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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
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 (par value
$.10 per share), as of May 25, 2004, was 115,037,969 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
May 1, 2004 and January 31, 2004................................ 2
Condensed Consolidated Statements of Operations
and Comprehensive Income
Thirteen weeks ended May 1, 2004 and May 3, 2003................ 3
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended May 1, 2004 and May 3, 2003................ 4
Notes to Condensed Consolidated Financial Statements.................. 5 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements............................................ 11 - 12
Critical Accounting Policies.......................................... 13
Results of Operations................................................. 13 - 17
Liquidity and Capital Resources....................................... 17 - 20
Financing............................................................. 20 - 21
Market Risk........................................................... 21 - 22
Impact of Recent Accounting Pronouncements............................ 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 22
Item 4. Controls and Procedures...................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
SIGNATURES............................................................ 24
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 1, January 31,
(Dollars in thousands, except share amounts) 2004 2004
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 145,324 $ 123,781
Available-for-sale securities ...................................... 59,214 55,688
Merchandise inventories ............................................ 356,441 309,995
Deferred taxes ..................................................... 19,861 19,902
Prepayments and other .............................................. 75,693 57,494
----------- -----------
Total current assets ........................................... 656,533 566,860
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 713,413 705,257
Less accumulated depreciation and amortization ..................... 396,207 386,633
----------- -----------
Net property, equipment, and leasehold improvements ............ 317,206 318,624
----------- -----------
Trademarks and other intangible assets ............................. 170,313 170,478
Goodwill ........................................................... 66,956 66,956
Available-for-sale securities ...................................... 15,480 14,521
Other assets ....................................................... 28,096 27,440
----------- -----------
Total assets ....................................................... $ 1,254,584 $ 1,164,879
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 173,329 $ 135,777
Accrued expenses ................................................... 146,523 138,166
Income taxes payable ............................................... 13,129 1,128
Current portion - long-term debt ................................... 23,035 17,278
Accrued expenses related to cost reduction plan .................... 2,531 2,596
----------- -----------
Total current liabilities ...................................... 358,547 294,945
----------- -----------
Deferred taxes and other non-current liabilities ................... 60,168 62,030
Long-term debt ..................................................... 196,835 202,819
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 127,057,083 shares and 125,526,573 shares, respectively 12,706 12,553
Additional paid-in capital ......................................... 213,077 201,798
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (7,035) (2,539)
Accumulated other comprehensive loss ............................... (280) (365)
Retained earnings .................................................. 504,702 477,774
----------- -----------
Total stockholders' equity ..................................... 639,034 605,085
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,254,584 $ 1,164,879
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
--------------------
May 1, May 3,
(In thousands, except per share amounts) 2004 2003
---- ----
Net sales ............................................................... $ 592,738 $ 564,286
--------- ---------
Cost of goods sold, buying, and occupancy expenses ...................... 400,387 395,488
Selling, general, and administrative expenses ........................... 148,850 145,265
Expenses related to cost reduction plan ................................. 0 4,431
--------- ---------
Total operating expenses ................................................ 549,237 545,184
--------- ---------
Income from operations .................................................. 43,501 19,102
Other income, principally interest ...................................... 394 424
Interest expense ........................................................ (3,883) (3,805)
--------- ---------
Income before income taxes and minority interest ........................ 40,012 15,721
Income tax provision .................................................... 13,084 6,116
--------- ---------
Income before minority interest ......................................... 26,928 9,605
Minority interest in net loss of consolidated subsidiary ................ 0 84
--------- ---------
Net income .............................................................. 26,928 9,689
--------- ---------
Other comprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale securities, net of income
tax (provision) benefit of $(21) and $24, respectively .............. 11 (38)
Reclassification of amortization of deferred loss on termination of
derivative, net of income taxes of $(40) and $(46), respectively .... 74 86
--------- ---------
Total other comprehensive income, net of taxes .......................... 85 48
--------- ---------
Comprehensive income .................................................... $ 27,013 $ 9,737
========= =========
Basic net income per share................................................ $ . 24 $ .09
====== =====
Diluted net income per share.............................................. $ . 22 $ .08
====== =====
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
--------------------
May 1, May 3,
(In thousands) 2004 2003
---- ----
Operating activities
Net income ........................................... $ 26,928 $ 9,689
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 17,007 19,270
Deferred income taxes ............................ (1,536) (1,025)
Other, net ....................................... 373 694
Changes in operating assets and liabilities:
Merchandise inventories ....................... (46,446) (55,976)
Accounts payable .............................. 37,552 58,449
Prepayments and other ......................... (18,199) (3,874)
Accrued expenses and other .................... 8,011 (15,143)
Income taxes payable .......................... 12,001 6,903
