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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 November 1, 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
December 1, 2003, was 113,180,608 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
November 1, 2003 and February 1, 2003 ........................ 2
Condensed Consolidated Statements of Operations
Thirteen weeks ended November 1, 2003 and November 2, 2002 ... 3
Thirty-nine weeks ended November 1, 2003 and November 2, 2002 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
Thirteen and Thirty-nine weeks ended November 1, 2003 and
November 2, 2002........................................ 5
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended November 1, 2003 and November 2, 2002 6
Notes to Condensed Consolidated Financial Statements ............... 7 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements ......................................... 17 - 18
Critical Accounting Policies ....................................... 19
Results of Operations .............................................. 19 - 27
Liquidity and Capital Resources .................................... 27 - 31
Financing .......................................................... 31
Market Risk ........................................................ 32
Impact of Recent Accounting Pronouncements ......................... 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures ................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 34
Item 6. Exhibits and Reports on Form 8-K .......................... 34
SIGNATURES ......................................................... 35
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 1, February 1,
(Dollars in thousands, except per-share amounts) 2003 2003
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 72,287 $ 102,026
Available-for-sale securities ...................................... 55,024 50,286
Merchandise inventories ............................................ 408,170 286,472
Deferred taxes ..................................................... 16,626 11,726
Prepayments and other .............................................. 64,123 77,504
----------- -----------
Total current assets ........................................... 616,230 528,014
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 698,052 668,168
Less accumulated depreciation and amortization ..................... 378,730 348,295
----------- -----------
Net property, equipment, and leasehold improvements ............ 319,322 319,873
----------- -----------
Trademarks and other intangible assets ............................. 170,643 171,138
Goodwill ........................................................... 68,594 68,594
Available-for-sale securities ...................................... 23,641 23,472
Other assets ....................................................... 24,791 28,065
----------- -----------
Total assets ....................................................... $ 1,223,221 $ 1,139,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 195,553 $ 147,952
Accrued expenses ................................................... 152,627 163,598
Income taxes payable ............................................... 801 7,144
Current portion - long-term debt ................................... 14,523 12,595
Accrued expenses related to cost reduction plan .................... 2,877 0
----------- -----------
Total current liabilities ...................................... 366,381 331,289
----------- -----------
Deferred taxes and other non-current liabilities ................... 61,986 43,188
Long-term debt ..................................................... 200,588 203,045
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 125,446,267 shares and 125,149,242 shares, respectively 12,545 12,515
Additional paid-in capital ......................................... 201,561 200,040
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (2,918) (3,370)
Accumulated other comprehensive loss ............................... (414) (550)
Retained earnings .................................................. 467,628 437,135
----------- -----------
Total stockholders' equity ..................................... 594,266 561,634
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,223,221 $ 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
--------------------
November 1, November 2,
(In thousands, except per-share amounts) 2003 2002(1)
---- -------
Net sales .............................................. $ 530,291 $ 542,332
--------- ---------
Cost of goods sold, buying, and occupancy expenses ..... 381,154 391,047
Selling, general, and administrative expenses .......... 141,719 148,323
Expenses related to cost reduction plan ................ 148 0
Restructuring credit ................................... 0 (1,351)
--------- ---------
Total operating expenses ............................... 523,021 538,019
--------- ---------
Income from operations ................................. 7,270 4,313
Other income, principally interest ..................... 344 698
Interest expense ....................................... (4,123) (4,667)
--------- ---------
Income before income taxes and minority interest ....... 3,491 344
Income tax provision ................................... 1,341 672
--------- ---------
Income (loss) before minority interest ................. 2,150 (328)
Minority interest in net loss of consolidated subsidiary 9 36
--------- ---------
Net income (loss) ...................................... $ 2,159 $ (292)
========= =========
Basic net income (loss) per share ...................... $ .02 $ .00
========= =========
Diluted net income (loss) per share .................... $ .02 $ .00
========= =========
- --------------------
(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
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirty-nine Weeks Ended
-----------------------
November 1, November 2,
(In thousands, except per-share amounts) 2003 2002(1)
---- -------
Net sales .............................................. $ 1,700,033 $ 1,811,255
----------- -----------
Cost of goods sold, buying, and occupancy expenses ..... 1,205,067 1,269,658
Selling, general, and administrative expenses .......... 423,883 458,870
Expenses related to cost reduction plan ................ 10,968 0
Restructuring credit ................................... 0 (1,351)
----------- -----------
Total operating expenses ............................... 1,639,918 1,727,177
----------- -----------
Income from operations ................................. 60,115 84,078
Other income, principally interest ..................... 1,308 1,861
Interest expense ....................................... (11,777) (17,147)
----------- -----------
Income before income taxes, minority interest, and
cumulative effect of accounting changes ............ 49,646 68,792
Income tax provision ................................... 19,295 26,829
----------- -----------
Income before minority interest and cumulative effect
of accounting changes .............................. 30,351 41,963
Minority interest in net loss of consolidated subsidiary 142 487
----------- -----------
Income before cumulative effect of accounting changes .. 30,493 42,450
Cumulative effect of accounting changes, net of
income tax benefit of $2,758 ....................... 0 (49,098)
----------- -----------
Net income (loss) ...................................... $ 30,493 $ (6,648)
=========== ===========
Basic net income (loss) per share:
Before cumulative effect of accounting changes ..... $ .27 $ .37
Cumulative effect of accounting changes ............ .00 (.43)
----------- -----------
Net income (loss) .................................. $ .27 $ (.06)
=========== ===========
Diluted net income (loss) per share:
Before cumulative effect of accounting changes ..... $ .26 $ .35
Cumulative effect of accounting changes ............ .00 (.37)
----------- -----------
Net income (loss) .................................. $ .26 $ (.02)
=========== ===========
- --------------------
(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 COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 1, November 2, November 1, November 2,
(In thousands) 2003 2002(1) 2003 2002(1)
---- ------- ---- -------
Net income (loss) ........................... $ 2,159 $ (292) $ 30,493 $ (6,648)
-------- -------- -------- --------
