Edgar Filing: CHARMING SHOPPES INC

form10qaug12009.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 1, 2009

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File No. 000-07258

CHARMING SHOPPES, INC.

(Exact name of registrant as specified in its charter)

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

	3750 STATE ROAD, BENSALEM, PA 19020		(215) 245-9100
	(Address of principal executive offices) (Zip Code)		(Registrant’s telephone number, including Area Code)

NOT APPLICABLE

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

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

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):

Yes o No o

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

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

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

Yes o No x

The number of shares outstanding of the issuer’s Common Stock (par value $.10 per share) as of August 26, 2009 was 115,553,275 shares.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Balance Sheets
	August 1, 2009 and January 31, 2009	2

	Condensed Consolidated Statements of Operations and Comprehensive Income
	Thirteen weeks ended August 1, 2009 and August 2, 2008	3
	Twenty-six weeks ended August 1, 2009 and August 2, 2008	4

	Condensed Consolidated Statements of Cash Flows
	Twenty-six weeks ended August 1, 2009 and August 2, 2008	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

	Forward-looking Statements	33

	Critical Accounting Policies	36

	Recent Developments	37

	Overview	38

	Results of Operations	41

	Liquidity and Capital Resources	52

	Financing	53

	Market Risk	59

	Impact of Recent Accounting Pronouncements	60

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION	61

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 4.	Submission of Matters to a Vote of Security Holders	63

Item 6.	Exhibits	64

	SIGNATURES	67

	Exhibit Index	68

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	August 1,			January 31,
(In thousands, except share amounts)	2009			2009
				(As Adjusted)

ASSETS
Current assets
Cash and cash equivalents	$	116,699		$	93,759
Available-for-sale securities		400			6,398
Accounts receivable, net of allowances of $2,362 and $6,018		3,359			33,300
Investment in asset-backed securities		100,358			94,453
Merchandise inventories		259,473			268,142
Deferred taxes		3,439			3,439
Prepayments and other		173,352			155,430
Total current assets		657,080			654,921

Property, equipment, and leasehold improvements – at cost		1,072,785			1,076,972
Less accumulated depreciation and amortization		726,478			693,796
Net property, equipment, and leasehold improvements		346,307			383,176

Trademarks and other intangible assets		187,132			187,365
Goodwill		23,436			23,436
Other assets		28,251			28,243
Total assets	$	1,242,206		$	1,277,141

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	121,165		$	99,520
Accrued expenses		152,031			166,631
Current portion – long-term debt		6,483			6,746
Total current liabilities		279,679			272,897

Deferred taxes		47,885			46,197
Other non-current liabilities		180,062			188,470
Long-term debt, net of debt discount of $54,459 and $72,913		196,257			232,722

Stockholders’ equity
Common Stock $.10 par value:
Authorized – 300,000,000 shares
Issued – 154,041,918 shares and 153,482,368 shares		15,404			15,348
Additional paid-in capital		501,580			498,551
Treasury stock at cost – 38,491,692 shares		(347,764	)		(347,730	)
Accumulated other comprehensive income		0			5
Retained earnings		369,103			370,681
Total stockholders’ equity		538,323			536,855
Total liabilities and stockholders’ equity	$	1,242,206		$	1,277,141

See Notes to Condensed Consolidated Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirteen Weeks Ended
	August 1,			August 2,
(In thousands, except per share amounts)	2009			2008
				(As Adjusted)

Net sales	$	527,217		$	648,616

Cost of goods sold		263,358			345,786
Gross profit		263,859			302,830

Occupancy and buying expenses		100,084			105,620
Selling, general, and administrative expenses		134,279			164,469
Depreciation and amortization		19,192			22,988
Restructuring and other charges		7,768			14,945
Total operating expenses		261,323			308,022

Income/(loss) from operations		2,536			(5,192	)

Other income		283			792
Gain on repurchases of 1.125% Senior Convertible Notes		7,313			0
Interest expense		(4,485	)		(4,842	)

Income/(loss) from continuing operations before income taxes		5,647			(9,242	)
Income tax provision/(benefit)		664			(3,719	)

Income/(loss) from continuing operations		4,983			(5,523	)

Loss from discontinued operations, net of income tax benefit
of $2,624 in 2008		0			(5,153	)

Net income/(loss)		4,983			(10,676	)

Other comprehensive income, net of tax
Unrealized gains on available-for-sale securities, net of income tax
provision of $2 in 2008		0			1

Comprehensive income/(loss)	$	4,983		$	(10,675	)

Basic net income/(loss) per share:
Income/(loss) from continuing operations	$	.04		$	(.05	)
Loss from discontinued operations		.00			(.05	)
Net income/(loss)(1)	$	.04		$	(.09	)

Diluted net income/(loss) per share:
Income/(loss) from continuing operations	$	.04		$	(.05	)
Loss from discontinued operations		.00			(.05	)
Net income/(loss)(1)	$	.04		$	(.09	)

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

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Twenty-six Weeks Ended
	August 1,			August 2,
(In thousands, except per share amounts)	2009			2008
				(As Adjusted)

Net sales	$	1,065,353		$	1,289,962

Cost of goods sold		513,919			660,213
Gross profit		551,434			629,749

Occupancy and buying expenses		202,640			212,348
Selling, general, and administrative expenses		291,781			350,781
Depreciation and amortization		39,274			49,499
Restructuring and other charges		16,473			18,556
Total operating expenses		550,168			631,184

Income/(loss) from operations		1,266			(1,435	)

Other income		481			1,307
Gain on repurchases of 1.125% Senior Convertible Notes		11,564			0
Interest expense		(9,505	)		(9,803	)

Income/(loss) from continuing operations before income taxes		3,806			(9,931	)
Income tax provision/(benefit)		5,384			(3,459	)

Loss from continuing operations		(1,578	)		(6,472	)

Loss from discontinued operations, net of income tax benefit
of $12,698 in 2008		0			(51,047	)

Net loss		(1,578	)		(57,519	)

Other comprehensive loss, net of tax
Unrealized losses on available-for-sale securities, net of income tax
benefit of $13 in 2008		(5	)		(24	)

Comprehensive loss	$	(1,583	)	$	(57,543	)

Basic net loss per share:
Loss from continuing operations	$	(.01	)	$	(.06	)
Loss from discontinued operations		.00			(.45	)
Net loss(1)	$	(.01	)	$	(.50	)

Diluted net loss per share:
Loss from continuing operations	$	(.01	)	$	(.06	)
Loss from discontinued operations		.00			(.45	)
Net loss(1)	$	(.01	)	$	(.50	)

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

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Twenty-six Weeks Ended
	August 1,			August 2,
(In thousands)	2009			2008
				(As Adjusted)

