CHRS-10.29.11_Q3-10Q
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 29, 2011
Or
¨ 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 ¨

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 ¨

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  ¨
Non-accelerated Filer  ¨
Smaller Reporting Company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
 Yes ¨  No x

The number of shares outstanding of the issuer’s Common Stock (par value $.10 per share) as of November 25, 2011 was 116,533,167 shares.
Table of Contents


CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
PART I.
 
 
 
Item 1.
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 
 


1
Table of Contents


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)
October 29,
2011
 
January 29,
2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
157,754

 
$
117,482

Accounts receivable, net of allowances of $2,045 and $5,667
6,630

 
36,568

Merchandise inventories
355,614

 
282,248

Deferred taxes
3,153

 
3,153

Prepayments and other
106,390

 
98,458

Total current assets
629,541

 
537,909

Property, equipment, and leasehold improvements – at cost
1,008,898

 
1,028,843

Less accumulated depreciation and amortization
777,895

 
772,895

Net property, equipment, and leasehold improvements
231,003

 
255,948

Trademarks, tradenames, and internet domain names
187,132

 
187,132

Goodwill
23,436

 
23,436

Other assets
17,720

 
18,233

Total assets
$
1,088,832

 
$
1,022,658

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
168,335

 
$
107,882

Accrued expenses
144,870

 
142,002

Current portion – long-term debt
10,453

 
11,449

Total current liabilities
323,658

 
261,333

Deferred taxes
54,122

 
51,466

Other non-current liabilities
149,773

 
167,089

Long-term debt, net of debt discount of $19,484 and $24,679
132,631

 
128,350

Stockholders’ equity
 
 
 
Common Stock $.10 par value:
 
 
 
Authorized – 300,000,000 shares
 
 
 
Issued – 155,148,754 shares and 154,185,373 shares
15,515

 
15,419

Additional paid-in capital
511,659

 
508,664

Treasury stock at cost – 38,617,180 shares
(348,400
)
 
(348,400
)
Retained earnings
249,874

 
238,737

Total stockholders’ equity
428,648

 
414,420

Total liabilities and stockholders’ equity
$
1,088,832

 
$
1,022,658


See Notes to Condensed Consolidated Financial Statements

2
Table of Contents


CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Thirteen Weeks Ended
(In thousands, except per share amounts)
October 29,
2011
 
October 30,
2010
Net sales
$
429,711

 
$
463,619

Cost of goods sold
196,897

 
221,918

Gross profit
232,814

 
241,701

 
 
 
 
Occupancy and buying expenses
84,128

 
92,687

Selling, general, and administrative expenses
140,691

 
145,016

Depreciation and amortization
13,564

 
16,367

Restructuring and other charges
3,450

 
3,234

Total operating expenses
241,833

 
257,304

 
 
 
 
Loss from operations
(9,019
)
 
(15,603
)
 
 
 
 
Other income
75

 
442

Interest expense
(3,232
)
 
(3,790
)
 
 
 
 
Loss before income taxes
(12,176
)
 
(18,951
)
Income tax provision/(benefit)
814

 
(141
)
 
 
 
 
Net loss
$
(12,990
)
 
$
(18,810
)
 
 
 
 
Basic net loss per share
$
(0.11
)
 
$
(0.16
)
 
 
 
 
Diluted net loss per share
$
(0.11
)
 
$
(0.16
)

See Notes to Condensed Consolidated Financial Statements

3
Table of Contents


CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Thirty-nine Weeks Ended
(In thousands, except per share amounts)
October 29,
2011
 
October 30,
2010
Net sales
$
1,433,266

 
$
1,485,988

Cost of goods sold
669,225

 
718,575

Gross profit
764,041

 
767,413

 
 
 
 
Occupancy and buying expenses
260,140

 
276,791

Selling, general, and administrative expenses
435,212

 
451,168

Depreciation and amortization
42,454

 
50,115

Gain from sale of office premises
(5,185
)
 
—

Restructuring and other charges
4,884

 
4,742

Total operating expenses
737,505

 
782,816

 
 
 
 
Income/(loss) from operations
26,536

 
(15,403
)
 
 
 
 
Other income
312

 
976

Gain on repurchases of 1.125% Senior Convertible Notes
—

 
1,907

Interest expense
(10,906
)
 
(12,360
)
 
 
 
 
Income/(loss) before income taxes
15,942

 
(24,880
)
Income tax provision/(benefit)
4,805

 
(1,323
)
 
 
 
 
Net income/(loss)
$
11,137

 
$
(23,557
)
 
 
 
 
Basic net income/(loss) per share
$
0.10

 
$
(0.20
)
 
 
 
 
Diluted net income/(loss) per share
$
0.09

 
$
(0.20
)

See Notes to Condensed Consolidated Financial Statements

4
Table of Contents


CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Thirty-nine Weeks Ended
(In thousands)
October 29,
2011
 
October 30,
2010
Operating activities
 
 
 
Net income/(loss)
$
11,137

 
$
(23,557
)
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities
 
 
 
Depreciation and amortization
43,854

 
51,593

Stock-based compensation
3,796

 
3,666

Accretion of discount on 1.125% Senior Convertible Notes
5,195

 
5,615

Deferred income taxes
2,656

 
(321
)
Gain on repurchases of 1.125% Senior Convertible Notes
—

 
(1,907
)
Write-down of capital assets due to restructuring
950

 
—

Impairment of store assets
654

 
—

Net (gain)/loss from disposition of capital assets
(4,841
)
 