Unrealized losses on available-for-sale
securities, net of income taxes of $66,
$18, $77, and $77, respectively ......... (102) (32) (120) (129)
Reclassification of amortization of deferred
loss on termination of derivative, net of
income taxes of $(46), $(46),
$(138), and $(138), respectively ........ 85 85 256 256
-------- -------- -------- --------
Total other comprehensive income (loss),
net of taxes ............................ (17) 53 136 127
-------- -------- -------- --------
Comprehensive income (loss) ................. $ 2,142 $ (239) $ 30,629 $ (6,521)
======== ======== ======== ========
- --------------------
(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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
-----------------------
November 1, November 2,
(In thousands) 2003 2002(1)
---- ------
Operating activities
Net income (loss) ................................................... $ 30,493 $ (6,648)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................... 56,714 58,263
Write-down of Catherine's Goodwill .............................. 0 43,975
Cumulative effect of capitalization of cash received from vendors 0 7,881
Deferred income taxes ........................................... 11,015 (2,762)
Loss from disposition of capital assets ......................... 1,363 2,667
Capitalized interest on conversion of convertible notes ......... 0 3,026
Other, net ...................................................... (142) (487)
Changes in operating assets and liabilities:
Merchandise inventories ...................................... (121,698) (81,985)
Accounts payable ............................................. 47,601 72,417
Prepayments and other ........................................ 13,252 (1,500)
Accrued expenses and other ................................... (8,007) 20,054
Income taxes payable ......................................... (6,343) 15,990
Accrued restructuring costs .................................. 0 (11,975)
Accrued expenses related to cost reduction plan .............. 2,877 0
--------- ---------
Net cash provided by operating activities ........................... 27,125 118,916
--------- ---------
Investing activities
Investment in capital assets ........................................ (39,376) (64,575)
Proceeds from sales of available-for-sale securities ................ 24,971 15,973
Gross purchases of available-for-sale securities .................... (30,075) (31,193)
Proceeds from sales of capital assets ............................... 0 801
Increase in other assets ............................................ (3,632) (374)
--------- ---------
Net cash used in investing activities ............................... (48,112) (79,368)
--------- ---------
Financing activities
Proceeds from short-term borrowings ................................. 173,213 362,358
Repayments of short-term borrowings ................................. (173,213) (390,460)
Proceeds from long-term borrowings .................................. 1,053 164,000
Repayments of long-term borrowings .................................. (10,792) (81,296)
Payments of deferred financing costs ................................ 0 (5,491)
Purchases of treasury stock ......................................... 0 (84,136)
Proceeds from exercise of stock options ............................. 987 5,093
--------- ---------
Net cash used in financing activities ............................... (8,752) (29,932)
--------- ---------
Increase (decrease) in cash and cash equivalents .................... (29,739) 9,616
Cash and cash equivalents, beginning of period ...................... 102,026 36,640
--------- ---------
Cash and cash equivalents, end of period ............................ $ 72,287 $ 46,256
========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes .............. $ 0 $ 92,131
========= =========
Equipment acquired through capital leases ........................... $ 9,210 $ 2,850
========= =========
- --------------------
(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
6
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 November 1,
2003, the condensed consolidated statements of operations and comprehensive
income (loss) for the thirteen and thirty-nine weeks ended November 1, 2003 and
November 2, 2002, and the condensed consolidated statements of cash flows for
the thirty-nine weeks ended November 1, 2003 and November 2, 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 November 1, 2003, the
results of operations for the thirteen and thirty-nine weeks ended November 1,
2003 and November 2, 2002, and cash flows for the thirty-nine weeks ended
November 1, 2003 and November 2, 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 and thirty-nine weeks ended November
1, 2003 and November 2, 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 terms "Fiscal 2004 Second Quarter" and "Fiscal 2003 Second
Quarter" refer to the thirteen weeks ended August 2, 2003 and August 3, 2002,
respectively. The terms "Fiscal 2004 Third Quarter" and "Fiscal 2003 Third
Quarter" refer to the thirteen weeks ended November 1, 2003 and November 2,
2002, respectively. The terms "first three quarters of Fiscal 2004" and "first
three quarters of Fiscal 2003" refer to the thirty-nine weeks ended November 1,
2003 and November 2, 2002, respectively. The term "Fiscal 2003 Fourth Quarter"
refers to the thirteen weeks ended February 1, 2003. The terms "the Company,"
"we," "us," and "our" refer to Charming Shoppes, Inc. and, where applicable, its
consolidated subsidiaries.
In accordance with the transition provisions of Financial Accounting
Standards Board ("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
Fiscal 2003 Second Quarter. We determined that the carrying value of goodwill
related to our acquisition of Catherines Stores Corporation ("Catherine's")
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.
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Condensed Consolidated Financial Statements (continued)
In the Fiscal 2003 Fourth Quarter, we adopted 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," 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 generally deferred, and are recognized in the
period in which markdown expenses are recognized.
The results of operations for the Fiscal 2003 Third Quarter and first three
quarters of Fiscal 2003 as previously reported, prior to the restatement for the
adoption of EITF Issue 02-16, were as follows:
Thirteen Thirty-nine
Weeks Ended Weeks Ended
November 2, November 2,
(In thousands, except per-share amounts) 2002 2002
---- ----
Net sales......................................... $ 542,332 $ 1,811,255
Cost of goods sold, buying, and occupancy expenses 389,748 1,269,802
Net income (loss)................................. 502 (1,613)
Net income (loss) per share:
Basic......................................... $ .00 $ (.01)
Diluted....................................... .00 .01
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 elected to follow the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," and have adopted the disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," as of the beginning of Fiscal 2004.
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Condensed Consolidated Financial Statements (continued)
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 Thirty-nine Weeks Ended
-------------------- -----------------------
(In thousands, except November 1, November 2, November 1, November 2,
per-share amounts) 2003 2002(1) 2003 2002(1)
---- ------- ---- -------
Net income (loss), as reported........... $ 2,159 $ (292) $ 30,493 $ (6,648)
Add stock-based employee compensation
as reported, using intrinsic value
method, net of income taxes......... 245 194 745 603
Less stock-based employee compensation,
using fair value method, net of
income taxes........................ (810) (1,502) (2,494) (4,360)
------- -------- -------- ---------
Pro forma net income (loss).............. $ 1,594 $ (1,600) $ 28,744 $ (10,405)
======= ======== ======== =========
Basic net income (loss) per share:
As reported......................... $ .02 $ .00 $ .27 $ (.06)
Pro forma........................... .01 (.01) .26 (.09)
Diluted net income (loss) per share:
As reported......................... .02 .00 .26 (.02)
Pro forma........................... .01 (.01) .25 (.05)
- --------------------
(1) Restated for adoption of EITF 02-16 (see above).