Operating activities
Net loss	$	(1,578	)	$	(57,519	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		40,501			50,382
Stock-based compensation		2,974			5,014
Net loss/(gain) from disposition of capital assets		237			(1,066	)
Net loss/(gain) from securitization activities		178			(83	)
Accretion of discount on 1.125% Senior Convertible Notes		5,434			5,417
Estimated loss on disposition of discontinued operations		0			42,768
Deferred income taxes		1,691			(2,091	)
Gain on repurchases of 1.125% Senior Convertible Notes		(11,564	)		0
Write-down of deferred taxes related to stock-based compensation		0			(1,333	)
Write-down of capital assets		7,128			2,217
Changes in operating assets and liabilities
Accounts receivable, net		29,941			29,995
Merchandise inventories		8,669			95
Accounts payable		21,645			32,242
Prepayments and other		(23,053	)		4,054
Accrued expenses and other		(24,790	)		1,425
Net cash provided by operating activities		57,413			111,517

Investing activities
Investment in capital assets		(9,766	)		(38,459	)
Proceeds from sales of capital assets		1,219			4,813
Gross purchases of securities		(1,698	)		(3,489	)
Proceeds from sales of securities		8,588			10,719
Decrease in other assets		3,354			459
Net cash provided/(used) by investing activities		1,697			(25,957	)

Financing activities
Proceeds from long-term borrowings		0			108
Repayments of long-term borrowings		(3,448	)		(4,579	)
Repurchases of 1.125% Senior Convertible Notes		(26,617	)		0
Net payments for settlements of hedges on convertible notes		(31	)		0
Payments of deferred financing costs		(6,328	)		(46	)
Purchases of treasury stock		0			(10,969	)
Net proceeds/(payments) from shares issued under employee stock plans		254			(62	)
Net cash used by financing activities		(36,170	)		(15,548	)

Increase in cash and cash equivalents		22,940			70,012
Cash and cash equivalents, beginning of period		93,759			61,842
Cash and cash equivalents, end of period	$	116,699		$	131,854

Non-cash financing and investing activities
Assets acquired through capital leases	$	0		$	5,959

See Notes to Condensed Consolidated Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In our opinion, we have made all adjustments (which, except as otherwise disclosed in these notes, include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and comprehensive income, and cash flows. Certain prior-year amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the current-year presentation. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles. These financial statements and related notes should be read in conjunction with our financial statements and related notes included in Exhibit 99.1 of our Form 8-K dated June 19, 2009, which retrospectively revised the financial statements and related notes included in our January 31, 2009 Annual Report on Form 10-K as a result of our adoption of FASB Staff Position (“FSP”) APB 14-1 (see Change in Accounting Principle” and “Note 4. Long-term Debt” below). The results of operations for the thirteen and twenty-six weeks ended August 1, 2009 and August 2, 2008 are not necessarily indicative of operating results for the full fiscal year.

As used in these notes, the term “Fiscal 2009” refers to our fiscal year ending January 30, 2010, the term “Fiscal 2008” refers to our fiscal year ended January 31, 2009, the term “Fiscal 2007” refers to our fiscal year ended February 2, 2008, and the term “Fiscal 2006” refers to our fiscal year ended February 3, 2007. The term “Fiscal 2009 First Quarter” refers to our fiscal quarter ended May 2, 2009 and the term “Fiscal 2008 First Quarter” refers to our fiscal quarter ended May 3, 2008. The term “Fiscal 2009 Second Quarter” refers to our fiscal quarter ended August 1, 2009 and the term “Fiscal 2008 Second Quarter” refers to our fiscal quarter ended August 2, 2008. The term “Fiscal 2009 Third Quarter” refers to our fiscal quarter ending October 31, 2009, the term “Fiscal 2008 Third Quarter” refers to our fiscal quarter ended November 1, 2008, and the term “Fiscal 2008 Fourth Quarter” refers to our fiscal quarter ended January 31, 2009. The term “Fiscal 2010” refers to our fiscal year ending January 29, 2011. The terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and, where applicable, our consolidated subsidiaries.

Reclassifications

Effective with the Fiscal 2009 Second Quarter we modified the presentation of our condensed consolidated statements of operations and comprehensive income to provide additional details of our operating expenses. The modifications consist primarily of separate disclosure of cost of goods sold, occupancy and buying expenses, and the reclassification of depreciation and amortization from occupancy, buying, selling, general, and administrative expenses to a separate line within operating expenses.

The following table presents our cost of goods sold, gross profit, and operating expenses for Fiscal 2008 prepared on a consistent basis with the current-year presentation for comparative purposes.

	Thirteen Weeks Ended								Year Ended
	May 3,		August 2,		November 1,		January 31,		January 31,
(In thousands)	2008		2008		2008		2009		2009

Cost of goods sold	$	314,427	$	345,786	$	299,195	$	367,979	$	1,327,387
Gross profit		326,919		302,830		253,871		263,891		1,147,511

Operating expenses:
Occupancy and buying		106,728		105,620		106,553		108,940		427,841
Selling, general, and administrative		186,312		164,469		166,338		172,976		690,095
Depreciation and amortization		26,511		22,988		23,131		21,111		93,741

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Change in Accounting Principle

The accompanying condensed consolidated balance sheet as of January 31, 2009 and the condensed consolidated statements of operations and comprehensive income for the thirteen and twenty-six weeks ended August 2, 2008 have been adjusted to reflect the retrospective adoption as of February 1, 2009 of FASB Staff Position (“FSP”) APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements).” Our 1.125% Senior Convertible Notes due May 2014 (the “1.125% Notes”) are within the scope of FSP APB 14-1. See “Note 4. Long-term Debt” below for further information related to our adoption of FSP APB 14-1.

In connection with the adoption of FSP APB 14-1 we identified an error related to the accounting for deferred taxes for a purchased call option that we entered into contemporaneously with the issuance of our 1.125% Notes in Fiscal 2007. Concurrent with the issuance of the Notes we entered into a series of hedge transactions, which included the purchase of a call option with a cost of approximately $90,500,000. The cost of the call option was accounted for as an equity transaction in our financial statements. For income tax purposes the cost of the call option is treated as original issue discount (“OID”) and amortized over the life of the 1.125% Notes. We were recording the resulting tax benefit in our financial statements as an increase to additional paid-in capital as the tax benefit was reported in our annual income tax returns. However, the treatment of the call option as OID for income tax purposes created a book-tax basis difference on the issuance date of the debt for which a deferred tax asset of approximately $33,000,000 should have been recognized, with a corresponding increase to additional paid-in capital.

During Fiscal 2008, based on our evaluation of the realization of deferred tax assets and negative evidence provided by recent losses, we recognized a non-cash income tax provision to establish a full valuation allowance against our net deferred tax assets. Accordingly, the understatement of deferred tax assets resulted in an understatement of the valuation allowance for deferred tax assets and the income tax provision in Fiscal 2008 of approximately $30,000,000.

