unless earlier repurchased by us or converted.

We received combined proceeds of approximately $268,125,000 from the issuance, net of underwriting fees of approximately $6,875,000. The underwriting fees, as well as additional transaction costs of $811,000 incurred in connection with the issuance of the 1.125% Notes, are included in “Other assets” on our condensed consolidated balance sheets and are being amortized to interest expense on an effective interest rate basis over the seven-year life of the notes. The issuance of the 1.125% Notes is more fully described in “Item 8. Financial Statements and Supplementary Data; Note 8. Long-term Debt” in our February 2, 2008 Annual Report on Form 10-K.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

On April 30, 2007 we called for the June 4, 2007 redemption of our $149,999,000 outstanding aggregate principal amount of 4.75% Senior Convertible Notes due June 2012 (the “4.75% Notes”). The holders of the 4.75% Notes had the option to convert their notes into shares of our common stock at a conversion price of $9.88 per share until the close of business on June 1, 2007. As of June 4, 2007 the holders of $149,956,000 principal amount of the 4.75% Notes had exercised their right to convert their notes into an aggregate of 15,145,556 shares of our common stock and the remaining notes were redeemed for $43,000. In addition, we paid $392,000 in lieu of fractional shares.

Note 5. Stockholders’ Equity

	Twenty-six
	Weeks Ended
	August 2,
(Dollars in thousands)	2008

Total stockholders’ equity, beginning of period	$	730,444
Cumulative effect of adoption of EITF Issue No. 06-4(1)		(13,696	)
Net loss		(42,794	)
Issuance of common stock (574,576 shares), net of shares withheld for payroll taxes		(62	)
Purchase of treasury shares (2,004,967 shares)		(10,969	)
Stock-based compensation expense		5,014
Tax benefit related to call options		1,910
Write-down of deferred taxes related to stock-based compensation		(1,333	)
Unrealized losses on available-for-sale securities, net of income tax benefit		(24	)
Total stockholders’ equity, end of period	$	668,490
____________________
(1) See “Note 13. Impact of Recent Accounting Pronouncements” below.

Note 6. Customer Loyalty Card Programs

We offer our customers various loyalty card programs. Customers that join these programs are entitled to various benefits, including discounts and rebates on purchases during the membership period. Customers join some of these programs by paying an annual membership fee. For these programs, we recognize revenue as a component of net sales over the life of the membership period based on when the customer earns the benefits and when the fee is no longer refundable. We recognize costs in connection with administering these programs as cost of goods sold when incurred. During the thirteen weeks ended August 2, 2008 we recognized revenues of $5,276,000 and during the thirteen weeks ended August 4, 2007 we recognized revenues of $5,309,000 in connection with our loyalty card programs. During the twenty-six weeks ended August 2, 2008 we recognized revenues of $10,374,000 and during the twenty-six weeks ended August 4, 2007 we recognized revenues of $11,011,000 in connection with these programs.

During Fiscal 2008 we began offering loyalty programs in connection with the issuance of our LANE BRYANT and PETITE SOPHISTICATE proprietary credit cards. Cardholders earn points for purchases using the credit card, which may be redeemed for merchandise coupons upon the accumulation of a specified number of points. We do not charge membership fees in connection with these programs. Our FASHION BUG brand also offers a similar loyalty card program that does not charge membership fees.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6. Customer Loyalty Card Programs (Continued)

We accrued $3,260,000 as of August 2, 2008 and $2,000,000 as of February 2, 2008 for the estimated costs of discounts earned and coupons issued and not redeemed under these programs.

Note 7. Net Income/(Loss) Per Share

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 2,			August 4,			August 2,			August 4,
(In thousands, except per share amounts)	2008			2007			2008			2007

Basic weighted average common shares outstanding		114,342			123,865			114,465			123,434
Dilutive effect of assumed conversion of
4.75% Senior Convertible Notes(1)		0			4,838			0			10,080
Dilutive effect of stock options, stock appreciation
rights, and awards(2)		0			1,533			0			1,643
Diluted weighted average common shares and
equivalents outstanding		114,342			130,236			114,465			135,087

Income/(loss) from continuing operations	$	(3,710	)	$	20,894		$	(3,053	)	$	47,360
Decrease in interest expense from assumed
conversion of 4.75% Senior Convertible
Notes, net of income tax benefit(1)		0			347			0			1,476
Income/(loss) from continuing operations used to
determine diluted net income/(loss) per share		(3,710	)		21,241			(3,053	)		48,836
Loss from discontinued operations,
net of income tax benefit		(4,627	)		(2,615	)		(39,741	)		(2,783	)
Net income/(loss) used to determine
diluted net income/(loss) per share	$	(8,337	)	$	18,626		$	(42,794	)	$	46,053

Options with weighted average exercise price
greater than market price, excluded from
computation of net income/(loss) per share:
Number of shares	--(2)				5		--(2)				4
Weighted average exercise price per share	--(2)			$	12.17		--(2)			$	12.87
____________________
(1) The 4.75% Senior Convertible Notes were converted or redeemed on June 4, 2007 (see “Note 4. Long-term Debt” above).
(2) Stock options, stock appreciation rights, and awards are excluded from the computation of diluted net loss per share for the Fiscal 2009 periods as their effect would have been anti-dilutive.