2. Trademarks and Other Intangible Assets
November 1, 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 ....................... 1,457 962
-------- --------
Net trademarks and other intangible assets ........ $170,643 $171,138
======== ========
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Long-term Debt
November 1, February 1,
(In thousands) 2003 2003
---- ----
4.75% Senior Convertible Notes due 2012 $150,000 $150,000
Capital lease obligations ............. 32,592 31,703
6.53% mortgage note ................... 12,600 13,650
7.77% mortgage note ................... 10,152 10,478
7.5% mortgage note .................... 5,896 6,059
Other long-term debt .................. 3,871 3,750
-------- --------
Total long-term debt .................. 215,111 215,640
Less current portion .................. 14,523 12,595
-------- --------
Long-term debt ........................ $200,588 $203,045
======== ========
4. Stockholders' Equity
Thirty-nine
Weeks Ended
November 1,
(In thousands) 2003
----
Total stockholders' equity, beginning of period ...................... $ 561,634
Net income ........................................................... 30,493
Exercises of stock options ........................................... 857
Amortization of deferred compensation expense ........................ 1,146
Amortization of deferred loss on termination of derivative, net of tax 256
Unrealized losses on available-for-sale securities, net of tax ....... (120)
---------
Total stockholders' equity, end of period ............................ $ 594,266
=========
5. Customer Loyalty Card Programs
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue on these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits. Costs we incur in connection with administering
these programs are recognized in cost of goods sold as incurred.
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Customer Loyalty Card Programs (continued)
During the Fiscal 2004 First Quarter, we introduced a new Fashion Bug
customer loyalty card program that we operate under our Fashion Bug proprietary
credit card program. Like our other loyalty programs, this program entitles
customers to various rebates, discounts, and other benefits upon payment of an
annual membership fee. This program also provides customers with the option to
cancel their membership within 90 days, entitling them to a full refund of their
annual fee. Additionally, after 90 days, customers that cancel their membership
are entitled to a pro rata fee refund based on the number of months remaining on
the annual membership. Accordingly, we recognize 25% of the annual membership
fee as revenue after 90 days, with the remaining fee recognized on a pro rata
basis over nine months. During the Fiscal 2004 Third Quarter and Fiscal 2004
Second Quarter, we recognized revenues of $2,517,000 and $2,791,000,
respectively, in connection with this program. No revenues were recognized
during the Fiscal 2004 First Quarter. We have accrued $1,900,000 for the
estimated costs of discounts earned and coupons issued and not redeemed during
the first three quarters of Fiscal 2004.
Under a previous Fashion Bug store loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who do not earn
discounts during the membership period that exceed the card fee, the difference
between the membership fee and discounts earned is recognized as revenue upon
the expiration of the annual membership period. Upon early cancellation of the
loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. During the Fiscal 2004 Third
Quarter and Fiscal 2003 Third Quarter, we recognized revenues of $401,000 and
$5,804,000, respectively, in connection with this program. During the first
three quarters of Fiscal 2004 and the first three quarters of Fiscal 2003, we
recognized revenues of $6,709,000 and $16,211,000, respectively, in connection
with this program. As of December 1, 2002, we discontinued the issuance of new
cards under this program. We terminated this program during the Fiscal 2004
Second Quarter.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Net Income (Loss) Per Share
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 1, November 2, November 1, November 2,
(In thousands, except per-share amounts) 2003 2002(1) 2003 2002(1)
---- ------- ---- -------
Basic weighted average common shares outstanding .......... 112,533 115,605 112,438 114,322
Dilutive effect of assumed conversion of
4.75% senior convertible notes ........................ 0 0 15,182 8,472
Dilutive effect of assumed conversion of
7.5% convertible subordinated notes ................... 0 0 0 7,341
Dilutive effect of stock options and awards ............... 2,423 0 1,139 1,867
------- ------- ------- -------
Diluted weighted average common shares and
equivalents outstanding ............................... 114,956 115,605 128,759 132,002
======= ======= ======= =======
Income (loss) before cumulative effect of
accounting changes .................................... $ 2,159 $ (292) $30,493 $42,450
Decrease in interest expense from assumed
conversion of notes, net of income taxes .............. 0 0 3,248 3,556
------- ------- ------- -------
Income (loss) before cumulative effect of
accounting changes used to determine diluted
net income (loss) per share ........................... 2,159 (292) 33,741 46,006
Cumulative effect of accounting changes ................... 0 0 0 (49,098)
------- ------- ------- -------
Net income (loss) used to determine diluted net
income (loss) per share ............................... $ 2,159 $ (292) $33,741 $ 3,092)
======= ======= ======= =======
Options with weighted average exercise price greater
than market price, excluded from computation of
diluted net income (loss) per share:
Number of shares ...................................... 7,542 4,910 8,351 1,008
Weighted average exercise price per share ............. $ 6.67 $ 7.58 $ 6.64 $ 11.23
- --------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 above).
The effect of an assumed conversion of our 4.75% senior convertible notes
into 15.2 million shares of our common stock was excluded from the calculation
of diluted net income per share for the thirteen weeks ended November 1, 2003
because the effect would have been anti-dilutive. The effect of an assumed
conversion of our 4.75% senior convertible notes, and the dilutive effect of
stock options and awards of 1.0 million shares, were excluded from the
calculation of diluted net loss per share for the thirteen weeks ended November
2, 2002 because the effect would have been anti-dilutive.
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. 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.
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 $11,143,000, of which $4,431,000
of costs were incurred during the Fiscal 2004 First Quarter, $6,389,000 of costs
were incurred during the Fiscal 2004 Second Quarter, and $148,000 of costs were
incurred during the Fiscal 2004 Third Quarter.
The total estimated costs related to the plan consist of the following:
(In thousands)
Workforce reduction costs..................................... $ 3,064
Lease termination and related costs........................... 3,703
Acceleration of depreciation of property, equipment,
and leasehold improvements................................ 3,703
Other facility closure costs.................................. 673
-------
Total estimated costs......................................... $11,143
=======
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 terminated 231 employees during the Fiscal 2004 Second Quarter in connection
with the closing of our Memphis, Tennessee distribution center, our Hollywood,
Florida credit operations, and our remaining Monsoon stores. In accordance with
SFAS No. 146, we recognized retention bonuses ratably over the 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
13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Expenses Related to Cost Reduction Plan (continued)
SFAS No. 146, we recognized the present value of the remaining lease obligation
less estimated sublease income related to the Hollywood, Florida facility in
June 2003 when we closed 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 closed in June 2003, to
estimated fair value.
During the Fiscal 2004 First Quarter, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset to its fair value as of its expected cease-use date of June 2003.
During the Fiscal 2004 Third Quarter, we made a decision to re-evaluate the use
of the facility. As a result, we began to depreciate the current carrying amount
of the asset over its estimated useful life.