Accrued expenses related to cost reduction plan (65) 1,581
--------- ---------
Net cash provided by operating activities ............ 35,626 20,568
--------- ---------
Investing activities
Investment in capital assets ......................... (9,825) (13,325)
Proceeds from sales of available-for-sale securities . 10,231 8,888
Gross purchases of available-for-sale securities ..... (14,684) (14,669)
Increase in other assets ............................. (2,021) (2,562)
--------- ---------
Net cash used in investing activities ................ (16,299) (21,668)
--------- ---------
Financing activities
Proceeds from short-term borrowings .................. 57,052 81,172
Repayments of short-term borrowings .................. (57,052) (81,172)
Repayments of long-term borrowings ................... (4,126) (3,382)
Proceeds from issuance of common stock ............... 6,342 85
--------- ---------
Net cash provided by (used in) financing activities .. 2,216 (3,297)
--------- ---------
Increase (decrease) in cash and cash equivalents ..... 21,543 (4,397)
Cash and cash equivalents, beginning of period ....... 123,781 102,026
--------- ---------
Cash and cash equivalents, end of period ............. $ 145,324 $ 97,629
========= =========
Non-cash financing and investing activities
Equipment acquired through capital leases ............ $ 3,899 $ 4,836
========= =========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
4
See Notes to Condensed Consolidated Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Condensed Consolidated Financial Statements
We have prepared our condensed consolidated balance sheet as of May 1,
2004, and our condensed consolidated statements of operations and comprehensive
income and cash flows for the thirteen weeks ended May 1, 2004 and May 3, 2003,
without audit. In our opinion, we have made all adjustments (which include only
normal recurring adjustments) necessary to present fairly our financial position
at May 1, 2004, and the results of our operations and cash flows for the
thirteen weeks ended May 1, 2004 and May 3, 2003. 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 financial statements should be read in conjunction
with our financial statements and related notes included in our January 31, 2004
Annual Report on Form 10-K. The results of operations for the thirteen weeks
ended May 1, 2004 and May 3, 2003 are not necessarily indicative of operating
results for the full fiscal year.
As used in these notes, the terms "Fiscal 2005" and "Fiscal 2004" refer to
our fiscal year ending January 29, 2005 and our fiscal year ended January 31,
2004, respectively. The terms "Fiscal 2005 First Quarter" and "Fiscal 2004 First
Quarter" refer to the thirteen weeks ended May 1, 2004 and May 3, 2003,
respectively. The terms "the Company," "we," "us," and "our" refer to Charming
Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
We account for cash consideration received from vendors in accordance with
the provisions of EITF Issue 02-16, "Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor." For interim reporting,
we generally defer markdown allowances and recognize them in the period in which
markdown expenses are recognized. Inasmuch as the markdown allowances at the
date of purchase are intended to compensate us for future markdowns taken at the
time of sale, we defer the recognition of markdown allowances during the interim
periods in order to better match the recognition of markdown allowances to the
period the related markdown expenses are recorded.
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
on a straight-line basis 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.
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1. Condensed Consolidated Financial Statements (Continued)
The following table reconciles net income and net income per share as
reported, using the intrinsic value method under APB No. 25, to pro forma net
income and net income per share using the fair value method under Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-based Compensation":
Thirteen Weeks Ended
--------------------
May 1, May 3,
(In thousands, except per share amounts) 2004 2003
---- ----
Net income as reported ........................................ $ 26,928 $ 9,689
Add stock-based employee compensation using intrinsic value
method, net of income taxes .............................. 387 270
Less stock-based employee compensation using fair value method,
net of income taxes ...................................... (841) (989)
-------- --------
Pro forma net income .......................................... $ 26,474 $ 8,970
======== ========
Basic net income per share:
As reported............................................... $ . 24 $ .09
Pro forma................................................. . 23 .08
Diluted net income per share:
As reported............................................... . 22 .08
Pro forma................................................. . 21 .08
Note 2. Trademarks and Other Intangible Assets
May 1, January 31,
(In thousands) 2004 2004
---- ----
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 .......................... 1,787 1,622
-------- --------
Net trademarks and other intangible assets ........... $170,313 $170,478
======== ========
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3. Long-term Debt
May 1, January 31,
(In thousands) 2004 2004
---- ----
4.75% Senior Convertible Notes due 2012.................. $150,000 $150,000
Capital lease obligations ............................... 38,520 37,934
6.53% mortgage note ..................................... 11,900 12,250
7.77% mortgage note ..................................... 9,923 10,039
7.5% mortgage note ...................................... 5,783 5,840
8.15% note .............................................. 2,164 2,494
Other long-term debt .................................... 1,580 1,540
-------- --------
Total long-term debt .................................... 219,870 220,097
Less current portion .................................... 23,035 17,278
-------- --------
Long-term debt .......................................... $196,835 $202,819
======== ========
Note 4. Stockholders' Equity
Thirteen
Weeks Ended
May 1,
(In thousands) 2004
----
Total stockholders' equity, beginning of period....................... $605,085
Net income............................................................ 26,928
Issuance of common stock.............................................. 6,342
Amortization of deferred compensation expense......................... 594
Amortization of deferred loss on termination of derivative, net of tax 74
Unrealized gains on available-for-sale securities, net of tax ........ 11
--------
Total stockholders' equity, end of period............................. $639,034
========
Note 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 from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. We
recognize costs we incur in connection with administering these programs as cost
of goods sold when incurred.
