August 28, 2007 at 16:05 PM EDT
CPI Corp. Announces 2007 Second Quarter Results
- Company completes strategic acquisition of assets of Portrait Corporation of America

ST. LOUIS, Aug. 28 /PRNewswire-FirstCall/ -- CPI Corp. (NYSE:CPY) today reported a loss per share of $0.53 per diluted share for the 12-week quarter ended July 21, 2007 compared to earnings per share of $0.10 per diluted share in the comparable quarter of fiscal 2006. The net loss for the second quarter of 2007 was $3.4 million versus net income of $0.6 million in the second quarter of 2006. As discussed more fully below, purchase accounting associated with the Company's acquisition of the operating assets of Portrait Corporation of America, Inc. (PCA) on June 8, 2007 had a significant negative impact on the Company's reported results for the quarter. The acquisition negatively impacted second quarter diluted per share results and net earnings by $1.00 per share and $6.4 million, respectively. Hereafter and throughout this release, the results related to the PCA acquisition will be referred to as those of the PictureMe Studio Division (PM).

Due to the recency of the PCA acquisition and to facilitate a better understanding of the 2007 second quarter results, the Company has prepared the attached Condensed Consolidating Statements of Operations that separates out the results of the acquired PictureMe Studio Division.

Sears Portrait Studio Division

SPS net sales for the second quarter of 2007 declined $3.1 million, or approximately 6%, to $53.2 million from the $56.3 million reported in the second quarter of 2006. The 2007 second quarter sales performance was the result of an approximate 9% decline in sittings partially offset by an approximate 5% increase in average sale per customer sitting.

Income from operations for the second quarter of 2007 improved to $4.7 million from $1.5 million in the second quarter of 2006. The $3.2 million increase in income from operations is the result of decreases in cost of sales, selling, general and administrative expenses, depreciation and amortization, and other charges and impairments of $1.2 million, $3.9 million, $0.9 million and $0.1 million, respectively, partially offset by a $3.1 million decline in sales.

The decrease in cost of sales resulted principally from lower overall production levels as a result of declines in sittings, additional gains in labor productivity resulting from the continuing refinement of digital manufacturing processes, and an improved product mix.

Selling, general and administrative expenses decreased primarily as a result of lower studio and corporate employment costs totaling $2.8 million and net other reductions totaling $1.1 million in various other cost categories reflecting the continued focus on adjusting the legacy cost structure to reflect the new operating environment. Studio employment costs declined $1.6 million principally due to a focused initiative to improve labor scheduling and productivity. Corporate employment declined $0.4 million resulting principally from a flattening of the executive management ranks that took place in the third quarter of 2006. Studio and corporate employment costs declined an additional $0.8 million during the 2007 second quarter as a result of a change in the Company's vacation policy announced in the first quarter of 2007.

The decrease in depreciation and amortization is principally attributable to reduced capital spending beginning in the fourth quarter of 2005 and continuing to date following the significant digital investments made in 2004 and the first three quarters of 2005.

Preliminary net sales for the first four weeks of the fiscal 2007 third quarter ended August 18, 2007 represent an approximate 5% decline versus the comparable period ended August 19, 2006.

PictureMe Studio Division

The Company completed its acquisition of PM on June 8, 2007. Accordingly, the Company's consolidated financial statements reflect the results of operations of the PM division only for the six-week period from June 8, 2007 through July 21, 2007.

In accordance with purchase accounting guidance, PM's deferred revenue balance at the June 8, 2007 date of acquisition was reduced by a purchase accounting adjustment to record deferred revenue at its fair value in PM's beginning, post-acquisition balance sheet. This purchase accounting adjustment has the effect of reducing revenue in periods subsequent to the acquisition for approximately one year. The deferred revenue adjustment resulted in lower net sales of $8.1 million and an increased pre-tax loss from operations of $3.4 million for the 2007 second quarter.

In addition, as reflected in the attached Condensed Consolidated Statement of Operations, PM results for the period June 8, 2007-July 21, 2007 were also negatively impacted by the following:

    -- Other charges and impairments totaling $1.2 million relating
       principally to severance accruals and cure costs associated with
       contracts assumed by the Company.

