================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 000-07258
CHARMING SHOPPES, INC.
----------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
----------------------------------
(Address of principal executive offices) (Zip Code)
(215) 245-9100
--------------
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock (par value
$.10 per share), as of May 23, 2005, was 119,824,275 shares.
================================================================================
CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................... 2
Condensed Consolidated Balance Sheets
April 30, 2005 and January 29, 2005............................ 2
Condensed Consolidated Statements of Operations and Comprehensive Income
Thirteen weeks ended April 30, 2005 and May 1, 2004............ 3
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended April 30, 2005 and May 1, 2004............ 4
Notes to Condensed Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 13
Forward-looking Statements............................................... 13
Restatement of Financial Statements...................................... 15
Critical Accounting Policies............................................. 16
Recent Developments...................................................... 16
Results of Operations.................................................... 17
Liquidity and Capital Resources.......................................... 20
Financing................................................................ 24
Market Risk.............................................................. 25
Impact of Recent Accounting Pronouncements............................... 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 26
Item 4. Controls and Procedures........................................ 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 27
Item 6. Exhibits....................................................... 28
SIGNATURES............................................................... 29
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, January 29,
(Dollars in thousands, except share amounts) 2005 2005
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 254,801 $ 273,049
Available-for-sale securities ...................................... 84,639 52,857
Merchandise inventories ............................................ 347,794 285,120
Deferred taxes ..................................................... 15,500 15,500
Prepayments and other .............................................. 91,671 86,382
----------- -----------
Total current assets ............................................... 794,405 712,908
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 797,687 786,028
Less accumulated depreciation and amortization ..................... 479,179 465,365
----------- -----------
Net property, equipment, and leasehold improvements ................ 318,508 320,663
----------- -----------
Trademarks and other intangible assets ............................. 169,653 169,818
Goodwill ........................................................... 66,666 66,666
Available-for-sale securities ...................................... 240 240
Other assets ....................................................... 35,987 33,476
----------- -----------
Total assets ....................................................... $ 1,385,459 $ 1,303,771
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 171,781 $ 127,819
Accrued expenses ................................................... 156,571 154,681
Income taxes payable ............................................... 3,942 0
Current portion - long-term debt ................................... 20,822 16,419
----------- -----------
Total current liabilities .......................................... 353,116 298,919
----------- -----------
Deferred taxes and other non-current liabilities ................... 106,040 101,743
Long-term debt ..................................................... 199,862 208,645
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 132,077,353 shares and 132,063,290 shares, respectively ... 13,208 13,206
Additional paid-in capital ......................................... 258,367 249,485
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (15,639) (8,715)
Retained earnings .................................................. 554,641 524,624
----------- -----------
Total stockholders' equity ......................................... 726,441 694,464
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,385,459 $ 1,303,771
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
--------------------
April 30, May 1,
(In thousands, except per share amounts) 2005 2004
---- ----
(Restated)
Net sales .......................................................... $ 603,255 $ 592,738
----------- -----------
Cost of goods sold, buying, and occupancy expenses ................. 403,824 401,774
Selling, general, and administrative expenses ...................... 150,938 148,539
----------- -----------
Total operating expenses ........................................... 554,762 550,313
----------- -----------
Income from operations ............................................. 48,493 42,425
Other income ....................................................... 2,815 394
Interest expense ................................................... (3,925) (3,883)
----------- -----------
Income before income taxes ......................................... 47,383 38,936
Income tax provision ............................................... 17,366 12,687
----------- -----------
Net income ......................................................... 30,017 26,249
----------- -----------
Other comprehensive income, net of tax
Unrealized gains on available-for-sale securities, net of
of income tax provision of $21 in 2004 ............................. 0 11
Reclassification of amortization of deferred loss on termination of
derivative, net of income tax benefit of $40 in 2004 ............... 0 74
----------- -----------
Total other comprehensive income, net of tax ....................... 0 85
----------- -----------
Comprehensive income ............................................... $ 30,017 $ 26,334
=========== ===========
Basic net income per share ......................................... $ .25 $ .23
=========== ===========
Diluted net income per share ....................................... $ .23 $ .21
=========== ===========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
--------------------
April 30, May 1,
(In thousands) 2005 2004
---- ----
(Restated)
Operating activities
Net income ......................................................... $ 30,017 $ 26,249
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................................... 19,954 19,092
Deferred income taxes .............................................. 151 (1,007)
Tax benefit related to stock plans ................................. 546 0
Net (gain)/loss from disposition of capital assets ................. (873) 373
Gain from securitization of Catherines portfolio ................... (759) 0
Changes in operating assets and liabilities:
Merchandise inventories ............................................ (62,674) (46,446)
Accounts payable ................................................... 43,962 37,552
Prepayments and other .............................................. (4,530) (18,199)
Accrued expenses and other ......................................... 6,036 8,085
Income taxes payable ............................................... 3,942 12,001
----------- -----------
Net cash provided by operating activities .......................... 35,772 37,700
----------- -----------
Investing activities
Investment in capital assets ....................................... (17,697) (11,899)
Proceeds from sales of capital assets .............................. 1,923 0
Proceeds from sales of available-for-sale securities ............... 0 10,231
Gross purchases of available-for-sale securities ................... (31,782) (14,684)
Purchase of Catherines receivables portfolio ....................... (56,582) 0
Securitization of Catherines receivables portfolio ................. 56,582 0
Increase in other assets ........................................... (2,272) (2,021)
----------- -----------
Net cash used by investing activities .............................. (49,828) (18,373)
----------- -----------
Financing activities
Proceeds from short-term borrowings ................................ 67,262 57,052
Repayments of short-term borrowings ................................ (67,262) (57,052)
Repayments of long-term borrowings ................................. (4,380) (4,126)
Proceeds from issuance of common stock ............................. 188 6,342
----------- -----------
Net cash provided/(used) by financing activities ................... (4,192) 2,216
----------- -----------
Increase (decrease) in cash and cash equivalents ................... (18,248) 21,543
Cash and cash equivalents, beginning of period ..................... 273,049 123,781
----------- -----------
Cash and cash equivalents, end of period ........................... $ 254,801 $ 145,324
=========== ===========
Non-cash financing and investing activities
Equipment acquired through capital leases .......................... $ 0 $ 3,899
=========== ===========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Condensed Consolidated Financial Statements
We have prepared our condensed consolidated balance sheet as of April 30,
2005, and our condensed consolidated statements of operations and comprehensive
income and cash flows for the thirteen weeks ended April 30, 2005 and May 1,
2004, without audit. In our opinion, we have made all adjustments (which, except
for the restatement discussed in Note 2, below, include only normal recurring
adjustments) necessary to present fairly our financial position, results of
operations, and cash flows. We have condensed or omitted certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States.
These financial statements and related notes should be read in conjunction with
our financial statements and related notes included in our January 29, 2005
Annual Report on Form 10-K. The results of operations for the thirteen weeks
ended April 30, 2005 and May 1, 2004 are not necessarily indicative of operating
results for the full fiscal year.
