Edgar Filing: CHARMING SHOPPES INC

form10qoct312009.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 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

Table of Contents

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

Yes o No x

The number of shares outstanding of the issuer’s Common Stock (par value $.10 per share) as of November 30, 2009 was 115,585,753 shares.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Balance Sheets
	October 31, 2009 and January 31, 2009	2

	Condensed Consolidated Statements of Operations and Comprehensive Income
	Thirteen weeks ended October 31, 2009 and November 1, 2008	3
	Thirty-nine weeks ended October 31, 2009 and November 1, 2008	4

	Condensed Consolidated Statements of Cash Flows
	Thirty-nine weeks ended October 31, 2009 and November 1, 2008	5

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

	Forward-looking Statements	34

	Critical Accounting Policies	38

	Recent Developments	38

	Overview	39

	Results of Operations	42

	Liquidity and Capital Resources	56

	Financing	58

	Market Risk	61

	Impact of Recent Accounting Pronouncements	62

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	62

PART II.	OTHER INFORMATION	63

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

Item 6.	Exhibits	66

	SIGNATURES	69

	Exhibit Index	70

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

ASSETS
Current assets
Cash and cash equivalents	$	223,944		$	93,759
Available-for-sale securities		400			6,398
Accounts receivable, net of allowances of $2,017 and $6,018		4,100			33,300
Investment in asset-backed securities		0			94,453
Merchandise inventories		334,462			268,142
Deferred taxes		3,439			3,439
Prepayments and other		131,166			155,430
Total current assets		697,511			654,921

Property, equipment, and leasehold improvements – at cost		1,067,100			1,076,972
Less accumulated depreciation and amortization		734,768			693,796
Net property, equipment, and leasehold improvements		332,332			383,176

Trademarks and other intangible assets		187,132			187,365
Goodwill		23,436			23,436
Other assets		25,497			28,243
Total assets	$	1,265,908		$	1,277,141

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	163,142		$	99,520
Accrued expenses		184,344			166,631
Current portion – long-term debt		6,470			6,746
Total current liabilities		353,956			272,897

Deferred taxes		48,730			46,197
Other non-current liabilities		188,979			188,470
Long-term debt, net of debt discount of $47,962 and $72,913		183,630			232,722

Stockholders’ equity
Common Stock $.10 par value:
Authorized – 300,000,000 shares
Issued – 154,098,888 shares and 153,482,368 shares		15,410			15,348
Additional paid-in capital		502,339			498,551
Treasury stock at cost – 38,514,410 shares and 38,482,213 shares		(347,877	)		(347,730	)
Accumulated other comprehensive income		0			5
Retained earnings		320,741			370,681
Total stockholders’ equity		490,613			536,855
Total liabilities and stockholders’ equity	$	1,265,908		$	1,277,141

See Notes to Condensed Consolidated Financial Statements

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirteen Weeks Ended
	October 31,			November 1,
(In thousands, except per share amounts)	2009			2008
				(As Adjusted)

Net sales	$	460,237		$	553,066

Cost of goods sold		223,421			299,196
Gross profit		236,816			253,870

Occupancy and buying expenses		95,020			106,552
Selling, general, and administrative expenses		135,479			166,338
Depreciation and amortization		18,260			23,131
Sale of proprietary credit card receivables programs		13,379			0
Impairment of store assets		0			20,216
Restructuring and other charges		14,746			6,391
Total operating expenses		276,884			322,628

Loss from operations		(40,068	)		(68,758	)

Other income		198			1,876
Gain on repurchases of 1.125% Senior Convertible Notes		1,264			0
Interest expense		(4,822	)		(4,862	)

Loss from continuing operations before income taxes		(43,428	)		(71,744	)
Income tax provision/(benefit)		4,934			(11,858	)

Loss from continuing operations		(48,362	)		(59,886	)

Loss from discontinued operations, net of income tax benefit
of $12,698 in 2008		0			(23,875	)

Net loss	$	(48,362	)	$	(83,761	)

Basic net loss per share:
Loss from continuing operations	$	(0.42	)	$	(0.52	)
Loss from discontinued operations		0.00			(0.21	)
Net loss	$	(0.42	)	$	(0.73	)

Diluted net loss per share:
Loss from continuing operations	$	(0.42	)	$	(0.52	)
Loss from discontinued operations		0.00			(0.21	)
Net loss	$	(0.42	)	$	(0.73	)