    -- Amortization of intangible assets totaling $0.4 million pursuant to the
       purchase price allocations.

    -- Interest expense totaling $1.1 million associated with the refinancing
       of the Company's previously existing debt to fund the PM acquisition.

Preliminary net sales for the PM division on a comparable store basis for the first four weeks of the fiscal 2007 third quarter which ended August 18, 2007 represent an approximate 5% decline versus the comparable period (not included in the Company's historical results) ended August 19, 2006.

PCA Integration Update

The Company plans to convert up to 400 PM studios to digital technology before the 2007 holiday selling season. The balance of the U.S. studios are planned to be converted prior to the 2008 busy season with conversions of the Canadian and Mexican studios to follow in 2009. Preliminary estimates of the capital required to complete the PM integration, principally the digital conversion, are as follows: 2007 - $15 million and 2008 - $23 million.

In addition to digital conversion preparations, integration efforts are presently focused on overhauling sales and marketing programs, implementing new measurement, monitoring and incentive systems in the field, integrating a wide array of back office/support functions, pruning unprofitable activities and driving manufacturing efficiencies through best practices sharing.

The Company will host a conference call and audio webcast on Wednesday, August 29, at 10:00 a.m. central time to discuss the financial results and provide a Company update. To participate on the call, please dial 888-260-4537 or 706-634-1012 at least 5 minutes before start time.

The webcast can be accessed on the Company's own site at http://www.cpicorp.com as well as http://www.earnings.com. To listen to a live broadcast, please go to these websites at least 15 minutes prior to the scheduled start time in order to register, download, and install any necessary audio software. A replay will be available on the above web sites as well as by dialing 706-645-9291 or 800-642-1687 and providing confirmation code 14796404. The replay will be available through September 5 by phone and for 30 days on the Internet.

CPI is the leading portrait studio operator in North America offering photography services in approximately 3,100 locations in the United States, Puerto Rico, Canada and Mexico as well as the United Kingdom, principally in Sears and Wal-Mart stores.

The statements contained in this press release that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties. We try to identify forward-looking statements by using words such as "plan," "expect," "looking ahead," "anticipate," "estimate," "believe," "should," "intend," and other similar expressions. Management wishes to caution the reader that these forward-looking statements, such as our outlook for the integration of the PCA Acqusition, portrait studios, net income, future cash requirements, cost savings, compliance with debt covenants, valuation allowances, reserves for charges and impairments and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing us. Such risks include, but are not limited to: the Company's dependence on Sears and Wal-Mart, the approval of our business practices and operations by Sears and Wal-Mart, the termination, breach or increase of the Company's expenses by Sears or Wal-Mart under our license agreements, customer demand for the Company's products and services, manufacturing interruptions, dependence on certain suppliers, competition, dependence on key personnel, fluctuations in operating results, a significant increase in piracy of the Company's photographs, widespread equipment failure, compliance with debt covenants, increased debt level due to the acquisition of Portrait Corporation of America, Inc ("PCA"), the ability to successfully integrate the PCA acquisition, implementation of marketing and operating strategies, and other risks as may be described in the Company's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended February 3, 2007 and its Form 10-Q for the 12 weeks ended April 28, 2007. The Company does not undertake any obligations to update any of these forward-looking statements.

                        Financial tables to follow ...



                                  CPI CORP.
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands except per share amounts)
                                 (Unaudited)

                      12        12       24        24       52        52
                     Weeks  Vs Weeks    Weeks  Vs Weeks    Weeks  Vs Weeks
                    July 21,  July 22, July 21,  July 22, July 21,  July 22,
                      2007     2006     2007      2006      2007      2006

    Net sales       $68,642  $56,345  $126,403  $116,014  $304,191  $297,469

    Cost and
     expenses:
      Cost of sales
       (exclusive of
       depreciation
       and
       amortization
       shown below)   7,776    5,806    12,673    11,375    29,426    29,966
      Selling, general
       and
       administrative
       expenses      57,547   44,822   102,866    91,181   232,980   222,076
      Depreciation
       and
       amortization   6,177    4,046     9,590     8,232    18,279    19,135
      Other charges
       and
       impairments    1,261      143     1,290       534     1,997     1,725
                     72,761   54,817   126,419   111,322   282,682   272,902