Expenses incurred in connection with the plan and payments/settlements of
those expenses for the first three quarters of Fiscal 2004, and the remaining
accrual at November 1, 2003, were as follows:
Thirty-nine Weeks Ended
November 1, 2003
---------------- Accrual at
Expenses Payments/ November 1,
(In thousands) Incurred Settlements 2003
-------- ----------- ----
Workforce reduction costs ...................... $ 3,059 $(2,856) $ 203
Lease termination and related costs ............ 3,571 (897) 2,674
Accelerated depreciation costs (non-cash charge) 3,703 (3,703) 0
Other facility closure costs ................... 635 (635) 0
------- ------- -------
Total .......................................... $10,968 $(8,091) $ 2,877
======= ======= =======
Expenses related to the plan accrued during the thirteen-weeks and
thirty-nine weeks ended November 1, 2003 are included in "Expenses related to
cost reduction plan" in the accompanying Condensed Consolidated Statements of
Operations for the respective periods.
8. Restructuring Credit
On January 28, 2002, we announced a restructuring plan that included the
closing of The Answer/Added Dimensions chain of 77 stores and the conversion of
approximately 20% of the Added Dimensions stores to Catherine's stores.
During the thirteen weeks ended November 2, 2002 we completed the closing
and conversion of The Answer/Added Dimensions stores, and we recognized a
pre-tax restructuring credit of $1,351,000. The restructuring credit was
primarily a result of our ability to negotiate lease terminations and amendments
on terms more favorable than our original estimates.
14
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Corporate-owned Life Insurance Program
During the Fiscal 2004 Second Quarter, we reached a settlement with the
Internal Revenue Service regarding its audit of our corporate-owned life
insurance ("COLI") program. The settlement included $18,477,000 of income taxes
and $4,428,000 of interest, net of a tax benefit of $2,390,000. Of the
$18,477,000 of income taxes, $16,125,000 was satisfied through the use of
existing operating loss and tax credit carrybacks. As part of the settlement, we
surrendered our existing life insurance policies and received their cash
surrender value of $16,332,000. The settlement had no impact on our current
results of operations, as we had previously provided for taxes to cover the
settlement. The settlement will have a net positive impact of approximately
$7,100,000 on our Fiscal 2004 cash flows.
10. 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 had no impact on our financial position or results of
operations.
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 voluntarily 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. Adoption of SFAS No. 149 had no impact on our
financial position or results of operations.
15
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Impact of Recent Accounting Pronouncements (continued)
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. On November 7, 2003, the FASB issued a FASB
Staff Position ("FSP") to defer indefinitely the application of various
provisions of SFAS No. 150 for certain mandatorily redeemable non-controlling
interests of all entities. The FSP also deferred indefinitely the classification
and measurement provisions for non-controlling interests in consolidated
limited-life 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.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements." A
variable interest entity ("VIE") is a corporation, trust, partnership, or other
legal entity used for business purposes that either does not have equity
investors with substantive voting rights or has equity investors that do not
provide sufficient financial resources for the entity to finance its activities
without additional subordinated financial support from other parties.
Consolidation of a VIE by a variable interest holder is required if the variable
interest holder is subject to a majority of the VIE's risk of loss, is entitled
to receive a majority of the VIE's residual returns, or both. The variable
interest holder that consolidates the VIE is the primary beneficiary. FIN No. 46
also requires that the primary beneficiary and all other enterprises with a
significant variable interest in a VIE provide certain additional disclosures.
FIN No. 46 provides certain exceptions to these rules, including qualifying
special purpose entities ("QSPEs") subject to the requirements of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
FIN No. 46 is effective for all VIEs created after January 31, 2003. The
disclosure provisions of FIN No. 46 apply to financial statements issued after
January 31, 2003, regardless of when the VIE was established. For VIEs created
before February 1, 2003, the consolidation provisions of FIN. No. 46, as
originally issued, were to be applied in the first interim or annual reporting
period beginning after June 15, 2003. In October 2003, the FASB postponed the
implementation date for VIEs created before February 1, 2003 to the first
interim or annual period ending after December 15, 2003, provided that the
reporting entity has not issued financial statements reporting the VIE in
accordance with FIN No. 46. Early adoption of the provisions of FIN No. 46 is
permitted. We are currently assessing the impact of FIN No. 46 on our financial
statements; however, we do not expect that adoption of FIN No. 46 will have a
material impact on our financial position or results of operations.
16
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 term "Fiscal 2005" refers to our fiscal year ending January
29, 2005. 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 ended August 2, 2003 and August 3, 2002, respectively. The terms
"Fiscal 2004 Third Quarter" and "Fiscal 2003 Third Quarter" refer to the
thirteen weeks ended November 1, 2003 and November 2, 2002, respectively. The
terms "first three quarters of Fiscal 2004" and "first three quarters of Fiscal
2003" refer to the thirty-nine weeks ended November 1, 2003 and November 2,
2002, respectively. The term "Fiscal 2003 Fourth Quarter" refers to the thirteen
weeks ended February 1, 2003. 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.
17
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.
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 Columbus, Ohio distribution center 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, quotas, or
sanctions, 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.
18
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 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 Fashion Bug
customer loyalty card program that is being operated under our Fashion Bug
proprietary credit card program. See "Item 1. NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited); Note 5. Customer Loyalty Card Program" above
for 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:
Thirteen Weeks Ended Percentage Thirty-nine Weeks Ended Percentage
-------------------- Change ----------------------- Change
November 1, November 2, From Prior November 1, November 2, From Prior
2003 2002(1) Period 2003 2002(1) Period
---- ------- ------ ---- ------- ------
Net sales................... 100.0% 100.0% (2.3)% 100.0% 100.0% (6.1)%
Cost of goods sold,
buying, and occupancy
expenses................ 71.9 72.1 (2.5) 70.9 70.1 (5.1)
Selling, general, and
administrative expenses. 26.7 27.3 (4.5) 24.9 25.3 (7.6)
Expenses related to cost
reduction plan.......... 0.0 - - 0.6 - -
Restructuring credit........ - (0.2) (100.0) - (0.1) (100.0)
Income from operations...... 1.4 0.8 68.6 3.5 4.6 (28.5)
Other income, principally
interest................ 0.1 0.1 (50.7) 0.1 0.1 (29.7)
Interest expense............ 0.8 0.9 (11.6) 0.7 0.9 (31.3)
Income tax provision........ 0.3 0.1 99.6 1.1 1.5 (28.1)
Minority interest in net
loss
of subsidiary........... - - (75.0) - - (70.8)
Cumulative effect of
accounting changes...... - - - - (2.7) (100.0)
Net income (loss) 0.4 (0.1) - 1.8 (0.4) -
- --------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
Results may not add due to rounding.