See Notes to Condensed Consolidated Financial Statements

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirty-nine Weeks Ended
	October 31,			November 1,
(In thousands, except per share amounts)	2009			2008
				(As Adjusted)

Net sales	$	1,525,590		$	1,843,028

Cost of goods sold		737,340			959,409
Gross profit		788,250			883,619

Occupancy and buying expenses		297,660			318,900
Selling, general, and administrative expenses		427,260			517,119
Depreciation and amortization		57,534			72,630
Sale of proprietary credit card receivables programs		13,379			0
Impairment of store assets		0			20,216
Restructuring and other charges		31,219			24,947
Total operating expenses		827,052			953,812

Loss from operations		(38,802	)		(70,193	)

Other income		679			3,183
Gain on repurchases of 1.125% Senior Convertible Notes		12,828			0
Interest expense		(14,327	)		(14,665	)

Loss from continuing operations before income taxes		(39,622	)		(81,675	)
Income tax provision/(benefit)		10,318			(15,317	)

Loss from continuing operations		(49,940	)		(66,358	)

Loss from discontinued operations		0			(74,922	)

Net loss		(49,940	)		(141,280	)

Other comprehensive loss, net of tax
Unrealized losses on available-for-sale securities, net of income tax
benefit of $12 in 2008		(5	)		(24	)

Comprehensive loss	$	(49,945	)	$	(141,304	)

Basic net loss per share:
Loss from continuing operations	$	(0.43	)	$	(0.58	)
Loss from discontinued operations		0.00			(0.65	)
Net loss	$	(0.43	)	$	(1.23	)

Diluted net loss per share:
Loss from continuing operations	$	(0.43	)	$	(0.58	)
Loss from discontinued operations		0.00			(0.65	)
Net loss	$	(0.43	)	$	(1.23	)

See Notes to Condensed Consolidated Financial Statements

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Thirty-nine Weeks Ended
	October 31,			November 1,
(In thousands)	2009			2008
				(As Adjusted)

Operating activities
Net loss	$	(49,940	)	$	(141,280	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		58,908			73,498
Stock-based compensation		4,301			4,708
Sale of proprietary credit card receivables programs		13,379			0
Net loss/(gain) from disposition of capital assets		182			(722	)
Net loss/(gain) from securitization activities		(2,465	)		531
Accretion of discount on 1.125% Senior Convertible Notes		7,786			8,199
Loss on disposition of discontinued operations		0			46,736
Impairment of store assets		0			20,216
Deferred income taxes		2,536			11,025
Gain on repurchases of 1.125% Senior Convertible Notes		(12,828	)		0
Write-down of deferred taxes related to stock-based compensation		0			(1,352	)
Write-down of capital assets		8,935			2,456
Changes in operating assets and liabilities
Accounts receivable, net		29,200			29,058
Merchandise inventories		(66,320	)		(65,430	)
Accounts payable		63,622			51,768
Prepayments and other		(13,369	)		(11,322	)
Accrued expenses and other		5,395			(8,971	)
Proceeds from sale of retained interests in proprietary credit card receivables		85,050			0
Net cash provided by operating activities		134,372			19,118

Investing activities
Investment in capital assets		(16,313	)		(49,498	)
Proceeds from sale of certificates related to proprietary credit card receivables		51,250			0
Proceeds from sales of capital assets		1,719			4,813
Net proceeds from sale of discontinued operations		0			34,440
Gross purchases of securities		(2,448	)		(3,935	)
Proceeds from sales of securities		8,588			11,651
Decrease in other assets		4,357			6,635
Net cash provided by investing activities		47,153			4,106

Financing activities
Proceeds from long-term borrowings		0			108
Repayments of long-term borrowings		(5,076	)		(6,813	)
Repurchases of 1.125% Senior Convertible Notes		(39,323	)		0
Net payments for settlements of hedges on convertible notes		(31	)		0
Payments of deferred financing costs		(7,308	)		(47	)
Purchases of treasury stock		0			(10,969	)
Net proceeds from shares issued under employee stock plans		398			484
Net cash used by financing activities		(51,340	)		(17,237	)

Increase in cash and cash equivalents		130,185			5,987
Cash and cash equivalents, beginning of period		93,759			61,842
Cash and cash equivalents, end of period	$	223,944		$	67,829

(Continued on next page)

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

	Thirty-nine Weeks Ended
	October 31,		November 1,
(In thousands)	2009		2008
			(As Adjusted)

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

See Notes to Condensed Consolidated Financial Statements

Table of Contents

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 certain provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, “Debt With Conversion and Other Options” (formerly FASB Staff Position APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)”) in accordance with the transition provisions of ASC 470-20-65-1 (see “Change in Accounting Principle” and “Note 4. Long-term Debt” below). The results of operations for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 are not necessarily indicative of operating results for the full fiscal year.

