Edgar Filing: CHARMING SHOPPES INC

form10qnov12008.htm

Table of Contents

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 November 1, 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 November 28, 2008 was 113,884,069 shares.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Balance Sheets
	November 1, 2008 and February 2, 2008	2

	Condensed Consolidated Statements of Operations and Comprehensive Income
	Thirteen weeks ended November 1, 2008 and November 3, 2007	3
	Thirty-nine weeks ended November 1, 2008 and November 3, 2007	4

	Condensed Consolidated Statements of Cash Flows
	Thirty-nine weeks ended November 1, 2008 and November 3, 2007	5

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Forward-looking Statements	27

	Critical Accounting Policies	30

	Recent Developments	31

	Overview	33

	Results of Operations	35

	Liquidity and Capital Resources	44

	Financing	49

	Market Risk	51

	Impact of Recent Accounting Pronouncements	52

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	52

PART II.	OTHER INFORMATION	53

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 6.	Exhibits	55

	SIGNATURES	58

	Exhibit Index	59

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	November 1,			February 2,
(In thousands, except share amounts)	2008			2008

ASSETS
Current assets
Cash and cash equivalents	$	67,829		$	61,335
Available-for-sale securities		6,375			13,364
Accounts receivable, net of allowances of $1,579 and $6,262		4,477			33,535
Investment in asset-backed securities		112,801			115,912
Merchandise inventories		406,102			330,216
Deferred advertising		12,908			5,546
Deferred taxes		0			9,773
Prepayments and other		177,765			151,716
Current assets of discontinued operations		0			119,994
Total current assets		788,257			841,391

Property, equipment, and leasehold improvements – at cost		1,075,629			1,117,559
Less accumulated depreciation and amortization		657,884			658,410
Net property, equipment, and leasehold improvements		417,745			459,149

Trademarks and other intangible assets		189,021			189,562
Goodwill		66,666			66,666
Other assets		31,801			56,536
Total assets	$	1,493,490		$	1,613,304

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	177,102		$	122,629
Accrued expenses		190,447			168,573
Current liabilities of discontinued operations		0			46,086
Current portion – long-term debt		6,601			8,827
Total current liabilities		374,150			346,115

Deferred taxes		42,465			38,122
Other non-current liabilities		192,525			192,454
Long-term debt		307,649			306,169

Stockholders’ equity
Common Stock $.10 par value:
Authorized – 300,000,000 shares
Issued – 152,352,569 shares and 151,569,850 shares		15,235			15,157
Additional paid-in capital		414,127			407,499
Treasury stock at cost – 38,482,213 shares and 36,477,246 shares		(347,730	)		(336,761	)
Accumulated other comprehensive income/(loss)		(2	)		22
Retained earnings		495,071			644,527
Total stockholders’ equity		576,701			730,444
Total liabilities and stockholders’ equity	$	1,493,490		$	1,613,304

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

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirteen Weeks Ended
	November 1,			November 3,
(In thousands, except per share amounts)	2008			2007

Net sales	$	553,066		$	599,665

Cost of goods sold, buying, catalog, and occupancy expenses		428,338			429,175
Selling, general, and administrative expenses		167,585			172,423
Impairment of store assets		20,216			0
Restructuring and other charges		5,685			0
Total operating expenses		621,824			601,598

Loss from operations		(68,758	)		(1,933	)

Other income		1,876			2,686
Interest expense		(2,172	)		(2,206	)

Loss from continuing operations before income taxes		(69,054	)		(1,453	)
Income tax (benefit)/provision		(11,269	)		287

Loss from continuing operations		(57,785	)		(1,740	)

Loss from discontinued operations, net of income tax (provision)/benefit
of ($24,004) in 2008 and $1,365 in 2007		(35,181	)		(1,828	)

Net loss		(92,966	)		(3,568	)

Other comprehensive income, net of tax
Unrealized gains on available-for-sale securities, net of income tax
provision of $8 in 2007		0			15

Comprehensive loss	$	(92,966	)	$	(3,553	)

Basic net loss per share:
Loss from continuing operations	$	(.50	)	$	(.01	)
Loss from discontinued operations, net of tax		(.31	)		(.02	)
Net loss	$	(.81	)	$	(.03	)

Diluted net loss per share:
Loss from continuing operations	$	(.50	)	$	(.01	)
Loss from discontinued operations, net of tax		(.31	)		(.02	)
Net loss	$	(.81	)	$	(.03	)

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

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirty-nine Weeks Ended
	November 1,			November 3,
(In thousands, except per share amounts)	2008			2007

Net sales	$	1,843,028		$	1,990,638

Cost of goods sold, buying, catalog, and occupancy expenses		1,349,389			1,387,562
Selling, general, and administrative expenses		519,375			528,744
Impairment of store assets		20,216			0
Restructuring and other charges		24,241			0
Total operating expenses		1,913,221			1,916,306