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 5. Customer Loyalty Card Programs (Continued)
During the Fiscal 2004 First Quarter, we introduced a new FASHION BUG(R)
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 2005 First Quarter, we recognized
revenues of $1,415,000 in connection with this program. No revenues were
recognized during the Fiscal 2004 First Quarter. As of May 1, 2004 and January
31, 2004, we accrued $803,000 and $1,200,000, respectively, for the estimated
costs of discounts earned and coupons issued and not redeemed.
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 did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. During the
Fiscal 2004 First Quarter, we recognized revenues of $4,173,000 in connection
with this program. We discontinued the issuance of new cards under this program
in December 2002, and we terminated the program during the second quarter of
Fiscal 2004. Our CATHERINES(R) brand currently offers a similar loyalty program.
During the Fiscal 2005 First Quarter and Fiscal 2004 First Quarter, we
recognized revenues of $1,849,000 and $1,903,000, respectively, in connection
with this program.
Note 6. Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. We accounted for the plan in accordance with the provisions of
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The total costs recognized during Fiscal 2004 related to this plan
were $11,534,000, with $4,431,000 of the costs recognized during the Fiscal 2004
First Quarter.
Costs incurred during the Fiscal 2004 First Quarter consisted of the
following (in thousands):
Workforce reduction costs............................................... $2,409
Lease termination and related costs..................................... 301
Acceleration of depreciation of property, equipment,
and leasehold improvements......................................... 1,363
Other facility closure costs............................................ 358
------
Total costs............................................................. $4,431
======
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6. Expenses Related to Cost Reduction Plan (Continued)
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 at our corporate and divisional home offices. We accrued the
severance benefit in accordance with SFAS No. 146 and recognized retention
bonuses ratably over the employees' remaining service period. Lease termination
and related costs mainly represent the estimated fair value of the remaining
lease obligations at our Hollywood, Florida credit facility, reduced by
estimated sublease income. We recognized the present value of the remaining
lease obligations, less sublease income, related to the Hollywood 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 and our Hollywood, Florida credit facility, which we closed
in June 2003, to their estimated fair values. 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 to its estimated
net realizable value as of its expected cease-use date of June 2003. During the
Fiscal 2004 Third Quarter, we began to evaluate alternative uses for the
facility, and began to depreciate the then-current carrying amount of the asset
over its estimated useful life.
As of May 1, 2004 and January 31, 2004, there were $2,531,000 and
$2,596,000, respectively, of accrued lease termination costs related to the
closing of the Hollywood facility.
Note 7. Net Income Per Share
Thirteen Weeks Ended
--------------------
May 1, May 3,
(In thousands) 2004 2003
---- ----
Basic weighted average common shares outstanding.................... 113,297 112,361
Dilutive effect of assumed conversion of convertible notes.......... 15,182 15,182
Dilutive effect of stock options and awards......................... 1,903 185
------- -------
Diluted weighted average common shares and equivalents outstanding.. 130,382 127,728
======= =======
Net income.......................................................... $26,928 $ 9,689
Decrease in interest expense from assumed conversion of notes,
net of income taxes............................................. 1,135 1,099
------- -------
Net income used to determine diluted net income per share........... $28,063 $10,788
======= =======
Options with weighted average exercise price greater than market
price, excluded from computation of net income per share:
Number of shares (in thousands)................................. 433 11,626
Weighted average exercise price per share....................... $8.25 $6.07
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8. Income Taxes
The effective income tax rate was 32.7% in the Fiscal 2005 First Quarter as
compared to 38.9% in the Fiscal 2004 First Quarter. The lower effective tax rate
in the Fiscal 2005 First Quarter is primarily the result of finalizing certain
prior year tax audits. The higher effective tax rate in the Fiscal 2004 First
Quarter was due primarily to a provision for taxes related to one of our
insurance programs, which we settled with the Internal Revenue Service during
the second half of Fiscal 2004.