In June 2009 the FASB established the ASC as the official single source of authoritative accounting principles to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States (see “Note 16. Recent Accounting Pronouncements” below). Information in the FASB ASC is organized numerically in descending order by topic, subtopic, section, and subsection. References to the ASC shown in these footnotes are abbreviated as “ASC” followed by the specific topic, subtopic, section, or subsection where the relevant literature is contained.

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, and the term “Fiscal 2007” refers to our fiscal year ended February 2, 2008. The term “Fiscal 2009 Third Quarter” refers to our fiscal quarter ended October 31, 2009 and the term “Fiscal 2008 Third Quarter” refers to our fiscal quarter ended November 1, 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 2008 First Quarter” refers to our fiscal quarter ended May 3, 2008. The term “Fiscal 2010” refers to our fiscal year ending January 29, 2011 and the term “Fiscal 2010 First Quarter” refers to our fiscal quarter ending May 1, 2010. 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 and 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. A table presenting our cost of goods sold, gross profit, and operating expenses by quarter for Fiscal 2008 prepared on a consistent basis with the current-year presentation is included in “Note 1. Condensed Consolidated Financial Statements” of our Report on Form 10-Q for the quarterly period ended August 1, 2009.

Table of Contents

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 thirty-nine weeks ended November 1, 2008 have been adjusted to reflect the retrospective adoption as of February 1, 2009, in accordance with the transition provisions of ASC 470-20-65-1, of certain provisions of ASC 470-20, “Debt With Conversion and Other Options,” related to certain debt instruments that may be settled in cash upon conversion. Our 1.125% Senior Convertible Notes due May 2014 (the “1.125% Notes”) are within the scope of these provisions (see “Note 4. Long-term Debt” below for further information).

In connection with our adoption of these provisions 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 ASC 250, “Accounting Changes and Error Corrections,” SEC Staff Accounting Bulletin No. 99 (ASC 250-10-S99-1), “Materiality,” and ASC 270, “Interim 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 ASC 470-20. 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.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

In accordance with ASC 470-20-25 and ASC 470-20-30, 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 ASC 470-20-30, 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 ASC 470-20.

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 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 to be accounted for as held for sale. In July 2009 we announced the discontinuation of the exploration of the sale of FIGI’S.

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

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

Net sales	$	34,563		$	155,811

Loss from discontinued operations	$	(11,177	)(2)	$	(74,922	)(2)
Income tax benefit		(12,698	)(3)		0
Loss from discontinued operations, net of income tax benefit	$	(23,875	)	$	(74,922	)
____________________
(1) Through September 18, 2008 (the date of sale).
(2) Includes $7,209,000 of losses from operations and an increase of $3,968,000 in the loss on disposition for the thirteen weeks ended November 1, 2008, and $28,186,000 of losses from operations and a $46,736,000 loss on disposition for the thirty-nine weeks ended November 1, 2008.
(3) Reversal of previously recognized tax benefit as a result of our recognition of a valuation allowance against net deferred tax assets.

Table of Contents

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 closing 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 closing of the LANE BRYANT WOMAN catalog operations did not meet the requirements for being reported as a discontinued operation.

On August 13, 2009 we announced an agreement for the sale of our proprietary credit card receivables programs to World Financial Network National Bank, a subsidiary of Alliance Data Systems Corporation (“Alliance Data”). We also entered into ten-year operating agreements with Alliance Data for the provision of private-label credit card programs for our customers (see “Note 9. Sale of Proprietary Credit Card Receivables Programs” below). Due to our significant continuing involvement and retained cash flows as a result of the ten-year operating agreements with Alliance Data, the sale of the proprietary credit card receivables programs did not meet the requirements for being reported as a discontinued operation.