Our 1.125% Notes will not impact our diluted net income per share until the price of our common stock exceeds the conversion price of $15.379 per share because we expect to settle the principal amount of the 1.125% Notes in cash upon conversion. Our call options are not considered for purposes of the diluted net income per share calculation as their effect would be anti-dilutive. Should the price of our common stock exceed $21.607 per share, we would include the dilutive effect of the additional potential shares that may be issued related to our warrants, using the treasury stock method. See “Note 4. Long-term Debt” above and “Item 8. Financial Statements and Supplementary Data; Note 8. Long-term Debt” in our February 2, 2008 Annual Report on Form 10-K for further information regarding our 1.125% Notes, our call options and warrants, and the conversion of our 4.75% Notes.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Income Taxes

Our income tax benefit for the twenty-six weeks ended August 2, 2008 was $1,645,000 on a loss from continuing operations before taxes of $4,698,000 as compared to a provision for income taxes of $27,925,000 on income from continuing operations before taxes of $75,285,000 for the twenty-six weeks ended August 4, 2007. The income tax benefit for the twenty-six weeks ended August 2, 2008 was unfavorably impacted by an increase in our liability for unrecognized tax benefits, interest, and penalties in accordance with FIN No. 48, which was partially offset by the receipt of non-taxable life insurance proceeds and adjustments to certain state tax accruals.

We adopted the provisions of FIN No. 48 effective as of February 4, 2007. See “Item 8. Financial Statements and Supplementary Data; Note 7. Income Taxes” in our February 2, 2008 Annual Report on Form 10-K for further information regarding our adoption of FIN No. 48.

As of August 2, 2008 our gross unrecognized tax benefits were $27,381,000. If recognized, the portion of the liabilities for gross unrecognized tax benefits that would decrease our provision for income taxes and increase our net income was $19,106,000. The accrued interest and penalties as of August 2, 2008 were $13,108,000. During the twenty-six weeks ended August 2, 2008 the gross unrecognized tax benefits increased by $716,000 and the portion of the liabilities for gross unrecognized tax benefits that, if recognized, would decrease our provision for income taxes and increase our net income increased by $519,000. Accrued interest and penalties increased during the twenty-six weeks ended August 2, 2008 by $533,000.

As of August 2, 2008 it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by as much as $340,000 due to resolutions of audits or expirations of statutes of limitations related to U.S. Federal and state tax positions.

Our U.S. Federal income tax returns for Fiscal 2005 and beyond remain subject to examination by the U.S. Internal Revenue Service (“IRS”). The IRS is not currently examining any of our tax returns. We file returns in numerous state jurisdictions, with varying statutes of limitations. Our state tax returns for Fiscal 2004 and beyond, depending upon the jurisdiction, generally remain subject to examination. The statute of limitations on a limited number of returns for years prior to Fiscal 2004 has been extended by agreement between us and the particular state jurisdiction. The earliest year still subject to examination by state tax authorities is Fiscal 1999.

Note 9. Asset Securitization

Our FASHION BUG, LANE BRYANT, CATHERINES, PETITE SOPHISTICATE, and Crosstown Traders proprietary credit card receivables are originated by Spirit of America National Bank (the “Bank”), our wholly-owned credit card bank. The Bank transfers its interest in all the receivables, including LANE BRYANT WOMAN catalog credit card receivables but excluding other Crosstown Traders receivables, to the Charming Shoppes Master Trust (the “Trust”) through Charming Shoppes Receivables Corp. (“CSRC”), a separate and distinct special-purpose entity. The Trust is an unconsolidated qualified special-purpose entity (“QSPE”).

Through Fiscal 2007 our Crosstown Traders apparel-related catalog proprietary credit card receivables, which we securitized subsequent to our acquisition of Crosstown Traders, were originated in a non-bank program by Crosstown Traders. Crosstown Traders transferred its interest in the receivables to Catalog Receivables LLC, a separate and distinct unconsolidated QSPE, through a separate and distinct special-purpose entity. On February 5, 2007 the Bank acquired the account relationships of the Crosstown Traders catalog proprietary credit cards and all subsequent new receivables are originations of the Bank. This acquisition did not cause a change in the securitization entities used by the Crosstown Traders proprietary credit card program.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Asset Securitization (Continued)

The QSPEs can sell interests in these receivables on a revolving basis for a specified term. At the end of the revolving period an amortization period begins during which the QSPEs make principal payments to the parties that have entered into the securitization agreement with the QSPEs. All assets of the QSPEs (including the receivables) are isolated and support the securities issued by those entities. Our asset securitization program is more fully described in “Item 8. Financial Statements and Supplementary Data; Note 17. Asset Securitization” in our February 2, 2008 Annual Report on Form 10-K.

We securitized $455,716,000 of private label credit card receivables during the twenty-six weeks ended August 2, 2008 and had $584,861,000 of securitized credit card receivables outstanding as of August 2, 2008. We held certificates and retained interests in our securitizations of $109,301,000 as of August 2, 2008, which are generally subordinated in right of payment to certificates issued by the QSPEs to third-party investors. Our obligation to repurchase receivables sold to the QSPEs is limited to those receivables that, at the time of their transfer, fail to meet the QSPE’s eligibility standards under normal representations and warranties. To date, our repurchases of receivables pursuant to this obligation have been insignificant.

CSRC, Charming Shoppes Seller, Inc., and Catalog Seller LLC, our consolidated wholly-owned indirect subsidiaries, are separate special-purpose entities (“SPEs”) created for the securitization program. As of August 2, 2008 our investment in asset-backed securities included $51,500,000 of QSPE certificates, an I/O strip of $23,501,000, and other retained interests of $34,300,000. These assets are first and foremost available to satisfy the claims of the respective creditors of these separate corporate entities, including certain claims of investors in the QSPEs.

Additionally, with respect to certain Trust Certificates, if either the Trust or Charming Shoppes, Inc. does not meet certain financial performance standards, the Trust is obligated to reallocate to third-party investors holding certain certificates issued by the Trust, collections in an amount up to $9,450,000 that otherwise would be available to CSRC. The result of this reallocation is to increase CSRC’s retained interest in the Trust by the same amount, with the third-party investor retaining an economic interest in the certificates. Subsequent to such a transfer occurring, and upon certain conditions being met, these same investors are required to repurchase these interests when the financial performance standards are again satisfied. Our net loss for the third quarter of Fiscal 2008 resulted in the requirement to reallocate collections as discussed above. Accordingly, $9,450,000 of collections was fully transferred as of February 2, 2008. The requirement for the reallocation of these collections will cease and such investors would be required to repurchase such interests upon our announcement of a quarter with net income and the fulfillment of such conditions. With the exception of the requirement to reallocate collections of $9,450,000 that were fully transferred as of February 2, 2008, the Trust was in compliance with its financial performance standards as of August 2, 2008, including all financial performance standards related to the performance of the underlying receivables.