723

Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
29,938

 
28,206

Merchandise inventories
(73,366
)
 
(126,983
)
Accounts payable
60,453

 
50,055

Prepayments and other
(7,932
)
 
20,064

Accrued expenses and other
(9,526
)
 
(21,071
)
Net cash provided/(used) by operating activities
62,968

 
(13,917
)
 
 
 
 
Investing activities
 
 
 
Investment in capital assets
(22,749
)
 
(29,217
)
Proceeds from sales of capital assets
7,537

 
318

Proceeds from sales of securities
—

 
200

(Increase)/decrease in other assets
(101
)
 
2,900

Net cash used by investing activities
(15,313
)
 
(25,799
)
 
 
 
 
Financing activities
 
 
 
Repayments of long-term borrowings
(4,793
)
 
(4,674
)
Repurchases of 1.125% Senior Convertible Notes
—

 
(38,260
)
Payment of deferred financing costs
(1,885
)
 
—

Issuance of common stock under employee stock plans, net of amounts withheld for payroll taxes
(705
)
 
227

Net cash used by financing activities
(7,383
)
 
(42,707
)
 
 
 
 
Increase/(decrease) in cash and cash equivalents
40,272

 
(82,423
)
Cash and cash equivalents, beginning of period
117,482

 
186,580

Cash and cash equivalents, end of period
$
157,754

 
$
104,157

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

 
$
—


See Notes to Condensed Consolidated Financial Statements

5
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 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 thirty-nine weeks ended October 29, 2011 and October 30, 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:

(In thousands)
October 29,
2011
 
January 29,
2011
Due from customers
$
8,675

 
$
42,235

Allowance for doubtful accounts
(2,045
)
 
(5,667
)
Net accounts receivable
$
6,630

 
$
36,568



Note 3. Long-term Debt
(In thousands)
October 29,
2011
 
January 29,
2011
1.125% Senior Convertible Notes, due May 1, 2014
$
140,451

 
$
140,451

6.07% mortgage note, due October 11, 2014
8,449

 
9,035

6.53% mortgage note, due November 1, 2012
1,400

 
2,450

7.77% mortgage note, due December 1, 2011
5,187

 
5,793

Capital lease obligations
7,081

 
6,749

Total long-term debt principal
162,568

 
164,478

Less unamortized discount on 1.125% Senior Convertible Notes
(19,484
)
 
(24,679
)
Long-term debt – carrying value
143,084

 
139,799

Current portion
(10,453
)
 
(11,449
)
Net long-term debt
$
132,631

 
$
128,350



6
Table of Contents
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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 October 29, 2011 the applicable rates under the facility were 4.5% (Base Rate plus 1.25%) for Base Rate Loans and 2.50% (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 October 29, 2011 we had an aggregate total of $4,129,000 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 October 29, 2011.




7
Table of Contents
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:

 
Thirty-nine Weeks Ended
(Dollars in thousands)
October 29,
2011
Total stockholders’ equity, beginning of period
$
414,420

Net income
11,137

Issuance of common stock under employee stock plans (963,381 shares), net of amounts withheld for payroll taxes
(705
)
Stock-based compensation
3,796

Total stockholders’ equity, end of period
$
428,648



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 thirty-nine weeks ended October 29, 2011 was as follows:

 
Option/
SARs
Shares
 
Weighted
Average
Exercise
Price
 
Range of Exercise
Prices per Share
 
Aggregate
Intrinsic
Value(1)
(000’s)
 
Outstanding at January 29, 2011(2) 
6,098,153

 
$
3.10

 
$
1.00

 
—
 
$
13.84

 
$
—

 
Granted – exercise price equal to market price
2,492,133

 
3.97

 
2.71

 
—
 
4.37

 
 
 
Canceled/forfeited
(827,041
)
 
5.02

 
1.00

 
—
 
13.84

 
 
 
Exercised(3)
(1,622,562
)
 
1.80

 
1.00

 
—
 
2.93

 
2,184

(4) 
Outstanding at October 29, 2011(5) 
6,140,683

 
$
3.53

 
$
1.00

 
—
 
$
11.28

 
156

 
Exercisable at October 29, 2011(5) 
1,469,717

 
$
3.26

 
$
1.00

 
—
 
$
11.28

 
447

 
____________________
(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 207,164 shares were exercisable.

8
Table of Contents
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


As of October 29, 2011 the following shares were available for future grants under our stock-based compensation plans:

 
Shares
Available
2010 Stock Award and Incentive Plan
5,078,476

1994 Employee Stock Purchase Plan
301,699


Total stock-based compensation expense was as follows:

 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
(In thousands)
October 29,
2011
 
October 30,
2010
 
October 29,
2011
 
October 30,
2010
Stock-based compensation expense, excluding cash-settled RSUs
$
1,409

 
$
1,656

 
$
3,796

 
$
3,666

Stock-based compensation expense, cash-settled RSUs(1)
—

 
—

 
—

 
4

Total stock-based compensation expense
$
1,409

 
$
1,656

 
$
3,796

 
$
3,670

____________________
(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 SARs.  We amortize stock-based compensation on a straight-line basis over the requisite service period of an award.  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 SARs and awards outstanding, was $11,988,000 as of October 29, 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.