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 11. 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 October 31, 2009 were as follows:

2004 Stock Award and Incentive Plan			2,321,480
2003 Non-Employee Directors Compensation Plan			161,897
1994 Employee Stock Purchase Plan			578,070
1988 Key Employee Stock Option Plan			122,105

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Current grants of stock-based compensation consist primarily of stock appreciation rights. Stock option and stock appreciation rights activity for the thirty-nine weeks ended October 31, 2009 was as follows:

											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		4,771,540			1.74		0.99	–		5.72
Canceled/forfeited		(513,894	)		4.96		1.00	–		11.28
Exercised		(7,260	)		1.00		1.00	–		1.00		23	(2)
Outstanding at October 31, 2009		7,542,771		$	2.99	$	0.99	–	$	13.84	$	11,653
Exercisable at October 31, 2009		1,516,235		$	5.82	$	1.00	–	$	13.84	$	0
____________________
(1) Aggregate market value less aggregate exercise price.
(2) As of date of exercise.

Total stock-based compensation expense was as follows:

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	October 31,		November 1,			October 31,		November 1,
(In thousands)	2009		2008			2009		2008

Total stock-based compensation expense	$	1,327	$	(306	)(1)	$	4,301	$	4,708	(1)
____________________
(1) Includes $955 reversal of previously recognized stock-based compensation related to performance-based awards.

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 ASC 718-10-25-11, “Compensation – Stock Compensation; Recognition.” Compensation expense related to cash-settled RSUs is recognized over a one-year period from the date of grant and included in “Accrued expenses” in our consolidated balance sheets. Compensation expense of $199,000 for the thirteen weeks and $761,000 for the thirty-nine weeks ended October 31, 2009 related to these cash-settled RSUs has been excluded from the above table. In addition, a decrease in compensation expense of $214,000 for the thirteen weeks and an increase in compensation expense of $267,000 for the thirty-nine weeks ended November 1, 2008 have been excluded from the above table. The $214,000 decrease in compensation expense is a result of a reduction in the market value of our common stock during the Fiscal 2008 Third Quarter. Total compensation expense for unvested cash-settled RSUs not yet recognized as of October 31, 2009 was $426,000.

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.

Table of Contents

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 $10,490,000 as of October 31, 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:

	October 31,			January 31,
(In thousands)	2009			2009

Due from customers	$	6,117		$	39,318
Allowance for doubtful accounts		(2,017	)		(6,018	)
Net accounts receivable	$	4,100		$	33,300

Note 3. Trademarks and Other Intangible Assets

	October 31,		January 31,
(In thousands)	2009		2009

Trademarks, tradenames, and internet domain names	$	187,132	$	187,132
Customer relationships, net		0		233
Net trademarks and other intangible assets	$	187,132	$	187,365

Note 4. Long-term Debt

	October 31,			January 31,
(In thousands)	2009			2009
				(As Adjusted)

1.125% Senior Convertible Notes, due May 2014	$	205,757		$	275,000
Capital lease obligations		11,192			14,041
6.07% mortgage note, due October 2014		9,954			10,419
6.53% mortgage note, due November 2012		4,200			5,250
7.77% mortgage note, due December 2011		6,729			7,249
Other long-term debt		230			422
Total long-term debt principal		238,062			312,381
Less unamortized discount on 1.125% Senior Convertible Notes		(47,962	)		(72,913	)
Long-term debt – carrying value		190,100			239,468
Current portion		(6,470	)		(6,746	)
Net long-term debt	$	183,630		$	232,722

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

ASC 470-20, “Debt With Conversion and Other Options,” specifies, among other things, the accounting treatment for convertible securities that an issuer may settle fully or partially in cash. In accordance with ASC 470-20-65-1, we adopted the provisions of ASC 470-20 as of January 31, 2009 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 ASC 470-20 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 ASC 470-20-25 and ASC 470-20-30, 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 ($205,757,000 as of October 31, 2009).

Our adoption of ASC 470-20 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 (54 months as of October 31, 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 ASC 470-20 does not affect our cash flows.

Our adoption of ASC 470-20 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:

	October 31,			January 31,
(In thousands)	2009			2009

Equity component of 1.125% Senior Convertible Notes	$	90,750		$	91,715

Principal value of 1.125% Senior Convertible Notes	$	205,757		$	275,000
Unamortized discount		(47,962	)		(72,913	)
Liability component of 1.125% Senior Convertible Notes	$	157,795		$	202,087

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

Our retrospective adoption of ASC 470-20 resulted in the following adjustments to our condensed consolidated balance sheet as of January 31, 2009:

	January 31, 2009
	As Previously		Other			ASC 470-20			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.