In addition to the above, we could be affected by certain other events that would cause the QSPEs to hold proceeds of receivables, which would otherwise be available to be paid to us with respect to our subordinated interests, within the QSPEs as additional enhancement. For example, if we or the QSPEs do not meet certain financial performance standards, a credit enhancement condition would occur, and the QSPEs would be required to retain amounts otherwise payable to us. In addition, the failure to satisfy certain financial performance standards could further cause the QSPEs to stop using collections on QSPE assets to purchase new receivables, and would require such collections to be used to repay investors on a prescribed basis, as provided in the securitization agreements. As of August 2, 2008 we and the QSPEs were in compliance with the applicable financial performance standards referred to in this paragraph.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Asset Securitization (Continued)

Amounts placed into enhancement accounts, if any, that are not required for payment to other certificate holders will be available to us at the termination of the securitization series. We have no obligation to directly fund the enhancement account of the QSPEs other than for breaches of customary representations, warranties, and covenants and for customary indemnities. These representations, warranties, covenants, and indemnities do not protect the QSPEs or investors in the QSPEs against credit-related losses on the receivables. The providers of the credit enhancements and QSPE investors have no other recourse to us.

Note 10. Segment Reporting

The accounting policies of the segments are generally the same as those described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies” in our February 2, 2008 Annual Report on Form 10-K. Our chief operating decision-makers evaluate the performance of our operating segments based on a measure of their contribution to operations, which consists of net sales less the cost of merchandise sold and certain directly identifiable and allocable operating costs. We do not allocate certain corporate costs, such as shared service costs, information systems support costs, and insurance costs to our Retail Stores or Direct-to-Consumer segments. Operating costs for our Retail Stores segment consist primarily of store selling, buying, occupancy, and warehousing costs. Operating costs for our Direct-to-Consumer segment consist primarily of catalog development, production, and circulation costs; E-commerce advertising costs; warehousing costs; and order processing costs.

Corporate and Other includes unallocated general and administrative costs; shared services costs; insurance costs; information systems support costs; corporate depreciation and amortization; corporate occupancy costs; the results of our proprietary credit card operations; and other non-routine charges. Operating contribution for the Retail Stores and Direct-to-Consumer segments less Corporate and Other net expenses equals income before interest and taxes.

Operating segment assets are those directly used in, or allocable to, that segment’s operations. Operating assets for the Retail Stores segment consist primarily of inventories; the net book value of store facilities; goodwill; and intangible assets. Operating assets for the Direct-to-Consumer segment consist primarily of trade receivables; inventories; deferred advertising costs; the net book value of catalog operating facilities; and intangible assets. Corporate and Other assets include corporate cash and cash equivalents; the net book value of corporate facilities; deferred income taxes; and other corporate long-lived assets.

Selected financial information for our operations by reportable segment (excluding discontinued operations) and a reconciliation of the information by segment to our consolidated totals is presented in the table on the following page.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Segment Reporting (Continued)

	Retail		Direct-to-			Corporate
(In thousands)	Stores		Consumer(1)			and Other			Consolidated

Thirteen weeks ended August 2, 2008
Net sales	$	622,050	$	22,547		$	4,019		$	648,616
Depreciation and amortization		14,294		36			8,752			23,082	(3)
Income/(loss) before interest and taxes		35,338		(5,599	)		(34,139	)(2)		(4,400	)
Interest expense							(2,201	)		(2,201	)
Income tax benefit							2,891			2,891
Income/(loss) from continuing operations		35,338		(5,599	)		(33,449	)		(3,710	)
Capital expenditures		13,438		275			2,587			16,300	(3)

Twenty-six weeks ended August 2, 2008
Net sales	$	1,235,441	$	49,493		$	5,028		$	1,289,962
Depreciation and amortization		26,221		74			23,687			49,982	(3)
Income/(loss) before interest and taxes		78,366		(9,798	)		(68,696	)(2)		(128	)
Interest expense							(4,570	)		(4,570	)
Income tax benefit							1,645			1,645
Income/(loss) from continuing operations		78,366		(9,798	)		(71,621	)		(3,053	)
Capital expenditures		32,159		275			5,558			37,992	(3)

Thirteen weeks ended August 4, 2007
Net sales	$	684,991	$	5,127		$	4,241		$	694,359
Depreciation and amortization		14,420		94			8,763			23,277	(4)
Income before interest and taxes		67,395		(2,391	)		(28,333	)		36,671
Interest expense							(2,818	)		(2,818	)
Income tax provision							(12,959	)		(12,959	)
Income from continuing operations		67,395		(2,391	)		(44,110	)		20,894
Capital expenditures		25,758		119			10,064			35,941	(4)