    Income (loss)
     from operations (4,119)   1,528       (16)    4,692    21,509    24,567

    Interest expense  1,561      563     2,008     1,166     3,221     2,068

    Interest income     410       74       716       131     1,150       508

    Loss from
     extinguishment
     of debt              -        -         -         -         -       529

    Impairment (recovery)
     and related
     obligations of
     preferred security
     interest             -        -         -      (300)     (587)     (300)

    Other income
     (expense), net      56       27         8        67        85       105

    Earnings (loss)
     from operations
     before income
     tax expense
     (benefit)       (5,214)   1,066    (1,300)    4,024    20,110    22,883

    Income tax
     expense
     (benefit)       (1,812)     426      (453)    1,540     7,113     8,936

    Net earnings
     (loss)         ($3,402)    $640     ($847)   $2,484   $12,997   $13,947

    Net earnings
     (loss) per
     common share -
     diluted         ($0.53)   $0.10    ($0.13)    $0.39     $2.03     $1.94

    Net earnings
     (loss) per
     common share -
     basic           ($0.53)   $0.10    ($0.13)    $0.39     $2.04     $1.94

    Weighted average
     number of common
     and common
     equivalent shares
     outstanding:
      Diluted         6,386    6,369     6,375     6,374     6,388     7,194
      Basic           6,386    6,342     6,375     6,354     6,363     7,173



                                  CPI CORP.
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                (In thousands)
                                 (Unaudited)

                                              12 Weeks Ended
                                    CPI/SPS     Picture Me      Total
                               July 21, July 22, July 21,  July 21, July 22,
                                2007     2006     2007      2007     2006


    Net sales                 $53,194   $56,345  $15,448   $68,642   $56,345

    Cost and expenses:
      Cost of sales
       (exclusive of
       depreciation and
       amortization shown
       below)                   4,564     5,806    3,212     7,776     5,806
      Selling, general and
       administrative
       expenses                40,891    44,822   16,656    57,547    44,822
      Depreciation and
       amortization             3,076     4,046    3,101     6,177     4,046
      Other charges and
       impairments                 12       143    1,249     1,261       143
                               48,543    54,817   24,218    72,761    54,817

    Income (loss) from
     operations                 4,651     1,528   (8,770)   (4,119)    1,528

    Interest expense              460       563    1,101     1,561       563

    Interest income               406        74        4       410        74

    Loss from extinguishment
     of debt                        -         -        -         -         -

    Impairment (recovery)
     and related obligations
     of preferred security
     interest                       -         -        -                   -

    Other income (expense), net    37        27       19        56        27

    Earnings (loss) from
     operations before
     income tax expense
     (benefit)                  4,634     1,066   (9,848)   (5,214)    1,066

    Income tax expense
     (benefit)                  1,615       426   (3,427)   (1,812)      426

    Net earnings (loss)        $3,019      $640  ($6,421)  ($3,402)     $640

    EBITDA                     $8,178    $5,691  $(5,646)   $2,532    $5,691

    Adjusted EBITDA            $8,190    $5,834  $(4,397)   $3,793    $5,834


                                             24 Weeks Ended
                                   CPI/SPS     Picture Me       Total
                             July 21,  July 22, July 21,  July 21,  July 22,
                               2007      2006     2007      2007      2006

    Net sales                $110,955  $116,014  $15,448  $126,403  $116,014

    Cost and expenses:
      Cost of sales
      (exclusive of
       depreciation and
       amortization shown
       below)                   9,461    11,375    3,212    12,673    11,375
      Selling, general and
       administrative
       expenses                86,210    91,181   16,656   102,866    91,181
      Depreciation and
       amortization             6,489     8,232    3,101     9,590     8,232
      Other charges and
       impairments                 41       534    1,249     1,290       534
                              102,201   111,322   24,218   126,419   111,322

    Income (loss) from
     operations                 8,754     4,692   (8,770)      (16)    4,692

    Interest expense              907     1,166    1,101     2,008     1,166

    Interest income               712       131        4       716       131

    Loss from extinguishment
     of debt                        -         -        -         -         -