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

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	October 31,			November 1,			October 31,			November 1,
(Dollars in thousands)	2009			2008			2009			2008

Contractual interest expense	$	612		$	773		$	2,057		$	2,320
Amortization of debt discount		2,352			2,782			7,786			8,199
Total interest expense	$	2,964		$	3,555		$	9,843		$	10,519

Effective interest rate		7.4	%		7.4	%		7.4	%		7.4	%

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

Our adoption of ASC 470-20 resulted in the following adjustments to our condensed consolidated statements of operations for the thirteen and thirty-nine weeks ended October 31, 2009:

	Before			Adoption of			As
(In thousands, except per-share amounts)	Adoption			ASC 470-20			Adjusted

Thirteen weeks ended October 31, 2009
Interest expense	$	2,562		$	2,260	(1)	$	4,822
Income tax provision		4,934			0			4,934
Loss from continuing operations		(46,102	)		(2,260	)		(48,362	)
Net loss		(46,102	)		(2,260	)		(48,362	)
Basic net loss per share		(0.40	)		(0.02	)		(0.42	)
Diluted net loss per share		(0.40	)		(0.02	)		(0.42	)

Thirty-nine weeks ended October 31, 2009
Interest expense	$	6,816		$	7,511	(1)	$	14,327
Income tax provision		10,318			0			10,318
Loss from continuing operations		(42,429	)		(7,511	)		(49,940	)
Net loss		(42,429	)		(7,511	)		(49,940	)
Basic net loss per share(2)		(0.37	)		(0.07	)		(0.43	)
Diluted net loss per share(2)		(0.37	)		(0.07	)		(0.43	)
____________________
(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.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

Our adoption of ASC 470-20 resulted in the following adjustments to our condensed consolidated statements of operations for the thirteen and thirty-nine weeks ended November 1, 2008:

	As Previously			Other			Adoption of			As
(In thousands, except per-share amounts)	Reported			Adjustments(1)			ASC 470-20			Adjusted

Thirteen weeks ended November 1, 2008
Interest expense	$	2,172					$	2,690	(2)	$	4,862
Income tax benefit		(11,269	)	$	27,283			(27,872	)(3)		(11,858	)
Loss from continuing operations		(57,785	)		(27,283	)		25,182			(59,886	)
Net loss		(81,660	)		(27,283	)		25,182			(83,761	)
Basic net loss per share:
Continuing operations		(0.50	)		(0.24	)		0.22			(0.52	)
Net loss		(0.71	)		(0.24	)		0.22			(0.73	)
Diluted net loss per share:
Continuing operations		(0.50	)		(0.24	)		0.22			(0.52	)
Net loss		(0.71	)		(0.24	)		0.22			(0.73	)

Thirty-nine weeks ended November 1, 2008
Interest expense	$	6,742					$	7,923	(2)	$	14,665
Income tax benefit		(12,914	)	$	27,293			(29,696	)(3)		(15,317	)
Loss from continuing operations		(60,838	)		(27,293	)		21,773			(66,358	)
Net loss		(135,760	)		(27,293	)		21,773			(141,280	)
Basic net loss per share:
Continuing operations		(0.53	)		(0.24	)		0.19			(0.58	)
Net loss		(1.18	)		(0.24	)		0.19			(1.23	)
Diluted net loss per share:
Continuing operations		(0.53	)		(0.24	)		0.19			(0.58	)
Net loss		(1.18	)		(0.24	)		0.19			(1.23	)
____________________
(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) Amortization of the debt discount related to the 1.125% Notes less amortization of debt issue costs related to the equity component.
(3) Tax effect of adoption of ASC 470-20.

During the thirteen weeks ended October 31, 2009 we repurchased $17,508,000 aggregate principal amount of 1.125% Notes with $4,145,000 of unamortized discount for a purchase price of $12,706,000 and recognized a gain of $1,264,000 net of unamortized issue costs. During the thirty-nine weeks ended October 31, 2009 we repurchased $69,243,000 aggregate principal amount of 1.125% Notes with $17,165,000 of unamortized discount for a purchase price of $39,323,000 and recognized a gain of $12,828,000 net of unamortized issue costs. In accordance with ASC 470-20 approximately $965,000 of the aggregate purchase price was accounted for as a reduction of stockholders’ equity during the thirty-nine weeks ended October 31, 2009. In conjunction with the repurchases, during the Fiscal 2009 Second Quarter and Fiscal 2009 Third 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. Subsequent to October 31, 2009 we repurchased additional 1.125% Notes (see “Note 17. Subsequent Events” below).