9
Table of Contents
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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

 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
(In thousands)
October 29,
2011
 
October 30,
2010
 
October 29,
2011
 
October 30,
2010
Loyalty card revenues recognized
$
4,474

 
$
4,644

 
$
13,641

 
$
13,860


 
Accrued as of
(In thousands)
October 29,
2011
 
January 29,
2011
Discounts earned but not yet issued and discounts issued but not yet redeemed
$
2,203

 
$
2,277



Note 7. Net Income/(Loss) per Share

 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
(In thousands, except per share amounts)
October 29,
2011
 
October 30,
2010
 
October 29,
2011
 
October 30,
2010
 
Basic weighted average common shares outstanding
116,890

 
115,794

 
116,603

 
115,832

 
Dilutive effect of SARs, stock options, and awards
—

(1) 
—

(1) 
1,167

 
—

(1) 
Diluted weighted average common shares and equivalents outstanding
116,890

 
115,794

 
117,770

 
115,832

 
Net income/(loss) used to determine basic and diluted net income/(loss) per share
$
(12,990
)
 
$
(18,810
)
 
$
11,137

 
$
(23,557
)
 
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
—

(1) 
—

(1) 
3,667

 
—

(1) 
Weighted average exercise price per share


 


 
$
4.62

 


 
____________________
(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.

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.


10
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Note 8. Income Taxes

Due to the variability that we have experienced in our pretax 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.

Income taxes receivable, net, which primarily include amended return receivables as of October 29, 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:

(In thousands)
October 29,
2011
 
January 29,
2011
Income taxes receivable, net
$
9,281

 
$
10,733


The reduction in income taxes receivable during the thirty-nine weeks ended October 29, 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 October 29, 2011 our gross unrecognized tax benefits associated with uncertain tax positions were $28,383,000.  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 $18,590,000.  The accrued interest and penalties as of October 29, 2011 were $14,738,000.


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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


During the thirty-nine weeks ended October 29, 2011 the gross unrecognized tax benefits decreased by $410,000 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 $465,000.  Accrued interest and penalties decreased by $16,000 during the thirty-nine weeks ended October 29, 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 October 29, 2011 it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by as much as $10,273,000 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.


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.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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:

(In thousands)
Retail
Stores
 
Direct-to-
Consumer
 
Corporate
and Other
 
Consolidated
Thirteen Weeks Ended October 29, 2011
 
 
 
 
 
 
 
Net sales
$
417,721

 
$
11,990

 
$
—

 
$
429,711

Depreciation and amortization
10,334

 
265

 
2,965

 
13,564

Loss from operations
20,254

 
(3,317
)
 
(25,956
)
(1) 
(9,019
)
Net interest expense and other income
 
 
 
 
(3,157
)
 
(3,157
)
Income tax provision
 
 
 
 
814

 
814

Net loss
20,254

 
(3,317
)
 
(29,927
)
 
(12,990
)
Capital expenditures
3,583

 
384

 
4,187

 
8,154

 
 
 
 
 
 
 
 
Thirteen Weeks Ended October 30, 2010
 
 
 
 
 
 
 
Net sales
$
453,901

 
$
9,718

 
$
—

 
$
463,619

Depreciation and amortization
13,214

 
216

 
2,937

 
16,367

Loss from operations
15,214

 
(2,944
)
 
(27,873
)
(2) 
(15,603
)
Net interest expense and other income
 
 
 
 
(3,348
)
 
(3,348
)
Income tax benefit
 
 
 
 
(141
)
 
(141
)
Net loss
15,214

 
(2,944
)
 
(31,080
)
 
(18,810
)
Capital expenditures
7,434

 
274

 
4,925

 
12,633

____________________
(1)
Includes $3,450 of restructuring and other charges (see “Note 10. Restructuring and Other Charges” below).
(2)
Includes $3,234 of restructuring and other charges (see “Note 10. Restructuring and Other Charges” below).


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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


(In thousands)
Retail
Stores
 
Direct-to-
Consumer
 
Corporate
and Other
 
Consolidated
Thirty-nine Weeks Ended October 29, 2011
 
 
 
 
 
 
 
Net sales
$
1,401,080

 
$
32,186

 
$
—

 
$
1,433,266

Depreciation and amortization
32,418

 
781

 
9,255

 
42,454

Income from operations
109,170

 
(9,101
)
 
(73,533
)
(1) 
26,536

Net interest expense and other income
 
 
 
 
(10,594
)
 
(10,594
)
Income tax provision
 
 
 
 
4,805

 
4,805

Net income
109,170

 
(9,101
)
 
(88,932
)
 
11,137

Capital expenditures
9,072

 
1,574

 
12,103

 
22,749

 
 
 
 
 
 
 
 
Thirty-nine Weeks Ended October 30, 2010
 
 
 
 
 
 
 
Net sales
$
1,458,194

 
$
27,794

 
$
—

 
$
1,485,988

Depreciation and amortization
39,970

 
811

 
9,334

 
50,115

Loss from operations
57,282

 
(7,853
)
 
(64,832
)
(2) 
(15,403
)
Gain on repurchases of 1.125% Senior Convertible Notes
 
 
 
 
1,907

 
1,907

Net interest expense and other income
 
 
 
 
(11,384
)
 
(11,384
)
Income tax benefit
 
 
 
 
(1,323
)
 
(1,323
)
Net loss
57,282

 
(7,853
)
 
(72,986
)
 
(23,557
)
Capital expenditures
15,591

 
354

 
13,272

 
29,217

____________________
(1)
Includes $4,884 of restructuring and other charges (see “Note 10. Restructuring and Other Charges” below) and a $5,185 gain from the sale of office premises.
(2)
Includes $4,742 of restructuring and other charges (see “Note 10. Restructuring and Other Charges” below).