Income/(loss) from operations		(70,193	)		74,332

Other income		3,183			7,787
Interest expense		(6,742	)		(8,287	)

Income/(loss) from continuing operations before income taxes		(73,752	)		73,832
Income tax (benefit)/provision		(12,914	)		28,212

Income/(loss) from continuing operations		(60,838	)		45,620

Loss from discontinued operations, net of income tax benefit of $3,628 in 2007		(74,922	)		(4,611	)

Net income/(loss)		(135,760	)		41,009

Other comprehensive income/(loss), net of tax
Unrealized gains/(losses) on available-for-sale securities, net of income tax
(provision)/benefit of $12 in 2008 and ($11) in 2007		(24	)		17

Comprehensive income/(loss)	$	(135,784	)	$	41,026

Basic net income/(loss) per share:
Income/(loss) from continuing operations	$	(.53	)	$	.37
Loss from discontinued operations, net of tax		(.65	)		(.04	)
Net income/(loss)	$	(1.18	)	$	.33

Diluted net income/(loss) per share:
Income/(loss) from continuing operations	$	(.53	)	$	.36
Loss from discontinued operations, net of tax		(.65	)		(.04	)
Net income/(loss)	$	(1.18	)	$	.32

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

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Thirty-nine Weeks Ended
	November 1,			November 3,
(In thousands)	2008			2007

Operating activities
Net income/(loss)	$	(135,760	)	$	41,009
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Depreciation and amortization		73,774			69,492
Loss on disposition of discontinued operations		46,736			0
Impairment of store assets		20,216			0
Deferred income taxes		13,428			8,856
Stock-based compensation		4,708			8,494
Excess tax benefits related to stock-based compensation		0			(847	)
Write-down of deferred taxes related to stock-based compensation		(1,352	)		0
Write-down of capital assets		2,456			0
Net (gain)/loss from disposition of capital assets		(722	)		1,926
Net loss/(gain) from securitization activities		531			(7,486	)
Changes in operating assets and liabilities
Accounts receivable, net		29,058			29,807
Merchandise inventories		(65,430	)		(68,763	)
Accounts payable		51,768			15,778
Deferred advertising		(5,317	)		(10,423	)
Prepayments and other		(6,005	)		980
Accrued expenses and other		(8,971	)		15,278
Purchase of Lane Bryant credit card receivables portfolio		0			(230,975	)
Securitization of Lane Bryant credit card receivables portfolio		0			230,975
Net cash provided by operating activities		19,118			104,101

Investing activities
Investment in capital assets		(49,498	)		(108,775	)
Proceeds from sales of capital assets		4,813			0
Net proceeds from sale of discontinued operations		34,440			0
Gross purchases of securities		(3,935	)		(73,089	)
Proceeds from sales of securities		11,651			2,206
(Increase)/decrease in other assets		6,635			(15,650	)
Net cash provided by/(used by) investing activities		4,106			(195,308	)

Financing activities
Proceeds from issuance of senior convertible notes		0			275,000
Proceeds from long term borrowings		108			986
Repayments of long-term borrowings		(6,813	)		(9,044	)
Payments of deferred financing costs		(47	)		(7,611	)
Excess tax benefits related to stock-based compensation		0			847
Purchase of hedge on senior convertible notes		0			(90,475	)
Sale of common stock warrants		0			53,955
Purchases of treasury stock		(10,969	)		(240,289	)
Net proceeds from shares issued under employee stock plans		484			389
Net cash used by financing activities		(17,237	)		(16,242	)

Increase/(decrease) in cash and cash equivalents		5,987			(107,449	)
Cash and cash equivalents, beginning of period		61,842			143,838
Cash and cash equivalents, end of period	$	67,829		$	36,389

Certain prior-year amounts have been reclassified to conform to the current-year presentation.
(Continued on next page)

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Thirty-nine Weeks Ended
	November 1,		November 3,
(In thousands)	2008		2007

Non-cash financing and investing activities
Common stock issued on redemption of convertible notes	$	0	$	149,564
Assets acquired through capital leases	$	5,959	$	5,509

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission. 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 financial statements, primarily related to discontinued operations (see below), 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 thirty-nine weeks ended November 1, 2008 and November 3, 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 Third Quarter” refers to our fiscal quarter ended November 1, 2008 and the term “Fiscal 2008 Third Quarter” refers to our fiscal quarter ended November 3, 2007. The term “Fiscal 2009 First Quarter” refers to our fiscal quarter ended May 3, 2008 and the term “Fiscal 2009 Second Quarter” refers to our fiscal quarter ended August 2, 2008. The terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and, where applicable, our consolidated subsidiaries.