Table of Contents

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 replaced our then-existing $375,000,000 revolving credit facility and provides for committed revolving credit availability through July 31, 2012. The amount of credit 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 credit facility 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; proprietary 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 October 31, 2009 we had an aggregate total of $6,700,000 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 October 31, 2009.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5. Stockholders’ Equity

	Thirty-nine
	Weeks Ended
	October 31,
(Dollars in thousands)	2009

Total stockholders’ equity, beginning of period (as adjusted)	$	536,855	(1)
Net loss		(49,940	)
Issuance of common stock (616,520 shares), net of shares withheld for payroll taxes		398
Stock-based compensation		4,301
Net payments for settlement of hedges on convertible notes		(31	)(2)
Equity component of repurchases of 1.125% Senior Convertible Notes		(965	)(2)
Unrealized losses on available-for-sale securities		(5	)
Total stockholders’ equity, end of period	$	490,613
____________________
(1) We adopted the provisions of ASC 470-20 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 $4,836,000 during the thirteen weeks ended October 31, 2009, $14,810,000 during the thirty-nine weeks ended October 31, 2009, $5,270,000 during the thirteen weeks ended November 1, 2008, and $15,644,000 during the thirty-nine weeks ended November 1, 2008 in connection with our loyalty card programs. We accrued $2,935,000 as of October 31, 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.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7. Net Loss Per Share

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	October 31,			November 1,			October 31,			November 1,
(In thousands, except per share amounts)	2009			2008			2009			2008
				(As Adjusted)						(As Adjusted)

Basic weighted average common shares outstanding		115,816			114,877			115,536			114,602
Dilutive effect of stock options, stock appreciation rights, and awards(1)		0			0			0			0
Diluted weighted average common shares and equivalents outstanding		115,816			114,877			115,536			114,602

Loss from continuing operations	$	(48,362	)	$	(59,886	)	$	(49,940	)	$	(66,358	)
Loss from discontinued operations, net of income tax benefit		0			(23,875	)		0			(74,922	)

Net loss used to determine diluted net loss per share	$	(48,362	)	$	(83,761	)	$	(49,940	)	$	(141,280	)

Options with weighted average exercise price greater
than market price, excluded from computation of net
loss per share:(1)
Number of shares		–			–			–			–
Weighted average exercise price per share		–			–			–			–
____________________
(1) Stock options, stock appreciation rights, and awards are excluded from the computation of diluted net 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 ASC 740-270, “Income Taxes; Interim Reporting.” For interim periods, we estimate our annual effective income tax rate and apply the estimated rate to our year-to-date income or loss before income taxes. We also compute the tax provision or benefit related to items 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.

Table of Contents

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 ASC 740, “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. ASC 740 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 ASC 740, 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, which include available net operating loss carrybacks for Fiscal 2008, amended return receivables, and prepaid income taxes and are net of income tax payables, of $17,125,000 as of October 31, 2009 and $47,303,000 as of January 31, 2009 are included in “Prepayments and other” on our condensed consolidated balance sheets. The decrease in the net income tax receivables is substantially due to the receipt during the Fiscal 2009 Third Quarter of a Federal tax refund related to our available net operating loss carryback for Fiscal 2008.

The sale of our proprietary credit card receivables programs (see “Note 9. Sale of Proprietary Credit Card Receivables Programs” below) resulted in the reversal of deferred tax liabilities relating to these receivables. After considering these reversals, as well as our financial statement loss from continuing operations and other estimated movements in deferred taxes, we are expecting a Federal and state income tax liability for Fiscal 2009. However, we are able to fully offset this liability using some of our available net operating loss carryforwards as of January 31, 2009. There is no resulting benefit to our income tax provision from the utilization of the net operating loss carryforwards as the previously-mentioned deferred tax liabilities associated with our proprietary credit card receivables programs had been considered in determining the required valuation allowance.