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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Note 10. Restructuring and Other Charges

The following table summarizes our restructuring and other charges:

 
Costs
Incurred
as of
 
Costs Incurred
for Thirty-nine Weeks Ended
 
Estimated
Remaining
Costs
 
Total
Estimated/
Actual
Costs as of
(In thousands)
January 29,
2011
 
October 29,
2011
 
To be
Incurred
 
October 29,
2011
Fiscal 2011 Announcements
 
 
 
 
 
 
 
Transformational initiatives
$
—

 
$
3,576

 
$
815

(1) 
$
4,391

Store impairment charges
—

 
654

 
—

 
654

Store lease termination charges
—

 
484

 
2,000

 
2,484

 
 
 
 
 
 
 
 
Fiscal 2010 Announcements
 
 
 
 
 
 
 
Closing of under-performing stores:
 
 
 
 
 
 
 
Non-cash impairment charge for CATHERINES® stores in outlet locations
3,210

 
—

 
—

 
3,210

Store lease termination and other charges
—

 
(873
)
 
6,000

 
5,127

Severance for departure of former CEO
2,898

 
—

 
—

 
2,898

 
 
 
 
 
 
 
 
Fiscal 2009 Announcements
 
 
 
 
 
 
 
Closing of PETITE SOPHISTICATE OUTLET® stores:
 
 
 
 
 
 
 
Non-cash accelerated depreciation
612

 
—

 
—

 
612

Store lease termination charges
1,070

 
—

 
—

 
1,070

Other non-cash costs
195

 
—

 
—

 
195

Closing of under-performing stores:
 
 
 
 
 
 
 
Store lease termination charges
2,691

 
1,116

 
3,000

 
6,807

 
 
 
 
 
 
 
 
Fiscal 2007 and Fiscal 2008 Announcements
 
 
 
 
 
 
 
Lease termination and accretion charges
11,575

 
(87
)
 
1,715

(2) 
13,203

Severance, retention, and other costs
5,123

 
14

 
—

 
5,137

Closing of under-performing stores:
 
 
 
 
 
 
 
Store lease termination charges
8,305

 
—

 
—

 
8,305

Total
$
35,679

 
$
4,884

 
$
13,530

 
$
54,093

____________________
(1)
We cannot estimate all remaining costs related to our plans to divest FASHION BUG and to undertake a comprehensive strategic review (see "Note 14. Subsequent Event" below) at this time as we cannot assure the implementation of the divestiture or any additional courses of action that may result from the review.
(2)
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)


The following table summarizes our accrued restructuring and other charges:

 
Accrued
 
Thirty-nine Weeks Ended
 
Accrued
 
as of
 
October 29, 2011
 
as of
(In thousands)
January 29,
2011(1)

 
Costs
Incurred
 
Payments/
Settlements
 
October 29,
2011(1)
Fiscal 2011 Announcements
 
 
 
 
 
 
 
Transformational initiatives
—

 
3,576

 
(2,612
)
 
964

Store lease termination charges
—

 
575

 
(575
)
 
—

 
 
 
 
 
 
 
 
Fiscal 2010 Announcements
 
 
 
 
 
 
 
Severance for departure of former CEO
1,910

 
—

 
(828
)
 
1,082

Closing of under-performing stores:
 
 
 
 
 
 
 
Store lease termination charges
619

 
413

 
(311
)
 
721

 
 
 
 
 
 
 
 
Fiscal 2009 Announcements
 
 
 
 
 
 
 
Closing of PETITE SOPHISTICATE OUTLET stores:
 
 
 
 
 
 
 
Store lease termination charges
599

 
—

 
(292
)
 
307

Closing of under-performing stores:
 
 
 
 
 
 
 
Store lease termination charges
485

 
1,433

 
(1,187
)
 
731

 
 
 
 
 
 
 
 
Fiscal 2007 and Fiscal 2008 Announcements
 
 
 
 
 
 
 
Non-core misses apparel assets:
 
 
 
 
 
 
 
Lease termination charges
7,074

 
(87
)
 
(2,183
)
 
4,804

Other costs
153

 
—

 
—

 
153

Transformational initiatives:
 
 
 
 
 
 
 
Severance and retention costs
117

 
14

 
(131
)
 
—

Closing of under-performing stores:
 
 
 
 
 
 
 
Store lease termination charges
798

 
—

 
(258
)
 
540

Total
$
11,755

 
$
5,924

 
$
(8,377
)
 
$
9,302

____________________
(1)
Included in “Accrued expenses” in the accompanying condensed consolidated balance sheets.

Restructuring and other charges for the thirty-nine weeks ended October 29, 2011 consisted primarily of professional fees and retention costs related to our announced plans to divest our FASHION BUG® business and to undertake a comprehensive strategic review (see "Note 14. Subsequent Event" below), non-cash store impairment charges, and lease termination costs net of store-related deferred allowances in connection with our under-performing store closing programs.