As used in these notes, the terms "Fiscal 2006" and "Fiscal 2005" refer to
our fiscal year ending January 28, 2006 and our fiscal year ended January 29,
2005, respectively. The term "Fiscal 2007" refers to our fiscal year ending
February 3, 2007. The terms "Fiscal 2006 First Quarter" and "Fiscal 2005 First
Quarter" refer to the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. The term "Fiscal 2006 Second Quarter" refers to the thirteen weeks
ending July 30, 2005. The term "Fiscal 2005 Fourth Quarter" refers to the
thirteen weeks ended January 29, 2005. The terms "the Company," "we," "us," and
"our" refer to Charming Shoppes, Inc. and, where applicable, its consolidated
subsidiaries.
We account for cash consideration received from vendors in accordance with
the provisions of Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") Issue 02-16, "Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor." For interim reporting,
we generally defer markdown allowances and recognize them in the period in which
markdown expenses are recognized. Inasmuch as the markdown allowances at the
date of purchase are intended to compensate us for future markdowns taken at the
time of sale, we defer the recognition of markdown allowances during the interim
periods in order to better match the recognition of markdown allowances to the
period that the related markdown expenses are recorded.
We account for stock-based compensation using the intrinsic value method,
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. We
amortize deferred compensation expense attributable to stock awards and stock
options having an exercise price less than the market price on the date of grant
on a straight-line basis over the vesting period of the award or option. We do
not recognize compensation expense for options having an exercise price equal to
the market price on the date of grant or for shares purchased under our Employee
Stock Purchase Plan.
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1. Condensed Consolidated Financial Statements (Continued)
The following table reconciles net income and net income per share as
reported, using the intrinsic value method under APB No. 25, to pro forma net
income and net income per share using the fair value method under FASB Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation":
Thirteen Weeks Ended
--------------------
April 30 May 1,
(In thousands, except per share amounts) 2005 2004
---- ----
(Restated)
Net income as reported ............................... $ 30,017 $ 26,249
Add stock-based employee compensation using intrinsic
value method, net of income taxes .................. 797 387
Less stock-based employee compensation using fair
value method, net of income taxes................... (1,057) (841)
---------- ----------
Pro forma net income ................................. $ 29,757 $ 25,795
========== ==========
Basic net income per share:
As reported ........................................ $ .25 $ .23
Pro forma .......................................... .25 .23
Diluted net income per share:
As reported ........................................ .23 .21
Pro forma .......................................... .23 .21
Note 2. Restatement of Financial Statements
In the Fiscal 2005 Fourth Quarter, we restated our financial statements for
the prior quarters of Fiscal 2005 to correct our accounting for landlord
allowances, calculation of straight-line rent expense, recognition of rent
holiday periods, and depreciation of leasehold improvements for our retail
stores. See "Item 8. Financial Statements and Supplementary Data; Note 2.
Restatement of Financial Statements" of our Report on Form 10-K for the fiscal
year ended January 29, 2005 for additional information.
Prior to the restatement, we classified construction allowances received
from landlords in connection with our store leases as a reduction of property,
equipment, and leasehold improvements on our consolidated balance sheets and as
a reduction of capital expenditures on our consolidated statements of cash
flows. In addition, when accounting for leases with renewal options, we
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term, beginning with the lease commencement date. However,
we depreciated leasehold improvements over their estimated useful life of ten
years, which, in many cases, may have included both the initial non-cancelable
lease term and option renewal periods provided for in the lease. Also, we
historically recognized rent holiday periods on a straight-line basis over the
lease term commencing with the initial occupancy date instead of the date we
took possession of the leased space for construction purposes, which is
generally two months prior to a store opening date.
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 2. Restatement of Financial Statements (Continued)
As a result of the restatement, we record construction allowances as a
deferred rent liability on our consolidated balance sheets rather than as a
reduction of the cost of leasehold improvements, and recognize construction
allowances as an operating activity in our consolidated statements of cash flows
rather than as a reduction of our investment in capital assets. In addition, we
amortize construction allowances over the related lease term as a reduction of
rent expense rather than as a reduction of depreciation expense, commencing on
the date we take possession of the leased space for construction purposes. The
lease term we use to record straight-line rent expense and depreciation of
leasehold improvements includes lease option renewal periods only in instances
in which the exercise of the option period is reasonably assured and the failure
to exercise such an option would result in an economic penalty. We depreciate
leasehold improvements over the shorter of the lease term or the assets'
estimated useful lives. The lease terms we use to determine straight-line rent
expense include pre-opening store build-out periods (commonly referred to as
"rent holidays"), where applicable. These corrections resulted in the
accelerated recognition of certain annual rent expense and depreciation expense
on leasehold improvements, which are included in "cost of goods sold, buying,
and occupancy expenses" on the consolidated statements of operations and
comprehensive income.
The effects of the restatement, as previously reported in our Fiscal 2005
Form 10-K, on our condensed consolidated financial statements for the thirteen
weeks ended May 1, 2004 are summarized as follows:
As Previously As
(In thousands, except per share amounts) Reported(1) Adjustments Restated
----------- ----------- --------
Condensed Consolidated Statement of Operations:
Cost of goods sold, buying, and occupancy expenses..... $400,698 $ 1,076 $401,774
Income tax provision................................... 13,084 (397) 12,687
Net income .......................................... 26,928 (679) 26,249
Basic net income per share............................. $ .24 $(.01) $ .23
Diluted net income per share........................... $ .22 $(.01) $ .21
Condensed Consolidated Statement of Cash Flows:
Operating activities:
Net income............................................. $ 26,928 $ (679) $ 26,249
Additions to reconcile net income to net cash provided
by operations:
Depreciation and amortization..................... 17,007 2,085 19,092
Deferred income taxes............................. (610) (397) (1,007)
Changes in operating assets and liabilities:
Accrued expenses and other.................... 7,020 1,065 8,085
Net cash provided by operating activities.............. $ 35,626 $ 2,074 $ 37,700
Investing activities:
Investment in capital assets........................... $ (9,825) $(2,074) $(11,899)
Net cash used in investing activities.................. $(16,299) $(2,074) $(18,373)
-------------------
(1) Certain amounts have been reclassified to conform to the current-year
presentation.
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3. Trademarks and Other Intangible Assets
April 30, January 29,
(In thousands) 2005 2005
---- ----
Trademarks, tradenames, and internet domain names .... $ 168,800 $ 168,800
Customer lists and covenant not to compete ........... 3,300 3,300
---------- ----------
Total at cost ........................................ 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete .............................. 2,447 2,282
---------- ----------
Net trademarks and other intangible assets ........... $ 169,653 $ 169,818
========== ==========
Note 4. Long-term Debt
April 30, January 29,
(In thousands) 2005 2005
---- ----
4.75% Senior Convertible Notes, due June 2012 ........ $ 150,000 $ 150,000
Capital lease obligations ............................ 31,199 34,825
6.07% mortgage note, due October 2014 ................ 12,684 12,821
6.53% mortgage note, due November 2012 ............... 10,500 10,850
7.77% mortgage note, due December 2011 ............... 9,439 9,564
Variable rate mortgage note, due March 2006 .......... 5,522 5,605
Other long-term debt ................................. 1,340 1,399
---------- ----------
Total long-term debt ................................. 220,684 225,064
Less current portion ................................. 20,822 16,419
---------- ----------
Long-term debt ....................................... $ 199,862 $ 208,645
========== ==========
Note 5. Stockholders' Equity
Thirteen
Weeks Ended
April 30,
(Dollars in thousands) 2005
----
Total stockholders' equity, beginning of period .................... $ 694,464
Net income ......................................................... 30,017
Issuance of common stock (14,063 shares) ........................... 188
Tax benefit related to stock plans ................................. 546
Amortization of deferred compensation expense ...................... 1,226
----------
Total stockholders' equity, end of period .......................... $ 726,441
==========
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6. Customer Loyalty Card Programs
We offer our customers various loyalty card programs. Customers who join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. We
recognize costs we incur in connection with administering these programs as cost
of goods sold when incurred. During the thirteen weeks ended April 30, 2005 and
May 1, 2004, we recognized revenues of $3,162,000 and $3,264,000, respectively,
in connection with our loyalty card programs.