In evaluating these errors we considered the requirements in FASB Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3,” SEC Staff Accounting Bulletin No. 99, “Materiality,” and Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting.” We considered both the quantitative and qualitative factors in evaluating the materiality of the errors and concluded that the errors are not material to the Fiscal 2007 and Fiscal 2008 financial statements. Accordingly, we have not restated our previously issued financial statements to correct these errors. However, the correction of these errors has been considered when adjusting the historical financial statements and related notes that are included in Exhibit 99.1 of our Form 8-K dated June 19, 2009 for the retrospective application of FSP APB 14-1. The financial statements and related footnotes included in the Form 8-K dated June 19, 2009 revise the financial statements included in our Form 10-K for the fiscal year ended January 31, 2009.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

In accordance with FSP APB 14-1, which requires retrospective application in all periods presented, the 1.125% Notes are separated into their debt and equity components. The carrying amount of the liability component is determined by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component represented by the embedded conversion option is then determined by deducting the fair value of the liability component from the initial proceeds ascribed to the convertible debt instrument as a whole. Upon measuring the liability in accordance with FSP APB 14-1, we determined that the tax basis and book basis of the debt are substantially the same; therefore the effects of the aforementioned financial statement errors in Fiscal 2007 and Fiscal 2008 related to deferred income taxes and income tax expense were substantially offset by the effects of adopting FSP APB 14-1.

Discontinued Operations

On April 25, 2008 we announced that our Board of Directors began exploring a broad range of operating and strategic alternatives for our non-core misses apparel catalog titles (collectively, “Crosstown Traders”) in order to provide a greater focus on our core brands and to enhance shareholder value. Crosstown Traders met the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to be accounted for as held for sale. Accordingly, the results of operations of Crosstown Traders were reported as discontinued operations in our consolidated statements of operations as of the beginning of the Fiscal 2008 First Quarter. In August 2008 we entered into a definitive agreement to sell the Crosstown Traders non-core misses apparel catalogs and the sale was completed in September 2008. Crosstown Traders’ operations have been eliminated from our financial statements as of the date of sale.

In August 2008 we announced our plans to explore the sale of our FIGI’S® Gifts in Good Taste catalog business based in Wisconsin, stating at that time that we would only enter into a transaction at an acceptable valuation. The results of operations of FIGI’S were not reported as discontinued operations as they had not met the requirements of SFAS No. 144. In July 2009 we announced the discontinuation of the exploration of the sale of FIGI’S.

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

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

Net sales	$	56,569		$	121,248

Loss from discontinued operations	$	(7,777	)(1)	$	(63,745	)(2)
Income tax benefit		(2,624	)(1)		(12,698	)(2)
Loss from discontinued operations, net of income tax benefit	$	(5,153	)(1)	$	(51,047	)(2)
____________________
(1) Includes reduction of estimated loss on disposition of $980, net of a reduction in income tax benefit of $1,503 and a loss from operations of ($6,133), net of an income tax benefit of ($4,127).
(2) Includes an estimated loss on disposition of ($38,190), net of an income tax benefit of ($4,578) and a loss from operations of ($12,857), net of an income tax benefit of ($8,120).

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

During the Fiscal 2008 Third Quarter we announced the shutdown of our LANE BRYANT WOMAN catalog, which was completed during the Fiscal 2009 Second Quarter. The customers served by this catalog sales channel will continue to be served by our other LANE BRYANT sales channels; therefore, the shutdown of the LANE BRYANT WOMAN catalog operations did not meet the requirements of SFAS No. 144 for being reported as a discontinued operation.

On August 13, 2009 we announced an agreement for the sale of our credit card receivables program to World Financial Network National Bank, a subsidiary of Alliance Data Systems Corporation (“Alliance Data”). We also entered into a ten-year operating agreement with Alliance Data for the servicing of our private label credit card receivables program (see “Note 15. Subsequent Events” below). Due to our significant continuing involvement and retained cash flows as a result of the ten-year operating agreement with Alliance Data, we determined in accordance with EITF 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations,” that the sale of the credit card receivables program did not meet the requirements of SFAS No. 144 for being reported as a discontinued operation. Our investment in asset-backed securities on our condensed consolidated balance sheet represents the assets held for sale in connection with the agreement for the sale of our credit card receivables program.

The financial information for the Fiscal 2008 periods included in these Notes to Condensed Consolidated Financial Statements reflects only the results of our continuing operations.

Segment Reporting

We operate and report in two segments: Retail Stores and Direct-to-Consumer. We determine our operating segments based on the way our chief operating decision-makers review our results of operations. Additional information regarding our segment reporting is included in “Note 10. Segment Reporting” below. We also include sales and operating profit by brand in our Management’s Discussion and Analysis of Results of Operations in order to provide additional information for our Retail Stores segment.

Stock-based Compensation

We have various stock-based compensation plans under which we are currently granting awards, which are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 11. Stock-Based Compensation Plans” of Exhibit 99.1 to our Form 8-K dated June 19, 2009.

Shares available for future grants under our stock-based compensation plans as of August 1, 2009:

2004 Stock Award and Incentive Plan			2,322,935
2003 Non-Employee Directors Compensation Plan			121,897
1994 Employee Stock Purchase Plan			624,421
1988 Key Employee Stock Option Plan			119,004

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Stock option and stock appreciation rights activity for the twenty-six weeks ended August 1, 2009:

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

Outstanding at January 31, 2009		3,292,385		$	5.09	$	1.00	–	$	13.84	$	0
Granted – exercise price equal to market price		4,692,300			1.68		0.99	–		4.74
Canceled/forfeited		(446,446	)		5.18		1.00	–		11.28
Exercised		(2,432	)		1.00		1.00	–		1.00		6	(2)
Outstanding at August 1, 2009		7,535,807		$	2.96	$	0.99	–	$	13.84	$	13,765
Exercisable at August 1, 2009		1,360,009		$	6.35	$	1.00	–	$	13.84	$	0
____________________
(1) Aggregate market value less aggregate exercise price.
(2) As of date of exercise.

Stock-based compensation expense includes compensation cost for (i) all partially-vested stock-based awards granted prior to the beginning of Fiscal 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and (ii) all stock-based awards granted subsequent to the beginning of Fiscal 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), a revision of SFAS No. 123. Current grants of stock-based compensation consist primarily of stock appreciation right awards.

