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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 May 3, 2003
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 (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
---------------------------- -----
(Address of principal executive offices) (Zip Code)
(215) 245-9100
--------------
(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, as of May
23, 2003, was 112,981,870 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
May 3, 2003 and February 1, 2003................................ 2
Condensed Consolidated Statements of Operations
Thirteen weeks ended May 3, 2003 and May 4, 2002................ 3
Condensed Consolidated Statements of Comprehensive Income (Loss)
Thirteen weeks ended May 3, 2003 and May 4, 2002................ 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended May 3, 2003 and May 4, 2002................ 5
Notes to Condensed Consolidated Financial Statements.................. 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements............................................ 13 - 14
Critical Accounting Policies.......................................... 14 - 15
Results of Operations................................................. 15 - 20
Liquidity and Capital Resources....................................... 20 - 22
Financing............................................................. 23
Market Risk........................................................... 23 - 24
Impact of Recent Accounting Pronouncements............................ 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 24
Item 4. Controls and Procedures...................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 25
Item 6. Exhibits and Reports on Form 8-K............................. 25
SIGNATURES AND CERTIFICATIONS......................................... 26 - 28
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 3, February 1,
(Dollars in thousands, except per-share amounts) 2003 2003
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 97,629 $ 102,026
Available-for-sale securities ...................................... 54,613 50,286
Merchandise inventories ............................................ 342,448 286,472
Deferred taxes ..................................................... 17,986 11,726
Prepayments and other .............................................. 81,379 77,504
----------- -----------
Total current assets ........................................... 594,055 528,014
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 681,106 668,168
Less: accumulated depreciation and amortization .................... 360,033 348,295
----------- -----------
Net property, equipment, and leasehold improvements ............ 321,073 319,873
----------- -----------
Trademarks and other intangible assets ............................. 170,973 171,138
Goodwill ........................................................... 68,594 68,594
Available-for-sale securities ...................................... 24,864 23,472
Other assets ....................................................... 28,253 28,065
----------- -----------
Total assets ....................................................... $ 1,207,812 $ 1,139,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 206,401 $ 147,952
Accrued expenses ................................................... 147,324 163,598
Income taxes payable ............................................... 14,047 7,144
Current portion - long-term debt ................................... 13,644 12,595
Accrued expenses related to cost reduction plan .................... 1,581 0
----------- -----------
Total current liabilities ...................................... 382,997 331,289
----------- -----------
Deferred taxes and other non-current liabilities ................... 49,492 43,188
Long-term debt ..................................................... 203,450 203,045
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 125,247,463 shares and 125,149,242 shares, respectively 12,525 12,515
Additional paid-in capital ......................................... 200,683 200,040
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (3,521) (3,370)
Accumulated other comprehensive loss ............................... (502) (550)
Retained earnings .................................................. 446,824 437,135
----------- -----------
Total stockholders' equity ..................................... 571,873 561,634
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,207,812 $ 1,139,156
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended
--------------------
May 3, May 4,
(In thousands, except per-share amounts) 2003 2002(1)
---- ----
Net sales .............................................. $ 564,286 $ 630,616
--------- ---------
Cost of goods sold, buying, and occupancy expenses ..... 395,488 437,235
Selling, general, and administrative expenses .......... 145,265 159,156
Expenses related to cost reduction plan ................ 4,431 0
--------- ---------
Total operating expenses ............................... 545,184 596,391
--------- ---------
Income from operations ................................. 19,102 34,225
Other income, principally interest ..................... 424 444
Interest expense ....................................... (3,805) (6,802)
--------- ---------
Income before income taxes, minority interest, and
cumulative effect of accounting changes ............ 15,721 27,867
Income tax provision ................................... 6,116 10,656
--------- ---------
Income before minority interest and cumulative effect
of accounting changes .............................. 9,605 17,211
Minority interest in net loss of consolidated subsidiary 84 61
--------- ---------
Income before cumulative effect of accounting changes .. 9,689 17,272
Cumulative effect of accounting changes, net of
income tax benefit of $2,758 ....................... 0 (49,098)
--------- ---------
Net income (loss) ...................................... $ 9,689 $ (31,826)
========= =========
Basic net income (loss) per share:
Before cumulative effect of accounting changes ..... $.09 $ .15
Cumulative effect of accounting changes ............ .00 (.44)
---- -----
Net income (loss) .................................. $.09 $(.28)(2)
==== =====
Diluted net income (loss) per share:
Before cumulative effect of accounting changes ..... $.08 $ .14
Cumulative effect of accounting changes ............ .00 (.39)
---- -----
Net income (loss) .................................. $.08 $(.24)(2)
==== =====
- --------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
(2) Results do not add due to rounding.