We performed an impairment review of long-lived assets for FASHION BUG and identified 18 stores with asset carrying values in excess of such stores' respective forecasted undiscounted cash flows. Accordingly, during the thirty-nine weeks ended October 29, 2011 we recognized non-cash impairment charges of $654,000 to write down the long-lived assets (primarily leasehold improvements) at these stores to their respective fair values. Due to the nature of the assets being written down and our past history of abandoning such assets, we have determined the fair value of the assets to be minimal.

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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


During the Fiscal 2011 Third Quarter we approved the planned closing of 18 additional under-performing FASHION BUG stores. We expect to close all of these under-performing stores in Fiscal 2011 and we expect to incur approximately $2,500,000 of lease termination and other costs to close these stores.

Restructuring and other charges for the thirty-nine weeks ended October 30, 2010 consisted primarily of cash severance and non-cash equity compensation costs in connection with the resignation of our former CEO and lease termination costs related to our store closing program and accretion charges on lease termination costs for our store closing program announced March 30, 2010.

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.


Note 11. Fair Value of Financial Instruments

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

 
October 29, 2011
 
January 29, 2011
(In thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
157,754

 
$
157,754

 
$
117,482

 
$
117,482

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
1.125% Senior Convertible Notes, due May 1, 2014
120,967

(1) 
120,788

 
115,772

(1) 
118,681

6.07% mortgage note, due October 11, 2014
8,449

 
8,316

 
9,035

 
8,887

6.53% mortgage note, due November 1, 2012
1,400

 
1,400

 
2,450

 
2,451

7.77% mortgage note, due December 1, 2011
5,187

 
5,267

 
5,793

 
5,921

____________________
(1)
Net of unamortized discount of $19,484 at October 29, 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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CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Note 13. Impact of Recent Accounting Pronouncements

In September 2011 the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08, "Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment." Topic 350 currently requires entities to test goodwill on an annual basis by comparing the fair value of a reporting unit to its carrying value including goodwill (step one). Step two of the test must be performed to measure the amount of impairment. Under ASU 2011-08 entities are not required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not (i.e. there is a greater than 50% likelihood) that the unit's carrying value is greater than its fair value based on an assessment of events and circumstances. ASU 2011-08 includes examples of events and circumstances that entities should consider to determine whether they have to perform step one of the goodwill impairment test. ASU 2011-08 is effective for our fiscal year which begins on January 29, 2012. Early adoption is permitted for interim or annual reports that have not been issued. We do not expect that adoption of ASU 2011-08 will have a material impact on our financial position or results of operations.


Note 14. Subsequent Event

Subsequent to the end of the Fiscal 2011 Third Quarter we announced that we are undertaking a comprehensive strategic review of our operations to determine how best to enhance shareholder value. As part of these efforts, we announced plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT® brand. This review is expected to focus on optimizing the use of our cash position to drive the potential of the LANE BRYANT brand, as well as evaluating other alternatives to further enhance shareholder value. A time frame for the divestiture of FASHION BUG or the completion of the strategic review has not yet been determined. The results of operations of our FASHION BUG business are not reported as discontinued operations as the requirements for treating the business as held-for-sale were not met as of October 29, 2011.
 

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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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Table of Contents


•
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 successfully implement, or to manage the risks associated with, our plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT business, or additional courses of action, if any, that may result from our planned comprehensive strategic review;

•
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.


RECENT DEVELOPMENTS

Subsequent to the end of the Fiscal 2011 Third Quarter we announced that we are undertaking a comprehensive strategic and financial review of our operations to determine how best to enhance shareholder value. As part of these efforts, we announced plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT brand. This review is expected to focus on optimizing the use of our strong cash position to drive the potential of the LANE BRYANT brand, as well as evaluating other alternatives to further enhance shareholder value. The results of operations of our FASHION BUG business are not reported as discontinued operations as the requirements for treating the business as held-for-sale were not met as of October 29, 2011.

Our Board of Directors and management will explore a full range of strategic alternatives for the Company, and have engaged Barclays Capital as a financial advisor to assist in the process. We cannot assure that this process will result in any specific course of action beyond the planned divestiture of FASHION BUG. A time frame for the divestiture of FASHION BUG or the completion of the strategic review has not yet been determined. Additional discussion of our management initiatives is included in "OVERVIEW; Management Initiatives" below.


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

Our Fiscal 2011 Third Quarter operating results reflect our continuing progress on our initiatives to increase inventory productivity and to improve overall profitability. Consolidated Adjusted EBITDA for the Fiscal 2011 Third Quarter increased by $4.0 million to $8.0 million as compared to the prior-year period (see “RESULTS OF OPERATIONS; EBITDA and Adjusted EBITDA” below).  This increase was driven by decreases in operating expenses as a result of the closing of under-performing stores and increased gross margins across all of our brands as a result of our disciplined inventory management. Our disciplined inventory management resulted in an 8% decrease in inventory at cost on a comparable store basis at the end of the quarter as compared to the end of the prior-year period.


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Consolidated net sales for the Fiscal 2011 Third Quarter reflected the impact of 168 net store closings during the preceding 12-month period in connection with our store closing programs and a decrease of 4% in consolidated comparable store sales, partially offset by sales from new stores and a 10% increase in e-commerce net sales as compared to the Fiscal 2010 Third Quarter.  Our Fall seasonal fashion inventory assortments were well received by our customers, resulting in improved average unit retails and average dollar sales during the Fiscal 2011 Third Quarter as compared to the prior-year period. However, Fiscal 2011 Third Quarter sales were negatively impacted by planned reductions in levels of clearance inventory as compared to the prior-year period as we continued to execute against our plan for tightly controlled inventories to drive higher gross margins.