As of October 31, 2009 our gross unrecognized tax benefits associated with uncertain tax positions were $29,813,000. If recognized, the portion of the liabilities for gross unrecognized tax benefits that would decrease our provision for income taxes and increase our net income was $19,704,000. The accrued interest and penalties as of October 31, 2009 were $12,993,000. During the thirty-nine weeks ended October 31, 2009 the gross unrecognized tax benefits increased by $635,000 and the portion of the liabilities for gross unrecognized tax benefits that, if recognized, would decrease our provision for income taxes and increase our net income increased by $857,000. Accrued interest and penalties increased by $262,000 during the thirty-nine weeks ended October 31, 2009.

As of October 31, 2009 it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by as much as $3,582,000 as a result of resolutions of audits related to U.S. Federal and state tax positions.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Income Taxes (Continued)

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 2004 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.

On November 6, 2009, H.R. 3548, the “Worker, Homeownership, and Business Assistance Act of 2009” (the “Act”) was signed into law. The Act contains a number of tax law changes, including a provision that permits companies to carryback applicable 2008 or 2009 net operating losses (“NOL”) up to five years, instead of the general two-year carryback. The Act defines an applicable NOL as a NOL that arises in a tax year either beginning or ending in 2008 or 2009. We previously carried a portion of our Fiscal 2008 NOL back two years; however, we now have the opportunity to carry back the remaining NOL to the preceding three years to offset taxable income in those years and receive a cash refund. Under ASC 740, “Income Taxes,” the tax effects of the Act, including the re-measurement of existing current and deferred tax assets and liabilities, as well as related valuation allowances, are recognized in the interim period that includes the enactment date of the change (our Fiscal 2009 Fourth Quarter). We are currently evaluating the Act, and any resulting impact on our income tax provision has not yet been determined.

Note 9. Sale of Proprietary Credit Card Receivables Programs

On August 13, 2009 we announced an agreement for the sale of our proprietary credit card receivables programs to World Financial Network National Bank (“WFNNB”), a subsidiary of Alliance Data Systems Corporation (“Alliance Data”). We also entered into ten-year operating agreements with Alliance Data for the provision of private-label credit card programs for our customers. The transaction closed on October 30, 2009. We received net cash proceeds of $136,300,000 related to the transaction and recognized one-time net charges as a result of the sale of $13,379,000 for the thirteen weeks and thirty-nine weeks ended October 31, 2009, primarily related to contract termination, transaction, severance, and retention costs.

The transaction consisted of the sale of our proprietary credit card portfolio, along with certain other assets and liabilities that are required to support these card programs, including our consolidated balance sheet asset “Investment in asset-backed securities.” The components of the investment in asset-backed securities comprising the net sales proceeds were $51,250,000 of outstanding trust certificates owned by Charming Shoppes Receivables Corp. (“CSRC”), $59,690,000 of cash account balances in the Charming Shoppes Master Trust (the “Trust”) that had been funded by CSRC, an interest-only strip of $21,700,000, and other retained interests of $3,660,000.

The proceeds of the transaction are subject to a true-up within 60 days of the closing of the sale, which could increase or decrease the final proceeds of the sale. Gross proceeds from the transaction were $166,300,000. Approximately $30,000,000 of the gross proceeds were used to fund the termination of contractual obligations related to the transaction as well as exit costs. In addition, on the sale date, we surrendered the charter of the Spirit of America National Bank (the “Bank”), our wholly-owned credit card bank, and merged the remaining assets and liabilities of the Bank into another non-banking subsidiary.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Sale of Proprietary Credit Card Receivables Programs (Continued)

We will receive ongoing payments from Alliance Data under the ten-year operating agreements based on credit sales generated by our private-label credit card customers. Alliance Data will assume the servicing obligations for the Trust, which was renamed the World Financial Network Credit Card Trust II effective as of the date of sale. Prior to the sale, the Trust was an unconsolidated qualified special-purpose entity (“QSPE”) through which the Charming Shoppes credit card receivables were financed. Therefore, we will have no further obligations with respect to financing our credit card programs. The ten-year operating agreements may be terminated early by either party for cause upon the occurrence of certain events as specified in the agreements including, but not limited to: unsatisfactory performance by WFNNB under the terms of the agreements; substantial declines in private-label credit card sales volume or substantial closings of sales channels; and events of insolvency or other material defaults.