19
The following table presents our net sales by store brand:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 1, November 2, November 1, November 2,
(In millions) 2003 2002 2003 2002
---- ---- ---- ----
Fashion Bug........... $247.9 $256.6 $ 797.9 $ 867.1
Lane Bryant........... 206.7 205.0 652.6 670.8
Catherine's........... 75.7 79.8(1) 247.8 270.6(1)
Monsoon/Accessorize... - (2) 0.9 1.7(2) 2.8
------ ------ -------- --------
Total net sales....... $530.3 $542.3 $1,700.0 $1,811.3
====== ====== ======== ========
- --------------------
(1) Includes sales from Added Dimensions stores that were closed during Fiscal
2003.
(2) All Monsoon/Accessorize stores were closed prior to August 2, 2003.
The following table presents certain additional information related to
changes in our net sales:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
---- ---- ---- ----
Increase (Decrease) in comparable
store sales(1):
Consolidated company.................... 0% (4)% (3)% (1)%
Fashion Bug............................. 6 (1) 2 0
Catherine's............................. (5) 1 (1) 0
Lane Bryant............................. (5) (8) (9) (4)
Sales from new stores as a percentage of
total consolidated prior-period sales:
Fashion Bug............................. 1 3 1 3
Catherine's............................. 1 2 1 2
Lane Bryant............................. 3 2 3 35
Prior-period sales from closed stores as a
percentage of total consolidated
prior-period sales:
Fashion Bug............................. (4) (3) (5) (3)
Catherine's............................. (1) (4) (2) (4)
Lane Bryant............................. (1) (1) (1) 0
Increase (decrease) in total sales............. (2) (1) (6) 34
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
20
Comparison of Thirteen Weeks Ended November 1, 2003 and November 2, 2002
Net Sales
Net sales were $530.3 million for the quarter ended November 1, 2003
("Fiscal 2004 Third Quarter"), a decrease of 2.2% from net sales of $542.3
million for the quarter ended November 2, 2002 ("Fiscal 2003 Third Quarter").
The number of retail stores in operation at the end of the Fiscal 2004 Third
Quarter was 2,257 stores, compared to 2,340 stores at the end of the Fiscal 2003
Third Quarter. The decrease in sales was due primarily to a decrease in the
number of operating stores at our Fashion Bug chain following our Fiscal 2003
store restructuring initiative and negative comparable store sales results at
our Lane Bryant and Catherine's chains. Consolidated comparable store sales were
flat for the Fiscal 2004 Third Quarter.
For Fashion Bug stores, higher average dollar transactions and positive
comparable store sales in the Plus and Misses categories, along with the chain's
"Priced Just Right" program, contributed to a comparable store sales increase of
6% for the Fiscal 2004 Third Quarter. For Catherine's stores, higher unit sales
in the quarter were more than offset by negative traffic trends, resulting in
negative comparable store sales of 5%. Categories with positive comparable store
sales included Denim, which performed strongly as a result of the chain's fit
initiative, Accessories, Leather Coats, Bras, and Shape Wear, which were offset
by declines in comparable store sales of Career Wear, including Separates,
Dresses, and Suits. Lane Bryant experienced negative comparable stores sales of
5% for the quarter but improved on a quarter over quarter basis. Lane Bryant
stores experienced increased unit sales and higher average dollar transactions,
which were more than offset by weak mall traffic and lower numbers of
transactions as compared to the prior-year period. Improved comparable store
sales of Intimate Apparel, Accessories, Active Wear, Knit and Woven Separates,
and Outerwear were offset by declines in comparable store sales of Casual and
Wear-to-Work Apparel lines. Our plans are to remain focused on continuing our
progress in improving merchandise assortments at Lane Bryant.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue on these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits. Costs we incur in connection with administering
these programs are recognized in cost of goods sold as incurred.
During the Fiscal 2004 First Quarter, we introduced a new Fashion Bug
customer loyalty card program that is being operated under our Fashion Bug
proprietary credit card program. See "Item 1. NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited); Note 5. Customer Loyalty Card Program" above
for details of this program. During the Fiscal 2004 Third Quarter, we decreased
the accrual for the estimated costs of discounts earned and coupons issued and
not redeemed from $2.4 million to $1.9 million. During the Fiscal 2004 Third
Quarter, we recognized revenues of $2.5 million in connection with the new
loyalty card program.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited); Note 5. Customer Loyalty Card Program" above for details
of this program. During the Fiscal 2004 Third Quarter and Fiscal 2003 Third
Quarter, we recognized revenues of $0.4 million and $5.8 million, respectively,
in connection with this program. As of December 1, 2002, we discontinued the
issuance of new cards under this program. We terminated this program during the
Fiscal 2004 Second Quarter.
21
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $381.2 million for
the Fiscal 2004 Third Quarter, a decrease from $391.0 million for the Fiscal
2003 Third Quarter, principally reflecting the decrease in net sales. As a
percentage of net sales, these costs decreased 0.2% in the Fiscal 2004 Third
Quarter as compared to the Fiscal 2003 Third Quarter.
Cost of goods sold as a percentage of net sales decreased 0.2% in the
Fiscal 2004 Third Quarter as compared to the Fiscal 2003 Third Quarter. The
decrease was primarily a result of improved margins in our Fashion Bug and Lane
Bryant chains, partially offset by reduced margins in our Catherine's 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 in the Fiscal
2004 Third Quarter were unchanged from the Fiscal 2003 Third Quarter. 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 $141.7 million for the
Fiscal 2004 Third Quarter, a decrease from $148.3 million for the Fiscal 2003
Third Quarter. As a percentage of net sales, these costs decreased by 0.6% in
the Fiscal 2004 Third Quarter as compared to the Fiscal 2003 Third Quarter.
Selling expenses as a percentage of sales for the Fiscal 2004 Third Quarter
decreased 0.6% from the prior-year period. General and administrative expenses
were slightly lower than the prior-year period, and were unchanged as a
percentage of sales. The improvements in selling, general, and administrative
expenses were primarily a result of reductions in store payroll and the
realization of cost reduction initiatives, including improved management of
controllable expenses.