Although the planned reductions in clearance inventory negatively impacted net sales, they contributed to an increase in gross margin for the Fiscal 2011 Third Quarter as compared to the Fiscal 2010 Third Quarter. This increase was driven by improvements across all of our brands, and benefited from improved seasonal assortments and disciplined inventory management, which resulted in fewer markdowns as compared to the prior-year period and faster sell-throughs of seasonal merchandise. We continue to seek the proper balance of full-price, promotional, and clearance inventories in order to maximize gross profit dollars.  The decline in gross profit dollars was primarily driven by the net closure of 168 stores over the preceding 12 months in connection with our store closing program.

Our operating expenses (excluding restructuring and other charges of $3.5 million) decreased by $15.7 million , driven primarily by the impact of 168 net store closures and expense reductions across all of our brands.  Our occupancy and buying expenses decreased both in dollar amount and as a percentage of net sales for the Fiscal 2011 Third 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 in dollar amount for the Fiscal 2011 Third Quarter as compared to the prior-year period, primarily as a result of a combination of lower store payroll attributable to operating fewer stores and lower advertising expenses, but increased as a percentage of net sales, primarily as a result of negative leverage from the decrease in comparable store sales at our FASHION BUG brand.

Depreciation and amortization expenses decreased by $2.8 million for the Fiscal 2011 Third 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 Third Quarter were primarily for professional fees and retention costs related to our announced plans to divest our FASHION BUG business and to undertake a comprehensive strategic and financial review (see "RECENT DEVELOPMENTS" above), non-cash store impairment charges, and lease termination costs net of store-related deferred allowances in connection with our under-performing store closing programs.  Fiscal 2010 Third Quarter charges were primarily for cash severance and non-cash equity compensation costs in connection with the resignation of our former Chief Executive Officer.

As discussed in prior quarters of Fiscal 2011, our product pricing was affected by inflation in cotton costs that mostly impacted our Fall season.  Our Fiscal 2011 Third Quarter average unit retail increased approximately 12%, which did not completely cover the increased product cost. However, our improved assortments and tighter inventory management resulted in a gross margin rate increase of 210 basis points. A decrease in the number of units sold indicated that many of the price increases were not sustainable in the current consumer spending environment. Looking ahead to the December Holiday and Spring seasons, we expect year-over-year price increases to subside into the mid to high single digits.

We continue to make progress on our initiatives to drive sustainable productivity and profitability. Although we are pleased with our progress, our results remain below our expectations. However, we are continuing to achieve better results through core fundamentals, including more fashionable, trend-right assortments coupled with disciplined inventory management, gross margin expansion, and decreases in operating expenses.


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Financial Position and Liquidity

We ended the Fiscal 2011 Third Quarter with $158 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 three quarters 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.  

As we continue to rationalize our store base, we expect to close approximately 230-240 unprofitable stores in 2011. The majority of these stores have natural lease expirations in 2011. Lease termination costs for Fiscal 2011 are projected to be approximately $4 million. During the first three quarters of Fiscal 2011, we have closed 144 stores, including 80 FASHION BUG stores, and the majority of the remaining store closings will occur near the end of the fourth quarter.

On July 14, 2011 we entered into an amended and restated loan and security agreement for a $200 million senior secured revolving credit facility, which replaced our $225 million 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 and a total liquidity position of $305 million.

Management Initiatives

We are currently engaged in a number of initiatives that we believe will further improve our business and enhance shareholder value (see "RECENT DEVELOPMENTS" above). The first substantive step is the divestiture of our FASHION BUG business. Although we have made progress in improving FASHION BUG's profitability, we believe that it does not fit within our future strategic plan. Concurrent with this process, we are assessing the appropriate expense structure for the Company that incorporates the planned divestiture of FASHION BUG.

We believe that our financial and operational resources are better spent on focusing on our more profitable LANE BRYANT brand. We expect to invest in and focus on that business, using its strong consumer franchise and leading market position to drive our sales and profits. We expect to achieve our vision for the LANE BRYANT brand as the premier brand for women's fashion plus apparel through a number of initiatives, including:

•
offering fashionable, on-trend, lifestyle merchandise collections;

•
enhanced CACIQUE intimate apparel brand awareness and merchandise offerings;

•
expansion to approximately 900 stores over several years, resulting in approximately 750 full-line LANE BRYANT stores and 150 LANE BRYANT OUTLET® locations; and

•
innovative digital sales initiatives like our recently launched "Fashion Genius" online outfitting technology.

Our plans for the next few years include approximately 125 new locations and 125 relocations from malls into power-strip and lifestyle centers with stronger operating metrics, while closing approximately 50 stores through natural lease expirations. Our current mix of LANE BRYANT stores in strip centers to malls is 55% to 45%, and we plan to improve this mix to 80% to 20% over the next few years. The operating metrics for LANE BRYANT stores in power-strip and lifestyle centers support increased profitability, with projected increases in sales and decreases in occupancy expenses as compared to malls, resulting in a projected improvement in sales productivity and Adjusted EBITDA.


