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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 000-07258
CHARMING SHOPPES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
---------------------------- -----
(Address of principal executive offices) (Zip Code)
(215) 245-9100
--------------
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, as of August
28, 2003, was 113,072,721 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
August 2, 2003 and February 1, 2003................................... 2
Condensed Consolidated Statements of Operations
Thirteen weeks ended August 2, 2003 and August 3, 2002................ 3
Twenty-six weeks ended August 2, 2003 and August 3, 2002.............. 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
Thirteen and Twenty-six weeks ended August 2, 2003 and August 3, 2002. 5
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended August 2, 2003 and August 3, 2002.............. 6
Notes to Condensed Consolidated Financial Statements........................ 7 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements.................................................. 17 - 18
Critical Accounting Policies................................................ 18 - 19
Results of Operations....................................................... 19 - 27
Liquidity and Capital Resources............................................. 27 - 30
Financing................................................................... 30 - 31
Market Risk................................................................. 31
Impact of Recent Accounting Pronouncements.................................. 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 32
Item 4. Controls and Procedures............................................ 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 33
Item 4. Submission of Matters to a Vote of Security Holders................ 33
Item 6. Exhibits and Reports on Form 8-K................................... 34
SIGNATURES.................................................................. 35
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 2, February 1,
(Dollars in thousands, except per-share amounts) 2003 2003
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 139,874 $ 102,026
Available-for-sale securities ...................................... 51,226 50,286
Merchandise inventories ............................................ 307,052 286,472
Deferred taxes ..................................................... 17,970 11,726
Prepayments and other .............................................. 80,378 77,504
----------- -----------
Total current assets ........................................... 596,500 528,014
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 694,817 668,168
Less accumulated depreciation and amortization ..................... 374,406 348,295
----------- -----------
Net property, equipment, and leasehold improvements ............ 320,411 319,873
----------- -----------
Trademarks and other intangible assets ............................. 170,808 171,138
Goodwill ........................................................... 68,594 68,594
Available-for-sale securities ...................................... 24,275 23,472
Other assets ....................................................... 26,588 28,065
----------- -----------
Total assets ....................................................... $ 1,207,176 $ 1,139,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 184,013 $ 147,952
Accrued expenses ................................................... 146,559 163,598
Income taxes payable ............................................... 9,559 7,144
Current portion - long-term debt ................................... 14,626 12,595
Accrued expenses related to cost reduction plan .................... 3,678 0
----------- -----------
Total current liabilities ...................................... 358,435 331,289
----------- -----------
Deferred taxes and other non-current liabilities ................... 53,372 43,188
Long-term debt ..................................................... 204,102 203,045
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 125,333,748 shares and 125,149,242 shares, respectively 12,533 12,515
Additional paid-in capital ......................................... 201,057 200,040
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (3,259) (3,370)
Accumulated other comprehensive loss ............................... (397) (550)
Retained earnings .................................................. 465,469 437,135
----------- -----------
Total stockholders' equity ..................................... 591,267 561,634
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,207,176 $ 1,139,156
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended
--------------------
August 2, August 3,
(In thousands, except per-share amounts) 2003 2002(1)
---- -------
Net sales .............................................. $ 605,456 $ 638,307
--------- ---------
Cost of goods sold, buying, and occupancy expenses ..... 428,425 441,376
Selling, general, and administrative expenses .......... 136,899 151,391
Expenses related to cost reduction plan ................ 6,389 0
--------- ---------
Total operating expenses ............................... 571,713 592,767
--------- ---------
Income from operations ................................. 33,743 45,540
Other income, principally interest ..................... 540 719
Interest expense ....................................... (3,849) (5,678)
--------- ---------
Income before income taxes and minority interest ....... 30,434 40,581
Income tax provision ................................... 11,838 15,501
--------- ---------
Income before minority interest ........................ 18,596 25,080
Minority interest in net loss of consolidated subsidiary 49 390
--------- ---------
Net income ............................................. $ 18,645 $ 25,470
========= =========
Basic net income per share.............................. $ .17 $ .22
===== =====
Diluted net income per share............................ $ .15 $ .20
===== =====
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Twenty-six Weeks Ended
----------------------
August 2, August 3,
(In thousands, except per-share amounts) 2003 2002(1)
---- -------
Net sales .............................................. $ 1,169,742 $ 1,268,923
----------- -----------
Cost of goods sold, buying, and occupancy expenses ..... 823,913 878,611
Selling, general, and administrative expenses .......... 282,164 310,547
Expenses related to cost reduction plan ................ 10,820 0
----------- -----------
Total operating expenses ............................... 1,116,897 1,189,158
----------- -----------
Income from operations ................................. 52,845 79,765
Other income, principally interest ..................... 964 1,163
Interest expense ....................................... (7,654) (12,480)
----------- -----------
Income before income taxes, minority interest, and
cumulative effect of accounting changes ............ 46,155 68,448
Income tax provision ................................... 17,954 26,157
----------- -----------
Income before minority interest and cumulative effect
of accounting changes .............................. 28,201 42,291
Minority interest in net loss of consolidated subsidiary 133 451
----------- -----------
Income before cumulative effect of accounting changes .. 28,334 42,742
Cumulative effect of accounting changes, net of
income tax benefit of $2,758 ....................... 0 (49,098)
----------- -----------
Net income (loss) ...................................... $ 28,334 $ (6,356)
=========== ===========
Basic net income (loss) per share:
Before cumulative effect of accounting changes...... $ .25 $ .38
Cumulative effect of accounting changes............. .00 (.43)
----- -----
Net income (loss)................................... $ .25 $(.06)(2)
===== =====
Diluted net income (loss) per share:
Before cumulative effect of accounting changes...... $ .24 $ .34
Cumulative effect of accounting changes............. .00 (.37)
----- -----
Net income (loss)................................... $ .24 $(.03)
===== =====
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements). (2) Results do not add due to rounding.
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
(In thousands) 2003 2002(1) 2003 2002(1)
---- ------- ---- -------
Net income (loss) .................................. $ 18,645 $ 25,470 $ 28,334 $ (6,356)
-------- -------- -------- --------
Unrealized gains (losses) on available-for-sale
securities, net of income taxes of $(13), $79,
$11, and $59, respectively ..................... 20 (112) (18) (97)
Reclassification of amortization of deferred loss on
termination of derivative, net of income taxes
of $(46), $(46), $(92) and $(92), respectively . 85 85 171 171
-------- -------- -------- --------
Total other comprehensive income (loss),
net of taxes ................................... 105 (27) 153 74
-------- -------- -------- --------
Comprehensive income (loss) ........................ $ 18,750 $ 25,443 $ 28,487 $ (6,282)
======== ======== ======== ========
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
----------------------
August 2, August 3,
(In thousands) 2003 2002(1)
---- -------
Operating activities
Net income (loss) ................................................... $ 28,334 $ (6,356)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................... 39,226 38,813
Write-down of Catherine's Goodwill .............................. 0 43,975
Cumulative effect of capitalization of cash received from vendors 0 7,881
Deferred income taxes ........................................... 2,240 (2,230)
Loss from disposition of capital assets ......................... 1,342 1,870
Capitalized interest on conversion of convertible notes ......... 0 3,026
Other, net ...................................................... (133) (451)
Changes in operating assets and liabilities:
Merchandise inventories ...................................... (20,580) (7,803)
Accounts payable ............................................. 36,061 33,228
Prepayments and other ........................................ (2,968) (14,172)
Accrued expenses and other ................................... (15,286) 20,640
Income taxes payable ......................................... 2,415 16,209
Accrued restructuring costs .................................. 0 (5,497)
Accrued expenses related to cost reduction plan .............. 3,678 0
--------- ---------
Net cash provided by operating activities ........................... 74,329 129,133
--------- ---------
Investing activities
Investment in capital assets ........................................ (25,914) (24,829)
Proceeds from sales of available-for-sale securities ................ 19,735 3,922
Gross purchases of available-for-sale securities .................... (21,507) (23,735)
Increase (decrease) in other assets ................................. (3,144) 2,242
--------- ---------
Net cash used in investing activities ............................... (30,830) (42,400)
--------- ---------
Financing activities
Proceeds from short-term borrowings ................................. 111,069 222,613
Repayments of short-term borrowings ................................. (111,069) (276,909)
Proceeds from long-term borrowings .................................. 1,050 150,000
Repayments of long-term borrowings .................................. (7,172) (79,079)
Payments of deferred financing costs ................................ 0 (5,378)
Purchases of treasury stock ......................................... 0 (18,271)
Proceeds from exercise of stock options ............................. 471 4,542
--------- ---------
Net cash used in financing activities ............................... (5,651) (2,482)
--------- ---------
Increase in cash and cash equivalents ............................... 37,848 84,251
Cash and cash equivalents, beginning of period ...................... 102,026 36,640
--------- ---------
Cash and cash equivalents, end of period ............................ $ 139,874 $ 120,891
========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes .............. $ 0 $ 92,131
========= =========
Equipment acquired through capital leases ........................... $ 9,210 $ 640
========= =========
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
See Notes to Condensed Consolidated Financial Statements
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
We have prepared the condensed consolidated balance sheet as of August 2,
2003, the condensed consolidated statements of operations and comprehensive
income (loss) for the thirteen and twenty-six weeks ended August 2, 2003 and
August 3, 2002, and the condensed consolidated statements of cash flows for the
twenty-six weeks ended August 2, 2003 and August 3, 2002 without audit. In the
opinion of our management, all adjustments (which include only normal recurring
adjustments, except for the cumulative effect of accounting changes) necessary
to present fairly the financial position at August 2, 2003, the results of
operations for the thirteen and twenty-six weeks ended August 2, 2003 and August
3, 2002, and cash flows for the twenty-six weeks ended August 2, 2003 and August
3, 2002 have been made.