Discontinued Operations

On April 25, 2008 we announced that our Board of Directors began exploring a broad range of operating and strategic alternatives for our non-core misses apparel catalog titles (collectively, “Crosstown Traders”) in order to provide a greater focus on our core brands and to enhance shareholder value. Crosstown Traders met the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) to be accounted for as held for sale. Accordingly, the assets, liabilities, and results of operations of Crosstown Traders have been reported as discontinued operations in our consolidated statements of operations and balance sheets for all periods presented.

On August 25, 2008 we announced that we had entered into a definitive agreement to sell our Crosstown Traders non-core misses apparel catalogs to Orchard Brands, a portfolio company owned by Golden Gate Capital, for a cash purchase price of approximately $35,000,000. The sale was completed on September 18, 2008. Crosstown Traders’ operations and cash flows have been eliminated from our financial statements as of the date of sale and we will not have any significant involvement in the operations after the sale.

As part of the definitive agreement we have retained certain components of the infrastructure of Crosstown Traders. Accordingly, we entered into transitional service agreements with Orchard Brands to provide certain services, including information technology, use of existing facilities, and financial services. These services are to be provided for specified time periods ranging up to one year from the date of the agreement, depending on the services provided. In addition, Orchard Brands agreed to provide certain transitional services to us, including distribution and call center services. Subsequent to the transitional period we will be responsible for the remaining lease liabilities for the retained facilities. We will discontinue using the fixed assets related to the retained facilities after the transitional period. Accordingly, we will fully depreciate these fixed assets over the transitional services period.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

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 inflows and outflows over the transitional period are not expected to be significant. Accordingly, the reporting of discontinued operations was deemed appropriate in accordance with SFAS No. 144.

During the Fiscal 2009 Third Quarter we finalized our calculation of the loss on disposition of the discontinued operations by increasing the aggregate pre-tax loss on disposition to $46,736,000. The $3,968,000 increase in the pre-tax loss on disposition during the Fiscal 2009 Third Quarter was primarily a result of changes in working capital during the quarter. During the Fiscal 2009 Third Quarter we also recognized an increase in the net pre-tax loss from discontinued operations of $7,209,000. During our Fiscal 2009 Third Quarter we recorded a valuation allowance against our net deferred tax assets (see “Note 8. Income Taxes” below) for the discontinued operations. This had the effect of reversing $24,004,000 of tax benefits recognized during the Fiscal 2009 First and Second Quarters. In addition, no tax benefit was recorded on the additional losses recorded in the Fiscal 2009 Third Quarter. A portion of the reversal of previously recognized tax benefits that was recorded in the Fiscal 2009 Third Quarter related to an excess tax benefit of $10,780,000 that was initially recorded in the Fiscal 2009 First Quarter. As a result of the completion of the sale, the computation of the tax benefit related to the disposition of the discontinued operations was finalized during the Fiscal 2009 Third Quarter.

Results from discontinued operations for the thirteen weeks and thirty-nine weeks ended November 1, 2008 and November 3, 2007 were as follows:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1,			November 3,			November 1,			November 3,
(In thousands)	2008(1)			2007			2008(1)			2007

Net sales	$	34,563		$	69,724		$	155,811		$	234,388

Loss from discontinued operations	$	(11,177	)(2)	$	(3,193	)	$	(74,922	)(3)	$	(8,239	)
Income tax benefit		(24,004	)(4)		1,365			0			3,628
Loss from discontinued operations, net of income tax benefit	$	(35,181	)	$	(1,828	)	$	(74,922	)	$	(4,611	)
____________________
(1) Through September 18, 2008 (the date of sale).
(2) Includes $7,209,000 of losses from operations and an increase of $3,968,000 in the loss on disposition.
(3) Includes $28,186,000 of losses from operations and a $46,736,000 loss on disposition.
(4) Reversal of previously recognized tax benefit as a result of our recognition of a valuation allowance against net deferred tax assets and the correction of an error.

We received net proceeds from the disposition of $34,440,000 and recognized a liability of $7,700,000 for the fair value of certain transitional services to be provided to the buyer at no cost. The liability will be amortized to continuing operations over the term of the transitional service agreements as the services are performed. In addition, we recognized a liability of $2,500,000 for costs to sell the Crosstown Traders business.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Current assets and liabilities of discontinued operations as of September 18, 2008 (the date of sale) and February 2, 2008 were as follows:

	September 18,		February 2,
(In thousands)	2008		2008

Current assets:
Merchandise inventories	$	50,855	$	61,311
Deferred advertising and other, net		13,594		13,286
Intangible assets		44,758		45,397
Current assets of discontinued operations	$	109,207	$	119,994

Current liabilities:
Accounts payable	$	15,219	$	17,924
Accrued expenses		4,192		10,884
Deferred taxes		18,820		17,278
Current liabilities of discontinued operations	$	38,231	$	46,086

On August 25, 2008 we also announced that we entered into an agreement to sell the misses apparel catalog credit card receivables, which are directly related to the catalog titles sold to Orchard Brands, to World Financial Network National Bank, a unit of Alliance Data Systems Corporation. On November 14, 2008 we completed the sale of the receivables at par value for $43,294,000, and utilized the proceeds to pay off and terminate the related securitization funding facility (see “Note 15. Subsequent Event” below). The sale of the credit card receivables and the elimination of funding-related cash collateral requirements, less the prepayment of securitized indebtedness, resulted in net cash proceeds to us of $12,455,000.