    Impairment (recovery)
     and related obligations
     of preferred
     security interest              -      (300)       -                (300)

    Other income (expense),
     net                          (11)       67       19         8        67

    Earnings (loss) from
     operations before
     income tax expense
     (benefit)                  8,548     4,024   (9,848)   (1,300)    4,024

    Income tax expense
     (benefit)                  2,974     1,540   (3,427)     (453)    1,540

    Net earnings (loss)        $5,574    $2,484  ($6,421)    ($847)   $2,484

    EBITDA                    $15,961   $13,447  $(5,646)  $10,315   $13,447

    Adjusted EBITDA           $16,002   $13,681  $(4,397)  $11,605   $13,681


                                             52 Weeks Ended
                                  CPI/SPS      Picture Me       Total
                             July 21,  July 22, July 21,  July 21,  July 22,
                               2007      2006     2007      2007      2006

    Net sales                $288,743  $297,469  $15,448  $304,191  $297,469

    Cost and expenses:
      Cost of sales
      (exclusive of
       depreciation and
       amortization shown
       below)                  26,214    29,966    3,212    29,426    29,966
      Selling, general and
       administrative
       expenses               216,324   222,076   16,656   232,980   222,076
      Depreciation and
       amortization            15,178    19,135    3,101    18,279    19,135
      Other charges and
       impairments                748     1,725    1,249     1,997     1,725
                              258,464   272,902   24,218   282,682   272,902

    Income (loss) from
     operations                30,279    24,567   (8,770)   21,509    24,567

    Interest expense            2,120     2,068    1,101     3,221     2,068

    Interest income             1,146       508        4     1,150       508

    Loss from extinguishment
     of debt                        -       529        -         -       529

    Impairment (recovery)
     and related obligations
     of preferred
     security interest           (587)     (300)       -      (587)     (300)

    Other income (expense),
     net                           66       105       19        85       105

    Earnings (loss) from
     operations before
     income tax expense
     (benefit)                 29,958    22,883   (9,848)   20,110    22,883

    Income tax expense
     (benefit)                 10,540     8,936   (3,427)    7,113     8,936

    Net earnings (loss)       $19,418   $13,947  ($6,421)  $12,997   $13,947

    EBITDA                    $47,290   $44,885  $(5,646)  $41,644   $44,885

    Adjusted EBITDA           $47,451   $46,310  $(4,397)  $43,054   $46,310



                                  CPI CORP.
                ADDITIONAL CONSOLIDATED OPERATING INFORMATION
                                (In thousands)
                                 (Unaudited)

                           12        12       24       24      52       52
                          Weeks Vs. Weeks   Weeks Vs. Weeks   Weeks Vs.Weeks
                        July 21,  July 22, July 21, July 22, July 21, July 22,
                          2007     2006      2007     2006     2007     2006
    Capital
     expenditures        $2,843    $626    $3,615   $1,670   $4,705   $8,170

    EBITDA is calculated
     as follows:
    Net earnings (loss)
     from operations    ($3,402)   $640     ($847)  $2,484  $12,997  $13,947
    Income tax
     expense (benefit)   (1,812)    426      (453)   1,540    7,113    8,936
    Interest expense/
     loss from debt
     extinguishment       1,561     563     2,008    1,166    3,221    2,597
    Depreciation and
     amortization         6,177   4,046     9,590    8,232   18,279   19,135
    Other non-cash
     charges                  8      16        17       25       34      270

    EBITDA(1)&(5)        $2,532  $5,691   $10,315  $13,447  $41,644  $44,885

    Adjusted EBITDA(2)   $3,793  $5,834   $11,605  $13,681  $43,054  $46,310

    EBITDA margin(3)       3.69%  10.10%     8.16%   11.59%   13.69%   15.09%

    Adjusted EBITDA
     margin(4)             5.53%  10.35%     9.18%   11.79%   14.15%   15.57%


    (1) EBITDA represents net earnings from continuing operations before
        interest expense, income taxes, depreciation and amortization and
        other non-cash charges. EBITDA is included because it is one liquidity
        measure used by certain investors to determine a company's ability to
        service its indebtedness.  EBITDA is unaffected by the debt and equity
        structure of the company. EBITDA does not represent cash flow from
        operations as defined by GAAP, is not necessarily indicative of cash
        available to fund all cash flow needs and should not be considered an
        alternative to net income under GAAP for purposes of evaluating the
        Company's results of operations.  EBITDA is not necessarily comparable
        with similarly-titled measures for other companies.