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 1,		August 2,		August 1,		August 2,
(In thousands)	2009		2008		2009		2008

Total stock-based compensation expense	$	1,264	$	2,116	$	2,974	$	5,014

During the Fiscal 2009 Second Quarter and the Fiscal 2008 Second Quarter we granted cash-settled restricted stock units (“RSUs”) under our 2003 Non-Employee Directors Compensation Plan. These cash-settled RSUs have been accounted for as liabilities in accordance with SFAS No. 123(R). Compensation expense of $280,000 for the thirteen weeks and $562,000 for the twenty-six weeks ended August 1, 2009 and $481,000 for the thirteen and twenty-six weeks ended August 2, 2008 related to these cash-settled RSUs has been excluded from the above table. Total compensation expense for unvested cash-settled RSUs not yet recognized as of August 1, 2009 was $304,000, which is included in accrued expenses in the accompanying condensed consolidated balance sheet and will be recognized over a one-year period from the date of grant.

We use the Black-Scholes valuation model to estimate the fair value of stock options and stock appreciation rights. We amortize stock-based compensation on a straight-line basis over the requisite service period of an award except for awards that include a market condition, which are amortized on a graded vesting basis over their derived service period. Estimates and assumptions we use under the Black-Scholes model are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies; Stock-based Compensation” of Exhibit 99.1 to our Form 8-K dated June 19, 2009.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Total stock-based compensation expense not yet recognized, related to the non-vested portion of stock options, stock appreciation rights, and awards outstanding, was $11,638,000 as of August 1, 2009. The weighted-average period over which we expect to recognize this compensation expense is approximately 3 years.

Note 2. Accounts Receivable

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

	August 1,			January 31,
(In thousands)	2009			2009

Due from customers	$	5,721		$	39,318
Allowance for doubtful accounts		(2,362	)		(6,018	)
Net accounts receivable	$	3,359		$	33,300

Note 3. Trademarks and Other Intangible Assets

	August 1,		January 31,
(In thousands)	2009		2009

Trademarks, tradenames, and internet domain names	$	187,132	$	187,132
Customer relationships		2,872		2,872
Total at cost		190,004		190,004
Less accumulated amortization of customer relationships		2,872		2,639
Net trademarks and other intangible assets	$	187,132	$	187,365

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt

	August 1,			January 31,
(In thousands)	2009			2009
				(As Adjusted)

1.125% Senior Convertible Notes, due May 2014	$	223,265		$	275,000
Capital lease obligations		12,113			14,041
6.07% mortgage note, due October 2014		10,071			10,419
6.53% mortgage note, due November 2012		4,550			5,250
7.77% mortgage note, due December 2011		6,906			7,249
Other long-term debt		294			422
Total long-term debt principal		257,199			312,381
Less unamortized discount on 1.125% Senior Convertible Notes		(54,459	)		(72,913	)
Long-term debt – carrying value		202,740			239,468
Current portion		(6,483	)		(6,746	)
Net long-term debt	$	196,257		$	232,722

In May 2008 the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)” (previously FSP APB 14-a), which changes the accounting treatment for convertible securities that the issuer may settle fully or partially in cash. We adopted the provisions of FSP APB 14-1 for our 1.125% Senior Convertible Notes due May 2014 (the “1.125% Notes”), which were issued in Fiscal 2007, and applied the provisions retrospectively to all past periods presented. Additional details regarding the 1.125% Notes are included in “Item 8. Financial Statements and Supplementary Data; Note 8. Long-term Debt” of Exhibit 99.1 to our Form 8-K dated June 19, 2009.

Prior to the adoption of FSP APB 14-1 we recorded the liability for our 1.125% Notes at their principal value and recognized the contractual interest on the notes as interest expense. Under FSP APB 14-1, cash-settled convertible securities are separated into their debt and equity components. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature. As a result, the debt is 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 fair value of the conversion feature and has been recognized as additional paid-in capital. We will accrete the debt to its principal value over its expected life using the effective interest method, with an offsetting increase in interest expense on our statements of operations to reflect the market rate for the debt component at the date of issuance. Upon maturity of the 1.125% Notes we will be obligated to repay the principal value of the notes to holders of outstanding notes ($223,265,000 as of August 1, 2009).

Our adoption of FSP APB 14-1 resulted in an initial reduction in long-term debt and increase in stockholders’ equity of $91,715,000 as of the date of issuance of the debt (May 2007). The non-cash amortization of this discount component increases interest expense and long-term debt over the life of the 1.125% Notes (57 months as of August 1, 2009). The pre-tax amortization to interest expense and increase to long-term debt recognized retrospectively was $7,770,000 for Fiscal 2007 (from the date of original issuance) and $11,032,000 for Fiscal 2008. Adoption of FSP APB 14-1 does not affect our cash flows.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

Our adoption of FSP APB 14-1 also resulted in the reclassification of $2,564,000 of debt issuance costs from other assets to equity to allocate a proportionate share of the issuance costs related to the 1.125% Notes to the equity component recognized.

The carrying amount of the equity component of the 1.125% Notes and the principal value, unamortized discount, and net carrying amount of the liability component of the 1.125% Notes were as follows:

	August 1,			January 31,
(In thousands)	2009			2009

Equity component of 1.125% Senior Convertible Notes	$	91,569		$	91,715

Principal value of 1.125% Senior Convertible Notes	$	223,265		$	275,000
Unamortized discount		(54,459	)		(72,913	)
Liability component of 1.125% Senior Convertible Notes	$	168,806		$	202,087

Our retrospective adoption of FSP APB 14-1 resulted in the following adjustments to our condensed consolidated balance sheet as of January 31, 2009:

	As Previously		Other			FSP APB 14-1			As
(In thousands)	Reported		Adjustments(1)			Adjustments			Adjusted

Deferred taxes	$	4,066				$	(627	)(2)	$	3,439
Other assets		30,167					(1,924	)(3)		28,243
Total assets		1,279,692					(2,551	)		1,277,141

Deferred taxes		46,824					(627	)(2)		46,197
Long-term debt		305,635					(72,913	)(4)		232,722
Additional paid-in capital		411,623	$	30,208			56,720	(5)		498,551
Retained earnings		386,620		(30,208	)		14,269	(6)		370,681
Total stockholders’ equity		465,866					70,989			536,855
Total liabilities and stockholders’ equity		1,279,692					(2,551	)		1,277,141
____________________
(1) Correction of accounting for deferred taxes related to purchased call option (see “Note 1. Condensed Consolidated Financial Statements; Change in Accounting Principle” above).
(2) Reallocation of deferred taxes.
(3) Cumulative adjustment to debt issuance costs related to 1.125% Notes.
(4) Unamortized discount as of January 31, 2009.
(5) Equity component of 1.125% Notes and debt issuance costs.
(6) Cumulative impact of amortization of debt discount and amortization of equity component of debt issuance costs, net of tax benefit.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

The contractual interest expense, amortization of debt discount, and effective interest rate for the 1.125% Notes were as follows:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 1,			August 2,			August 1,			August 2,
(Dollars in thousands)	2009			2008			2009			2008