Note 9. Impact of Recent Accounting Pronouncements
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. In December 2003, the FASB revised FIN No. 46 to
delay the required implementation date for entities that are not special purpose
entities ("SPEs"), such as equity method investments in operating companies.
Adoption of FIN No. 46 did not have a material impact on our financial position
or results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements and accompanying notes included in Item 1 of this report. It should
also be read in conjunction with the management's discussion and analysis of
financial condition and results of operations, financial statements, and
accompanying notes appearing in our Annual Report on Form 10-K for the fiscal
year ended January 31, 2004. As used in this management's discussion and
analysis, the terms "Fiscal 2005," "Fiscal 2004," and Fiscal 2003" refer to our
fiscal year ending January 29, 2005 and our fiscal years ended January 31, 2004
and February 1, 2003, respectively. The terms "Fiscal 2005 First Quarter" and
"Fiscal 2004 First Quarter" refer to the thirteen weeks ended May 1, 2004 and
May 3, 2003, respectively. The terms "Fiscal 2005 Second Quarter," "Fiscal 2005
Third Quarter," and "Fiscal 2005 Fourth Quarter" refer to the thirteen weeks
ending July 31, 2004, October 30, 2004, and January 29, 2005, respectively. The
term "Fiscal 2006 First Quarter" refers to the thirteen weeks ending April 30,
2005. The term "Fiscal 2004 Third Quarter" refers to the thirteen weeks ended
November 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, cost reductions, capital expenditures, liquidity, financing needs or
plans, and plans for future operations, 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 A slowdown in the United States economy, an uncertain economic outlook, and
escalating gasoline prices could lead to reduced consumer demand for our
apparel and accessories 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-size women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-size women's apparel market, which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these employees
or recruit additional qualified personnel.
11
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 depend on the availability of credit for our working capital needs,
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 generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability, imposition of, or changes
in, duties or quotas, increased security requirements applicable to
imports, delays in shipping, increased costs of transportation, and issues
relating to compliance with domestic or international labor standards.
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 during the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have a negative 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 are important to our success and our competitive position.
o We may be unable to hire and retain a sufficient number of 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 implement our plan to improve merchandise
assortments in our brands.
o The carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse change in
interest rates or other factors could have a significant impact on the
results of the valuation tests, resulting in a write-down of the carrying
value or acceleration of amortization of acquired intangible assets.
12
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 January 31, 2004. 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.
RESULTS OF OPERATIONS
The following table shows our results of operations expressed as a
percentage of net sales and on a comparative basis:
Thirteen Weeks Ended Percentage
-------------------- Change
May 1, May 3, From Prior
2004 2003 Period
---- ---- ------
Net sales........................................... 100.0% 100.0% 5.0%
Cost of goods sold, buying, and occupancy expenses.. 67.5 70.1 1.2
Selling, general, and administrative expenses....... 25.1 25.7 2.5
Expenses related to cost reduction plan............. - 0.8 (100.0)
Income from operations.............................. 7.3 3.4 127.7
Other income, principally interest.................. 0.1 0.1 (7.1)
Interest expense.................................... 0.7 0.7 2.0
Income tax provision................................ 2.2 1.1 113.9
Net income.......................................... 4.5 1.7 177.9
- --------------------
Results may not add due to rounding.
The following table shows our net sales by store brand:
Thirteen Weeks Ended
--------------------
May 1, May 3,
(In millions) 2004 2003
---- ----
FASHION BUG(R).......................................... $262.3 $252.9
LANE BRYANT(R).......................................... 246.6 224.9
CATHERINES(R)........................................... 83.8 85.7
Monsoon(R)/Accessorize(R)............................... - (1) 0.8
------ ------
Total net sales......................................... $592.7 $564.3
====== ======
- --------------------
(1) The Monsoon/Accessorize stores were closed during Fiscal 2004.