In addition, we announced our plans to explore the sale of our FIGI’S® Gifts in Good Taste catalog business based in Wisconsin. The results of operations of FIGI’S are not reported as discontinued operations as they have not met the requirements of SFAS No. 144.

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

Segment Reporting

We operate and report in two segments: Retail Stores and Direct-to-Consumer. We determine our operating segments based on the way our chief operating decision-makers review our results of operations. We consider our retail stores and store-related e-commerce as operating segments that are similar in terms of economic characteristics, production processes, and operations. Accordingly, we have aggregated our retail stores and store-related e-commerce into a single reporting segment (the “Retail Stores” segment). Our catalog and catalog-related e-commerce operations are reported under the Direct-to-Consumer segment. The Retail Stores segment derives its revenues from sales through retail stores and store-related e-commerce sales under our LANE BRYANT® (including LANE BRYANT OUTLET®), FASHION BUG®, CATHERINES PLUS SIZES®, and PETITE SOPHISTICATE 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” below for further information regarding our discontinued operations and segment reporting.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

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 November 1, 2008:

2004 Stock Award and Incentive Plan			4,744,437
2003 Non-Employee Directors Compensation Plan			155,924
1994 Employee Stock Purchase Plan			874,664
1988 Key Employee Stock Option Plan			104,292

Stock option and stock appreciation rights activity for the thirty-nine weeks ended November 1, 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		3,255,674			4.79		1.13	–		5.64
Granted – option price less than market price		14,000			1.00		1.00	–		1.00
Canceled/forfeited		(1,061,581	)		5.10		1.00	–		12.48
Exercised		(234,198	)		4.02		1.00	–		5.47		357	(2)
Outstanding at November 1, 2008		3,868,769		$	5.31	$	1.00	–	$	13.84	$	0
Exercisable at November 1, 2008		1,718,283		$	6.22	$	1.00	–	$	13.84	$	0
____________________
(1) Aggregate market value less aggregate exercise price.
(2) As of date of exercise.

Stock-based compensation expense includes compensation cost for (i) all partially-vested stock-based awards granted prior to the beginning of Fiscal 2007, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“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 unit and stock appreciation right awards.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	November 1,			November 3,		November 1,			November 3,
(In thousands)	2008			2007		2008			2007

Total stock-based compensation expense	$	(306	)(1)	$	734	$	4,708	(1)	$	8,494
____________________
(1) Includes $955 reversal of previously recognized stock-based compensation related to performance-based awards.

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 $(306,000) and $4,708,000 of compensation expense in the above table are a decrease of $214,000 and an increase of $267,000, respectively, in compensation expense related to these cash-settled RSUs. The $214,000 decrease in compensation expense is a result of a reduction in the market value of our common stock during the Fiscal 2009 Third Quarter. Total compensation expense for unvested cash-settled RSUs not yet recognized as of November 1, 2008 was $145,000, which is included in accrued expenses in the accompanying condensed consolidated balance sheet as of November 1, 2008, and 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 use under the Black-Scholes model are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies; Stock-based Compensation” in our 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 $10,810,000 as of November 1, 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:

	November 1,			February 2,
(In thousands)	2008			2008

Due from customers	$	6,056		$	39,797
Allowance for doubtful accounts		(1,579	)		(6,262	)
Net accounts receivable	$	4,477		$	33,535

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(Unaudited)

Note 3. Trademarks and Other Intangible Assets

	November 1,		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		5,759		5,218
Net trademarks and other intangible assets	$	189,021	$	189,562

Note 4. Long-term Debt

	November 1,		February 2,
(In thousands)	2008		2008

Long-term debt
1.125% Senior Convertible Notes, due May 2014	$	275,000	$	275,000
Capital lease obligations		15,163		13,698
6.07% mortgage note, due October 2014		10,586		11,078
6.53% mortgage note, due November 2012		5,600		6,650
7.77% mortgage note, due December 2011		7,416		7,897
Other long-term debt		485		673
Total long-term debt		314,250		314,996
Less current portion		6,601		8,827
Long-term debt	$	307,649	$	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.

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 $812,000 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.

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.