Twenty-six weeks ended August 4, 2007
Net sales	$	1,370,772	$	15,401		$	4,800		$	1,390,973
Depreciation and amortization		26,781		116			18,907			45,804	(4)
Income before interest and taxes		142,680		(3,167	)		(58,147	)		81,366
Interest expense							(6,081	)		(6,081	)
Income tax provision							(27,925	)		(27,925	)
Income from continuing operations		142,680		(3,167	)		(92,153	)		47,360
Capital expenditures		55,592		127			17,614			73,333	(4)
____________________
(1) Current-year periods include LANE BRYANT WOMAN catalog.
(2) Includes restructuring charges of $5,617 for the thirteen weeks ended August 2, 2008 and $9,228 for the twenty-six weeks ended August 2, 2008 related to the Retail Stores segment and severance costs of $9,328 for the thirteen weeks and twenty-six weeks ended August 2, 2008 related to our Corporate segment (see “Note 11. Restructuring and Other Charges” below).
(3) Excludes $296 of depreciation and amortization and $145 of capital expenditures for the thirteen weeks ended August 2, 2008, and $584 of depreciation and amortization and $467 of capital expenditures for the twenty-six weeks ended August 2, 2008, related to our discontinued operations.
(4) Excludes $235 of depreciation and amortization and $564 of capital expenditures for the thirteen weeks ended August 4, 2007, and $452 of depreciation and amortization and $683 of capital expenditures for the twenty-six weeks ended August 4, 2007, related to our discontinued operations.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Restructuring and Other Charges

In November 2007 we announced our plan to relocate our CATHERINES operations located in Memphis, Tennessee to our corporate headquarters in Bensalem, Pennsylvania in conjunction with the consolidation of a number of our operating functions. The costs of this plan included accelerated depreciation, severance and retention, and relocation costs.

The accelerated depreciation represents the change in the estimated useful life of the Memphis facility and was recognized over the period from the inception of the plan to the closing date of the facility, which was the end of the Fiscal 2009 First Quarter. Severance and retention costs represent involuntary termination benefits for approximately 80 employees who did not relocate from the Memphis facility to our Bensalem headquarters. Relocation costs represent estimated costs to relocate approximately 30 employees from Memphis to Bensalem. The involuntary terminations and relocations were completed during the Fiscal 2009 First Quarter.

On May 21, 2008 we completed the sale of our Memphis, Tennessee distribution center. We received $4,813,000 of cash in connection with the sale of the facility and we recognized a pre-tax gain on the sale of approximately $1,842,000 during the thirteen weeks ended August 2, 2008.

In February 2008 we announced additional initiatives and actions to: streamline our business operations and further sharpen our focus on our core businesses; reduce selling, general, and administrative expenses and capital expenditures; improve cash flow; and enhance shareholder value. The initiatives and actions include: the elimination of approximately 150 corporate and field management positions; a decrease in the capital budget for Fiscal 2009, primarily through a significant reduction in the number of planned store openings for Fiscal 2009; the closing of approximately 150 under-performing stores; and the closing of our full-line PETITE SOPHISTICATE stores. To date, we have completed the elimination of corporate and field positions, closed 78 of the identified under-performing stores, and expect to complete the remainder of these initiatives by the end of Fiscal 2009.

We accounted for the above plans in accordance with the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.”

The following table summarizes the costs incurred to date and the total estimated costs to be recognized under the plans:

	Costs		Costs Incurred		Estimated		Total
	Incurred		for Twenty-six		Remaining		Estimated
	as of		Weeks Ended		Costs		Costs as of
	February 2,		August 2,		to be		August 2,
(In thousands)	2008		2008		Incurred		2008

Severance, retention, and related costs	$	2,792	$	391	$	0	$	3,183
Store lease termination costs		0		5,867		3,408		9,275
Asset write-downs and accelerated
Depreciation		11,325		2,217		63		13,605
Relocation and other closing costs		241		753		300		1,294
Total	$	14,358	$	9,228	$	3,771	$	27,357

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Restructuring and Other Charges (Continued)

The following table summarizes the severance, retention, and related costs accrued in accordance with SFAS No. 146 and SFAS No. 112 and the payments/settlements for the above plans as of August 2, 2008:

			Costs Accrued
			for Twenty-six					Accrued
	Balance at		Weeks Ended					as of
	February 2,		August 2,		Payments/			August 2,
(In thousands)	2008		2008		Settlements			2008

Severance, retention, and related costs	$	2,688	$	391	$	(3,026	)	$	53

During the thirteen weeks ended August 2, 2008 we recognized $9,328,000 of severance costs in connection with the resignation of our former Chief Executive Officer, Dorrit J. Bern, and $5,336,000 of these costs are included in accrued expenses in the accompanying condensed consolidated balance sheet as of August 2, 2008.

Note 12. Fair Value Measurements

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides a single definition of fair value along with a framework for measuring it, and requires additional disclosure about using fair value to measure assets and liabilities. SFAS No. 157 emphasizes that fair value measurement is market-based, not entity-specific, and establishes a fair value hierarchy which places the highest priority on the use of quoted prices in active markets to determine fair value. It also requires, among other things, that entities are to include their own credit standing when measuring their liabilities at fair value.

In February 2008 the FASB issued FSP FAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” The FSP amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and certain related accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. The scope exception of FSP FAS No. 157-1 does not apply to assets acquired or liabilities assumed in a business combination that are required to be measured at fair value under SFAS No. 141, “Business Combinations,” or SFAS No. 141(R) (see “Note 13. Impact of Recent Accounting Pronouncements” below), regardless of whether those assets and liabilities are related to leases. The scope exception also does not apply to fair value measurements required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” or FASB Interpretation No. 21, “Accounting for Leases in a Business Combination.” FSP FAS No. 157-1 is effective on the initial adoption of SFAS No. 157. In February 2008 the FASB also issued FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for non-financial assets and non-financial liabilities that are not currently recognized or disclosed at fair value on a recurring basis.

Under SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we use various methods, including discounted cash flow projections based on available market interest rates and management estimates of future cash payments.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 12. Fair Value Measurements (Continued)

Financial assets and liabilities that are measured and reported at fair value are classified and disclosed in one of the following categories:

· Level 1 – Quoted market prices in active markets for identical assets or liabilities

· Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data

· Level 3 – Unobservable inputs that are not corroborated by market data

With the exception of assets and liabilities included within the scope of FSP FAS No. 157-2, we adopted the provisions of SFAS No. 157 prospectively effective as of the beginning of Fiscal 2009. For financial assets and liabilities included within the scope of FSP FAS No. 157-2, we will be required to adopt the provisions of SFAS No. 157 prospectively as of the beginning of Fiscal 2010. The adoption of SFAS No. 157 did not have an impact on our financial position or results of operations, and we do not believe that the adoption of FSP FAS No. 157-2 will have a material impact on our financial position or results of operations.