Note 7. Net Income Per Share
Thirteen Weeks Ended
--------------------
(In thousands, except weighted average April 30, May 1,
exercise price per share) 2005 2004
---- ----
(Restated)
Basic weighted average common shares outstanding ..... 118,984 113,297
Dilutive effect of assumed conversion of
convertible notes .................................... 15,182 15,182
Dilutive effect of stock options and awards .......... 1,577 1,903
------- -------
Diluted weighted average common shares and
equivalents outstanding .............................. 135,743 130,382
======= =======
Net income ........................................... $30,017 $26,249
Decrease in interest expense from assumed
conversion of notes, net of income taxes ............. 1,128 1,135
------- -------
Net income used to determine diluted net income
per share ............................................ $31,145 $27,384
======= =======
Options with weighted average exercise price greater
than market price, excluded from computation of net
income per share:
Number of shares.................................. 111 433
Weighted average exercise price per share......... $8.28 $8.25
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8. Income Taxes
The effective income tax rate was 36.7% for the Fiscal 2006 First Quarter,
as compared to 32.6% for the Fiscal 2005 First Quarter. The lower effective tax
rate for the Fiscal 2005 First Quarter was primarily the result of finalizing
certain prior-year tax audits.
On October 22, 2004, the President of the United States of America signed
into law H.R. 4250, "The American Jobs Creation Act of 2004" (the "Act"), which
includes among its provisions certain tax benefits related to the repatriation
to the United States of profits from a company's international operations. The
Act permits the repatriation of profits from international operations at a tax
rate not to exceed 5.25% for approximately a one-year period. These tax benefits
are subject to various limitations and, as of April 30, 2005, the U.S. Treasury
Department has not issued final guidelines for applying the repatriation
provisions of the Act. We are currently evaluating the effects of the Act, and
have not determined the effect, if any, that it will have on our results of
operations, but we do not expect the Act to have a significant impact on our
financial condition. As of April 30, 2005, our consolidated cash balance
included approximately $43,234,000 of cash held by our international operations.
We will finalize our analysis before the end of Fiscal 2006.
Note 9. Asset Securitization
As of January 29, 2005, we had a non-recourse agreement, which was
scheduled to expire in March 2005, under which a third party provided an
accounts receivable proprietary credit card sales accounts receivable funding
facility for our CATHERINES brand. In accordance with the terms of the Merchant
Services Agreement pursuant to which the CATHERINES proprietary credit cards
were issued, we gave the requisite notice of our intent to exercise our option
to purchase the CATHERINES portfolio upon the expiration of the agreement. In
March 2005, Spirit of America National Bank (our wholly-owned credit card bank)
purchased the CATHERINES credit card portfolio for approximately $56,600,000
(subject to adjustment). The purchase was funded through our securitization
facilities, including a portion of the proceeds from the sale of certificates
under our Series 2004-1 securitization facility. The Merchant Services Agreement
provided to us the ability to purchase the CATHERINES portfolio at par value.
The purchase of the portfolio at par and the subsequent securitization of the
purchased portfolio resulted in the recognition of a benefit of approximately $2
million, which is included in selling, general, and administrative expenses for
the Fiscal 2006 First Quarter.
Note 10. Impact of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R" or the "Statement"), a revision of SFAS No. 123. SFAS
No. 123R supersedes APB Opinion No. 25, and amends SFAS No. 95, "Statement of
Cash Flows." The accounting for share-based payments under SFAS No. 123R is
similar to the fair value method in SFAS No. 123, except that we will be
required to recognize the fair value of share-based payments as compensation
expense in our financial statements (pro forma disclosure will no longer be
allowed).
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 10. Impact of Recent Accounting Pronouncements (Continued)
Under SFAS No. 123R, we will be required to determine the fair value of
employee stock options using an option pricing model, and the value of
non-vested stock awards will be based on the fair market value of our stock on
the date we grant the award, without regard to service or performance conditions
(as defined in the Statement). In addition to recognizing compensation cost for
stock options and awards, we will be required to recognize compensation cost
related to our employee stock purchase plan. We will not be required to
recognize compensation cost for options or awards that do not vest as a result
of a failure to satisfy service or performance conditions. The determination of
the fair value of options or awards under SFAS No. 123R may also be affected by
"market conditions" or "other conditions" (as defined in the Statement).
However, recognition of compensation expense will not be affected by the failure
to satisfy a market or other condition.
The period over which we will be required to recognize compensation expense
related to an option or award will be determined based on all the terms of the
option or award. For options or awards with graded vesting based on a service
condition (portions of the option or award vest ratably over the service
period), we will be required to elect either a straight-line recognition method
or the accelerated method specified in FASB Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
Under SFAS No. 123R, we will be required to present cash flows for excess
tax benefits related to share-based payments as financing cash flows in our
consolidated statements of cash flows, instead of as operating cash flows, as
currently permitted under EITF Issue No. 00-15, "Classification in the Statement
of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option."
Under the provisions of SFAS No. 123R, we would have been required to adopt
SFAS No. 123R as of the beginning of the third quarter of Fiscal 2006 for
options and awards granted after the date of adoption. On April 15, 2005, the
Securities and Exchange Commission ("SEC") issued a rule entitled "Amendment to
Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Financial
Accounting Standards No. 123 (revised 2004), Share-based Payment." This rule
amended the date we are required to adopt SFAS No. 123R to the beginning of
Fiscal 2007.
We will be required to adopt one of two alternative transition methods as
of the date of adoption of SFAS No. 123R. Under the modified-prospective-
transition method, for unvested options and awards granted prior to the date of
adoption, we will be required to recognize compensation expense in our financial
statements in accordance with the provisions of SFAS No. 123, adjusted to
reflect estimated forfeitures in accordance with the provisions of SFAS No.
123R. We will also recognize a cumulative effect of a change in accounting
principle as of the date of adoption to reflect the reversal of any compensation
expense for periods prior to the date of adoption for such estimated
forfeitures, if material. Under the modified-retrospective-transition method, we
will also have the option to restate our financial statements for periods prior
to adoption presented for comparative purposes, to recognize compensation cost
previously reported in our pro forma footnote disclosures in accordance with
SFAS No. 123. We will be required to apply the provisions of SFAS No. 123R
related to cash flow reporting prospectively from the date of adoption under the
modified-prospective-transition method, and retrospectively for the same periods
for which the modified-retrospective-transition method is applied.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 10. Impact of Recent Accounting Pronouncements (Continued)
Our adoption of SFAS No. 123R will result in the recognition of additional
compensation expense for stock-based compensation in periods subsequent to
January 28, 2006. Because we are not able to reliably estimate the nature and
amounts of stock-based awards to be issued in future periods, the future impact
of adoption cannot be quantified. See "Note 1. Condensed Consolidated Financial
Statements" above for pro forma disclosure of stock-based compensation expense
determined in accordance with the provisions of SFAS No. 123 for the Fiscal 2006
First Quarter and the Fiscal 2005 First Quarter. We have not yet determined
whether we will adopt the modified-prospective-transition method or the
modified-retrospective-transition method.