We have condensed or omitted certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and related notes included in our February 1, 2003 Annual Report on Form 10-K.
The results of operations for the thirteen and twenty-six weeks ended August 2,
2003 and August 3, 2002 are not necessarily indicative of operating results for
the full fiscal year.
As used in these notes, the terms "Fiscal 2004" and "Fiscal 2003" refer to
our fiscal year ending January 31, 2004 and our fiscal year ended February 1,
2003, respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2003 First
Quarter" refer to the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. The terms "Fiscal 2004 Second Quarter" and "Fiscal 2003 Second
Quarter" refer to the thirteen weeks ended August 2, 2003 and August 3, 2002,
respectively. The terms "first half of Fiscal 2004" and "first half of Fiscal
2003" refer to the twenty-six weeks ended August 2, 2003 and August 3, 2002,
respectively. The terms "the Company," "we," "us," and "our" refer to Charming
Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
In accordance with the transition provisions of FASB Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
we performed a review of our goodwill and other indefinite-lived intangible
assets for impairment during the second quarter of Fiscal 2003. We determined
that the carrying value of goodwill related to our acquisition of Catherines
Stores Corporation ("Catherine's") exceeded its estimated fair value under SFAS
No. 142. We recognized a charge of $43,975,000 as the cumulative effect of an
accounting change as of the beginning of Fiscal 2003 to reduce the carrying
value of the Catherine's goodwill to its estimated fair value. This charge has
no tax effect, as it is not deductible for tax purposes.
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Condensed Consolidated Financial Statements (continued)
In the fourth quarter of Fiscal 2003, we adopted 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," as of the beginning of Fiscal 2003 and
restated our results of operations for the first three quarters of Fiscal 2003.
EITF Issue 02-16 addresses the accounting for cash consideration given to a
customer, including both a reseller of the vendor's products and an entity that
purchases the vendor's products, from a reseller. The Issue provides accounting
guidance on how a customer should characterize cash consideration received from
a vendor, and when to recognize and how to measure that consideration in its
income statement. The cumulative effect of the adoption of EITF Issue 02-16 as
of the beginning of Fiscal 2003 was a charge of $5,123,000, net of income taxes
of $2,758,000. For interim reporting, markdown allowances are generally
deferred, and are recognized in the period in which markdown expenses are
recognized.
The results of operations for the Fiscal 2003 Second Quarter and first half
of Fiscal 2003 as previously reported, prior to the restatement for the adoption
of EITF Issue 02-16, were as follows:
Thirteen Twenty-six
Weeks Ended Weeks Ended
(In thousands, except per-share amounts) August 3, 2002 August 3, 2002
-------------- --------------
Net sales ........................................ $ 638,307 $ 1,268,923
Cost of goods sold, buying, and occupancy expenses 441,246 880,054
Net income (loss) ................................ 25,549 (2,115)
Net income (loss) per share:
Basic ........................................ $ .22 $ (.02)
Diluted ...................................... .20 .00
We account for stock-based compensation using the intrinsic value method,
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. We
amortize deferred compensation expense attributable to stock awards and stock
options having an exercise price less than the market price on the date of grant
over the vesting period of the award or option. We do not recognize compensation
expense for options having an exercise price equal to the market price on the
date of grant or for shares purchased under our Employee Stock Purchase Plan. We
have elected to follow the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," and have adopted the disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," as of the beginning of Fiscal 2004.
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Condensed Consolidated Financial Statements (continued)
The following table reconciles net income (loss) and net income (loss) per
share as reported, using the intrinsic value method under APB No. 25, to pro
forma net income (loss) and pro forma net income (loss) per share using the fair
value method under SFAS No. 123:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
(In thousands, except per-share amounts) 2003 2002(1) 2003 2002(1)
---- ------- ---- -------
Net income (loss), as reported ............. $ 18,645 $ 25,470 $ 28,334 $ (6,356)
Add stock-based employee compensation as
reported, using intrinsic value method,
net of income taxes ................... 230 201 500 409
Less stock-based employee compensation,
using fair value method, net of income
taxes ................................. (695) (1,493) (1,684) (2,858)
-------- -------- -------- --------
Pro forma net income (loss) ................ $ 18,180 $ 24,178 $ 27,150 $ (8,805)
======== ======== ======== ========
Basic net income (loss) per share:
As reported............................ $ .17 $ .22 $ .25 $ (.06)
Pro forma.............................. .16 .21 .24 (.08)
Diluted net income (loss) per share:
As reported............................ .15 .20 .24 (.03)
Pro forma.............................. .15 .19 .23 (.05)
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
2. Trademarks and Other Intangible Assets
August 2, February 1,
(In thousands) 2003 2003
---- ----
Trademarks, tradenames, and internet domain names . $168,800 $168,800
Customer lists and covenant not to compete ........ 3,300 3,300
-------- --------
Total at cost ..................................... 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete ....................... 1,292 962
-------- --------
Net trademarks and other intangible assets ........ $170,808 $171,138
======== ========
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Long-term Debt
August 2, February 1,
(In thousands) 2003 2003
---- ----
4.75% Senior Convertible Notes due 2012 $ 150,000 $ 150,000
Capital lease obligations ............. 35,378 31,703
6.53% mortgage note ................... 12,950 13,650
7.77% mortgage note ................... 10,263 10,478
7.5% mortgage note .................... 5,952 6,059
Other long-term debt .................. 4,185 3,750
--------- ---------
Total long-term debt .................. 218,728 215,640
Less current portion .................. 14,626 12,595
--------- ---------
Long-term debt ........................ $ 204,102 $ 203,045
========= =========
4. Stockholders' Equity
Twenty-six
Weeks Ended
(In thousands) August 2, 2003
--------------
Total stockholders' equity, beginning of period ...................... $ 561,634
Net income ........................................................... 28,334
Exercises of stock options ........................................... 377
Amortization of deferred compensation expense ........................ 769
Amortization of deferred loss on termination of derivative, net of tax 171
Unrealized losses on available-for-sale securities, net of tax ....... (18)
---------
Total stockholders' equity, end of period ............................ $ 591,267
=========
5. Customer Loyalty Card Program
During the Fiscal 2004 First Quarter, we introduced a new Fashion Bug
customer loyalty card program that is being operated under our Fashion Bug
proprietary credit card program. For an annual fee of $25, the program grants,
among other benefits, a $20 discount each time a customer accumulates over $200
of purchases (up to $2,000 of purchases) to be applied at the next purchase. We
have accrued $2,400,000 for the estimated costs of discounts earned and coupons
issued and not redeemed during the first half of Fiscal 2004. Customers are
entitled to a full refund of the $25 annual fee if membership is canceled within
90 days. After 90 days customers will be entitled to a pro rata refund based on
the number of months remaining on the annual membership. Accordingly, we
recognize 25 % of the annual membership fee as revenue after 90 days, with the
remaining fee recognized on a pro rata basis over nine months. Costs we incur in
connection with administering the program are recognized in cost of goods sold
as incurred. During the Fiscal 2004 Second Quarter, we recognized revenues of
$2,791,000 in connection with the new loyalty card program. No revenues were
recognized during the Fiscal 2004 First Quarter.