13
The following table shows additional information related to changes in our
net sales:
Thirteen Weeks Ended
--------------------
May 1, May 3,
2004 2003
---- ----
Increase (decrease) in comparable store sales(1):
Consolidated Company................................... 5% (6)%
FASHION BUG............................................ 7 (3)
CATHERINES............................................. (3) (2)
LANE BRYANT............................................ 5 (11)
Sales from new stores as a percentage of total
consolidated prior-period sales:
FASHION BUG............................................ 1 1
CATHERINES............................................. 1 1
LANE BRYANT............................................ 3 3
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
FASHION BUG............................................ (2) (5)
CATHERINES............................................. (1) (3)
LANE BRYANT............................................ (1) (1)
Increase (decrease) in total sales......................... 5 (11)
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
The following table sets forth information with respect to our store
activity for the Fiscal 2005 First Quarter and planned store activity for all of
Fiscal 2005 (including the Fiscal 2005 First Quarter):
FASHION LANE
BUG BRYANT CATHERINES Total
--- ------ ---------- -----
Fiscal 2005 First Quarter:
Stores at January 31, 2004........ 1,051 710 466 2,227
----- --- --- -----
Stores opened..................... 1 6 5 12
Stores closed..................... (1) (3) (2) ( 6)
----- --- --- -----
Net change in stores.............. 0 3 3 6
----- --- --- -----
Stores at May 1, 2004............. 1,051 713 469 2,233
===== === === =====
Stores relocated during period.... 7 4 2 13
Stores remodeled during period.... 1 3 4
Fiscal 2005:
Planned store openings............ 5 35 15 55
Planned store closings............ 25 10 15 50
Planned store relocations......... 20 20 15 55
14
Comparison of Thirteen Weeks Ended May 1, 2004 and May 3, 2003
Net Sales
The increase in net sales from the Fiscal 2004 First Quarter to the Fiscal
2005 First Quarter resulted primarily from positive comparable store sales
results at our FASHION BUG and LANE BRYANT brands, which were partially offset
by negative comparable store sales results at our CATHERINES brand. We operated
2,233 retail stores at the end of the Fiscal 2005 First Quarter, as compared to
2,245 stores at the end of the Fiscal 2004 First Quarter.
The increase in FASHION BUG comparable store sales exceeded our sales plan
for the quarter. FASHION BUG stores experienced stronger traffic levels during
the current-year quarter, with the average number of transactions and average
number of units sold per customer ("UPC") increasing 9% and 4%, respectively.
The stronger traffic levels were partially offset by decreases of 2% in the
average dollar sale and 5% in the average retail value per unit sold. FASHION
BUG stores experienced increases in sales of misses and plus sportswear,
accessories, and intimate apparel, which were partially offset by decreases in
sales of junior sportswear and dresses. FASHION BUG store sales also benefited
from sales of maternity and girls, two new categories added to the FASHION BUG
brand during the fourth quarter of Fiscal 2004.
The increase in LANE BRYANT comparable store sales also exceeded our sales
plan for the quarter. LANE BRYANT stores experienced stronger traffic levels
during the current-year quarter, with the average number of transactions
increasing 6%. The stronger traffic levels were partially offset by decreases of
1% in the average dollar sale and 4% in the average UPC. The average retail
value per unit sold increased 3%, reflecting reduced levels of promotional
pricing for the brand as compared to the prior-year period. LANE BRYANT
experienced comparable store sales increases for the quarter in all merchandise
categories, particularly in wear-to-work and accessories. During the second half
of Fiscal 2003, the LANE BRYANT brand experienced poor customer acceptance of,
and fit and quality issues with, certain of its products. As a result, we had to
maintain higher levels of promotional pricing during the Fiscal 2004 First
Quarter. Improvements in the merchandise assortments offered at LANE BRYANT
resulted in the improved sales performance for the brand during the Fiscal 2005
First Quarter.
CATHERINES stores experienced mixed results in comparable store sales
during the Fiscal 2004 First Quarter, and were below our sales plan for the
quarter. Traffic levels were down slightly from the prior-year period, with the
average number of transactions decreasing 4%. The average dollar sale was flat
as compared to the prior-year quarter, with a 2% increase in the average UPC
offset by a 2% decrease in the average retail value per unit sold. Increased
sales of denim, jewelry, casual wovens, and intimate apparel were offset
primarily by decreases in sales of dresses and wear-to-work.
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 and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in cost
of goods sold as incurred. See "Item 1. Notes To Condensed Consolidated
Financial Statements (Unaudited); Note 5. Customer Loyalty Card Program" above
for further information on our loyalty card programs.
15
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. During the Fiscal 2005 First Quarter, we
recognized revenues of $1.4 million in connection with this loyalty card
program. During the Fiscal 2004 First Quarter, no revenues were recognized in
connection with this program. During the Fiscal 2005 First Quarter and Fiscal
2004 First Quarter, we also recognized revenues of $1.8 million and $1.9
million, respectively, in connection with our CATHERINES loyalty card program.
In Fiscal 2002, we began a customer loyalty card program for our FASHION
BUG store customers. During the Fiscal 2004 First Quarter, we recognized
revenues of $4.2 million in connection with this program. As of December 1,
2002, we discontinued the issuance of new cards under this program, and we
terminated this program during the Fiscal 2004 Second Quarter.