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Additionally, we are currently developing a new store design for the LANE BRYANT brand, reflective of our vision for LANE BRYANT as the premier brand for women's fashion plus apparel. The new store design will include visual packages that promote lifestyle storytelling experiences, and will be simplified for easy navigation to enhance our customers' shopping experience. We expect to launch our first new store under this design in Fall 2012. Following the execution of our broader plans for new and relocated stores, nearly one-third of our LANE BRYANT stores will be repositioned and represented by our fresh new store design.

Our CACIQUE intimate apparel brand, which offers key intimates categories and complementary products, has grown to approximately one-third of sales at our full-line LANE BRYANT chain. We are seeking to further grow CACIQUE revenue through enhanced product assortments. Further into the future we expect to explore additional sales distribution channels, such as potential mall-based stand-alone stores, sister brands, and international growth.

As a leading retailer in the women's plus-size apparel market in the United States, we are making the distinction that we are not a plus-size retailer selling fashion, but rather a fashion retailer serving the plus-size apparel market. We must continue our progress in identifying and relating to our target customers, creating fashion-right assortment offerings, and focusing on our LANE BRYANT brand.

We are poised for growth and improved profitability. Our performance will be driven principally by revenue enhancements at LANE BRYANT, through improved merchandise assortments and by transitioning real estate to higher-performing strip-center locations. We believe that our initiatives will create shareholder value.


RESULTS OF OPERATIONS

EBITDA and Adjusted EBITDA

We believe that Adjusted EBITDA, along with other measures, provides a useful pretax 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 following tables 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

(In millions)
LANE
BRYANT(1)
 
FASHION
BUG
 
CATHERINES
 
Total Retail
Stores
Thirteen Weeks Ended October 29, 2011
 
 
 
 
 
 
 
Net sales
$
221.3

 
$
126.8

 
$
69.6

 
$
417.7

 
 
 
 
 
 
 
 
Net loss
21.7

 
(3.4
)
 
1.9

 
20.2

Income tax provision
—

 
—

 
—

 
—

Net interest expense and other income
—

 
—

 
—

 
—

Depreciation and amortization
7.3

 
1.7

 
1.3

 
10.3

EBITDA
29.0

 
(1.7
)
 
3.2

 
30.5

Restructuring and other charges
—

 
—

 
—

 
—

Adjusted EBITDA
$
29.0

 
$
(1.7
)
 
$
3.2

 
$
30.5

Adjusted EBITDA as a % of net sales
13.1
%
 
(1.3
)%
 
4.6
%
 
7.3
%
____________________
(1)
Includes LANE BRYANT OUTLET stores, with net sales of $30.0 and Adjusted EBITDA of $3.8.

(In millions)
Direct-to-
Consumer(2)
 
Corporate
And Other
 
Consolidated(4)
Thirteen Weeks Ended October 29, 2011
 
 
 
 
 
Net sales
$
12.0

 
$
—

 
$
429.7

 
 
 
 
 
 
Net loss
(3.3
)
 
(29.9
)
 
(13.0
)
Income tax provision
—

 
0.8

 
0.8

Net interest expense and other income
—

 
3.2

 
3.2

Depreciation and amortization
0.3

 
3.0

 
13.6

EBITDA
(3.0
)
 
(22.9
)
 
4.6

Restructuring and other charges
—

 
3.5

 
3.5

Adjusted EBITDA
$
(3.0
)
 
$
(19.4
)
 
$
8.0

Adjusted EBITDA as a % of net sales
(25.0
)%
 
—

(3) 
1.9
%
____________________
(2)
Primarily FIGI’S catalog business. A substantial portion of FIGI’s sales occur during the December holiday season.
(3)
Not meaningful.
(4)
Results may not add due to rounding

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(In millions)
LANE
BRYANT(1)
 
FASHION
BUG
 
CATHERINES
 
Total Retail
Stores
Thirteen Weeks Ended October 30, 2010
 
 
 
 
 
 
 
Net sales
$
227.5

 
$
156.4

 
$
70.0

 
$
453.9

 
 
 
 
 
 
 
 
Net loss
19.9

 
(1.8
)
 
(2.9
)
 
15.2

Income tax benefit
—

 
—

 
—

 
—

Net interest expense and other income
—

 
—

 
—

 
—

Depreciation and amortization
8.4

 
2.9

 
1.9

 
13.2

EBITDA
28.3

 
1.1

 
(1.0
)
 
28.4

Gain on repurchases of 1.125% Senior Convertible Notes
—

 
—

 
—

 
—

Restructuring and other charges
—

 
—

 
—

 
—

Adjusted EBITDA
$
28.3

 
$
1.1

 
$
(1.0
)
 
$
28.4

Adjusted EBITDA as a % of net sales
12.4
%
 
0.7
%
 
(1.4
)%
 
6.3
%
____________________
(1)
Includes LANE BRYANT OUTLET stores, with net sales of $28.3 and Adjusted EBITDA of $3.7.