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Thirteen Weeks Ended
--------------------
May 3, May 4,
(In thousands) 2003 2002(1)
---- ----
Net income (loss) ....................................................... $ 9,689 $(31,826)
-------- --------
Unrealized gains (losses) on available-for-sale securities, net of income
taxes of $24 and $(20), respectively ................................ (38) 15
Reclassification of amortization of deferred loss on termination of
derivative, net of income taxes of $(46) and $(46), respectively .... 86 86
-------- --------
Total other comprehensive income (loss), net of taxes ............... 48 101
-------- --------
Comprehensive income (loss) ............................................. $ 9,737 $(31,725)
======== ========
- --------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
--------------------
May 3, May 4,
(In thousands) 2003 2002(1)
---- ----
Operating activities
Net income (loss) ................................................... $ 9,689 $ (31,826)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................... 19,270 18,335
Write-down of Catherine's goodwill .............................. 0 43,975
Cumulative effect of capitalization of cash received from vendors 0 7,881
Deferred income taxes ........................................... (1,025) (2,211)
Other, net ...................................................... 694 33
Changes in operating assets and liabilities:
Merchandise inventories ...................................... (55,976) (38,069)
Accounts payable ............................................. 58,449 41,664
Prepayments and other ........................................ (4,048) (14,148)
Accrued expenses and other ................................... (15,143) 28,093
Income taxes payable ......................................... 6,903 0
Accrued restructuring costs .................................. 0 (1,274)
Accrued expenses related to cost reduction plan .............. 1,581 0
--------- ---------
Net cash provided by operating activities ........................... 20,394 52,453
--------- ---------
Investing activities
Investment in capital assets ........................................ (13,325) (10,606)
Proceeds from sales of available-for-sale securities ................ 8,888 3
Gross purchases of available-for-sale securities .................... (14,669) (8,996)
Increase in other assets ............................................ (2,562) (1,239)
--------- ---------
Net cash used in investing activities ............................... (21,668) (20,838)
--------- ---------
Financing activities
Proceeds from short-term borrowings ................................. 81,172 222,613
Repayments of short-term borrowings ................................. (81,172) (255,167)
Repayments of long-term borrowings .................................. (3,382) (2,355)
Proceeds from exercise of stock options ............................. 259 4,053
--------- ---------
Net cash used in financing activities ............................... (3,123) (30,856)
--------- ---------
Increase (decrease) in cash and cash equivalents .................... (4,397) 759
Cash and cash equivalents, beginning of period ...................... 102,026 36,640
--------- ---------
Cash and cash equivalents, end of period ............................ $ 97,629 $ 37,399
========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes .............. $ 0 $ 13
========= =========
Equipment acquired through capital leases ........................... $ 4,836 $ 640
========= =========
- --------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
We have prepared the condensed consolidated balance sheet as of May 3,
2003, and the condensed consolidated statements of operations, comprehensive
income (loss) and cash flows for the thirteen weeks ended May 3, 2003 and May 4,
2002, without audit. In the opinion of our management, all adjustments (which
include only normal recurring adjustments, except for the cumulative effect of
accounting changes) necessary to present fairly the financial position at May 3,
2003, and the results of operations and cash flows for the thirteen weeks ended
May 3, 2003 and May 4, 2002, have been made.
We have condensed or omitted certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and related notes included in our February 1, 2003 Annual Report on Form 10-K.
The results of operations for the thirteen weeks ended May 3, 2003 and May 4,
2002 are not necessarily indicative of operating results for the full fiscal
year.
As used in these notes, the terms "Fiscal 2004" and "Fiscal 2003" refer to
our fiscal year ending January 31, 2004 and our fiscal year ended February 1,
2003, respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2003 First
Quarter" refer to the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. The term "Fiscal 2004 Second Quarter" refers to the thirteen weeks
ending August 2, 2003. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
In the fourth quarter of Fiscal 2003, we adopted the provisions of
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force
("EITF") Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor," as of the beginning of Fiscal 2003 and
restated our results of operations for the first three quarters of Fiscal 2003.
EITF Issue 02-16 addresses the accounting for cash consideration given to a
customer, including both a reseller of the vendor's products and an entity that
purchases the vendor's products, from a reseller. The Issue provides accounting
guidance on how a customer should characterize cash consideration received from
a vendor, and when to recognize and how to measure that consideration in its
income statement. The cumulative effect of the adoption of EITF Issue 02-16 as
of the beginning of Fiscal 2003 was a charge of $5,123,000, net of income taxes
of $2,758,000. For interim reporting, markdown allowances are deferred, and are
recognized in the period in which markdown expenses are recognized.
In accordance with the transition provisions of FASB Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
we performed a review of our goodwill and other indefinite-lived intangible
assets for impairment during the second quarter of Fiscal 2003. We determined
that the carrying value of goodwill related to our acquisition of Catherines
Stores Corporation exceeded its estimated fair value under SFAS No. 142. We
recognized a charge of $43,975,000 as the cumulative effect of an accounting
change as of the beginning of Fiscal 2003 to reduce the carrying value of the
Catherine's goodwill to its estimated fair value. This charge has no tax effect,
as it is not deductible for tax purposes.
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Condensed Consolidated Financial Statements (continued)
The results of operations for the Fiscal 2003 First Quarter as previously
reported, prior to the restatement for the adoption of EITF Issue 02-16 and the
cumulative effect of accounting changes for the adoption of EITF Issue 02-16 and
SFAS No. 142, were as follows:
Thirteen
Weeks Ended
(In thousands, except per-share amounts) May 4, 2002
-----------
Net sales............................................ $630,616
Cost of goods sold, buying, and occupancy expenses... 438,808
Net income........................................... 16,311
Net income per share:
Basic............................................ $.15
Diluted.......................................... .14
We account for stock-based compensation using the intrinsic value method,
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. We
amortize deferred compensation expense attributable to stock awards and stock
options having an exercise price less than the market price on the date of grant
over the vesting period of the award or option. We do not recognize compensation
expense for options having an exercise price equal to the market price on the
date of grant or for shares purchased under our Employee Stock Purchase Plan. We
have adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure."
The following table reconciles net income (loss) and net income (loss) per
share as reported, using the intrinsic value method under APB No. 25, to pro
forma net income (loss) and pro forma net income (loss) per share using the fair
value method under SFAS No. 123:
Thirteen Weeks Ended
--------------------
(In thousands, except per-share amounts) May 3, 2003 May 4, 2002
----------- -----------
(Restated)
Net income (loss), as reported ................................... $ 9,689 $ (31,826)
Add stock-based employee compensation as reported, using intrinsic
value method, net of income taxes ........................... 270 208
Less stock-based employee compensation, using fair value method,
net of income taxes ......................................... (989) (1,365)
--------- ----------
Pro forma net income (loss) ...................................... $ 8,970 $ (32,983)
========= ==========
Basic net income (loss) per share:
As reported ................................................. .09 (.28)
Pro forma ................................................... .08 (.30)
Diluted net income (loss) per share:
As reported ................................................. .08 (.24)
Pro forma ................................................... .08 (.25)
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Trademarks and Other Intangible Assets
May 3, February 1,
(In thousands) 2003 2003
---- ----
Trademarks, tradenames, and internet domain names . $168,800 $168,800
Customer lists and covenant not to compete ........ 3,300 3,300
-------- --------
Total at cost ..................................... 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete ....................... 1,127 962
-------- --------
Net trademarks and other intangible assets ........ $170,973 $171,138
======== ========
3. Long-term Debt
May 3, February 1,
(In thousands) 2003 2003
---- ----
4.75% Senior Convertible Notes due 2012 $150,000 $150,000
Capital lease obligations ............. 33,971 31,703
6.53% mortgage note ................... 13,300 13,650
7.77% mortgage note ................... 10,372 10,478
7.5% mortgage note .................... 6,006 6,059
8.15% note ............................ 3,445 3,750
-------- --------
Total long-term debt .................. 217,094 215,640
Less current portion .................. 13,644 12,595
-------- --------
Long-term debt ........................ $203,450 $203,045
======== ========
4. Stockholders' Equity
Thirteen
Weeks Ended
(In thousands) May 3, 2003
-----------
Total stockholders' equity, beginning of period ...................... $ 561,634
Net income ........................................................... 9,689
Exercises of stock options ........................................... 86
Amortization of deferred compensation expense ........................ 416
Amortization of deferred loss on termination of derivative, net of tax 86
Unrealized losses on available-for-sale securities, net of tax ....... (38)
---------
Total stockholders' equity, end of period ............................ $ 571,873
=========
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Customer Loyalty Card Program
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds the card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the Fiscal 2004 First Quarter and Fiscal 2003 First Quarter, we
recognized revenues of $4,173,000 and $4,311,000, respectively, in connection
with this program. As of December 1, 2002, we discontinued the issuance of new
cards under this program. We plan to terminate this program by the end of the
Fiscal 2004 Second Quarter.