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(Unaudited)

Note 5. Stockholders’ Equity

	Thirty-nine
	Weeks Ended
	November 1,
(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		(135,760	)
Issuance of common stock (782,719 shares), net of shares withheld for payroll taxes		484
Purchase of treasury shares (2,004,967 shares)		(10,969	)
Stock-based compensation expense		4,708
Tax benefit related to call options		2,866
Write-down of deferred taxes related to stock-based compensation		(1,352	)
Unrealized losses on available-for-sale securities, net of income tax benefit		(24	)
Total stockholders’ equity, end of period	$	576,701
____________________
(1) See “Note 14. 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 November 1, 2008 we recognized revenues of $5,270,000 and during the thirteen weeks ended November 3, 2007 we recognized revenues of $5,438,000 in connection with our loyalty card programs. During the thirty-nine weeks ended November 1, 2008 we recognized revenues of $15,644,000 and during the thirty-nine weeks ended November 3, 2007 we recognized revenues of $16,449,000 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.

We accrued $3,460,000 as of November 1, 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.

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(Unaudited)

Note 7. Net Income/(Loss) Per Share

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1,			November 3,			November 1,			November 3,
(In thousands, except per share amounts)	2008			2007			2008			2007

Basic weighted average common shares outstanding		114,877			121,196			114,602			122,688
Dilutive effect of assumed conversion of
4.75% Senior Convertible Notes(1)		0			0			0			6,674
Dilutive effect of stock options, stock appreciation
rights, and awards(2)		0			0			0			1,478
Diluted weighted average common shares and
equivalents outstanding		114,877			121,196			114,602			130,840

Income/(loss) from continuing operations	$	(57,785	)	$	(1,740	)	$	(60,838	)	$	45,620
Decrease in interest expense from assumed
conversion of 4.75% Senior Convertible
Notes, net of income tax benefit(1)		0			0			0			1,476
Income/(loss) from continuing operations used to
determine diluted net income/(loss) per share		(57,785	)		(1,740	)		(60,838	)		47,096
Loss from discontinued operations,
net of income tax benefit in 2007		(35,181	)		(1,828	)		(74,922	)		(4,611	)
Net income/(loss) used to determine
diluted net income/(loss) per share	$	(92,966	)	$	(3,568	)	$	(135,760	)	$	42,485

Options with weighted average exercise price
greater than market price, excluded from
computation of net income/(loss) per share:
Number of shares	(2)			(2)			(2)				77
Weighted average exercise price per share	(2)			(2)			(2)			$	9.30
____________________
(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 2008 periods and for the thirteen weeks ended November 3, 2007 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Income Taxes

We calculate our interim tax provision in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods.” For each interim period we estimate our annual effective income tax rate and apply the estimated rate to our year-to-date income or loss before income taxes. We also compute the tax provision or benefit related to items separately reported, such as discontinued operations, and recognize the items net of their related tax effect in the interim periods in which they occur. We also recognize the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

In computing the annual estimated effective tax rate we make certain estimates and management judgments, such as estimated annual taxable income or loss, the nature and timing of permanent and temporary differences between taxable income for financial reporting and tax reporting, and the recoverability of deferred tax assets. Our estimates and assumptions may change as new events occur, additional information is obtained, or as the tax environment changes.

SFAS No. 109 “Accounting for Income Taxes,” provides that a deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for net operating loss and credit carryforwards. In addition, SFAS No. 109 requires recognition of a valuation allowance if, based on existing facts and circumstances, it is more likely than not that some portion or all of the deferred tax asset will not be realized. During the Fiscal 2009 Third Quarter we evaluated our assumptions regarding the recoverability of our deferred tax assets. Based on all available evidence we determined that the recoverability of our deferred tax assets is more likely than not limited to our available tax loss carrybacks. Accordingly, we recognized a non-cash provision of $17,466,000 during the Fiscal 2009 Third Quarter to establish a valuation allowance against our net deferred tax assets, which includes $2,541,000 of net operating loss carryforwards. Pursuant to SFAS No. 109, when our results demonstrate a pattern of future profitability the valuation allowance may be adjusted, which would result in the reinstatement of all or a part of the net deferred tax assets.

We adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” 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 November 1, 2008 our gross unrecognized tax benefits were $27,916,000. 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 $19,580,000. The accrued interest and penalties as of November 1, 2008 were $12,660,000. During the thirty-nine weeks ended November 1, 2008 the gross unrecognized tax benefits increased by $1,251,000 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 $992,000. Accrued interest and penalties increased during the thirty-nine weeks ended November 1, 2008 by $86,000.

As of November 1, 2008 it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by as much as $200,000 due to resolutions of audits or expirations of statutes of limitations related to U.S. Federal and state tax positions.

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(Unaudited)

Note 8. Income Taxes (Continued)

Our U.S. Federal income tax returns for Fiscal 2006 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 2005 has been extended by agreement between us and the particular state jurisdiction. The earliest year still subject to examination by state tax authorities is Fiscal 1999.

