UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
______________
FORM
10-K
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x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended January 31, 2009
OR
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _______________ to _____________
Commission
File Number: 000-07258
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CHARMING SHOPPES, INC.
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(Exact
Name of Registrant as Specified in Its
Charter)
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PENNSYLVANIA
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23-1721355
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3750 STATE ROAD, BENSALEM,
PA 19020
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(215) 245-9100
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(Address
of principal executive offices) (Zip
Code)
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(Registrant’s
telephone number, including Area Code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock (par value $.10 per share)
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The
NASDAQ Stock Market LLC
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Chicago
Stock Exchange, Inc.
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Stock
Purchase Rights
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act:
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Yes
x
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No
o
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act:
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Yes
o
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No
x
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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:
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Yes
x
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No
o
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K:
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act):
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Large
Accelerated Filer x
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Accelerated
Filer o
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Non-accelerated
Filer o
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Smaller
Reporting Company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
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Yes
o
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No
x
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The
aggregate market value of the outstanding common stock of the registrant held by
non-affiliates as of August 2, 2008 (the last day of the registrant’s most
recently completed second fiscal quarter), based on the closing price on August
1, 2008, was approximately $616,261,448.
As of
March 23, 2009, 115,291,618 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Part III of this Form 10-K is incorporated by reference
herein from the registrant’s definitive proxy statement for its 2009 annual
shareholders meeting, which is expected to be filed within 120 days after the
end of the fiscal year covered by this Annual Report.
FORM
10-K ANNUAL REPORT
TABLE
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TABLE OF
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(Continued)
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Item
8
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Financial
Statements and Supplementary Data (Continued)
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We are a
multi-brand, specialty apparel retailer with a leading market share in women’s
plus-size specialty apparel. During our fiscal year ended January 31,
2009 (“Fiscal 2009”) the sale of plus-size apparel represented approximately 80%
of our total net sales. Through our multiple channels, fashion
content, and broad merchandise assortments, we seek to appeal to customers from
a broad range of socioeconomic, demographic, and cultural
groups. During Fiscal 2009 our business operations consisted
primarily of three distinct core brands: LANE BRYANT®, FASHION
BUG®, and
CATHERINES PLUS SIZES®. These
core brands operate retail stores and store-related e-commerce websites under
our Retail Stores business segment.
LANE
BRYANT®
is a widely recognized brand name in plus-size fashion. Through
private labels such as VENEZIA®,
CACIQUE®, and
LANE BRYANT®, we
offer fashionable and sophisticated apparel in plus-sizes 14 – 28, including intimate
apparel, wear-to-work and casual sportswear, and accessories. LANE
BRYANT has a loyal customer base, generally ranging in age from 35 to 55 years
old, which shops for fashionable merchandise in the moderate price
range. Our 786 LANE BRYANT retail stores are located in 47 states, in
a combination of destination malls, lifestyle centers, and strip malls, and
average approximately 5,900 square feet. During Fiscal 2009 our LANE
BRYANT website (lanebryant.com) averaged 2.3
million unique visitors per month with an established on-line
community.
Our LANE
BRYANT intimate apparel side-by-side store pairs LANE BRYANT’s casual and
wear-to-work sportswear assortments with an expanded line of CACIQUE intimates
as well as additional national brands, presented in a double
store-front. This larger footprint of approximately 7,200 square feet
per combined store compares with the full-line LANE BRYANT store footprint of
approximately 5,600 square feet. Included in the 786 stores operated by
LANE BRYANT as of January 31, 2009 are 132 stores operated in the side-by-side
format.
LANE
BRYANT OUTLET® is the
only national chain exclusively offering women’s plus-size apparel in the outlet
sales channel. Through our private labels and selected national
brands we offer fashionable and sophisticated apparel in plus-sizes
14 – 28, including
intimate apparel, wear-to-work and casual sportswear, and accessories, as well
as selected footwear and social occasion apparel. As of January 31, 2009 we
operated 106 LANE BRYANT OUTLET stores in 34 states throughout the
country. LANE BRYANT OUTLET stores average approximately 5,800 square
feet.
FASHION
BUG®
stores specialize in selling plus-size and misses apparel in sizes 6 – 30
serving women’s lifestyle needs from casual to dressy, as well as accessories,
intimate apparel, and footwear. FASHION BUG customers generally range
in age from 20 to 49 years old and shop in the low-to-moderate price
range. Our 897 FASHION BUG stores are located in 43 states, primarily
in strip shopping centers, and average approximately 8,700 square
feet. During Fiscal 2009 our FASHION BUG website (fashionbug.com) averaged
988,000 unique visitors per month.
CATHERINES PLUS
SIZES®
is particularly known for extended sizes (over size 28) and petite
plus-sizes. CATHERINES® offers
classic apparel and accessories for wear-to-work and casual
lifestyles. CATHERINES customers are generally in the 40 years old
and older age group, shop in the moderate price range, and are concerned with
fit and value. Our 463 CATHERINES stores are located in 44 states,
primarily in strip shopping centers, and average approximately 4,200 square
feet. During Fiscal 2009 our CATHERINES website (catherines.com) averaged more
than 503,000 unique visitors per month.
PETITE
SOPHISTICATE OUTLET® is the
only national chain exclusively offering women’s petite-size apparel in the
outlet sales channel. PETITE SOPHISTICATE OUTLET targets women 35 –
55 years old and offers traditional and contemporary apparel in casual and
career assortments. We offer clothing tailored to women 4'11''
– 5'4'' who wear petite sizes 0 – 14. Substantially all of the PETITE
SOPHISTICATE OUTLET stores operate with a LANE BRYANT OUTLET store in
side-by-side locations. As of January 31, 2009 we operated 49 PETITE
SOPHISTICATE OUTLET stores in 24 states throughout the country. These
stores average approximately 2,600 square feet and the side-by-side locations
average a combined total of approximately 8,900 square feet. During
Fiscal 2009 our PETITE SOPHISTICATE OUTLET website (petitesophisticate.com) began
e-commerce operations and in March 2009 it transitioned from an e-commerce
website to a marketing and informational website.
In
addition to the core brands operated under our Retail Stores segment, during
Fiscal 2009 our Crosstown Traders and LANE BRYANT WOMAN catalog and
catalog-related e-commerce websites operated under our Direct-to-Consumer
segment. Crosstown Traders marketed women’s apparel through various
catalog titles and related e-commerce websites, and marketed food and specialty
gift products through its FIGI’S® catalog
and related e-commerce website. The LANE BRYANT WOMAN catalog and
related e-commerce website targeted a different core customer from our LANE
BRYANT retail stores with different fashion and price points. In
April 2008 we began to explore strategic alternatives for our Crosstown Traders
business in order to provide a greater focus on our core brands and to enhance
shareholder value. In September 2008 we completed the sale of our
Crosstown Traders non-core misses apparel catalogs. During the third
quarter of Fiscal 2009 we also decided to discontinue the LANE BRYANT WOMAN
catalog in order to focus on our core LANE BRYANT retail customer and began to
actively explore the sale of our FIGI’S gift catalog. We expect to
discontinue the LANE BRYANT WOMAN catalog operations during the first half of
our fiscal year ending January 30, 2010 (“Fiscal 2010”). These steps
will enable us to focus all of our direct-to-consumer efforts on our three core
brands, particularly on their e-commerce businesses.
Financial
information by business segment for each of our last three fiscal years is
included in “Item
8. Financial Statements and Supplementary Data: Notes to Consolidated
Financial Statements; NOTE 19. SEGMENT
REPORTING”
below.
We are
currently reviewing our organizational structure with a view towards empowering
each of our core brands to take full ownership of all aspects of the customers’
experience while collectively seeking to maximize synergies from being a
multi-brand retailer. With the assistance of a global management
consulting firm we are in the process of transforming our operations into a
vertical specialty store model and increasing our percentage of internally
designed, developed, and sourced fashion product. We plan to develop
and source more of our own proprietary fashion merchandise, become more focused
on fashion and less driven by commodity product, and ultimately create an
enhanced brand experience for our customers through an improved assortment
across each of our core brands. Under the vertical specialty store
model, each of our brands can project a unique fashion point-of-view with a
consistent fit, color, and brand attitude. Increasing the percentage
of merchandise we source directly will lead to gross margin enhancement
opportunities and better value for our customers. During Fiscal 2009
we appointed experienced brand presidents for each of our core brands and hired
product design and development executives as part of our commitment to this
transformation and to support this process.
In
conjunction with these organizational initiatives, we also began to implement a
multi-year strategy to enhance our competitive position and improve our
financial results. The strategy includes: a re-focus on
our core retail brands; divestiture of non-core assets; substantial reductions
in operating expenses and a streamlining of our operations; and maintaining and
protecting our strong financial position. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations;
OVERVIEW” below for further discussion of our planned organizational
initiatives and details of our multi-year strategy.
Stores
Our 2,301
retail stores (as of January 31, 2009) are primarily located in suburban areas
and small towns. Approximately 79% of these stores are located in
strip shopping centers and lifestyle centers, with the remainder located in
community and regional malls. The majority of our FASHION BUG,
CATHERINES, and outlet stores are strip-center based. Approximately
51% of our LANE BRYANT stores are located in strip and lifestyle shopping
centers, with the remaining stores located primarily in national
malls.
We
believe that our customers visit strip shopping centers frequently as a result
of the tenant mix and convenience of strip shopping centers. Our
long-term real estate strategy is to continue to increase the percentage of
total stores in strip and lifestyle centers, primarily through growth at the
LANE BRYANT brand. Availability of strip and lifestyle center retail
space significantly outpaces mall expansion. In addition, we benefit
in strip and lifestyle centers from substantially lower occupancy costs as
compared to occupancy costs in malls. We continue to seek additional
store locations that meet our financial and operational objectives.
Our
retail store merchandise displays enable our customers to assemble coordinated
and complete outfits that satisfy many of their lifestyle needs. We
frequently test and implement new store designs and fixture packages that are
aimed at providing an effective merchandise presentation. We relocate
or remodel our stores as appropriate to convey a fresh and contemporary shopping
environment. We emphasize customer service, including the presence of
helpful salespeople in the stores, layaway plans, customer loyalty programs, and
acceptance of merchandise returns for cash or credit within a reasonable time
period. Typically, our stores are open seven days per week, eleven
hours per day Monday through Saturday and seven hours on Sunday.
All
retail stores are operated under our direct management. Each store
has a manager and/or an assistant manager or supervisor who is in daily
operational control of the location. We also employ district managers
who travel to all stores in their district on a frequent basis to supervise
store operations. Each district manager has responsibility for an
average of 14 stores. Regional managers, who report to a Vice
President of Stores, supervise the district managers. Generally, we
appoint district managers from our pool of store managers and our store managers
from our pool of assistant store managers. We seek to motivate our
store management through internal advancement and promotion, competitive wages,
and various incentive, medical, and retirement plans. We centrally
develop store operations, merchandising, and buying policies, and assign to
individual store management the principal duties of display, selling, and
reporting through point-of-sale terminals.
The
recessionary economy that existed during Fiscal 2009 has resulted in a
continuing downward trend in traffic levels in our retail stores. The
women’s specialty apparel market has been particularly hard hit, as consumers
are delaying purchases in response to the increasingly uncertain economic
environment and a deteriorating job market. In response to the
continuing weak retail and economic environment, during February 2008 we
announced a significant reduction in the number of planned store openings and
the closing of approximately 150 under-performing stores during Fiscal
2009. In November 2008 we announced the closing of as many as 100
additional stores and a significant reduction in store openings and relocations
during Fiscal 2010. We also announced a substantial reduction in capital
spending in Fiscal 2010 that will result in the opening and relocation of fewer
stores than in prior years. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations;
OVERVIEW” below for additional
information regarding our planned store openings and closings.
Our store
openings, closings, and number of locations over the past three fiscal years are
as follows:
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Year
Ended
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||||||||||||
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January
31,
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February
2,
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February
3,
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2009
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2008
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2007
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Store
Activity:
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Number
of stores open at beginning of
period
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2,409 | 2,378 | 2,236 | |||||||||
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Opened
during
period
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48 | (1) | 103 | (2) | 198 | (3) | ||||||
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Closed
during
period
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(156 | )(4) | (72 | ) | (56 | ) | ||||||
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Number
of stores open at end of
period
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2,301 | 2,409 | 2,378 | |||||||||
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Number
of Stores Open at End of Period by Brand:
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FASHION
BUG
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897 | 989 | 1,009 | |||||||||
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LANE
BRYANT
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892 | (5) | 896 | (5) | 859 | (5) | ||||||
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CATHERINES
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463 | 468 | 465 | |||||||||
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PETITE
SOPHISTICATE
OUTLET
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49 | 56 | (6) | 45 | ||||||||
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Number
of stores open at end of
period
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2,301 | 2,409 | 2,378 | |||||||||
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____________________
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(1)
Includes 7 LANE BRYANT OUTLET stores, 11 LANE BRYANT/CACIQUE intimate
apparel side-by-side stores, and 4 PETITE SOPHISTICATE OUTLET
stores.
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(2)
Includes 19 LANE BRYANT OUTLET stores, 37 LANE BRYANT intimate apparel
side-by-side stores, 7 PETITE SOPHISTICATE OUTLET stores, and 4 PETITE
SOPHISTICATE stores.
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(3)
Includes 82 LANE BRYANT OUTLET stores and 45 PETITE SOPHISTICATE OUTLET
stores.
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(4)
Includes 78 FASHION BUG, 10 CATHERINES, 21 LANE BRYANT, 2 LANE BRYANT
OUTLET, 1 PETITE SOPHISTICATE OUTLET, and 4 PETITE SOPHISTICATE stores in
connection with the closure of under-performing stores announced in
February 2008.
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(5)
Includes LANE BRYANT OUTLET stores as follows: 106 in Fiscal 2009, 101 in
Fiscal 2008, and 82 in Fiscal 2007.
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(6)
Includes 4 PETITE SOPHISTICATE stores.
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Our
planned store activity by brand for Fiscal 2010 is as follows:
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Openings
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Closings(1)
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Relocations
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FASHION
BUG
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0 | 45 | 3 | |||||||||
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LANE
BRYANT
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6 | 30 | 9 | |||||||||
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CATHERINES
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0 | 13 | 0 | |||||||||
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PETITE
SOPHISTICATE OUTLET
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0 | 12 | 0 | |||||||||
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Total
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6 | 100 | 12 | |||||||||
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____________________
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(1)
Closure
of under-performing stores announced in November 2008.
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Merchandising
and Buying
We employ
a merchandising and buying strategy that is focused on providing an attractive
selection of apparel and accessories that reflect the fashion preferences of the
core customer for each of our retail store brands. The marketing and
merchandising operations for each of our core brands operate as separate
groups. We believe that the specialization of marketers and buyers
within each brand enhances each brand’s identity and
distinctiveness. We also use domestic and international fashion
market guidance, fashion advisory services, proprietary design, and in-store and
e-commerce testing to determine the optimal product assortments for each of our
brands. We believe that this approach results in greater success in
predicting customer preferences while reducing our inventory investment and
risk. We seek to maintain high quality standards with respect to
merchandise fabrication, construction, and fit. Our merchandising and
buying philosophy, coupled with enhancements in inventory management, helps
facilitate the timely and orderly purchase and flow of
merchandise. This enables our stores to offer fresh product
assortments on a regular basis.