During the Fiscal 2004 First Quarter, we introduced a new customer loyalty
card program that is being operated under our proprietary credit card program.
For an annual fee of $25, the program grants, among other benefits, a $20
discount each time a customer accumulates over $200 of purchases (up to $2,000
of purchases) to be applied at the next purchase. We have accrued $2,100,000 for
the estimated costs of discounts earned during the Fiscal 2004 First Quarter,
based on year-to-date purchases. Customers are entitled to a full refund of the
$25 annual fee if membership is canceled within 90 days. After 90 days the
refund will be reduced by a pro rata amount over nine months. Accordingly,
revenues from card fees under the program will be recognized as sales on a pro
rata basis after 90 days. Costs we incur in connection with administering the
program are recognized in cost of goods sold as incurred. During the Fiscal 2004
First Quarter, no revenues were recognized in connection with the new loyalty
card program.
6. Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve profitability. The components of the cost reduction plan are as follows:
o Reduction in corporate operating expenses by streamlining processes
and gaining optimal pricing through the consolidation of vendors and
the continued centralization of finance, human resources, and other
administrative functions in order to leverage the efficiency of our
shared services organization.
o Workforce reduction at our corporate and divisional home offices.
o Consolidation of our Memphis, Tennessee distribution center into our
distribution center in White Marsh, Maryland.
o Consolidation of our Hollywood, Florida credit operations into our
Milford, Ohio facility.
o Closing of the 9 Monsoon/Accessorize stores that we operate under a
joint venture with Monsoon plc.
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Expenses Related to Cost Reduction Plan (continued)
We are accounting for the plan in accordance with the provisions of SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
total estimated costs related to the plan are $10,425,000, of which $4,431,000
of costs were incurred during the Fiscal 2004 First Quarter. We expect to incur
the majority of the remaining costs in connection with the plan by the end of
the Fiscal 2004 Second Quarter.
The total estimated costs related to the plan consist of the following:
(In thousands)
Workforce reduction costs ................................ $ 3,160
Lease termination and related costs ...................... 3,264
Acceleration of depreciation of property, equipment,
and leasehold improvements........................... 3,224
Other facility closure costs ............................. 777
-------
Total estimated costs .................................... $10,425
=======
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the
Fiscal 2004 First Quarter. During the Fiscal 2004 First Quarter, we terminated
118 employees and accrued the severance benefit in accordance with SFAS No. 146.
We expect to terminate approximately 250 additional employees during the Fiscal
2004 Second Quarter in connection with the closing of our Memphis, Tennessee
distribution center and our Hollywood, Florida credit operations. In accordance
with SFAS No. 146, we are recognizing retention bonuses ratably over the future
service period. Lease termination and related costs mainly represent the
estimated fair value of the remaining lease obligations at the Hollywood,
Florida facility, reduced by estimated sublease income. In accordance with SFAS
No. 146, we will recognize the value of the remaining lease obligation related
to the Hollywood, Florida facility in June 2003 when we close the facility.
Accelerated depreciation costs mainly represent the acceleration of depreciation
of the net book value of the assets at our Memphis, Tennessee distribution
center, which we expect to close in June 2003, to their estimated salvage value.
During the Fiscal 2004 First Quarter, we made the decision to sell the Memphis,
Tennessee distribution center.
Costs accrued in connection with the plan, and payments/settlements against
the accrual for the Fiscal 2004 First Quarter, were as follows:
Costs for
Quarter Ended Payments/ Accrued at
(In thousands) May 3, 2003 Settlements May 3, 2003
----------- ----------- -----------
Workforce reduction costs ...................... $ 2,409 $ (828) $ 1,581
Lease termination and related costs ............ 301 (301) 0
Accelerated depreciation costs (non-cash charge) 1,363 (1,363) 0
Other facility closure costs ................... 358 (358) 0
------- ------- -------
Total .......................................... $ 4,431 $(2,850) $ 1,581
======= ======= =======
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Expenses Related to Cost Reduction Plan (continued)
Expenses related to the plan incurred during the Fiscal 2004 First Quarter
are included in "Expenses related to cost reduction plan" in the accompanying
Condensed Consolidated Statements of Operations.
