Attached files

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EX-10.3 - FORM OF RESTRICTED STOCK AGREEMENT - SAKS INCdex103.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - SAKS INCdex322.htm
EX-10.4 - FORM OF SUPPLEMENT TO RESTRICTED STOCK AGREEMENT - SAKS INCdex104.htm
EX-10.2 - FORM OF STOCK OPTION GRANT DOCUMENT - SAKS INCdex102.htm
EX-10.5 - FORM OF PERFORMANCE AWARD AGREEMENT - SAKS INCdex105.htm
EX-10.6 - FORM OF SUPPLEMENT TO PERFORMANCE AWARD AGREEMENT - SAKS INCdex106.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - SAKS INCdex311.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - SAKS INCdex321.htm
EX-10.1 - FORM OF STOCK OPTION AGREEMENT - SAKS INCdex101.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - SAKS INCdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: October 31, 2009

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 Number: 1-13113

SAKS INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

TENNESSEE   62-0331040
(State or other jurisdiction
of incorporation)
  (IRS Employer
Identification No.)

 

12 East 49th Street

New York, New York

  10017
(Address of principal
executive offices)
  (Zip Code)

212-940-5305

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule-405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 16, 2009, the number of shares of the Registrant’s Common Stock outstanding was 159,573,704.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page No.

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements (Unaudited)   
  Condensed Consolidated Balance Sheets – October 31, 2009, January 31, 2009 and November 1, 2008    3
  Condensed Consolidated Statements of Income – Three and Nine Months Ended October 31, 2009 and November 1, 2008    4
  Condensed Consolidated Statements of Cash Flows – Nine Months Ended October 31, 2009 and November 1, 2008    5
  Notes to Condensed Consolidated Financial Statements    6

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    31

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    46

Item 4.

  Controls and Procedures    46

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings    47

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    47

Item 6.

  Exhibits    47

SIGNATURE

   49

 

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Table of Contents

SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

 

     October 31,
2009
   January 31,
2009
   November 1,
2008
               Revised

ASSETS

        

Current Assets

        

Cash and cash equivalents

   $ 7,122    $ 10,273    $ 20,008

Merchandise inventories

     799,110      728,841      1,016,192

Other current assets

     89,846      105,350      119,917

Deferred income taxes, net

     30,971      29,916      35,954
                    

Total current assets

     927,049      874,380      1,192,071

Property and Equipment, net

     1,007,636      1,058,393      1,073,912

Deferred Income Taxes, net

     219,186      194,956      83,224

Other Assets

     24,653      19,948      49,344
                    

TOTAL ASSETS

   $ 2,178,524    $ 2,147,677    $ 2,398,551
                    

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current Liabilities

        

Trade accounts payable

   $ 163,193    $ 90,208    $ 250,353

Accrued expenses and other current liabilities

     228,347      275,547      259,805

Current portion of long-term debt

     4,847      4,673      88,804
                    

Total current liabilities

     396,387      370,428      598,962

Long-Term Debt

     514,606      593,103      516,416

Other Long-Term Liabilities

     202,477      193,560      159,377
                    

Total liabilities

     1,113,470      1,157,091      1,274,755

Commitments and Contingencies

     —        —        —  

Shareholders’ Equity

     1,065,054      990,586      1,123,796
                    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 2,178,524    $ 2,147,677    $ 2,398,551
                    

See notes to condensed consolidated financial statements.

 

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
           Revised           Revised  

NET SALES

   $ 631,434      $ 690,297      $ 1,820,218      $ 2,203,856   

Cost of sales

     376,799        443,968        1,153,177        1,400,727   
                                

Gross margin

     254,635        246,329        667,041        803,129   

Selling, general and administrative expenses

     162,552        180,860        478,749        575,292   

Other operating expenses:

        

Property and equipment rentals

     24,854        26,469        77,818        79,570   

Depreciation and amortization

     33,117        32,120        102,371        96,094   

Taxes other than income taxes

     17,784        20,285        55,637        62,764   

Store pre-opening costs

     534        823        1,900        1,350   

Impairments and dispositions

     185        141        454        1,380   
                                

OPERATING INCOME (LOSS)

     15,609        (14,369     (49,888     (13,321

Interest expense

     (12,831     (11,583     (35,611     (34,756

Gain on extinguishment of debt

     —          —          783        —     

Other income, net

     23        1,487        973        3,174   
                                

INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES

     2,801        (24,465     (83,743     (44,903

Provision (benefit) for income taxes

     (3,532     6,328        (30,706     (2,175
                                

INCOME (LOSS) FROM CONTINUING OPERATIONS

     6,333        (30,793     (53,037     (42,728

DISCONTINUED OPERATIONS:

        

Loss from discontinued operations before income taxes

     (23     (20,740     (421     (25,951

Benefit for income taxes

     (8     (7,804     (147     (9,619
                                

LOSS FROM DISCONTINUED OPERATIONS

     (15     (12,936     (274     (16,332
                                

NET INCOME (LOSS)

   $ 6,318      $ (43,729   $ (53,311   $ (59,060
                                

Per-Share amounts - Basic

        

Income (loss) from continuing operations

   $ 0.04      $ (0.22   $ (0.37   $ (0.31

Loss from discontinued operations

   $ 0.00      $ (0.10   $ 0.00      $ (0.12

Net Income (loss) per share

   $ 0.04      $ (0.32   $ (0.37   $ (0.43

Per-Share amounts - Diluted

        

Income (loss) from continuing operations

   $ 0.04      $ (0.22   $ (0.37   $ (0.31

Loss from discontinued operations

   $ 0.00      $ (0.10   $ 0.00      $ (0.12

Net Income (loss) per share

   $ 0.04      $ (0.32   $ (0.37   $ (0.43

Weighted average common shares:

        

Basic

     148,055        137,715        143,182        138,713   

Diluted

     152,456        137,715        143,182        138,713   

See notes to condensed consolidated financial statements.

 

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SAKS INCORPORATED and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

     Nine Months Ended  
     October 31,
2009
    November 1,
2008
 
           Revised  

Operating Activities:

    

Net Loss

   $ (53,311   $ (59,060

Loss from discontinued operations

     (274     (16,332
                

Loss from continuing operations

     (53,037     (42,728

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     102,371        96,094   

Impairments and dispositions

     454        1,380   

Gain on extinguishment of debt

     (783     —     

Equity compensation

     12,697        11,572   

Amortization of discount on convertible notes

     6,983        5,069   

Deferred income taxes

     (28,111     5,303   

Gain on sale of land

     —          (1,217

Gain on sale of property

     (628     —     

Change in operating assets and liabilities, net

     3,015        (110,120
                

Net Cash Provided By (Used In) Operating Activities - Continuing Operations

     42,961        (34,647

Net Cash Provided By (Used In) Operating Activities - Discontinued Operations

     (13,613     2,159   
                

Net Cash Provided By (Used In) Operating Activities

     29,348        (32,488

Investing Activities:

    

Purchases of property and equipment

     (61,356     (91,824

Proceeds from the sale of property and equipment

     643        1,339   
                

Net Cash Used In Investing Activities - Continuing Operations

     (60,713     (90,485

Net Cash Used In Investing Activities - Discontinued Operations

     —          (1,876
                

Net Cash Used In Investing Activities

     (60,713     (92,361

Financing Activities:

    

Proceeds from issuance of convertible senior notes

     120,000        —     

Proceeds from (payments on) revolving credit facility

     (156,675     80,625   

Payment of deferred financing costs

     (4,686     —     

Payments on long-term debt and capital lease obligations

     (25,783     (4,013

Cash dividends paid

     (781     (1,187

Purchases and retirements of common stock

     —          (34,889

Net proceeds from the issuance of common stock

     96,139        3,159   
                

Net Cash Provided By Financing Activities - Continuing Operations

     28,214        43,695   

Net Cash Used In Financing Activities - Discontinued Operations

     —          —     
                

Net Cash Provided By Financing Activities

     28,214        43,695   

Decrease in Cash and Cash Equivalents

     (3,151     (81,154

Cash and cash equivalents at beginning of period

     10,273        101,162   

Cash and cash equivalents at end of period

   $ 7,122      $ 20,008   
                

See notes to condensed consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

NOTE 1 – GENERAL

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Operating results for the three and nine months ended October 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending January 30, 2010 (fiscal year 2009). The financial statements include the accounts of Saks Incorporated and its subsidiaries (collectively, the “Company”). All intercompany amounts and transactions have been eliminated.

The Company has performed an evaluation of subsequent events through December 4, 2009, which is the date the financial statements were issued (see Note 11).

The accompanying Condensed Consolidated Balance Sheet at January 31, 2009 has been derived from the audited financial statements at that date but does not include all disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 as updated by the Current Report on Form 8-K that was filed on July 30, 2009 solely to reflect certain retrospective accounting adjustments described below.

On February 1, 2009, the Company retrospectively adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470 related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) (“ASC 470”), which requires an allocation of convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component) (see Note 4). Certain prior period amounts in the accompanying Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, and Condensed Consolidated Statements of Cash Flows have been revised to reflect the impact of the Company’s adoption of this new accounting standard.

During the preparation of our condensed consolidated financial statements for the quarterly period ended October 31, 2009, the Company identified a classification error in our Consolidated Statements of Income for the year ended January 31, 2009 and prior periods and the quarterly periods therein. The classification error also existed in our Condensed Consolidated Statements of

 

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Income for the quarterly periods ended August 1, 2009 and May 2, 2009. The Company improperly included certain shipping and handling revenue in Selling, General and Administrative expenses (“SG&A”). The Company corrected this error in our Condensed Consolidated Statements of Income by adjusting Net Sales and SG&A to reflect all shipping and handling revenue in Net Sales. The adjustment to increase Net Sales and SG&A for the three and nine months ended November 1, 2008 was $3,068 and $9,618, respectively. This adjustment had no effect on Operating Loss, Loss from Continuing Operations, or Net Loss for the periods adjusted. The Company does not believe these adjustments are material to the Condensed Consolidated Statements of Income for the three and nine months ended October 31, 2009 or to any prior period’s Consolidated Statements of Income or the financial statements taken as a whole.

Certain reclassifications were made to prior period amounts to conform to the current year presentation.

The Company’s operations consist of Saks Fifth Avenue (“SFA”), Saks Fifth Avenue OFF 5TH, and SFA’s e-commerce operations. Previously, the Company also operated Club Libby Lu (“CLL”), the operations of which were discontinued in January 2009. The operations of CLL are presented as discontinued operations in the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the current and prior year periods.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Net Sales – Net Sales include sales of merchandise (net of returns and exclusive of sales taxes), commissions from leased departments, shipping and handling revenues related to merchandise sold and breakage income from unredeemed gift cards. Commissions from leased departments were $5,977 and $5,274 for the three months ended October 31, 2009 and November 1, 2008, respectively. Leased department sales were $40,527 and $39,444 for the three months ended October 31, 2009 and November 1, 2008, respectively, and were excluded from Net Sales in the accompanying Condensed Consolidated Statements of Income. Commissions from leased departments were $17,419 and $19,089 for the nine months ended October 31, 2009 and November 1, 2008, respectively. Leased department sales were $127,684 and $140,641 for the nine months ended October 31, 2009 and November 1, 2008, respectively, and were excluded from Net Sales in the accompanying Condensed Consolidated Statements of Income.