Contractual interest expense	$	670		$	773		$	1,444		$	1,547
Amortization of debt discount		2,550			2,733			5,434			5,417
Total interest expense	$	3,220		$	3,506		$	6,878		$	6,964

Effective interest rate		7.4	%		7.4	%		7.4	%		7.4	%

Our adoption of FSP APB 14-1 resulted in the following adjustments to our condensed consolidated statements of operations for the thirteen and twenty-six weeks ended August 1, 2009 and August 2, 2008:

	Before		Adoption of			As
(In thousands, except per-share amounts)	Adoption		FSP APB 14-1			Adjusted

Thirteen weeks ended August 1, 2009
Interest expense	$	2,027	$	2,458	(1)	$	4,485
Income tax provision		664		0			664
Income from continuing operations		7,441		(2,458	)		4,983
Net income		7,441		(2,458	)		4,983
Basic net income per share		0.06		(0.02	)		0.04
Diluted net income per share		0.06		(0.02	)		0.04

Twenty-six weeks ended August 1, 2009
Interest expense	$	4,255	$	5,250	(1)	$	9,505
Income tax provision		5,384		0			5,384
Loss from continuing operations		3,672		(5,250	)		(1,578	)
Net loss		3,672		(5,250	)		(1,578	)
Basic net loss per share(2)		0.03		(0.05	)		(0.01	)
Diluted net loss per share(2)		0.03		(0.05	)		(0.01	)
____________________
(1) Amortization of the debt discount related to the 1.125% Notes less amortization of debt issue costs related to the equity component.
(2) Results do not add across due to rounding.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

	As Previously			Adoption of			As
(In thousands, except per-share amounts)	Reported			FSP APB 14-1			Adjusted

Thirteen weeks ended August 2, 2008
Interest expense	$	2,201		$	2,641	(1)	$	4,842
Income tax benefit		(2,891	)		(828	)(2)		(3,719	)
Loss from continuing operations		(3,710	)		(1,813	)		(5,523	)
Net loss		(8,863	)		(1,813	)		(10,676	)
Basic net loss per share:
Continuing operations		(0.03	)		(0.02	)		(0.05	)
Net loss(3)		(0.08	)		(0.02	)		(0.09	)
Diluted net loss per share:
Continuing operations		(0.03	)		(0.02	)		(0.05	)
Net loss(3)		(0.08	)		(0.02	)		(0.09	)

Twenty-six weeks ended August 2, 2008
Interest expense	$	4,570		$	5,233	(1)	$	9,803
Income tax benefit		(1,645	)		(1,814	)(2)		(3,459	)
Loss from continuing operations		(3,053	)		(3,419	)		(6,472	)
Net loss		(54,100	)		(3,419	)		(57,519	)
Basic net loss per share:
Continuing operations		(0.03	)		(0.03	)		(0.06	)
Net loss		(0.47	)		(0.03	)		(0.50	)
Diluted net loss per share:
Continuing operations		(0.03	)		(0.03	)		(0.06	)
Net loss		(0.47	)		(0.03	)		(0.50	)
____________________
(1) Amortization of the debt discount related to the 1.125% Notes less amortization of debt issue costs related to the equity component.
(2) Tax effect of adoption of FSP APB 14-1.
(3) Results do not add across due to rounding.

During the thirteen weeks ended August 1, 2009 we repurchased $38,235,000 aggregate principal amount of 1.125% Notes with $9,582,000 of unamortized discount for a purchase price of $20,986,000 and recognized a gain of $7,313,000 net of unamortized issue costs. During the twenty-six weeks ended August 1, 2009 we repurchased $51,735,000 aggregate principal amount of 1.125% Notes with $13,020,000 of unamortized discount for a purchase price of $26,617,000 and recognized a gain of $11,564,000 net of unamortized issue costs. In conjunction with the repurchases, during the Fiscal 2009 Second Quarter we unwound a portion of our positions in the warrants and call options that we had sold and purchased in Fiscal 2007 to hedge the impact of the convertible debt, which had an immaterial impact on our consolidated financial statements.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

The 6.07% mortgage note is secured by a mortgage on real property at our distribution center in Greencastle, Indiana and an Assignment of Lease and Rents and Security Agreement related to the Greencastle facility. The 6.53% mortgage note is secured by a mortgage on land, a building, and certain fixtures we own at our distribution center in White Marsh, Maryland and by leases we own or rents we receive, if any, from tenants of the White Marsh facility. The 7.77% mortgage note is secured by a mortgage on land, buildings, and fixtures we own at our offices in Bensalem, Pennsylvania and by leases we own or rents we receive, if any, from tenants of the Bensalem facility.

On July 31, 2009 we entered into an amended and restated loan and security agreement (the “Agreement”) for a $225,000,000 senior secured revolving credit facility. The amended facility replaces our $375,000,000 revolving credit facility and provides for committed revolving credit availability through July 31, 2012. The amount of credit that is available from time to time under the Agreement is determined as a percentage of the value of eligible inventory, accounts receivable, and cash, as reduced by certain reserves. In addition, the Agreement includes an option allowing us to increase our maximum credit up to $300,000,000, based on certain terms and conditions. The credit facility may be used for general corporate purposes, and provides that up to $100,000,000 of the $225,000,000 may be used for letters of credit.

The Agreement provides for borrowings under either “Base Rate” loans or “Eurodollar Rate” loans. Borrowings under Base Rate loans will generally accrue interest at a margin ranging from 2.75% to 3.25% over the Base Rate (as defined in the agreement) and Eurodollar Rate loans will generally accrue interest at a margin ranging from 3.75% to 4.25% over the London Interbank Offered Rate (“LIBOR”).

The Agreement provides for customary representations and warranties and affirmative covenants. The Agreement also contains customary negative covenants providing limitations, subject to negotiated exceptions, for sales of assets; encumbrances; indebtedness; loans, advances and investments; acquisitions; guarantees; new subsidiaries; dividends and redemptions; transactions with affiliates; change in business; limitations or restrictions affecting subsidiaries; credit card agreements; private-label credit cards; and changes in control of certain of our subsidiaries. If at any time “Excess Availability” (as defined in the Agreement) is less than $40,000,000 then, in each month in which Excess Availability is less than $40,000,000, we will be required to maintain a minimum fixed charge coverage ratio of at least 1.1 to 1 for the then preceding twelve-month fiscal period. The Agreement also provides for certain rights and remedies if there is an occurrence of one or more events of default under the terms of the Agreement. Under certain conditions the maximum amount available under the Agreement may be reduced or terminated by the lenders and the obligation to repay amounts outstanding under the Agreement may be accelerated.

