Edgar Filing: CHARMING SHOPPES INC

form10qjul302011.htm

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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 July 30, 2011

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 x No o

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

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

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

Yes o No x

The number of shares outstanding of the issuer’s Common Stock (par value $.10 per share) as of August 26, 2011 was 116,474,254 shares.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

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		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2

	Condensed Consolidated Balance Sheets
	July 30, 2011 (Unaudited) and January 29, 2011	2

	Condensed Consolidated Statements of Operations (Unaudited)
	Thirteen weeks ended July 30, 2011 and July 31, 2010	3
	Twenty-six weeks ended July 30, 2011 and July 31, 2010	4

	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Twenty-six weeks ended July 30, 2011 and July 31, 2010	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Forward-looking Statements	18

	Critical Accounting Policies	19

	Overview	20

	Results of Operations	22

	Liquidity and Capital Resources	35

	Financing	37

	Market Risk	38

	Impact of Recent Accounting Pronouncements	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION	40

Item 1.	Legal Proceedings	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	40

	SIGNATURES	42

	Exhibit Index	43

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 30,			January 29,
(In thousands, except share amounts)	2011			2011
	(Unaudited)

ASSETS
Current assets
Cash and cash equivalents	$	227,436		$	117,482
Accounts receivable, net of allowances of $2,326 and $5,667		5,395			36,568
Merchandise inventories		271,862			282,248
Deferred taxes		3,153			3,153
Prepayments and other		95,839			98,458
Total current assets		603,685			537,909

Property, equipment, and leasehold improvements – at cost		1,009,497			1,028,843
Less accumulated depreciation and amortization		772,312			772,895
Net property, equipment, and leasehold improvements		237,185			255,948

Trademarks, tradenames, and internet domain names		187,132			187,132
Goodwill		23,436			23,436
Other assets		18,659			18,233
Total assets	$	1,070,097		$	1,022,658

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	136,222		$	107,882
Accrued expenses		142,318			142,002
Current portion – long-term debt		10,826			11,449
Total current liabilities		289,366			261,333

Deferred taxes		53,237			51,466
Other non-current liabilities		155,291			167,089
Long-term debt, net of debt discount of $21,247 and $24,679		132,056			128,350

Stockholders’ equity
Common Stock $.10 par value:
Authorized – 300,000,000 shares
Issued – 155,087,788 shares and 154,185,373 shares		15,509			15,419
Additional paid-in capital		510,174			508,664
Treasury stock at cost – 38,617,180 shares		(348,400	)		(348,400	)
Retained earnings		262,864			238,737
Total stockholders’ equity		440,147			414,420
Total liabilities and stockholders’ equity	$	1,070,097		$	1,022,658

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Thirteen Weeks Ended
	July 30,			July 31,
(In thousands, except per share amounts)	2011			2010

Net sales	$	499,202		$	517,564

Cost of goods sold		253,296			268,441
Gross profit		245,906			249,123

Occupancy and buying expenses		86,601			91,880
Selling, general, and administrative expenses		140,847			146,979
Depreciation and amortization		14,482			16,937
Restructuring and other charges		474			619
Total operating expenses		242,404			256,415

Income/(loss) from operations		3,502			(7,292	)

Other income		96			396
Gain on repurchases of 1.125% Senior Convertible Notes		0			1,907
Interest expense		(3,898	)		(4,096	)

Loss before income taxes		(300	)		(9,085	)
Income tax provision/(benefit)		1,611			(443	)

Net loss	$	(1,911	)	$	(8,642	)

Basic and diluted net loss per share	$	(0.02	)	$	(0.07	)

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Twenty-six Weeks Ended
	July 30,			July 31,
(In thousands, except per share amounts)	2011			2010

Net sales	$	1,003,555		$	1,022,369

Cost of goods sold		472,328			496,657
Gross profit		531,227			525,712

Occupancy and buying expenses		176,012			184,104
Selling, general, and administrative expenses		296,094			306,152
Depreciation and amortization		28,890			33,748
Gain from sale of office premises		(5,185	)		0
Restructuring and other charges/(credits)		(139	)		1,508
Total operating expenses		495,672			525,512

Income from operations		35,555			200

Other income		237			534
Gain on repurchases of 1.125% Senior Convertible Notes		0			1,907
Interest expense		(7,674	)		(8,570	)

Income/(loss) before income taxes		28,118			(5,929	)
Income tax provision/(benefit)		3,991			(1,182	)

Net income/(loss)	$	24,127		$	(4,747	)

Basic net income/(loss) per share	$	0.21		$	(0.04	)

Diluted net income/(loss) per share	$	0.20		$	(0.04	)

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Twenty-six Weeks Ended
	July 30,			July 31,
(In thousands)	2011			2010

Operating activities
Net income/(loss)	$	24,127		$	(4,747	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Depreciation and amortization		29,991			34,696
Stock-based compensation		2,387			2,010
Accretion of discount on 1.125% Senior Convertible Notes		3,432			3,974
Deferred income taxes		1,771			(918	)
Gain on repurchases of 1.125% Senior Convertible Notes		0			(1,907	)
Write-down of capital assets due to restructuring		822			0
Net (gain)/loss from disposition of capital assets		(4,849	)		534
Changes in operating assets and liabilities
Accounts receivable, net		31,173			28,886
Merchandise inventories		10,386			(21,931	)
Accounts payable		28,340			33,182
Prepayments and other		2,619			30,916
Accrued expenses and other		(7,010	)		(22,653	)
Net cash provided by operating activities		123,189			82,042