Our financial assets and liabilities subject to SFAS No. 157 as of August 2, 2008 were as follows:

	Balance
	August 2,		Fair Value Method Used
(In thousands)	2008		Level 2		Level 3(1)

Assets
Available-for-sale securities(2)	$	6,380	$	6,380
Certificates and retained interests in securitized receivables		109,301			$	109,301

Liabilities
Servicing liability		3,198				3,198
____________________
(1) Fair value is estimated based on internally-developed models or methodologies utilizing significant inputs that are unobservable from objective sources.
(2) Unrealized gains and losses on our available-for-sale securities are included in stockholders’ equity until realized and realized gains and losses are recognized in income when the securities are sold.

We estimate the fair value of our certificates and retained interests in our securitized receivables based on the present value of future expected cash flows using assumptions for the average life of the receivables sold, anticipated credit losses, and the appropriate market discount rate commensurate with the risks involved. This cash flow includes an “interest-only” (“I/O”) strip, consisting of the present value of the finance charges and late fees in excess of the amounts paid to certificate holders, credit losses, and servicing fees.

The fair value of our servicing liabilities represents the present value of the excess of our cost of servicing over the servicing fees received. We determine the fair value by calculating all costs associated with billing, collecting, maintaining, and providing customer service during the expected life of the securitized credit card receivable balances. We discount the amount of these costs in excess of the servicing fees over the estimated life of the receivables sold. The discount rate and estimated life assumptions used for the present value calculation of the servicing liability are consistent with those used to value the certificates and retained interests.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 12. Fair Value Measurements (Continued)

The table below presents a reconciliation of the beginning and ending balances of our certificates and retained interests and our servicing liability during the twenty-six weeks ended August 2, 2008:

	Retained			Servicing
(In thousands)	Interests			Liability

Balance, February 2, 2008	$	115,912		$	3,038
Additions to I/O strip and servicing liability		20,019			2,745
Net reductions to other retained interests		(6,669	)
Reductions and maturities of QSPE certificates		(185	)
Amortization and valuation adjustments to I/O strip and servicing liability		(19,776	)		(2,585	)
Balance, August 2, 2008	$	109,301		$	3,198

Note 13. Impact of Recent Accounting Pronouncements

In September 2006, the FASB ratified the consensus of EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Agreements.” EITF Issue No. 06-4 addresses accounting for separate agreements that split life insurance policy benefits between an employer and an employee. EITF Issue No. 06-4 requires employers to recognize a liability for future benefits payable to the employee under such agreements. The effect of applying the provisions of Issue No. 06-4 should be recognized either through a change in accounting principle by a cumulative-effect adjustment to equity or through the retrospective application to all prior periods. We adopted the provisions of EITF Issue No. 06-4 effective as of the beginning of Fiscal 2009 and recognized a cumulative-effect adjustment of $13,696,000, increasing our liabilities related to our split-dollar life insurance agreements with former executive employees and reducing the February 3, 2008 balance of retained earnings.

In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities–Including an amendment of FASB Statement No. 115,” which permits an entity to measure certain financial assets and financial liabilities at fair value. The intent of SFAS No. 159 is to reduce volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes without the need for applying hedge accounting. Entities that elect the fair value option will report unrealized gains and losses in earnings as of each subsequent reporting date. Generally, the fair value option may be elected on an instrument-by-instrument basis as long as it is applied to the instrument in its entirety. Election of the fair value option is irrevocable unless a new election date occurs.

The provisions of SFAS No. 159 were effective as of the beginning of Fiscal 2009. We did not elect the fair value option for any existing or new financial assets or liabilities that were not previously accounted for at fair value; therefore, SFAS No. 159 had no impact on our financial position or results of operations.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13. Impact of Recent Accounting Pronouncements (Continued)

In December 2007 the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” As compared to SFAS No. 141 and ARB No. 51, these statements change the accounting for business combinations and non-controlling interests in subsidiaries by requiring:

The measurement of additional assets acquired and liabilities assumed at fair value as of the acquisition date;

Re-measurement of liabilities related to contingent consideration at fair value in periods subsequent to acquisition;

The expensing in pre-acquisition periods of acquisition-related costs incurred by the acquirer; and

The initial measurement of non-controlling interests in subsidiaries at fair value and classification of the interest as a separate component of equity.

We will be required to adopt the provisions of SFAS No. 141(R) and SFAS No. 160 prospectively effective as of the beginning of Fiscal 2010.

In February 2008 the FASB issued FSP FAS No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSP FAS No. 140-3 addresses whether there are circumstances that would permit a transferor and a transferee to evaluate the accounting for the transfer of a financial asset separately from a repurchase financing when the counterparties to the two transactions are the same. The FSP presumes that the initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (a linked transaction) under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” However, if certain criteria specified in FSP FAS No. 140-3 are met, the initial transfer and repurchase financing may be evaluated separately under SFAS No. 140.

The provisions of FSP FAS No. 140-3 will be effective prospectively as of the beginning of Fiscal 2010. We do not expect that the adoption of FSP FAS No. 140-3 will have a material effect on our financial position or results of operations.

In March 2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” Under SFAS No. 161, entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows.