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Customer Loyalty Card Program (continued)
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds the card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the Fiscal 2004 Second Quarter and Fiscal 2003 Second Quarter, we
recognized revenues of $2,135,000 and $6,096,000, respectively, in connection
with this program. During the first half of Fiscal 2004 and the first half of
Fiscal 2003, we recognized revenues of $6,308,000 and $10,407,000, respectively,
in connection with this program. As of December 1, 2002, we discontinued the
issuance of new cards under this program. We terminated this program during the
Fiscal 2004 Second Quarter.
6. Net Income (Loss) Per Share
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
(In thousands, except per-share amounts) 2003 2002(1) 2003 2002(1)
---- ------- ---- -------
Basic weighted average common shares
outstanding ............................... 112,421 115,621 112,391 113,681
Dilutive effect of assumed conversion of
4.75% senior convertible notes ............ 15,182 10,233 15,182 5,117
Dilutive effect of assumed conversion of
7.5% convertible subordinated notes ....... 9,148 11,012
Dilutive effect of stock options .............. 807 2,208 496 2,297
--------- --------- --------- ---------
Diluted weighted average common shares and
equivalents outstanding ................... 128,410 137,210 128,069 132,107
========= ========= ========= =========
Income before cumulative effect of accounting
changes ................................... $ 18,645 $ 25,470 $ 28,334 $ 42,742
Decrease in interest expense from assumed
conversion of notes, net of income taxes .. 1,062 1,352 2,161 2,472
--------- --------- --------- ---------
Income before cumulative effect of accounting
changes used to determine diluted net
income per share .......................... 19,707 26,822 30,495 45,214
Cumulative effect of accounting changes ....... 0 0 0 (49,098)
--------- --------- --------- ---------
Net income (loss) used to determine diluted net
income (loss) per share ................... $ 19,707 $ 26,822 $ 30,495 $ (3,884)
========= ========= ========= =========
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Net Income (Loss) Per Share (continued)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
(In thousands, except per-share amounts) 2003 2002 2003 2002
---- ---- ---- ----
Options with weighted average exercise price
greater than market price, excluded
from computation of diluted net income
(loss) per share:
Number of shares........................... 8,430 1,075 10,342 951
Weighted average exercise price per share.. $6.44 $11.03 $6.14 $11.46
7. Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve profitability. The components of the cost reduction plan are as follows:
o Reduction in corporate operating expenses by streamlining processes and
gaining optimal pricing through the consolidation of vendors and the
continued centralization of finance, human resources, and other
administrative functions in order to leverage the efficiency of our shared
services organization.
o Workforce reduction at our corporate and divisional home offices.
o Consolidation of our Memphis, Tennessee distribution center into our
distribution center in White Marsh, Maryland.
o Consolidation of our Hollywood, Florida credit operations into our Milford,
Ohio facility.
o Closing of the 9 Monsoon/Accessorize stores that we operate under a joint
venture with Monsoon plc.
We are accounting for the plan in accordance with the provisions of SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
total estimated costs related to the plan are $11,140,000, of which $4,431,000
of costs were incurred during the Fiscal 2004 First Quarter and $6,389,000 of
costs were incurred during the Fiscal 2004 Second Quarter. We expect to incur
the remaining costs in connection with the plan by the end of Fiscal 2004.
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Expenses Related to Cost Reduction Plan (continued)
The total estimated costs related to the plan consist of the following:
(In thousands)
Workforce reduction costs ..................................................... $ 3,075
Lease termination and related costs ........................................... 3,690
Acceleration of depreciation of property, equipment, and leasehold improvements 3,703
Other facility closure costs .................................................. 672
--------
Total estimated costs ......................................................... $ 11,140
========
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the
Fiscal 2004 First Quarter. During the Fiscal 2004 First Quarter, we terminated
118 employees and accrued the severance benefit in accordance with SFAS No. 146.
We terminated 231 employees during the Fiscal 2004 Second Quarter in connection
with the closing of our Memphis, Tennessee distribution center, our Hollywood,
Florida credit operations, and our remaining Monsoon stores. In accordance with
SFAS No. 146, we recognized retention bonuses ratably over the service period.
Lease termination and related costs mainly represent the estimated fair value of
the remaining lease obligations at the Hollywood, Florida facility, reduced by
estimated sublease income. In accordance with SFAS No. 146, we recognized the
present value of the remaining lease obligation less estimated sublease income
related to the Hollywood, Florida facility in June 2003 when we closed the
facility. Accelerated depreciation costs mainly represent the acceleration of
depreciation of the net book value of the assets at our Memphis, Tennessee
distribution center, which we closed in June 2003, to estimated fair value.
During the Fiscal 2004 First Quarter, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset to its fair value as of its cease-use date of June 2003. Subsequent
to the end of the Fiscal 2004 Second Quarter, we made a decision to re-evaluate
the use of the facility. As a result, we will depreciate the current carrying
amount of the asset over its estimated useful life.
The total estimated costs related to the plan increased $715,000 during the
Fiscal 2004 Second Quarter, primarily as a result of a decrease in estimated
sublease income for the Hollywood, Florida facility and a decrease in the
estimated fair value of the Memphis, Tennessee distribution center.
13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Expenses Related to Cost Reduction Plan (continued)
Costs accrued in connection with the plan, and payments/settlements against
the accrual for the first half of Fiscal 2004, were as follows:
Costs for Costs for
Quarter Ended Quarter Ended Payments/ Accrued at
(In thousands) May 3, 2003 August 2, 2003 Settlements August 2, 2003
----------- -------------- ----------- --------------
Workforce reduction costs .... $ 2,409 $ 650 $ (2,140) $ 919
Lease termination and
related costs ........... 301 3,139 (681) 2,759
Accelerated depreciation costs
(non-cash charge) ....... 1,363 2,340 (3,703) 0
Other facility closure costs . 358 260 (618) 0
------- ------- -------- -------
Total ........................ $ 4,431 $ 6,389 $ (7,142) $ 3,678
======= ======= ======== =======
Expenses related to the plan incurred during the Fiscal 2004 Second Quarter
and first half of Fiscal 2004 are included in "Expenses related to cost
reduction plan" in the accompanying Condensed Consolidated Statements of
Operations.
8. Corporate-owned Life Insurance Program
Pending final calculation of interest, we reached a settlement with the
Internal Revenue Service regarding its audit of our corporate-owned life
insurance ("COLI") program. The settlement includes $18,477,000 of income taxes
and approximately $4,420,000 of interest, net of a tax benefit of $2,380,000. Of
the $18,477,000 of income taxes, $16,125,000 was satisfied through the use of
existing operating loss and tax credit carrybacks. As part of the settlement, we
surrendered our existing life insurance policies and received their cash
surrender value of $16,332,000. The settlement had no impact on our current
results of operations, as we had previously provided for taxes to cover the
settlement. The settlement will have a net positive impact of approximately
$7,100,000 on our Fiscal 2004 cash flows.
9. Impact of Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Our adoption of SFAS No. 143 as of the
beginning of Fiscal 2004 had no impact on our financial position or results of
operations.
14
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Impact of Recent Accounting Pronouncements (continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 amends SFAS No. 123 to
provide alternative transition methods for a voluntary change from the intrinsic
value method of accounting for stock-based compensation under APB Opinion No. 25
to the fair value method of accounting under SFAS No. 123. SFAS No. 148 also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
used in accounting for stock-based compensation and the effects of the method
used on reported results.
We have adopted the interim financial statement disclosure requirements of
SFAS No. 148 in the Fiscal 2004 First Quarter. At the present time, we do not
intend to change from the intrinsic value method of accounting for stock-based
compensation to the fair value method.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after that date.