Cash and Cash Equivalents – Cash and cash equivalents primarily consist of cash on hand in the stores, deposits with banks, and investments with banks and financial institutions that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Cash equivalents totaled $240 and $10,510 at October 31, 2009 and November 1, 2008, respectively, primarily consisting of money market funds, demand and time deposits. Income earned on cash equivalents was $47 and $262 for the three-month periods ended October 31, 2009 and November 1, 2008, respectively. For the nine-month periods ended October 31, 2009 and November 1, 2008, income earned on these cash equivalents was $326 and $1,893, respectively. Income earned on cash equivalents is reflected in Other Income in the accompanying Condensed Consolidated Statements of Income.

 

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Inventory – Merchandise inventories are stated at the lower of cost or market and include freight, buying and distribution costs. The Company takes markdowns related to slow moving inventory, ensuring the appropriate inventory valuation. The Company receives vendor provided support in different forms. When the vendor provides support for inventory markdowns, the Company records the support as a reduction to cost of sales. Such support is recorded in the period that the corresponding markdowns are taken. When the Company receives inventory-related support that is not designated for markdowns, the Company includes this support as a reduction in the cost of purchases.

Impairments and Dispositions – The Company continuously evaluates its real estate portfolio and closes underproductive stores in the normal course of business as leases expire or as other circumstances dictate. The Company also performs an asset impairment analysis at each fiscal year end. The Company incurred net charges primarily related to asset dispositions in the normal course of business of $185 and $141 for the three month periods ended October 31, 2009 and November 1, 2008, respectively, and charges of $454 and $1,380 for the nine months ended October 31, 2009 and November 1, 2008, respectively. Asset dispositions are included in Impairments and dispositions in the accompanying Condensed Consolidated Statements of Income.

Segment Reporting – The Company derives all of its revenue from the sale of luxury merchandise. Accordingly, the Company has identified the operation of its retail stores and e-commerce business as the Company’s one reportable segment.

Income Taxes – The effective income tax rate from continuing operations for the three and nine-month periods ended October 31, 2009 was (126.1%) and 36.7%, respectively, as compared to (25.9%) and 4.8%, for the three and nine-month periods ended November 1, 2008. The effective tax rate for the three-month period ended October 31, 2009 was primarily due to the reversal of a reserve for an uncertain tax position. The effective tax rate for the nine-month period ended October 31, 2009 was primarily due to the reversal of a reserve for an uncertain tax position off-set by an increase in the state valuation allowance associated with state net operating loss (“NOL”) carryforwards recorded in the three-month period ended August 1, 2009. The effective tax rate for the three and nine-month periods ended November 1, 2008 was primarily due to the write-off of a deferred tax asset associated with a Federal NOL, which expired in 2008 and an increase in the state valuation allowance associated with state NOL carryforwards, reducing the expected tax benefit of the pre-tax losses in that period.

Components of the Company’s income tax expense (benefit) from continuing operations for the three and nine-month periods ended October 31, 2009 and November 1, 2008 were as follows:

 

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     Three Months Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
           Revised           Revised  

Expected federal income taxes at 35%

   $ 980      $ (8,563   $ (29,310   $ (15,716

State income taxes, net of federal benefit

     (37     (1,157     (3,197     (2,926

State NOL valuation allowance adjustment

     —          3,619        5,936        3,619   

Write-off of expiring Federal NOL

     —          10,980        —          10,980   

Effect of settling tax exams and other tax reserve adjustments

     (4,378     562        (4,572     1,019   

Change in state tax law

     —          —          —          (414

Other items, net

     (97     887        437        1,263   
                                

Provision (benefit) for income taxes from continuing operations

   $ (3,532   $ 6,328      $ (30,706   $ (2,175
                                

During the three months ended October 31, 2009 the Company reversed approximately $4.4 million of its reserve for uncertain tax positions due to the expiration of statute of limitations. In addition, the Company believes that it is reasonably possible that a decrease of approximately $25.5 million in the reserve for uncertain tax positions could occur within 12 months of the October 31, 2009 balance sheet date.

The Company files a consolidated U.S. Federal income tax return as well as state tax returns in multiple state jurisdictions. The Company has completed examinations by the Internal Revenue Service or the statute of limitations has expired for taxable years through January 28, 2006. With respect to state and local jurisdictions, the Company has completed examinations in many jurisdictions through the same period and currently has examinations in progress for several jurisdictions.

Our consolidated balance sheet as of October 31, 2009 includes a gross deferred tax asset of $175,621 related to U.S. federal and state NOL and alternative minimum tax credit carryforwards. The majority of the NOL carryforward is a result of the net operating loss incurred during the fiscal year ended January 31, 2009 due principally to difficult market and macroeconomic conditions. We have concluded, based on the weight of all available positive and negative evidence, that all but $48,126 of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, a valuation allowance for the $48,126 has been established. During the quarter ended October 31, 2009, the valuation allowance was evaluated on a jurisdiction-by-jurisdiction basis which resulted in no change to the overall valuation allowance based on projections of future profitability. While the Company has incurred a cumulative loss over the three years ended October 31, 2009, after evaluating all available evidence including our past operating results, the macroeconomic factors contributing to the most recent fiscal year loss, the length of the carryforward periods available, and our forecast of future taxable income, including the implementation of prudent and feasible tax planning strategies, we concluded that it is more likely than not the net deferred tax asset will be realized. We will continue to assess the need for additional valuation allowance in the future. If future results are less than projected or tax planning alternatives are no longer viable, then additional valuation allowance may be required to reduce the deferred tax assets which could have a material impact on our results of operations in the period in which it is recorded.

 

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NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncements

On August 1, 2009, the Company adopted the provisions of a new accounting standard related to subsequent events, which established general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The standard requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.

In June 2009, the FASB issued the Accounting Standards Codification (the “Codification”). The Codification is the single source of authoritative, U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of the Codification did not have an impact on the Company’s condensed consolidated financial statements.

On May 3, 2009, the Company adopted the provisions of a new accounting standard related to disclosures about the fair value of financial instruments, which requires publicly-traded companies to provide disclosures on the fair value of financial instruments in interim financial statements. See Note 4 for fair value disclosures of the Company’s financial instruments.

On February 1, 2009, the Company retrospectively adopted the provisions of ASC 470 related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). See Note 4 for further discussion of the adoption of this new accounting standard.

On February 1, 2009, the Company adopted the provisions of the fair value measurement standard related to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. See Note 6 for further discussion of the adoption of this new accounting standard.

On February 1, 2009, the Company adopted the provisions of a new accounting standards related to accounting for instruments granted in share-based payment transactions as participating securities. This update provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of both basic and diluted earnings per share. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements for the three and nine-month periods ended October 31, 2009.

On February 1, 2009, the Company adopted the provisions of a new accounting standard related to accounting by lessees for nonrefundable maintenance deposits, which clarifies how a lessee shall account for a maintenance deposit under an arrangement accounted for as a lease. The adoption of the new accounting standard did not have a material impact on the Company’s consolidated financial statements for the three and nine-month periods ended October 31, 2009.

 

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Recently Issued Pronouncements

In December 2008, the FASB issued additional guidance on employers’ disclosures about the plan assets of defined benefit pension or other postretirement plans. The new disclosure requirements include a description of how investment allocation decisions are made, major categories of plan assets, valuation techniques used to measure the fair value of plan assets, the impact of measurement using significant unobservable inputs and concentrations of risk within plan assets. The new disclosure requirements are effective for fiscal years ending after December 15, 2009. The Company intends to adopt the new disclosure requirements in its Form 10-K for the year ending January 30, 2010.

NOTE 3 – EARNINGS PER COMMON SHARE

Calculations of earnings per common share (“EPS”) for the three and nine-month periods ended October 31, 2009 and November 1, 2008, respectively, are as follows:

 

     For the Three Months Ended
October 31, 2009
    For the Three Months Ended
November 1, 2008
 
                      Revised  
     Net
Income
    Weighted
Average
Shares
   Per
Share
Amount
    Net Loss     Weighted
Average
Shares
   Per
Share
Amount
 

Basic EPS

   $ 6,318      148,055    $ 0.04      $ (43,729   137,715    $ (0.32

Effect of dilutive potential common shares

     —        4,401      —          —        —        —     
                                          

Diluted EPS

   $ 6,318      152,456    $ 0.04      $ (43,729   137,715    $ (0.32
                                          
     For the Nine Months Ended
October 31, 2009
    For the Nine Months Ended
November 1, 2008
 
                      Revised  
     Net Loss     Weighted
Average
Shares
   Per
Share
Amount
    Net Loss     Weighted
Average
Shares
   Per
Share
Amount
 

Basic EPS

   $ (53,311   143,182    $ (0.37   $ (59,060   138,713    $ (0.43

Effect of dilutive potential common shares

     —        —        —          —        —        —     
                                          

Diluted EPS

   $ (53,311   143,182    $ (0.37   $ (59,060   138,713    $ (0.43
                                          

For the three months ended October 31, 2009, the Company had 40,889 potentially exercisable shares under the Company’s convertible notes that were not included in the computation of diluted EPS because inclusion of the potential common shares would have been anti-dilutive. Additionally, the Company had 1,598 options that were excluded from the computation of diluted EPS for the three months ended October 31, 2009, because the exercise prices of the options exceeded the average market price of the Company’s common stock for the period. These options represent the number of awards outstanding at the end of the period and application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted EPS.

 

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For the nine months ended October 31, 2009, the Company had 2,329 options and 6,129 unvested restricted stock and performance share awards outstanding that were excluded from the computation of diluted EPS because the potential common shares would have been anti-dilutive as the Company generated a net loss for the nine month period. These options and unvested restricted stock and performance share awards represent the number of shares outstanding at the end of the period and application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted EPS. There were also 40,889 potentially exercisable shares under the Company’s convertible notes that were not included in the computation of diluted EPS for the nine months ended October 31, 2009 because inclusion of the potential common shares would have been anti-dilutive as the Company generated a net loss for the period.

For the three and nine months ended November 1, 2008, the Company had 2,542 options and 4,284 unvested restricted stock and performance share awards outstanding that were excluded from the computation of diluted EPS because the potential common shares would have been anti-dilutive as the Company generated net losses for the three and nine-month periods. These options and unvested restricted stock and performance share awards represent the number of shares outstanding at the end of the period and application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted EPS. There were also 19,219 potentially exercisable shares under the Company’s convertible senior notes that were not included in the computation of diluted EPS for the three and nine months ended November 1, 2008 because inclusion of the potential common shares would have been anti-dilutive as the Company generated net losses for the three and nine-month periods.

 

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NOTE 4 – DEBT

A summary of long-term debt and capital lease obligations is as follows:

 

     October 31, 2009    January 31, 2009    November 1, 2008  
     Carrying
Amount
    Fair
Value
   Carrying
Amount
    Fair
Value
   Carrying
Amount
    Fair
Value
 
                           Revised        

Notes 8.25%, matured fiscal year 2008

   $ —        $ —      $ —        $ —      $ 84,132      $ 84,132   

Notes 7.50%, maturing fiscal year 2010

     22,859        22,173      45,872        36,698      45,872        40,367   

Notes 9.875%, maturing fiscal year 2011

     141,557        142,973      141,557        99,090      141,557        115,369   

Notes 7.00%, maturing fiscal year 2013

     2,922        2,571      2,922        1,753      2,922        2,454   

Notes 7.375%, maturing fiscal year 2019

     1,911        1,395      1,911        993      1,911        1,452   

Convertible Notes 7.50%, maturing fiscal year 2013, net (1)

     99,587        156,744      —          —        —          —     

Convertible Notes 2.00%, maturing fiscal year 2024, net (2)

     193,093        183,713      187,703        89,125      185,960        97,676   

Revolving credit facility

     —          —        156,675        156,675      80,625        80,625   

Terminated interest rate swap agreements, net (3)

     16        N/A      53        N/A      61        N/A   

Capital lease obligations (4)

     57,508        N/A      61,083        N/A      62,180        N/A   
                                              

Total debt

     519,453        509,569      597,776        384,334      605,220        422,075   

Less current portion:

              

Notes 8.25%, matured fiscal year 2008

   $ —        $ —      $ —        $ —      $ (84,132   $ (84,132

Capital lease obligations (4)

     (4,847     N/A      (4,673     N/A      (4,672     N/A   
                                              

Current portion of long-term debt

     (4,847     —        (4,673     —        (88,804     (84,132

Long-term debt

   $ 514,606      $ 509,569    $ 593,103      $ 384,334    $ 516,416      $ 337,943   
                                              

 

(1) Amount represents the $120,000 convertible notes, net of the unamortized discount of $20,413 as of October 31, 2009.