We
continually refine our merchandise assortments to reflect the needs and demands
of our diverse customer groups and the demographics of each store
location. At LANE BRYANT we offer a combination of fashion basics,
seasonal fashions, and high fashion in casual and wear-to-work merchandise and
our CACIQUE brand of intimate apparel, as well as other national brand intimate
apparel and accessories. We translate current trends into plus-sizes
and strive to be first to market with our styles. At FASHION BUG we
offer a broad assortment of both casual and wear-to-work apparel in plus and
misses sizes at low-to-moderate prices. FASHION BUG’s merchandise
typically reflects established fashion trends and includes a broad offering of
ready-to-wear apparel as well as footwear, accessories, intimate apparel, and
seasonal items, such as outerwear. At CATHERINES we offer a broad
assortment of plus-size merchandise in classic styles designed to provide
“head-to-toe” dressing for our customers. CATHERINES features casual
and career sportswear, dresses, intimate apparel, suits, and accessories in a
variety of plus-sizes, including petites and extended
sizes. CATHERINES has developed a unique expertise in the fit,
design, and manufacturing of extended sizes, making it one of the few retailers
to emphasize these sizes. Our “Right Fit by Lane Bryant®”, “Right
Fit by Fashion Bug®”, and
“Right Fit by Catherines®”
campaigns support our core denim and career pant assortments using a unique fit
and sizing technology, based on an extensive fit survey. Right Fit
adapts to three different body shapes: straight, moderately curvy, and
curvy.
LANE
BRYANT OUTLET features products developed exclusively for our outlet stores,
which include updated key items and best-sellers from our full-line LANE BRYANT
brand. Selected national brands and expanded categories, such as
intimate apparel, footwear, and social occasion, are also offered at LANE BRYANT
OUTLET. PETITE SOPHISTICATE OUTLET offers career and casual
sportswear in petite sizes 0-14. The brand provides traditional,
updated classics, and collections to meet the customers’ everyday work and
casual needs, with an emphasis on outfitting.
As
discussed under the caption “GENERAL” above, we are in the
process of transforming our merchandising operations into a vertical specialty
store model and increasing our percentage of internally designed, developed and
sourced fashion product. We plan to develop more of our own
proprietary fashion merchandise, become more focused on fashion and less driven
by commodity product, present a strong fashion point-of-view, and ultimately
create an enhanced brand experience for our customers through an improved
assortment across each of our core brands.
For
stores that are identified as having certain attributes we use our distribution
capabilities to stock the stores with products specifically targeted to such
attributes. Our merchandising staff obtains store-wide and brand-wide
inventory information generated by merchandise information systems that use
point-of-sale terminals. The status of our merchandise can be tracked
from the placement of our initial order for the merchandise to the actual sale
to our customer. Based on this data, our merchandise managers compare
budgeted-to-actual sales and make merchandising decisions as needed, including
re-order, markdowns, and changes in the buying plans for upcoming
seasons. In addition, we continue to work to improve inventory
turnover by better managing the flow of seasonal merchandise to our stores
across all geographic regions.
We employ
a realistic pricing strategy for our stores that is aimed at setting the initial
price markup of fashion merchandise in order to increase the percentage of sales
at the original ticketed price. We believe this strategy has resulted
in a greater degree of credibility with the customer. However, our
pricing strategy typically does allow sufficient margin to permit merchandise
discounts in order to stimulate customer purchases when necessary.
Our
stores experience a normal seasonal sales pattern for the retail apparel
industry, with peak sales typically occurring during the spring and December
holiday seasons. We generally build inventory levels before these
peak sales periods. To maintain current and fashionable inventory we
reduce the price of slow-moving merchandise throughout the year. Much
of our merchandise is developed for one or more of our four seasons: Spring,
Summer, Fall, and Holiday. End-of-season sales are conducted with the
objective of carrying a minimal amount of seasonal merchandise over from one
season to another. Retail Stores segment sales for the four quarters
of Fiscal 2009, as a percent of annual Retail Stores segment sales, were 26.8%,
27.0%, 23.1%, and 23.1%, respectively.
Marketing
and Promotions
We use
several types of advertising to stimulate retail store customer
traffic. We primarily use targeted direct-mail and e-mail advertising
to preferred customers selected from a database of approximately 27.9 million
proprietary credit card, third-party credit card, and cash customers who have
purchased merchandise from us within the past three years. We may
also use radio, television, newspaper, and internet advertising and fashion
shows to stimulate traffic at certain strategic times of the year. We
also use pricing policies, displays, store promotions, and convenient store
hours to attract customers. We maintain websites for our LANE BRYANT,
FASHION BUG, CATHERINES, and PETITE SOPHISTICATE OUTLET brands that provide
information regarding current fashions and promotions and, except for PETITE
SOPHISTICATE OUTLET, also provide internet shopping. We believe that,
with the planning and guidance of our specialized home-office personnel, each
brand provides such displays and advertising as may be necessary to feature
certain merchandise or certain promotional selling prices from time to
time.
We offer
our FASHION BUG, LANE BRYANT, CATHERINES, and PETITE SOPHISTICATE OUTLET retail
store customers various loyalty card programs. Customers who join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers join some of
these programs by paying an annual membership fee. These membership
fee programs include those administered by our proprietary credit card programs
as well as those administered outside of our proprietary credit card
programs. The proprietary credit card programs provide customers with
the option to cancel their membership within 30 days, entitling them to a full
refund of their annual fee. Other programs are offered that do not
require the payment of a membership fee but allow cardholders to earn points for
purchases using a proprietary credit card, which may be redeemed for merchandise
coupons upon the accumulation of a specified number of
points. Additional information on our loyalty card programs is
included in “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations; CRITICAL ACCOUNTING
POLICIES; Revenue
Recognition”
below.
Sourcing
To meet
the demands of our customers we access both the domestic wholesale and overseas
markets for our retail store merchandise purchases. This allows us to
maintain flexible lead times, respond quickly to current fashion trends, and
replenish merchandise inventory as necessary. During Fiscal 2009 we
purchased merchandise from approximately 580 suppliers located throughout the
world. We use our overseas sourcing operations, which generally
require longer lead times, primarily to purchase fashion-basic merchandise for
our stores. In Fiscal 2009 our overseas sourcing operations accounted
for approximately 40% of retail store merchandise purchases. Overseas
sourcing by brand, as a percent of merchandise purchases, was approximately 38%
for FASHION BUG, 41% for LANE BRYANT, 33% for CATHERINES, and 60% for LANE
BRYANT OUTLET and PETITE SOPHISTICATE OUTLET. We also purchase a
portion of our LANE BRYANT merchandise from Mast Industries, Inc. (“Mast”), a
contract manufacturer and apparel importer that is a wholly-owned subsidiary of
Limited Brands, Inc. These purchases from Mast accounted for
approximately 5% of our total retail store merchandise purchases and
approximately 15% of merchandise purchases for LANE BRYANT during Fiscal
2009. No other vendor accounted for more than 2% of total retail
store merchandise purchases during Fiscal 2009.
As
discussed under the caption “GENERAL” above, we are in the
process of transforming our operations into a vertical specialty store model and
increasing our percentage of internally sourced fashion
product. Increasing the percentage of merchandise we source directly
will lead to gross margin enhancement opportunities and better value for our
customers.
We pay
for a majority of our merchandise purchases outside the United States on an open
account basis. We pay for the remainder of our purchases outside the
United States through corporate-issued letters of credit and, to a lesser
extent, through bank-issued letters of credit where we are the importer of
record. The geographic diversification of our sourcing network
provides us with the flexibility to locate alternate sources for our products in
order to meet our pricing targets.
To date,
we have not experienced difficulties in purchasing merchandise overseas or
importing such merchandise into the United States. Should events such
as political instability or a natural disaster result in a disruption of normal
activities in any single country with which we do business, we believe that we
would have adequate alternative sources of supply.
Distribution
and Logistics
We
currently operate two distribution centers for our Retail Stores
segment. For our FASHION BUG, LANE BRYANT OUTLET, and PETITE
SOPHISTICATE OUTLET stores we operate a distribution center in Greencastle,
Indiana. This facility is located on a 150-acre tract of land and
contains a building of approximately 1,040,000 square feet. We
estimate that this facility has the capacity to service up to approximately
1,800 stores. For our LANE BRYANT and CATHERINES stores we operate a
distribution center in White Marsh, Maryland. The White Marsh
facility is located on 28 acres of land and contains a building of approximately
513,000 square feet that is currently designed to service up to approximately
1,800 stores.
The vast
majority of our merchandise purchases are received at these distribution
facilities, where they are prepared for distribution to our
stores. Automated sorting systems in the distribution centers enhance
the flow of merchandise from receipt to quality control inspection, receiving,
ticketing, packing, and final shipment. Merchandise is shipped to
each store principally by common carriers. We use computerized
automated distribution attributes to combine shipments when possible and improve
the efficiency of the distribution operations.
Inventory
and fulfillment activities for our store-related e-commerce operations are
handled by a third-party warehouse facility in Indianapolis,
Indiana. We utilize approximately 375,000 square feet of space that
is used for merchandise receipt, storage, picking, packing, shipping, and
returns processing. A majority of this merchandise is received from
our Greencastle and White Marsh distribution centers.
Our
distribution and logistics operations provide adequate capacity for the
foreseeable future, and we continually evaluate our overall long-term
distribution and logistics requirements.
We
established our Direct-to-Consumer segment in June 2005 with the acquisition of
Crosstown Traders, Inc. Crosstown Traders operated multiple catalog
titles and related websites, with the majority of revenues derived from the
catalog sales of women's apparel, footwear, and
accessories. Crosstown Traders also derived revenues from the catalog
sales of food and gifts through its FIGI’S catalog. A substantial
majority of sales through the FIGI’S catalog occur during the December holiday
season. In October 2007 the LANE BRYANT catalog trademark, which had
been licensed to a third party, reverted to us and we launched our LANE BRYANT
WOMAN catalog and related website.
In April
2008 we began to explore strategic alternatives for our Crosstown Traders
business in order to provide a greater focus on our core brands and to enhance
shareholder value. In September 2008 we completed the sale of our
Crosstown Traders non-core misses apparel catalogs to an affiliate of Orchard
Brands, a portfolio company owned by Golden Gate Capital. During the
third quarter of Fiscal 2009 we also decided to discontinue the LANE BRYANT
WOMAN catalog and began to actively explore the sale of our FIGI’S gift
catalog. As of the end of Fiscal 2009 our Direct-to-Consumer segment
consisted of the operations of our FIGI’S and LANE BRYANT WOMAN
catalogs. We expect to discontinue the LANE BRYANT WOMAN catalog
operations during the first half of our fiscal year ending January 30, 2010
(“Fiscal 2010”).
In
connection with the sale of the Crosstown Traders apparel catalogs we retained
certain components of its infrastructure. Accordingly, we entered
into transitional service agreements with an affiliate of 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, an
affiliate of Orchard Brands agreed to provide certain transitional services to
us, including distribution and call center services, for specified time periods
ranging up to one year from the date of the agreement. Subsequent to
the transitional period we will be responsible for any remaining lease
liabilities for the retained facilities and we will discontinue using the fixed
assets related to the retained facilities.
We own
125,000 square-feet of automated distribution center space in Marshfield,
Wisconsin that serves as the main distribution area for our FIGI’S catalog and
ships approximately 2,400,000 packages per year. A 122,000
square-foot leased facility in Stevens Point, Wisconsin and a 46,000 square-foot
owned facility in Neillsville, Wisconsin also service FIGI’S. These
facilities provide adequate capacity for our FIGI’S catalog operations for the
foreseeable future.
PROPRIETARY
CREDIT PROGRAMS
We seek
to encourage sales through the promotion of our proprietary credit
cards. We believe that our credit cards act as promotional vehicles
by engendering customer loyalty, creating a substantial base for targeted
direct-mail promotion, and encouraging incremental sales. Our FASHION
BUG, LANE BRYANT, CATHERINES, and PETITE SOPHISTICATE brands each offer our
customers the convenience of proprietary credit card programs.
Our
FASHION BUG credit card program accounted for approximately 33% of FASHION BUG
retail sales in Fiscal 2009 and has approximately 2.0 million active
accounts. Our CATHERINES credit card program accounted for
approximately 35% of CATHERINES retail sales in Fiscal 2009 and has
approximately 0.6 million active accounts. The LANE BRYANT credit
card program accounted for approximately 30% of LANE BRYANT retail sales in
Fiscal 2009 and has approximately 1.9 million active accounts. The
PETITE SOPHISTICATE credit card program accounted for approximately 18% of
PETITE SOPHISTICATE OUTLET retail sales in Fiscal 2009 and has approximately 45
thousand active accounts. Our LANE BRYANT WOMAN CATALOG credit card
accounted for approximately 31% of LANE BRYANT WOMAN catalog apparel sales in
Fiscal 2009 and has approximately 128 thousand active accounts.
We
control credit policies and service the FASHION BUG, CATHERINES, LANE BRYANT,
PETITE SOPHISTICATE, and LANE BRYANT WOMAN CATALOG proprietary credit card files
and, through various agreements, we securitize and sell the credit card
receivables generated by these programs.
On August
25, 2008 we announced that we had entered into an agreement to sell our misses
apparel catalog credit card receivables in conjunction with the sale of the
related Crosstown Traders catalog titles (see “DIRECT-TO-CONSUMER SEGMENT”
above). On December 31, 2008, we finalized 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. The portfolio was sold for a par value of $43.5
million. We utilized a portion of the proceeds to pay off and
terminate the related securitization funding facility and realized net cash
proceeds of $12.5 million.
In
addition to our credit card programs our FIGI’S non-apparel catalog brand offers
interest-free, three-payment credit terms over three months to its customers,
with the first payment due on a defined date 30 to 60 days after a stated
holiday.
A more
comprehensive description of our proprietary credit programs and our asset
securitization process is included in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations; FINANCIAL
CONDITION; Off-Balance-Sheet
Arrangements” and
“Item 8. Financial
Statements and Supplementary Data: Notes to Consolidated Financial Statements;
NOTE
17. ASSET SECURITIZATION” below.
COMPETITION
The
women's specialty retail apparel business is highly competitive, with numerous
competitors, including individual and chain fashion specialty stores, department
stores, discount stores, catalog retailers, and Internet-based
retailers. We cannot reasonably estimate the number of our
competitors due to the large number of women’s apparel retailers. The
primary elements of competition are merchandise style, size, selection, fit,
quality, display, price, attractive website layout, efficient fulfillment of
website mail orders, and personalized service to our customers. For
our retail stores, store location, design, advertising, and promotion are also
significant elements of competition.
EMPLOYEES
As of the
end of Fiscal 2009 we employed approximately 28,700 associates, which included
approximately 20,700 part-time employees. In addition, we hire a
number of temporary employees during the December holiday
season. Approximately 60 of our employees are represented by unions
whose contracts are currently due to expire in August 2009. We
believe that our overall relationship with these unions and our associates in
general is satisfactory.
TRADEMARKS
AND SERVICEMARKS
We own,
or are in the process of obtaining, all rights to the trademarks and trade names
we believe are necessary to conduct our business as presently
operated. “FASHION BUG®”,
“FASHION BUG PLUS®”,
“FIGURE®”, “L.A.