Investing activities
Investment in capital assets		(14,596	)		(16,584	)
Proceeds from sales of capital assets		7,537			0
Proceeds from sales of securities		0			200
Increase in other assets		(345	)		(954	)
Net cash used by investing activities		(7,404	)		(17,338	)

Financing activities
Repayments of long-term borrowings		(3,232	)		(3,100	)
Repurchases of 1.125% Senior Convertible Notes		0			(38,260	)
Payment of deferred financing costs		(1,812	)		0
Issuance of common stock under employee stock plans, net of amounts withheld for payroll taxes		(787	)		131
Net cash used by financing activities		(5,831	)		(41,229	)

Increase in cash and cash equivalents		109,954			23,475
Cash and cash equivalents, beginning of period		117,482			186,580
Cash and cash equivalents, end of period	$	227,436		$	210,055

Non-cash financing and investing activities
Assets acquired through capital leases	$	2,883		$	0

See Notes to Condensed Consolidated Financial Statements

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“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 cash flows. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles. These financial statements and related notes should be read in conjunction with our financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The results of operations for the thirteen weeks and twenty-six weeks ended July 30, 2011 and July 31, 2010 are not necessarily indicative of operating results for the full fiscal year. As used in these notes, the terms “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and, where applicable, our consolidated subsidiaries.

Note 2. Accounts Receivable

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

	July 30,			January 29,
(In thousands)	2011			2011

Due from customers	$	7,721		$	42,235
Allowance for doubtful accounts		(2,326	)		(5,667	)
Net accounts receivable	$	5,395		$	36,568

Note 3. Long-term Debt

	July 30,			January 29,
(In thousands)	2011			2011

1.125% Senior Convertible Notes, due May 1, 2014	$	140,451		$	140,451
6.07% mortgage note, due October 11, 2014		8,646			9,035
6.53% mortgage note, due November 1, 2012		1,750			2,450
7.77% mortgage note, due December 1, 2011		5,393			5,793
Capital lease obligations		7,889			6,749
Total long-term debt principal		164,129			164,478
Less unamortized discount on 1.125% Senior Convertible Notes		(21,247	)		(24,679	)
Long-term debt – carrying value		142,882			139,799
Current portion		(10,826	)		(11,449	)
Net long-term debt	$	132,056		$	128,350

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3. Long-term Debt (Continued)

On July 14, 2011 we entered into an amended and restated loan and security agreement (the “Amended Agreement”) for a $200,000,000 senior secured revolving credit facility (the “Amended Facility”). The Amended Facility replaces our $225,000,000 senior secured revolving credit facility and provides for committed revolving credit availability through July 14, 2016. The amount of credit available from time to time under the Amended Facility is determined as a percentage of the value of eligible inventory, accounts receivable, and cash, as reduced by certain reserves (the “Borrowing Base.”). In addition, the Amended Agreement includes an option allowing us to increase our credit facility to an amount not in excess of $300,000,000, based on certain terms and conditions. The Amended Facility may be used for working capital and other general corporate purposes, and provides that up to $100,000,000 of the $200,000,000 may be used for letters of credit.

The Amended Agreement provides for borrowings under either “Base Rate” loans or “Eurodollar Rate” loans. Borrowings under Base Rate loans are variable and will generally accrue interest at a margin ranging from 1.0% to 1.5% over the Base Rate (as defined in the Agreement). Eurodollar Rate loans will generally accrue interest at a margin ranging from 2.0% to 2.5% over the London Interbank Offered Rate (“LIBOR”) as adjusted for reserves. The applicable margin will be adjusted each fiscal month based on our Monthly Average Liquidity (as defined in the Amended Agreement) for the preceding month. We are also required to pay a monthly unused line fee ranging from 0.375% to 0.5% of the amount by which the maximum credit available under the Amended Facility exceeds the average daily principal balance of any outstanding revolving loans and letters of credit. As of July 30, 2011 the applicable rates under the facility were 4.5% (Base Rate plus 1.25%) for Base Rate Loans and 2.4% (LIBOR plus 2.25%) for Eurodollar Rate Loans.

The Amended Agreement provides for customary representations and warranties and affirmative covenants. The Amended 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; changes in business; certain actions affecting subsidiaries; credit card agreements; private-label credit cards; and changes in control of certain of our subsidiaries. At all times we are required to maintain Excess Availability (as defined in the Amended Agreement) of at least the greater of 10% of the Borrowing Base or $15,000,000. The Amended 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 Amended Agreement. Under certain conditions the maximum amount available under the Amended Agreement may be reduced or terminated by the lenders and the obligation to repay amounts outstanding under the Amended Agreement may be accelerated.

In connection with the Amended Agreement we executed an Amended and Restated Guarantee (the “Amended Guarantee”). Pursuant to the Amended Guarantee, we and most of our subsidiaries jointly and severally guaranteed the borrowings and obligations under the Amended Agreement, subject to standard insolvency limitations. In accordance with the Amended Guarantee, collateral for the borrowings under the Amended Agreement consists of pledges by us and certain of our subsidiaries of the capital stock of each such entity’s subsidiaries. The Amended 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 Amended Agreement and the Amended Guarantee.