 

(2) Amount represents the $230,000 convertible notes, net of the unamortized discount of $36,907, $42,297, and $44,040 as of October 31, 2009, January 31, 2009, and November 1, 2008, respectively.

 

(3) The fair value of the terminated interest rate swaps is considered immaterial.

 

(4) Disclosure regarding fair value of capital leases is not required.

The fair values of the long-term debt were estimated based on quotes obtained from financial institutions for those or similar instruments or on the basis of quoted market prices. For variable rate notes that reprice frequently, such as the Company’s revolving credit agreement, fair value approximates carrying value.

REVOLVING CREDIT AGREEMENT

The Company has a $500,000 revolving credit facility maturing in 2011, subject to a borrowing base equal to a specified percentage of eligible inventory and certain credit card receivables. At October 31, 2009, the Company had $500,000 of borrowing capacity under the revolving credit facility. At October 31, 2009, the Company had no direct outstanding borrowings and had letters of credit outstanding of $23,268. The obligations under the facility are guaranteed by certain of the Company’s existing and future domestic subsidiaries, and the obligations are secured by the Company’s and the guarantors’ merchandise inventories and certain third party accounts receivable. Borrowings under the facility bear interest at a per annum rate of either LIBOR plus a percentage ranging from 1.00% to 1.50% or at the higher of the prime rate and federal funds rate. Letters of credit are charged a per annum fee equal to the then applicable LIBOR borrowing spread (for standby letters of credit) or fifty percent of the LIBOR borrowing spread (for

 

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documentary or commercial letters of credit). The Company also pays an unused line fee of 0.25% per annum on the average daily unused revolver.

During periods in which availability under the agreement is $60,000 or more, the Company is not subject to financial covenants. If and when availability under the agreement decreases to less than $60,000, the Company will be subject to a minimum fixed charge coverage ratio of 1 to 1. There is no debt rating trigger. As of October 31, 2009, the Company was not subject to the minimum fixed charge coverage ratio.

The revolving credit agreement restricts additional debt to specific categories including the following (each category being subject to limitations as described in the revolving credit agreement): debt arising from permitted sale and leaseback transactions; debt to finance purchases of machinery, equipment, real estate and other fixed assets; debt in connection with permitted acquisitions; and unsecured debt. The revolving credit agreement also places certain restrictions on, among other things, asset sales, the ability to make acquisitions and investments, and to pay dividends. The credit agreement contains default provisions that are typical for this type of financing, including a provision that would trigger a default under the credit agreement if a default were to occur in another debt instrument resulting in the acceleration of principal of more than $20,000 under that other instrument.

On November 24, 2009, the Company entered into an amended and restated revolving credit agreement (see Note 11).

SENIOR NOTES

At October 31, 2009, the Company had $169,249 of unsecured senior notes outstanding, excluding the convertible notes, comprised of four separate series having maturities ranging from 2010 to 2019 and interest rates ranging from 7.000% to 9.875%. The senior notes are guaranteed by all of the subsidiaries that guarantee the Company’s credit facility and have substantially identical terms except for the maturity dates and interest rates payable to investors. Subject to certain exceptions, the notes restrict the Company from incurring secured debt or entering into sale/leaseback transactions that are, in the aggregate greater than 15% (17.5% in the case of the notes due in 2013) of consolidated net tangible assets of the Company. The notes permit certain sale/leaseback transactions but place certain restrictions around the use of proceeds generated from a sale/leaseback transaction. The terms of each senior note require all principal to be repaid at maturity. There are no financial covenants associated with these notes, and there are no debt-rating triggers.

During June and July 2009, the Company extinguished $23,013 of its 7.5% senior notes that mature in December 2010. The repurchase of these notes resulted in a gain on extinguishment of debt of approximately $783 for the nine months ended October 31, 2009.

 

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CONVERTIBLE NOTES

7.5% Convertible Notes

The Company issued $120,000 of 7.5% convertible notes in May 2009 (the “7.5% Convertible Notes”). The 7.5% Convertible Notes mature in December 2013 and are convertible, at the option of the holders at any time, into shares of the Company’s common stock at a conversion rate of $5.54 per share of common stock (21,670 shares of common stock to be issued upon conversion). The Company can settle a conversion of the notes with shares and/or cash. Authoritative accounting literature requires the allocation of convertible debt proceeds between the liability component and the embedded conversion option (i.e., the equity component). The liability component of the debt instrument is accreted to par value using the effective interest method over the remaining life of the debt. The accretion is reported as a component of interest expense. The equity component is not subsequently revalued as long as it continues to qualify for equity treatment.

Upon issuance, the Company estimated the fair value of the liability component of the 7.5% Convertible Notes, assuming a 13% non-convertible borrowing rate, to be $97,994. The difference between the fair value and the principal amount of the 7.5% Convertible Notes was $22,006. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the 4.5 year period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense in future periods.

The following tables provide additional information about the Company’s 7.5% Convertible Notes.

 

     October 31,
2009

Carrying amount of the equity component (additional paid-in capital)

   $ 22,006

Principal amount of the 7.5% Convertible Notes

   $ 120,000

Unamortized discount of the liability component

   $ 20,413

Net carrying amount of liability component

   $ 99,587

 

     Three Months Ended     Nine Months Ended  
     October 31,
2009
    October 31,
2009
 

Effective interest rate on liability component

     12.9     12.9

Cash interest expense recognized

   $ 2,250      $ 3,850   

Non-cash interest expense recognized

   $ 956      $ 1,593   

The remaining period over which the unamortized discount will be recognized is 4.1 years. As of October 31, 2009, the if-converted value of the notes exceeded its principal amount by $1,571.

The 7.5% Convertible Notes were classified within “long-term debt” on the condensed consolidated balance sheet as of October 31, 2009 because the Company can settle the principal amount of the notes with shares and/or cash.

 

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2.0% Convertible Senior Notes

The Company issued $230,000 of 2.0% convertible senior notes in March 2004 (the “2.0% Convertible Notes”). The 2.0% Convertible Notes mature in 2024 and in certain circumstances, the provisions of the 2.0% Convertible Notes allow the holder to convert the notes to shares of the Company’s common stock at a conversion rate of $11.97 per share of common stock (19,219 shares of common stock to be issued upon conversion) subject to an anti-dilution adjustment. The Company can settle a conversion of the notes with shares and/or cash. The holders may convert the notes at the following times, among others: if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; if the credit ratings of the notes are below a certain threshold; or upon the occurrence of certain consolidations, mergers or share exchange transactions involving the Company. At October 31, 2009, the conversion criteria with respect to the credit rating requirements were met.

In connection with the issuance of the 2.0% Convertible Notes, the Company entered into a convertible note hedge and written call options on its common stock to reduce the Company’s exposure to dilution from the conversion of the 2.0% Convertible Notes. The terms and conditions of the note hedge include: strike price of $11.97; contract is indexed to 19,219 shares of the Company’s common stock; maturity dates of the hedge instruments range from March 24, 2011 to April 20, 2011. The terms of the written call options include: strike price of $13.81; contract is indexed to 19,219 shares of the Company’s common stock; maturity date of the written call option instruments is August 2, 2011. These transactions were accounted for as a net reduction of stockholders’ equity of approximately $25,000 in 2004. The estimated fair value of the convertible note hedge and written call option was $60, $0 and $3,052 at October 31, 2009, January 31, 2009 and November 1, 2008, respectively.

The 2.0% Convertible Notes are within the scope of ASC 470 related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), which was adopted by the Company on February 1, 2009, and which required retrospective application of its provisions. Upon adoption, the Company estimated the fair value of the liability component as of the date of issuance of its 2.0% Convertible Notes, assuming a 6.25% non-convertible borrowing rate, to be $158,148. The difference between the fair value and the principal amount of the 2.0% Convertible Notes was $71,852. This amount was retrospectively recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the ten-year period to the first put date of the 2.0% Convertible Notes in 2014 resulting in an increase in non-cash interest expense in prior and future periods.

The following tables set forth the effect of the retrospective application of ASC 470 related to the 2.0% Convertible Notes on certain previously reported items.

 

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Condensed Consolidated Statement of Income:

 

     Three Months Ended
November 1, 2008
    Nine Months Ended
November 1, 2008
 
     As
Reported (1)
    As
Revised
    As
Reported (1)
    As
Revised
 

Interest expense

   $ (9,961   $ (11,583   $ (29,970   $ (34,756

Loss from continuing operations before income taxes

   $ (22,843   $ (24,465   $ (40,117   $ (44,903

Provision (benefit) for income taxes for continuing operations

   $ 6,976      $ 6,328      $ (262   $ (2,175

Loss from continuing operations

   $ (29,819   $ (30,793   $ (39,855   $ (42,728

Net loss

   $ (42,755   $ (43,729   $ (56,187   $ (59,060

Per share amounts - Basic

        

Loss from continuing operations

   $ (0.22   $ (0.22   $ (0.29   $ (0.31

Net loss

   $ (0.31   $ (0.32   $ (0.41   $ (0.43

Per share amounts - Diluted

        

Loss from continuing operations

   $ (0.22   $ (0.22   $ (0.29   $ (0.31

Net loss

   $ (0.31   $ (0.32   $ (0.41   $ (0.43

 

(1) As revised for discontinued operations.

Condensed Consolidated Balance Sheets:

 

     November 1, 2008  
     As Reported    As Revised  

Property and equipment, net

   $ 1,072,990    $ 1,073,912   

Other assets

   $ 50,814    $ 49,344   

Deferred income taxes, net

   $ 100,758    $ 83,224   

Long-term debt

   $ 560,456    $ 516,416   

Additional paid-in capital

   $ 1,097,584    $ 1,140,612   

Retained earnings (accumulated deficit)

   $ 1,049    $ (16,021

The following tables provide additional information about the Company’s 2.0% Convertible Notes.

 

     October 31,
2009
   January 31,
2009
   November 1,
2008

Carrying amount of the equity component (additional paid-in capital)

   $ 71,852    $ 71,852    $ 71,852

Principal amount of the 2.0% Convertible Notes

   $ 230,000    $ 230,000    $ 230,000

Unamortized discount of the liability component

   $ 36,907    $ 42,297    $ 44,040

Net carrying amount of liability component

   $ 193,093    $ 187,703    $ 185,960

 

     Three Months Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Effective interest rate on liability component

     6.2     6.2     6.2     6.2

Cash interest expense recognized

   $ 1,150      $ 1,150      $ 3,450      $ 3,450   

Non-cash interest expense recognized

   $ 1,825      $ 1,716      $ 5,390      $ 5,069   

 

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The remaining period over which the unamortized discount will be recognized is 4.4 years. As of October 31, 2009, the if-converted value of the notes did not exceed its principal amount.

The 2.0% Convertible Notes were classified within “long-term debt” on the condensed consolidated balance sheet as of October 31, 2009 and November 1, 2008 because the Company can settle the principal amount of the notes with shares and/or cash.