BLUES®”,
“STUDIO 1940®”, “RIGHT
FIT BY FASHION BUG®”,
“CATHERINES®”,
“CATHERINES PLUS SIZES®”,
“MAGGIE BARNES®”, “ANNA
MAXWELL®”,
“LIZ&ME®”,
“SERENADA®”, “RIGHT
FIT BY CATHERINES®”, “LANE
BRYANT®”, “LANE
BRYANT OUTLET®”, “LANE
BRYANT WOMAN®”,
“VENEZIA®”,
“CACIQUE®”, “RIGHT
FIT BY LANE BRYANT®”,
“PETITE SOPHISTICATE®”,
“PETITE SOPHISTICATE OUTLET®”, “FIGI’S®”,
“SHOETRADER®”, and
several other trademarks and servicemarks of lesser importance to us have been
registered or are in the process of being registered with the United States
Patent and Trademark Office and in other countries.
We also
own the following Internet domain name registrations: catherines.com, charming.com,
charmingshoppes.com, fashionbug.com, fashionbugcard.com, fashionbugplus.com,
figuremagazine.com, lanebryant.com, lanebryantcatalog.com,
petitesophisticate.com, shoetrader.com, figis.com and others of lesser
importance.
EXECUTIVE
OFFICES
Charming
Shoppes, Inc. was incorporated in Pennsylvania in 1969. Our principal
offices are located at 3750 State Road, Bensalem, Pennsylvania
19020. Our telephone number is (215) 245-9100.
Copies of
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge on or through our website at www.charmingshoppes.com as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission (“SEC”). Our
historical filings can also be read and copied at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549 or can be accessed directly from
the SEC’s website at www.sec.gov. Information
on the operation of the Public Reference Room can be obtained by calling the SEC
at (800) 732-0330. See “PART III; Item 10. Directors,
Executive Officers, and Corporate Governance” below for additional
information that is available on our Internet website.
You
should carefully consider and evaluate all of the information in this annual
report on Form 10-K and the documents incorporated by reference into this
report, including the risk factors listed below. Any of these risks
could materially and adversely affect our business, financial condition, and
operating results, and could cause our actual results to differ materially from
our plans, projections, or other forward-looking statements included in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” below
and elsewhere in this Report on Form 10-K, and in our other public
filings. The occurrence of one or more of these risks could also
materially and adversely affect the price of our common stock.
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
A
continuing slowdown in the United States economy, an uncertain economic outlook,
and escalating energy costs could lead to further reductions in consumer demand
for our products in the future.
Consumer
spending habits, including spending for our products, are affected by, among
other things, prevailing economic conditions, levels of employment, salary
levels, wage rates, availability of consumer credit, consumer confidence,
fluctuating fuel and energy costs, and consumer perception of economic
conditions. Consumer discretionary spending, including purchases of
women’s apparel, tends to decline during recessionary periods. The
continuing general slowdown in the United States economy, the global credit
crisis, and an uncertain economic outlook have adversely affected consumer
spending habits and customer traffic, which have contributed to a reduction in
our net sales. We cannot reliably predict the extent to which the
current economic conditions will affect our business. A prolonged
economic downturn could have a material adverse effect on our business,
financial condition, and results of operations.
Our
business is dependent upon our ability to accurately predict rapidly changing
fashion trends, customer preferences, and other fashion-related
factors.
Customer
tastes and fashion trends are volatile and tend to change rapidly, particularly
for women's apparel. Our success depends in part on our ability to
effectively predict and respond to quickly changing fashion tastes and consumer
demands, and to translate market trends into appropriate, saleable product
offerings. These risks may increase as we shift a higher proportion
of our product from third-party vendors to internally-designed
merchandise. If we are unable to successfully implement our plans for
the transformation of our brands to a vertical store model or successfully
predict or respond to changing styles or trends and misjudge the market for our
products or any new product lines, our sales will be lower and we may be faced
with a substantial amount of unsold inventory or missed sales
opportunities. In response, we may be forced to rely on additional
markdowns or promotional sales to dispose of excess or slow-moving inventory,
which could have a material adverse effect on our business, financial condition,
and results of operations. This could also impact our reputation with
our customers, which could diminish brand loyalty.
Existing
and increased competition in the women's retail apparel and direct-to-consumer
markets may reduce our net revenues, profits, and market share.
The
women's specialty retail apparel and direct-to-consumer markets are highly
competitive. Our competitors include individual and chain fashion
specialty stores, department stores, discount stores, catalog retailers, and
Internet-based retailers. As a result of this competition we are
required to effectively market and competitively price our products to consumers
in diverse markets, and we may experience pricing pressures, increased marketing
expenditures, and loss of market share. This could have a material
adverse effect on our business, financial condition, and results of operations,
including reduced sales and margins.
We
believe that the principal bases upon which we compete are merchandise style,
size, selection, fit, quality, display, price, attractive website layout,
efficient fulfillment of website mail orders, and personalized service to our
customers, as well as store location, design, advertising, and
promotion. Other women's apparel and direct-to-consumer companies
with greater financial resources, marketing capabilities, or brand recognition
may enter the plus-size business. We cannot give assurance that we
will be able to compete successfully against existing or future
competitors.
Maintaining
and improving our operating margins are dependent on our ability to successfully
control our operating costs.
In order
to maintain or improve our operating margins we need to successfully manage our
operating costs. Our inability to successfully manage labor costs,
occupancy costs, or other operating costs, or our inability to take advantage of
opportunities to reduce operating costs, could adversely affect our operating
margins and our results of operations. We are subject to the Fair
Labor Standards Act and various state and Federal laws and regulations governing
such matters as minimum wages, exempt status classification, overtime, and
employee benefits. Changes in Federal or state laws or regulations
regarding minimum wages, unionization, or other employee benefits could cause us
to incur additional wage and benefit costs, which could adversely affect our
results of operations. The finance charges on most of our proprietary
credit card accounts are billed using a floating rate index, subject to a floor
and limited by legal maximums. Changes in legislation limiting
interest rates and other credit card charges that can be billed on credit
card accounts could negatively impact the operating margins of our credit
operation. In addition, we may be unable to obtain adequate insurance
coverage for our operations at a reasonable cost.
We
may be unable to attain the expected results of our cost-cutting
initiatives.
In Fiscal
2009 we announced initiatives and actions designed to: streamline our business
operations and further sharpen our focus on our core businesses, including the
discontinuation of our LANE BRYANT WOMAN catalog and our figure
magazine, and reduction of operating expenses and capital expenditures; improve
cash flow; and enhance shareholder value. The benefits of our
initiatives are based on forecasts which could vary substantially from our
actual results. We cannot assure the successful implementation of our
planned cost reduction and capital budget reduction plans, and we cannot assure
the realization of our anticipated annualized expense savings from cost
reduction initiatives and restructuring programs announced in Fiscal
2009.
We
may not be able to obtain sufficient working capital financing.
Our
business requires substantial investment in our inventory for a long period
before sales of that inventory occur. Consequently, we require
significant amounts of working capital financing. We depend on the
availability of credit to fund our working capital, including credit we receive
from our suppliers and their agents, on our credit card securitization program,
and on our revolving credit facility. In addition, the current global
financial crisis could adversely affect our ability or the ability of our
vendors to secure adequate credit financing. If we or our vendors are
unable to obtain sufficient financing at an affordable cost, our ability to
merchandise our retail stores or e-commerce businesses could be adversely
affected.
We plan
to refinance our maturing credit card term securitization series with our credit
conduit facilities, which are renewed annually, or through the issuance of a new
term series. To the extent that our conduit facilities are not
renewed they would begin to amortize and we would finance this amortization
using our committed revolving credit facilities to the extent
available. There is no assurance that we can refinance or renew our
conduit facilities on terms comparable to our existing facilities or that there
would be sufficient availability under our revolving credit facilities for such
financing. These concerns are heightened by the current global
economic credit crisis. 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.
On
February 19, 2009, Moody's Investors Service, a nationally recognized
statistical rating organization (“NRSRO”) that has rated our term series
securitizations in the past, announced that it had downgraded the ratings of our
term series asset-backed securities. No other NRSRO took a similar
action. The Moody’s action could negatively impact our ability to complete
future term series securitization transactions on acceptable terms and cause our
asset securitization program to rely on other potentially more expensive funding
sources to the extent available. The Moody’s action does not affect our
current conduit and term series transactions, which we currently expect will
provide sufficient funding for our securitization program for Fiscal
2010.
Our
operating results fluctuate from season to season.
Our
retail store and direct-to-consumer operations experience seasonal fluctuations
in net sales and consequently in operating income, with peak sales typically
occurring during the Easter, Labor Day, and December holiday
seasons. In addition, extreme or unseasonable weather can affect our
sales. Any decrease in net sales or margins during our peak selling
periods similar to what we experienced during our December 2008 holiday season,
or in the availability of working capital needed in the months before these
periods, could have a material adverse effect on our business, financial
condition, and results of operations.
We
usually order merchandise in advance of peak selling periods and sometimes
before new fashion trends are confirmed by customer purchases. We
must carry a significant amount of inventory, including perishable products for
our FIGI’S food and gift catalog, before the peak selling periods. If
we are not successful in selling our inventory, especially during our peak
selling periods, we may be forced to rely on markdowns or promotional sales to
dispose of the inventory or we may not be able to sell the inventory at all,
which could have a material adverse effect on our business, financial condition,
and results of operations.
We
face challenges in managing our business.
Our
operating challenges and management responsibilities are increasing as we
re-focus on the development of our core brands, divestiture of our non-core
assets, and the implementation of our plans for the transformation of our brands
to a vertical store model. Successful long-term growth will require
that we continue to expand and improve our internal systems and our operations,
including our internal sourcing operations.
Our
long-term growth plan for our Retail Stores segment depends on our ability to
open and operate new retail stores and to convert, where applicable, the formats
of existing stores on a profitable basis. In addition, we will need
to identify, hire, and retain a sufficient number of qualified personnel to work
in our stores.
These
objectives have created, and may continue to create, additional demands on our
staff and on our operating systems. We cannot assure the successful
implementation of our business plan to re-focus on our core brands, divest
non-core assets (including the sale of our FIGI’S catalog), and transform our
operations to a vertical store model, or that we will achieve our objectives as
quickly or as effectively as we have planned. Any delays in achieving
our objectives could substantially increase the costs associated with such
initiatives.
Recent
changes in our management as part of an effort to improve our competitive
position and operating results may not achieve the desired results.
We
depend on key personnel and may not be able to retain or replace these employees
or recruit additional qualified personnel.
Our
success and our ability to execute our business strategy depend largely on the
efforts and abilities of our executive officers and their management
teams. We also must motivate employees to remain focused on our
strategies and goals, particularly during a period of changing executive
leadership at both our corporate level and our operating division
level. The inability to find a suitable permanent replacement for our
Interim Chief Executive Officer within a reasonable time period could have a
material adverse effect on our business. We do not maintain
key-person life insurance policies with respect to any of our
employees.
Our
business plan is largely dependent upon continued growth in the plus-size
women’s apparel market.
Our
business is primarily focused on sales of plus-size women’s apparel, which
represents a majority of our total net sales. Our operating results
could be adversely affected by a lack of continued growth in the plus-size
women’s apparel market.
We
could be materially and adversely affected if any of our distribution or
fulfillment centers are shut down.
We
operate distribution and fulfillment centers in Greencastle, Indiana; White
Marsh, Maryland; Marshfield, Wisconsin; and Stevens Point, Wisconsin and use a
third-party fulfillment center in Indianapolis, Indiana that services our
e-commerce operations. In addition, we use third-party freight
consolidators and service providers in Los Angeles, California and North Bergen,
New Jersey. Most of the merchandise we purchase is shipped directly
to our distribution and fulfillment centers or freight consolidators where it is
prepared for shipment to the appropriate stores or to the
customer. If any of our distribution centers, fulfillment centers, or
freight consolidators were to shut down or lose significant capacity for any
reason, the other locations may not be able to adequately support the resulting
additional distribution demands, in part because of capacity constraints and in
part because each location services a particular brand or brands. As
a result, we could incur significantly higher costs and longer lead times
associated with distributing our products to our stores or customers during the
time it takes for us to reopen or replace the affected distribution center,
fulfillment center, or freight consolidator.
The
occurrence of, or threat of, a natural disaster, war, acts of terrorism, or
other armed conflict on the United States or international economies may
negatively impact the availability of merchandise and otherwise adversely impact
our business.
The
occurrence of, or threat of, a natural disaster, war, acts of terrorism, or
other armed conflict could negatively affect our ability to obtain merchandise
for sale in our stores or through our direct-to-consumer business. A
significant portion of our merchandise is imported from other
countries. If imported goods become difficult or impossible to bring
into the United States and we cannot obtain such merchandise from other sources
at similar costs, our net sales and profit margins may be adversely
impacted. If commercial transportation is curtailed or substantially
delayed our business may be adversely impacted, as we may have difficulty
shipping merchandise to our distribution centers, fulfillment centers, freight
consolidators, stores, or our direct-to-consumer customers. As a
result of the occurrence of, or threat of, a natural disaster or acts of
terrorism in the United States we may be required to suspend operations in some
or all of our stores, which could have a material adverse impact on our
business, financial condition, and results of operations.
Our
inability to successfully manage customer service or fulfillment for our
e-commerce websites could adversely impact our operating results.
Successful
management of our e-commerce operations is dependent on our ability to maintain
efficient and uninterrupted customer service and order
fulfillment. Inadequate systems capacity, a disruption or slowdown in
telecommunications services, changes in technology, changes in government
regulations, systems issues, security breaches, a failure to integrate order
management systems, or customer privacy issues could result in reduced sales or
increases in operating expenses as a result of our efforts or our inability to
remedy such issues. In addition, we may not be able to hire
sufficient qualified associates to support our e-commerce operations during peak
periods, especially during the December holiday season. The
occurrence of one or more of these events could adversely affect our e-commerce
business.
During
Fiscal 2009 we began to implement a new and upgraded e-commerce platform through
an outsourcing arrangement and the consolidation of our e-commerce business at
our Bensalem, Pennsylvania headquarters. If we are unsuccessful in
effectively implementing the new platform and consolidation our e-commerce
business could be adversely affected.
We
rely on foreign sources of production.
We
purchase a significant portion of our apparel directly in foreign markets and
indirectly through domestic vendors with foreign sources. We face a
variety of risks generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to):
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political
instability;
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increased
security requirements applicable to imported goods;
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trade
restrictions;
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imposition
of or changes in duties, quotas, taxes, and other charges on
imports;
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currency
and exchange risks;
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issues
relating to compliance with domestic or international labor
standards;
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concerns
over anti-dumping;
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delays
in shipping; or
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increased
costs of transportation.
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New
requirements could be proposed that would have an impact on the trading status
of certain countries and could include retaliatory duties or other trade
sanctions that, if enacted, could increase the cost of products purchased from
suppliers in such countries or restrict the importation of products from such
countries.
Our
purchasing patterns are dictated by our seasonal inventory
requirements. We typically enter into purchase commitments with our
vendors for seasonal inventories up to six months ahead of when we take delivery
of those products. All of our purchase commitments with foreign
vendors are denominated in U.S. dollars and are settled in U.S.
dollars. These arrangements provide a natural hedge to the impacts of
changes in the value of the U.S. dollar relative to the foreign currencies
during the period from when we enter into purchase commitments with our vendors
to when we take delivery of the products in the countries from which we source
our products. However, changes in the value of the U.S. dollar
relative to other currencies can impact the negotiated pricing for products when
comparing one seasonal buying period to another. We have a network of
countries and vendors from which we can source, but additional weakening of the
U.S. dollar in relation to those foreign currencies could negatively impact the
cost of our foreign-sourced products. The future performance of our
business depends on our foreign suppliers and may be adversely affected by the
factors listed above, which are beyond our control.