Note 11. Subsequent Event
On May 19, 2005, we announced that we had entered into a definitive
agreement to acquire Crosstown Traders, Inc. ("Crosstown"), a direct marketer of
women's apparel, footwear, accessories, and specialty gifts, from JPMorgan
Partners, the private equity arm of J.P. Morgan Chase & Co. The acquisition was
approved by our Board of Directors and, subject to regulatory approval and
certain closing conditions, we expect to complete the transaction during the
Fiscal 2006 Second Quarter. On May 24, 2005, we received notice that the waiting
period under the Hart-Scott-Rodino Act was terminated.
Under terms of the agreement, we will pay approximately $218 million in
cash for Crosstown, plus the assumption of Crosstown's debt. In conjunction with
the closing of the transaction, we plan to securitize a substantial portion of
Crosstown's accounts receivable under a new conduit funding facility established
specifically for funding the Crosstown receivables. We expect the proceeds from
the securitization to approximate the amount of Crosstown's indebtedness, which
will be retired at closing.
We will finance the transaction with existing cash and borrowings under our
existing revolving credit facility. Concurrent with this transaction, we are
negotiating with our lenders for an amended committed credit facility in the
amount of $375 million for a period of five years. We expect the new facility to
provide additional liquidity on significantly improved terms compared to our
current $300 million revolving credit facility, which is scheduled to expire in
August 2008. We expect the amended facility to be in place by the end of the
Fiscal 2006 Second Quarter.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements and accompanying notes included in Item 1 of this report. It should
also be read in conjunction with the management's discussion and analysis of
financial condition and results of operations, financial statements, and
accompanying notes appearing in our Annual Report on Form 10-K for the fiscal
year ended January 29, 2005. As used in this management's discussion and
analysis, the terms "Fiscal 2006" and "Fiscal 2005" refer to our fiscal year
ending January 28, 2006 and our fiscal year ended January 29, 2005,
respectively. The terms "Fiscal 2006 First Quarter" and "Fiscal 2005 First
Quarter" refer to the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. The term "Fiscal 2006 Second Quarter" refers to the thirteen weeks
ending July 30, 2005. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, cost reductions, capital expenditures, proposed acquisitions,
liquidity, financing needs or plans, and plans for future operations, as well as
assumptions relating to the foregoing. The words "expect," "should," "project,"
"estimate," "predict," "anticipate," "plan," "believes," and similar expressions
are also intended to identify forward-looking statements. Forward-looking
statements are inherently subject to risks and uncertainties, some of which we
cannot predict or quantify. Future events and actual results, performance, and
achievements could differ materially from those set forth in, contemplated by,
or underlying the forward-looking statements. We assume no obligation to update
any forward-looking statement to reflect actual results or changes in, or
additions to, the factors affecting such forward-looking statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the future.
o A slowdown in the United States economy, an uncertain economic outlook, and
escalating energy costs could lead to reduced consumer demand for our
apparel and accessories in the future.
o Our business could be negatively affected by a deflationary pricing
environment in the apparel industry.
o The women's specialty retail apparel industry is highly competitive and we
may be unable to compete successfully against existing or future
competitors.
o We may be unable to successfully complete the acquisition of Crosstown
Traders, Inc. or the related financing arrangements, or to successfully
integrate the operations of Crosstown Traders, Inc. with the operations of
Charming Shoppes, Inc. In addition, we cannot assure the successful
implementation of our business plan for Crosstown Traders, Inc.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-size women's apparel
business.
o Our business plan is largely dependent upon continued growth in the
plus-size women's apparel market, which may not occur.
13
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these employees
or recruit additional qualified personnel.
o We depend on our distribution centers and could incur significantly higher
costs and longer lead times associated with distributing our products to
our stores if operations at any of these distribution centers were to be
disrupted for any reason.
o We depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents, and on our
credit card securitization facility. If we were unable to obtain sufficient
financing at an affordable cost, our ability to merchandise our stores
would be adversely affected.
o We rely significantly on foreign sources of production and face a variety
of risks generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability, imposition of, or changes
in, duties or quotas, trade restrictions, increased security requirements
applicable to imports, delays in shipping, increased costs of
transportation, and issues relating to compliance with domestic or
international labor standards.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods, or
in the availability of working capital during the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have a negative impact on
our sales.
o Natural disasters, as well as war, acts of terrorism, or the threat of
either may negatively impact availability of merchandise and customer
traffic to our stores, or otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
o We may be unable to hire and retain a sufficient number of suitable sales
associates at our stores.
o Our manufacturers may be unable to manufacture and deliver merchandise to
us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip centers
and malls in which our stores are located, and our future growth is
dependent upon the availability of suitable locations for new stores.
o We may be unable to successfully implement our plan to improve merchandise
assortments in our brands.
o The carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse change in
interest rates or other factors could have a significant impact on the
results of the valuation tests, resulting in a write-down of the carrying
value or acceleration of amortization of acquired intangible assets.
14
o Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to include our assessment of the effectiveness of our internal control over
financial reporting in our annual reports. Our independent registered
public accounting firm is also required to attest to whether or not our
assessment is fairly stated in all material respects and to separately
report on whether or not they believe that we maintained, in all material
respects, effective internal control over financial reporting. If we are
unable to maintain effective internal control over financial reporting, or
if our independent registered public accounting firm is unable to timely
attest to our assessment, we could be subject to regulatory sanctions and a
possible loss of public confidence in the reliability of our financial
reporting. Such a failure could result in our inability to provide timely
and/or reliable financial information and could adversely affect our
business.
RESTATEMENT OF FINANCIAL STATEMENTS
In the Fiscal 2005 Fourth Quarter, we restated our financial statements for
the prior quarters of Fiscal 2005 to correct our accounting for landlord
allowances, calculation of straight-line rent expense, recognition of rent
holiday periods, and depreciation of leasehold improvements for our retail
stores. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations; RESTATEMENT OF FINANCIAL STATEMENTS" of our Report on
Form 10-K for the fiscal year ended January 29, 2005 for additional details
regarding the restatement.
Prior to the restatement, we classified construction allowances received
from landlords in connection with our store leases as a reduction of property,
equipment, and leasehold improvements on our consolidated balance sheets and as
a reduction of capital expenditures on our consolidated statements of cash
flows. In addition, when accounting for leases with renewal options, we
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term, beginning with the lease commencement date. However,
we depreciated leasehold improvements over their estimated useful life of ten
years, which, in many cases, may have included both the initial non-cancelable
lease term and option renewal periods provided for in the lease. Also, we
historically recognized rent holiday periods on a straight-line basis over the
lease term commencing with the initial occupancy date instead of the date we
took possession of the leased space for construction purposes, which is
generally two months prior to a store opening date.