NOTE 5 – EMPLOYEE BENEFIT PLANS

The Company sponsors a defined benefit cash balance pension plan and supplemental executive retirement plan (“SERP”) for certain employees of the Company. The Company amended the pension plan during 2006, freezing benefit accruals for all participants except those who have attained age 55 and completed 10 years of credited service as of January 1, 2007, who are considered to be non-highly compensated employees. In January 2009, the Company suspended future benefit accruals for all remaining participants in the plan, effective March 13, 2009. The Company generally funds pension costs currently, subject to regulatory funding requirements. The components of net periodic pension expense (benefit) related to the Company’s pension plan and SERP for the three and nine months ended October 31, 2009 and November 1, 2008 were as follows:

 

     Three Months Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Service cost

   $ 17      $ 169      $ 52      $ 507   

Interest cost

     2,111        2,123        6,332        6,369   

Expected return on plan assets

     (1,583     (3,037     (4,748     (9,111

Net amortization of losses and prior service costs

     677        184        2,030        552   
                                

Net periodic pension expense (benefit)

   $ 1,222      $ (561   $ 3,666      $ (1,683
                                

The Company expects no funding requirements in 2009.

NOTE 6 – FAIR VALUE MEASUREMENTS

The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

 

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Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions

The Company may also be required, from time to time, to measure certain other financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP.

As of October 31, 2009, the Company had no material assets or liabilities that required adjustments or write-downs.

NOTE 7 – SHAREHOLDERS’ EQUITY

The following table summarizes the changes in shareholders’ equity for the nine months ended October 31, 2009:

 

     Common
Stock
Shares
    Common
Stock
Amount
    Additional
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Shareholders’
Equity
 

Balance at January 31, 2009

   142,170      $ 14,218      $ 1,148,227      $ (115,423   $ (56,436   $ 990,586   

Net Loss

           (53,311       (53,311

Issuance of common stock, net

   15,087        1,509        94,630            96,139   

Dividend adjustment - cancelled restricted shares

         11            11   

Income tax impact related to employee stock plans

         (1,829         (1,829

Issuance of 7.5% Convertible Notes

         21,147            21,147   

Net activity under stock compensation plans

   2,371        237        (237         —     

Restricted shares withheld for taxes

   (64     (6     (232         (238

Stock-based compensation

         12,549            12,549   
                                              

Balance at October 31, 2009

   159,564      $ 15,958      $ 1,274,266      $ (168,734   $ (56,436   $ 1,065,054   
                                              

On July 30, 2009, the Company filed a universal shelf registration statement with the Securities and Exchange Commission (“SEC”) permitting the Company to issue securities, in one or more offerings, with a maximum aggregate offering price of $400,000. The shelf registration statement covers a variety of securities including common stock, preferred stock, warrants, and debt securities.

Under the universal shelf registration, the Company completed the public offering of approximately 14,925 shares of its common stock on October 6, 2009, at an offering price of $6.70 per share for $95,095 in proceeds, net of issuance costs.

During the nine months ended November 1, 2008, the Company repurchased and retired 2,949 shares of its common stock at an average price of $11.83 per share and total cost of approximately $34,889. There were no repurchases and retirements of common stock during the nine months ended October 31, 2009. At October 31, 2009, there were 32,709 shares remaining available for repurchase under the Company’s existing share repurchase program.

 

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NOTE 8 – STOCK-BASED COMPENSATION

The Company maintains an equity incentive plan for the granting of options, stock appreciation rights, performance shares, restricted stock, and other forms of equity awards to employees and directors. Options granted generally vest over a four-year period after grant and have an exercise life of seven to ten years from the grant date. Restricted stock and performance shares generally vest three to five years after the grant date, although the plan permits accelerated vesting in certain circumstances at the discretion of the Human Resources and Compensation Committee of the Board of Directors.

Compensation cost for restricted stock and performance shares that cliff vest is expensed straight line over the requisite service period. Restricted stock and performance shares with graded vesting features are treated as multiple awards based upon the vesting date. The Company records compensation costs for these awards straight line over the requisite service period for each separately vesting portion of the award. Compensation cost for stock option awards with graded vesting are expensed straight line over the requisite service period.

Total pre-tax stock-based compensation expense for the three and nine month periods ended October 31, 2009 was approximately $4,190 and $12,697, respectively, and total stock-based compensation expense for the three and nine month periods ended November 1, 2008 was approximately $3,299 and $11,572.

NOTE 9 – CONTINGENCIES

LEGAL CONTINGENCIES

The Company is involved in legal proceedings arising from its normal business activities and has accruals for losses where appropriate. Management believes that none of these legal proceedings will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

TAX MATTERS

The Company is routinely under audit by federal, state or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions and the allocation of income among various tax jurisdictions. Based on the current evaluations of tax filing positions, the Company believes it has adequately accrued for its tax exposures.

OTHER MATTERS

From time to time the Company has issued guarantees to landlords under leases of stores operated by its subsidiaries. Certain of these stores were sold in connection with the Southern Department Store Group and Northern Department Store Group transactions. If the purchasers fail to perform certain obligations under the leases guaranteed by the Company, the Company could have obligations to landlords under such guarantees. Based on the information currently available, management does not believe that its potential obligations under these lease guarantees would be material.

 

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NOTE 10 – CLUB LIBBY LU CLOSURE

In January 2009, the Company discontinued the operations of its CLL specialty store business, which consisted of 98 leased, mall-based stores, as CLL was no longer determined to be a strategic fit for the Company. The Company incurred charges of $44,521 in 2008 associated with the CLL store closings. The charges consisted of $16,993 for asset impairments, $14,045 in lease termination costs (net of a non-cash deferred rent benefit of $3,701), $6,965 in inventory liquidation costs, $5,074 in severance and personnel related costs and $1,444 in other closing costs.

The following table summarizes 2009 activity related to the discontinuation of the CLL business:

 

     Severance and
Personnel
Related Costs
    Lease
Termination
Costs
    Other
Closing
Costs
    Total  

Balance at January 31, 2009

   $ 3,651      $ 9,780      $ 172      $ 13,603   

Adjustments to the reserve

     —          156        —          156   

Cash payments

     (3,651     (9,234     (172     (13,057
                                

Balance at October 31, 2009

   $ —        $ 702      $ —        $ 702   
                                

NOTE 11 – SUBSEQUENT EVENTS

On November 24, 2009, the Company entered into an amended and restated revolving credit agreement (the “Amendment”). The maximum committed borrowing capacity of the amended facility remains at $500,000. The Amendment revises certain terms and covenants to the existing revolving credit facility. The Amendment extends the maturity date of this facility to November 22, 2013. While the borrowing capacity formula based on eligible collateral remains substantially unchanged, the new interest rates vary with usage and are in the range of LIBOR plus 3.5% to 4.0%. The facility is subject to no financial covenants unless the availability falls below $87,500. At that time, the Company is subject to a fixed charge coverage ratio of at least 1:1. The credit facility is available for working capital, the issuance of letters of credit, capital expenditures, and other general corporate purposes.

NOTE 12 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following tables present condensed consolidating financial information for: (1) Saks Incorporated and (2) on a combined basis, the guarantors of Saks Incorporated’s senior notes and revolving credit facility (which are all of the wholly owned subsidiaries of Saks Incorporated).

The condensed consolidating financial statements presented as of and for the three and nine-month periods ended October 31, 2009 and November 1, 2008 and as of January 31, 2009 reflect the legal entity compositions at the respective dates. The results of operations of CLL are presented as discontinued operations in the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the current and prior year periods. Additionally, certain prior period amounts have been revised to reflect the adoption of a new accounting standard related to the Company’s 2.0% Convertible Notes and the adjustment to Net Sales and SG&A to reflect all shipping and handling revenue in Net Sales (see Note 1).

 

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Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees. Borrowings and the related interest expense under the Company’s revolving credit agreement are allocated to Saks Incorporated and the guarantor subsidiaries under an intercompany revolving credit arrangement. There are also management and royalty fee arrangements among Saks Incorporated and these subsidiaries. At October 31, 2009, Saks Incorporated was the sole obligor for a majority of the Company’s long-term debt.

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT OCTOBER 31, 2009

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
   Guarantor
Subsidiaries
   Eliminations     Consolidated

ASSETS

          

Current Assets

          

Cash and cash equivalents

   $ 240    $ 6,882      $ 7,122

Merchandise inventories

        799,110        799,110

Other current assets

        89,846        89,846

Deferred income taxes, net

        30,971        30,971
                            

Total Current Assets

     240      926,809      —          927,049

Property and Equipment, net

        1,007,636        1,007,636

Deferred Income Taxes, net

     66,688      152,498        219,186

Other Assets

     6,354      18,299        24,653

Investment in and Advances to Subsidiaries

     1,460,597      —      $ (1,460,597  
                            

Total Assets

   $ 1,533,879    $ 2,105,242    $ (1,460,597   $ 2,178,524
                            

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Current Liabilities

          

Trade accounts payable

      $ 163,193      $ 163,193

Accrued expenses and other current liabilities

   $ 6,880      221,467        228,347

Current portion of long-term debt

        4,847        4,847
                            

Total Current Liabilities

     6,880      389,507      —          396,387

Long-Term Debt

     461,945      52,661        514,606

Other Long-Term Liabilities

        202,477        202,477

Investment by and Advances from Parent

        1,460,597    $ (1,460,597  

Shareholders’ Equity

     1,065,054           1,065,054
                            

Total Liabilities and Shareholders’ Equity

   $ 1,533,879    $ 2,105,242    $ (1,460,597   $ 2,178,524
                            

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED OCTOBER 31, 2009

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

     $ 631,434        $ 631,434   

Cost of Sales

       376,799          376,799   
                                

Gross Margin

     —          254,635        —          254,635   

Selling, general and administrative expenses

   $ 228        162,324          162,552   

Other operating expenses

     1        75,754          75,755   

Store pre-opening costs

       534          534   

Impairments and dispositions

       185          185   
                                

Operating Income (Loss)

     (229     15,838        —          15,609   

Other income (expense)

        

Equity in earnings of subsidiaries

     13,235        $ (13,235  

Interest expense

     (11,109     (1,722       (12,831

Other income, net

     23            23   
                                

Income from continuing operations before provision (benefit) for income taxes

     1,920        14,116        (13,235     2,801   

Provision (benefit) for income taxes

     (4,413     881          (3,532
                                

Income from continuing operations

   $ 6,333      $ 13,235      $ (13,235   $ 6,333   

Discontinued Operations:

        

Equity in earnings of subsidiaries—discontinued operations (net of tax)

     (15       15     

Loss from discontinued operations before benefit for income taxes

       (23       (23

Benefit for income taxes

       (8       (8
                                

Loss from discontinued operations

     (15     (15     15        (15

Net Income

   $ 6,318      $ 13,220      $ (13,220   $ 6,318   
                                

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED OCTOBER 31, 2009

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations    Consolidated  

Net sales

     $ 1,820,218         $ 1,820,218   

Cost of Sales

       1,153,177           1,153,177   
                               

Gross Margin

     —          667,041        —        667,041   

Selling, general and administrative expenses

   $ 699        478,050           478,749   

Other operating expenses

     3        235,823           235,826   

Store pre-opening costs

       1,900           1,900   

Impairments and dispositions

       454           454   
                               

Operating Loss

     (702     (49,186     —        (49,888

Other income (expense)

         

Equity in earnings of subsidiaries

     (35,110     $ 35,110   

Interest expense

     (30,442     (5,169        (35,611

Gain on extinguishment of debt

     783             783   

Other income, net

     973             973   
                               

Loss from continuing operations before benefit for income taxes

     (64,498     (54,355     35,110      (83,743

Benefit for income taxes

     (11,461     (19,245        (30,706
                               

Loss from continuing operations

   $ (53,037   $ (35,110   $ 35,110    $ (53,037

Discontinued Operations:

         

Equity in earnings of subsidiaries—discontinued operations (net of tax)

     (274       274   

Loss from discontinued operations before benefit for income taxes

       (421        (421

Benefit for income taxes

       (147        (147
                               

Loss from discontinued operations

     (274     (274     274      (274

Net Loss

   $ (53,311   $ (35,384   $ 35,384    $ (53,311
                               

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 31, 2009

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

OPERATING ACTIVITIES

        

Net Loss

   $ (53,311   $ (35,384   $ 35,384      $ (53,311

Loss from discontinued operations

     (274     (274     274        (274
                                

Loss from continuing operations

     (53,037     (35,110     35,110        (53,037

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Equity in earnings of subsidiaries

     35,110          (35,110     —     

Depreciation and amortization

       102,371          102,371   

Impairments and dispositions

       454          454   

Gain on extinguishment of debt

     (783         (783

Equity compensation

     12,697            12,697   

Amortization of discount on convertible senior notes

     6,983            6,983   

Deferred income taxes

     1,433        (29,544       (28,111

Gain on sale of property

       (628       (628

Changes in operating assets and liabilities, net

     (436     3,451          3,015   
                                

Net Cash Provided By Operating Activities - Continuing Operations

     1,967        40,994        —          42,961   

Net Cash Used In Operating Activities - Discontinued Operations

       (13,613       (13,613
                                

Net Cash Provided By Operating Activities

     1,967        27,381        —          29,348   

INVESTING ACTIVITIES

        

Purchases of property and equipment

       (61,356       (61,356

Proceeds from the sale of property and equipment

       643          643   
                                

Net Cash Used In Investing Activities - Continuing Operations

     —          (60,713     —          (60,713

Net Cash Used In Investing Activities - Discontinued Operations

       —            —     
                                

Net Cash Used In Investing Activities

     —          (60,713     —          (60,713

FINANCING ACTIVITIES

        

Intercompany borrowings, contributions and distributions

     (33,752     33,752          —     

Proceeds from issuance of convertible senior notes

     120,000            120,000   

Payment of deferred financing costs

     (4,686         (4,686

Payments on revolving credit facility

     (156,675         (156,675

Payments on long-term debt and capital lease obligations

     (22,208     (3,575       (25,783

Cash dividends paid

     (781         (781

Net proceeds from issuance of common stock

     96,139            96,139   
                                

Net Cash Provided By (Used In) Financing Activities - Continuing Operations

     (1,963     30,177        —          28,214   

Net Cash Provided By (Used In) Financing Activities - Discontinued Operations

       —            —     
                                

Net Cash Provided By (Used In) Financing Activities

     (1,963     30,177        —          28,214   

Increase (Decrease) in Cash and Cash Equivalents

     4        (3,155       (3,151

Cash and Cash Equivalents at beginning of period

     236        10,037          10,273   
                                

Cash and Cash Equivalents at end of period

   $ 240      $ 6,882      $ —        $ 7,122   
                                

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT NOVEMBER 1, 2008

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
   Guarantor
Subsidiaries
   Eliminations     Consolidated

ASSETS

          

Current Assets

          

Cash and cash equivalents

   $ 10,510    $ 9,498      $ 20,008

Merchandise inventories

        1,016,192        1,016,192

Other current assets

        119,917        119,917

Deferred income taxes, net

        35,954        35,954
                            

Total Current Assets

     10,510      1,181,561      —          1,192,071

Property and Equipment, net

        1,073,912        1,073,912

Deferred Income Taxes, net

     59,877      23,347        83,224

Other Assets

     4,284      45,060        49,344

Investment in and Advances to Subsidiaries

     1,599,968      —      $ (1,599,968  
                            

Total Assets

   $ 1,674,639    $ 2,323,880    $ (1,599,968   $ 2,398,551
                            

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Current Liabilities

          

Trade accounts payable

      $ 250,353      $ 250,353

Accrued expenses and other current liabilities

   $ 7,803      252,002        259,805

Current portion of long-term debt

     84,132      4,672        88,804
                            

Total Current Liabilities

     91,935      507,027      —          598,962

Long-Term Debt

     458,908      57,508        516,416

Other Long-Term Liabilities

        159,377        159,377

Investment by and Advances from Parent

        1,599,968    $ (1,599,968  

Shareholders’ Equity

     1,123,796           1,123,796
                            

Total Liabilities and Shareholders’ Equity

   $ 1,674,639    $ 2,323,880    $ (1,599,968   $ 2,398,551
                            

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED NOVEMBER 1, 2008

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations    Consolidated  

Net sales

     $ 690,297         $ 690,297   

Cost of Sales

       443,968           443,968   
                               

Gross Margin

     —          246,329        —        246,329   

Selling, general and administrative expenses

   $ 167        180,693           180,860   

Other operating expenses

     2,008        76,866           78,874   

Store pre-opening costs

       823           823   

Impairments and dispositions

       141           141   
                               

Operating Loss

     (2,175     (12,194     —        (14,369

Other income (expense)

         

Equity in earnings of subsidiaries

     (24,423     $ 24,423   

Interest expense

     (9,754     (1,829        (11,583

Other income, net

     1,487             1,487   
                               

Loss from continuing operations before provision (benefit) for income taxes

     (34,865     (14,023     24,423      (24,465

Provision (benefit) for income taxes

     (4,072     10,400           6,328   
                               

Loss from continuing operations

   $ (30,793   $ (24,423   $ 24,423    $ (30,793

Discontinued Operations:

         

Equity in earnings of subsidiaries – discontinued operations (net of tax)

     (12,936       12,936   

Loss from discontinued operations before benefit for income taxes

       (20,740        (20,740

Benefit for income taxes

       (7,804        (7,804
                               

Loss from discontinued operations

     (12,936     (12,936     12,936      (12,936

Net Loss

   $ (43,729   $ (37,359   $ 37,359    $ (43,729
                               

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED NOVEMBER 1, 2008

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations    Consolidated  

Net sales

     $ 2,203,856         $ 2,203,856   

Cost of Sales

       1,400,727           1,400,727   
                               

Gross Margin

     —          803,129        —        803,129   

Selling, general and administrative expenses

   $ 774        574,518           575,292   

Other operating expenses

     2,020        236,408           238,428   

Store pre-opening costs

       1,350           1,350   

Impairments and dispositions

       1,380           1,380   
                               

Operating Loss

     (2,794     (10,527     —        (13,321

Other income (expense)

         

Equity in earnings of subsidiaries

     (25,122     $ 25,122   

Interest expense

     (29,242     (5,514        (34,756

Other income, net

     3,174             3,174   
                               

Loss from continuing operations before provision (benefit) for income taxes

     (53,984     (16,041     25,122      (44,903

Provision (benefit) for income taxes

     (11,256     9,081           (2,175
                               

Loss from continuing operations

   $ (42,728   $ (25,122   $ 25,122    $ (42,728

Discontinued Operations:

         

Equity in earnings of subsidiaries – discontinued operations (net of tax)

     (16,332       16,332   

Loss from discontinued operations before benefit for income taxes

       (25,951        (25,951

Benefit for income taxes

       (9,619        (9,619
                               

Loss from discontinued operations

     (16,332     (16,332     16,332      (16,332

Net Loss

   $ (59,060   $ (41,454   $ 41,454    $ (59,060
                               

 

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Table of Contents

SAKS INCORPORATED

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED NOVEMBER 1, 2008

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

OPERATING ACTIVITIES

        

Net Loss

   $ (59,060   $ (41,454   $ 41,454      $ (59,060

Loss from discontinued operations

     (16,332     (16,332     16,332        (16,332
                                

Loss from continuing operations

     (42,728     (25,122     25,122        (42,728

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Equity in earnings of subsidiaries

     25,122          (25,122     —     

Depreciation and amortization

       96,094          96,094   

Impairments and dispositions

       1,380          1,380   

Equity compensation

     11,572            11,572   

Amortization of discount on convertible senior notes

     5,069            5,069   

Deferred income taxes

     1,387        3,916          5,303   

Gain on sale of land

     (1,217         (1,217

Changes in operating assets and liabilities, net

     (59,186     (50,934       (110,120
                                

Net Cash Provided By (Used In) Operating Activities - Continuing Operations

     (59,981     25,334        —          (34,647

Net Cash Provided By Operating Activities - Discontinued Operations

       2,159          2,159   
                                

Net Cash Provided By (Used In) Operating Activities

     (59,981     27,493        —          (32,488

INVESTING ACTIVITIES

        

Purchases of property and equipment

       (91,824       (91,824

Proceeds from the sale of property and equipment

       1,339          1,339   
                                

Net Cash Used In Investing Activities - Continuing Operations

     —          (90,485     —          (90,485

Net Cash Used In Investing Activities - Discontinued Operations

       (1,876       (1,876
                                

Net Cash Used In Investing Activities

     —          (92,361     —          (92,361

FINANCING ACTIVITIES

        

Intercompany borrowings, contributions and distributions

     (62,709     62,709          —     

Proceeds from revolving credit facility

     80,625            80,625   

Payments on long-term debt and capital lease obligations

       (4,013       (4,013

Cash dividends paid

     (1,187         (1,187

Purchases and retirements of common stock

     (34,889         (34,889

Proceeds from the issuance of common stock

     3,159            3,159   
                                

Net Cash Provided By (Used In) Financing Activities - Continuing Operations

     (15,001     58,696        —          43,695   

Net Cash Provided By (Used In) Financing Activities - Discontinued Operations

       —            —     
                                

Net Cash Provided By (Used In) Financing Activities

     (15,001     58,696        —          43,695   

Decrease in Cash and Cash Equivalents

     (74,982     (6,172       (81,154

Cash and Cash Equivalents at beginning of period

     85,492        15,670          101,162   
                                

Cash and Cash Equivalents at end of period

   $ 10,510      $ 9,498      $ —        $ 20,008   
                                

 

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SAKS INCORPORATED

CONDENSED CONSOLIDATING BALANCE SHEETS AT JANUARY 31, 2009

(Dollar Amounts In Thousands)

 

     Saks
Incorporated
   Guarantor
Subsidiaries
   Eliminations     Consolidated

ASSETS

          

Current Assets

          

Cash and cash equivalents

   $ 236    $ 10,037      $ 10,273

Merchandise inventories

        728,841        728,841

Other current assets

        105,350        105,350

Deferred income taxes, net

        29,916        29,916
                            

Total Current Assets

     236      874,144      —          874,380

Property and Equipment, net

        1,058,393        1,058,393

Deferred Income Taxes, net

     55,227      139,729        194,956

Other Assets

     3,614      16,334        19,948

Investment in and Advances to Subsidiaries

     1,476,437      —      $ (1,476,437  
                            

Total Assets

   $ 1,535,514    $ 2,088,600    $ (1,476,437   $ 2,147,677
                            

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Current Liabilities

          

Trade accounts payable

      $ 90,208      $ 90,208

Accrued expenses and other current liabilities

   $ 8,235      267,312        275,547

Current portion of long-term debt

        4,673        4,673
                            

Total Current Liabilities

     8,235      362,193      —          370,428

Long-Term Debt

     536,693      56,410        593,103

Other Long-Term Liabilities

        193,560        193,560

Investment by and Advances from Parent

        1,476,437    $ (1,476,437  

Shareholders’ Equity

     990,586           990,586
                            

Total Liabilities and Shareholders’ Equity

   $ 1,535,514    $ 2,088,600    $ (1,476,437   $ 2,147,677
                            

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis (“MD&A”) is intended to provide an analytical view of the business from management’s perspective and has four major components:

 

   

Management’s Overview

 

   

Results of Operations

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Policies

MD&A should be read in conjunction with the condensed consolidated financial statements and related notes thereto contained elsewhere in this report.