Issues
of global workplace conditions may adversely affect our business.
If any
one of our manufacturers or vendors fails to operate in compliance with
applicable laws and regulations, is perceived by the public as failing to meet
certain labor standards in the United States, or employs unfair labor practices,
our business could be adversely affected. Current global workplace
concerns of the public include perceived low wages, poor working conditions, age
of employees, and various other employment standards. These
globalization issues may affect the available supply of certain manufacturers'
products, which may result in increased costs to us. Furthermore, a
negative customer perception of any of our key vendors or their products may
result in a lower customer demand for our apparel.
We
depend on strip shopping center and mall traffic and our ability to identify
suitable store locations for our Retail Stores segment.
Our sales
are dependent in part on a high volume of strip shopping center and mall
traffic. Strip shopping center and mall traffic may be adversely
affected by, among other things, economic downturns, the closing of anchor
stores, or changes in customer shopping preferences. A decline in the
popularity of strip shopping center or mall shopping among our target customers
could have a material adverse effect on our business. To take
advantage of customer traffic and the shopping preferences of our customers we
need to maintain or acquire stores in desirable locations. We cannot
assure that desirable store locations will continue to be
available. Acquisition of additional store locations is also
dependent on our ability to successfully negotiate lease terms for such
locations. In addition, the timely opening of new store locations
could be adversely affected by delays in obtaining necessary permits and
approvals, lack of availability of construction materials and labor, or work
stoppages. Our ability to acquire or maintain desirable store
locations could be adversely affected by financial difficulties encountered by
strip shopping center or mall landlords.
We
may be unable to protect our trademarks and other intellectual property
rights.
We
believe that our trademarks and servicemarks are important to our success and
our competitive position due to their name recognition with our
customers. We devote substantial resources to the establishment and
protection of our trademarks and servicemarks on a worldwide
basis. Nevertheless, there can be no assurance that the actions we
have taken to establish and protect our trademarks and servicemarks will be
adequate to prevent imitation of our products by others or to prevent others
from seeking to block sales of our products as a violation of their trademarks,
servicemarks, or proprietary rights. Also, others may assert rights
in, or ownership of, our trademarks and other proprietary rights and we may not
be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may
not protect proprietary rights to the same extent as do the laws of the United
States.
We
may acquire or divest businesses or enter into joint ventures or strategic
alliances, which may materially affect our business, financial condition, and
operating results.
We
continually evaluate our portfolio of businesses and may decide to buy or sell
businesses or enter into joint ventures or other strategic
alliances. Significant acquisitions and alliances may increase
demands on management, financial resources, and information and internal control
systems. Our success with respect to acquisitions and alliances will
depend, in part, on our ability to manage and integrate acquired businesses and
alliances with our existing businesses and to successfully implement, improve,
and expand our systems, procedures, and controls. In addition, we may
divest existing businesses, which would cause a decline in revenues and may make
our financial results more volatile. If we fail to integrate and
manage acquired businesses successfully or to manage the risks associated with
divestitures, joint ventures, or other alliances, our business, financial
condition, and operating results could be materially and adversely
affected.
OTHER
RISKS
Anti-takeover
provisions in our governing documents and Pennsylvania law may discourage other
companies from attempting to acquire us.
Some
provisions of our articles of incorporation and bylaws and of Pennsylvania law
may discourage some transactions where we would otherwise experience a change in
control, such as provisions that:
|
●
|
do
not permit cumulative voting;
|
|
●
|
permit
our board to issue "blank check" preferred stock without shareholder
approval;
|
|
●
|
require
certain advance notice procedures with regard to the nomination of
candidates for election as directors, other than nominations by or at the
direction of our board;
|
|
●
|
prevent
our directors from being removed without cause except upon super-majority
shareholder approval; and
|
|
●
|
prevent
a holder of 20% or more of our common stock from taking certain actions
without certain approvals.
|
We also
have adopted a Shareholder Rights Plan that expires in April
2009. This plan may make it more difficult and more expensive to
acquire us, and may discourage open market purchases of our common stock or a
non-negotiated tender or exchange offer for such stock and, accordingly, may
limit a shareholder's ability to realize a premium over the market price of our
common stock in connection with any such transaction.
Failure
to comply with the provisions of the Sarbanes-Oxley Act of 2002 could adversely
affect our business.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 we are required to include our
assessment of the effectiveness of our internal control over financial reporting
in our annual reports. Our independent registered public accounting
firm is 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.
We
could be required to repurchase our 1.125% Senior Convertible Notes due May 1,
2014 for cash prior to maturity of the notes.
The
holders of our 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125%
Notes”) could require us to repurchase the principal amount of the notes for
cash before maturity of the notes upon the occurrence of a “fundamental change”
as defined in the prospectus filed in connection with the 1.125%
Notes. Such a repurchase would require significant amounts of cash,
would be subject to important limitations on our ability to repurchase, such as
the risk of our inability to obtain funds for such repurchase, and could
adversely affect our financial condition. See “If we are unable
to maintain the standards necessary for continued listing on the NASDAQ Global
Select Market our common stock could be de-listed. Such de-listing
could have an adverse effect on the market liquidity of our common stock and
could harm our business.” below
for additional information.
If
we are unable to maintain the standards necessary for continued listing on the
NASDAQ Global Select Market our common stock could be de-listed. Such
de-listing could have an adverse effect on the market liquidity of our common
stock and could harm our business.
Our
common stock is currently listed on the NASDAQ Global Select
Market. NASDAQ rules require, among other things, that the minimum
closing bid price of our common stock be at least $1.00. Recently,
our common stock has traded below $1.00 per share. If the minimum
closing bid price of our common stock fails to meet NASDAQ’s minimum bid price
requirement for a period of 30 consecutive business days, NASDAQ may take steps
to de-list our common stock. However, before any de-listing could
occur, we would have an initial 180-day cure period in which to achieve
compliance with the minimum closing bid price. If we were unable to
achieve compliance within this 180-day period, we could transfer to the NASDAQ
Capital Market if we then meet its initial listing criteria (other than the
minimum bid price). Following such transfer, we would have an
additional 180-day period in which to achieve compliance with the minimum bid
price.
On March 23, 2009, NASDAQ suspended the $1.00 per share
minimum closing bid price
requirement through at
least July 20, 2009. Consequently, for as long as NASDAQ’s
rule suspension remains in effect, NASDAQ will not take steps to de-list our
common stock if the minimum closing bid price for our common stock trades below
$1.00 per share during the rule suspension period. We can provide no
assurance, however, that NASDAQ will extend this rule suspension period beyond
July 20, 2009.
Any
de-listing would likely have an adverse impact on the liquidity of our common
stock and, as a result, the market price for our common stock could become more
volatile and significantly decline. We may seek to avoid de-listing
by requesting shareholder approval for a reverse stock
split. However, we can give no assurance that such action would
stabilize the market price, improve the liquidity of our common stock, or would
prevent our common stock from dropping below the NASDAQ minimum closing bid
price requirement in the future. Such consequences may however be
mitigated by our dual-listing on the Chicago Stock Exchange.
Holders
of our 1.125% Notes have the right to require us to repurchase their notes for
cash prior to maturity upon a “fundamental change,” which is deemed to have
occurred if, among other events, our common stock at any time is not listed for
trading on a U.S. national or regional securities exchange. Due to
the above risk that we could be subject to de-listing from the NASDAQ Global
Select Market, we applied for dual-listing on the Chicago Stock Exchange (“CHX”)
and began trading on March 26, 2009. The CHX does not have a $1.00
minimum stock price requirement for listing.
New
accounting rules or regulations or changes in existing rules or regulations
could adversely impact our reported results of operations.
Changes
to existing accounting rules or the adoption of new rules could have an adverse
effect on our reported results of operations.
In
September 2008, the Financial Accounting Standards Board (“FASB”) issued
exposure drafts proposing amendments to Statement of Financial Accounting
Standards (“SFAS”) 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities,” and FASB Interpretation No. 46R, “Consolidation of Variable Interest
Entities.” Currently, transfers of our credit card receivables
in securitization transactions qualify for sale accounting
treatment. We do not consolidate the trust used in our
securitizations for financial reporting purposes because the trust is a
qualifying special purpose entity (“QSPE”). Because the transfers
qualify as sales and the trust is not subject to consolidation under current
generally accepted accounting principles, we do not include the assets and
liabilities of the trust in our consolidated balance sheets.
Under the
proposed amendments, the concept of a QSPE would be eliminated, the
consolidation model for variable interest entities would be modified, and a
continual reassessment of consolidation conclusions would be
required. If adopted, we would be required to adopt the amendments as
of the beginning of Fiscal 2011. As a result of adoption, we could be
required to consolidate the assets and liabilities of our securitization trust,
which could have a material impact on our financial condition and results of
operations.
Changes
in estimates related to our evaluation of property, plant, equipment, goodwill,
or intangible assets for impairment could adversely affect our reported results
of operations.
We make
certain significant assumptions, estimates, and projections related to the
useful lives and valuation of our property, plant, and equipment and the
valuation of goodwill and other intangible assets related to
acquisitions. The carrying amount and/or useful life of these assets
are subject to periodic and/or annual valuation tests for
impairment. Impairment results when the carrying value of an asset
exceeds the undiscounted (or for goodwill and indefinite-lived intangible assets
the discounted) future cash flows associated with the asset. If
actual experience were to differ materially from the assumptions, estimates, and
projections used to determine useful lives or the valuation of property, plant,
equipment, goodwill, or intangible assets, a write-down for impairment of the
carrying value of the assets, or acceleration of depreciation or amortization of
the assets, could result. Such a write-down or acceleration of
depreciation or amortization could have an adverse impact on our reported
results of operations.
Item
1B. Unresolved Staff Comments
Not
applicable.
We lease
all our stores with the exception of three stores that we
own. Typically, our store leases have initial terms of 5 to 10 years
and generally contain provisions for co-tenancies, renewal options, additional
rents based on a percentage of sales, and payment of real estate taxes and
common area charges. In addition, we lease certain of our corporate
office, distribution center, warehouse, and other administrative
facilities. Additional information with respect to our real estate
leases is included in “Item
8. Financial Statements and Supplementary Data: Notes to Consolidated
Financial Statements; NOTE
18. LEASES” below.
With
respect to leased stores open as of January 31, 2009 the following table shows
the number of store leases expiring during the calendar periods indicated,
assuming the exercise of our renewal options:
|
Period
|
Number
of
Leases Expiring
|
|
2009
|
126(1)
|
|
2010
– 2014
|
652
|
|
2015
– 2019
|
512
|
|
2020
– 2024
|
650
|
|
2025
– 2029
|
304
|
|
2030
– 2034
|
42
|
|
Thereafter
|
12
|
|
____________________
|
|
|
(1)Includes
70 stores on month-to-month
leases.
|
|
Additional
information with respect to facilities that we own or lease is as
follows:
|
Size
in
|
Leased/
|
||
|
Sq. Feet
|
Location
|
Owned
|
Description
|
|
1,040,000
|
Greencastle,
IN
|
Owned
|
FASHION
BUG, LANE BRYANT OUTLET, and PETITE SOPHISTICATE OUTLET distribution
center
|
|
513,000
|
White
Marsh, MD
|
Owned
|
LANE
BRYANT and CATHERINES distribution center
|
|
288,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders transitional distribution center(1)
|
|
240,000
|
Wilmington,
NC
|
Leased
|
Crosstown
Traders transitional distribution center(1)
|
|
145,000
|
Bensalem,
PA
|
Owned
|
Corporate
headquarters, technology center, and administrative
offices
|
|
142,000
|
Bensalem,
PA
|
Leased
|
FASHION
BUG, CATHERINES,(2)
LANE BRYANT OUTLET, and PETITE SOPHISTICATE OUTLET home offices and
corporate administrative offices
|
|
135,000
|
Columbus,
OH
|
Leased
|
LANE
BRYANT home office
|
|
125,000
|
Marshfield,
WI
|
Owned
|
FIGI’S
distribution center
|
|
122,000
|
Stevens
Point, WI
|
Leased
|
FIGI’S
distribution and call centers
|
|
108,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders transitional distribution center(1)
|
|
71,000
|
Marshfield,
WI
|
Owned
|
FIGI’S
warehouse
|
|
64,000
|
Marshfield,
WI
|
Owned
|
FIGI’S
administrative offices and call center
|
|
63,000
|
Memphis,
TN
|
Owned
|
Currently
idle(2)
|
|
52,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders transitional offices(1)
|
|
46,000
|
Neillsville,
WI
|
Owned
|
FIGI’S
catalog distribution center
|
|
40,000
|
Marshfield,
WI
|
Owned
|
FIGI’S
warehouse
|
|
36,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders transitional offices(1)
|
|
30,000
|
Miami
Township, OH
|
Leased
|
Spirit
of America National Bank (our wholly-owned credit card bank subsidiary)
and credit operations
|
|
23,000
|
Hong
Kong, PRC
|
Owned
|
International
sourcing offices
|
|
17,000
|
New
York, NY
|
Leased
|
e-commerce
operations (through March 2009)
|
|
16,000
|
Marshfield,
WI
|
Owned
|
FIGI’S
manufacturing facility
|
|
15,000
|
Tucson,
AZ
|
Leased
|
Crosstown
Traders transitional offices(1)
|
|
11,000
|
Hangzhou,
PRC
|
Leased
|
International
sourcing offices
|
|
7,000
|
New
Delhi, India
|
Leased
|
International
sourcing offices
|
|
____________________
|
|||
|
(1)
In September 2008 we sold our Crosstown Traders non-core misses apparel
catalogs to an affiliate of Orchard Brands. In connection with
the sale we retained certain components of their infrastructure and
entered into transitional service agreements with an affiliate of Orchard
Brands. See “Item 1. Business;
DIRECT-TO-CONSUMER SEGMENT” above for additional
information.
|
|||
|
(2)
During Fiscal 2009 we relocated our CATHERINES operations from Memphis,
Tennessee to Bensalem, Pennsylvania in connection with the consolidation
of a number of our operating
functions.
|
|||
Item
3. Legal Proceedings
Other
than ordinary routine litigation incidental to our business, there are no
pending material legal proceedings that we or any of our subsidiaries are a
party to, or of which any of their property is the subject. There are
no proceedings that are expected to have a material adverse effect on our
financial condition or results of operations.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
The
following list contains certain information relative to our executive
officers. There are no family relationships among any of our
executive officers.
Alan Rosskamm, 59, has served
as Chairman of the Board of Directors since June 2008 and as a member of the
Board of Directors since 1992. He has also served as Interim Chief
Executive Officer since July 2008. Before that, he served as Chief
Executive Officer of Jo-Ann Stores, Inc. (“Jo-Ann”) from October 1985 to August
2006 and Chairman of the Board of Directors for Jo-Ann from July 1992 to August
2006, and continues to serve as a member of Jo-Ann’s Board of
Directors. Mr. Rosskamm’s term as a Director expires in June
2009.
Joseph M. Baron, 61, has
served as Executive Vice President and Chief Operating Officer since
2002.