We will be required to adopt the provisions of SFAS No. 161 as of the beginning of Fiscal 2010. We do not expect that the adoption of SFAS No. 161 will have a material effect on our financial position or results of operations.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13. Impact of Recent Accounting Pronouncements (Continued)

In May 2008 the FASB issued FASB Staff Position (“FSP”) APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (previously FSP APB 14-a), which will change the accounting treatment for convertible securities that the issuer may settle fully or partially in cash. Under the final FSP, cash-settled convertible securities will be separated into their debt and equity components. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature. As a result, the debt will be recorded at a discount to adjust its below-market coupon interest rate to the market coupon interest rate for the similar debt instrument without the conversion feature. The difference between the proceeds for the convertible debt and the amount reflected as the debt component represents the value of the conversion feature and will be recorded as additional paid-in capital. The debt will subsequently be accreted to its par value over its expected life, with an offsetting increase in interest expense on the income statement to reflect the market rate for the debt component at the date of issuance.

FSP APB 14-1 is to be applied retrospectively to all past periods presented, and will apply to our 1.125% Senior Convertible Notes due May 2014. As compared to our current accounting for the 1.125% Notes, adoption of the proposal will reduce long-term debt, increase stockholders’ equity, and reduce net income and earnings per share. Adoption of the proposal will not affect our cash flows. We will be required to adopt the provisions of FSP APB 14-1 as of the beginning of Fiscal 2010. We are currently evaluating the impact of the adoption of FSP APB 14-1 on our financial statements.

Note 14. Subsequent Event

On August 25, 2008 we announced that we have entered into a definitive agreement to sell our non-core misses apparel catalogs (collectively, “Crosstown Traders”) to Orchard Brands, a portfolio company owned by Golden Gate Capital, for a cash purchase price of approximately $35,000,000. Subject to certain customary closing conditions, we expect the transaction to close by the end of September 2008.

As part of the definitive agreement we will retain the infrastructure of Crosstown Traders and accordingly we have agreed to provide certain services to Orchard Brands, including distribution, information technology, and call center functions, for a limited transition period. Subsequent to the transition period we will be responsible for the remaining lease liabilities and disposition costs for the distribution and office facilities, including fixed assets that we expect to fully depreciate over the transition period. The estimated loss on disposition of Crosstown Traders for the six months ended August 2, 2008, which is included in the loss from discontinued operations (see “Note 1. Condensed Consolidated Financial Statements; Discontinued Operations” above), reflects the above definitive agreement. Any adjustment to the estimated loss related to the finalization of the sale of Crosstown Traders to Orchard Brands will be recorded in the Fiscal 2009 Third Quarter.

We also announced that we have entered into an agreement for the sale of the misses apparel catalog credit card receivables for approximately $40,000,000 in cash to Alliance Data Systems Corporation. These receivables are directly related to the catalog titles being sold to Orchard Brands. We expect this transaction to close prior to the end of Fiscal 2009. We expect the sale of the catalogs and the related credit card receivables, less securitized indebtedness of approximately $32,000,000, to result in aggregate pre-tax net cash proceeds of approximately $40,000,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included in Item 1 of this report. It should also be read in conjunction with the management’s discussion and analysis of financial condition and results of operations, financial statements, and accompanying notes appearing in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008. As used in this management’s discussion and analysis, “Fiscal 2009” refers to our fiscal year ending January 31, 2009 and “Fiscal 2008” refers to our fiscal year ended February 2, 2008. “Fiscal 2009 Second Quarter” refers to our fiscal quarter ended August 2, 2008 and “Fiscal 2008 Second Quarter” refers to our fiscal quarter ended August 4, 2007. “Fiscal 2009 First Quarter” refers to our fiscal quarter ended May 3, 2008, “Fiscal 2009 Third Quarter” refers to our fiscal quarter ending November 1, 2008, and “Fiscal 2008 Fourth Quarter” refers to our fiscal quarter ended February 2, 2008. The terms “Charming Shoppes, Inc.,” “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated subsidiaries except where the context otherwise requires or as otherwise indicated.

FORWARD-LOOKING STATEMENTS

With the exception of historical information, the matters contained in the following analysis and elsewhere in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of revenues, income or loss, cost reductions, capital expenditures, liquidity, financing needs or plans, and plans for future operations, as well as assumptions relating to the foregoing. The words “expect,” “could,” “should,” “project,” “estimate,” “predict,” “anticipate,” “plan,” “intend,” “believes,” and similar expressions are also intended to identify forward-looking statements.

We operate in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors that may affect us. Forward-looking statements are inherently subject to risks and uncertainties, some of which we cannot predict or quantify. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements, which speak only as of the date on which they were made. We assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Factors that could cause our actual results of operations or financial condition to differ from those described in this report include, but are not necessarily limited to, the following, which are discussed in more detail in “PART I; Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended February 2, 2008 and in “PART II. OTHER INFORMATION; Item 1A. Risk Factors” below:

·	Our business is dependent upon our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors, which we may not be able to successfully accomplish in the future.

·	Our business plan is largely dependent upon continued growth in the plus-size women’s apparel market, which may not occur.

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

·	The women’s specialty retail apparel and direct-to-consumer markets are highly competitive and we may be unable to compete successfully against existing or future competitors.

·	We cannot assure the successful consummation of our expected sale of our non-core misses apparel catalog titles.

·	We cannot assure the successful implementation of our business plan for our LANE BRYANT WOMAN catalog or the realization of our anticipated benefits from our re-launch of the LANE BRYANT credit card program.

·	We cannot assure the successful implementation of our business plan for increased profitability and growth in our Retail Stores or Direct-to-Consumer segments. Recent changes in management may result in a failure to achieve improvement in our operating results.

We cannot assure the successful implementation of our planned cost reduction and capital budget reduction plans; the effective implementation of our plans for consolidation of our CATHERINES brand, a new organizational structure; and enhancements in our merchandise and marketing; and we cannot assure the realization of our anticipated annualized expense savings from restructuring programs announced in February 2008.