MANAGEMENT’S OVERVIEW

GENERAL

The operations of Saks Incorporated and its subsidiaries (together the “Company”) consist of Saks Fifth Avenue (“SFA”), Saks Fifth Avenue OFF 5th (“OFF 5 th”), and SFA’s e-commerce operations. Previously, the Company also operated Club Libby Lu (“CLL”), the operations of which were discontinued in January 2009. The Company is primarily a fashion retail organization offering a wide assortment of distinctive luxury fashion apparel, shoes, accessories, jewelry, cosmetics and gifts. SFA stores are principally free-standing stores in exclusive shopping destinations or anchor stores in upscale regional malls. Customers may also purchase SFA products by catalog or online at www.saks.com. OFF 5th is intended to be the premier luxury off-price retailer in the United States. OFF 5th stores are primarily located in upscale mixed-use and off-price centers and offer luxury apparel, shoes, and accessories, targeting the value-conscious customer. As of October 31, 2009, Saks operated 53 SFA stores with 5.9 million square feet and 55 OFF 5th stores with 1.6 million square feet.

FINANCIAL PERFORMANCE SUMMARY

The Company recorded net income of $6.3 million, or $0.04 per share for the three months ended October 31, 2009. For the three months ended November 1, 2008, the Company recorded a net loss of $43.7 million, or $0.32 per share. Excluding the after-tax loss from discontinued operations of $12.9 million, or $0.10 per share, the Company recorded a net loss from continuing operations of $30.8 million, or $0.22 per share, for the three months ended November 1, 2008.

The three-month period ended October 31, 2009 included an income tax benefit related to the reversal of a reserve for an uncertain tax position of $4.4 million, or $.03 per share.

 

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The three-month period ended November 1, 2008 included charges of $13.9 million (net of taxes), or $0.10 per share, primarily related to a write-off and adjustment of $14.6 million of certain deferred tax assets primarily associated with Federal Net Operating Loss (“NOL”) tax credits that were subject to expiration at the end of fiscal 2008. The prior year third quarter also included an after tax gain of $0.7 million related to the sale of a vacant real estate parcel.

The Company believes that an understanding of its reported financial condition and results of operations is not complete without considering the effect of all other components of MD&A included herein.

RESULTS OF OPERATIONS

The following table shows, for the periods indicated, items from the Company’s Condensed Consolidated Statements of Income expressed as percentages of net sales. (numbers may not total due to rounding)

 

     Three Months Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
           Revised           Revised  

Net sales

   100.0   100.0   100.0   100.0

Cost of sales

   59.7   64.3   63.4   63.6

Gross margin

   40.3   35.7   36.6   36.4

Selling, general & administrative expenses

   25.7   26.2   26.3   26.1

Other operating expenses

   12.0   11.4   13.0   10.8

Store pre-opening costs

   0.1   0.1   0.1   0.1

Impairments and dispositions

   0.0   0.0   0.0   0.1

Operating income (loss)

   2.5   -2.1   -2.7   -0.6

Interest expense

   -2.0   -1.7   -2.0   -1.6

Gain on extinguishment of debt

   0.0   0.0   0.0   0.0

Other income, net

   0.0   0.2   0.1   0.1

Income (loss) from continuing operations before income taxes

   0.4   -3.5   -4.6   -2.0

Provision (benefit) for income taxes

   -0.6   0.9   -1.7   -0.1

Income (loss) from continuing operations

   1.0   -4.5   -2.9   -1.9

Discontinued Operations:

        

Loss from discontinued operations

   0.0   -3.0   0.0   -1.2

Benefit for income taxes

   0.0   -1.1   0.0   -0.4

Loss from discontinued operations

   0.0   -1.9   0.0   -0.7

Net Income (loss)

   1.0   -6.3   -2.9   -2.7

 

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THREE MONTHS ENDED OCTOBER 31, 2009 COMPARED TO THREE MONTHS ENDED NOVEMBER 1, 2008

DISCUSSION OF OPERATING INCOME (LOSS)—CONTINUING OPERATIONS

The following table shows the changes in operating income (loss) from continuing operations for the three-month period ended November 1, 2008 compared to the three-month period ended October 31, 2009:

 

(In Millions)

   Total
Company
 

For the three months ended November 1, 2008

   $ (14.4

Store sales and margin

     8.3   

Operating expenses

     21.7   

Impairments and dispositions

     —     
        

Increase

     30.0   
        

For the three months ended October 31, 2009

   $ 15.6   
        

For the three month period ended October 31, 2009, operating income was $15.6 million compared to operating loss of $14.4 million for the same period last year. The $30.0 million increase in operating income for the quarter was driven by 460 basis point increase in the year-over-year gross margin rate resulting from controlled inventory levels and a more disciplined promotional and clearance cadence during the current quarter. The increase in operating income was also due to a year-over-year reduction in SG&A of $18.3 million attributable to reduced variable selling expenses associated with the comparable store sales decline of 10.1% and other cost savings initiatives implemented by the Company.

NET SALES

For the three months ended October 31, 2009, total net sales decreased 8.5% to $631.4 million from $690.3 million for the three months ended November 1, 2008. Similarly, consolidated comparable store sales decreased $68.3 million, or 10.1%, from $678.6 million for the three months ended November 1, 2008 to $610.3 million for the three months ended October 31, 2009. The Company experienced continued weakness during the quarter, although there were modestly improving trends in each month of the quarter.

Comparable store sales are determined on a rolling 13-month basis. Thus, to be included in the comparison, a store must be open for 13 months. The additional month is used to transition the first month impact of a new store opening. Correspondingly, closed stores are removed from the comparable store sales comparison when they begin liquidating merchandise. Expanded, remodeled and converted stores are included in the comparable store sales comparison, except for the periods in which they are closed for remodeling and renovation.

GROSS MARGIN

For the three months ended October 31, 2009, gross margin was $254.6 million, or 40.3% of net sales, compared to $246.3 million, or 35.7% of net sales, for the three months ended November 1, 2008. The Company’s gross margin rate increased 460 basis points in the quarter primarily as a result of controlled inventory levels and a more disciplined promotional and clearance cadence during the current quarter. In 2008, the Company accelerated certain markdowns into the third quarter from the fourth quarter which

 

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negatively impacted the prior year third quarter gross margin rate by approximately 190 basis points.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three months ended October 31, 2009, SG&A was $162.6 million, or 25.7% of net sales, compared to $180.9 million, or 26.2% of net sales, for the three months ended November 1, 2008. The $18.3 million decrease was principally related to lower variable costs associated with the $58.9 million sales decrease, as well as other cost savings initiatives implemented by the Company.

OTHER OPERATING EXPENSES

For the three months ended October 31, 2009, other operating expenses, including property and equipment rentals, depreciation and amortization, taxes other than income taxes and store pre-opening costs, were $76.3 million, or 12.1% of net sales, compared to $79.7 million, or 11.5% of net sales, for the three months ended November 1, 2008. As a percent of sales, other operating expenses increased 50 basis points in 2009, reflecting the rate deleverage caused by the 10.1% comparable store sales decline in the current year third quarter.

IMPAIRMENTS AND DISPOSITIONS

For the three months ended October 31, 2009, the Company recorded losses from impairments and dispositions of $0.2 million, compared to a loss of $0.1 million for the three months ended November 1, 2008. The current and prior quarter net charges were primarily due to asset dispositions in the normal course of business.

INTEREST EXPENSE

For the three months ended October 31, 2009, interest expense was $12.8 million, or 2.0% of net sales, compared to $11.6 million, or 1.7% of net sales, for the three months ended November 1, 2008. The increase in interest expense was primarily due to the issuance of $120.0 million of convertible notes in May 2009 partially offset by the extinguishment of $23.0 million of senior notes in July 2009 and the retirement of $84.1 million of senior notes in November 2008. Non-cash interest expense associated with the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470 (“ASC 470”) was $2.8 million and $1.7 million for the three months ended October 31, 2009 and November 1, 2008, respectively.

INCOME TAXES

The effective income tax rate from continuing operations for the three-month periods ended October 31, 2009 and November 1, 2008 was (126.1%) and (25.9%), respectively. The effective tax rate for the three-month period ended October 31, 2009 was primarily

 

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due to the reversal of a reserve for an uncertain tax position of $4.4 million. The effective tax rate for the three-month period ended November 1, 2008 was primarily due to the write-off of a deferred tax asset associated with a Federal NOL, which expired in 2008 and an increase in the state valuation allowance associated with state NOL carryforwards, reducing the expected tax benefit of the pre-tax losses in that period.

Our consolidated balance sheet as of October 31, 2009 includes a gross deferred tax asset of $175.6 million related to U.S. federal and state net operating loss and alternative minimum tax credit carryforwards. The majority of the net operating loss carryforward is a result of the net operating loss incurred during the fiscal year ended January 31, 2009 due principally to difficult market and macroeconomic conditions. We have concluded, based on the weight of all available positive and negative evidence, that all but $48.1 million of these tax benefits relating to certain state losses are more likely than not to be realized in the future. Therefore, a valuation allowance for the $48.1 million has been established. During the quarter ended October 31, 2009, the valuation allowance was evaluated on a jurisdiction-by-jurisdiction basis which resulted in no change to the overall valuation allowance based on projections of future profitability. While the Company has incurred a cumulative loss over the three years ended October 31, 2009, after evaluating all available evidence including our past operating results, the macroeconomic factors contributing to the most recent fiscal year loss, the length of the carryforward periods available, and our forecast of future taxable income, including the implementation of prudent and feasible tax planning strategies, we concluded that it is more likely than not the net deferred tax asset will be realized. We will continue to assess the need for additional valuation allowance in the future. If future results are less than projected or tax planning alternatives are no longer viable, then additional valuation allowance may be required to reduce the deferred tax assets which could have a material impact on our results of operations in the period in which it is recorded.

NINE MONTHS ENDED OCTOBER 31, 2009 COMPARED TO NINE MONTHS ENDED NOVEMBER 1, 2008

DISCUSSION OF OPERATING LOSS – CONTINUING OPERATIONS

The following table shows the changes in operating loss from continuing operations for the nine-month period ended November 1, 2008 compared to the nine-month period ended October 31, 2009:

 

(In Millions)

   Total
Company
 

For the nine months ended November 1, 2008

   $ (13.3

Store sales and margin

     (136.1

Operating expenses

     98.6   

Impairments and dispositions

     0.9   
        

Decrease

     (36.6
        

For the nine months ended October 31, 2009

   $ (49.9
        

 

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For the nine month period ended October 31, 2009, operating loss was $49.9 million compared to operating loss of $13.3 million for the same period last year. The $36.6 million increase in operating loss for the nine months was primarily driven by a $136.1 million decrease in gross margin resulting from a comparable store sales decline of 18.5%. This is partially offset by a year-over-year reduction in SG&A of $96.5 million, primarily attributable to reduced variable selling expenses associated with the sales decline and other cost savings initiatives implemented by the Company.

NET SALES

For the nine months ended October 31, 2009, total net sales decreased 17.4% to $1,820.2 million from $2,203.9 million for the nine months ended November 1, 2008. Similarly, consolidated comparable store sales decreased $400.4 million, or 18.5%, from $2,163.6 million for the nine months ended November 1, 2008 to $1,763.2 million for the nine months ended October 31, 2009.