7. Net Income (Loss) Per Share
Thirteen Weeks Ended
--------------------
(In thousands, except per-share amounts) May 3, 2003 May 4, 2002
----------- -----------
(Restated)
Basic weighted average common shares outstanding ............................... 112,361 111,741
Dilutive effect of assumed conversion of convertible notes ..................... 15,182 12,875
Dilutive effect of stock options ............................................... 185 2,387
------- -------
Diluted weighted average common shares and equivalents outstanding ............. 127,728 127,003
======= =======
Income before cumulative effect of accounting changes .......................... $ 9,689 $ 17,272
Decrease in interest expense from assumed conversion of notes,
net of income taxes ........................................................ 1,099 1,120
------- --------
Income before cumulative effect of accounting changes used to
determine diluted net income per share ..................................... 10,788 18,392
Cumulative effect of accounting changes ........................................ 0 (49,098)
------- --------
Net income (loss) used to determine diluted net income (loss) per share ........ $10,788 $(30,706)
======= ========
Options with weighted average exercise price greater than market price, excluded
from computation of diluted net income (loss) per share:
Number of shares ........................................................... 11,626 828
Weighted average exercise price per share .................................. $6.07 $12.01
8. Impact of Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Our adoption of SFAS No. 143 as of the
beginning of Fiscal 2004 did not have a material impact on our financial
position or results of operations.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Impact of Recent Accounting Pronouncements (continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 amends SFAS No. 123 to
provide alternative transition methods for a voluntary change from the intrinsic
value method of accounting for stock-based compensation under APB Opinion No. 25
to the fair value method of accounting under SFAS No. 123. SFAS No. 148 also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
used in accounting for stock-based compensation and the effects of the method
used on reported results.
We have adopted the interim financial statement disclosure requirements of
SFAS No. 148 in the Fiscal 2004 First Quarter. At the present time, we do not
intend to change from the intrinsic value method of accounting for stock-based
compensation to the fair value method.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after that date.
We do not currently hold derivative instruments subject to the provisions
of SFAS No. 133, as amended. We do not expect that adoption of SFAS No. 149 will
have a material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that financial instruments within the scope of the statement be
classified as a liability (or an asset in some circumstances). Under previous
guidance, such instruments could be classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities.
We have not issued financial instruments subject to the provisions of SFAS
No. 150. We do not expect that adoption of SFAS No. 150 will have a material
impact on our financial position or results of operations.
12
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 appearing elsewhere in 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 February 1, 2003. As used in this management's discussion and
analysis, the terms "Fiscal 2004" and "Fiscal 2003" refer to our fiscal year
ending January 31, 2004 and our fiscal year ended February 1, 2003,
respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2003 First
Quarter" refer to the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. The terms Fiscal 2004 Second Quarter" and "Fiscal 2003 Second
Quarter" refer to the thirteen weeks ending August 2, 2003 and the thirteen
weeks ended August 3, 2002, respectively. The term "Fiscal 2005" refers to our
fiscal year ending January 29, 2005. The terms "the Company," "we," "us," and
"our" refer to Charming Shoppes, Inc. and, where applicable, its consolidated
subsidiaries.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, capital expenditures and cost reductions, plans for future operations,
and financing needs or plans, as well as assumptions relating to the foregoing.
The words "expect," "should," "project," "estimate," "predict," "anticipate,"
"plan," "believes," and similar expressions are also intended to identify
forward-looking statements. 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. We assume no obligation to update 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:
o Our business is dependent upon our being able to accurately predict
rapidly changing fashion trends, customer preferences, and other
fashion-related factors, which we may not be able to successfully
accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel
and accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive
and we may be unable to compete successfully against existing or
future competitors.
o We cannot assure the successful implementation of our business plan
for increased profitability and growth in our plus-sized women's
apparel business.
o Our business plan is largely dependent upon the continued growth in
the plus-sized women's apparel market, which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
13
o We depend on our distribution centers and could incur significantly
higher costs and longer lead times associated with distributing our
products to our stores if any of these distribution centers were to
shut down for any reason.
o We may experience disruptions in the flow of our merchandise during
the relocation of our Memphis, Tennessee and Columbus, Ohio
distribution centers to our White Marsh, Maryland distribution center.
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and
on our credit card securitization program. If we were unable to obtain
sufficient financing at affordable cost, our ability to merchandise
our stores would be adversely affected.
o We rely significantly on foreign sources of production and face a
variety of risks (including political instability, imposition of
duties or quotas, increased security requirements applicable to
imports, delays in shipping, increased costs of transportation, and
issues relating to compliance with domestic or international labor
standards) generally associated with doing business in foreign markets
and importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales
periods, or in the availability of working capital needed in the
months preceding such periods, could have a material adverse effect on
our business. In addition, extreme or unseasonable weather conditions
may have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual
property rights, which we believe are important to our success and our
competitive position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our cost reduction plan
described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise
to us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip
centers and malls in which our stores are located, and our future
growth is dependent upon the availability of suitable locations for
new stores.
o We may be unable to successfully integrate Lane Bryant into our
current operating structure, or implement our plan to improve
merchandise assortments and sales performance in our Lane Bryant
stores. We also currently rely on logistics services from Limited
Brands, Inc. ("Limited Brands") with respect to our Lane Bryant
stores.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the management's
discussion and analysis of financial condition and results of operations and
notes accompanying the consolidated financial statements that appear in our
annual report on Form 10-K for the fiscal year ended February 1, 2003. Except as
otherwise disclosed in the financial statements and accompanying notes included
in this report, there were
14
no material changes in our critical accounting policies or in the assumptions or
estimates we used to prepare the financial information appearing in this report.
During the Fiscal 2004 First Quarter, we introduced a new customer loyalty
card program that is being operated under our proprietary credit card program.
See "Net Sales" below for further details of this program.
RESULTS OF OPERATIONS
The following table presents certain financial data expressed as a
percentage of net sales and on a comparative basis:
Percentage
Increase/
Thirteen Weeks Ended (Decrease)
-------------------- From Prior
May 3, 2003 May 4, 2002 Period
----------- ----------- ------
(Restated)
Net sales........................................... 100.0% 100.0% (10.5)%
Cost of goods sold, buying, and occupancy expenses.. 70.1 69.3 (9.5)
Selling, general, and administrative expenses....... 25.7 25.2 (8.7)
Expenses related to cost reduction plan............. 0.8 -- --
Income from operations.............................. 3.4 5.4 (44.2)
Other income, principally interest.................. 0.1 0.1 (4.5)
Interest expense.................................... 0.7 1.1 (44.1)
Income tax provision................................ 1.1 1.7 (42.6)
Minority interest in net loss of subsidiary......... -- -- 37.7
Cumulative effect of accounting changes............. -- (7.8) (100.0)
Net income (loss)................................... 1.7 (5.0) --
- --------------------
Results may not add due to rounding.