As of July 30, 2011 we had an aggregate total of $4,270,000 of unamortized deferred debt acquisition costs related to the facility that will be amortized on a straight-line basis over the life of the Amended Facility as interest expense. There were no borrowings outstanding under the facility as of July 30, 2011.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Stockholders’ Equity

The following table summarizes changes in total stockholders’ equity for the period indicated:

	Twenty-six
	Weeks Ended
	July 30,
(Dollars in thousands)	2011

Total stockholders’ equity, beginning of period	$	414,420
Net income		24,127
Issuance of common stock under employee stock plans (902,415 shares), net of amounts withheld for payroll taxes		(787	)
Stock-based compensation		2,387
Total stockholders’ equity, end of period	$	440,147

Note 5. Stock-based Compensation Plans

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 9. Stock-Based Compensation Plans” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. Current grants of stock-based compensation consist primarily of stock appreciation rights (“SARs”) and restricted stock units (“RSUs”).

SARS and stock option activity under our various stock-based compensation plans for the twenty-six weeks ended July 30, 2011 was as follows:

				Weighted							Aggregate
	Option/			Average							Intrinsic
	SARs			Exercise		Range of Exercise					Value(1)
	Shares			Price		Prices per Share					(000’s)

Outstanding at January 29, 2011(2)		6,098,153		$	3.10	$	1.00	–	$	13.84	$	0
Granted – exercise price equal to market price		2,414,258			4.00		3.20	–		4.37
Canceled/forfeited		(761,095	)		5.05		1.00	–		13.84
Exercised(3)		(1,598,696	)		1.80		1.00	–		2.93		2,145	(4)
Outstanding at July 30, 2011(5)		6,152,620		$	3.55	$	1.00	–	$	11.28		3,410
Exercisable at July 30, 2011(5)		1,405,713		$	3.29	$	1.00	–	$	11.28		1,136
____________________
(1) Aggregate market value less aggregate exercise price.
(2) Includes 1,416,496 shares related to “inducement grants” of SARs in accordance with Nasdaq Marketplace Rule 5635(c)(4).
(3) Includes 825,000 shares exercised related to “inducement grants” (see note (2) above).
(4) As of date of exercise.
(5) Includes 591,496 shares outstanding related to “inducement grants” (see note (2) above), of which 127,476 shares were exercisable.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5. Stock-based Compensation Plans (Continued)

As of July 30, 2011 the following shares were available for future grants under our stock-based compensation plans:

2010 Stock Award and Incentive Plan			4,594,025
1994 Employee Stock Purchase Plan			348,025

Total stock-based compensation expense was as follows:

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	July 30,		July 31,			July 30,		July 31,
(In thousands)	2011		2010			2011		2010

Stock-based compensation expense, excluding cash-settled RSUs	$	1,356	$	936		$	2,387	$	2,010
Stock-based compensation expense, cash-settled RSUs(1)		0		(237	)		0		4
Total stock-based compensation expense	$	1,356	$	699		$	2,387	$	2,014
____________________
(1) During the Fiscal 2009 Second Quarter we granted cash-settled RSUs under our 2003 Non-Employee Directors Compensation Plan. We accounted for these cash-settled RSUs as liabilities and recognized compensation expense over the vesting period of one year from the date of grant. Total compensation expense for these cash-settled RSUs was fully recognized as of the Fiscal 2010 Second Quarter.

We use the Black-Scholes valuation model to estimate the fair value of stock options and SARs. 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” and “Note 9. Stock-Based Compensation Plans” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

Total stock-based compensation expense not yet recognized, related to the non-vested portion of stock options, SARs, and awards outstanding, was $13,218,000 as of July 30, 2011. The weighted-average period over which we expect to recognize this compensation expense is approximately 3 years.

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 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 we incur in connection with administering these programs as selling, general, and administrative expenses when incurred. Our loyalty card programs are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 10. Customer Loyalty Card Programs” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6. Customer Loyalty Card Programs (Continued)

Additional information with respect to our various loyalty card programs is as follows:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	July 30,		July 31,		July 30,		July 31,
(In thousands)	2011		2010		2011		2010

Loyalty card revenues recognized	$	4,593	$	4,809	$	9,168	$	9,216

	Accrued as of
	July 30,		January 29,
(In thousands)	2011		2011

Discounts earned but not yet issued and discounts issued but not yet redeemed	$	1,920	$	2,277

Note 7. Net Income/(Loss) per Share

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 30,			July 31,			July 30,		July 31,
(In thousands, except per share amounts)	2011			2010			2011		2010

Basic weighted average common shares outstanding		116,743			115,699			116,459		115,851
Dilutive effect of SARs, stock options, and awards		0	(1)		0	(1)		1,344		0	(1)
Diluted weighted average common shares and equivalents outstanding		116,743			115,699			117,803		115,851

Net income/(loss) used to determine basic and diluted net income per share	$	(1,911	)	$	(8,642	)	$	24,127	$	(4,747	)

SARs and stock options with weighted average exercise price greater than market price, excluded from computation of diluted net income per share:
Number of shares		0	(1)		0	(1)		3,453		0	(1)
Weighted average exercise price per share							$	4.70
____________________
(1) SARs, Stock options, and awards are excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7. Net Income/(Loss) per Share (Continued)

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 also include the dilutive effect of the additional potential shares that may be issued related to the warrants, using the treasury stock method. See “Item 8. Financial Statements and Supplementary Data; Note 7. Long-term Debt” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011 for further information regarding our 1.125% Notes, call options, and warrants.