GROSS MARGIN

For the nine months ended October 31, 2009, gross margin was $667.0 million, or 36.6% of net sales, compared to $803.1 million, or 36.4% of net sales, for the nine months ended November 1, 2008. The Company’s gross margin rate is slightly better than the prior year driven by a 460 basis point increase in the current quarter offset by a year over year decrease for the six months ended August 1, 2009.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the nine months ended October 31, 2009, SG&A was $478.7 million, or 26.3% of net sales, compared to $575.3 million, or 26.1% of net sales, for the nine months ended November 1, 2008. The $96.5 million decrease was principally related to lower variable selling expenses associated with the comparable sales decline of 18.5%, as well as other cost savings initiatives implemented by the Company.

OTHER OPERATING EXPENSES

For the nine months ended October 31, 2009, other operating expenses, including property and equipment rentals, depreciation and amortization, taxes other than income taxes and store pre-opening costs, were $237.7 million, or 13.1% of net sales, compared to $239.8 million, or 10.9% of net sales, for the nine months ended November 1, 2008. As a percent of sales, other operating expenses increased 220 basis points in 2009, reflecting the rate deleverage caused by the 18.5% comparable store sales decline in the nine months ended October 31, 2009.

 

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IMPAIRMENTS AND DISPOSITIONS

For the nine months ended October 31, 2009, the Company recorded losses from impairments and dispositions of $0.5 million, compared to a loss of $1.4 million for the nine months ended November 1, 2008. The current and prior quarter net charges were primarily due to asset dispositions in the normal course of business.

INTEREST EXPENSE

For the nine months ended October 31, 2009, interest expense was $35.6 million, or 2.0% of net sales, compared to $34.8 million, or 1.6% of net sales, for the nine months ended November 1, 2008. The increase in interest expense was primarily due to the issuance of $120.0 million of convertible notes in May 2009 offset by the extinguishment of $23.0 million of senior notes in July 2009 and the retirement of $84.1 million of senior notes in November 2008. Non cash interest expense associated with the adoption of ASC 470 was $7.0 million and $5.1 million for the nine months ended October 31, 2009 and November 1, 2008, respectively.

INCOME TAXES

The effective income tax rate for continuing operations for the nine-month periods ended October 31, 2009 and November 1, 2008 was 36.7% and 4.8%, respectively. The effective tax rate for the nine-month period ended October 31, 2009 was primarily due to the reversal of a reserve for an uncertain tax position of $4.4 million off-set by an increase in the state valuation allowance of $5.9 million associated with state NOL carryforwards recorded in the 3-month period ended August 1, 2009. The effective tax rate for the nine-month period ended November 1, 2008 was primarily due to the write-off of a deferred tax asset associated with a Federal NOL reducing the expected tax benefit of the pre-tax losses in that period.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

The primary needs for cash are to fund operations, acquire or construct new stores, renovate and expand existing stores, provide working capital for new and existing stores, invest in technology and distribution centers and service debt. The Company anticipates that cash on hand, cash generated from operating activities and borrowings under its revolving credit facility will be sufficient to sustain its current level of operations.

Cash provided by (used in) operating activities from continuing operations was $43.0 million for the nine months ended October 31, 2009 and ($34.6) million for the nine months ended November 1, 2008. Cash provided by (used in) operating activities principally represents income before depreciation and non-cash charges and changes in working capital. Working capital is significantly impacted by changes in inventory and accounts payable. Inventory levels typically increase or decrease to support expected sales levels and accounts payable fluctuations are generally determined by the timing of merchandise purchases and payments. The $77.6 million year-over-year increase in operating cash flows from continuing operations was driven by the changes in working capital, primarily

 

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attributable to the decrease in inventory levels during the nine months ended October 31, 2009 resulting from the Company’s effort to more closely align inventories with current consumption trends and consistent with the 18.5% decrease in comparable store sales for the period. Net cash used in operating activities for discontinued operations was $13.6 million for the nine months ended October 31, 2009 and was primarily related to the payment of severance, lease termination and other closing costs associated with the January 2009 CLL store closings.

Cash used in investing activities for continuing operations was $60.7 million for the nine months ended October 31, 2009 and $90.5 million for the nine months ended November 1, 2008. Cash used in investing activities principally consists of construction of new stores, renovation and expansion of existing stores and investments in support areas (e.g., technology and distribution centers). The $29.8 million decrease in cash used in investing activities for continuing operations is primarily due to a decrease in capital expenditures in the current year.

Cash provided by financing activities from continuing operations was $28.2 million for the nine months ended October 31, 2009 and $43.7 million for the nine months ended November 1, 2008. The current year cash provided by financing activities was driven by $115.3 million of proceeds, net of deferred financing costs, from the issuance of the 7.5% convertible notes and $95.1 million of proceeds, net of issuance costs, from the issuance of 14.9 million shares of the Company’s common stock. This was partially off-set by the repayment of borrowings under the revolving credit facility of $156.7 million, the early extinguishment of $23.0 million of 7.5% senior notes due in December 2010, and payment on capital lease obligations of $3.6 million. The prior year cash provided by financing activities primarily relates to $80.6 million in borrowing under the revolving credit facility partially off-set by the repurchase of approximately 2.9 million shares of common stock at a cost of approximately $34.9 million.

CASH BALANCES AND LIQUIDITY

The Company’s primary sources of short-term liquidity are cash on hand and availability under its $500 million revolving credit facility. At October 31, 2009, the Company had no direct borrowings under its revolving credit facility, and had $23.3 million in unfunded letters of credit. At October 31, 2009 and November 1, 2008, the Company maintained cash and cash equivalent balances of $7.1 million and $20.0 million, respectively. Exclusive of approximately $6.9 million and $9.5 million of store operating cash at October 31, 2009 and November 1, 2008, respectively, cash was invested principally in various money market funds. There was no restricted cash as of October 31, 2009 and November 1, 2008.

On July 30, 2009, the Company filed a universal shelf registration statement with the Securities and Exchange Commission permitting the Company to issue securities, in one or more offerings, with a maximum aggregate offering price of $400 million. The shelf registration statement covers a variety of securities including common stock, preferred stock, warrants, and debt securities. The filing, which became effective on August 13, 2009, allows the Company to access public markets if and when funds are needed.

 

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Under the universal shelf registration, the Company completed the public offering of approximately 14.9 million shares of its common stock on October 6, 2009, at an offering price of $6.70 per share for $95.1 million in proceeds, net of issuance costs.

On May 27, 2009, the Company issued $120.0 million of convertible notes due 2013, which bear cash interest semiannually at an annual rate of 7.5%. The notes are convertible at the option of holders at an initial conversion rate of 180.5869 shares of common stock per $1 thousand principal amount of notes into, at the Company’s election, cash, shares of the Company’s common stock, or a combination thereof. The Company received net proceeds from the notes of approximately $115.3 million after deducting initial purchasers’ discounts and offering expenses. The Company used the net proceeds to pay down amounts outstanding under its revolving credit facility and for general corporate purposes.

The Company is very focused on cash management and capital preservation and has implemented a number of actions in an effort to be free cash flow positive for fiscal 2009. The planned actions include a reduction in year over year capital expenditures, a reduction in year over year inventory purchases, a significant reduction in force that was implemented in January 2009, salary reductions for certain corporate employees which were effective in June 2009, and general operating expense reductions throughout the Company. Based on these actions and the fact that the Company has no maturities of debt until late 2010 and ample availability on its revolving credit facility, the Company expects to be cash flow positive for fiscal year 2009 and have sufficient liquidity to fund operations for the next twelve months.

There were no repurchases and retirements of common stock during the nine months ended October 31, 2009. At October 31, 2009, there were 32.7 million shares remaining available for repurchase under the Company’s existing share repurchase program. During the nine months ended November 1, 2008, the Company repurchased and retired 2.9 million shares of its common stock at an average price of $11.83 per share and total cost of approximately $34.9 million.

CAPITAL STRUCTURE

The Company continuously evaluates its debt-to-capitalization ratio in light of the economic trends, business trends, levels of interest rates, and terms, conditions and availability of capital in the capital markets. At October 31, 2009, the Company’s capital and financing structure was comprised of a revolving credit agreement, senior unsecured notes, convertible unsecured notes, and capital and operating leases. On October 31, 2009, total funded debt (including the equity component of the convertible notes) was $576.8 million, representing a decrease of $72.5 million from a balance of $649.3 million at November 1, 2008. This decrease was primarily

 

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related to a decrease of $80.6 million in outstanding borrowings from the revolving credit facility as of October 31, 2009, the extinguishment of $23.0 million of the 7.5% senior notes in June and July 2009, and the $84.1 million maturity of the 8.25% senior notes in November 2008. These decreases were partially offset by the issuance of $120.0 million ($99.6 million, net of current unamortized discount) of 7.5% convertible notes during the second quarter of 2009. The debt-to-capitalization ratio decreased to 36.4% from 37.6% in the prior year, as a result of the net decrease in debt in the current year and the issuance of 14.9 million shares in October 2009.

Senior Revolving Credit Facility

At October 31, 2009, the Company maintained a $500 million senior revolving credit facility maturing in 2011, which is secured by inventory and certain third party credit card accounts receivable. Borrowings are limited to a prescribed percentage of eligible inventories and receivables. The Company’s inventory position increases and decreases over time and this change will at times cause the revolver capacity to fall below the stated $500 million facility. There are no debt ratings-based provisions in the revolving credit facility. The facility includes a fixed-charge coverage ratio requirement of 1 to 1 that the Company is subject to only if availability under the facility becomes less than $60 million. At October 31, 2009, the Company was not subject to the fixed charge coverage ratio as its availability under the facility exceeded $60 million. The Company had unutilized availability under the facility of $416.7 million after deducting outstanding letters of credit at October 31, 2009 and excluding the last $60 million of availability due to the fixed charge ratio falling below the required 1 to 1 coverage. The facility contains default provisions that are typical for this type of financing, including a provision that would trigger a default under the facility if a default were to occur in another debt instrument resulting in the acceleration of principal of more than $20 million in that other instrument. At October 31, 2009, the Company had no direct outstanding borrowings under the revolving credit facility.

On November 24, 2009, the Company entered into an amended and restated revolving credit agreement (the “Amendment”). The maximum committed borrowing capacity of the amended facility remains at $500 million. The Amendment revises certain terms and covenants to the existing revolving credit facility. The Amendment extends the maturity date of this facility to November 22, 2013. While the borrowing capacity formula based on eligible collateral remains substantially unchanged, the new interest rates vary with usage and are in the range of LIBOR plus 3.5% to 4.0%. The facility is subject to no financial covenants unless the availability falls below $87.5 million. At that time, the Company is subject to a fixed charge coverage ratio of at least 1:1. The credit facility is available for working capital, the issuance of letters of credit, capital expenditures, and other general corporate purposes.

 

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Senior Notes

At October 31, 2009, the Company had $169.2 million of senior notes outstanding, excluding the convertible notes, comprising four separate series having maturities ranging from 2010 to 2019 and interest rates ranging from 7.00% to 9.88%. The terms of each senior note call for all principal to be repaid at maturity. The senior notes have substantially identical terms except for the maturity dates and interest rates payable to investors. Each senior note contains limitations on the amount of secured indebtedness the Company may incur. The Company believes it will have sufficient cash on hand, availability under its revolving credit facility and access to various capital markets to repay these notes at maturity.

7.5% Convertible Notes

The Company had $120 million of convertible notes, at October 31, 2009, that bear cash interest semiannually at an annual rate of 7.5% and mature in 2013. The provisions of the convertible notes allow the holder to convert the notes at any time to shares of the Company’s common stock at a conversion rate of 180.5869 shares per one thousand dollars in principal amount of notes. The Company can settle a conversion with shares and/or cash; or a combination thereof. The Company received net proceeds from the convertible notes of approximately $115.3 million after deducting initial purchasers’ discounts and offering expenses. The Company used the net proceeds to pay down amounts outstanding under its revolving credit facility and for general corporate purposes.