The following table presents our net sales by store brand:
Thirteen Weeks Ended
--------------------
(In millions) May 3, 2003 May 4, 2002
----------- -----------
Fashion Bug.................................. $252.9 $289.9
Lane Bryant.................................. 224.9 238.8
Catherine's.................................. 85.7 101.0(1)
Monsoon/Accessorize.......................... 0.8 0.9
------ ------
Total net sales.............................. $564.3 $630.6
====== ======
- --------------------
(1) Includes sales from 41 Added Dimensions stores that were closed during
Fiscal 2003.
15
The following table presents certain additional information related to
changes in our net sales:
Thirteen Weeks Ended
--------------------
May 3, 2003 May 4, 2002
----------- -----------
Decrease in comparable store sales (1):
Fashion Bug............................................. (3)% (3)%
Catherine's............................................. (2) (2)
Lane Bryant............................................. (11) --
Sales from new stores as a percentage of total consolidated
prior-period sales:
Fashion Bug............................................. 1 4
Catherine's............................................. 1 3
Lane Bryant............................................. 3 61
Prior-period sales from closed stores as a percentage of total
consolidated prior-period sales:
Fashion Bug............................................. (5) (3)
Catherine's/Added Dimensions............................ (3) (3)
Lane Bryant............................................. (1) --
Increase (decrease) in total consolidated sales................ (11) 60
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
Comparison of Thirteen Weeks Ended May 3, 2003 and May 4, 2002
Net Sales
Net sales were $564.3 million for the quarter ended May 3, 2003 ("Fiscal
2004 First Quarter"), a decrease of 10.5% from net sales of $630.6 million for
the quarter ended May 4, 2002 ("Fiscal 2003 First Quarter"). The number of
retail stores in operation at the end of the Fiscal 2004 First Quarter was 2,245
stores, compared to 2,415 stores at the end of the Fiscal 2003 First Quarter. We
experienced a year-over-year decrease in overall comparable store sales of 6%.
The decrease in sales was due primarily to negative results at our Lane Bryant
chain and the decrease in the number of operating stores. As a result of
continuing soft demand for apparel caused by a weak economic environment, we
continued to experience lower customer traffic levels at each of our chains.
Lane Bryant stores experienced comparable store sales decreases in sweaters,
wear-to-work and denim separates, and casual woven tops, which were partially
offset by increases in casual woven separates, wear-to-work tops, and intimate
apparel. The Lane Bryant chain continued to experience poor customer acceptance
of certain of its spring apparel merchandise assortments during the Fiscal 2004
First Quarter, resulting in higher levels of promotional pricing. This trend
could continue to negatively impact our results for the Fiscal 2004 Second
Quarter. Our plans at Lane Bryant include improved merchandise assortments for
the 2003 fall season, which should result in improved sales performance for the
chain. Fashion Bug stores experienced comparable store sales decreases in junior
and missy sportswear and dresses, which were partially offset by increases in
intimate apparel and plus sportswear. For Catherine's Stores, comparable store
sales decreases in career and casual sportswear were partially offset by
increases in dresses and intimate apparel.
16
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds the card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the Fiscal 2004 First Quarter and Fiscal 2003 First Quarter, we
recognized revenues of $4.2 million and $4.3 million, respectively, in
connection with this program. As of December 1, 2002, we discontinued the
issuance of new cards under this program. We plan to terminate this program by
the end of the Fiscal 2004 Second Quarter.
During the Fiscal 2004 First Quarter, we introduced a new customer loyalty
card program that is being operated under our proprietary credit card program.
For an annual fee of $25, the program grants, among other benefits, a $20
discount each time a customer accumulates over $200 of purchases (up to $2,000
of purchases) to be applied at the next purchase. We have accrued $2.1 million
for the estimated costs of discounts earned during the Fiscal 2004 First
Quarter, based on year-to-date purchases. Customers are entitled to a full
refund of the $25 annual fee if membership is canceled within 90 days. After 90
days the refund will be reduced by a pro rata amount over nine months.
Accordingly, revenues from card fees under the program will be recognized as
sales on a pro rata basis after 90 days. Costs we incur in connection with
administering the program are recognized in cost of goods sold as incurred.
During the Fiscal 2004 First Quarter, no revenues were recognized in connection
with the new loyalty card program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $395.5 million in
the Fiscal 2004 First Quarter, a decrease of 9.5% from $437.2 million in the
Fiscal 2003 First Quarter, principally reflecting the decrease in net sales. As
a percentage of net sales, these costs increased 0.8% in the Fiscal 2004 First
Quarter as compared to the Fiscal 2003 First Quarter.
Cost of goods sold as a percentage of net sales decreased 0.8% in the
Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter. The
decrease was a result of higher merchandise margins in our Fashion Bug and
Catherine's chains, partially offset by lower margins in our Lane Bryant chain.
Cost of goods sold includes merchandise costs, net of discounts and allowances,
freight, and inventory shrinkage. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 1.6%
in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter.
The increase in buying and occupancy expenses as a percentage of sales was
primarily attributable to the lack of leverage on relatively fixed occupancy
costs as a result of negative overall comparable store sales, particularly in
our Lane Bryant chain. Buying expenses include payroll, payroll-related costs,
and operating expenses for our buying departments and warehouses. Occupancy
expenses include rent, real estate taxes, insurance, common area maintenance,
utilities, maintenance, and depreciation for our stores and warehouse facilities
and equipment. Buying and occupancy costs are treated as period costs and are
not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $145.3 million in the
Fiscal 2004 First Quarter, a decrease of 8.7% from $159.2 million in the Fiscal
2003 First Quarter. As a percentage of net sales, these costs increased by 0.5%
in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter.
Selling expenses as a percentage of sales for the Fiscal 2004 First Quarter
increased 0.7% from the prior-year period,
17
primarily as a result of the lack of leverage from the decrease in comparable
store sales. General and administrative expenses decreased 0.2% as a percentage
of sales, primarily as a result of the realization of cost reduction
initiatives, partially offset by the lack of leverage from negative comparable
store sales.