We do not currently hold derivative instruments subject to the provisions
of SFAS No. 133, as amended. Adoption of SFAS No. 149 had no impact on our
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that financial instruments within the scope of the statement be
classified as a liability (or an asset in some circumstances). Under previous
guidance, such instruments could be classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities.
We have not issued financial instruments subject to the provisions of SFAS
No. 150. We do not expect that adoption of SFAS No. 150 will have a material
impact on our financial position or results of operations.
15
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Impact of Recent Accounting Pronouncements (continued)
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements." A
variable interest entity ("VIE") is a corporation, trust, partnership, or other
legal entity used for business purposes that either does not have equity
investors with substantive voting rights or has equity investors that do not
provide sufficient financial resources for the entity to finance its activities
without additional subordinated financial support from other parties.
Consolidation of a VIE by a variable interest holder is required if the variable
interest holder is subject to a majority of the VIE's risk of loss, is entitled
to receive a majority of the VIE's residual returns, or both. The variable
interest holder that consolidates the VIE is the primary beneficiary. FIN No. 46
also requires that the primary beneficiary and all other enterprises with a
significant variable interest in a VIE provide certain additional disclosures.
FIN No. 46 provides certain exceptions to these rules, including qualifying
special purpose entities ("QSPEs") subject to the requirements of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
FIN No. 46 is effective immediately for new VIEs created after January 31,
2003. For VIEs created before February 1, 2003, the consolidation provisions of
FIN. No. 46 are to be applied in the first interim or annual reporting period
beginning after June 15, 2003. The disclosure provisions of FIN No. 46 apply to
financial statements issued after January 31, 2003, regardless of when the VIE
was established. We are currently assessing the impact of FIN No. 46 on our
financial statements; however, we do not expect that adoption of FIN No. 46 will
have a material impact on our financial position or results of operations.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. It should
also be read in conjunction with the management's discussion and analysis of
financial condition and results of operations, financial statements, and
accompanying notes appearing in our annual report on Form 10-K for the fiscal
year ended February 1, 2003. As used in this management's discussion and
analysis, the terms "Fiscal 2004" and "Fiscal 2003" refer to our fiscal year
ending January 31, 2004 and our fiscal year ended February 1, 2003,
respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2003 First
Quarter" refer to the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. The terms "Fiscal 2004 Second Quarter" and "Fiscal 2003 Second
Quarter" refer to the thirteen weeks ended August 2, 2003 and August 3, 2002,
respectively. The term "Fiscal 2005" refers to our fiscal year ending January
29, 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, capital expenditures and cost reductions, plans for future operations,
and financing needs or plans, as well as assumptions relating to the foregoing.
The words "expect," "should," "project," "estimate," "predict," "anticipate,"
"plan," "believes," and similar expressions are also intended to identify
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, some of which we cannot predict or quantify. Future
events and actual results, performance, and achievements could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements. We assume no obligation to update any forward-looking statement to
reflect actual results or changes in or additions to the factors affecting such
forward-looking statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel and
accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive and we
may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-sized women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-sized women's apparel market, which may not continue.
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.
17
o We depend on our distribution centers and could incur significantly higher
costs and longer lead times associated with distributing our products to
our stores if any of these distribution centers were to shut down for any
reason.
o We may experience disruptions in the flow of our merchandise during the
relocation of our Memphis, Tennessee and Columbus, Ohio distribution
centers to our White Marsh, Maryland distribution center.
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and on our
credit card securitization program. If we were unable to obtain sufficient
financing at affordable cost, our ability to merchandise our stores would
be adversely affected.
o We rely significantly on foreign sources of production and face a variety
of risks (including political instability, imposition of duties, quotas, or
sanctions, increased security requirements applicable to imports, delays in
shipping, increased costs of transportation, and issues relating to
compliance with domestic or international labor standards) generally
associated with doing business in foreign markets and importing merchandise
from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods, or
in the availability of working capital needed in the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which we believe are important to our success and our competitive
position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our cost reduction plan
described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise to
us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip centers
and malls in which our stores are located, and our future growth is
dependent upon the availability of suitable locations for new stores.
o We may be unable to successfully integrate Lane Bryant into our current
operating structure, or implement our plan to improve merchandise
assortments and sales performance in our Lane Bryant stores. We also
currently rely on logistics services from Limited Brands, Inc. ("Limited
Brands") with respect to our Lane Bryant stores.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the management's
discussion and analysis of financial condition and results of operations and
notes accompanying the consolidated financial statements that appear in our
annual report on Form 10-K for the fiscal year ended February 1, 2003. Except as
18
otherwise disclosed in the financial statements and accompanying notes included
in this report, there were no material changes in our critical accounting
policies or in the assumptions or estimates we used to prepare the financial
information appearing in this report.
During the Fiscal 2004 First Quarter, we introduced a new customer loyalty
card program that is being operated under our proprietary credit card program.
See "Comparison of Thirteen Weeks Ended August 2, 2003 and August 3, 2002; Net
Sales" and "Comparison of Twenty-six Weeks Ended August 2, 2003 and August 3,
2002; Net Sales" below for further details of this program.
RESULTS OF OPERATIONS
The following table presents certain financial data expressed as a
percentage of net sales and on a comparative basis:
Thirteen Weeks Ended Percentage Twenty-six Weeks Ended Percentage
-------------------- Change ---------------------- Change
August 2, August 3, From Prior August 2, August 3, From Prior
2003 2002(1) Period 2003 2002(1) Period
---- ------- ------ ---- ------- ------
Net sales............................... 100.0% 100.0% (5.1)% 100.0% 100.0% (7.8)%
Cost of goods sold, buying, and
occupancy expenses.................. 70.8 69.1 (2.9) 70.4 69.2 (6.2)
Selling, general, and administrative
expenses............................ 22.6 23.7 (9.6) 24.1 24.5 (9.1)
Expenses related to cost reduction plan. 1.1 0.0 - 0.9 0.0 -
Income from operations.................. 5.6 7.1 (25.9) 4.5 6.3 (33.7)
Other income, principally interest...... 0.1 0.1 (24.9) 0.1 0.1 (17.1)
Interest expense........................ 0.6 0.9 (32.2) 0.7 1.0 (38.7)
Income tax provision.................... 2.0 2.5 (23.6) 1.5 2.1 (31.4)
Minority interest in net loss of - 0.1 (87.4) - - (70.5)
subsidiary..............................
Cumulative effect of accounting changes. - - - - (3.9) -
Net income (loss) 3.1 4.0 (26.8) 2.4 (0.5) -
--------------------
(1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed
Consolidated Financial Statements).
Results may not add due to rounding.
The following table presents our net sales by store brand:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
(In millions) 2003 2002 2003 2002
---- ---- ---- ----
Fashion Bug............. $ 297.1 $ 320.6 $ 550.0 $ 610.5
Lane Bryant............. 221.0 226.9 445.9 465.7
Catherine's............. 86.4 89.8(1) 172.1 190.8(1)
Monsoon/Accessorize..... 1.0 1.0 1.7 1.9
------- ------- --------- ---------
Total net sales......... $ 605.5 $ 638.3 $ 1,169.7 $ 1,268.9
======= ======= ========= =========
--------------------
(1) Includes sales from Added Dimensions stores that were closed during Fiscal
2003.
19
The following table presents certain additional information related to
changes in our net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
---- ---- ---- ----
Increase (Decrease) in comparable store sales (1):
Fashion Bug.................................... 3% 4% 0% 0%
Catherine's.................................... 4 0 1 (1)
Lane Bryant.................................... (9) - (10) -
Sales from new stores as a percentage of total
consolidated prior-period sales:
Fashion Bug.................................... 1 3 1 4
Catherine's.................................... 1 3 1 3
Lane Bryant.................................... 3 56 3 58
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
Fashion Bug.................................... (5) (3) (5) (3)
Catherine's.................................... (2) (5) (2) (4)
Lane Bryant.................................... (1) - (1) -
Increase (decrease) in total sales.................... (5) 59 (8) 59
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
Comparison of Thirteen Weeks Ended August 2, 2003 and August 3, 2002
Net Sales
Net sales were $605.5 million for the quarter ended August 2, 2003 ("Fiscal
2004 Second Quarter"), a decrease of 5.1% from net sales of $638.3 million for
the quarter ended August 3, 2002 ("Fiscal 2003 Second Quarter"). The number of
retail stores in operation at the end of the Fiscal 2004 Second Quarter was
2,240 stores, compared to 2,334 stores at the end of the Fiscal 2003 Second
Quarter. The decrease in sales was due primarily to negative results at our Lane
Bryant chain and a decrease in the number of operating stores at our Fashion Bug
chain following our Fiscal 2003 store restructuring initiative. We continued to
experience lower customer traffic levels as a result of soft demand for apparel.