As a result of the restatement, we record construction allowances as a
deferred rent liability on our consolidated balance sheets rather than as a
reduction of the cost of leasehold improvements, and recognize construction
allowances as an operating activity in our consolidated statements of cash flows
rather than as a reduction of our investment in capital assets. In addition, we
amortize construction allowances over the related lease term as a reduction of
rent expense rather than as a reduction of depreciation expense, commencing on
the date we take possession of the leased space for construction purposes. The
lease term we use to record straight-line rent expense and depreciation of
leasehold improvements includes lease option renewal periods only in instances
in which the exercise of the option period is reasonably assured and the failure
to exercise such an option would result in an economic penalty. We depreciate
leasehold improvements over the shorter of the lease term or the assets'
estimated useful lives. The lease terms we use to determine straight-line rent
expense include pre-opening store build-out periods (commonly referred to as
"rent holidays"), where applicable. These corrections resulted in the
accelerated recognition of certain annual rent expense and depreciation expense
on leasehold improvements, which are included in "cost of goods sold, buying,
and occupancy expenses" on the consolidated statements of operations and
comprehensive income.
See "Item 1. Financial Statements; NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited); Note 2. Restatement of Financial Statements"
above for the effect of the restatement on our results of operations and cash
flows for the Fiscal 2005 First Quarter.
15
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the management's
discussion and analysis of financial condition and results of operations and
notes accompanying the consolidated financial statements that appear in our
Annual Report on Form 10-K for the fiscal year ended January 29, 2005. Except as
otherwise disclosed in the financial statements and accompanying notes included
in this report, there were no material changes in our critical accounting
policies or in the assumptions or estimates we used to prepare the financial
information appearing in this report.
RECENT DEVELOPMENTS
On May 19, 2005, we announced that we had entered into a definitive
agreement to acquire Crosstown Traders, Inc. ("Crosstown"), a direct marketer of
women's apparel, footwear, accessories, and specialty gifts, from JPMorgan
Partners, the private equity arm of J.P. Morgan Chase & Co. The acquisition was
approved by our Board of Directors and, subject to regulatory approval and
certain closing conditions, we expect to complete the transaction during the
Fiscal 2006 Second Quarter. On May 24, 2005, we received notice that the waiting
period under the Hart-Scott-Rodino Act was terminated. This acquisition is a
major step in our long-term growth strategy of becoming a multi-channel
retailer, and we expect it to be accretive to our earnings per share beginning
in Fiscal 2006. The acquisition is also a key step in our preparation for the
launch of our own catalog for the Lane Bryant brand in October 2007, when the
Lane Bryant catalog trademark reverts to us.
Under terms of the agreement, we will pay approximately $218 million in
cash for Crosstown, plus the assumption of Crosstown's' debt. In conjunction
with the closing of the transaction, we plan to securitize a substantial portion
of Crosstown's accounts receivable under a new conduit funding facility
established specifically for funding the Crosstown receivables. We expect the
proceeds from the securitization to approximate the amount of Crosstown's
indebtedness, which will be retired at closing.
We will finance the transaction with existing cash and borrowings under our
existing revolving credit facility. Concurrent with this transaction, we are
negotiating with our lenders for an amended committed credit facility in the
amount of $375 million for a period of five years. We expect the new facility to
provide additional liquidity on significantly improved terms compared to our
current $300 million revolving credit facility, which is scheduled to expire in
August 2008. We expect the amended facility to be in place by the end of the
Fiscal 2006 Second Quarter.
Crosstown Traders, Inc. operates eleven catalog titles, with 2004 revenues
of approximately $460 million. The majority of Crosstown's revenues are derived
from the catalog sales of women's apparel, of which plus-sizes is an important
component, as well as footwear and accessories. We plan to continue operating
Crosstown as a separate operation, which will remain at its Tucson, Arizona
headquarters.
16
RESULTS OF OPERATIONS
The following table shows our results of operations expressed as a
percentage of net sales and on a comparative basis:
Thirteen Weeks Ended Percentage
-------------------- Change
April 30, May 1, From Prior
2005 2004 Period
---- ---- ------
(Restated)
Net sales........................................... 100.0% 100.0% 1.8%
Cost of goods sold, buying, and occupancy expenses.. 66.9 67.8 0.5
Selling, general, and administrative expenses....... 25.0 25.1 1.6
Income from operations.............................. 8.0 7.2 14.3
Other income, principally interest.................. 0.5 0.1 614.5
Interest expense.................................... 0.7 0.7 1.1
Income tax provision................................ 2.9 2.1 36.9
Net income.......................................... 5.0 4.4 14.4
--------------------
Results may not add due to rounding.
The following table shows our net sales by store brand:
Thirteen Weeks Ended
--------------------
April 30, May 1,
(In millions) 2005 2004
---- ----
FASHION BUG(R) ....................................... $ 256.8 $ 262.3
LANE BRYANT(R) ....................................... 257.3 246.6
CATHERINES(R) ........................................ 89.2 83.8
---------- ----------
Total net sales ...................................... $ 603.3 $ 592.7
========== ==========
17
The following table shows information related to the change in our net
sales:
Thirteen Weeks Ended
--------------------
April 30, May 1,
2005 2004
---- ----
Increase (decrease) in comparable store sales(1):
Consolidated Company............................. 0% 5%
FASHION BUG...................................... (2) 7
LANE BRYANT...................................... 0 5
CATHERINES....................................... 4 (3)
Sales from new stores and E-commerce as a percentage
of total consolidated prior-period sales:
FASHION BUG...................................... 1 1
LANE BRYANT...................................... 4 3
CATHERINES....................................... 1 1
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
FASHION BUG...................................... (2) (2)
LANE BRYANT...................................... (2) (1)
CATHERINES....................................... 0 (1)
Increase (decrease) in total sales................... 2 5
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
The following table sets forth information with respect to our store
activity for the first quarter of Fiscal 2006 and planned store activity for all
of Fiscal 2006 (including the first quarter of Fiscal 2006):
FASHION LANE
BUG BRYANT CATHERINES Total
--- ------ ---------- -----
Fiscal 2006 Year-to-Date:
Stores at January 29, 2005 ............. 1,028 722 471 2,221
----- ----- ----- -----
Stores opened .......................... 4 8 4 16
Stores closed .......................... (5) (0) (2) (7)
----- ----- ----- -----
Net change in stores ................... (1) 8 2 9
----- ----- ----- -----
Stores at April 30, 2005 ............... 1,027 730 473 2,230
===== ===== ===== =====
Stores relocated during period ......... 4 8 4 16
Fiscal 2006:
Planned store openings ................. 15 45-50 5 65-70
Planned store closings ................. 20 15 15 50
Planned store relocations .............. 25 40 15 80
18
Comparison of Thirteen Weeks Ended April 30, 2005 and May 1, 2004
Net Sales
The increase in net sales from the Fiscal 2005 First Quarter to the Fiscal
2006 First Quarter was primarily the result of sales from new LANE BRYANT
stores, increased E-commerce sales, and an increase in comparable store sales at
our CATHERINES brand. Sales for all of our brands, particularly in the Northeast
and Mid-Atlantic regions, were affected by an unseasonably cool spring, which
negatively impacted sales of our spring assortments. We operated 2,230 retail
stores at the end of the Fiscal 2006 First Quarter, as compared to 2,233 stores
at the end of the Fiscal 2005 First Quarter.