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve profitability. We expect this cost reduction plan to improve annualized
pre-tax earnings by approximately $45 million, with an improvement of
approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that
the full annual pre-tax benefit of $45 million will first be realized during
Fiscal 2005. We expect the execution of the plan to have no material after-tax
cash impact. The components of the cost reduction plan are as follows:
o Reduction in corporate operating expenses by streamlining processes
and gaining optimal pricing through the consolidation of vendors and
the continued centralization of finance, human resources, and other
administrative functions in order to leverage the efficiency of our
shared services organization.
o Workforce reduction at our corporate and divisional home offices.
o Consolidation of our Memphis, Tennessee distribution center into our
distribution center in White Marsh, Maryland.
o Consolidation of our Hollywood, Florida credit operations into our
Milford, Ohio facility.
o Closing of the 9 Monsoon/Accessorize stores that we operate under a
joint venture with Monsoon plc.
We are accounting for the plan in accordance with the provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The total estimated costs related to the plan are $10.4
million, of which $4.4 million of costs were incurred during the Fiscal 2004
First Quarter. We expect to incur the majority of the remaining costs in
connection with the plan by the end of the Fiscal 2004 Second Quarter.
The total estimated costs related to the plan consist of the following:
(In millions)
Workforce reduction costs................................ $ 3.1
Lease termination and related costs...................... 3.3
Acceleration of depreciation of property, equipment,
and leasehold improvements.......................... 3.2
Other facility closure costs ............................ 0.8
-----
Total estimated costs.................................... $10.4
=====
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the
Fiscal 2004 First Quarter. During the Fiscal 2004 First Quarter, we terminated
118 employees and accrued the severance benefit in accordance with SFAS No. 146.
We expect to terminate approximately 250 additional employees during the Fiscal
2004 Second Quarter in connection with the closing of our Memphis, Tennessee
distribution center and our Hollywood, Florida credit operations. In accordance
with SFAS No. 146, we are recognizing retention bonuses ratably over the future
service period. Lease termination and related costs mainly represent the
estimated fair value of the remaining lease obligations at the Hollywood,
Florida facility, reduced by estimated sublease income. In
18
accordance with SFAS No. 146, we will recognize the value of the remaining lease
obligation related to the Hollywood, Florida facility in June 2003 when we close
the facility. Accelerated depreciation costs mainly represent the acceleration
of depreciation of the net book value of the assets at our Memphis, Tennessee
distribution center, which we expect to close in June 2003, to their estimated
salvage value. During the Fiscal 2004 First Quarter, we made the decision to
sell the Memphis, Tennessee distribution center.
Costs accrued in connection with the plan, and payments/settlements against
the accrual for the Fiscal 2004 First Quarter, were as follows:
Costs for
Quarter Ended Payments/ Accrued at
(In millions) May 3, 2003 Settlements May 3, 2003
----------- ----------- -----------
Workforce reduction costs....................... $2.4 $(0.8) $1.6
Lease termination and related costs............. 0.3 (0.3) 0.0
Accelerated depreciation costs (non-cash charge) 1.4 (1.4) 0.0
Other facility closure costs.................... 0.3 (0.3) 0.0
---- ------ ----
Total........................................... $4.4 $(2.8) $1.6
==== ====== ====
Expenses incurred during the Fiscal 2004 First Quarter are included in
"Expenses related to cost reduction plan" in the accompanying Condensed
Consolidated Statements of Operations.
Other Income/Interest Expense
Other income (principally interest income) was $0.4 million in the Fiscal
2004 First Quarter, unchanged from $0.4 million in the Fiscal 2003 First
Quarter. Interest expense was $3.8 million in the Fiscal 2004 First Quarter, a
decrease of 44.1% from $6.8 million in the Fiscal 2003 First Quarter. The
decrease was the result of both lower interest rates on borrowings and reduced
levels of borrowings in the Fiscal 2004 First Quarter as compared to the Fiscal
2003 First Quarter. During the Fiscal 2003 Second Quarter, we replaced $96.0
million of 7.5% Convertible Subordinated Notes due 2006 and a $67.5 million
11.5% term loan with $150.0 million of 4.75% Senior Convertible Notes.
Income Tax Provision
The income tax provision for the Fiscal 2004 First Quarter was $6.1
million, resulting in a 38.9% effective tax rate, as compared to an income tax
provision for the Fiscal 2003 First Quarter of $10.7 million, resulting in a
38.2% effective tax rate.
Cumulative Effect of Accounting Changes
In Fiscal 2003, we changed our method of accounting for cash consideration
received from a vendor in accordance with the provisions of FASB Emerging Issues
Task Force ("EITF") Issue 02-16, "Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor." EITF Issue 02-16
addresses the accounting for cash consideration given to a customer, including
both a reseller of the vendor's products and an entity that purchases the
vendor's products, from a reseller. The Issue provides accounting guidance on
how a customer should characterize cash consideration received from a vendor and
when to recognize and how to measure that consideration in its income statement.
19
We adopted the provisions of EITF Issue 02-16 as of the beginning of Fiscal
2003 and restated our results of operations for the first three quarters of
Fiscal 2003. The cumulative effect of the adoption of EITF Issue 02-16 as of the
beginning of Fiscal 2003 was a charge of $5.1 million, net of income taxes of
$2.8 million.
In accordance with the transition provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," we performed a review of our goodwill and other
indefinite-lived intangible assets for impairment during the Fiscal 2003 Second
Quarter. We determined that the carrying value of goodwill related to our
Catherine's stores acquisition exceeded the estimated fair value of the goodwill
under SFAS No. 142. We recognized a charge of $44.0 million as the cumulative
effect of an accounting change as of the beginning of Fiscal 2003 to reduce the
carrying value of the Catherine's goodwill to its estimated fair value. This
charge has no tax effect, as it is not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facility.