Note 9. Asset Securitization

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

Through Fiscal 2007 our Crosstown Traders apparel-related catalog credit card receivables, which we securitized subsequent to our Fiscal 2006 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 credit cards and all subsequent new receivables were originations of the Bank. This acquisition did not cause a change in the securitization entities used by the Crosstown Traders credit card program. On August 25, 2008 we announced that we entered into an agreement to sell our misses apparel catalog credit card receivables in connection with the sale of the related Crosstown Traders catalog titles (see “Note 1. Condensed Consolidated Financial Statements; Discontinued Operations” above). On November 14, 2008 we completed the sale of the receivables at par value and utilized the proceeds to pay off and terminate the related securitization funding facility (see “Note 15. Subsequent Event” below).

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 $674,817,000 of private label credit card receivables during the thirty-nine weeks ended November 1, 2008 and had $588,456,000 of securitized credit card receivables outstanding as of November 1, 2008. We held certificates and retained interests in our securitizations of $112,801,000 as of November 1, 2008, which are generally subordinated in right of payment to certificates issued by the QSPEs to third-party investors. The amount of securitized credit card receivables as of November 1, 2008 includes $43,656,000 of securitized credit card receivables associated with the sold Crosstown Traders credit card receivables portfolio and the retained interests in our securitizations as of November 1, 2008 include $15,164,000 associated with the portfolio (see “Note 15. Subsequent Event” below). 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.

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(Unaudited)

Note 9. Asset Securitization (Continued)

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 November 1, 2008 our investment in asset-backed securities included $51,200,000 of QSPE certificates, an I/O strip of $23,057,000, and other retained interests of $38,544,000. Included in these balances are $2,927,000 for the I/O strip and $12,237,000 for the other retained interests which are associated with the sold Crosstown Traders credit card receivables portfolio. 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 November 1, 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 November 1, 2008 we and the QSPEs were in compliance with the applicable financial performance standards referred to in this paragraph.

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

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(Unaudited)

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 services, information systems support, and insurance to our Retail Stores or Direct-to-Consumer segments. Operating costs for our Retail Stores segment consist primarily of store selling, buying, occupancy, and warehousing. Operating costs for our Direct-to-Consumer segment consist primarily of catalog development, production, and circulation; e-commerce advertising; warehousing; and order processing.

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

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(Unaudited)

Note 10. Segment Reporting (Continued)

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

Thirteen weeks ended November 1, 2008
Net sales	$	528,501		$	21,311		$	3,254		$	553,066
Depreciation and amortization		14,375			43			8,568			22,986	(3)
Loss before interest and taxes		(12,784	)		(9,673	)		(44,425	)(2)		(66,882	)
Interest expense								(2,172	)		(2,172	)
Income tax benefit								11,269			11,269
Loss from continuing operations		(12,784	)		(9,673	)		(35,328	)		(57,785	)
Capital expenditures		9,314			78			1,633			11,025	(3)

Thirty-nine weeks ended November 1, 2008
Net sales	$	1,761,680		$	70,804		$	10,544		$	1,843,028
Depreciation and amortization		40,596			117			32,255			72,968	(3)
Income/(loss) before interest and taxes		63,320			(20,202	)		(110,128	)(2)		(67,010	)
Interest expense								(6,742	)		(6,742	)
Income tax benefit								12,914			12,914
Income/(loss) from continuing operations		63,320			(20,202	)		(103,956	)		(60,838	)
Capital expenditures		41,473			354			7,190			49,017	(3)

Thirteen weeks ended November 3, 2007
Net sales	$	588,055		$	9,255		$	2,355		$	599,665
Depreciation and amortization		15,678			137			7,158			22,973	(4)
Income/(loss) before interest and taxes		32,776			(1,337	)		(30,686	)		753
Interest expense								(2,206	)		(2,206	)
Income tax provision								(287	)		(287	)
Income/(loss) from continuing operations		32,776			(1,337	)		(33,179	)		(1,740	)
Capital expenditures		27,672			624			5,603			33,899	(4)

Thirty-nine weeks ended November 3, 2007
Net sales	$	1,958,827		$	24,656		$	7,155		$	1,990,638
Depreciation and amortization		42,459			253			26,065			68,777	(4)
Income/(loss) before interest and taxes		175,456			(4,504	)		(88,833	)		82,119
Interest expense								(8,287	)		(8,287	)
Income tax provision								(28,212	)		(28,212	)
Income/(loss) from continuing operations		175,456			(4,504	)		(125,332	)		45,620
Capital expenditures		83,264			751			23,217			107,232	(4)
____________________
(1) Current-year periods include LANE BRYANT WOMAN catalog.
(2) Includes restructuring charges of $1,585 for the thirteen weeks ended November 1, 2008 and $10,812 for the thirty-nine weeks ended November 1, 2008, severance and restructure costs of $1,971 for the thirteen and thirty-nine weeks ended November 1, 2008, and severance, restructure, and store impairment costs of $22,345 for the thirteen weeks ended November 1, 2008 and $31,674 for the thirty-nine weeks ended November 1, 2008 (see “Note 12. Restructuring and Other Charges” below).
(3) Excludes $222 of depreciation and amortization and $14 of capital expenditures for the thirteen weeks ended November 1, 2008, and $806 of depreciation and amortization and $481 of capital expenditures for the thirty-nine weeks ended November 1, 2008, related to our discontinued operations.
(4) Excludes $264 of depreciation and amortization and $860 of capital expenditures for the thirteen weeks ended November 3, 2007, and $715 of depreciation and amortization and $1,543 of capital expenditures for the thirty-nine weeks ended November 3, 2007, related to our discontinued operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Impairment of Store Assets