Although LANE BRYANT's comparable store sales were flat for the quarter,
total net sales for the brand increased as the result of sales from new stores
and an increase in E-commerce sales. An increase in the average dollar sale per
transaction was offset by a slight decrease in traffic levels during the
current-year quarter. The average dollar sale per transaction increased as a
result of an improved average retail value per unit sold that was partially
offset by a decrease in the average number of units sold per customer ("UPC").
FASHION BUG's negative comparable store sales performance was a result of
weaker store traffic levels during the current-year quarter, partially offset by
a higher average dollar sale per transaction. The average dollar sale per
transaction reflected an increase in the average retail value per unit sold and
a slight increase in the average UPC. FASHION BUG's net sales for the Fiscal
2006 First Quarter benefited from an increase in E-commerce sales. FASHION BUG
commenced E-commerce operations in July 2004.
CATHERINES' comparable store sales benefited from an improved customer
response to the brand's Spring merchandise offerings as compared to the Fiscal
2005 First Quarter. CATHERINES stores experienced increased traffic levels
during the current-year period, which were partially offset by a slight decrease
in the average dollar sale per transaction. The average dollar sale per
transaction for the quarter reflected a slight decrease in the average retail
value per unit sold and a flat UPC.
We offer our customers various loyalty card programs. Customers who join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue on these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in cost
of goods sold as incurred. During the Fiscal 2006 First Quarter and Fiscal 2005
First Quarter, we recognized revenues of $3.2 million and $3.3 million,
respectively, in connection with our loyalty card programs.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses decreased 0.9% as a
percentage of sales from the Fiscal 2005 First Quarter to the Fiscal 2006 First
Quarter, reflecting improved merchandise margins at our LANE BRYANT and
CATHERINES brands and leverage on relatively fixed occupancy costs. Cost of
goods sold as a percentage of net sales was 0.7% lower in the Fiscal 2006 First
Quarter as compared to the Fiscal 2005 First Quarter as a result of reduced
markdowns and lower inventory levels in the current-year period. Cost of goods
sold includes merchandise costs net of discounts and allowances, freight,
inventory shrinkage, and shipping and handling costs associated with our
e-commerce business. Net merchandise costs and freight are capitalized as
inventory costs.
19
Buying and occupancy expenses as a percentage of net sales were 0.2% lower
in the Fiscal 2006 First Quarter as compared to the Fiscal 2005 First Quarter,
primarily as a result of leverage from increased net sales on relatively fixed
occupancy costs. Buying expenses include payroll, payroll-related costs, and
operating expenses for our buying departments and warehouses. Occupancy expenses
include rent, real estate taxes, insurance, common area maintenance, utilities,
maintenance, and depreciation for our stores and warehouse facilities and
equipment. Buying and occupancy costs are treated as period costs and are not
capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were higher in the Fiscal
2006 First Quarter as compared to the Fiscal 2005 First Quarter, but were 0.1%
lower as a percentage of net sales. The increase was primarily a result of
higher expenses related to incentive-based employee compensation and employee
benefit programs. Selling expenses were positively affected by improved
performance of our proprietary credit card operations, which benefited from the
acquisition of the CATHERINES credit card portfolio as well as continued
favorable experience in delinquencies during the Fiscal 2006 First Quarter. Our
previous Merchant Services Agreement provided to us the ability to purchase the
CATHERINES portfolio at par value. The purchase of the portfolio at par and the
subsequent securitization of the purchased portfolio resulted in the recognition
of a benefit of approximately $2 million, which is included in the Fiscal 2006
First Quarter selling expenses. Selling expenses for the Fiscal 2006 First
Quarter were 0.5% lower as a percentage of sales, while general and
administrative expenses were 0.4% higher as a percentage of net sales.
Other Income
Interest income increased $1.2 million from the Fiscal 2005 First Quarter
to the Fiscal 2006 first quarter as a result of both higher interest rates and
higher levels of invested cash and cash equivalents in the Fiscal 2006 First
Quarter. Other income for the Fiscal 2006 First Quarter also included a pre-tax
gain of $1.2 million from the sale of certain facilities owned by our Hong Kong
sourcing operations.
Income Tax Provision
The effective income tax rate was 36.7% in the Fiscal 2006 First Quarter,
as compared to 32.6% in the Fiscal 2005 First Quarter. The lower effective tax
rate for the Fiscal 2005 First Quarter was primarily a result of finalizing
certain prior-year tax audits.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our revolving credit facility. The following table highlights
certain information related to our liquidity and capital resources:
April 30, January 29,
(Dollars in millions) 2005 2005
---- ----
Cash and cash equivalents ............................ $ 254.8 $ 273.0
Working capital ...................................... $ 441.3 $ 414.0
Current ratio ........................................ 2.3 2.4
Long-term debt to equity ratio ....................... 27.5% 30.0%
20
Our net cash provided by operating activities was $35.8 million for the
Fiscal 2006 First Quarter, as compared to $37.7 million for the Fiscal 2005
First Quarter. A $3.8 million increase in net income before non-cash charges and
a $0.5 million tax benefit related to compensation expense under our stock plans
in the Fiscal 2006 First Quarter were offset by an increase in net cash used for
operating assets and liabilities. Our net investment in inventories increased by
$9.8 million in the Fiscal 2006 First Quarter as compared to the Fiscal 2005
First Quarter, primarily a result of a normal seasonal build-up of Spring
inventories, while net cash used by other operating assets and liabilities
decreased by $3.6 million.
Acquisitions
Subsequent to the end of the Fiscal 2006 First Quarter, we announced that
we had entered into a definitive agreement to acquire Crosstown Traders, Inc.
(see "RECENT DEVELOPMENTS" above for further details of this agreement).
Capital Expenditures
Our capital expenditures were $17.7 million during the Fiscal 2006 First
Quarter. During the remainder of Fiscal 2006, we anticipate incurring additional
capital expenditures of approximately $75 - $85 million, primarily for the
construction and fixturing of new stores, remodeling and fixturing of existing
stores, and improvements in information technology. We expect to finance these
additional capital expenditures primarily through internally generated funds.
Dividends
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. The payment
of future dividends is within the discretion of our Board of Directors and will
depend upon our future earnings, if any, our capital requirements, our financial
condition, and other relevant factors. Additionally, our existing credit
facility prohibits the payment of dividends on our common stock.
Off-Balance-Sheet Financing
Spirit of America National Bank (our wholly-owned credit card bank)
transfers its interest in credit card receivables created under our FASHION BUG
and CATHERINES proprietary credit card programs to the Charming Shoppes Master
Trust (the "Trust") through a special-purpose entity. The Trust is an
unconsolidated qualified special purpose entity. The Trust can sell interests in
these receivables on a revolving basis for a specified term. At the end of the
revolving period, an amortization period begins during which the Trust makes
principal payments to the parties that have entered into the securitization
agreement with the Trust.