Cost of Goods Sold, Buying, and Occupancy
The increase in cost of goods sold, buying, and occupancy expenses from the
Fiscal 2004 First Quarter to the Fiscal 2005 First Quarter principally reflects
the increase in net sales. Cost of goods sold as a percentage of net sales
decreased 1.1% from the Fiscal 2004 First Quarter to the Fiscal 2005 First
Quarter. All of our brands experienced improvements in merchandise margins.
Higher levels of promotional activity at our LANE BRYANT brand, as discussed
above, negatively affected merchandise margins in the Fiscal 2004 First Quarter.
Cost of goods sold includes merchandise costs net of discounts and allowances,
freight, inventory shrinkage, and shipping and handling costs associated with
our e-commerce business. Net merchandise costs and freight are capitalized as
inventory costs.
Buying and occupancy expenses as a percentage of net sales decreased 1.5%
from the Fiscal 2004 First Quarter to the Fiscal 2005 First Quarter. The
decrease was primarily a result of leverage on relatively fixed occupancy costs
as a result of the increase in net sales. 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 increased from the Fiscal
2004 First Quarter to the Fiscal 2005 First Quarter, but decreased 0.6% as a
percentage of net sales. The increase was primarily a result of the increase in
net sales, partially offset by continued tight control of store expenses,
particularly store payroll. Selling expenses decreased 0.5% as a percentage of
net sales. General and administrative expenses decreased 0.1% as a percentage of
net sales.
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. See "Item 1. Notes To Condensed Consolidated Financial Statements
(Unaudited); Note 6. Expenses Related to Cost Reduction Plan" above and "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 14. Expenses Related to Cost Reduction Plan" in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2004 for details of
this program. We accounted for the plan in accordance with the provisions of
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The cost reduction plan was substantially completed during Fiscal
2004. The total costs recognized during Fiscal 2004 related to this plan were
$11.5 million, with $4.4 million of the costs recognized during the Fiscal 2004
First Quarter.
16
This cost reduction plan is expected to improve annualized pre-tax earnings
by a total of approximately $45 million. During Fiscal 2004, we realized cost
reductions of more than $30 million, and we expect to realize the remaining
benefits of the cost reduction plan during 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 to its estimated net realizable value as of its expected cease-use
date of June 2003. During the Fiscal 2004 Third Quarter, we began to evaluate
alternative uses for the facility, and began to depreciate the then-current
carrying amount of the asset over its estimated useful life.
Expenses related to the plan incurred during the Fiscal 2004 First Quarter
are included in "Expenses related to cost reduction plan" in the accompanying
Condensed Consolidated Statements of Operations and Comprehensive Income.
Income Tax Provision
The effective income tax rate was 32.7% in the Fiscal 2005 First Quarter as
compared to 38.9% in the Fiscal 2004 First Quarter. The lower effective tax rate
in the Fiscal 2005 First Quarter is primarily the result of finalizing certain
prior-year tax audits. We expect the effective income tax rate for the year to
be approximately 36.3%. The higher effective tax rate in the Fiscal 2004 First
Quarter was due primarily to a provision for taxes related to one of our
insurance programs, which we settled with the Internal Revenue Service during
the second half of Fiscal 2004.
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 revolving credit facility. The following table highlights
certain information related to our liquidity and capital resources:
May 1, January 31,
(Dollars in millions) 2004 2004
---- ----
Cash and cash equivalents.................................. $145.3 $123.8
Long-term available-for-sale securities.................... $15.5 $14.5
Working capital............................................ $298.0 $271.9
Current ratio.............................................. 1.8 1.9
Long-term debt to equity ratio............................. 30.8% 33.5%
Our net cash provided by operating activities was $35.6 million for the
Fiscal 2005 First Quarter, as compared to $20.6 million for the Fiscal 2004
First Quarter. The increase was a result of a $14.1 million increase in net
income before non-cash charges and a $26.6 million increase in accrued expenses,
income taxes, and other liabilities. These increases were partially offset by a
$11.4 million increase in our investment in inventories, net of accounts payable
and a $14.3 million increase in prepaid expenses.
17
The increase in the net investment in inventories was primarily a result of
a seasonal build-up of year-round and transitional inventories. Prepaid expenses
increased $18.2 million during the Fiscal 2005 First Quarter, as compared to an
increase of $3.9 million during the Fiscal 2004 First Quarter. The increase was
primarily a result of the timing of payments for rent. Accrued expenses and
other liabilities increased $7.9 million during the Fiscal 2005 First Quarter,
as compared to a decrease of $13.6 million during the Fiscal 2004 First Quarter,
primarily as a result of the timing of certain payments. Income taxes payable
increased $12.0 million during the Fiscal 2005 First Quarter, as compared to an
increase of $6.9 million during the Fiscal 2004 First Quarter. The increase in
income taxes payable was primarily a result of the increase in income before
income taxes in the Fiscal 2005 First Quarter as compared to the Fiscal 2004
First Quarter.