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. See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited); Note 7. Expenses Related to Cost Reduction Plan" above
for details of this program. The total estimated costs related to this plan are
$11.1 million, of which $0.1 million of costs were incurred during the Fiscal
2004 Third Quarter. We do not expect a material after-tax cash impact from
execution of this plan. We expect this cost reduction plan to improve annualized
pre-tax earnings by approximately $45 million. During the thirty-nine weeks
ended November 1, 2003, we realized cost reductions of more than $20 million as
a result of this plan. We expect to realize the remaining benefits of the cost
reduction plan by the end of Fiscal 2005.
During the Fiscal 2004 First Quarter, we made the decision to sell our
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset so that it was recorded at fair value on its cease-use date of June
2003. During the Fiscal 2004 Third Quarter, we made a decision to re-evaluate
the use of the facility. As a result, we began to depreciate the current
carrying amount of the asset over its estimated useful life.
22
Expenses incurred in connection with the plan and payments/settlements of
those expenses for the Fiscal 2004 Third Quarter, and the remaining accrual at
November 1, 2003, were as follows:
Expenses for
Accrued at Quarter Ended Accrued at
August 2, November 1, Payments/ November 1,
(In millions) 2003 2003 Settlements 2003
---- ---- ----------- ----
Workforce reduction costs... $0.9 $0.0 $(0.7) $0.2
Lease termination and
related costs........... 2.8 0.1 (0.2) 2.7
---- ---- ----- ----
Total....................... $3.7 $0.1 $(0.9) $2.9
==== ==== ===== ====
Expenses related to the plan incurred during the Fiscal 2004 Third Quarter
are included in "Expenses related to cost reduction plan" in the accompanying
Condensed Consolidated Statements of Operations.
Restructuring Credit
During the Fiscal 2003 Third Quarter, we completed the closing and
conversion of The Answer/ Added Dimensions stores, and we recognized a pre-tax
restructuring credit of $1.4 million. See "Item 1. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 8. Restructuring Credit"
above. The restructuring credit was primarily a result of our ability to
negotiate lease terminations and amendments on terms more favorable than our
original estimates.
Other Income/Interest Expense
Other income (principally interest income) was $0.3 million for the Fiscal
2004 Third Quarter, a decrease from $0.7 million for the Fiscal 2003 Third
Quarter. Interest expense was $4.1 million for the Fiscal 2004 Third Quarter, a
decrease of 11.7% from $4.7 million for the Fiscal 2003 Third Quarter. The
decrease was primarily a result of a reduced level of borrowings in the Fiscal
2004 Third Quarter as compared to the Fiscal 2003 Third Quarter.
Income Tax Provision
The income tax provision for the Fiscal 2004 Third Quarter was $1.3
million, resulting in a 38.4% effective tax rate, as compared to an income tax
provision for the Fiscal 2003 Third Quarter of $0.7 million, resulting in a
195.4% effective tax rate. During the Fiscal 2003 Third Quarter we increased the
estimated effective tax rate for Fiscal 2003 from 38.2% to 39.0%. The increase
in the effective tax rate for Fiscal 2003 was a result of the effect of
unfavorable net permanent differences between book income and taxable income on
our reduced estimate of Fiscal 2003 pre-tax income. The impact of this change in
estimate on a relatively small pre-tax income for the Fiscal 2003 Third Quarter
resulted in the high effective tax rate for the quarter.
23
Comparison of Thirty-nine Weeks Ended November 1, 2003 and November 2, 2002
Net Sales
Net sales were $1,700.0 million for the first three quarters of Fiscal
2004, a decrease of 6.1% from net sales of $1,811.3 million for the first three
quarters of Fiscal 2003. The decrease in sales was due primarily to negative
comparable store sales results at our Lane Bryant chain, a decrease in the
number of operating stores at our Fashion Bug chain following our Fiscal 2003
store restructuring initiative, and the closing of our The Answer/Added
Dimensions chain during Fiscal 2003. We experienced a year-over-year decrease in
consolidated comparable store sales of 3%.
Fashion Bug stores experienced quarter-over-quarter improvements in
comparable store sales, with a comparable store sales decrease of 3% in the
Fiscal 2004 First Quarter offset by comparable store sales increases of 3% and
6% in the Fiscal 2004 Second Quarter and Fiscal 2004 Third Quarter,
respectively. Year-to-date comparable store sales increased 2%, with increases
in Plus Sportswear, Accessories, Intimate Apparel, and Shoes partially offset by
decreases in Junior Sportswear and Dresses. Catherine's stores comparable store
sales, which had improved from a decrease of 2% in the Fiscal 2004 First Quarter
to an increase of 4% in the Fiscal 2004 Second Quarter, decreased 5% in the
Fiscal 2004 Third Quarter. Year-to-date comparable store sales decreased 1%,
reflecting decreases in Dresses, Career Sportswear, Suits, and Hosiery. Although
Lane Bryant stores have experienced negative comparative store sales, they have
shown quarter-over-quarter improvements, with a 5% decrease in comparable store
sales in the Fiscal 2004 Third Quarter, as compared to a 9% decrease in the
Fiscal 2004 Second Quarter and an 11% decrease in the Fiscal 2004 First Quarter.
Year-to-date comparable stores sales decreased 9%, reflecting decreases in
Sweaters, Casual Woven Tops, and Denim Separates which were partially offset by
increases in Knit and Active Separates, Sleepwear, and Casual Woven Tops.
Improved merchandise assortments for our Lane Bryant stores have resulted in
increased unit sales and improved sales performance for the chain.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue on these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits. Costs we incur in connection with administering
these programs are recognized in cost of goods sold as incurred.
During the Fiscal 2004 First Quarter, we introduced a new Fashion Bug
customer loyalty card program that is being operated under our Fashion Bug
proprietary credit card program. See "Item 1. NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited); Note 5. Customer Loyalty Card Program" above
for details of this program. We have accrued $1.9 million for the estimated
costs of discounts earned and coupons issued and not redeemed during the first
three quarters of Fiscal 2004. During the first three quarters of Fiscal 2004,
we recognized revenues of $5.3 million in connection with the new loyalty card
program.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited); Note 5. Customer Loyalty Card Program" above for details
of this program. During the first three quarters of Fiscal 2004 and the first
three quarters of Fiscal 2003, we recognized revenues of $6.7 million and $16.2
million, respectively, in connection with this program. As of December 1, 2002,
we discontinued the issuance of new cards under this program. We terminated this
program during the Fiscal 2004 Second Quarter.
24
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,205.1 million
for the first three quarters of Fiscal 2004, a decrease from $1,269.7 million
for the first three quarters of Fiscal 2003, principally reflecting the decrease
in net sales. As a percentage of net sales, these costs increased 0.8% in the
first three quarters of Fiscal 2004 as compared to the first three quarters of
Fiscal 2003.