We experienced a year-over-year decrease in consolidated comparable store sales
of 1%. Fashion Bug stores experienced comparable store sales increases in plus
and missy sportswear, accessories, shoes, and intimate apparel, which were
partially offset by a decrease in dresses. For Catherine's Stores, comparable
store sales increases in knit and denim sportswear, accessories, and intimate
apparel were partially offset by a decrease in career wear. Lane Bryant stores
continued to experience comparable store sales decreases in dresses, casual
woven tops, and non-core denim, which were partially offset by increases in knit
tops, sleepwear, casual woven separates, jewelry, and accessories. The Lane
Bryant chain continued to experience poor customer acceptance of certain of its
merchandise assortments during the Fiscal 2004 Second Quarter, resulting in
higher levels of promotional pricing. This trend could continue to negatively
impact our results for the Fiscal 2004 Third Quarter. Our plans at Lane Bryant
include improved merchandise assortments for the 2003 fall season along with an
expanded direct marketing campaign, which are expected to result in improved
sales performance for the chain.
20
During the Fiscal 2004 First Quarter, we introduced a new Fashion Bug
customer loyalty card program that is being operated under our Fashion Bug
proprietary credit card program. For an annual fee of $25, the program grants,
among other benefits, a $20 discount each time a customer accumulates over $200
of purchases (up to $2,000 of purchases) to be applied at the next purchase.
During the Fiscal 2004 Second Quarter, we increased the accrual for the
estimated costs of discounts earned and coupons issued and not redeemed from
$2.1 million to $2.4 million. Customers are entitled to a full refund of the $25
annual fee if membership is canceled within 90 days. After 90 days customers
will be entitled to a pro rata refund based on the number of months remaining on
the annual membership. Accordingly, we recognize 25 % of the annual membership
fee as revenue after 90 days, with the remaining fee recognized on a pro rata
basis over nine months. Costs we incur in connection with administering the
program are recognized in cost of goods sold as incurred. During the Fiscal 2004
Second Quarter, we recognized revenues of $2.8 million in connection with the
new loyalty card program.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds the card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the Fiscal 2004 Second Quarter and Fiscal 2003 Second Quarter, we
recognized revenues of $2.1 million and $6.1 million, respectively, in
connection with this program. As of December 1, 2002, we discontinued the
issuance of new cards under this program. We terminated this program during the
Fiscal 2004 Second Quarter.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $428.4 million in
the Fiscal 2004 Second Quarter, a decrease of 2.9% from $441.4 million in the
Fiscal 2003 Second Quarter, principally reflecting the decrease in net sales. As
a percentage of net sales, these costs increased 1.7% in the Fiscal 2004 Second
Quarter as compared to the Fiscal 2003 Second Quarter.
Cost of goods sold as a percentage of net sales increased 1.8% in the
Fiscal 2004 Second Quarter as compared to the Fiscal 2003 Second Quarter. The
increase was primarily a result of lower merchandise margins in our Catherine's
and Lane Bryant chains, partially offset by improved margins in our Fashion Bug
chain. Cost of goods sold includes merchandise costs, net of discounts and
allowances, freight, and inventory shrinkage. Net merchandise costs and freight
are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales decreased 0.1%
in the Fiscal 2004 Second Quarter as compared to the Fiscal 2003 Second Quarter.
Buying expenses include payroll, payroll-related costs, and operating expenses
for our buying departments and warehouses. Occupancy expenses include rent, real
estate taxes, insurance, common area maintenance, utilities, maintenance, and
depreciation for our stores and warehouse facilities and equipment. Buying and
occupancy costs are treated as period costs and are not capitalized as part of
inventory.
21
Selling, General, and Administrative
Selling, general, and administrative expenses were $136.9 million in the
Fiscal 2004 Second Quarter, a decrease of 9.6% from $151.4 million in the Fiscal
2003 Second Quarter. As a percentage of net sales, these costs decreased by 1.1%
in the Fiscal 2004 Second Quarter as compared to the Fiscal 2003 Second Quarter.
Selling expenses as a percentage of sales for the Fiscal 2004 Second Quarter
decreased 0.8% from the prior-year period, primarily as a result of improved
management of store payroll budgets and hours. General and administrative
expenses decreased 0.3% as a percentage of sales, primarily as a result of the
realization of cost reduction initiatives, including improved management of
controllable expenses.
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve profitability. We expect this cost reduction plan to improve annualized
pre-tax earnings by approximately $45 million, with an improvement of
approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that
the full annual pre-tax benefit of $45 million will be realized during Fiscal
2005. We expect the execution of the plan to have no material after-tax cash
impact. The components of the cost reduction plan are as follows:
o Reduction in corporate operating expenses by streamlining processes and
gaining optimal pricing through the consolidation of vendors and the
continued centralization of finance, human resources, and other
administrative functions in order to leverage the efficiency of our shared
services organization.
o Workforce reduction at our corporate and divisional home offices.
o Consolidation of our Memphis, Tennessee distribution center into our
distribution center in White Marsh, Maryland.
o Consolidation of our Hollywood, Florida credit operations into our Milford,
Ohio facility.
o Closing of the 9 Monsoon/Accessorize stores that we operate under a joint
venture with Monsoon plc.
We are accounting for the plan in accordance with the provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The total estimated costs related to the plan are $11.1
million, of which $6.4 million of costs were incurred during the Fiscal 2004
Second Quarter. We expect to incur the majority of the remaining costs in
connection with the plan by the end of Fiscal 2004.
The total estimated costs related to the plan consist of the following:
(In millions)
Workforce reduction costs .............................. $ 3.1
Lease termination and related costs .................... 3.7
Acceleration of depreciation of property, equipment,
and leasehold improvements ......................... 3.7
Other facility closure costs ........................... 0.6
------
Total estimated costs .................................. $ 11.1
======
22
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the
Fiscal 2004 First Quarter. During the Fiscal 2004 Second Quarter, we terminated
231 employees in connection with the closing of our Memphis, Tennessee
distribution center, our Hollywood, Florida credit operations, and our remaining
Monsoon stores, and accrued the severance benefit in accordance with SFAS No.
146. In accordance with SFAS No. 146, we recognized retention bonuses ratably
over the service period. Lease termination and related costs mainly represent
the estimated fair value of the remaining lease obligations at the Hollywood,
Florida facility, reduced by estimated sublease income. In accordance with SFAS
No. 146, we recognized the present value of the remaining lease obligation less
estimated sublease income related to the Hollywood, Florida facility in June
2003 when we closed the facility. Accelerated depreciation costs mainly
represent the acceleration of depreciation of the net book value of the assets
at our Memphis, Tennessee distribution center, which we closed in June 2003, to
estimated fair value.
During the Fiscal 2004 First Quarter, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset so that it was recorded at fair value on its cease-use date of June
2003. Subsequent to the end of the Fiscal 2004 Second Quarter, we made a
decision to re-evaluate the use of the facility. As a result, we will depreciate
the current carrying amount of the asset over its estimated useful life.
The total estimated costs related to the plan increased $715,000 during the
Fiscal 2004 Second Quarter, primarily as a result of a decrease in estimated
sublease income for the Hollywood, Florida facility and a decrease in the
estimated fair value of the Memphis, Tennessee distribution center.
Costs accrued in connection with the plan, and payments/settlements against
the accrual for the Fiscal 2004 Second Quarter, were as follows:
Costs for
Accrued at Quarter Ended Payments/ Accrued at
(In millions) May 3, 2003 August 2, 2003 Settlements August 2, 2003
----------- -------------- ----------- --------------
Workforce reduction costs...... $ 1.6 $ 0.6 $ (1.3) $ 0.9
Lease termination and
related costs.............. 0.0 3.2 (0.4) 2.8
Accelerated depreciation costs
(non-cash charge).......... 0.0 2.3 (2.3) 0.0
Other facility closure costs... 0.0 0.3 (0.3) 0.0
----- ----- ------ -----
Total.......................... $ 1.6 $ 6.4 $ (4.3) $ 3.7
===== ===== ====== =====
Expenses related to the plan incurred during the Fiscal 2004 Second Quarter
are included in "Expenses related to cost reduction plan" in the accompanying
Condensed Consolidated Statements of Operations.