The following table highlights certain information related to our liquidity
and capital resources:
May 3, February 1,
(Dollars in millions) 2003 2003
---- ----
Cash and cash equivalents................ $ 97.6 $102.0
Long-term available-for-sale securities.. 24.9 23.5
Working capital.......................... 211.1 196.7
Current ratio............................ 1.6 1.6
Long-term debt to equity ratio........... 35.6% 36.2%
Our net cash provided by operating activities was $20.4 million for the
Fiscal 2004 First Quarter, as compared to $52.5 million for the Fiscal 2003
First Quarter. The decrease was primarily a result of a $7.6 million decrease in
net income before non-cash charges and the cumulative effect of accounting
changes, and a $23.4 million decrease in net prepaid and accrued expenses.
Our capital expenditures were $13.3 million during the Fiscal 2004 First
Quarter. In addition, we acquired $4.8 million of equipment under capital
leases. During the remainder of Fiscal 2004, we anticipate incurring additional
capital expenditures of approximately $35.0 - $40.0 million, primarily for the
construction and fixturing of new stores, remodeling and fixturing of existing
stores, and improvements to our corporate offices and distribution centers. We
expect to finance these capital expenditures principally through internally
generated funds. In addition to the $35.0 - $40.0 million of capital
expenditures discussed above, we expect to incur approximately $4.0 million of
additional capital lease financing over the next three to six months for
equipment for, and improvements to, the White Marsh facility.
20
The following table sets forth information with respect to our store
activity for the Fiscal 2004 First Quarter and planned store activity for all of
Fiscal 2004 (including the Fiscal 2004 First Quarter):
Fashion Lane Monsoon/
Bug Bryant Catherine's Accessorize Total
--- ------ ----------- ----------- -----
Fiscal 2004 First Quarter:
Stores at February 1, 2003.... 1,083 689 467 9 2,248
----- --- --- -- -----
Stores opened................. 1 9 2 12
Stores converted.............. 4(1) 4
Stores closed................. (11) (3) (4) (1) ( 19)
----- --- --- -- -----
Net change in stores.......... (10) 10 (2) (1) (3)
----- --- --- -- -----
Stores at May 3, 2003......... 1,073 699 465 8 2,245
===== === === == =====
Stores relocated during period 7 2 5 14
Stores remodeled during period 3 2 5
Fiscal 2004:
Planned store openings........ 2 33-36 10-15 45-53
Planned store closings........ 25-30 15 15 8 63-68
Planned store relocations..... 20-25 20-25 15-20 55-70
- --------------------
(1) Fashion Bug stores closed prior to February 1, 2003 which were converted to
Lane Bryant stores during the Fiscal 2004 First Quarter.
We have formed a trust called the Charming Shoppes Master Trust to which
Spirit of America National Bank, our credit card bank, has transferred, through
a special-purpose entity, its interest in credit card receivables created under
our Fashion Bug proprietary credit card program. We, together with the trust,
have entered into various agreements under which the trust can sell, on a
revolving basis, interests in these receivables for a specified term. When the
revolving period terminates, an amortization period begins during which
principal payments are made to the parties with whom the trust has entered into
the securitization agreement. We securitized $74.6 million of credit card
receivables in the Fiscal 2004 First Quarter and had $277.1 million of
securitized credit card receivables outstanding as of May 3, 2003. We held
certificates and retained interests in our securitizations of $54.4 million as
of May 3, 2003, which were generally subordinated in right of payment to
certificates issued by the trust to third-party investors. Our obligation to
repurchase receivables sold to the trust is limited to those receivables that,
at the time of their transfer, fail to meet the trust's eligibility standards
under normal representations and warranties. To date, our repurchases of
receivables pursuant to this obligation have been insignificant.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly-owned indirect subsidiaries, are separate special-purpose
entities created for the securitization program. At May 3, 2003, Charming
Shoppes Receivables Corp. held $44.1 million of Charming Shoppes Master Trust
certificates and retained interests and Charming Shoppes Seller, Inc. held
retained interests of $0.7 million (which are included in the $54.4 million of
retained interests we held at May 3, 2003). These assets are first and foremost
available to satisfy the claims of the respective creditors of these separate
corporate entities, including certain claims of investors in the Charming
Shoppes Master Trust.
21
We could be affected by certain events that would cause the trust to hold
proceeds of receivables within the trust as additional enhancement, which
proceeds would otherwise be available to be paid to us with respect to our
subordinated interests. For example, if either we or the trust fail to meet
certain financial performance standards, a credit enhancement condition would
occur and the trust would be required to retain amounts otherwise payable to us.
In addition, the failure to satisfy certain financial performance standards
could further cause the trust to stop using collections on trust assets to
purchase new receivables, and would require such collections to be used to repay
investors on a prescribed basis, as provided in the trust agreements. If this
were to occur, it could result in our having insufficient liquidity; however, we
believe we should have sufficient notice to seek alternative forms of financing
through other third-party providers. As of May 3, 2003, the trust was in
compliance with all applicable financial performance standards. Amounts placed
into enhancement accounts, if not required to be paid to the other certificate
holders, will be available to us at the termination of the securitization
series. We have no obligation to directly fund the enhancement account of the
trust, other than for breaches of customary representations, warranties, and
covenants and for customary indemnities. These representations, warranties,
covenants, and indemnities do not protect the trust or investors in the trust
against credit-related losses on the receivables. The providers of the credit
enhancements and trust investors have no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Part II,
Item 8. Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 14. Asset Securitization" of our Annual Report on
Form 10-K for the fiscal year ended February 1, 2003.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Additional information regarding these agreements is included in "Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Part II, Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 14. Asset Securitization" of
our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. The payment
of future dividends is within the discretion of our Board of Directors and will
depend upon our future earnings, if any, our capital requirements, financial
condition and other relevant factors. Additionally, our existing credit facility
and one of our agreements with Limited Brands restrict the payment of dividends
on our common stock.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
22
FINANCING
As of May 3, 2003, we had a $300.0 million revolving credit facility, which
provides for cash borrowings and enables us to issue up to $150.0 million of
letters of credit for overseas purchases of merchandise and for other
guarantees. As of May 3, 2003, there were no borrowings outstanding under the
revolving credit facility. The availability of borrowings under our revolving
credit facility is subject to limitations based on eligible inventory and the
value of certain real property. The credit facility is secured by our general
assets, except for certain assets related to our credit card securitization
program, certain real properties and equipment subject to other mortgages, our
interest in our joint venture with Monsoon plc, and the assets of our non-U.S.
subsidiaries. The credit facility expires on August 16, 2004, and can be renewed
for an additional year at our option.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus
2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on our Leverage Ratio or excess availability, as defined in the
credit facility. As of May 3, 2003, the interest rate on borrowings under the
revolving credit line was 4.25%.