In connection with the Agreement we executed an Amended and Restated Guaranty (the “Amended Guaranty”). Pursuant to the Amended Guaranty, we and most of our subsidiaries jointly and severally guaranteed the borrowings and obligations under the Agreement, subject to standard insolvency limitations. Under the Amended Guaranty, collateral for the borrowings under the Agreement consists of pledges by us and certain of our subsidiaries of the capital stock of each such entity’s subsidiaries. The Agreement also provides for a security interest in substantially all of our assets excluding, among other things, equipment, real property, and stock or other equity and assets of excluded subsidiaries. Excluded subsidiaries are not Guarantors under the Agreement and the Amended Guaranty.

As of August 1, 2009 we had an aggregate total of $7,170,000 of unamortized deferred debt acquisition costs related to the facility that will be amortized on a straight-line basis over the life of the facility as interest expense. There were no borrowings outstanding under the facility as of August 1, 2009.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5. Stockholders’ Equity

	Twenty-six
	Weeks Ended
	August 1,
(Dollars in thousands)	2009

Total stockholders’ equity, beginning of period (as adjusted)	$	536,855	(1)
Net loss		(1,578	)
Issuance of common stock (559,550 shares), net of shares withheld for payroll taxes		254
Stock-based compensation		2,974
Net payments for settlement of hedges on convertible notes		(31	)(2)
Equity component of repurchases of 1.125% Senior Convertible Notes		(146	)(2)
Unrealized losses on available-for-sale securities		(5	)
Total stockholders’ equity, end of period	$	538,323
____________________
(1) We adopted the provisions of FSP APB 14-1 retrospectively as of the beginning of Fiscal 2009 and recognized a net increase in stockholders’ equity of $70,989,000 as of January 31, 2009 (see “Note 4. Long-term Debt” above).
(2) See “Note 4. Long-term Debt” above.

Note 6. Customer Loyalty Card Programs

We offer our customers various loyalty card programs. Customers that join these programs are entitled to various benefits, including discounts and rebates on purchases during the membership period. Customers join some of these programs by paying an annual membership fee. For these programs, we recognize revenue as a component of net sales over the life of the membership period based on when the customer earns the benefits and when the fee is no longer refundable. We recognize costs in connection with administering these programs as cost of goods sold when incurred.

We recognized revenues of $4,955,000 during the thirteen weeks ended August 1, 2009, $9,974,000 during the twenty-six weeks ended August 1, 2009, $5,276,000 during the thirteen weeks ended August 2, 2008, and $10,374,000 during the twenty-six weeks ended August 2, 2008 in connection with our loyalty card programs. We accrued $2,920,000 as of August 1, 2009 and $3,597,000 as of January 31, 2009 for the estimated costs of discounts earned and coupons issued and not yet redeemed under these programs.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7. Net Income/(Loss) Per Share

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	August 1,		August 2,			August 1,			August 2,
(In thousands, except per share amounts)	2009		2008			2009			2008
			(As Adjusted)						(As Adjusted)

Basic weighted average common shares outstanding		115,612		114,342			115,396			114,465
Dilutive effect of stock options, stock appreciation rights, and awards		3,319		0	(1)		0	(1)		0	(1)
Diluted weighted average common shares and equivalents outstanding		118,931		114,342			115,396			114,465

Income/(loss) from continuing operations	$	4,983	$	(5,523	)	$	(1,578	)	$	(6,472	)
Loss from discontinued operations, net of income tax benefit		0		(5,153	)		0			(51,047	)
Net income/(loss) used to determine diluted
net income/(loss) per share	$	4,983	$	(10,676	)	$	(1,578	)	$	(57,519	)

Options with weighted average exercise price greater
than market price, excluded from computation of net
income/(loss) per share:
Number of shares		1,160		–	(1)		–	(1)		–	(1)
Weighted average exercise price per share	$	6.63		–	(1)		–	(1)		–	(1)
____________________
(1) Stock options, stock appreciation rights, and awards are excluded from the computation of diluted net income/(loss) per share as their effect would have been anti-dilutive.

Our 1.125% Notes will not impact our diluted net income per share until the price of our common stock exceeds the conversion price of $15.379 per share because we expect to settle the principal amount of the 1.125% Notes in cash upon conversion. Our call options are not included in the diluted net income per share calculation as their effect would be anti-dilutive. Should the price of our common stock exceed $21.607 per share, we would include the dilutive effect of the additional potential shares that may be issued related to our warrants, using the treasury stock method. See “Note 4. Long-term Debt” above and “Item 8. Financial Statements and Supplementary Data; Note 8. Long-term Debt” of Exhibit 99.1 to our Form 8-K dated June 19, 2009 for further information regarding our 1.125% Notes, call options and warrants.

Note 8. Income Taxes

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

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Income Taxes (Continued)

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

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 the Fiscal 2008 Third Quarter we evaluated our assumptions regarding the recoverability of our deferred tax assets. Based on all available evidence we determined that the recoverability of our deferred tax assets is more-likely-than-not limited to our available tax loss carrybacks. Accordingly, we established a valuation allowance against our net deferred tax assets. In future periods we will continue to recognize a valuation allowance until such time as the certainty of future tax benefits can be reasonably assured. 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.

Income tax receivables, including net operating loss carrybacks for Fiscal 2008, amended return receivables, and prepaid income taxes, of $45,596,000 as of August 1, 2009 and $47,303,000 as of January 31, 2009 are included in “prepayments and other” on our condensed consolidated balance sheets.

The agreement for the sale of our credit card receivables program (see “Note 15. Subsequent Events” below) will result in a gain for income tax purposes that will utilize a significant portion of our net operating loss carryforwards.

As of August 1, 2009 our gross unrecognized tax benefits were $27,959,000. If recognized, the portion of the liabilities for gross unrecognized tax benefits that would decrease our provision for income taxes and increase our net income was $17,824,000. The accrued interest and penalties as of August 1, 2009 were $12,436,000. During the twenty-six weeks ended August 1, 2009 the gross unrecognized tax benefits decreased by $1,219,000 and the portion of the liabilities for gross unrecognized tax benefits that, if recognized, would decrease our provision for income taxes and increase our net income decreased by $1,023,000. Accrued interest and penalties decreased by $295,000 during the twenty-six weeks ended August 1, 2009.

As of August 1, 2009 it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by as much as $3,622,000 as a result of resolutions of audits related to U.S. Federal and state tax positions.