Note 8. Income Taxes

Due to the variability that we have experienced in our pre-tax earnings and the existence of a full valuation allowance on our net deferred tax assets, we have concluded that computing our actual year-to-date effective tax rate (as opposed to estimating our annual effective tax rate) provides an appropriate basis for recording income taxes in our interim periods. Additionally, we record an income tax expense or benefit that does not relate to ordinary income/(loss) in the current fiscal year discretely in the interim period in which it occurs. We also recognize the effects of changes in enacted tax laws or rates in the interim periods in which the changes occur.

In computing the income tax provision/(benefit) 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.

We recognize deferred tax assets for temporary differences that will result in deductible amounts in future years and for net operating loss (“NOL”) and credit carryforwards. We recognize 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 our deferred tax assets will not be realized. During Fiscal 2008 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. During Fiscal 2009 we increased the valuation allowance and recognized an additional non-cash provision, net of a tax benefit resulting from the carryback of remaining Fiscal 2008 NOLs pursuant to H.R. 3548, the “Worker, Homeownership, and Business Assistance Act of 2009,” which was signed into law on November 6, 2009. During Fiscal 2010 we further increased our valuation allowance and recognized an additional non-cash provision. 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. 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.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Income Taxes (Continued)

Income taxes receivable, net, which primarily include amended return receivables as of July 30, 2011, and amended return receivables and the NOL carryback for Fiscal 2009 as of January 29, 2011, are included in “Prepayments and other” on our condensed consolidated balance sheets, and were as follows:

	July 30,		January 29,
(In thousands)	2011		2011

Income taxes receivable, net	$	8,872	$	10,733

The reduction in income taxes receivable during the twenty-six weeks ended July 30, 2011 was principally a result of the receipt of $1,620,000 of net Federal tax refunds that related primarily to our NOL carryback for Fiscal 2009.

As of July 30, 2011 our gross unrecognized tax benefits associated with uncertain tax positions were $28,290,000. 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 $18,601,000. The accrued interest and penalties as of July 30, 2011 were $14,471,000.

During the twenty-six weeks ended July 30, 2011 the gross unrecognized tax benefits decreased by $503,000 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 $454,000. Accrued interest and penalties decreased by $284,000 during the twenty-six weeks ended July 30, 2011. These decreases are primarily the result of payments relating to audits of state tax positions, partially offset by additional accruals for uncertain tax positions.

As of July 30, 2011 it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by as much as $2,418,000 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 2004 and beyond remain subject to examination by the U.S. Internal Revenue Service (“IRS”) due to statute of limitations and the filing of amended returns and NOL carryback claims. We file returns in numerous state jurisdictions, with varying statutes of limitations. Our state tax returns for Fiscal 2006 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 2006 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 2003.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Segment Reporting

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 the “Retail Stores” segment. Our catalog and catalog-related e-commerce operations are separately reported under the Direct-to-Consumer segment. Further information regarding our operating segments is included in “Item 8. Financial Statements and Supplementary Data; Note 18. Segment Reporting” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

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

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

Thirteen weeks ended July 30, 2011
Net sales	$	492,778	$	6,424		$	0		$	499,202
Depreciation and amortization		11,057		262			3,163			14,482
Income from operations		33,268		(3,808	)		(25,958	)(1)		3,502
Net interest expense and other income							(3,802	)		(3,802	)
Income tax provision							1,611			1,611
Net loss		33,268		(3,808	)		(31,371	)		(1,911	)
Capital expenditures		2,131		445			3,132			5,708

Thirteen weeks ended July 31, 2010
Net sales	$	512,219	$	5,345		$	0		$	517,564
Depreciation and amortization		13,637		297			3,003			16,937
Loss from operations		14,119		(3,243	)		(18,168	)(2)		(7,292	)
Gain on repurchases of 1.125% Senior Convertible Notes							1,907			1,907
Net interest expense and other income							(3,700	)		(3,700	)
Income tax benefit							(443	)		(443	)
Net loss		14,119		(3,243	)		(19,518	)		(8,642	)
Capital expenditures		2,887		80			5,854			8,821
____________________
(1) Includes $474 of restructuring and other charges (see “Note 10. Restructuring and Other Charges/(Credits)” below).
(2) Includes $619 of restructuring and other charges (see “Note 10. Restructuring and Other Charges/(Credits)” below).