21
As of April 30, 2005, the Trust had the following securitization facilities
outstanding:
(Dollars in millions) Series 1999-2 Series 2002-1 Series 2004 Series 2004-1
------------- ------------- ----------- -------------
Date of facility.................. May 1999 November 2002 January 2004 August 2004
Type of facility.................. Conduit Term Conduit Term
Maximum funding................... $50.0 $100.0 $100.0(2) $180.0
Funding as of April 30, 2005...... $12.7 $100.0 $0.0 $180.0
First scheduled principal payment. Not applicable August 2007 Not applicable April 2009
Expected final principal payment.. Not applicable(1) May 2008 Not applicable(1) March 2010
Renewal........................... Annual Not applicable Annual Not applicable
--------------------
(1) Series 1999-2 and Series 2004 have scheduled final payment dates that occur
in the twelfth month following the month in which the series begins
amortizing. These series generally begin amortizing 364 days after start of
the purchase commitment by the series purchaser currently in effect.
(2) Subsequent to April 30, 2005, we negotiated an amendment to the Series 2004
conduit to reduce the maximum funding to $50.0 million.
The remaining $15.8 million of principal on our Series 1999-1
securitization was amortized in the Fiscal 2006 First Quarter. We funded this
remaining amortization with a portion of the proceeds available from Series
2004-1. In addition, we used $56.6 million of funds from our securitization
facilities, including a portion of the proceeds available from Series 2004-1, to
fund the acquisition of the CATHERINES proprietary credit card portfolio in
March 2005 (see below).
As these credit card receivables securitizations reach maturity, we plan to
obtain funding for the FASHION BUG and CATHERINES proprietary credit card
programs through additional securitizations. However, we can give no assurance
that we will be successful in securing financing through either replacement
securitizations or other sources of replacement financing.
We securitized $151.5 million of private label credit card receivables in
the Fiscal 2006 First Quarter and had $303.9 million of securitized credit card
receivables outstanding as of April 30, 2005. We held certificates and retained
interests in our securitizations of $63.0 million as of April 30, 2005, which
were generally subordinated in right of payment to certificates issued by the
Trust to third-party investors. Our obligation to repurchase receivables sold to
the Trust is limited to those receivables that, at the time of their transfer,
fail to meet the Trust's eligibility standards under normal representations and
warranties. To date, our repurchases of receivables pursuant to this obligation
have been insignificant.
Charming Shoppes Receivables Corp. ("CSRC") and Charming Shoppes Seller,
Inc., our consolidated wholly-owned indirect subsidiaries, are separate
special-purpose entities created for the securitization program. As of April 30,
2005, CSRC held $10.1 million of Charming Shoppes Master Trust certificates and
retained interests and Charming Shoppes Seller, Inc. held retained interests of
$12.8 million (which are included in the $84.6 million of short-term
available-for-sale securities we held at April 30, 2005). These assets are first
and foremost available to satisfy the claims of the respective creditors of
these separate corporate entities, including certain claims of investors in the
Charming Shoppes Master Trust. Additionally, if either the Trust or Charming
Shoppes, Inc. fails to meet certain financial performance standards, the Trust
would be obligated to reallocate to third-party investors holding certain
certificates issued by the Trust, collections in an amount up to $9.5 million
that otherwise would be available to CSRC. The result of this reallocation would
be to increase CSRC's retained interest in the Trust by the same amount.
Subsequent to such a transfer occurring, and upon certain conditions being met,
these same investors would be required to repurchase these interests. As of
April 30, 2005, there were no reallocated collections as the result of a failure
to meet these financial performance standards.
22
In addition to the above, we could be affected by certain other events that
would cause the Trust to hold proceeds of receivables, which would otherwise be
available to be paid to us with respect to our subordinated interests, within
the Trust as additional enhancement. For example, if we fail or the Trust fails
to meet certain financial performance standards, a credit enhancement condition
would occur and the Trust would be required to retain amounts otherwise payable
to us. In addition, the failure to satisfy certain financial performance
standards could further cause the Trust to stop using collections on Trust
assets to purchase new receivables, and would require such collections to be
used to repay investors on a prescribed basis, as provided in the Trust
agreements. If this were to occur, it could result in our having insufficient
liquidity; however, we believe we would have sufficient notice to seek
alternative forms of financing through other third-party providers. As of April
30, 2005, the Trust was in compliance with all applicable financial performance
standards. Amounts placed into enhancement accounts, if any, that are not
required for payment to other certificate holders will be available to us at the
termination of the securitization series. We have no obligation to directly fund
the enhancement account of the Trust, other than for breaches of customary
representations, warranties, and covenants and for customary indemnities. These
representations, warranties, covenants, and indemnities do not protect the Trust
or investors in the Trust against credit-related losses on the receivables. The
providers of the credit enhancements and Trust investors have no other recourse
to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. Additional information
regarding our asset securitization facility is included in "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Part II, Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements; Note 16. Asset Securitization" of
our Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
We have a non-recourse agreement under which a third party provides a
proprietary credit card sales accounts receivable funding facility for our LANE
BRYANT brand. The facility expires in October 2007. Under this agreement, the
third party reimburses us daily for sales generated by LANE BRYANT's proprietary
credit card accounts. Upon termination of this agreement, we have the right to
repurchase the receivables portfolio from the third party and operate the
facility.
As of January 29, 2005, we also had a similar non-recourse agreement, which
was scheduled to expire in March 2005, for our CATHERINES brand. In accordance
with the terms of the Merchant Services Agreement pursuant to which the
CATHERINES proprietary credit cards were issued, we gave the requisite notice of
our intent to exercise our option to purchase the CATHERINES portfolio upon the
expiration of the agreement. In March 2005, Spirit of America National Bank
purchased the CATHERINES credit card portfolio for approximately $56.6 million
(subject to adjustment). The purchase was funded through our securitization
facilities, including a portion of the proceeds from the sale of certificates
under our Series 2004-1 securitization facility.
Additional information regarding the LANE BRYANT and CATHERINES agreements
is included in "Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Part II, Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
Note 16. Asset Securitization" of our Annual Report on Form 10-K for the fiscal
year ended January 29, 2005.
23
In conjunction with the agreement to acquire Crosstown Traders, Inc. (see
"RECENT DEVELOPMENTS" above), we plan to securitize a substantial portion of
Crosstown's accounts receivable. The securitization funding will be provided by
a new conduit funding facility that we put in place subsequent to April 30,
2005, which provides up to $55.0 million in funding. This new facility has been
established with an initial term of one year specifically for funding the
Crosstown accounts receivable and is separate and distinct from the Trust. We
expect the proceeds from the securitization to approximate the amount of
Crosstown's indebtedness, which will be retired at the closing of the
acquisition.