Cost of goods sold as a percentage of net sales increased 0.2% in the first
three quarters of Fiscal 2004 as compared to the first three quarters of Fiscal
2003. The increase was a result of lower merchandise margins in our Lane Bryant
and Catherine's chains, partially offset by an improvement in margins in our
Fashion Bug 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 0.6%
in the first three quarters of Fiscal 2004 as compared to the first three
quarters of Fiscal 2003. 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 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 $423.9 million for the
first three quarters of Fiscal 2004, a decrease from $458.9 million for the
first three quarters of Fiscal 2003. As a percentage of net sales, these costs
decreased by 0.4% in the first three quarters of Fiscal 2004 as compared to the
first three quarters of Fiscal 2003. Selling expenses as a percentage of sales
for the first three quarters of Fiscal 2004 decreased 0.2% from the prior-year
period, and general and administrative expenses decreased 0.2% as a percentage
of sales. These decreases were primarily a result of the realization of cost
reduction initiatives, including improved management of controllable expenses.
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. See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited); Note 7. Expenses Related to Cost Reduction Plan" above
for details of this program. The total estimated costs related to this plan are
$11.1 million, of which $11.0 million of costs were incurred during the first
three quarters of Fiscal 2004. We do not expect a material after-tax cash impact
from execution of this plan. We expect this cost reduction plan to improve
annualized pre-tax earnings by approximately $45 million. During the thirty-nine
weeks ended November 1, 2003, we realized cost reductions of more than $20
million as a result of this plan. We expect to realize the remaining benefits of
the cost reduction plan by the end of Fiscal 2005.
During the Fiscal 2004 First Quarter, we terminated 118 employees and
accrued the severance benefit in accordance with SFAS No. 146. We terminated 231
employees during the Fiscal 2004 Second Quarter in connection with the closing
of our Memphis, Tennessee distribution center, our Hollywood, Florida credit
operations, and our remaining Monsoon stores. In accordance with SFAS No. 146,
we recognized retention bonuses ratably over the service period. In accordance
with SFAS No. 146, we recognized the present value
25
of the remaining lease obligation less estimated sublease income related to the
Hollywood, Florida facility in June 2003 when we closed the facility.
During the Fiscal 2004 First Quarter, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset so that it was recorded at fair value on its cease-use date of June
2003. During the Fiscal 2004 Third Quarter, we made a decision to re-evaluate
the use of the facility. As a result, we began to depreciate the current
carrying amount of the asset over its estimated useful life.
Expenses incurred in connection with the plan and payments/settlements of
those expenses for the first three quarters of Fiscal 2004, and the remaining
accrual at November 1, 2003, were as follows:
Expenses for
Thirty-nine
Weeks Ended Accrued at
November 1, Payments/ November 1,
(In millions) 2003 Settlements 2003
---- ----------- ----
Workforce reduction costs........................... $ 3.1 $(2.9) $0.2
Lease termination and related costs................. 3.6 (0.9) 2.7
Accelerated depreciation costs (non-cash charge).... 3.7 (3.7) 0.0
Other facility closure costs........................ 0.6 (0.6) 0.0
----- ----- ----
Total............................................... $11.0 $(8.1) $2.9
===== ===== ====
Expenses related to the plan incurred during the first three quarters of
Fiscal 2004 are included in "Expenses related to cost reduction plan" in the
accompanying Condensed Consolidated Statements of Operations.
Restructuring Credit
During the first three quarters of Fiscal 2003, we completed the closing
and conversion of The Answer/Added Dimensions stores, and we recognized a
pre-tax restructuring credit of $1.4 million (see "Item 1. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 8. Restructuring Credit"
above). The restructuring credit was primarily a result of our ability to
negotiate lease terminations and amendments on terms more favorable than our
original estimates.
Other Income/Interest Expense
Other income (principally interest income) was $1.3 million for the first
three quarters of Fiscal 2004, a decrease from $1.9 million for the first three
quarters of Fiscal 2003. Interest expense was $11.8 million for the first three
quarters of Fiscal 2004, a decrease of 31.3% from $17.1 million for the first
three quarters of Fiscal 2003. Interest expense for the first three quarters of
Fiscal 2003 included a write-off of $1.0 million of unamortized deferred
financing costs related to our $67.5 million 11.5% term loan which was paid off.
In addition, the decrease was the result of both reduced levels of borrowings
and lower interest rates on borrowings in the first three quarters of Fiscal
2004 as compared to the first three quarters of Fiscal 2003. 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.
26
Income Tax Provision
The income tax provision for the first three quarters of Fiscal 2004 was
$19.3 million, resulting in a 38.9% effective tax rate, as compared to an income
tax provision for the first three quarters of Fiscal 2003 of $26.8 million,
resulting in a 39.0% 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 (the
"Issue") 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.
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:
November 1, February 1,
(Dollars in millions) 2003 2003
---- ----
Cash and cash equivalents................... $72.3 $102.0
Long-term available-for-sale securities..... $23.6 $23.5
Working capital............................. $249.8 $196.7
Current ratio............................... 1.7 1.6
Long-term debt to equity ratio.............. 33.8% 36.2%
Our net cash provided by operating activities was $27.1 million for the
first three quarters of Fiscal 2004, as compared to $118.9 million for the first
three quarters of Fiscal 2003. The decrease was a result of a $6.5 million
decrease in net income before non-cash charges and the cumulative effect of
accounting changes; a $64.5 million increase in our investment in inventories,
net of accounts payable; and a $20.8 million net change in prepaid and accrued
expenses and income taxes payable.
27
The increase in the net investment in inventories was primarily a result of
a pre-Christmas seasonal build-up of inventories and a temporarily depressed
level of inventories at the end of the Fiscal 2003 Third Quarter caused by dock
strikes on the West Coast. The current year increase reflects a return to more
normalized inventory levels. Prepaid expenses decreased $13.3 million during the
first three quarters of Fiscal 2004, as compared to an increase of $1.5 million
during the first three quarters of Fiscal 2003. The Fiscal 2004 decrease was
primarily a result of our surrender of existing life insurance policies and
receipt of their cash surrender value in connection with our settlement of an
Internal Revenue Service audit of our corporate-owned life insurance program
(see below). The settlement also resulted in a decrease in income taxes payable
during the first three quarters of Fiscal 2004 that more than offset accrued
taxes payable for the period. Income taxes payable decreased $6.3 million during
the first three quarters of Fiscal 2004, as compared to an increase of $16.0
million during the first three quarters of Fiscal 2003. Accrued expenses and
other liabilities decreased $8.0 million during the first three quarters of
Fiscal 2004, as compared to an increase of $20.1 million during the first three
quarters of Fiscal 2003, primarily as a result of the timing of certain
payments. Cash flow from operating activities for the first three quarters of
Fiscal 2003 also included a $12.0 million decrease in accrued restructuring
costs for payments related to a restructuring plan announced on January 28,
2002.