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Segment Reporting (Continued)

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

Twenty-six weeks ended July 30, 2011
Net sales	$	983,359	$	20,196		$	0		$	1,003,555
Depreciation and amortization		22,084		516			6,290			28,890
Income from operations		88,916		(5,784	)		(47,577	)(1)		35,555
Net interest expense and other income							(7,437	)		(7,437	)
Income tax provision							3,991			3,991
Net income		88,916		(5,784	)		(59,005	)		24,127
Capital expenditures		5,490		1,190			7,916			14,596

Twenty-six weeks ended July 31, 2010
Net sales	$	1,004,293	$	18,076		$	0		$	1,022,369
Depreciation and amortization		26,756		595			6,397			33,748
Income from operations		42,068		(4,909	)		(36,959	)(2)		200
Gain on repurchases of 1.125% Senior Convertible Notes							1,907			1,907
Net interest expense and other income							(8,036	)		(8,036	)
Income tax benefit							(1,182	)		(1,182	)
Net loss		42,068		(4,909	)		(41,906	)		(4,747	)
Capital expenditures		8,157		80			8,347			16,584
____________________
(1) Includes $139 of restructuring and other credits (see “Note 10. Restructuring and Other Charges/(Credits)” below) and a $5,185 gain from the sale of office premises.
(2) Includes $1,508 of restructuring and other charges (see “Note 10. Restructuring and Other Charges/(Credits)” below).

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Restructuring and Other Charges/(Credits)

The following table summarizes our restructuring and other charges:

									Total
	Costs		Costs Incurred			Estimated			Estimated/
	Incurred		for Twenty-six			Remaining			Actual
	as of		Weeks Ended			Costs			Costs as of
	January 29,		July 30,			To be			July 30,
(In thousands)	2011		2011			Incurred			2011

Fiscal 2010 Announcements
Closing of under-performing stores:
Non-cash impairment charge for
CATHERINES® stores in outlet locations	$	3,210	$	0		$	0		$	3,210
Store lease termination and other charges		0		11			5,815			5,826
Severance for departure of former CEO		2,898		0			0			2,898

Fiscal 2009 Announcements
Closing of PETITE SOPHISTICATE OUTLET® stores:
Non-cash accelerated depreciation		612		0			0			612
Store lease termination charges		1,070		0			0			1,070
Other non-cash costs		195		0			0			195
Closing of under-performing stores:
Store lease termination charges		2,691		0			3,300			5,991

Fiscal 2007 and Fiscal 2008 Announcements
Lease termination and accretion charges		11,575		(157	)		1,912	(1)		13,330
Severance, retention, and other costs		5,123		7			0			5,130
Closing of under-performing stores:
Store lease termination charges		8,305		0			0			8,305
Total	$	35,679	$	(139	)	$	11,027		$	46,567
____________________
(1) Accretion charges related to lease termination liability for assets retained from the sale of our Crosstown Traders apparel catalogs.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Restructuring and Other Charges/(Credits) (Continued)

The following table summarizes our accrued restructuring and other charges:

	Accrued		Twenty-six Weeks Ended						Accrued
	as of		July 30, 2011						as of
	January 29,		Costs			Payments/			July 30,
(In thousands)	2011(1)		Incurred			Settlements			2011(1)

Fiscal 2010 Announcements
Severance for departure of former CEO	$	1,910	$	0		$	(571	)	$	1,339
Closing of under-performing stores:
Store lease termination charges		0		1,075			(900	)		175

Fiscal 2009 Announcements
Closing of PETITE SOPHISTICATE OUTLET stores:
Store lease termination charges		599		0			(248	)		351
Closing of under-performing stores:
Store lease termination charges		1,104		0			(25	)		1,079

Fiscal 2007 and Fiscal 2008 Announcements
Non-core misses apparel assets:
Lease termination charges		7,074		(157	)		(1,610	)		5,307
Other costs		153		0			0			153
Transformational initiatives:
Severance and retention costs		117		7			(121	)		3
Closing of under-performing stores:
Store lease termination charges		798		0			(183	)		615
Total	$	11,755	$	925		$	(3,658	)	$	9,022
____________________
(1) Included in “Accrued expenses” in the accompanying condensed consolidated balance sheets.

The net credit in restructuring and other charges for the twenty-six weeks ended July 30, 2011 consisted primarily of adjustments to store-related deferred allowances as a result of the closure of under-performing stores identified for closure during the Fiscal 2010 Fourth Quarter and the settlement of minor lease obligations for certain facilities retained in connection with the sale of our Crosstown Traders apparel catalogs. These charges were partially offset by lease termination costs, non-cash accelerated depreciation, and cash severance costs for store personnel related to under-performing stores identified for closure during the Fiscal 2010 Fourth Quarter.

Restructuring and other charges for the twenty-six weeks ended July 31, 2010 consisted primarily of lease termination costs for the closing of under-performing stores identified during the Fiscal 2009 Fourth Quarter and accretion charges on lease termination costs for facilities retained in connection with the sale of our Crosstown Traders apparel catalogs.

See “Item 8. Financial Statements and Supplementary Data; Note 13. Restructuring and Other Charges” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011 for further information regarding our restructuring and other charges.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Fair Value of Financial Instruments

The carrying amounts and estimated fair values of our financial instruments are as follows:

	July 30, 2011					January 29, 2011
	Carrying			Fair		Carrying			Fair
(In thousands)	Amount			Value		Amount			Value

Assets:
Cash and cash equivalents	$	227,436		$	227,436	$	117,482		$	117,482

Liabilities:
1.125% Senior Convertible Notes, due May 1, 2014		119,204	(1)		126,406		115,772	(1)		118,681
6.07% mortgage note, due October 11, 2014		8,646			8,509		9,035			8,887
6.53% mortgage note, due November 1, 2012		1,750			1,750		2,450			2,451
7.77% mortgage note, due December 1, 2011		5,393			5,488		5,793			5,921
____________________
(1) Net of unamortized discount of $21,247at July 30, 2011 and $24,679 at January 29, 2011 (see “Note 3. Long-term Debt” above).