James G. Bloise, 65, has
served as Executive Vice President – Supply Chain Management, Information
Technology, and Shared Business Services since December 2005 and as Senior Vice
President – Supply Chain Management from 2002 to December 2005.
Anthony M. Romano, 46, has
served as Executive Vice President – Business Transformation, since February
2009. Before that he served as Executive Vice President, Chief Supply
Chain Officer for Ann Taylor, Inc. from May 2005 through July 2008, as Executive
Vice President, Corporate Operations for Ann Taylor from March 2004 through May
2005, and as Senior Vice President, Logistics and Purchasing for Ann
Taylor from June 1997 to March 2004.
Eric M. Specter, 51, has
served as Executive Vice President – Chief Financial Officer
since January 1997, and he has been employed by us since 1983.
Colin D. Stern, 60, has served
as Executive Vice President and General Counsel since 1990, and he has been
employed by us since 1989. He has also served as Secretary since
February 1998.
Gale H. Varma, 58, has served
as Executive Vice President – Human Resources since July 2003.
Jay H. Levitt, 51, has served
as President – Fashion Bug since September 2008. Before that, he held
two consulting positions with international footwear retailers from April 2006 to September 2008
and was a managing partner at Gentsch Capital partners, a private equity firm,
from December 2005 to September 2008. From April 2001 to
September 2005 he
was Chief Executive Officer for the May Merchandising division of May Department
Stores Company.
Brian Woolf, 60, has served as
President – Lane Bryant since July 2008. Before that, he served as
Chairman of the Board and Chief Executive Officer for Cache, a women's specialty
retailer, from October 2000 to January 2008.
John J. Sullivan, 62, has
served as Senior Vice President – Corporate Controller since April 2007 and as
Vice President –
Corporate Controller since October 1998.
Our
common stock is traded on the over-the-counter market and quoted on the NASDAQ
Global Select Market (“NASDAQ”) and, as of March 26, 2009 on the Chicago Stock
Exchange (“CHX”) under the symbol “CHRS.” The following table sets
forth the high and low sale prices for our common stock during the indicated
periods, as reported by NASDAQ.
|
Fiscal 2009
|
Fiscal 2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
1st
Quarter
|
$ | 6.83 | $ | 4.26 | $ | 13.38 | $ | 11.33 | ||||||||
|
2nd
Quarter
|
6.20 | 4.14 | 12.92 | 9.16 | ||||||||||||
|
3rd
Quarter
|
6.35 | 1.01 | 9.72 | 6.79 | ||||||||||||
|
4th
Quarter
|
2.88 | 0.57 | 7.34 | 4.01 | ||||||||||||
The
approximate number of holders of record of our common stock as of March 23, 2009
was 1,615. This number excludes individual stockholders holding stock
under nominee security position listings.
We have
not paid any dividends since 1995 and we do not expect to declare or pay any
dividends on our common stock in the near future. The payment of
future dividends is within the discretion of our Board of Directors and will
depend upon our future earnings, if any, our capital requirements, our financial
condition, and other relevant factors. Our existing revolving credit
facility allows the payment of dividends on our common stock subject to
maintaining a minimum level of Excess Availability (as defined in the facility
agreement) for 30 days before and immediately after the payment of such
dividends. (See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations;
FINANCIAL
CONDITION; Financing;
Long-term
Debt” and “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE
8. LONG-TERM DEBT” below).
Information
regarding our equity compensation plans appears in “Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” below.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers:
|
Total
|
Maximum
|
|||||||||||||||
|
Number
|
Number
of
|
|||||||||||||||
|
of
Shares
|
Shares
that
|
|||||||||||||||
|
Total
|
Purchased
as
|
May
Yet be
|
||||||||||||||
|
Number
|
Average
|
Part
of Publicly
|
Purchased
|
|||||||||||||
|
of
Shares
|
Price
Paid
|
Announced
Plans
|
Under
the Plans
|
|||||||||||||
|
Period
|
Purchased
|
per Share
|
or Programs(2)
|
or Programs(2)
|
||||||||||||
|
November
2, 2008 through
|
||||||||||||||||
|
November 29,
2008
|
6,926 | (1) | $ | 1.29 | – | |||||||||||
|
November
30, 2008 through
|
||||||||||||||||
|
January 3, 2009
|
39 | (1) | 1.60 | – | ||||||||||||
|
January
4, 2009 through
|
||||||||||||||||
|
January 31,
2009
|
2,214 | (1) | 1.28 | – | ||||||||||||
|
Total
|
9,179 | $ | 1.29 | – | (2) | |||||||||||
|
____________________
|
||||||||||||||||
|
(1)
Shares withheld for the payment of payroll taxes on employee stock awards
that vested during the period.
|
||||||||||||||||
|
(2)
On November 8, 2007 we publicly announced that our Board of Directors
granted authority to repurchase shares of our common stock up to an
aggregate value of $200 million. Shares may be purchased in the open
market or through privately-negotiated transactions, as market conditions
allow. As of February 2, 2008 no shares had been purchased under this
plan. During the period from February 3, 2008 through May 3, 2008 we
repurchased a total of 505,406 shares of stock ($5.21 average price paid
per share) in the open market under this program. During the period
from May 4, 2008 through January 31, 2009 no shares were purchased under
this plan. As of January 31, 2009, $197,364,592 was available for
future repurchases under this program. This repurchase program has no
expiration date.
|
||||||||||||||||
The
following graph shows a five-year comparison of cumulative total returns on our
common stock, the Russell 2000 Composite Index, and the Dow Jones U.S. Retailers
– Apparel Index:
COMPARISON
OF FIVE YEAR CUMULATIVE TOTAL RETURN*
Among
Charming Shoppes, Inc., The Russell 2000 Index
And
The Dow Jones U.S. Retailers – Apparel Index
* Assumes
$100 invested on January 31, 2004 in Charming Shoppes, Inc. common stock, the
Russell 2000 Index, or the Dow Jones U.S. Retailers – Apparel Index, including
reinvestment of dividends.
The above
chart was plotted using the following data:
|
1/31/04
|
1/29/05
|
1/28/06
|
2/3/07
|
2/2/08
|
1/31/09
|
|||||||||||||||||||
|
Charming
Shoppes, Inc.
|
$ | 100 | $ | 137 | $ | 214 | $ | 225 | $ | 117 | $ | 18 | ||||||||||||
|
Russell
2000 Composite Index
|
100 | 107 | 129 | 144 | 132 | 81 | ||||||||||||||||||
|
Dow
Jones U.S. Retailers – Apparel Index
|
100 | 121 | 138 | 167 | 132 | 69 | ||||||||||||||||||
The
following table presents selected financial data taken from our audited
financial statements for our five fiscal years ended as of January 29, 2005
through January 31, 2009 and should be read in conjunction with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
and “Item
8. Financial Statements and Supplementary Data.”
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR
COMPARATIVE SUMMARY
|
Year
Ended
|
||||||||||||||||||||
|
Jan.
31,
|
Feb.
2,
|
Feb.
3,
|
Jan.
28,
|
Jan.
29,
|
||||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
2009
|
2008
|
2007(1)
|
2006
|
2005
|
|||||||||||||||
|
Operating
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 2,474,898 | $ | 2,722,462 | $ | 2,751,845 | $ | 2,553,645 | $ | 2,334,736 | ||||||||||
|
Cost
of goods sold, buying, catalog, and
|
||||||||||||||||||||
|
occupancy
expenses
|
1,846,954 | 1,954,495 | 1,890,565 | 1,763,693 | 1,642,650 | |||||||||||||||
|
Selling,
general, and administrative expenses
|
692,110 | 719,107 | 699,009 | 638,403 | 577,301 | |||||||||||||||
|
Impairment
of store assets, goodwill, and trademarks
|
81,498 | (2) | 27,197 | (2) | 0 | 0 | 0 | |||||||||||||
|
Restructuring
and other
charges
|
33,145 | (3) | 5,332 | (3) | 0 | 0 | 605 | (4) | ||||||||||||
|
Total
operating
expenses
|
2,653,707 | 2,706,131 | 2,589,574 | 2,402,096 | 2,220,556 | |||||||||||||||
|
Income/(loss)
from
operations
|
(178,809 | ) | 16,331 | 162,271 | 151,549 | 114,180 | ||||||||||||||
|
Other
income
|
4,430 | 8,793 | 8,273 | 7,474 | 3,098 | |||||||||||||||
|
Interest
expense
|
(8,795 | ) | (10,552 | ) | (14,746 | ) | (17,885 | ) | (15,610 | ) | ||||||||||
|
Income/(loss)
from continuing operations
|
||||||||||||||||||||
|
before income taxes and
extraordinary item
|
(183,174 | ) | 14,572 | 155,798 | 141,138 | 101,668 | ||||||||||||||
|
Income
tax
provision/(benefit)
|
(13,885 | ) | 13,858 | 53,839 | 48,718 | 37,142 | ||||||||||||||
|
Income/(loss)
from continuing operations
|
||||||||||||||||||||
|
before extraordinary
item
|
(169,289 | ) | 714 | 101,959 | 92,420 | 64,526 | ||||||||||||||
|
Income/(loss)
from discontinued operations, net of income
|
||||||||||||||||||||
|
taxes(5)
|
(74,922 | ) | (85,039 | ) | 6,964 | 6,971 | 0 | |||||||||||||
|
Extraordinary
item, net of income
taxes
|
0 | 912 | 0 | 0 | 0 | |||||||||||||||
|
Net
income/(loss)
|
$ | (244,211 | ) | $ | (83,413 | ) | $ | 108,923 | $ | 99,391 | $ | 64,526 | ||||||||
|
Basic
income/(loss) per share:
|
||||||||||||||||||||
|
Continuing
operations before extraordinary item
|
$ | (1.48 | ) | $ | .01 | $ | .83 | $ | .77 | $ | .56 | |||||||||
|
Discontinued
operations, net of income taxes(5)
|
(.65 | ) | (.70 | ) | .06 | .06 | .00 | |||||||||||||
|
Net
income/(loss)(6)
|
$ | (2.13 | ) | $ | (.69 | ) | $ | .89 | $ | .83 | $ | .56 | ||||||||
|
Basic
weighted average common shares outstanding
|
114,690 | 121,160 | 122,388 | 119,831 | 116,196 | |||||||||||||||
|
Diluted
income/(loss) per share:
|
||||||||||||||||||||
|
Continuing
operations before extraordinary item
|
$ | (1.48 | ) | $ | .01 | $ | .76 | $ | .71 | $ | .52 | |||||||||
|
Discontinued
operations, net of income taxes(5)
|
(.65 | ) | (.69 | ) | .05 | .05 | .00 | |||||||||||||
|
Net
income/(loss)(6)
|
$ | (2.13 | ) | $ | (.68 | ) | $ | .81 | $ | .76 | $ | .52 | ||||||||
|
Diluted
weighted average common shares and
|
||||||||||||||||||||
|
equivalents
outstanding
|
114,690 | 122,426 | 139,763 | 137,064 | 133,174 | |||||||||||||||
|
_______________________
|
||||||||||||||||||||
|
(1)
Fiscal 2007 consisted of 53 weeks.
|
||||||||||||||||||||
|
(2)
See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial
Statements; NOTE
13. IMPAIRMENT OF STORE ASSETS, GOODWILL, AND TRADEMARKS” below.
|
||||||||||||||||||||
|
(3)
See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial
Statements; “NOTE 14. RESTRUCTURING AND
OTHER CHARGES”
below.
|
||||||||||||||||||||
|
(4)
Additional lease termination costs related to a cost reduction plan
implemented and substantially completed during Fiscal
2004.
|
||||||||||||||||||||
|
(5)
See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial
Statements; NOTE
2. DISCONTINUED OPERATIONS” below.
|
||||||||||||||||||||
|
(6)
Results may not add due to rounding.
|
||||||||||||||||||||
CHARMING
SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR
COMPARATIVE SUMMARY
(Continued)
|
Year
Ended
|
||||||||||||||||||||
|
Jan.
31,
|
Feb.
2,
|
Feb.
3,
|
Jan.
28,
|
Jan.
29,
|
||||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
2009
|
2008
|
2007(2)
|
2006
|
2005
|
|||||||||||||||
|
Performance
Data(1):
|
||||||||||||||||||||
|
Net
return on average stockholders’ equity
|
(28.3 | )% | 0.1 | % | 11.6 | % | 12.3 | % | 10.1 | % | ||||||||||
|
Net
return on average total
assets
|
(12.2 | ) | 0.0 | 6.2 | 6.5 | 5.2 | ||||||||||||||
|
As
Of
|
||||||||||||||||||||
|
Jan.
31,
|
Feb.
2,
|
Feb.
3,
|
Jan.
28,
|
Jan.
29,
|
||||||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008(3)
|
2007(3)
|
2006(3)
|
2005
|
|||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Total
assets
|
$ | 1,279,692 | $ | 1,613,304 | $ | 1,705,723 | $ | 1,572,583 | $ | 1,303,771 | ||||||||||
|
Current
portion – long-term
debt
|
6,746 | 8,827 | 10,887 | 14,765 | 16,419 | |||||||||||||||
|
Long-term
debt
|
305,635 | 306,169 | 181,124 | 191,979 | 208,645 | |||||||||||||||
|
Working
capital
|
382,651 | 495,096 | 460,620 | 344,229 | 413,989 | |||||||||||||||
|
Stockholders’
equity
|
465,866 | 730,444 | 947,538 | 814,348 | 694,464 | |||||||||||||||
|
____________________
|
||||||||||||||||||||
|
(1)
Based on net income/(loss) from continuing operations.
|
||||||||||||||||||||
|
(2)
Fiscal 2007 consisted of 53 weeks.
|
||||||||||||||||||||
|
(3)
Includes
discontinued operations (see “Item
8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; NOTE 2.
DISCONTINUED OPERATIONS”
below).
|
||||||||||||||||||||
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) should be read in conjunction with the financial
statements and accompanying notes included in “Item 8. Financial
Statements and Supplementary Data” below. As used in this
report the terms “Fiscal 2009,” “Fiscal 2008,” and “Fiscal 2007” refer to our
fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007,
respectively. Fiscal 2009 and Fiscal 2008 each consisted of 52 weeks,
while Fiscal 2007 consisted of 53 weeks. The term “Fiscal 2010”
refers to our fiscal year which will end on January 30, 2010. The
terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and,
where applicable, our consolidated subsidiaries.
FORWARD-LOOKING
STATEMENTS
With the
exception of historical information, the matters contained in the following
analysis and elsewhere in this report are “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements may include, but are not limited to,
projections of revenues, income or loss, cost reductions, capital expenditures,
liquidity, divestitures, financing needs or plans, store closings, merchandise
strategy, and plans for future operations, as well as assumptions relating to
the foregoing. The words “expect,” “could,” “should,” “project,”
“estimate,” “predict,” “anticipate,” “plan,” “intend,” “believes,” and similar
expressions are also intended to identify forward-looking
statements.