Our U.S. Federal income tax returns for Fiscal 2005 and beyond remain subject to examination by the U.S. Internal Revenue Service (“IRS”) and the IRS is currently examining our amended return for Fiscal 2004. We file returns in numerous state jurisdictions, with varying statutes of limitations. Our state tax returns for Fiscal 2003 and subsequent years, depending upon the jurisdiction, generally remain subject to examination. The statute of limitations on a limited number of returns for years prior to Fiscal 2004 has been extended by agreement between us and the particular state jurisdiction. The earliest year still subject to examination by state tax authorities is Fiscal 1998.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Asset Securitization

Our FASHION BUG, LANE BRYANT, CATHERINES, and PETITE SOPHISTICATE proprietary credit card receivables are originated by Spirit of America National Bank (the “Bank”), our wholly-owned credit card bank. The Bank transfers its interest in all the receivables associated with these programs to the Charming Shoppes Master Trust (the “Trust”) through Charming Shoppes Receivables Corp. (“CSRC”), a separate and distinct special-purpose entity. The Trust is an unconsolidated qualified special-purpose entity (“QSPE”). Subsequent to August 1, 2009 we announced that we have entered into an agreement to sell our credit card receivables program (see “Note 15. Subsequent Events” below).

Prior to the November 14, 2008 sale of our misses apparel catalog credit card receivables in connection with the sale of the related Crosstown Traders catalog titles (see “Note 1. Condensed Consolidated Financial Statements; Discontinued Operations” above), our Crosstown Traders apparel-related catalog credit card receivables were also originated by the Bank. On December 31, 2008 we finalized the sale of the receivables. In connection with the sale we paid off and terminated the related Series 2005-RPA conduit securitization facility that was dedicated to these receivables.

The QSPEs can sell interests in these receivables on a revolving basis for a specified term. At the end of the revolving period an amortization period begins during which the QSPEs make principal payments to the parties that have entered into the securitization agreement with the QSPEs. All assets of the QSPEs (including the receivables) are isolated and support the securities issued by those entities. Our asset securitization program is more fully described in “Item 8. Financial Statements and Supplementary Data; Note 17. Asset Securitization” of Exhibit 99.1 to our Form 8-K dated June 19, 2009.

We had $495,221,000 of securitized credit card receivables outstanding as of August 1, 2009. We held certificates and retained interests in our securitizations of $100,358,000 as of August 1, 2009, which are generally subordinated in right of payment to certificates issued by the QSPEs to third-party investors. Our obligation to repurchase receivables sold to the QSPEs is limited to those receivables that, at the time of their transfer, fail to meet the QSPE’s eligibility standards under normal representations and warranties. To date, our repurchases of receivables pursuant to this obligation have been insignificant.

The following table presents additional information relating to the QSPEs:

	Twenty-six Weeks Ended
	August 1,		August 2,
(In thousands)	2009		2008

Proceeds from sales of new receivables to QSPE	$	359,677	$	455,716
Collections reinvested in revolving-period securitizations		464,226		567,889
Cash flows received on retained interests		43,031		54,518
Servicing fees received		4,888		5,742
Net credit losses		22,593		22,278
Credit card balances 90 or more days delinquent at end of year		18,340		19,467

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Asset Securitization (Continued)

We record gains or losses on the securitization of our proprietary credit card receivables based on the estimated fair value of the assets retained and liabilities incurred in the sale. Gains represent the present value of the estimated cash flows that we have retained over the estimated outstanding period of the receivables. This excess cash flow essentially represents an I/O strip, consisting of the present value of the finance charges and late fees in excess of the amounts paid to certificate holders, credit losses, and servicing fees.

Our management uses various valuation assumptions in determining the fair value of our I/O strip. We estimate the values for these assumptions using historical data, the impact of the current economic environment on the performance of the receivables sold, and the impact of the potential volatility of the current market for similar instruments in assessing the fair value of the retained interests.

In addition, we recognize a servicing liability because 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 our cost of servicing over the servicing fees received and is recorded at its estimated fair value. Because quoted market prices are generally not available for the servicing of proprietary credit card portfolios of comparable credit quality, we determine the fair value of the cost of servicing by calculating all costs associated with billing, collecting, maintaining, and providing customer service during the expected life of the securitized credit card receivable balances. We discount the amount of these costs in excess of the servicing fees over the estimated life of the receivables sold. The discount rate and estimated life assumptions used for the present value calculation of the servicing liability are consistent with those used for the I/O strip.

The key assumptions used to value our retained interest were as follows:

	August 1,	January 31,
	2009	2009

Payment rate	11.5 – 14.0%	12.1 – 14.6%
Residual cash flows discount rate	15.5 – 16.5%	15.5 – 16.5%
Net credit loss percentage	7.25 – 12.0%	6.75 – 11.75%
Average life of receivables sold	0.6 – 0.7 years	0.6 – 0.7 years

CSRC and Charming Shoppes Seller, Inc., our consolidated wholly-owned indirect subsidiaries, are separate special-purpose entities (“SPEs”) created for the securitization program. Our investment in asset-backed securities, which are first and foremost available to satisfy the claims of the respective creditors of these separate corporate entities, including certain claims of investors in the QSPEs, consisted of the following:

	August 1,		January 31,
(In thousands)	2009		2009

Trading securities
I/O Strip	$	19,089	$	19,298
Retained interest (primarily collateralized cash)		30,769		23,755

Available-for-sale securities
Ownership interest		50,500		51,400

Investment in asset-backed securities	$	100,358	$	94,453

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Asset Securitization (Continued)

See “Note 12. Fair Value Measurements” below for further information related to our certificates and retained interests in our securitized receivables, including activity related to our I/O strip and servicing liability.

Additionally, with respect to certain Trust Certificates, if either the Trust or Charming Shoppes, Inc. does not meet certain financial performance standards, the Trust is obligated to reallocate to third-party investors holding certain certificates issued by the Trust, collections in an amount up to $9,450,000 that otherwise would be available to CSRC. The result of this reallocation is to increase CSRC’s retained interest in the Trust by the same amount, with the third-party investor retaining an economic interest in the certificates. Subsequent to such a transfer occurring, and upon certain conditions being met, these same investors are required to repurchase these interests when the financial performance standards are again satisfied. Our net loss for the third quarter of Fiscal 2007 resulted in the requirement to reallocate collections as discussed above. Accordingly, $9,450,000 of collections was fully transferred as of February 2, 2008. The requirement for the reallocation of these collections will cease and such investors would be required to repurchase such interests upon our announcement of a quarter with net income and the fulfillment of such conditions. With the exception of the requirement to reallocate collections of $9,450,000 that were fully transferred as of February 2, 2008, the Trust was in compliance with its financial performance standards as of August 1, 2009, including all financial performance standards related to the performance of the underlying receivables.

In addition to the above, we could be affected by certain other events that would cause the QSPEs to hold proceeds of receivables, which would otherwise be available to be paid to us with respect to our subordinated interests, within the QSPEs as additional enhancement. For example, if we or the QSPEs do not meet certain financial performance standards, a credit enhancement condition would occur, and the QSPEs would be required to retain amounts otherwise payable to us. In addition, the failure to satisfy certain financial performance standards could further cause the QSPEs to stop using collections on QSPE assets to purchase new receivables, and would require such collections to be used to repay investors on a prescribed basis, as provided in the securitization agreements. As of August 1, 2009 we and the QSPEs were in compliance with the applicable financial performance standards referred to in this paragraph.