We evaluate the recoverability of our long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We 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 future estimated results when evaluating an asset for potential impairment, and we 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. The estimates and assumptions that we use to evaluate possible impairment require certain significant assumptions regarding factors such as future sales growth and operating performance, and they may change as new events occur or as additional information is obtained.

Based on our assessment of the carrying value of long-lived assets conducted in accordance with SFAS No. 144, during the Fiscal 2009 Third Quarter we identified approximately 120 stores with asset carrying values in excess of such stores’ respective forecasted undiscounted cash flows. Accordingly, we recognized a non-cash charge of $20,216,000 to write down these stores to their respective fair values.

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” we also performed a review during the Fiscal 2009 Third Quarter of our goodwill and other intangible assets with indefinite lives for possible impairment and determined that these assets were not impaired.

Note 12. 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 Fiscal 2009 Second Quarter.

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 and closed 100 of the identified under-performing stores, including our full-line PETITE SOPHISTICATE stores. We expect to complete the remainder of these initiatives by the end of February 2009.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 12. Restructuring and Other Charges (Continued)

During the Fiscal 2009 Second Quarter we recognized $9,328,000 of severance costs in connection with the resignation of our former Chief Executive Officer, Dorrit J. Bern. During the Fiscal 2009 Third Quarter we recognized $1,941,000 of severance costs related to the elimination of 20 corporate positions. Additionally, as a result of the sale of our non-core misses apparel catalog titles we recognized $972,000 of accelerated depreciation related to fixed assets we retained in connection with the sale, which we will cease to use after a transitional period (see “Note 1. Condensed Consolidated Financial Statements; Discontinued Operations” above).

During the Fiscal 2009 Third Quarter we decided to discontinue our LANE BRYANT WOMAN catalog. As a result of this decision we recognized a markdown allowance of $4,220,000 to reflect catalog-related inventory at the lower of cost or market. The markdown allowance is included in cost of goods sold, buying, catalog, and occupancy expenses in our condensed consolidated statements of operations and comprehensive income. We also recognized $1,187,000 of severance costs, which are included in restructuring and other charges, for the elimination of approximately 100 positions.

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 Thirty-nine		Remaining		Estimated
	as of		Weeks Ended		Costs		Costs as of
	February 2,		November 1,		to be		November 1,
(In thousands)	2008		2008		Incurred		2008

Severance, retention, and related costs	$	2,792	$	12,988	$	201	$	15,981
Store lease termination costs		0		7,151		1,756		8,907
Asset write-downs and accelerated
depreciation		11,325		3,240		29		14,594
Relocation and other closing costs		241		862		207		1,310
Total	$	14,358	$	24,241	$	2,193	$	40,792

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 November 1, 2008:

			Costs Accrued
	Accrued		for Thirty-nine					Accrued
	as of		Weeks Ended					as of
	February 2,		November 1,		Payments/			November 1,
(In thousands)	2008(1)		2008		Settlements			2008(1)

Severance, retention, and related costs	$	2,688	$	12,988	$	(7,223	)	$	8,453
____________________
(1) Included in “Accrued expenses” in the accompanying condensed consolidated balance sheets.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13. 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 disclosures 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 FASB Staff Position (“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 14 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. In October 2008 the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS No. 157-3 was effective upon issuance.

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. We use various methods to determine fair value, including discounted cash flow projections based on available market interest rates and management estimates of future cash payments.

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. The adoption of FSP SFAS No. 157-3 did not have an impact on our financial position or results of operations.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13. Fair Value Measurements (Continued)

Our financial assets and liabilities subject to SFAS No. 157 as of November 1, 2008 were as follows:

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

Assets
Available-for-sale securities(2)	$	6,375	$	6,375
Certificates and retained interests in securitized receivables		112,801			$	112,801

Liabilities
Servicing liability		3,367				3,367
____________________
(1) Fair value is estimated based on internally-developed models or methodologies utilizing significant inputs that are unobservable from objective sources.
(2) Unrealized gains and losses on our available-for-sale securities are included in stockholders’ equity until realized and realized gains and losses are recognized in income when the securities are sold.