23
Other Income/Interest Expense
Other income (principally interest income) was $0.5 million in the Fiscal
2004 Second Quarter, a decrease from $0.7 million in the Fiscal 2003 Second
Quarter. Interest expense was $3.8 million in the Fiscal 2004 Second Quarter, a
decrease of 32.2% from $5.7 million in the Fiscal 2003 Second Quarter. Fiscal
2003 Second Quarter interest expense included a write-off of $1.0 million of
unamortized deferred financing costs related to our $67.5 million 11.5% term
loan which was paid off. In addition, the decrease was primarily a result of
lower interest rates on borrowings in the Fiscal 2004 Second Quarter as compared
to the Fiscal 2003 Second Quarter. During the Fiscal 2003 Second Quarter, we
replaced $96.0 million of 7.5% Convertible Subordinated Notes due 2006 and a
$67.5 million 11.5% term loan with $150.0 million of 4.75% Senior Convertible
Notes.
Income Tax Provision
The income tax provision for the Fiscal 2004 Second Quarter was $11.8
million, resulting in a 38.9% effective tax rate, as compared to an income tax
provision for the Fiscal 2003 Second Quarter of $15.5 million, resulting in a
38.2% effective tax rate.
Comparison of Twenty-six Weeks Ended August 2, 2003 and August 3, 2002
Net Sales
Net sales were $1,169.7 million for the twenty-six weeks ended August 2,
2003 ("first half of Fiscal 2004"), a decrease of 7.8% from net sales of
$1,268.9 million for the twenty-six weeks ended August 3, 2002 ("first half of
Fiscal 2003"). The decrease in sales was due primarily to negative results at
our Lane Bryant chain and a decrease in the number of operating stores at our
Fashion Bug chain following our Fiscal 2003 store restructuring initiative. We
continued to experience lower customer traffic levels at each of our chains as a
result of soft demand for apparel. We experienced a year-over-year decrease in
consolidated comparable store sales of 4%. Fashion Bug stores experienced
comparable store sales increases in plus sportswear, intimate apparel,
accessories, and shoes, which were offset by decreases in junior and misses
sportswear and dresses. For Catherine's Stores, comparable store sales increases
in accessories, budget and petite dresses, knits, and denim were offset by
decreases in career wear, moderate dresses, and casual wovens. Lane Bryant
stores experienced comparable store sales decreases in dresses, casual woven
tops, and non-core denim, which were partially offset by increases in knit tops,
sleepwear, casual woven separates, jewelry, and accessories. The Lane Bryant
chain continued to experience poor customer acceptance of certain of its
merchandise assortments during the first half of Fiscal 2004, resulting in
higher levels of promotional pricing. This trend could continue to negatively
impact our results for the Fiscal 2004 Third Quarter. Our plans at Lane Bryant
include improved merchandise assortments for the 2003 fall season along with an
expanded direct marketing campaign, which are expected to result in improved
sales performance for the chain.
During the Fiscal 2004 First Quarter, we introduced a new Fashion Bug
customer loyalty card program that is being operated under our Fashion Bug
proprietary credit card program. For an annual fee of $25, the program grants,
among other benefits, a $20 discount each time a customer accumulates over $200
of purchases (up to $2,000 of purchases) to be applied at the next purchase. We
have accrued $2.4 million for the estimated costs of discounts earned and
coupons issued and not redeemed during the first half of Fiscal 2004. Customers
are entitled to a full refund of the $25 annual fee if membership is canceled
within 90 days. After 90 days customers will be entitled to a pro rata refund
based on the number of months remaining on the annual membership. Accordingly,
we recognize 25 % of the annual membership fee as revenue after 90 days,
24
with the remaining fee recognized on a pro rata basis over nine months. Costs we
incur in connection with administering the program are recognized in cost of
goods sold as incurred. During the first half of Fiscal 2004, we recognized
revenues of $2.8 million in connection with the new loyalty card program.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds the card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the first half of Fiscal 2004 and the first half of Fiscal 2003, we
recognized revenues of $6.3 million and $10.4 million, respectively, in
connection with this program. As of December 1, 2002, we discontinued the
issuance of new cards under this program. We terminated this program during the
first half of Fiscal 2004.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $823.9 million in
the first half of Fiscal 2004, a decrease of 6.2% from $878.6 million in the
first half of Fiscal 2003, principally reflecting the decrease in net sales. As
a percentage of net sales, these costs increased 1.2% in the first half of
Fiscal 2004 as compared to the first half of Fiscal 2003.
Cost of goods sold as a percentage of net sales increased 0.5% in the first
half of Fiscal 2004 as compared to the first half of Fiscal 2003. The increase
was a result of significantly lower merchandise margins in our Lane Bryant chain
and a decrease in margins in our Catherine's chain, partially offset by an
improvement in margins in our Fashion Bug chain. Cost of goods sold includes
merchandise costs, net of discounts and allowances, freight, and inventory
shrinkage. Net merchandise costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 0.7%
in the first half of Fiscal 2004 as compared to the first half of Fiscal 2003.
The increase in buying and occupancy expenses as a percentage of sales was
primarily attributable to the lack of leverage on relatively fixed occupancy
costs as a result of negative comparable store sales, particularly in our Lane
Bryant chain. Buying expenses include payroll, payroll-related costs, and
operating expenses for our buying departments and warehouses. Occupancy expenses
include rent, real estate taxes, insurance, common area maintenance, utilities,
maintenance, and depreciation for our stores and warehouse facilities and
equipment. Buying and occupancy costs are treated as period costs and are not
capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $282.2 million in the
first half of Fiscal 2004, a decrease of 9.1% from $310.5 million in the first
half of Fiscal 2003. As a percentage of net sales, these costs decreased by 0.4%
in the first half of Fiscal 2004 as compared to the first half of Fiscal 2003.
Selling expenses as a percentage of sales for the first half of Fiscal 2004
decreased 0.1% from the prior-year period, primarily as a result of improvements
in store payroll expenses and the realization of cost reduction initiatives.
General and administrative expenses decreased 0.3% as a percentage of sales,
primarily as a result of the realization of cost reduction initiatives,
including improved management of controllable expenses.
25
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve profitability (see "Comparison of Thirteen Weeks Ended August 2, 2003
and August 3, 2002; Expenses Related to Cost Reduction Plan" above for details
of the plan). The total estimated costs related to the plan are $11.1 million,
of which $10.8 million of costs were incurred during the first half of Fiscal
2004. We expect to incur the majority of the remaining costs in connection with
the plan by the end of Fiscal 2004.
During the Fiscal 2004 First Quarter, we terminated 118 employees and
accrued the severance benefit in accordance with SFAS No. 146. We terminated 231
employees during the Fiscal 2004 Second Quarter in connection with the closing
of our Memphis, Tennessee distribution center, our Hollywood, Florida credit
operations, and our remaining Monsoon stores. In accordance with SFAS No. 146,
we recognized retention bonuses ratably over the service period. In accordance
with SFAS No. 146, we recognized the present value of the remaining lease
obligation less estimated sublease income related to the Hollywood, Florida
facility in June 2003 when we closed the facility.
Costs accrued in connection with the plan, and payments/settlements against
the accrual for the first half of Fiscal 2004, were as follows:
Costs for Costs for
Quarter Ended Quarter Ended Payments/ Accrued at
(In millions) May 3, 2003 August 2, 2003 Settlements August 2, 2003
----------- -------------- ----------- --------------
Workforce reduction costs........ $ 2.4 $ 0.6 $ (2.1) $ 0.9
Lease termination and
related costs................ 0.3 3.2 (0.7) 2.8
Accelerated depreciation costs
(non-cash charge)............ 1.4 2.3 (3.7) 0.0
Other facility closure costs..... 0.3 0.3 (0.6) 0.0
----- ----- ------ -----
Total............................ $ 4.4 $ 6.4 $ (7.1) $ 3.7
===== ===== ====== =====
Expenses related to the plan incurred during the first half of Fiscal 2004
are included in "Expenses related to cost reduction plan" in the accompanying
Condensed Consolidated Statements of Operations.