    (2) Adjusted EBITDA is calculated as follows:


    EBITDA               $2,532  $5,691  $10,315   $13,447  $41,644  $44,885
      EBITDA
       adjustments:
        Impairment
         charges              -       -        7       179        7      492
        Reserves for
         severance and
         related costs        1      16        1        85      622    1,282
        Executive
         retirements/
         repositioning        -      21        6       164       13      236
        Cost associated
         with
         acquisition      1,249       -    1,249         -    1,249        -
        Contract
         terminations
         and settlements    (16)      -        -         -        -     (391)
        Cost associated
         with strategic
         alternative review   -     106        -       106       79      106
        Impairment
         (recovery) and
         related obligations
         of preferred
         security interest    -       -        -      (300)    (587)    (300)
        Other                27       -       27        -        27        -

    Adjusted EBITDA      $3,793  $5,834  $11,605   $13,681  $43,054  $46,310


    (3) EBITDA margin represents EBITDA, as defined in (1), stated as a
        percentage of sales.

    (4) Adjusted EBITDA margin represents Adjusted EBITDA, as defined in (2),
        stated as a percentage of sales.

    (5) As required by the SEC's Regulation G, a reconciliation of EBITDA, a
        non-GAAP liquidity measure, with the most directly comparable GAAP
        liquidity measure, cash flow from continuing operations follows:


                            12       12      24       24       52       52
                          Weeks Vs. Weeks  Weeks Vs. Weeks   Weeks Vs. Weeks
                         July 21, July 22, July 21, July 22, July 21, July 22,
                           2007     2006    2007     2006     2007     2006

    EBITDA               $2,532  $5,691  $10,315   $13,447   $41,644 $44,885
    Income tax
     (expense) benefit    1,812    (426)     453    (1,540)   (7,113) (8,936)
    Interest expense     (1,561)   (563)  (2,008)   (1,166)   (3,221) (2,597)
    Adjustments for
     items not
     requiring cash:
      Deferred income
       taxes             (1,422)    530     (389)    1,488     7,479   6,342
      Deferred revenues
       and related costs  4,265  (2,130)   4,589    (1,319)    2,790  (3,555)
      Impairment
       (recovery) and
       related
       obligations of
       preferred security
       interest               -       -        -      (300)     (587)   (300)
      Other, net          1,417     655    2,137     1,634     2,861   2,741
    Decrease (increase)
     in current assets   (2,728)  3,079   (1,660)    2,553    (4,331)  4,031
    Increase (decrease)
     in current
     liabilities           (523)   (678)  (4,512)   (2,463)   (4,607) (9,804)
    Increase (decrease)
     in current income
     taxes               (1,165)    (47)    (726)      716    (1,815)   (301)

    Cash flows from
     operations          $2,627  $6,111   $8,199   $13,050   $33,100 $32,506



                                  CPI CORP.
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                       JULY 21, 2007 AND JULY 22, 2006
                                (In thousands)
                                 (Unaudited)

                                                   JULY 21,          JULY 22,
                                                     2007              2006
    Assets

      Current assets:
       Cash and cash equivalents                   $42,641            $8,098
       Other current assets                         38,373            28,971
      Net property and equipment                    60,897            34,379
      Intangible assets                             63,204               513
      Other assets                                  14,432            13,354

        Total assets                              $219,547           $85,315

    Liabilities and stockholders' equity
     (deficit)

      Current liabilities                          $69,346           $52,934
      Long-term debt obligations                   110,862            11,718
      Other liabilities                             30,753            25,501
      Stockholders' equity (deficit)                   690            (4,838)

        Total liabilities and
         stockholders'
         equity (deficit)                         $211,651           $85,315

Source: CPI Corp.

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