We
operate in a rapidly changing and competitive environment. New risk
factors emerge from time to time and it is not possible for us to predict all
risk factors that may affect us. Forward-looking statements are
inherently subject to risks and uncertainties, some of which we cannot predict
or quantify. Future events and actual results, performance, and
achievements could differ materially from those set forth in, contemplated by,
or underlying the forward-looking statements, which speak only as of the date on
which they were made. We assume no obligation to update or revise any
forward-looking statement to reflect actual results or changes in, or additions
to, the factors affecting such forward-looking statements. Given
those risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
Factors
that could cause our actual results of operations or financial condition to
differ from those described in this report include, but are not necessarily
limited to, the following, which are discussed in more detail in “Item 1A. Risk
Factors,” above:
|
●
|
Our
business is dependent upon our ability to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the
future.
|
|
●
|
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 implementation of our business plan for
increased profitability and growth in our Retail Stores or
Direct-to-Consumer segments and we may be unable to successfully implement
our plan to improve merchandise assortments. Recent changes in
management may fail to achieve improvement in our operating
results.
|
|
●
|
A
continuing slowdown in the United States economy, an uncertain economic
outlook, and fluctuating energy costs could lead to reduced consumer
demand for our products in the future.
|
|
●
|
Our
inability to successfully manage labor costs, occupancy costs, or other
operating costs, or our inability to take advantage of opportunities to
reduce operating costs, could adversely affect our operating margins and
our results of operations. We cannot assure the successful
implementation of our planned cost reduction and capital budget reduction
plans or the realization of our anticipated annualized expense savings
from our restructuring programs. We may be unable to obtain
adequate insurance for our operations at a reasonable
cost.
|
|
●
|
We
are subject to the Fair Labor Standards Act and various state and Federal
laws and regulations governing such matters as minimum wages, exempt
status classification, overtime, and employee benefits. Changes
in Federal or state laws or regulations regarding minimum wages,
unionization, or other employee benefits could cause us to incur
additional wage and benefit costs, which could adversely affect our
results of operations. Changes in legislation limiting interest
rates and other credit card charges that can be billed on credit card
accounts could negatively impact the operating margins of our credit
operation.
|
|
●
|
We
depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents, and on
our credit card securitization facilities. The current global
financial crisis could adversely affect our ability or the ability of our
vendors to secure adequate credit financing. If we or our
vendors are unable to obtain sufficient financing at an affordable cost,
our ability to merchandise our retail stores or e-commerce businesses
could be adversely affected.
|
|
●
|
We
plan to refinance our maturing credit card term securitization series with
our credit conduit facilities, which are renewed annually, or through the
issuance of a new term series. To the extent that our conduit
facilities are not renewed they would begin to amortize and we would
finance this amortization using our committed revolving credit facilities
to the extent available. There is no assurance that we can
refinance or renew our conduit facilities on terms comparable to our
existing facilities or that there would be sufficient availability under
our revolving credit facilities for such financing. Without
adequate liquidity, our ability to offer our credit program to our
customers and consequently our financial condition and results of
operations, would be adversely affected.
|
|
●
|
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
cannot assure the successful implementation of our business plan for the
development of our core brands and transformation to a vertical store
model, that we will realize increased profitability through operating
under a vertical store model, or that we will achieve our objectives as
quickly or as effectively as we hope. We cannot assure the
successful sale of our FIGI’S catalog.
|
|
●
|
We
depend on the efforts and abilities of our executive officers and their
management teams and we may not be able to retain or replace these
employees or recruit additional qualified personnel. The
inability to find a suitable permanent replacement for our Interim Chief
Executive Officer within a reasonable time period could have a material
adverse affect on our business.
|
|
●
|
Our
business plan is largely dependent upon continued growth in the plus-size
women’s apparel market, which may not occur.
|
|
●
|
We
depend on our distribution and fulfillment centers and third-party freight
consolidators and service providers, and could incur significantly higher
costs and longer lead times associated with distributing our products to
our stores and shipping our products to our e-commerce and catalog
customers if operations at any of these locations were to be disrupted for
any reason.
|
|
●
|
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.
|
|
●
|
Successful
operation of our e-commerce websites and our catalog business is dependent
on our ability to maintain efficient and uninterrupted customer service
and fulfillment operations. We cannot assure the successful
implementation of our new and upgraded e-commerce platform and the
consolidation of our e-commerce business at our Bensalem, Pennsylvania
headquarters.
|
|
●
|
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
manufacturers may be unable to manufacture and deliver merchandise to us
in a timely manner or to meet our quality standards. In
addition, if any one of our manufacturers or vendors fails to operate in
compliance with applicable laws and regulations, is perceived by the
public as failing to meet certain labor standards in the United States, or
employs unfair labor practices, our business could be adversely
affected.
|
|
●
|
Our
long-term growth plan depends on our ability to open and profitably
operate new retail stores, to convert, where applicable, the formats of
existing stores on a profitable basis, and continue to expand our outlet
distribution channel. Our retail stores depend upon a high
volume of traffic in the strip centers and malls in which our stores are
located, and our future retail store growth is dependent upon the
availability of suitable locations for new stores. In addition,
we will need to identify, hire, and retain a sufficient number of
qualified personnel to work in our stores. We cannot assure
that desirable store locations will continue to be available, or that we
will be able to hire and retain a sufficient number of suitable sales
associates at our stores.
|
|
●
|
We
may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive
position.
|
|
●
|
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.
|
|
●
|
We
continually evaluate our portfolio of businesses and may decide to acquire
or divest businesses or enter into joint venture or strategic
alliances. If we fail to integrate and manage acquired
businesses successfully or fail to manage the risks associated with
divestitures, joint ventures, or other alliances, our business, financial
condition, and operating results could be materially and adversely
affected.
|
|
●
|
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 upon the occurrence of a
“fundamental change” as defined in the prospectus filed in connection with
the 1.125% Notes. Such a repurchase would require significant
amounts of cash, would be subject to important limitations on our ability
to repurchase, such as the risk of our inability to obtain funds for such
repurchase, and could adversely affect our financial
condition.
|
|
●
|
If
the minimum closing bid price of our common stock fails to meet NASDAQ’s
minimum closing bid price requirement of $1.00 per share for a consecutive
30-day period, NASDAQ may take steps to de-list our common
stock. On March 23, 2009, NASDAQ suspended the $1.00 per share
minimum closing bid price requirement through at least July 20,
2009. We can provide no assurance, however, that NASDAQ will
extend this rule suspension period beyond July 20, 2009. Such a de-listing
would likely have an adverse impact on our common stock. We may
seek to avoid this by requesting shareholder approval for a reverse stock
split. However, we can give no assurance that such action would
stabilize the market price, improve the liquidity of our common stock, or
would prevent our common stock from dropping below the NASDAQ minimum bid
price requirement in the future. Such consequences may however
be mitigated by our dual-listing on the Chicago Stock
Exchange.
Holders
of our 1.125% Notes have the right to require us to repurchase their notes
for cash prior to maturity upon a “fundamental change,” which is deemed to
have occurred if, among other events, our common stock at any time is not
listed for trading on a U.S. national or regional securities
exchange. Due to the above risk that we could be subject to
de-listing from the NASDAQ Global Select Market, we applied for
dual-listing on the Chicago Stock Exchange (“CHX”) and began trading on
March 26, 2009. The CHX does not have a $1.00 minimum stock
price requirement for listing.
|
|
●
|
Changes
to existing accounting rules or the adoption of new rules could have an
adverse impact on our reported results of operations.
|
|
●
|
We
make certain significant assumptions, estimates, and projections related
to the useful lives and valuation of our property, plant, and equipment
and the valuation of goodwill and other intangible assets related to
acquisitions. The carrying amount and/or useful life of these
assets are subject to periodic and/or annual valuation tests for
impairment. Impairment results when the carrying value of an
asset exceeds the undiscounted (or for goodwill and indefinite-lived
intangible assets the discounted) future cash flows associated with the
asset. If actual experience were to differ materially from the
assumptions, estimates, and projections used to determine useful lives or
the valuation of property, plant, equipment, or intangible assets, a
write-down for impairment of the carrying value of the assets, or
acceleration of depreciation or amortization of the assets, could
result. Such a write-down or acceleration of depreciation or
amortization could have an adverse impact on our reported results of
operations. See “CRITICAL ACCOUNTING POLICIES;
Impairment
of Property, Plant, and Equipment, Intangible Assets, and Goodwill”
and “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial
Statements; NOTE
13. IMPAIRMENT OF STORE ASSETS, GOODWILL, AND
TRADEMARKS” below.
|
CRITICAL
ACCOUNTING POLICIES
We have
prepared the financial statements and accompanying notes included elsewhere in
this report in conformity with United States generally accepted accounting
principles. This requires us to make estimates and assumptions that
affect the amounts reported in our financial statements and accompanying
notes. These estimates and assumptions are based on historical
experience, analysis of current trends, and various other factors that we
believe to be reasonable under the circumstances. Actual results
could differ from those estimates under different assumptions or
conditions.
We
periodically reevaluate our accounting policies, assumptions, and estimates and
make adjustments when facts and circumstances warrant. Our
significant accounting policies are described in the notes accompanying the
financial statements included elsewhere in this report. However, we
consider the following accounting policies and related assumptions to be more
critical to the preparation of our financial statements and accompanying notes
and involve the most significant management judgments and
estimates.
Revenue
Recognition
We
recognize revenue in accordance with SEC Codification of Staff Accounting
Bulletins Topic 13, “Revenue
Recognition.” Our revenues from merchandise sales are net of
sales discounts, returns, and allowances and exclude sales tax. We
record a reserve for estimated future sales returns based on an analysis of
actual returns and we defer recognition of layaway sales to the date of
delivery. A change in our actual rates of sales returns and layaway
sales experience would affect the level of revenue recognized.
Catalog
and e-commerce revenues include shipping and handling fees billed to
customers. These revenues are recognized after all of the following
have occurred: execution of the customer’s order, authorization of the
customer’s credit card has been received, and the product has been shipped to
and received by the customer. We defer recognition of revenue for
product shipped but not yet received by the customer based on an estimate of the
number of days the shipments are in-transit. A change in our actual
rates of sales returns and/or the time it takes for customers to receive our
products would affect the level of revenue recognized.
We sell
gift cards to our Retail Stores segment customers through our stores,
store-related websites, and through third parties. We recognize
revenue from gift cards when the gift card is redeemed by the
customer. Our gift cards do not currently contain expiration dates or
inactivity fees. We recognize gift card breakage (unused gift card
balances for which we believe the likelihood of redemption is remote) as net
sales based on an analysis of historical redemption patterns. A
change in the historical pattern of gift card redemptions would affect the level
of revenue recognized.
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. Certain loyalty card customers earn points for
purchases which may be redeemed for merchandise coupons upon the accumulation of
a specified number of points. No membership fees are charged in
connection with these programs. Costs we incur in connection with
administering these programs are recognized in cost of goods sold as
incurred.
Accounts
Receivable
Our
FIGI’S catalog offers credit to its customers using interest-free three-payment
credit terms over three months, with the first payment due on a defined date 30
to 60 days after a stated holiday. A substantial portion of the
FIGI’S catalog business is conducted during the December holiday
season. We evaluate the collectibility of our accounts receivable
based on a combination of factors, including analysis of historical trends,
aging of accounts receivable, write-off experience, past history of recoveries,
and expectations of future performance. Significant changes in future
performance relative to our historical experience could have an impact on the
levels of our accounts receivable valuation reserves.
Inventories
We value
our merchandise inventories at the lower of cost or market using the retail
inventory method (average cost basis). We adjust the valuation of
inventories at cost and the resulting gross margins in proportion to markdowns
and shrinkage on our retail inventories. The retail inventory method
results in the valuation of inventories at the lower of cost or market when
markdowns are currently taken as a reduction of the retail value of
inventories. The majority of these “permanent markdowns,” and the
resulting adjustments to the carrying cost of our inventories, are recorded in
our inventory costing system when the actual ticketed selling price of an item
is reduced and are therefore not subject to significant estimates on the part of
management. However, at the end of each quarter we perform a review
of merchandise that is currently on promotional markdowns (which is considered a
“temporary markdown”) and identify at an SKU-number level the merchandise that
will not be sold again above its current promotional price. As such
promotional markdowns have not yet been recorded in the perpetual inventory
system as permanent markdowns, we record a markdown reserve to properly record
the inventory at the lower of cost or market using the retail inventory
method. Our estimation of markdown reserves involves certain
management judgments and estimates that can significantly affect the ending
inventory valuation at cost, as well as the resulting gross
margins. The markdown reserve will fluctuate depending on the level
of seasonal merchandise on-hand, the level of promotional activity, and
management’s estimate of our ability to liquidate such promotional inventory
above its current promotional price in the future. Our failure to
properly estimate markdowns currently could result in an overstatement or
understatement of inventory cost under the lower of cost or market
principle. Our total reserves for these types of markdowns were $12.0
million as of January 31, 2009 and $10.6 million as of February 2,
2008. Historically, we have not had significant variances between our
estimates of these markdown reserves and the actual markdown experience for
which these reserves were established.
We
perform physical inventory observations at least once annually at each of our
stores. For stores with higher-than-average inventory loss rates, we
may perform physical inventory observations more frequently. Actual
inventory losses are recorded in our financial statements at the time these
physical inventory observations are performed. During the periods
between our physical inventory observations and our period-end reporting dates,
we record a reserve for estimated inventory losses (shrinkage). Our
estimates for shrinkage are based on actual inventory losses identified from the
results of physical inventory counts at our stores and distribution
centers. Historically, our physical inventory losses have averaged
between 1.5% and 2.5% of our net sales. Our reserves for estimated
inventory shrinkage were $2.0 million as of January 31, 2009 and $3.5 million as
of February 2, 2008.
FASB
Emerging Issues Task Force (“EITF”) Issue 02-16, “Accounting by a Customer (Including
a Reseller) for Cash Consideration Received from a
Vendor,” addresses the accounting for cash consideration received
from a vendor, including both a reseller of the vendor’s products and an entity
that purchases the vendor’s products from a reseller. In accordance
with the provisions of EITF Issue 02-16 we defer into inventory cash received
from vendors and recognize these amounts as a reduction of cost of goods sold as
the inventory is sold. We defer the recognition of cash received from
vendors during interim periods in order to better match the recognition of the
cash consideration to the period the inventory is sold.
Impairment
of Property, Plant, and Equipment, Intangible Assets, and Goodwill
We
evaluate the recoverability of our property, plant, and equipment and
amortizable intangible assets in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” Under SFAS No.
144 we are required to assess our long-lived assets for recoverability whenever
events or changes in circumstances indicate that the carrying amounts of
long-lived assets may not be recoverable. We consider historical
performance and estimated future results in our evaluation of potential
impairment and compare the carrying amount of the asset to the estimated future
undiscounted cash flows expected to result from the use of the
asset. If the estimated future undiscounted cash flows are less than
the carrying amount of the asset, we write down the asset to its estimated fair
value and recognize an impairment loss. Our estimate of fair value is
generally based on either appraised value or the present value of future cash
flows, based on a number of assumptions and estimates.
We test
our goodwill and our indefinite-lived intangible assets in accordance with the
provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets.” We re-evaluate goodwill and other intangible assets
for impairment at least annually or more frequently if there is an indication of
possible impairment. We perform our annual impairment analysis during
the fourth quarter of our fiscal year because our fourth quarter operating
results are significant to us and are an integral part of our
analyses. In addition, we prepare our financial plan for the
following fiscal year, which is an important part of our impairment analyses,
during the fourth quarter of our fiscal year. If our re-evaluation
determines that our goodwill or other intangible assets have become impaired, a
write-down of the carrying value of the assets would result.