The fair value of cash and cash equivalents approximates their carrying amount because of the short maturities of such instruments. The fair value of the 1.125% Senior Convertible Notes is based on quoted market prices for the securities. The fair values of the mortgage notes and other long-term debt are based on estimated current interest rates that we could obtain on similar borrowings.

Note 12. Gain from Sale of Office Premises

During the Fiscal 2011 First Quarter we sold office premises in Hong Kong, which served as the home office for our international sourcing operations, for gross proceeds of $7,512,000 and recognized a gain on the sale of $5,185,000. Our international sourcing operations now utilize leased space in Hong Kong.

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

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included in Item 1 of this report. It should also be read in conjunction with the management’s discussion and analysis of financial condition and results of operations, financial statements, and accompanying notes appearing in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. As used in this management’s discussion and analysis, the terms “Charming Shoppes,” “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated subsidiaries except where the context otherwise requires or as otherwise indicated.

FORWARD-LOOKING STATEMENTS

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

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

Factors that could cause our actual results of operations or financial condition to differ from those described in this report include, but are not necessarily limited to, the following, and the other factors discussed in more detail in “PART I; Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011 and in our other filings with the Securities and Exchange Commission:

●	ongoing economic conditions, including unemployment levels;

●	our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors and our ability to effectively manage our inventory levels;

●	competitive conditions in the women’s specialty retail apparel and direct-to-consumer markets;

●	the continuation of growth in the plus-size women’s apparel market;

●	our ability to attract, hire, and retain qualified officers and management;

●	our ability to successfully execute and realize the benefits of our business plans;

●	our ability to successfully manage labor costs, occupancy costs, transportation costs, and other operating costs, particularly in the face of inflationary pressures;

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●	the availability and price volatility of key raw materials in our products, such as cotton, wool, and synthetic fabrics;

●	our continued access to sufficient financing at an affordable cost;

●	recent significant changes in our private-label credit card programs and the impact of Federal and state laws on the availability and cost of providing credit to our cardholders;

●	seasonal fluctuations in net sales and extreme or unseasonable weather conditions;

●	our reliance on technology outsourced to third parties and such third parties’ failure to observe proper internal control practices and procedures;

●	our ability to maintain efficient and uninterrupted customer service and fulfillment operations through our distribution and fulfillment centers and our third-party freight consolidators and service providers;

●	natural disasters, acts of terrorism or other armed conflict, or the threat of any such event;

●	our ability to successfully operate our e-commerce websites and our catalog business and the failure to manage and remedy disruptions in technology, including security breaches;

●	our dependence on foreign sources of production;

●	litigation and regulatory actions relating to our business;

●	our ability to develop and profitably operate new retail stores, and to maintain good relationships with all of our landlords;

●	our ability to effectively implement our plan for closing under-performing stores;

●	the failure to integrate and manage acquired businesses successfully or to manage the risks associated with divestitures, joint ventures, or other alliances;

●	the failure to maintain effective internal control over financial reporting; and

●	changes to existing accounting rules or the adoption of new rules.

CRITICAL ACCOUNTING POLICIES

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

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We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Our significant accounting policies are described in “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; Note 1. Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The accounting policies and related assumptions that we consider to be more critical to the preparation of our financial statements and accompanying notes and involve the most significant management judgments and estimates are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. There were no material changes in, or additions to, our critical accounting policies or in the assumptions or estimates we used to prepare the financial information appearing in this report.

OVERVIEW

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

Results of Operations

During the Fiscal 2011 Second Quarter we continued to improve on our operating results, with increases in our consolidated Retail Stores segment comparable store sales and Adjusted EBITDA (see “RESULTS OF OPERATIONS; EBITDA and Adjusted EBITDA” below). Consolidated Adjusted EBITDA for the Fiscal 2011 Second Quarter increased by $8.2 million to $18.5 million as compared to $10.3 million for the prior-year period, reflecting improved profitability at each of our brands. The year-over-year operating improvement was driven by decreases in expenses, a more fashionable apparel assortment, and disciplined inventory management across all of our brands. During the Fiscal 2010 Second Quarter we were over-receipted in seasonal non-core merchandise and our Adjusted EBITDA was negatively impacted by heavy discounting to clear the seasonal merchandise.

Consolidated net sales for the Fiscal 2011 Second Quarter reflected an increase of 1% in consolidated comparable store sales and a 17% increase in e-commerce net sales as compared to the Fiscal 2010 Second Quarter. The improvement in comparable store sales was led by LANE BRYANT, with a 3% comparable store sales increase. However, these increases were more than offset by the impact of 155 net store closings during the preceding 12-month period in connection with our store closing program. Our improved Spring and Summer assortments have been resonating with our customer, resulting in higher conversion rates during the Fiscal 2011 Second Quarter as compared to the prior-year period.