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

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

The table below presents a reconciliation of the beginning and ending balances of our certificates and retained interests and our servicing liability during the thirty nine weeks ended November 1, 2008:

	Retained			Servicing
(In thousands)	Interests			Liability

Balance, February 2, 2008	$	115,912		$	3,038
Additions to I/O strip and servicing liability		29,617			4,283
Net reductions to other retained interests		(2,424	)
Reductions and maturities of QSPE certificates		(485	)
Amortization and valuation adjustments to I/O strip and servicing liability		(29,819	)		(3,954	)
Balance, November 1, 2008	$	112,801		$	3,367

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 14. Impact of Recent Accounting Pronouncements

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

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

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

In December 2007 the FASB issued SFAS No. 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:

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;

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

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.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 14. Impact of Recent Accounting Pronouncements (Continued)

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

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

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

We will be required to adopt the provisions of SFAS No. 161 prospectively 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.

In May 2008 the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (previously FSP APB 14-a), which 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 extent of the impact of the adoption of FSP APB 14-1 on our financial statements.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 15. Subsequent Event

On November 14, 2008 we completed the sale of the credit card receivables portfolio associated with the Crosstown Traders misses apparel catalogs to World Financial Network National Bank, a unit of Alliance Data Systems Corporation (see “Note 1. Condensed Consolidated Financial Statements; Discontinued Operations” and “Note 9. Asset Securitization” above). The portfolio was sold for a par value of $43,294,000, subject to a true-up of the amount by December 31, 2008. The sale enabled us to pay off and terminate the related Series 2005-RPA conduit securitization facility that was dedicated to these receivables. The sale of the receivables resulted in a one-time negative impact to the credit earnings contribution subsequent to November 1, 2008 of $618,000 associated with the elimination of the I/O strip and prepaid balances associated with the Crosstown portfolio, offset by the discount under which the receivables were conveyed to the conduit facility. The $39,000,000 outstanding under the 2005-RPA facility was paid off on the closing date. The sale of the credit card receivables and the elimination of funding-related cash collateral requirements, less the prepayment of securitized indebtedness, resulted in net cash proceeds to us of $12,455,000. Also, on November 14, 2008 we completed a $55,000,000 increase in the conduit capacity of our existing Series 2004-VFC facility, increasing the conduit to $105,000,000 in capacity.

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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, “Fiscal 2008” refers to our fiscal year ended February 2, 2008, and “Fiscal 2010” refers to our fiscal year ending January 30, 2010. “Fiscal 2009 Third Quarter” refers to our fiscal quarter ended November 1, 2008 and “Fiscal 2008 Third Quarter” refers to our fiscal quarter ended November 3, 2007. “Fiscal 2009 First Quarter” refers to our fiscal quarter ended May 3, 2008, “Fiscal 2009 Second Quarter” refers to our fiscal quarter ended August 2, 2008, and “Fiscal 2008 Fourth Quarter” refers to our fiscal quarter ended February 2, 2008. “Fiscal 2010 First Quarter” refers to our fiscal quarter ending May 2, 2009. The terms “Charming Shoppes,” “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated subsidiaries except where the context otherwise requires or as otherwise indicated.

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 or recession 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, which could adversely affect our business.

·	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 sale of our FIGI’S catalog.

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We cannot assure the successful implementation of our business plan for increased profitability and growth in our Retail Stores or Direct-to-Consumer segments. We cannot assure the successful implementation of our plans for the transformation of our brands to a vertical specialty store model. 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 and November 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. In addition, the current global financial crisis could adversely affect our ability to secure adequate credit financing. If we were unable to obtain sufficient financing at an affordable cost, our ability to merchandise our stores, e-commerce, or catalog businesses could be adversely affected.

We plan to refinance our maturing credit card securitization series with our credit conduit facilities, which are renewed annually. To the extent that these conduit facilities are not renewed they would begin to amortize and we would finance this amortization using our committed revolving credit facilities to the extent available. There is no assurance that we can refinance or renew our conduit facilities on terms comparable to our existing facilities or that there would be sufficient availability under our revolving credit facilities for such financing. Without adequate liquidity, our ability to offer our credit program to our customers and consequently our financial condition and results of operations, would be adversely affected.

·	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.

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

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 successfully implement our plan to improve merchandise assortments in our Retail Stores or Direct-to-Consumer segments.

The holders of our 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125% Notes”) could require us to repurchase the principal amount of the notes for cash before maturity of the notes upon the occurrence of a “fundamental change” as defined in the prospectus filed in connection with the 1.125% Notes. Such a repurchase would require significant amounts of cash, would be subject to important limitations, and could adversely affect our financial condition.

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.

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.

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

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CRITICAL ACCOUNTING POLICIES

We have prepared the financial statements and accompanying notes included in Item 1 of this report in conformity with United Stat