Other Income/Interest Expense
Other income (principally interest income) was $1.0 million in the first
half of Fiscal 2004, a decrease from $1.2 million in the first half of Fiscal
2003. Interest expense was $7.7 million in the first half of Fiscal 2004, a
decrease of 38.7% from $12.5 million in the first half of Fiscal 2003. Interest
expense for the first half of Fiscal 2003 included a write-off of $1.0 million
of unamortized deferred financing costs related to our $67.5 million 11.5% term
loan which was paid off. In addition, the decrease was the result of both lower
interest rates on borrowings and reduced levels of borrowings in the first half
of Fiscal 2004 as compared to the first half of Fiscal 2003. During the Fiscal
2003 Second Quarter, we replaced $96.0 million of 7.5% Convertible Subordinated
Notes due 2006 and a $67.5 million 11.5% term loan with $150.0 million of 4.75%
Senior Convertible Notes.
26
Income Tax Provision
The income tax provision for the first half of Fiscal 2004 was $18.0
million, resulting in a 38.9% effective tax rate, as compared to an income tax
provision for the first half of Fiscal 2003 of $26.2 million, resulting in a
38.2% effective tax rate.
Cumulative Effect of Accounting Changes
In Fiscal 2003, we changed our method of accounting for cash consideration
received from a vendor in accordance with the provisions of FASB Emerging Issues
Task Force ("EITF") Issue 02-16, "Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor." EITF Issue 02-16
addresses the accounting for cash consideration given to a customer, including
both a reseller of the vendor's products and an entity that purchases the
vendor's products, from a reseller. The Issue provides accounting guidance on
how a customer should characterize cash consideration received from a vendor and
when to recognize and how to measure that consideration in its income statement.
We adopted the provisions of EITF Issue 02-16 as of the beginning of Fiscal
2003 and restated our results of operations for the first three quarters of
Fiscal 2003. The cumulative effect of the adoption of EITF Issue 02-16 as of the
beginning of Fiscal 2003 was a charge of $5.1 million, net of income taxes of
$2.8 million.
In accordance with the transition provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," we performed a review of our goodwill and other
indefinite-lived intangible assets for impairment during the Fiscal 2003 Second
Quarter. We determined that the carrying value of goodwill related to our
Catherine's stores acquisition exceeded the estimated fair value of the goodwill
under SFAS No. 142. We recognized a charge of $44.0 million as the cumulative
effect of an accounting change as of the beginning of Fiscal 2003 to reduce the
carrying value of the Catherine's goodwill to its estimated fair value. This
charge has no tax effect, as it is not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facility.
The following table highlights certain information related to our liquidity
and capital resources:
August 2, February 1,
(Dollars in millions) 2003 2003
---- ----
Cash and cash equivalents..................... $139.9 $102.0
Long-term available-for-sale securities....... $24.3 $23.5
Working capital............................... $238.1 $196.7
Current ratio................................. 1.7 1.6
Long-term debt to equity ratio................ 34.5% 36.2%
Our net cash provided by operating activities was $74.3 million for the
first half of Fiscal 2004, as compared to $129.1 million for the first half of
Fiscal 2003. The decrease was primarily a result of a $15.5 million decrease in
net income before non-cash charges and the cumulative effect of accounting
changes; a $9.9 million increase in our investment in inventories, net of
accounts payable; and a $29.4 million decrease in net prepaid and accrued
expenses as a result of the timing of payments of accrued expenses.
27
Our capital expenditures were $25.9 million during the first half of Fiscal
2004. In addition, we acquired $9.2 million of equipment under capital leases.
During the remainder of Fiscal 2004, we anticipate incurring additional capital
expenditures of approximately $20 - $25 million, primarily for the construction
and fixturing of new stores, remodeling and fixturing of existing stores, and
improvements to our corporate offices and distribution centers. We expect to
finance these capital expenditures principally through internally generated
funds. In addition to the $20 - $25 million of capital expenditures discussed
above, we expect to incur approximately $8 million of additional capital lease
financing during the period from December 2003 through June 2004 in connection
with the replacement of point-of-sale equipment for our Lane Bryant stores.
Pending final calculation of interest, we reached a settlement with the
Internal Revenue Service regarding its audit of our corporate-owned life
insurance ("COLI") program. The settlement includes $18.5 million of income
taxes and approximately $4.4 million of interest, net of a tax benefit of $2.4
million. Of the $18.5 million of income taxes, $16.1 million was satisfied
through the use of existing operating loss and tax credit carrybacks. As part of
the settlement, we surrendered our existing life insurance policies and received
their cash surrender value of $16.3 million. The settlement had no impact on our
current results of operations, as we had previously provided for taxes to cover
the settlement. The settlement will have a net positive impact of approximately
$7.1 million on our Fiscal 2004 cash flows.
The following table sets forth information with respect to our store
activity for the first half of Fiscal 2004 and planned store activity for all of
Fiscal 2004 (including the first half of Fiscal 2004):
Fashion Lane Monsoon/
Bug Bryant Catherine's Accessorize Total
--- ------ ----------- ----------- -----
Fiscal 2004 First Half:
Stores at February 1, 2003...... 1,083 689 467 9 2,248
----- --- --- -- -----
Stores opened................... 1 17 2 20
Stores converted................ (2) 7(1) (1) 4
Stores closed................... (14) ( 6) (3) (9) (32)
----- --- --- -- -----
Net change in stores............ (15) 18 (2) (9) (8)
----- --- --- -- -----
Stores at August 2, 2003........ 1,068 707 465 0 2,240
===== === === == =====
Stores relocated during period.. 10 1 8 19
Stores remodeled during period.. 9 2 11
Fiscal 2004:
Planned store openings.......... 2 33-36 10-15 45-53
Planned store closings.......... 25-32 18-22 12-15 9 64-78
Planned store relocations....... 20-25 20-25 15-20 55-70
--------------------
(1) Includes 4 Fashion Bug stores closed prior to February 1, 2003 which were
converted to Lane Bryant stores during the Fiscal 2004 First Half.
28
We have formed a trust called the Charming Shoppes Master Trust (the
"Trust") to which Spirit of America National Bank, our credit card bank, has
transferred, through a special-purpose entity, its interest in credit card
receivables created under our Fashion Bug proprietary credit card program. We,
together with the Trust, have entered into various agreements under which the
Trust can sell, on a revolving basis, interests in these receivables for a
specified term. When the revolving period terminates, an amortization period
begins during which principal payments are made to the parties with whom the
Trust has entered into the securitization agreement. The Trust currently has two
series of credit card receivables securitizations, series 1999-1 and 2002-1,
with outstanding investor interests of $150,000,000 and $100,000,000,
respectively. The first scheduled principal payment dates and expected final
principal payment dates range from March 15, 2004 to February 15, 2005 for
Series 1999-1 and August 15, 2007 to May 15, 2008 for Series 2002-1. As credit
card receivables securitizations reach maturity, we anticipate that we will
continue to obtain funding for the Fashion Bug proprietary credit card program
through additional securitizations.
We securitized $158.1 million of private label credit card receivables in
the first half of Fiscal 2004 and had $273.7 million of securitized credit card
receivables outstanding as of August 2, 2003. We held certificates and retained
interests in our securitizations of $51.0 million as of August 2, 2003, which
were generally subordinated in right of payment to certificates issued by the
trust to third-party investors. Our obligation to repurchase receivables sold to
the trust is limited to those receivables that, at the time of their transfer,
fail to meet the trust's eligibility standards under normal representations and
warranties. To date, our repurchases of receivables pursuant to this obligation
have been insignificant.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly-owned indirect subsidiaries, are separate special-purpose
entities created for the securitization program. At August 2, 2003, Charming
Shoppes Receivables Corp. held $41.1 million of Charming Shoppes Master Trust
certificates and retained interests and Charming Shoppes Seller, Inc. held
retained interests of $0.7 million (which are included in the $51.0 million of
retained interests we held at August 2, 2003). These assets are first and
foremost available to satisfy the claims of the respective creditors of these
separate corporate entities, including certain claims of investors in the
Charming Shoppes Master Trust.