(In millions)
Direct-to-
Consumer(2)
 
Corporate
And Other
 
Consolidated
Thirteen Weeks Ended October 30, 2010
 
 
 
 
 
Net sales
$
9.7

 
$
—

 
$
463.6

 
 
 
 
 
 
Net loss
(2.9
)
 
(31.1
)
 
(18.8
)
Income tax benefit
—

 
(0.1
)
 
(0.1
)
Net interest expense and other income
—

 
3.3

 
3.3

Depreciation and amortization
0.2

 
3.0

 
16.4

EBITDA
(2.7
)
 
(24.9
)
 
0.8

Gain on repurchases of 1.125% Senior Convertible Notes
—

 
—

 
—

Restructuring and other charges
—

 
3.2

 
3.2

Adjusted EBITDA
$
(2.7
)
 
$
(21.7
)
 
$
4.0

Adjusted EBITDA as a % of net sales
(27.8
)%
 
—

(3) 
0.9
%
____________________
(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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(In millions)
LANE
BRYANT(1)
 
FASHION
BUG
 
CATHERINES
 
Total Retail
Stores(2)
Thirty-nine Weeks Ended October 29, 2011
 
 
 
 
 
 
 
Net sales
$
735.6

 
$
438.2

 
$
227.3

 
$
1,401.1

 
 
 
 
 
 
 
 
Net income
78.0

 
17.6

 
13.5

 
109.2

Income tax provision
—

 
—

 
—

 
—

Net interest expense and other income
—

 
—

 
—

 
—

Depreciation and amortization
22.4

 
5.6

 
4.4

 
32.4

EBITDA
100.4

 
23.2

 
17.9

 
141.6

Gain from sale of office premises
—

 
—

 
—

 
—

Restructuring and other credits
—

 
—

 
—

 
—

Adjusted EBITDA
$
100.4

 
$
23.2

 
$
17.9

 
$
141.6

Adjusted EBITDA as a % of net sales
13.6
%
 
5.3
%
 
7.9
%
 
10.1
%
____________________
(1)
Includes LANE BRYANT OUTLET® stores, with net sales of $93.9 and Adjusted EBITDA of $15.3.

(2)
Results may not add due to rounding

(In millions)
Direct-to-
Consumer(3)
 
Corporate
And Other
 
Consolidated(2)
Thirty-nine Weeks Ended October 29, 2011
 
 
 
 
 
Net sales
$
32.2

 
$
—

 
$
1,433.3

 
 
 
 
 
 
Net income
(9.1
)
 
(88.9
)
 
11.1

Income tax provision
—

 
4.8

 
4.8

Net interest expense and other income
—

 
10.6

 
10.6

Depreciation and amortization
0.8

 
9.3

 
42.5

EBITDA
(8.3
)
 
(64.2
)
 
69.0

Gain from sale of office premises
—

 
(5.2
)
 
(5.2
)
Restructuring and other credits
—

 
4.9

 
4.9

Adjusted EBITDA
$
(8.3
)
 
$
(64.5
)
 
$
68.7

Adjusted EBITDA as a % of net sales
(25.8
)%
 
—

(4) 
4.8
%
____________________
(3)
Primarily FIGI’S catalog business. A substantial portion of FIGI’s sales occur during the December holiday season.
(4)
Not meaningful.

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(In millions)
LANE
BRYANT(1)
 
FASHION
BUG
 
CATHERINES
 
Total Retail
Stores
Thirty-nine Weeks Ended October 30, 2010
 
 
 
 
 
 
 
Net sales
$
722.8

 
$
505.1

 
$
230.3

 
$
1,458.2

 
 
 
 
 
 
 
 
Net loss
49.3

 
3.7

 
4.3

 
57.3

Income tax benefit
—

 
—

 
—

 
—

Net interest expense and other income
—

 
—

 
—

 
—

Depreciation and amortization
25.8

 
8.3

 
5.9

 
40.0

EBITDA
75.1

 
12.0

 
10.2

 
97.3

Gain on repurchases of 1.125% Senior Convertible Notes
—

 
—

 
—

 
—

Restructuring and other charges
—

 
—

 
—

 
—

Adjusted EBITDA
$
75.1

 
$
12.0

 
$
10.2

 
$
97.3

Adjusted EBITDA as a % of net sales
10.4
%
 
2.4
%
 
4.4
%
 
6.7
%
____________________
(1)
Includes LANE BRYANT OUTLET stores, with net sales of $87.0 and Adjusted EBITDA of $13.4.

(In millions)
Direct-to-
Consumer(2)
 
Corporate
And Other
 
Consolidated
Thirty-nine Weeks Ended October 30, 2010
 
 
 
 
 
Net sales
$
27.8

 
$
—

 
$
1,486.0

 
 
 
 
 
 
Net loss
(7.8
)
 
(73.0
)
 
(23.5
)
Income tax benefit
—

 
(1.3
)
 
(1.3
)
Net interest expense and other income
—

 
11.4

 
11.4

Depreciation and amortization
0.8

 
9.3

 
50.1

EBITDA
(7.0
)
 
(53.6
)
 
36.7

Gain on repurchases of 1.125% Senior Convertible Notes
—

 
(1.9
)
 
(1.9
)
Restructuring and other charges
—

 
4.7

 
4.7

Adjusted EBITDA
$
(7.0
)
 
$
(50.8
)
 
$
39.5

Adjusted EBITDA as a % of net sales
(25.2
)%
 
—

(3) 
2.7
%
____________________
(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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The following table shows information related to the change in our Retail Stores segment net sales:

 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
October 29,
2011
 
October 30,
2010
 
October 29,
2011
 
October 30,
2010
Increase/(decrease) in comparable store sales(1) :
 
 
 
 
 
 
 
Consolidated retail stores
(4
)%
 
3
 %
 
—
 %
 
1
 %
LANE BRYANT(2)
—