Our gross margin increased as a percent of sales for the Fiscal 2011 Second Quarter as compared to the Fiscal 2010 Second Quarter. The increase was driven by improvements across all of our brands, and benefited from improved Spring and Summer assortments and disciplined inventory management, which resulted in fewer markdowns as compared to the prior-year period. The decline in gross profit dollars was primarily driven by the net closure of 155 stores over the preceding 12 months in connection with our store closing program.

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Our operating expenses (excluding restructuring and other charges of $0.5 million) decreased by $13.9 million and by 90 basis points as a percent of sales, driven primarily by the impact of the 155 net store closures and expense reductions at our LANE BRYANT and FASHION BUG brands. Our occupancy and buying expenses decreased both in dollar amount and as a percentage of net sales for the Fiscal 2011 Second Quarter as compared to the prior-year period, primarily related to lower rent expense as a result of the operation of fewer stores and the negotiation of store lease terms. Selling, general, and administrative expenses decreased both in dollar amount and as a percentage of net sales for the Fiscal 2011 Second Quarter as compared to the prior-year period, primarily as a result of a combination of lower store payroll attributable to operating fewer stores, lower advertising expenses, leverage from the increase in comparable store sales at our LANE BRYANT and CATHERINES brands, and higher credit income.

Depreciation and amortization expenses decreased by $2.4 million for the Fiscal 2011 Second Quarter as compared to the prior-year period primarily as a result of the operation of fewer stores and the write-down of store assets during the Fiscal 2010 Fourth Quarter.

Restructuring and other charges for the Fiscal 2011 Second Quarter were primarily for non-cash accelerated depreciation and severance costs for store personnel related to the closing of under-performing stores. Fiscal 2010 Second Quarter charges were primarily for lease termination costs related to our store closing program and accretion charges on lease termination costs for facilities retained from the sale of our Crosstown Traders apparel catalogs.

Cost increases associated with cotton, wool, and synthetic fabrics and increases in labor costs and inflation in developing countries during the first half of Fiscal 2011 have had a moderate impact on our Fiscal 2011 Second Quarter results and will have a greater impact on our Fall and Holiday seasons. We have only partially mitigated these price increases through value-engineering product, shifting production to lower-cost countries, and adjusting our product mix. Additionally, each of our brands has strategically increased initial ticket pricing. Although the upward trend of these costs has reversed and they are now decreasing, due to product lead times required for our Fall and Holiday 2011 seasons we do not expect to benefit from such decreases until our Spring 2012 season. We will continue to make price adjustments as warranted to ensure an appropriate value proposition for our customer.

Our Spring and Summer assortments of both core and fashion apparel continue to resonate with our customer, as evidenced by our increased conversion rates. However, traffic levels at our stores were down on a year-over-year basis and were below our expectations. Sales and traffic slowed in the latter half of the quarter, principally as a result of our inventory management plan to end the quarter with considerably lower Summer clearance inventory than the prior-year period. In response to these traffic trends, we continue to be more aggressive with our marketing efforts in an attempt to drive additional traffic to our stores and our websites. We will continue to manage inventories in order to protect our gross margins and operating results.

Financial Position

We ended the Fiscal 2011 Second Quarter with $227 million of cash as compared to $117 million as of the end of Fiscal 2010 and ended the quarter with a net cash position as compared to a net debt position as of the end of Fiscal 2010. Our cash position increased primarily as a result of improved operating results during the first half of Fiscal 2011, disciplined inventory management, improved sell-through of our seasonal merchandise at each of our brands, collections of accounts receivable generated from December 2010 holiday season sales by our Direct-to-Consumer segment, and proceeds of $7.5 million from the sale of office premises. Our comparable store inventories decreased 5% on a cost basis as of the end of the Fiscal 2011 Second Quarter. Our disciplined inventory management has led to better inventory productivity, as fewer units drove improved turns of seasonal merchandise.

On July 14, 2011 we entered into an amended and restated loan and security agreement for a $200,000,000 senior secured revolving credit facility, which replaces our $225,000,000 senior secured revolving credit facility and provides for committed revolving credit availability through July 14, 2016. See “FINANCING; Revolving Credit Facility” below for further discussion of the amended agreement. We ended the quarter with no borrowings against the revolving credit facility. As of July 30, 2011, our total liquidity position was $374 million.

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Management Initiatives

In March 2011 we announced the following areas of focus designed to further position the Company for a return to profitability (see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; OVERVIEW” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011 for further discussion of these initiatives):

●	intensify our focus on our primary target customers specific to each of our brands;

●	increase inventory productivity both qualitatively and quantitatively;

●	improve the overall profitability by brand and at the enterprise level; and

●	build a winning culture.

Our results for the first half of Fiscal 2011 reflect the beginning of the execution of the above initiatives. Our intensified focus on our primary target customer has led to improved fashion assortments, which are resonating with our target customer and are resulting in improved conversion rates. The improved assortments are generating increased inventory productivity and improved gross margins, which have led to improved overall profitability and increased Adjusted EBITDA.