We could be affected by certain events that would cause the trust to hold
proceeds of receivables within the trust as additional enhancement, which
proceeds would otherwise be available to be paid to us with respect to our
subordinated interests. For example, if either we or the trust fail to meet
certain financial performance standards, a credit enhancement condition would
occur and the trust would be required to retain amounts otherwise payable to us.
In addition, the failure to satisfy certain financial performance standards
could further cause the trust to stop using collections on trust assets to
purchase new receivables, and would require such collections to be used to repay
investors on a prescribed basis, as provided in the trust agreements. If this
were to occur, it could result in our having insufficient liquidity; however, we
believe we should have sufficient notice to seek alternative forms of financing
through other third-party providers. As of August 2, 2003, the trust was in
compliance with all applicable financial performance standards. Amounts placed
into enhancement accounts, if not required to be paid to the other certificate
holders, will be available to us at the termination of the securitization
series. We have no obligation to directly fund the enhancement account of the
trust, other than for breaches of customary representations, warranties, and
covenants and for customary indemnities. These representations, warranties,
covenants, and indemnities do not protect the trust or investors in the trust
against credit-related losses on the receivables. The providers of the credit
enhancements and trust investors have no other recourse to us.
During the Fiscal 2004 Second Quarter, a credit-rating agency placed our
rated securitization certificates on a credit watch. On September 10, 2003, the
credit-rating agency removed the securitization certificates from credit watch
and reconfirmed the ratings of the certificates.
29
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Part II,
Item 8. Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 14. Asset Securitization" of our Annual Report on
Form 10-K for the fiscal year ended February 1, 2003.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Additional information regarding these agreements is included in "Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Part II, Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 14. Asset Securitization" of
our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. The payment
of future dividends is within the discretion of our Board of Directors and will
depend upon our future earnings, if any, our capital requirements, financial
condition and other relevant factors. Additionally, our existing credit facility
and one of our agreements with Limited Brands restrict the payment of dividends
on our common stock.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
FINANCING
As of August 2, 2003, we had a $300.0 million revolving credit facility,
which provides for cash borrowings and enables us to issue up to $150.0 million
of letters of credit for overseas purchases of merchandise and for other
guarantees. As of August 2, 2003, there were no borrowings outstanding under the
revolving credit facility. The availability of borrowings under our revolving
credit facility is subject to limitations based on eligible inventory and the
value of certain real property. The credit facility is secured by our general
assets, except for certain assets related to our credit card securitization
program, certain real properties and equipment subject to other mortgages, our
interest in our joint venture with Monsoon plc, and the assets of our non-U.S.
subsidiaries. The credit facility expires on August 16, 2004, and can be renewed
for an additional year at our option.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus
2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on our Leverage Ratio or excess availability, as defined in the
credit facility. As of August 2, 2003, the interest rate on borrowings under the
revolving credit line was 4.0%.
30
The revolving credit facility includes limitations on sales and leasebacks,
the incurrence of additional liens and debt, capital lease financing, and other
limitations. The revolving credit facility also requires, among other things,
that we not pay dividends on our common stock and, under certain circumstances,
that we maintain an Adjusted Tangible Net Worth of $228.0 million (subject to
adjustment). As of August 2, 2003, we were not in violation of any of the
covenants included in the revolving credit facility. As of August 2, 2003, the
excess availability under the revolving credit facility was $166.9 million.
Additional information regarding our long-term borrowings is included in
"Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Part II, Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 7. Debt"
of our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.
As of August 2, 2003, under authority granted by our Board of Directors
during prior fiscal years, we are authorized to repurchase approximately 5
million additional shares of our common stock. Our ability to exercise this
authority currently is restricted by the terms of our revolving credit facility
and an agreement with Limited Brands that we entered into in conjunction with
our acquisition of Lane Bryant. Subject to obtaining consents, and as conditions
may allow, we may acquire additional shares of our common stock. Such shares, if
purchased, would be held as treasury shares.
MARKET RISK
We manage our Fashion Bug proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card portfolio, the balances of which we sell
under a credit card securitization program. Under the securitization program, we
can be exposed to fluctuations in interest rates to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the trust. Until November 2000, the credit card program billed finance
charges based on a fixed rate. As of November 2000, finance charges on all
accounts are billed using a floating rate index (the Prime lending rate),
subject to a floor and limited by legal maximums. As of August 2, 2003, a
portion of the certificates have fixed rates. To the extent that interest rates
decline, we may be exposed to interest-rate risk on our fixed-rate certificates.
The floating rate index on our floating-rate certificates is either one-month
LIBOR or the commercial paper rate, depending on the issuance. Consequently, we
have reduced our exposure to fluctuations in interest rates. However, we have
exposure in the movement of basis risk between the floating rate index on the
certificates and the Prime rate. As of August 2, 2003, the floating-rate finance
charge rate was below the contractual floor rate, thus exposing us to a portion
of interest-rate risk. If short-term interest rates were to increase by one
percentage point by the end of Fiscal 2004, an increase of approximately $600
thousand in selling, general, and administrative expenses would result.
As of August 2, 2003, there were no borrowings outstanding under our
revolving credit facility. To the extent that there are borrowings outstanding
under our revolving credit facility, such borrowings would be exposed to
variable interest rates. An increase in market interest rates would increase our
interest expense and decrease our cash flows. A decrease in market interest
rates would decrease our interest expense and increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
31
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited); Note 9. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have established a
Disclosure Committee, which is made up of several key management employees and
reports directly to the CEO and CFO, to centralize and enhance these controls
and procedures and assist our management, including our CEO and CFO, in
fulfilling their responsibilities for establishing and maintaining such controls
and procedures and providing accurate, timely, and complete disclosure.
As of the end of the period covered by this report on Form 10-Q (the
"Evaluation Date"), our Disclosure Committee, under the supervision and with the
participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective. Furthermore, there has been no change in
our internal control over financial reporting that occurred during the period
covered by this report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings involving the
Company or its subsidiaries since those reported in our Annual Report on Form
10-K for the fiscal year ended February 1, 2003 and our Quarterly Report on Form
10-Q for the quarter ended May 3, 2003.
Other than ordinary routine litigation incidental to our business, there
are no other pending legal proceedings to which we or any of our subsidiaries
are a party, and there are no other proceedings that are expected to have a
material adverse effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on June 26, 2003.
William O. Albertini and Charles T. Hopkins were nominated for election, in
our Proxy Statement, to serve three-year terms as Class A Directors. The total
number of shares represented at the Annual Meeting were 103,968,057 shares,
representing 92.0% of the total number of shares outstanding as of the close of
business on May 7, 2003 (the record date fixed by the Board of Directors). The
following table indicates the number of votes cast in favor of election and the
number of votes withheld with respect to each of the Class A Directors
nominated:
Name Votes For Votes Withheld
---- --------- --------------
William O. Albertini 103,570,231 397,826
Charles T. Hopkins 102,510,928 1,457,129
A proposal to approve the 2003 Non-Employee Directors Compensation Plan,
authorizing the availability of 600,000 shares of our common stock for grants
and awards to non-employee directors, was approved, with 91,218,147 votes for
the proposal, 12,626,319 votes against the proposal, and 123,591 abstentions.
A proposal to approve the 2003 Incentive Compensation Plan was approved,
with 96,815,474 votes for the proposal, 7,046,795 votes against the proposal,
and 105,788 abstentions.
33
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 29, 1994. (File No.
000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2)
31.1 Certification By Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification By Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On May 22, 2003, we filed a Current Report on Form 8-K to furnish, under
"Item 9. Regulation FD Disclosure," and "Item 12. Results of Operations and
Financial Condition," the text of our press release, issued May 22, 2003,
announcing our earnings for the quarter ended May 3, 2003 (the first quarter of
our fiscal year ending January 31, 2004).
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
(Registrant)
Date: September 5, 2003 /S/ DORRIT J. BERN
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: September 5, 2003 /S/ ERIC M. SPECTER
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
35
Exhibit Index
Exhibit No. Item
----------- ----
3.1 Restated Articles of Incorporation, incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended January
29, 1994. (File No. 000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999.
(Exhibit 3.2)
31.1 Certification By Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification By Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
36