Our capital expenditures were $39.4 million during the first three quarters
of Fiscal 2004. In addition, we acquired $9.2 million of equipment under capital
leases. During the remainder of Fiscal 2004, we anticipate incurring additional
capital expenditures of approximately $10 - $12 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 $10 - $12 million of capital expenditures
discussed above, we expect to incur approximately $8 million of additional
capital lease financing during the period from December 2003 through June 2004
in connection with the replacement of point-of-sale equipment for our Lane
Bryant stores.
During the Fiscal 2004 Second Quarter, we reached a settlement with the
Internal Revenue Service regarding its audit of our corporate-owned life
insurance ("COLI") program. The settlement included $18.5 million of income
taxes and $4.4 million of interest, net of a tax benefit of $2.4 million. Of the
$18.5 million of income taxes, $16.1 million was satisfied through the use of
existing operating loss and tax credit carrybacks. As part of the settlement, we
surrendered our existing life insurance policies and received their cash
surrender value of $16.3 million. The settlement had no impact on our current
results of operations, as we had previously provided for taxes to cover the
settlement. The settlement will have a net positive impact of approximately $7.1
million on our Fiscal 2004 cash flows.
28
The following table sets forth information with respect to our store
activity for the first three quarters of Fiscal 2004 and planned store activity
for all of Fiscal 2004 (including the first three quarters of Fiscal 2004):
Fashion Lane Monsoon/
Bug Bryant Catherine's Accessorize Total
--- ------ ----------- ----------- -----
Fiscal 2004 Year-to-Date:
Stores at February 1, 2003...... 1,083 689 467 9 2,248
----- --- --- -- -----
Stores opened................... 2 31 10 43
Stores converted................ (2) 8(1) (2) 4
Stores closed................... (15) (9) (5) (9) (38)
----- --- ----- -- -----
Net change in stores............ (15) 30 3 (9) 9
----- --- ----- -- -----
Stores at November 1, 2003...... 1,068 719 470 0 2,257
===== === === == =====
Stores relocated during period.. 19 20 15 54
Stores remodeled during period.. 3 10 1 14
Fiscal 2004:
Planned store openings.......... 2 33-35 10-15 45-52
Planned store closings.......... 25-32 16-20 10-15 9 60-76
Planned store relocations....... 20-25 20-25 15-20 55-70
- --------------------
(1) Includes 4 Fashion Bug stores closed prior to February 1, 2003 which were
converted to Lane Bryant stores during the first three quarters of Fiscal
2004.
We have formed a trust called the Charming Shoppes Master Trust (the
"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. The Trust currently has two
series of credit card receivables securitizations, series 1999-1 and 2002-1,
with outstanding investor interests of $150.0 million and $100.0 million,
respectively. The first scheduled principal payment dates and expected final
principal payment dates range from March 15, 2004 to February 15, 2005 for
Series 1999-1 and August 15, 2007 to May 15, 2008 for Series 2002-1. As these
credit card receivables securitizations reach maturity, we plan to obtain
funding for the Fashion Bug proprietary credit card program through additional
securitizations. However, we can give no assurance that we will be successful in
securing financing through either replacement securitizations or other sources
of replacement financing.
We securitized $232.7 million of private label credit card receivables in
the first three quarters of Fiscal 2004 and had $263.0 million of securitized
credit card receivables outstanding as of November 1, 2003. We held certificates
and retained interests in our securitizations of $54.7 million as of November 1,
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.
29
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 November 1, 2003, Charming
Shoppes Receivables Corp. held $45.6 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 $54.7 million of
retained interests we held at November 1, 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.
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 November 1, 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.
On June 24, 2003, a credit-rating agency placed our rated securitization
certificates on a credit watch. On September 10, 2003, the credit-rating agency
removed the securitization certificates from credit watch and reaffirmed the
ratings of the certificates.
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.
30
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.
FINANCING
As of November 1, 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. 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. As of November 1, 2003, there were no borrowings outstanding
under the revolving credit facility. We purchase merchandise from both the
domestic and overseas wholesale apparel marketplace six to nine months prior to
the start of a season and utilize letters of credit for overseas purchases.
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. The applicable
rate is determined quarterly, based on our Leverage Ratio or excess
availability, as defined in the credit facility. As of November 1, 2003, the
interest rate on borrowings under the revolving credit line was 4.0%.
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 November 1, 2003, we were in compliance with the covenants
included in the revolving credit facility. As of November 1, 2003, the excess
availability under the revolving credit facility was $234.5 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 November 1, 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.
31
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 November 1, 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 exposure in the movement of basis risk between the floating rate index on
the certificates and the Prime rate. As of November 1, 2003, the floating-rate
finance charge rate was below the contractual floor rate, thus exposing us to a
portion of interest-rate risk. If short-term interest rates were to increase by
one percentage point by the end of Fiscal 2004, an increase of approximately
$306 thousand in selling, general, and administrative expenses would result.
As of November 1, 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 10. 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.
32
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.
As of the end of the period covered by 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 has been no change in
our internal control over financial reporting that occurred during the period
covered by this report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In October 2003, we settled a purported class action suit filed in Alameda
Superior Court, California on October 26, 2001 against Lane Bryant, Inc. by a
terminated employee. The suit alleged that the terminated employee and all Lane
Bryant store sales managers in California were misclassified as exempt
employees, and are actually nonexempt employees and entitled to be paid overtime
which they had not received. The settlement did not have a material impact on
our results of operations for the quarter or nine months ended November 1, 2003.
There have been no other 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 and our Quarterly
Report on Form 10-Q for the quarter ended May 3, 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)
31.1 Certification by Principal Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On August 21, 2003, we filed a Current Report on Form 8-K to furnish, under
"Item 12. Results of Operations and Financial Condition," the text of our press
release, issued August 21, 2003, announcing our earnings for the quarter ended
August 2, 2003 (the second quarter of our fiscal year ending January 31, 2004).
34
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: December 4, 2003 /S/ Dorrit J. Bern
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: December 4, 2003 /S/ Eric M. Specter
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
35
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)
31.1 Certification By Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification By Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
36