The
process of evaluating goodwill for impairment involves the determination of the
fair value of our reporting units. Inherent in such fair value
determinations are certain judgments and estimates relating to future cash
flows, including our interpretation of current economic indicators and market
valuations, and assumptions about our strategic plans with regard to our
operations. To the extent that additional information arises, market
conditions change or our strategies change, it is possible that our conclusion
regarding whether existing goodwill is impaired could change and result in a
material effect on our consolidated financial position or results of
operations.
We rely
principally on a discounted cash flow method of the income approach in
estimating the fair value of our reporting units. We have
consistently applied this methodology in previous goodwill impairment tests
because we have concluded that the methodology is the best measure of fair value
and is a methodology that market participants would use in valuing these
reporting units. The income approach values a business enterprise by
discounting future debt-free net cash flows available to the providers of the
invested capital to their present worth at a discount rate that reflects both
the current return requirements of the market and the risks inherent in the
specific investment. The discounted cash flow method estimates annual
future cash flows, and then discounts the cash flows to present
value. The discounted cash flow methodology uses our projections of
financial performance. The most significant assumptions used in the
discounted cash flow methodology are the discount rate, the terminal value, and
expected future revenues, gross margins, and operating margins, which vary among
our reporting units.
For
purposes of our annual impairment test of goodwill performed as of January 31,
2009 we utilized a discount rate of 14.4%. Our estimates of future
cash flows are based on our current budgets and are reflective of our current
expectations as to sales growth rates and profitability. We believe
that our estimates are appropriate under the circumstances. If
economic conditions continue to deteriorate and negatively affect or results of
operations, we may recognize additional goodwill impairments.
Our
identifiable intangible assets consist primarily of trademarks. These
intangible assets arise primarily from the allocation of the purchase price of
businesses acquired to identifiable intangible assets based on their respective
fair market values at the date of acquisition. Amounts assigned to
identifiable intangible assets, and their related useful lives, are derived from
established valuation techniques and management estimates.
Consistent
with prior periods and with the methodology used to initially establish and
record the fair value of the trademarks noted above, we have applied the
“relief-from-royalty” method of the income approach in measuring the fair value
of our tradenames in the current-year impairment test. Under this
method it is assumed that a company, without the rights to the trade names,
would license the right to utilize them for business purposes. The
fair value is estimated by discounting the hypothetical royalty payments to
their present value over the estimated economic life of the
asset. These estimates can be affected by a number of factors
including, but not limited to, general economic conditions and availability of
market information, as well as our profitability. The most
significant assumptions used by management in evaluating the fair value of our
tradenames are the discount rate, the royalty rate, and estimated future
revenues associated with the use of the tradename.
For
purposes of our annual impairment test of our tradenames performed as of January
31, 2009 we utilized a discount rate of 14.4% and a royalty rate in the range of
3% – 5%. Our estimates of future revenues associated with our
tradenames are based on our current budgets and are reflective of our current
expectations as to sales growth rates. We believe that our estimates
are appropriate in the circumstances. Given the significant excess of
fair value over the book values of our tradenames as derived from our discounted
cash flow analysis we have determined, based on the performance of various
sensitivity analyses, that our conclusion would not be affected by other
outcomes that are reasonably likely to occur.
Although
we believe we have sufficient current and historical information available to us
to test for impairment, it is possible that actual cash flows could differ from
the estimated cash flows used in our impairment tests.
As a
result of the significant decrease in the market value of our common stock
during Fiscal 2009 and the impact of the current economic environment on our
operating results, we evaluated our property, plant, and equipment, intangible
assets, and goodwill for impairment during the Fiscal 2009 Third Quarter and
Fiscal 2009 Fourth Quarter. During Fiscal 2009 we recognized non-cash
impairment losses in connection with approximately 272 stores with asset
carrying values in excess of their forecasted undiscounted cash
flows. In addition, during Fiscal 2009 we recognized non-cash
impairment losses in connection with our CATHERINES goodwill and certain
acquired trademarks and tradenames. During Fiscal 2008 we recognized
non-cash impairment losses in connection with our Crosstown Traders goodwill and
intangible assets. See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES; Goodwill and
Other Intangible Assets,” “NOTE 5. PROPERTY,
EQUIPMENT, AND LEASEHOLD IMPROVEMENTS,” “NOTE 6. INTANGIBLE ASSETS
AND GOODWILL,”
and “NOTE
13. IMPAIRMENT OF STORE ASSETS, GOODWILL, AND TRADEMARKS”
below for additional information regarding our property, plant, and
equipment, goodwill, and intangible assets and the impairment losses recognized
during Fiscal 2009 and Fiscal 2008.
Asset
Securitization
Our asset
securitization program primarily involves the sale of proprietary credit card
receivables to a special-purpose entity which in turn transfers the receivables
to a separate and distinct qualified special-purpose entity (“QSPE”). The
QSPE’s assets and liabilities are not consolidated in our balance sheet and the
receivables transferred to the QSPEs are isolated for purposes of the
securitization program. We use asset securitization to fund the
credit card receivables generated by our proprietary credit card programs.
See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE
17. ASSET SECURITIZATION” below for additional
discussion of our asset securitization facility.
We
account for our asset securitizations in accordance with SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” and
SFAS No. 156, “Accounting and
Servicing of Financial Assets – an amendment of FASB Statement No.
140.” We record a beneficial interest, referred to as the
interest-only strip (“I/O strip”), which represents the estimated present value
of cash flows we expect to receive over the period the receivables are
outstanding. In addition to the I/O strip, we recognize a servicing
liability since the servicing fees we expect to receive from the securitizations
do not provide adequate compensation for servicing the
receivables. The servicing liability represents the present value of
the excess of the costs of servicing over the servicing fees we expect to
receive and is recorded at estimated fair value. We use the same
discount rate and estimated life assumptions in valuing the I/O strip and the
servicing liability. We amortize the I/O strip and the servicing
liability on a straight-line basis over the expected life of the credit card
receivables.
We use
certain valuation assumptions related to the average life of the receivables
sold and anticipated credit losses, as well as an appropriate market discount
rate, in determining the estimated value of the I/O strip and the servicing
liability. We estimate the values for these assumptions using
historical data, the impact of the current economic environment on the
performance of the receivables sold, and the impact of the potential volatility
of the current market for similar instruments in assessing the fair value of
these retained interests. Changes in the average life of the
receivables sold, discount rate, and credit-loss percentage could cause actual
results to differ materially from the estimates, and changes in circumstances
could result in significant future changes to the assumptions currently being
used.
The
following table presents the decrease in our I/O strip receivable that would
result from hypothetical adverse changes of 10% and 20% in the assumptions used
to determine the fair value of the I/O strip:
|
(In
millions)
|
10% Change
|
20% Change
|
||||||
|
Assumption:
|
||||||||
|
Payment
rate
|
$ | 1.6 | $ | 2.8 | ||||
|
Residual
cash flows discount
rate
|
0.1 | 0.1 | ||||||
|
Credit
loss
percentage
|
1.6 | 3.2 | ||||||
Costs
Associated With Exit or Disposal Activities
In
accordance with the provisions of SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities,” we recognize
liabilities for costs associated with an exit or disposal activity when the
liabilities are incurred. Commitment to a plan by itself does not
create an obligation that meets the definition of a liability. We
recognize one-time benefit payments over time rather than “up front” if the
benefit arrangement requires employees to render future service beyond a
“minimum retention period.” The liability for one-time benefits is
recognized as employees render service over the future service period, even if
the benefit formula used to calculate an employee’s termination benefit is based
on length of service. We use fair value for the initial measurement
of liabilities associated with exit or disposal activities. The
provisions of SFAS No. 146 result in the deferral of recognition of certain
costs for restructuring plans from the date of commitment to such a plan to the
date that costs are incurred under the plan. Severance payments that
are offered in accordance with an on-going benefit arrangement are accounted for
in accordance with SFAS No. 112, “Employers’ Accounting for
Postemployment Benefits.” Under SFAS No. 112 costs associated
with such ongoing benefit arrangements are recorded no later than the period
when it becomes probable that the costs will be incurred and the costs are
reasonably estimable.
Stock-Based
Compensation
We
account for stock-based compensation in accordance with SFAS No. 123 (revised
2004), “Share-Based
Payment” (“SFAS No. 123(R)”), a revision of SFAS No.
123. Under SFAS No. 123(R) we recognize the fair value of stock-based
payments as compensation expense in our financial statements. We use
the Black-Scholes valuation model to estimate the fair value of stock options
and stock appreciation rights (“SARs”) and straight-line amortization of
stock-based compensation. Our initial estimates of compensation cost
are based on the number of options, SARs, or awards for which we expect the
requisite service period to be completed. These initial estimates are
revised if subsequent information indicates that the number of options, SARs, or
awards expected to vest differs from our initial estimates. We
recognize the cumulative effect of such a change in estimated compensation
expense in the period of the change. We elected to calculate the
initial pool of excess tax benefits related to stock-based compensation as of
the adoption of SFAS No. 123(R) and the related presentation of excess tax
benefits in our consolidated statements of cash flows in accordance with the
provisions of paragraph 81 of SFAS No. 123(R).
The
Black-Scholes model requires estimates or assumptions as to the dividend yield
and price volatility of the underlying stock, the expected life of the option,
and a relevant risk-free interest rate. Periodic amortization of
compensation expense requires estimates as to the number of options expected to
be forfeited prior to completion of the requisite service period. The
use of different option-pricing models and different estimates or assumptions
could result in different estimates of compensation expense.
See “Item 8. Financial
Statements and Supplementary Data; NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES; Stock-based
Compensation”
below for further information on our stock-based compensation
expense.
Insurance
Liabilities
We use a
combination of third-party insurance and/or self-insurance for certain risks,
including workers’ compensation, medical, dental, automobile, and general
liability claims. Our insurance liabilities are a component of
“accrued expenses” on our consolidated balance sheet, and represent our estimate
of the ultimate cost of uninsured claims incurred as of the balance sheet
date. In estimating our self-insurance liabilities we use independent
actuarial estimates of expected losses, which are based on statistical analyses
of historical data. Loss estimates are adjusted based upon actual
claim settlements and reported claims. Although we do not expect the
amounts ultimately paid to differ significantly from our estimates,
self-insurance liabilities could be affected if future claim experience differs
significantly from the historical trends and the actuarial
assumptions. We evaluate the adequacy of these liabilities on a
regular basis, modifying our assumptions as necessary, updating our records of
historical experience, and adjusting our liabilities as
appropriate.
Operating
Leases
We lease
substantially all of our store properties as well as certain of our other
facilities and account for our store leases in accordance with SFAS No. 13 (as
amended), “Accounting for
Leases.” A majority of our store leases contain lease options
that we can unilaterally exercise. The lease term we use for such
operating leases includes lease option renewal periods only in instances in
which the failure to exercise such options would result in an economic penalty
for us and exercise of the renewal option is therefore reasonably assured at the
lease inception date. Store leasehold improvement assets are
depreciated over the shorter of their useful life or the lease
term.
For
leases that contain rent escalations, the lease term for recognition of
straight-line rent expense commences on the date we take possession of the
leased property for construction purposes, which for stores is generally two
months prior to a store opening date. Similarly, landlord incentives
or allowances under operating leases (tenant improvement allowances) are
recorded as a deferred rent liability and recognized as a reduction of rent
expense on a straight-line basis over the lease term, commencing on the date we
take possession of the leased property for construction purposes.
Senior
Convertible Notes
We
accounted for the issuance of our 1.125% Senior Convertible Notes due May 2014
(the “1.125% Notes”) in accordance with the guidance in EITF Issue 90-19, “Convertible Bonds with Issuer
Option to Settle for Cash upon Conversion” and EITF Issue 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.” Paragraph 11(a) of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” provides that contracts issued or
held by an entity that are both (1) indexed to the entity’s own common stock and
(2) classified in stockholders’ equity in its statement of financial position
are not considered to be derivative instruments under SFAS No. 133 if the
provisions of EITF Issue 00-19 are met. Accordingly, we have
recorded the 1.125% Notes as long-term debt in our consolidated balance
sheets.
Concurrent
with the issuance of the 1.125% Notes we entered into privately negotiated
common stock call options and warrants with affiliates of the initial
purchasers. We accounted for the call options and warrants in
accordance with the guidance in EITF Issue 00-19. The call options
and warrants meet the requirements of EITF Issue 00-19 to be accounted for as
equity instruments. Accordingly, the cost of the call options and the
proceeds from the sale of the warrants are included in additional paid-in
capital in our consolidated balance sheets.
In
accordance with SFAS No. 128, “Earnings Per Share,” the
1.125% Notes will have no impact on our diluted net income per share until the
price of our common stock exceeds the conversion price. Prior to
conversion we will include any dilutive effect of the 1.125% notes or the
warrants in the calculation of diluted net income per share using the treasury
stock method. The call options are excluded from the calculation of
diluted net income per share because their effect would be
anti-dilutive.
We
monitor the 1.125% Notes, call options, and warrants for compliance with the
provisions of EITF Issue 00-19 and paragraph 11(a) of SFAS No. 133 on a
quarterly basis. Should the issuance of the 1.125% Notes, the
purchase of the call options, or the sale of the warrants fail to continue to
qualify under the provisions of EITF Issue 00-19 or paragraph 11(a) of SFAS No.
133, we would be required to recognize derivative instruments in connection with
the transaction, include the effects of the transaction in assets or liabilities
instead of equity, and recognize changes in the fair values of the assets or
liabilities in consolidated net income as they occur until the provisions of
EITF Issue 00-19 and paragraph 11(a) of SFAS No. 133 are met.
In
May 2008 the FASB issued FASB Staff Position (“FSP”) APB 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlements),” which changes the
accounting treatment for convertible securities that an issuer may settle
fully or partially in cash. Under FSP APB 14-1 cash-settled
convertible securities 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 a similar debt instrument without the conversion
feature. The difference between the proceeds for the convertible debt
and the amount reflected as the debt component represents the value of the
conversion feature and 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 interest expense at 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% Notes. We will be required to adopt the provisions of
FSP APB 14-1 as of the beginning of Fiscal 2010. As compared to our
current accounting for the 1.125% Notes, adoption of the proposal will initially
reduce long-term debt and increase stockholders’ equity by approximately $90 –
$100 million. The non-cash accretion of the discount component will
increase interest expense and long-term debt annually. The estimated
pre-tax accretion to interest expense and increase to long-term debt is
approximately $7.0 – $9.0 million for Fiscal 2008, $10.0 – $12.0 million for
Fiscal 2009 and $11 – $13 million for Fiscal 2010. Adoption of the
FSP will not affect our cash flows.
See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 8. LONG-TERM
DEBT” below for
further information regarding our 1.125% Notes and related call options and
warrants.
Income
Taxes
We
adopted the provisions of FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109,” effective as of the
beginning of Fiscal 2008. FIN No. 48 prescribes the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN No. 48 also provides guidance on
de-recognition, measurement, classification, interest and penalties, accounting
in interim periods, expanded disclosures regarding tax uncertainties, and
transition. FIN No. 48 applies to all tax positions related to income taxes
subject to SFAS No. 109, “Accounting for Income
Taxes.”