We lease substantially all of our operating stores under non-cancelable
operating lease agreements. Additional details on these leases, including
minimum lease commitments, are included in "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 17. Leases"
of our Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
FINANCING
Revolving Credit Facility
We have a $300.0 million revolving credit facility (the "Facility") that
provides for cash borrowings and enables us to issue up to $150.0 million of
letters of credit for purchases of merchandise and for standby letters of
credit. As of April 30, 2005, there were no borrowings outstanding under the
Facility. The availability of borrowings under the Facility is subject to
limitations based on eligible inventory and, under certain circumstances, credit
card receivables and in-transit cash. The Facility is secured by our general
assets, except for (i) all assets related to our credit card securitization
facility, (ii) all real property, (iii) certain equipment subject to other
mortgages or capital leases, (iv) the assets of our non-U.S. subsidiaries, and
(v) certain other assets. The Facility expires on August 15, 2008. As of April
30, 2005, we had $3.0 million of unamortized deferred debt acquisition costs
related to the Facility, which we are amortizing on a straight-line basis over
the life of the Facility as interest expense. As a result of the acquisition of
Crosstown Traders subsequent to April 30, 2005 (see "RECENT DEVELOPMENTS"
above), eligible inventory and the corresponding availability of borrowings
under the Facility will increase.
The interest rate on borrowings under the Facility ranges from Prime to
Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus 1.50% to LIBOR
plus 2.00% per annum for Eurodollar Rate Loans. The applicable rate is
determined quarterly, based on our average excess and suppressed availability,
as defined in the Facility. As of April 30, 2005, the interest rate on
borrowings under the Facility was 5.75% for Prime Rate Loans and 4.56% for
Eurodollar Rate Loans.
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50.0 million at any time within a fiscal quarter, that
we maintain a minimum level of consolidated 12-month earnings before interest,
taxes, depreciation, and amortization ("EBITDA") (excluding non-recurring,
non-cash charges as defined in the Facility). During the Fiscal 2006 First
Quarter, our excess and suppressed availability was above $50.0 million at all
times. As of April 30, 2005, we were not in violation of any of the covenants
included in the Facility.
24
We expect to finance the acquisition of Crosstown Traders, Inc. (see
"RECENT DEVELOPMENTS" above) with existing cash and borrowings under our
existing revolving credit facility. Concurrent with the acquisition, we are
negotiating with our lenders for an amended committed credit facility in the
amount of $375 million for a period of five years. We expect the new facility to
provide additional liquidity on significantly improved terms compared to our
current $300 million revolving credit facility. We expect the amended facility
to be in place by the end of the Fiscal 2006 Second Quarter.
Additional information regarding our long-term borrowings is included in
"Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Part II, Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 7. Debt" of
our Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
MARKET RISK
We manage our FASHION BUG and CATHERINES proprietary credit card programs
through various operating entities that we own. The primary activity of these
entities is to service the balances of our proprietary credit card receivables
portfolio that we sell under credit card securitization facilities. Under the
securitization facilities, we can be exposed to fluctuations in interest rates
to the extent that the interest rates charged to our customers vary from the
rates paid on certificates issued by the Trust. The finance charges on most of
our FASHION BUG proprietary credit card accounts are billed using a
floating-rate index (the Prime rate), subject to a floor and limited by legal
maximums. The finance charges on most of our CATHERINES proprietary credit card
accounts are billed at a fixed rate of interest. The certificates issued under
the securitization facilities include both floating- and fixed-interest-rate
certificates. The floating-rate certificates are based on an index of either
one-month LIBOR or the commercial paper rate, depending on the issuance.
Consequently, we have basis risk exposure with respect to credit cards billed
using a floating-rate index to the extent that the movement of the floating-rate
index on the certificates varies from the movement of the Prime rate.
Additionally, as of April 30, 2005, the floating finance charge rate on the
floating-rate indexed credit cards was below the contractual floor rate, thus
exposing us to interest-rate risk with respect to these credit cards as well as
the fixed-rate credit cards for the portion of certificates that are funded at
floating rates. However, as a result of the Trust entering into a series of
fixed-rate interest rate hedge agreements with respect to $161.1 million of
Series 2004-1certificates and $89.5 million of Series 2002-1 fixed-rate
certificates, we have significantly reduced the exposure of floating-rate
certificates outstanding to interest-rate risk. To the extent that short-term
interest rates were to increase by one percentage point by the end of Fiscal
2006, an increase of approximately $136 thousand in selling, general, and
administrative expenses would result.
As of April 30, 2005, there were no borrowings outstanding under our
revolving credit facility. To the extent that there are borrowings outstanding
under our revolving credit facility, such borrowings would be exposed to
variable interest rates. An increase in market interest rates would increase our
interest expense and decrease our cash flows. Conversely, a decrease in market
interest rates would decrease our interest expense and increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
25
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. Notes To Condensed Consolidated Financial Statements
(Unaudited); Note 10. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have a Disclosure
Committee, which is made up of several key management employees and reports
directly to the CEO and CFO, to centralize and enhance these controls and
procedures and assist our management, including our CEO and CFO, in fulfilling
their responsibilities for establishing and maintaining such controls and
procedures and providing accurate, timely, and complete disclosure.
As of the end of the period covered by this report on Form 10-Q (the
"Evaluation Date"), our Disclosure Committee, under the supervision and with the
participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective. Furthermore, there has been no change in
our internal control over financial reporting that occurred during the period
covered by this report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than ordinary routine litigation incidental to our business, there
are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, or of which any of their property is the subject.
There are no proceedings that are expected to have a material adverse effect on
our financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total Maximum
Number Number of
of Shares Shares that
Total Purchased as May Yet be
Number Average Part of Publicly Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs(2) or Programs(2)
------ --------- --------- --------------- ---------------
January 30, 2005 through
February 26, 2005...... 20,746(1) $8.04 - -
February 27, 2005 through
April 2, 2005.......... 1,360(1) 8.95 - -
April 3, 2005 through
April 30, 2005......... - - - -
------ -----
Total...................... 22,106 $8.09 - -
====== =====
--------------------
(1) Shares withheld for the payment of payroll taxes on employee stock awards
that vested during the period.
(2) In Fiscal 1998, we publicly announced that our Board of Directors granted
authority to repurchase up to 10,000,000 shares of our common stock. In
Fiscal 2000, we publicly announced that our Board of Directors granted
authority to repurchase up to an additional 10,000,000 shares of our common
stock. In Fiscal 2003, the Board of Directors granted an additional
authorization to repurchase 6,350,662 shares of common stock issued to
Limited Brands in connection with our acquisition of LANE BRYANT. From
Fiscal 1998 through Fiscal 2003, we repurchased a total of 21,370,993
shares of common stock, which included shares purchased on the open market
as well as shares repurchased from Limited Brands. As of April 30, 2005,
4,979,669 shares of our common stock remain available for repurchase under
these programs. Our ability to exercise this authority is subject to
certain restrictions under the terms of our revolving credit facility. As
conditions may allow, and if any required consent is granted, we may from
time to time acquire additional shares of our common stock under these
programs. Such shares, if purchased, would be held as treasury shares. No
shares were acquired under these programs during the three months ended
April 30, 2005. The repurchase programs have no expiration date.
27
Item 6. Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 29, 1994 (File No.
000-07258, Exhibit 3.1).
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999 (File No. 000-07258,
Exhibit 3.2).
31.1 Certification by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: May 26, 2005 /S/ DORRIT J. BERN
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: May 26, 2005 /S/ ERIC M. SPECTER
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
29
Exhibit Index
Exhibit No. Item
----------- ----
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994 (File No. 000-07258, Exhibit 3.1).
3.2 Bylaws, as Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999
(File No. 000-07258, Exhibit 3.2)
31.1 Certification By Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification By Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
30