Our success and our ability to execute our business strategy depend largely on the efforts and abilities of our executive officers and their management teams. We also must motivate employees to remain focused on our strategies and goals, particularly during a period of changing leadership for the Company and a number of our operating divisions. The inability to find a suitable permanent replacement for our former Chief Executive Officer within a reasonable time period, as well as management personnel to replace departing executives, could have a material adverse effect on our business. We do not maintain key-person life insurance policies with respect to any of our employees.

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 one of these locations were to be disrupted for any reason.

We depend on the availability of credit for our working capital needs, including credit we receive from our suppliers and their agents, and on our credit card securitization facilities. If we were unable to obtain sufficient financing at an affordable cost, our ability to merchandise our stores, E-commerce, or catalog businesses would be adversely affected.

·	Natural disasters, as well as war, acts of terrorism, or other armed conflict, or the threat of any such event may negatively impact availability of merchandise and customer traffic to our stores, or otherwise adversely affect our business.

We rely significantly on foreign sources of production and face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad. Such risks include (but are not necessarily limited to) political instability; imposition of, or changes in, duties or quotas; trade restrictions; increased security requirements applicable to imports; delays in shipping; increased costs of transportation; and issues relating to compliance with domestic or international labor standards.

Our Retail Stores and Direct-to-Consumer segments experience seasonal fluctuations in net sales and operating income. Any decrease in sales or margins during our peak sales periods, or in the availability of working capital during the months preceding such periods, could have a material adverse effect on our business. In addition, extreme or unseasonable weather conditions may have a negative impact on our sales.

·	We may be unable to obtain adequate insurance for our operations at a reasonable cost.

·	We may be unable to protect our trademarks and other intellectual property rights, which are important to our success and our competitive position.

We may be unable to hire and retain a sufficient number of suitable sales associates at our stores. In addition, we are subject to the Fair Labor Standards Act and various state and Federal laws and regulations governing such matters as minimum wages, exempt status classification, overtime, and employee benefits. Changes in Federal or state laws or regulations regarding minimum wages or other employee benefits could cause us to incur additional wage and benefit costs, which could adversely affect our results of operations.

·	Our manufacturers may be unable to manufacture and deliver merchandise to us in a timely manner or to meet our quality standards.

·	Our Retail Stores segment sales are dependent upon a high volume of traffic in the strip centers and malls in which our stores are located, and our future retail store growth is dependent upon the availability of suitable locations for new stores.

Inadequate systems capacity, a disruption or slowdown in telecommunications services, changes in technology, changes in government regulations, systems issues, security breaches, a failure to integrate order management systems, or customer privacy issues could result in reduced sales or increases in operating expenses as a result of our efforts or our inability to remedy such issues.

·	Successful operation of our E-commerce websites and our catalog business is dependent on our ability to maintain efficient and uninterrupted customer service and fulfillment operations.

·	We may be unable to manage significant increases in certain costs vital to catalog operations, including postage, paper, and acquisition of prospects, which could adversely affect our results of operations.

·	Response rates to our catalogs and access to new customers could decline, which would adversely affect our net sales and results of operations.

·	We may be unable to successfully implement our plan to improve merchandise assortments in our Retail Stores or Direct-to-Consumer segments.

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

·	Changes to existing accounting rules or the adoption of new rules could have an adverse impact on our reported results of operations.

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

The holders of our 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125% Notes”) could require us to repurchase the principal amount of the notes for cash before maturity of the notes under certain circumstances. Such a repurchase would require significant amounts of cash and could adversely affect our financial condition.

CRITICAL ACCOUNTING POLICIES

We have prepared the financial statements and accompanying notes included in Item 1 of this report in conformity with United States generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates and assumptions are based on historical experience, analysis of current trends, and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions.

We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Historically, actual results have not differed materially from those determined using required estimates. Our critical accounting policies are discussed in the management’s discussion and analysis of financial condition and results of operations and notes accompanying the consolidated financial statements that appear in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

Except as disclosed in the financial statements and accompanying notes included in Item 1 of this report, there were no material changes in, or additions to, our critical accounting policies or in the assumptions or estimates we used to prepare the financial information appearing in this report.

RECENT DEVELOPMENTS

On July 9, 2008 we announced that Dorrit J. Bern tendered her resignation as President, Chief Executive Officer and a Director of the Company. Our Board of Directors appointed Alan Rosskamm, our Chairman of the Board and a member of our Board of Directors since 1992, to serve as our Interim Chief Executive Officer effective as of July 10, 2008 while a search is conducted for Ms. Bern’s successor. Mr. Rosskamm previously served as Chief Executive Officer and Chairman of the Board of Directors of Jo-Ann Stores, Inc., and continues as a member of Jo-Ann’s Board of Directors. Mr. Rosskamm has also advised a number of start-up ventures, including retailer PetSense, Inc. Our Board of Directors has formed a special committee to undertake an immediate search for a permanent Chief Executive Officer.

We also announced that Brian P. Woolf, the former Chairman and Chief Executive Officer of Caché, Inc., has been appointed President of the LANE BRYANT brand. Mr. Woolf has served in various retail-industry management and merchandising positions over the past three decades. Before joining Caché, he held senior merchandising positions at a number of well-known retailers, including Limited Stores, Marshall’s, Lazarus, Bloomingdale’s and Macy’s. We are continuing our search for presidents for our FASHION BUG and CATHERINES brands.

In support of our strategy to provide a greater focus on our core brands, we announced on August 25, 2008 that we have entered into a definitive agreement to sell our non-core misses apparel catalogs (collectively, “Crosstown Traders”) to Orchard Brands, a portfolio company owned by Golden Gate Capital, for a cash purchase price of approximately $35.0 million. The transaction includes the following catalog titles and their associated E-commerce sites: Old Pueblo Traders®, Bedford Fair®, Willow Ridge®, Lew Magram®, Brownstone Studio®, Intimate Appeal®, Monterey Bay Clothing Company®, and Coward® Shoe. The Crosstown Traders headquarters are expected to remain in Tucson, Arizona. Subject to certain customary closing conditions, we expect the transaction to close by the end of September 2008.