We are encouraged by our progress and improved financial results. However, we have a number of challenges to address, including generating additional traffic and continued optimization of our inventory mix, while navigating through the challenges of the current macro-economic environment. We have positioned ourselves to compete aggressively in this challenging macro-economic environment by continuing our disciplined inventory management and with more focused marketing, including appropriate promotional pricing adjustments, as our consumer dictates and as circumstances warrant. We recognize that the real measure of success will be consistent, improving performance. We will continue to execute on our initiatives throughout the remainder of Fiscal 2011.

RESULTS OF OPERATIONS

EBITDA and Adjusted EBITDA

We believe that Adjusted EBITDA, along with other measures, provides a useful pre-tax measure of our ongoing operating performance and our ability to meet debt service and capital requirements on a comparable basis excluding the impact of certain items and capital-related non-cash charges. We use Adjusted EBITDA to monitor and evaluate the performance of our business operations and we believe that it enhances our investors’ ability to analyze trends in our business, compare our performance to other companies in our industry, and evaluate our ability to service our debt and capital needs. In addition, we use Adjusted EBITDA as a performance metric in our compensation programs.

Although Adjusted EBITDA provides useful information on an operating cash flow basis, it is a limited measure in that it excludes the impact of cash requirements for interest expense, income taxes, capital expenditures, and certain other items requiring cash outlays or generating cash receipts. Therefore, Adjusted EBITDA should be used as a supplement to results of operations and cash flows as reported under Generally Accepted Accounting Principles (“GAAP”) and should not be used as a singular measure of operating performance or as a substitute for GAAP results.

Further information regarding our definition of EBITDA and Adjusted EBITDA is included in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Results of Operations; EBITDA and Adjusted EBITDA” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

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The tables on the following pages show details of our consolidated net sales and a reconciliation of our income/(loss) from continuing operations to EBITDA and Adjusted EBITDA for the periods indicated.

Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA

										Total
	LANE			FASHION						Retail
(In millions)	BRYANT(1)			BUG			CATHERINES			Stores

Thirteen weeks ended July 30, 2011
Net sales	$	251.5		$	161.4		$	79.9		$	492.8

Net loss		14.7			12.5			6.1			33.3
Income tax provision		–			–			–			–
Net interest expense and other income		–			–			–			–
Depreciation and amortization		7.7			1.8			1.5			11.0
EBITDA		22.4			14.3			7.6			44.3

Restructuring and other charges		–			–			–			–
Adjusted EBITDA	$	22.4		$	14.3		$	7.6		$	44.3
Adjusted EBITDA as a % of net sales		8.9	%		8.9	%		9.5	%		9.0	%
____________________
(1) Includes LANE BRYANT OUTLET® stores, with net sales of $34.7 and Adjusted EBITDA of $7.1.

	Direct-to-			Corporate
(In millions)	Consumer(2)			And Other			Consolidated

Thirteen weeks ended July 30, 2011
Net sales	$	6.4		$	0.0		$	499.2

Net loss		(3.8	)		(31.4	)		(1.9	)
Income tax provision		–			1.6			1.6
Net interest expense and other income		–			3.8			3.8
Depreciation and amortization		0.3			3.2			14.5
EBITDA		(3.5	)		(22.8	)		18.0

Restructuring and other charges		–			0.5			0.5
Adjusted EBITDA	$	(3.5	)	$	(22.3	)	$	18.5
Adjusted EBITDA as a % of net sales		(54.7	)%		–	(3)		3.7	%
____________________
(2) Primarily FIGI’S catalog business. A substantial portion of FIGI’s sales occur during the December holiday season.
(3) Not meaningful.

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Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA

(Continued)

										Total
	LANE			FASHION						Retail
(In millions)	BRYANT(1)			BUG			CATHERINES			Stores

Thirteen weeks ended July 31, 2010
Net sales	$	249.2		$	182.8		$	80.2		$	512.2

Net loss		3.8			6.4			3.9			14.1
Income tax benefit		–			–			–			–
Net interest expense and other income		–			–			–			–
Depreciation and amortization		8.9			2.7			2.0			13.6
EBITDA		12.7			9.1			5.9			27.7

Gain on repurchases of 1.125% Senior Convertible Notes
Restructuring and other charges		–			–			–			–
Adjusted EBITDA	$	12.7		$	9.1		$	5.9		$	27.7
Adjusted EBITDA as a % of net sales		5.1	%		5.0	%		7.4	%		5.4	%
____________________
(1) Includes LANE BRYANT OUTLET stores, with net sales of $31.8 and Adjusted EBITDA of $5.8.

	Direct-to-			Corporate
(In millions)	Consumer(2)			And Other(3)			Consolidated

Thirteen weeks ended July 31, 2010
Net sales	$	5.4		$	0.0		$	517.6

Net loss		(3.2	)		(19.5	)		(8.6	)
Income tax benefit		–			(0.4	)		(0.4	)
Net interest expense and other income		–			3.7			3.7
Depreciation and amortization		0.3			3.0			16.9
EBITDA		(2.9	)		(13.2	)		11.6

Gain on repurchases of 1.125% Senior Convertible Notes		–			(1.9	)		(1.9	)
Restructuring and other charges		–			0.6			0.6
Adjusted EBITDA	$	(2.9	)	$	(14.5	)	$	10.3
Adjusted EBITDA as a % of net sales