Under FIN
No. 48 we recognize a tax benefit when a tax position is more-likely-than-not to
be sustained upon examination, based solely on its technical
merits. We measure the recognized benefit as the largest amount of
benefit which is more-likely-than-not to be realized on ultimate settlement,
based on a cumulative probability basis. We recognize a tax position
failing to qualify for initial recognition in the first interim period in which
it meets the FIN No. 48 recognition standard, or is resolved through
negotiation, litigation, or upon expiration of the statute of
limitations. We de-recognize a previously recognized tax position if
we subsequently determine that the tax position no longer meets the
more-likely-than-not threshold of being sustained. As of the
beginning of Fiscal 2008 we recognized a cumulative-effect adjustment of $5.0
million, increasing our liability for unrecognized tax benefits, interest, and
penalties and reducing retained earnings for differences between amounts
recognized in our balance sheets prior to the adoption of FIN No. 48 and amounts
reported after adoption. See “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 7. INCOME
TAXES” below for
further details of our adoption of FIN No. 48.
We
adopted the provisions of FSP FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48,” effective with our adoption of FIN No.
48. Accordingly, we consider a tax position to be “effectively
settled” upon completion of an examination by a taxing authority without being
legally extinguished. For tax positions considered effectively
settled we recognize the full amount of the tax benefit, even if (1) the tax
position is not considered more-likely-than-not to be sustained solely on the
basis of its technical merits, and (2) the statute of limitations remains
open. The adoption of FSP FIN 48-1 did not have a material effect on
our financial position or results of operations.
In
accordance with SFAS No. 109, “Accounting for Income
Taxes,” we
recognize deferred tax assets for temporary differences that will result in
deductible amounts in future years and for net operating loss and credit
carryforwards. SFAS No. 109 requires recognition of a valuation
allowance to reduce deferred tax assets if, based on existing facts and
circumstances, it is more-likely-than-not that some portion or all of the
deferred tax assets will not be realized. During Fiscal 2009 we
evaluated our assumptions regarding the recoverability of our deferred tax
assets. Based on all available evidence we determined that the
recoverability of our deferred tax assets is more-likely-than-not limited to our
available tax loss carrybacks. Accordingly, we established a
valuation allowance against our net deferred tax assets. Pursuant to
SFAS No. 109, when our results of operations demonstrate a pattern of future
profitability the valuation allowance may be adjusted, which would result in the
reinstatement of all or a part of the net deferred tax assets.
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-K. 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-K and should not be
separately relied upon.
Net sales
for Fiscal 2009 were $2.47 billion, a decrease of 9.1% from Fiscal
2008. The challenging retail and macroeconomic environment
contributed to a 12% decrease in comparable store sales, which was the primary
driver of the decrease in net sales in our Retail Stores segment. The
closing of 156 stores during Fiscal 2009, which included the closing of
under-performing stores, also contributed to the decrease in net sales for our
Retail Stores segment. Net sales for our Direct-to-Consumer segment,
which excludes discontinued businesses, increased $46.9 million primarily from
our LANE BRYANT WOMAN catalog business, which began operations in the latter
half of last year. We have decided to discontinue our LANE BRYANT
WOMAN catalog (see “Divest Non-core
Assets and Reduce Costs” below).
The
ongoing impact of a challenging retail and macroeconomic environment resulted in
decreased net sales and gross margins in Fiscal 2009. However, our
proactive management of inventory in response to the reduced consumer demand
allowed us to reduce the levels of promotional markdown activity compared to the
prior year. We also continued to focus on reducing operating
expenses. Although our expenses de-leveraged as a percentage of sales
due to the negative comparable store sales, our strong expense management
initiatives resulted in reductions in expense dollars, particularly in our
selling and occupancy expenses.
In Fiscal
2009 we recorded restructuring and impairment charges of $114.6 million, of
which $90.1 million were non-cash. In Fiscal 2008 we recorded
restructuring and impairment charges of $32.5 million, of which $29.5 were
non-cash. The Fiscal 2009 restructuring and impairment charges relate
primarily to severance for our former chief executive officer and other
eliminated positions and the impairment of retail store assets and CATHERINES
goodwill.
We began
to execute on a multi-year strategy in Fiscal 2009, with the assistance of
third-party retail consultants, to enhance our competitive position and to
improve our financial results over time. The new strategy focuses on
the following:
|
●
|
Refocus
on our core retail brands.
|
|
●
|
Divest
non-core assets.
|
|
●
|
Substantially
reduce operating expenses and streamline operations.
|
|
●
|
Maintain
and protect our strong balance sheet and liquidity
position.
|
The
following summarizes our initiatives.
Organization
We have
begun the process of transforming into a vertical specialty store model that
will increase our percentage of internally designed, developed, and sourced
fashion product. We plan to develop and source more of our own
proprietary fashion merchandise, become more focused on fashion and less driven
by commodity product, and ultimately create an enhanced brand experience for our
customers through an improved assortment across each of our core
brands. Increasing the percentage of merchandise we source directly
should lead to gross margin enhancement opportunities and better value for our
customers.
In Fiscal
2009 we began the process of transforming each of our core brands into
independent, distinct brands by recruiting seasoned brand presidents with
extensive retail and executive leadership experience. The
appointments of these experienced brand presidents as well as the addition of
new product design and development executives signal our commitment to this
transformation.
We also
began the process of developing an entirely new and upgraded e-commerce platform
through an outsourcing arrangement and the consolidation of our Charming Direct
business at our Bensalem, Pennsylvania headquarters by closing our New York and
Tucson, Arizona e-commerce offices. By the fall of 2009 we expect all
of our core brands to share a common e-commerce infrastructure, and we will
begin to launch new websites one at a time, providing an improved online
experience for our customers. Our objective is to improve customer
conversion rates and to significantly increase our core brands’ e-commerce
penetration during the second half of Fiscal 2010.
Divest
Non-core Assets and Reduce Costs
In
accordance with our focus on our core brands, we began the divestiture of our
non-core assets. During the third quarter of Fiscal 2009 we completed
the sale of our misses apparel catalogs and our related misses apparel catalog
credit card receivables, which generated approximately $46.9 million in
cash. Additionally, we decided to discontinue our LANE BRYANT WOMAN
catalog, which services a different core customer, in order to focus on our core
LANE BRYANT customer. We are also exploring the sale of our FIGI’S
Gifts in Good Taste catalog business as well as reviewing financing options for
owned real estate. We also announced the discontinuation of our figure
magazine, effective immediately, and the closing of our shoetrader.com website during
the second half of Fiscal 2010. These actions are in line with our
strategy to return our focus and energies to our core brands – LANE BRYANT,
FASHION BUG, and CATHERINES.
We
continue to focus on reducing operating expenses to optimize our cash flow
through improvements to, and streamlining of, our operations. In
Fiscal 2009 we began to implement a two-year cost reduction program that we
originally estimated would result in expense savings of $100 – $125 million over
the two-year period, with $75 million expected to be realized in Fiscal
2010. Results to date have been favorable, with savings being
realized ahead of schedule. Our current expectation is for cost
savings of approximately $125 million during Fiscal 2010. These
initiatives will address the following five major cost areas:
|
●
|
Corporate
and Brand overhead;
|
|
●
|
Non-merchandise
expense;
|
|
●
|
Occupancy
expense;
|
|
●
|
Supply
chain; and
|
|
●
|
Store
operations.
|
In Fiscal
2009 we completed the relocation of our CATHERINES operations, the elimination
of 150 corporate and field management positions, and substantially all of our
program to close 150 under-performing stores. In November 2008 we
announced an additional store closing program of as many as 100 additional
stores in Fiscal 2010. Through negotiations with landlords we have
been able to achieve significant rent reductions on some of our store locations
and we expect to negotiate additional meaningful savings in Fiscal
2010. These initiatives have resulted in reductions to occupancy
expense dollars in Fiscal 2009 and we expect to further reduce our occupancy
costs in Fiscal 2010.
In
January 2009 we announced further reductions in our workforce of approximately
225 positions at our corporate support and brand headquarters
offices. These positions primarily represented a combination of
approximately 125 associate separations and the elimination of approximately 100
open positions.
Manage
Inventory
We
continue to focus on reducing our inventory levels through timely markdowns and
reduction of planned receipts in order to maximize gross margin
dollars. Our inventories as of the end of Fiscal 2009 have decreased
approximately 16% from the end of Fiscal 2008 on a comparable-store
basis. We are also reducing our planned receipts of Spring 2009
merchandise in response to the current retail trends. By taking these
actions our inventory is properly positioned at the end of Fiscal 2009 to limit
markdown exposure and positively impact our gross margins during Fiscal
2010.
Maintain
our Strong Balance Sheet
Our
balance sheet remains strong, with ample liquidity through our $100.2 million of
cash and available-for-sale securities as of the end of Fiscal 2009, compared to
$74.3 million as of the end of Fiscal 2008. We ended Fiscal 2009 with
no borrowings against our committed $375.0 million revolving credit
facility. As of the end of Fiscal 2009 our available borrowing
capacity on the facility was $205.8 million.
In
addition to our focus on reducing inventory levels and divesting non-core
assets, we have significantly reduced our capital expenditures for new store
development and store relocations, and have eliminated non-essential capital
expenditures. Our capital expenditures in Fiscal 2009 were half of
our original plan for the year and we expect our Fiscal 2010 capital
expenditures to be approximately half of our Fiscal 2009
expenditures. We are also continuing to explore additional
opportunities to strengthen our financial position, such as a re-financing of
certain company-owned real estate.
Subsequent
to the end of Fiscal 2009 we renewed our $50.0 million Series 1999-2 conduit
credit card securitization facility through March 30, 2010. Combined
with our other existing conduit and term credit card secutitization facilities,
our current receivables funding structure provides an availability of $655.0
million. In April 2009 our $180.0 million Series 2004-1 term facility
is scheduled to begin amortizing at a rate of approximately $14.4 million per
month. We expect to meet this amortization requirement through our
$155.0 million of available conduit facilities. We believe that the
availability of our combined securitization facilities will continue to exceed
our funding requirements during Fiscal 2010.
While we
are committed to executing our long-term growth strategy as a multi-brand
retailer, we continue to take a conservative operating approach given the
current uncertain economic climate and our expectations for continuing weak
traffic trends. In response, we will continue to maintain lean
inventories and proactively control and reduce operating expenses in order to
generate positive free cash flow, preserve cash, and maintain a strong balance
sheet.
The
following discussion of our results of operations, liquidity, and capital
resources is based on our continuing operations, and excludes the impact of our
discontinued operations (see “Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 2. DISCONTINUED OPERATIONS”
below).
RESULTS
OF OPERATIONS
Financial
Summary
The
following table shows our results of operations expressed as a percentage of net
sales and on a comparative basis:
|
Percentage
Increase
|
|||||||
|
(Decrease)
|
|||||||
|
Percentage of Net
Sales(1)
|
From Prior Year
|
||||||
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
|||
|
2009
|
2008
|
2007(2)
|
2009-2008
|
2008-2007(2)
|
|||
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
(9.1)%
|
(1.1)%
|
||
|
Cost
of goods sold, buying, catalog, and
|
|||||||
|
occupancy
expenses
|
74.6
|
71.8
|
68.7
|
(5.5)
|
3.4
|
||
|
Selling,
general, and administrative expenses
|
28.0
|
26.4
|
25.4
|
(3.8)
|
2.9
|
||
|
Impairment
of store assets, goodwill, and trademarks
|
3.3
|
1.0
|
–
|
199.7
|
–
|
||
|
Restructuring
and other charges
|
1.3
|
0.2
|
–
|
521.6
|
–
|
||
|
Income/(loss)
from operations
|
(7.2)
|
0.6
|
5.9
|
**
|
(89.9)
|
||
|
Other
income
|
0.2
|
0.3
|
0.3
|
(49.6)
|
6.3
|
||
|
Interest
expense
|
0.4
|
0.4
|
0.5
|
(16.7)
|
(28.4)
|
||
|
Income
tax (benefit)/provision
|
(0.6)
|
0.5
|
2.0
|
(200.2)
|
(74.3)
|
||
|
Income/(loss)
from continuing operations
|
(6.8)
|
0.0
|
3.7
|
**
|
(99.3)
|
||
|
Income/(loss)
from discontinued operations, net of taxes
|
(3.0)
|
(3.1)
|
0.3
|
(11.9)
|
**
|
||
|
Net
income/(loss)
|
(9.9)
|
(3.1)
|
4.0
|
(192.8)
|
(176.6)
|
||
|
____________________
|
|||||||
|
(1)
Results may not add due to rounding.
|
|||||||
|
(2)
Fiscal 2007 consisted of 53 weeks.
|
|||||||
|
**
Results not
meaningful.
|
|||||||
The
following table shows details of our consolidated total net sales:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||||||||
|
January 31, 2009
|
February 2, 2008
|
February 3, 2007(1)
|
||||||||||||||||||||||
|
Fiscal
|
Fourth
|
Fiscal
|
Fourth
|
Fiscal
|
Fourth
|
|||||||||||||||||||
|
(In
millions)
|
Year
|
Quarter
|
Year
|
Quarter
|
Year
|
Quarter
|
||||||||||||||||||
|
LANE
BRYANT(2)
|
$ | 1,111.9 | $ | 273.0 | $ | 1,237.6 | $ | 323.6 | $ | 1,202.3 | $ | 357.1 | ||||||||||||
|
FASHION
BUG
|
843.8 | 183.8 | 984.1 | 225.8 | 1,058.3 | 269.1 | ||||||||||||||||||
|
CATHERINES
|
312.1 | 68.1 | 353.2 | 76.8 | 367.7 | 91.5 | ||||||||||||||||||
|
Other
retail stores(3)
|
24.3 | 5.5 | 15.8 | 5.7 | 8.1 | 6.2 | ||||||||||||||||||
|
Total
Retail Stores
segment
|
2,292.1 | 530.4 | 2,590.7 | 631.9 | 2,636.4 | 723.9 | ||||||||||||||||||
|
Total
Direct-to-Consumer segment
|
167.5 | 96.7 | 120.6 | 95.9 | 112.1 | 94.9 | ||||||||||||||||||
|
Corporate
and other(4)
|
15.3 | 4.8 | 11.2 | 4.0 | 3.3 | 1.9 | ||||||||||||||||||
|
Total
net
sales
|
$ | 2,474.9 | $ | 631.9 | $ | 2,722.5 | $ | 731.8 | $ | 2,751.8 | $ | 820.7 | ||||||||||||
|
____________________
|
||||||||||||||||||||||||
|
(1)
Fiscal Year 2007 and Fourth Quarter 2007 consisted of 53 weeks and 14
weeks, respectively.
|
||||||||||||||||||||||||
|
(2)
Includes LANE BRYANT OUTLET stores.
|
||||||||||||||||||||||||
|
(3)
Includes PETITE SOPHISTICATE OUTLET stores, which began operations in
September 2006, and PETITE SOPHISTICATE stores, which began operations in
October 2007 and were closed in August 2008.
|
||||||||||||||||||||||||
|
(4)
Primarily revenue related to loyalty card fees.
|
||||||||||||||||||||||||
The
following table shows additional information related to changes in our net
sales:
|
Year
Ended
|
Year
Ended
|
|||
|
January 31, 2009
|
February 2, 2008(1)
|
|||
|
Fiscal
|
Fourth
|
Fiscal
|
Fourth
|
|
|
Year
|
Quarter
|
Year
|
Quarter
|
|
|
Retail
Stores segment
|
||||
|
Increase/(decrease)
in comparable store sales:(2)
|
|
|||
|
Consolidated retail
stores
|
(12)%
|
(15)%
|
(5)%
|
(9)%
|