Note 10. Asset Securitization

Prior to the sale of our proprietary credit card receivables programs our FASHION BUG®, LANE BRYANT, CATHERINES®, and PETITE SOPHISTICATE® proprietary credit card receivables were originated by Spirit of America National Bank (the “Bank”), our wholly-owned credit card bank. The Bank transferred its interest in all of the receivables associated with these programs to the Charming Shoppes Master Trust (the “Trust”) through Charming Shoppes Receivables Corp., a separate and distinct special-purpose entity. In connection with the sale of our proprietary credit card receivables programs to WFNNB we paid off and terminated the two conduit securitization facilities previously in the Trust and WFNNB assumed all future responsibility for the Trust and all remaining securitization series in the Trust.

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 these 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.

Our asset securitization program prior to the sale of our proprietary credit card receivables programs 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 held certificates and retained interests in our securitizations of $136,300,000 as of October 30, 2009, which were sold to Alliance Data in connection with the sale of our proprietary credit card receivables programs (see “Note 9. Sale of Proprietary Credit Card Receivables Programs” above).

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Asset Securitization (Continued)

The following table presents additional information relating to the receivables in our Trust prior to the sale of the credit card portfolio:

	Thirty-nine Weeks Ended
	October 31,		November 1,
(In thousands)	2009(1)		2008

Proceeds from sales of new receivables to QSPE	$	530,544	$	674,817
Collections reinvested in revolving-period securitizations		667,611		829,188
Cash flows received on retained interests		68,326		82,679
Servicing fees received		7,228		8,590
Net credit losses		37,035		34,027
____________________
(1) Through October 30, 2009 (the date of sale of the proprietary credit card receivables programs).

Prior to the sale of our proprietary credit card receivables programs we accounted for the securitization of our proprietary credit card receivables as follows:

●	We recorded 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 represented the present value of the estimated cash flows that we retained over the estimated outstanding period of the receivables. This excess cash flow essentially represented 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.

●	We used various valuation assumptions in determining the fair value of our I/O strip. We estimated 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 recognized a servicing liability because the servicing fees we expected to receive from the securitizations did not provide adequate compensation for servicing the receivables. The servicing liability represented the present value of the excess of our cost of servicing over the servicing fees received and was recorded at its estimated fair value. Because quoted market prices were generally not available for the servicing of proprietary credit card portfolios of comparable credit quality, we determined 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 discounted 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 were consistent with those used for the I/O strip.

See “Note 14. 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.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. 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.

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 closing of our LANE BRYANT WOMAN catalog and during the Fiscal 2009 Third Quarter we completed the closing of our SHOETRADER.COM website. During the Fiscal 2009 Third Quarter we also completed the sale of our proprietary credit card receivables programs (see “Note 9. Sale of Proprietary Credit Card Receivables Programs” above).

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. Retail Stores segment operating costs consist primarily of store selling, occupancy, buying, and warehousing. Direct-to-Consumer segment operating costs 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 private-label 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.

Table of Contents

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Segment Reporting (Continued)

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

Thirteen weeks ended October 31, 2009
Net sales	$	448,298		$	9,419		$	2,520		$	460,237
Depreciation and amortization		12,829			227			5,204			18,260
Loss from operations		3,715			(3,968	)		(39,815	)(1)		(40,068	)
Gain on repurchases of 1.125% Senior Convertible Notes								1,264			1,264
Net interest expense and other income								(4,624	)		(4,624	)
Income tax provision								4,934			4,934
Net loss		3,715			(3,968	)		(48,109	)		(48,362	)
Capital expenditures		2,426			0			4,121			6,547

Thirteen weeks ended November 1, 2008 (As adjusted)
Net sales	$	528,501		$	21,311		$	3,254		$	553,066
Depreciation and amortization		14,979			228			7,924			23,131
Loss from operations		(12,104	)		(6,077	)		(50,577	)(2)		(68,758	)
Net interest expense and other income								(2,986	)		(2,986	)
Income tax benefit								(11,858	)		(11,858	)
Loss from continuing operations		(12,104	)		(6,077	)		(41,705	)		(59,886	)
Capital expenditures		9,314			78			1,633			11,025	(3)

Thirty-nine weeks ended October 31, 2009
Net sales	$	1,482,118		$	35,222		$	8,250		$	1,525,590
Depreciation and amortization		38,338			667			18,529			57,534
Loss from operations		67,210			(11,578	)		(94,434	)(4)		(38,802	)
Gain on repurchases of 1.125% Senior Convertible Notes								12,828			12,828
Net interest expense and other income								(13,648	)		(13,648	)