As part of the definitive agreement we will retain the infrastructure of Crosstown Traders and accordingly we have agreed to provide certain services to Orchard Brands, including distribution, information technology, and call center functions, for a limited transition period. Subsequent to the transition period we will be responsible for the remaining lease liabilities and disposition costs for the distribution and office facilities, including fixed assets that we expect to fully depreciate over the transition period. The estimated loss on disposition of Crosstown Traders for the six months ended August 2, 2008, which is included in the loss from discontinued operations (see “Note 1. Condensed Consolidated Financial Statements; Discontinued Operations” above), reflects the above definitive agreement. We will adjust the estimated loss in the Fiscal 2009 Third Quarter for the finalization of the sale of Crosstown Traders to Orchard Brands.

We also announced that we have entered into an agreement for the sale of the misses apparel catalog credit card receivables for approximately $40.0 million in cash to Alliance Data Systems Corporation. These receivables are directly related to the catalog titles being sold to Orchard Brands. We expect this transaction to close prior to the end of Fiscal 2009. We expect the sale of the catalogs and the related credit card receivables, less securitized indebtedness of approximately $32.0 million, to result in aggregate pre-tax net cash proceeds of approximately $40.0 million.

Additionally, we announced that we will initiate a process to explore the sale of our Figi’s® Gifts in Good Taste catalog business, based in Wisconsin. Our decision to explore the sale of Figi’s is based on our strategic direction and is not a reflection of the performance of Figi’s, which continues to perform profitably and generate positive cash flows. We will only enter into a transaction that we deem favorable. We can provide no assurance that this process will result in any specific course of action or transaction, and we do not intend to comment further on this evaluation until final determinations have been made.

OVERVIEW

This overview of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) presents a high-level summary of more detailed information contained elsewhere in this Report on Form 10-Q. The intent of this overview is to put this detailed information into perspective and to introduce the discussion and analysis contained in this MD&A. Accordingly, this overview should be read in conjunction with the remainder of this MD&A and with the financial statements and other detailed information included in this Report on Form 10-Q and should not be separately relied upon.

During the Fiscal 2009 Second Quarter we continued to experience the downward traffic trends in our stores that we experienced during the latter half of Fiscal 2008 and the Fiscal 2009 First Quarter. We believe these negative trends are influenced by a challenging retail and economic environment, resulting in a reduced demand for core seasonal and casual merchandise offerings as consumers have become more selective with their purchases. The reduced demand in our core seasonal and casual merchandise offerings more than offset continued favorable responses to our other merchandise offerings, such as intimate apparel and our Right Fit pant programs. Our comparable store sales were 10% lower for the Fiscal 2009 Second Quarter and 11% lower for the first half of Fiscal 2009.

As a result of increased markdowns during the Fiscal 2009 Second Quarter to help stimulate sales, our merchandise margins for the Fiscal 2009 Second Quarter declined as compared to the Fiscal 2008 Second Quarter and were relatively flat for the first half of Fiscal 2009 as compared to the first half of Fiscal 2008. However, we were able to manage the level of markdowns as a result of our focus on inventory levels, which were down 6% on a comparable store basis.

Given the continuing uncertain economic climate, we anticipate continued weak traffic trends for the Fiscal 2009 Third Quarter. We will continue to work diligently to mitigate our same store sales decreases and continue to address our merchandise offerings in order to meet our customers’ needs.

Excluding the impact of restructuring charges and severance costs under the terms of Dorrit J. Bern’s employment contract related to her resignation (see “RECENT DEVELOPMENTS” above), we continued to reduce our expenses during the Fiscal 2009 Second Quarter. Although our expenses increased as a percentage of sales as a result of negative leverage from the decrease in comparable store sales, we were able to reduce expense dollars as compared to the Fiscal 2008 Second Quarter.

We expect to continue to benefit from our previously announced expense control initiatives during the remainder of the year. These initiatives include: the relocation of our CATHERINES operations from Memphis, Tennessee to our corporate headquarters in Bensalem, Pennsylvania, which we completed during March 2008; the elimination of 150 corporate and field management positions, which we completed during the Fiscal 2009 First Quarter; and the closing of our full-line PETITE SOPHISTICATE stores, which we expect to complete during the latter half of Fiscal 2009. We anticipate that these initiatives will result in additional pre-tax expense savings, primarily in payroll and occupancy costs, during the remainder of the year.

We also continued to implement our initiative to close approximately 150 under-performing stores, which will result in the elimination of losses from the under-performing stores upon closing. During the first half of Fiscal 2009 we closed 78 under-performing stores and expect to complete the remaining store closures during the remainder of Fiscal 2009.

During the Fiscal 2009 First Quarter we announced that we were exploring a broad range of operating and strategic alternatives that are expected to result in the sale of our non-core misses apparel catalog titles. Accordingly, we classified the results of the non-core misses apparel catalog titles within our Direct-to-Consumer segment as a discontinued operation. Our Direct-to-Consumer segment results, excluding these discontinued operations, include primarily our LANE BRYANT WOMAN and FIGI’S catalogs and related websites. On August 25, 2008 we announced that we have entered into a definitive agreement to sell our non-core misses apparel catalogs (see “RECENT DEVELOPMENTS” above).

While we are committed to executing our long-term growth strategy as a multi-brand, multi-channel retailer, we are continuing to take a conservative operating approach given the continuing uncertain economic climate and our expectations for continuing weak traffic trends. We expect the difficult retail apparel environment to continue and, in response, we will continue to maintain lean inventories and carefully control operating expenses in an effort to generate positive free cash flow.