On February 1, 2009, the Company adopted the provisions of ASC 470 related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), which specifies that issuers of such instruments should separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.

Upon issuance of the convertible notes, the Company estimated the fair value of the liability component of the 7.5% convertible notes, assuming a 13% non-convertible borrowing rate, to be $98.0 million. The difference between the fair value and the principal amount of the 7.5% convertible notes was $22.0 million. This amount was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The current unamortized discount of $20.4 million is being accreted to interest expense over the remaining 4.1 year period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense in future periods.

The convertible notes were classified within “long-term debt” on the condensed consolidated balance sheet as of October 31, 2009 because the Company can settle the principal amount of the notes with shares and/or cash.

2.0% Convertible Senior Notes

The Company had $230 million of convertible senior notes at October 31, 2009, that bear interest at a rate of 2.0% per annum and mature in 2024. The provisions of the convertible notes allow the holder to convert the notes to shares of the Company’s common

 

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stock at a conversion rate of 83.5609 shares per one thousand dollars in principal amount of notes (subject to an anti-dilution adjustment). The holder may put the debt back to the Company in 2014 or 2019 and the Company can call the debt on or after March 11, 2011. The Company can settle a conversion of the notes with shares and/or cash. The holders may convert the notes at the following times, among others: if the Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; if the credit ratings of the notes are below a certain threshold; or upon the occurrence of certain consolidations, mergers or share exchange transactions involving the Company. At October 31, 2009, the conversion criteria with respect to the credit rating requirements were met.

The Company used approximately $25 million of the proceeds from the issuances to enter into a convertible note hedge and written call options on its common stock to reduce the exposure to dilution from the conversion of the notes. The Company believes it will have sufficient cash on hand, availability under its revolving credit facility and access to various capital markets to repay both the senior notes and convertible notes at maturity.

Upon adoption of the provisions of ASC 470 related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company estimated the fair value of the liability component, as of the date of issuance, of its 2.0% convertible senior notes assuming a 6.25% non-convertible borrowing rate to be $158.1 million. The difference between the fair value and the principal amount of the notes was $71.9 million. This amount was retrospectively recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the ten-year period from the issuance date to the first put date of the notes in 2014 resulting in an increase in non-cash interest expense in prior periods. The current unamortized discount of $36.9 million will be recognized over the remaining 4.4 year period.

The convertible notes were classified within “long-term debt” on the condensed consolidated balance sheet as of October 31, 2009 and November 1, 2008 because the Company can settle the principal amount of the notes with shares and/or cash.

Capital Leases

At October 31, 2009, the Company had $57.5 million in capital leases covering various properties and pieces of equipment. The terms of the capital leases provide the lessor with a security interest in the asset being leased and require the Company to make periodic lease payments, aggregating between $4 million and $6 million per year.

Pension Plan

The Company is obligated to fund a cash balance pension plan. The Company’s current policy is to maintain at least the minimum funding requirements specified by the Employee Retirement Income Security Act of 1974. The Company expects no funding

 

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requirements in 2009. The Company amended the SFA Pension Plan during 2006, freezing benefit accruals for all participants except those who have attained age 55 and completed 10 years of credited service as of January 1, 2007, who are considered to be non-highly compensated employees. In January 2009, the Company suspended future benefit accruals for all remaining participants in the plan, effective March 13, 2009.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet arrangements which would be reasonably likely to have a current or future material effect, such as obligations under certain guarantees or contracts, retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements, obligations under certain derivative arrangements, or obligations under material variable interests.

On April 15, 2003, the Company entered into a program agreement (“Program Agreement”) with Household Bank (SB), N.A. now known as HSBC Bank Nevada, N.A., (“HSBC”), pursuant to which HSBC owns and issues, to our customers, proprietary credit cards. Under the terms of the Program Agreement, HSBC assumes substantially all risks while sharing with the Company certain revenue generated by interest and fees on the portfolio. The Company and HSBC have entered into several amendments to the Program Agreement since 2003. On October 19, 2009, the Company and HSBC entered into a Fifth Amendment to the Program Agreement (the “Fifth Amendment”), in response to macroeconomic conditions and portfolio performance, which provides for certain changes to the allocation of risk and revenue sharing between the Parties (as defined in the Fifth Amendment). The Fifth Amendment, which becomes effective February 1, 2010, provides for HSBC to share certain credit losses with the Company on the card portfolio. The Fifth Amendment also provides to the Company increased revenue sharing.

The Company issued $120.0 million of 7.5% convertible notes in May 2009. The 7.5% convertible notes mature in December 2013 and are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion rate of $5.54 per share. There were no other material changes in the Company’s contractual obligations specified in Item 303(a)(5) of Regulation S-K during the three and nine months ended October 31, 2009. For additional information regarding the Company’s contractual obligations as of January 31, 2009, see the Management’s Discussion and Analysis section of the Annual Report on Form 10-K for the year ended January 31, 2009 as updated by the Current Report on Form 8-K that was filed on July 30, 2009 solely to reflect certain retrospective accounting adjustments related to the adoption of the provisions of ASC 470 related to the Company’s 2.0% Convertible Senior Notes with respect to the financial information contained in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009.

 

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CRITICAL ACCOUNTING POLICIES

A summary of the Company’s critical accounting policies is included in the Management Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended January 31, 2009 as updated by the Current Report on Form 8-K that was filed on July 30, 2009 solely to reflect certain retrospective accounting adjustments related to the adoption of the provisions of ASC 470 related to the Company’s 2.0% Convertible Senior Notes with respect to the financial information contained in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009.

NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncements

On August 1, 2009, the Company adopted the provisions of a new accounting standard related to subsequent events, which established general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The standard requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.

In June 2009, the FASB issued the Accounting Standards Codification (the “Codification”). The Codification is the single source of authoritative, U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of the Codification did not have an impact on the Company’s condensed consolidated financial statements.

On May 3, 2009, the Company adopted the provisions of a new accounting standard related to disclosures about the fair value of financial instruments, which requires publicly-traded companies to provide disclosures on the fair value of financial instruments in interim financial statements. See Note 4 for fair value disclosures of the Company’s financial instruments.

On February 1, 2009, the Company retrospectively adopted the provisions of ASC 470 related to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). See Note 4 for further discussion of the adoption of this new accounting standard.

On February 1, 2009, the Company adopted the provisions of the fair value measurement standard related to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. See Note 6 for further discussion of the adoption of this new accounting standard.

On February 1, 2009, the Company adopted the provisions of a new accounting standards related to accounting for instruments granted in share-based payment transactions as participating securities. This update provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and

 

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shall be included in the computation of both basic and diluted earnings per share. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements for the three and nine-month periods ended October 31, 2009.

On February 1, 2009, the Company adopted the provisions of a new accounting standard related to accounting by lessees for nonrefundable maintenance deposits, which clarifies how a lessee shall account for a maintenance deposit under an arrangement accounted for as a lease. The adoption of the new accounting standard did not have a material impact on the Company’s consolidated financial statements for the three and nine-month periods ended October 31, 2009.

Recently Issued Pronouncements

In December 2008, the FASB issued additional guidance on employers’ disclosures about the plan assets of defined benefit pension or other postretirement plans. The new disclosure requirements include a description of how investment allocation decisions are made, major categories of plan assets, valuation techniques used to measure the fair value of plan assets, the impact of measurement using significant unobservable inputs and concentrations of risk within plan assets. The new disclosure requirements are effective for fiscal years ending after December 15, 2009. The Company intends to adopt the new disclosure requirements in its Form 10-K for the year ending January 30, 2010.

FORWARD-LOOKING INFORMATION

The information contained in this Form 10-Q that addresses future results or expectations is considered “forward-looking” information within the definition of the Federal securities laws. Forward-looking information in this document can be identified through the use of words such as “may,” “will,” “intend,” “plan,” “project,” “expect,” “anticipate,” “should,” “would,” “believe,” “estimate,” “contemplate,” “possible,” and “point.” The forward-looking information is premised on many factors, some of which are outlined below. Actual consolidated results might differ materially from projected forward-looking information.

The forward-looking information and statements are or may be based on a series of projections and estimates and involve risks and uncertainties. These risks and uncertainties include such factors as: the level of consumer spending for luxury apparel and other merchandise carried by the Company and its ability to respond quickly to consumer trends; macroeconomic conditions and their effect on consumer spending; the Company’s ability to secure adequate financing; adequate and stable sources of merchandise; the competitive pricing environment within the retail sector; the effectiveness of planned advertising, marketing, and promotional campaigns; favorable customer response to relationship marketing efforts of proprietary credit card loyalty programs; appropriate inventory management; effective expense control; successful operation of the Company’s proprietary credit card strategic alliance

 

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with HSBC Bank Nevada, N.A.; geo-political risks; the performance of the financial markets; changes in interest rates; and fluctuations in foreign currency. For additional information regarding these and other risk factors, please refer to the Company’s Form 10-K for the fiscal year ended January 31, 2009 filed with the SEC, which may be accessed through the Internet at www.sec.gov.

The Company undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk primarily arises from changes in interest rates and the U.S. equity and bond markets. The effects of changes in interest rates on earnings generally have been small relative to other factors that also affect earnings, such as sales and operating margins. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities, and if appropriate, through the use of derivative financial instruments. Such derivative instruments can be used as part of an overall risk management program in order to manage the costs and risks associated with various financial exposures. The Company does not enter into derivative instruments for trading purposes, as clearly defined in its risk management policies. The Company is exposed to interest rate risk primarily through its borrowings, and derivative financial instrument activities.

Based on the Company’s market risk sensitive instruments outstanding at October 31, 2009, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations, or cash flows as of such date.

 

Item 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.

 

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended October 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS.

The information in “Part I – Financial Information, Note 9 – Contingencies – Legal Contingencies,” is incorporated into this Item by reference.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended October 31, 2009, the Company did not sell any equity securities which were not registered under the Securities Act.

The Company has a share repurchase program that authorizes it to purchase shares of the Company’s common stock in order to both distribute cash to stockholders and manage dilution resulting from shares issued under the Company’s equity compensation plans. The Company did not repurchase and retire any shares of common stock during the quarter ended October 31, 2009. At October 31, 2009, 32.7 million shares remained available for repurchase under the Company’s 70.0 million share repurchase authorization.

 

Item 6. EXHIBITS

 

10.1    Form of Stock Option Agreement under the Saks Incorporated 2009 Long-Term Incentive Plan*
10.2    Form of Stock Option Grant Document under the Saks Incorporated 2009 Long-Term Incentive Plan*
10.3    Form of Restricted Stock Agreement under the Saks Incorporated 2009 Long-Term Incentive Plan*
10.4    Form of Supplement to Restricted Stock Agreement under the Saks Incorporated 2009 Long-Term Incentive Plan*

 

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10.5    Form of Performance Award Agreement under the Saks Incorporated 2009 Long-Term Incentive Plan*
10.6    Form of Supplement to Performance Award Agreement under the Saks Incorporated 2009 Long-Term Incentive Plan*
10.7    Fifth Amendment to the Program Agreement, dated as of October 19, 2009, among Saks Incorporated, Jackson Office Properties, Inc., and HSBC Bank Nevada, N.A. (incorporated herein by this reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 19, 2009 and filed with the Commission on October 21, 2009)
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Filed herewith

 

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SIGNATURE

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.

 

    SAKS INCORPORATED
    Registrant
Date: December 4, 2009     /s/ Kevin G. Wills
    Kevin G. Wills
   

On behalf of registrant and as Executive

Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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