The revolving credit facility includes limitations on sales and leasebacks,
the incurrence of additional liens and debt, capital lease financing, and other
limitations. The revolving credit facility also requires, among other things,
that we not pay dividends on our common stock and, under certain circumstances,
that we maintain an Adjusted Tangible Net Worth of $228.0 million (subject to
adjustment). As of May 3, 2003, we were not in violation of any of the covenants
included in the revolving credit facility. As of May 3, 2003, the excess
availability under the revolving credit facility was $193.4 million.
Additional information regarding our long-term borrowings is included in
"Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Part II, Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 7. Debt"
of our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.
As of May 3, 2003, under authority granted by our Board of Directors during
prior fiscal years, we are authorized to repurchase approximately 5 million
additional shares of our common stock. Our ability to exercise this authority
currently is restricted by the terms of our revolving credit facility and an
agreement with Limited Brands that we entered into in conjunction with our
acquisition of Lane Bryant. Subject to obtaining consents, and as conditions may
allow, we may acquire additional shares of our common stock. Such shares, if
purchased, would be held as treasury shares.
MARKET RISK
We manage our Fashion Bug proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card portfolio, the balances of which we sell
under a credit card securitization program. Under the securitization program, we
can be exposed to fluctuations in interest rates to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the trust. Until November 2000, the credit card program billed finance
charges based on a fixed rate. As of November 2000, finance charges on all
accounts are billed using a floating rate index (the Prime lending rate),
subject to a floor and limited by legal maximums. As of May 3, 2003, a portion
of the certificates have fixed rates. To the extent that interest rates decline,
we may be exposed to interest-rate risk on our fixed-rate certificates. The
floating rate index on our floating-rate certificates is either one-month LIBOR
or the commercial paper rate, depending on the issuance. Consequently, we have
reduced our exposure to fluctuations in interest rates. However, we have
exposure in the movement
23
of basis risk between the floating rate index on the certificates and the Prime
rate. As of May 3, 2003, the floating-rate finance charge rate was below the
contractual floor rate, thus exposing us to a portion of interest-rate risk. To
the extent that short-term interest rates were to increase by one percentage
point by the end of Fiscal 2004, an increase of approximately $700 thousand in
selling, general, and administrative expenses would result.
As of May 3, 2003, there were no borrowings outstanding under our revolving
credit facility. To the extent that there are borrowings outstanding under our
revolving credit facility, such borrowings would be exposed to variable interest
rates. An increase in market interest rates would increase our interest expense
and decrease our cash flows. A decrease in market interest rates would decrease
our interest expense and increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited); Note 8. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have established a
Disclosure Committee, which is made up of several key management employees and
reports directly to the CEO and CFO, to centralize and enhance these controls
and procedures and assist our management, including our CEO and CFO, in
fulfilling their responsibilities for establishing and maintaining such controls
and procedures and providing accurate, timely, and complete disclosure.
Within the 90-day period prior to the filing of this report on Form 10-Q
(the "Evaluation Date"), our Disclosure Committee, under the supervision and
with the participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective. Furthermore, there have been no
significant changes in our internal controls or in other factors (including any
corrective actions with regard to significant deficiencies or material
weaknesses in internal controls) that could significantly affect those controls
subsequent to the date of their most recent evaluation.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 17, 2003, Donald Brown, Thomas Lamore, and Sau Yeung filed suit
against 109 entities, including Lane Bryant, Inc., in the Los Angeles County
Superior Court, California. The named plaintiffs purport to represent a class of
applicants for employment against 109 defendants, alleging, among other things,
violations of California state laws regarding the questioning of job applicants
about certain illegal drug-related criminal convictions. We are conducting a
preliminary investigation of the allegations, but we have not made any final
judgments about the likelihood of class certification or liability of Lane
Bryant. Other than this matter, there have been no material developments in
legal proceedings involving the Company or its subsidiaries since those reported
in our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.
Other than ordinary routine litigation incidental to our business, there
are no other pending legal proceedings to which we or any of our subsidiaries
are a party, and there are no other proceedings that are expected to have a
material adverse effect on our financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 29, 1994. (File No.
000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2)
10.1 Charming Shoppes, Inc. Supplemental Retirement Plan, effective February 1,
2003.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350), executed by the Chief Executive Officer of the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350), executed by the Chief Financial Officer of the Company.
(b) Reports on Form 8-K
On March 18, 2003, we filed a Current Report on Form 8-K to report, under
"Item 9. Regulation FD Disclosure," our early adoption of the provisions of
Financial Accounting Standards Board Emerging Issues Task Force ("EITF") Issue
02-16, "Accounting by a Customer (Including A Reseller) for Cash Consideration
Received from a Vendor," effective as of the beginning of our fiscal year ended
February 1, 2003 ("Fiscal 2003"). The information provided under Item 9 included
a discussion of the impact of adoption of EITF Issue 02-16 on our reported
results for Fiscal 2003 and our condensed consolidated statements of operations
for the first three quarters of Fiscal 2003 as originally reported and as
restated for the adoption of EITF Issue 02-16.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: June 6, 2003 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: June 6, 2003 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
26
Certification By Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dorrit J. Bern, Principal Executive Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 6, 2003 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Principal Executive Officer
27
Certification By Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric M. Specter, Principal Financial Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 6, 2003 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Principal Financial Officer
28
Exhibit Index
Exhibit No. Item
- ---------- ----
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (File No. 000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit
3.2)
10.1 Charming Shoppes, Inc. Supplemental Retirement Plan, effective
February 1, 2003.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350), executed by the Chief Executive Officer of
the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350), executed by the Chief Financial Officer of
the Company.
29