Capital Expenditures
Our capital expenditures were $9.8 million during the Fiscal 2005 First
Quarter. In addition, we acquired $3.9 million of point-of-sale equipment for
our CATHERINES stores under capital leases. The total investment in property,
equipment, and leasehold improvements, including cash expenditures and capital
lease financing, was $13.7 million. During the remainder of Fiscal 2005, we
anticipate incurring additional capital expenditures of approximately $55 - $60
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 approximately $53 - $57 million of
these capital expenditures through internally generated funds and $2 - $3
million through capital lease financing.
Dividends
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, our 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.
Off-Balance-Sheet Financing
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.
As of May 1, 2004, the Trust had the following securitization facilities
outstanding:
(Dollars in millions) Series 1999-1 Series 2002-1 Series 1999-2 Series 2004-1
------------- ------------- ------------- -------------
Date of facility................... July 1999 November 2002 May 1999 January 2004
Type of facility................... Term Term Conduit Conduit
Maximum funding.................... $150.0 $100.0 $50.0 $100.0
Funding as of May 1, 2004.......... $125.4 $100.0 $9.4 $9.0
First scheduled principal payment.. March 2004 August 2007 Not applicable Not applicable
Expected final principal payment... February 2005 May 2008 Not applicable Not applicable
Renewal............................ Not applicable Not applicable Annual Annual(1)
- --------------------
(1) This facility has an initial term of two years, subject to an annual
renewal.
18
The Series 1999-1 securitization began its scheduled amortization period in
March 2004, and $24.6 million of principal was amortized in the Fiscal 2005
First Quarter. The remainder of the principal is scheduled to amortize as
follows: $36.8 million in the Fiscal 2005 Second Quarter; $36.8 million in the
Fiscal 2005 Third Quarter; $36.0 million in the Fiscal 2005 Fourth Quarter; and
$15.8 million in the Fiscal 2006 First Quarter. We expect to fund the
amortization through our securitization program.
During the Fiscal 2005 First Quarter, we sold to investors an additional
$9.5 million of certificates under the 2002-1 Series that we were previously
holding as a retained interest. These certificates were included in our
short-term available-for-sale securities as of January 31, 2004. 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 $75.2 million of private label credit card receivables in
the Fiscal 2005 First Quarter and had $248.7 million of securitized credit card
receivables outstanding as of May 1, 2004. We held certificates and retained
interests in our securitizations of $58.0 million as of May 1, 2004, which were
generally subordinated in right of payment to certificates issued by the trust
to third-party investors. Our obligation to repurchase receivables sold to the
trust is limited to those receivables that, at the time of their transfer, fail
to meet the trust's eligibility standards under normal representations and
warranties. To date, our repurchases of receivables pursuant to this obligation
have been insignificant.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly-owned indirect subsidiaries, are separate special-purpose
entities created for the securitization program. As of May 1, 2004, Charming
Shoppes Receivables Corp. held $19.0 million of Charming Shoppes Master Trust
certificates and retained interests and Charming Shoppes Seller, Inc. held
retained interests of $8.7 million (which are included in the $59.2 million of
short-term available-for-sale securities we held at May 1, 2004). 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, which would otherwise be available to be paid to us
with respect to our subordinated interests, within the trust as additional
enhancement. For example, if we fail or the trust fails 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 would have sufficient notice to seek alternative forms of financing
through other third-party providers. As of May 1, 2004, the trust was in
compliance with all applicable financial performance standards. Amounts placed
into enhancement accounts, if any, that are not required for payment to 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.
19
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 16. Asset Securitization" of our Annual Report on
Form 10-K for the fiscal year ended January 31, 2004.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales accounts receivable funding
programs for both our CATHERINES and LANE BRYANT brands. These funding programs
expire in January 2005 for CATHERINES and in January 2006 for LANE BRYANT. Under
these agreements, the third parties reimburse us daily for 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 16. Asset Securitization" of our Annual Report on Form 10-K for
the fiscal year ended January 31, 2004.
On January 28, 2004, in accordance with the terms of the Merchant Services
Agreement pursuant to which the CATHERINES proprietary credit cards are issued,
we gave notification of termination and election to purchase the CATHERINES
credit card portfolio to the third-party provider. In accordance with the terms
of the Merchant Services Agreement, the purchase option required us to provide
one year's notice in order to terminate the agreement and to purchase the
portfolio, subject to the negotiation of the final purchase agreement. We expect
to fund the CATHERINES credit card portfolio using our securitization program.