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

Note 10. Segment Reporting

We operate and report in two segments: Retail Stores and Direct-to-Consumer. We determine our operating segments based on the way our chief operating decision-makers review our results of operations. We consider our retail stores and store-related e-commerce as operating segments that are similar in terms of economic characteristics, production processes, and operations. Accordingly, we have aggregated our retail stores and store-related e-commerce into a single reporting segment (the “Retail Stores” segment). Our catalog and catalog-related e-commerce operations, excluding discontinued operations, are separately reported under the Direct-to-Consumer segment.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Segment Reporting (Continued)

The Retail Stores segment derives its revenues from sales through retail stores and store-related e-commerce sales under our LANE BRYANT® (including LANE BRYANT OUTLET®), FASHION BUG®, CATHERINES PLUS SIZES®, and PETITE SOPHISTICATE OUTLET® brands. The Direct-to-Consumer segment derives its revenues from catalog sales and catalog-related e-commerce sales under our LANE BRYANT WOMAN® and FIGI’S titles and e-commerce sales under our SHOETRADER.COM® website.

During Fiscal 2008 we decided to discontinue our LANE BRYANT WOMAN catalog and our SHOETRADER.COM website. During the Fiscal 2009 Second Quarter we completed the shutdown of our LANE BRYANT WOMAN catalog and we expect to complete the shutdown of the SHOETRADER.COM website during the Fiscal 2009 Third Quarter.

The accounting policies of the segments are generally the same as those described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies” of Exhibit 99.1 to our Form 8-K dated June 19, 2009. Our chief operating decision-makers evaluate the performance of our operating segments based on a measure of their contribution to operations, which consists of net sales less the cost of merchandise sold and certain directly identifiable and allocable operating costs. We do not allocate certain corporate costs, such as shared services, information systems support, and insurance to our Retail Stores or Direct-to-Consumer segments. Operating costs for our Retail Stores segment consist primarily of store selling, occupancy, buying, and warehousing. Operating costs for our Direct-to-Consumer segment consist primarily of catalog development, production, and circulation; e-commerce advertising; warehousing; and order processing.

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

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

Selected financial information for our operations by reportable segments and a reconciliation of the information by segment to our consolidated totals is included in the table on the following page.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Segment Reporting (Continued)

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

Thirteen weeks ended August 1, 2009
Net sales	$	518,190	$	6,348		$	2,679		$	527,217
Depreciation and amortization		12,676		214			6,302			19,192
Income before interest and taxes		24,944		(3,802	)		(11,010	)(1)		10,132
Interest expense							(4,485	)		(4,485	)
Income tax provision							664			664
Net income		24,944		(3,802	)		(16,159	)		4,983
Capital expenditures		1,541		14			3,509			5,064

Thirteen weeks ended August 2, 2008 (As adjusted)
Net sales	$	622,812	$	22,547		$	3,257		$	648,616
Depreciation and amortization		14,593		221			8,174			22,988	(3)
Loss before interest and taxes		38,173		(5,598	)		(36,975	)(2)		(4,400	)
Interest expense							(4,842	)		(4,842	)
Income tax benefit							(3,719	)		(3,719	)
Loss from continuing operations		38,173		(5,598	)		(38,098	)		(5,523	)
Capital expenditures		13,438		276			2,585			16,299	(3)

Twenty-six weeks ended August 1, 2009
Net sales	$	1,033,820	$	25,803		$	5,730		$	1,065,353
Depreciation and amortization		25,509		440			13,325			39,274
Income before interest and taxes		63,495		(7,239	)		(42,945	)(4)		13,311
Interest expense							(9,505	)		(9,505	)
Income tax provision							5,384			5,384
Net loss		63,495		(7,239	)		(57,834	)		(1,578	)
Capital expenditures		5,148		12			4,606			9,766

Twenty-six weeks ended August 2, 2008 (As adjusted)
Net sales	$	1,234,103	$	49,493		$	6,366		$	1,289,962
Depreciation and amortization		28,438		444			20,617			49,499	(6)
Loss before interest and taxes		81,577		(9,797	)		(71,908	)(5)		(128	)
Interest expense							(9,803	)		(9,803	)
Income tax benefit							(3,459	)		(3,459	)
Loss from continuing operations		81,577		(9,797	)		(78,252	)		(6,472	)
Capital expenditures		32,159		275			5,557			37,991	(6)
____________________
(1) Includes restructuring and other charges of $7,768 (see “Note 11. Restructuring and Other Charges” below) and a gain on repurchase of 1.125% Senior Convertible Notes of $7,313 (see “Note 4. Long-term Debt” above).
(2) Includes restructuring and other charges of $14,945 (see “Note 11. Restructuring and Other Charges” below).
(3) Excludes $111 of depreciation and amortization and $146 of capital expenditures related to our discontinued operations.
(4) Includes restructuring and other charges of $16,473 (see “Note 11. Restructuring and Other Charges” below) and a gain on repurchase of 1.125% Senior Convertible Notes of $11,564 (see “Note 4. Long-term Debt” above).
(5) Includes restructuring and other charges of $18,556 (see “Note 11. Restructuring and Other Charges” below).
(6) Excludes $850 of depreciation and amortization and $468 of capital expenditures related to our discontinued operations.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Restructuring and Other Charges

During the Fiscal 2009 Second Quarter we continued to execute on our multi-year transformational initiatives announced during Fiscal 2008. These initiatives include the closing of under-performing stores, discontinuation of the LANE BRYANT WOMAN catalog, and the transformation of our operations into a vertical specialty store model. See “Item 8. Financial Statements and Supplementary Data; Note 14. Restructuring and Other Charges” of Exhibit 99.1 to our Form 8-K dated June 19, 2009 for further discussion of these initiatives.

In July 2009, as part of our multi-year transformational initiatives, we outsourced certain information technology functions to a third-party provider. This action will result in the elimination of approximately 50 positions at our Bensalem, Pennsylvania corporate offices. We expect to complete this outsourcing initiative during the Fiscal 2009 Third Quarter.

The following tables summarize our restructuring and other charges as of August 1, 2009:

Costs Incurred

Accrued

for Twenty-six

Accrued

as of

Weeks Ended

as of

January 31

August 1,

Payments/

August 1,

(In thousands)

2009(1)

2009

Settlements

2009(1)

Fiscal 2007 Announcements

Relocation of CATHERINES operations:

Relocation and other charges

172

Closing of under-performing and PETITE