We lease substantially all of our operating stores under non-cancelable
operating lease agreements. Additional details on these leases, including
minimum lease commitments, are included in "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 17. Leases"
of our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
FINANCING
Revolving Credit Facility
We have a $300.0 million revolving credit facility (the "Facility") that
provides for cash borrowings and enables us to issue up to $150.0 million of
letters of credit for purchases of merchandise and for standby letters of
credit. As of May 1, 2004, there were no borrowings outstanding under the
Facility. The availability of borrowings under the Facility is subject to
limitations based on eligible inventory and, under certain circumstances, credit
card receivables and in-transit cash. The Facility is secured by our general
assets, except for (i) all assets related to our credit card securitization
program, (ii) all real property, (iii) certain equipment subject to other
mortgages or capital leases, (iv) the assets of our non-U.S. subsidiaries, and
(v) certain other assets. The Facility expires on August 15, 2008.
The interest rate on borrowings under the Facility ranges from Prime to
Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus 1.5% to LIBOR
plus 2.00% per annum for Eurodollar Rate Loans. The applicable rate is
determined quarterly, based on our average excess and suppressed availability,
as defined in the Facility. As of May 1, 2004, the interest rate on borrowings
under the Facility was 4.0% for Prime Rate Loans and 2.6% for Eurodollar Rate
Loans.
20
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50.0 million at any time within a fiscal quarter, that
we maintain consolidated 12-month earnings before interest, taxes, depreciation,
and amortization ("EBITDA") (excluding non-recurring, non-cash charges as
defined in the Facility), of $115.0 million. As of May 1, 2004, the excess and
suppressed availability, including excess cash, under the revolving credit
facility was $319.3 million. We had outstanding letters of credit totaling $55.2
million as of May 1, 2004. As of May 1, 2004, we were not in violation of any of
the covenants included in the Facility.
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 January 31, 2004.
As of May 1, 2004, 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 is
currently subject to certain restrictions 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 consent,
and as conditions may allow, we may from time to time acquire additional shares
of our common stock. Such shares, if purchased, would be held as treasury
shares.
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.
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 receivables 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. The finance charges on most of our proprietary
credit card accounts are billed using a floating rate index (the Prime lending
rate), subject to a floor and limited by legal maximums. The certificates issued
under the securitization include both floating and fixed interest rate
certificates. The floating rate certificates are based on an index of either
one-month LIBOR or the commercial paper rate, depending on the issuance.
Consequently, we have basis risk exposure to the extent that the movement of the
floating rate index on the certificates varies from the movement of the Prime
rate. Additionally, as of May 1, 2004, the floating finance charge rate on the
credit cards was below the contractual floor rate, thus exposing us to interest
rate risk on the portion of certificates that are funded at floating rates. To
the extent that short-term interest rates were to increase by one percentage
point by the end of Fiscal 2005, an increase of approximately $685 thousand in
selling, general, and administrative expenses would result.
21
As of May 1, 2004, 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 9. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have 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.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings involving the
Company or its subsidiaries since those reported in our Annual Report on Form
10-K for the fiscal year ended January 31, 2004.
Other than ordinary routine litigation incidental to our business, there
are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, and there are no other proceedings that are
expected to have a material adverse effect on our financial condition or results
of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994.
(File No. 000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit
3.2)
10.1 2003 Incentive Compensation Plan, incorporated by reference to
Appendix C of the Registrant's Proxy Statement Pursuant to Section 14
of the Securities Exchange Act of 1934, filed on May 22, 2003.
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 February 4, 2004, we filed a Current Report on Form 8-K to report, under
"Item 5. Other Events and Regulation FD Disclosure" the text of our press
release, issued February 4, 2004, announcing that we have amended and restated
our $300 million revolving credit facility effective as of January 29, 2004.
On March 18, 2004, 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 March 18, 2004, announcing our earnings for the quarter and
fiscal year ended January 31, 2004.
On April 14, 2004, we filed a Current Report on Form 8-K to report, under
"Item 5. Other Events and Regulation FD Disclosure" the text of our press
release, issued April 12, 2004, announcing that Yvonne Montgomery Curl has been
appointed to our Board of Directors.
23
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: May 28, 2004 /S/ Dorrit J. Bern
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: May 28, 2004 /S/ Eric M. Specter
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
24
Exhibit Index
Exhibit No. Item
- ----------- ----
3.1 Restated Articles of Incorporation, incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended January
29, 1994. (File No. 000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999.
(Exhibit 3.2)
10.1 2003 Incentive Compensation Plan, incorporated by reference to
Appendix C of the Registrant's Proxy Statement Pursuant to
Section 14 of the Securities Exchange Act of 1934, filed on May
22, 2003.
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.
25