CHRS-01.28.12_Q4-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 2012
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)
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PENNSYLVANIA | 23-1721355 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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3750 STATE ROAD, BENSALEM, PA 19020 | (215) 245-9100 |
(Address of principal executive offices) (Zip Code) | (Registrant’s telephone number, including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $.10 per share | The NASDAQ Stock Market LLC Chicago Stock Exchange, Inc. |
(Title of Each Class) | (Name of Each Exchange on Which Registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Each Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:
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:
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
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Large Accelerated Filer ¨ | Accelerated Filer x |
Non-accelerated Filer ¨ | Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
The aggregate market value of the outstanding common stock of the registrant held by non-affiliates as of July 30, 2011 (the last day of the registrant's most recently completed second fiscal quarter), based on the closing price on July 29, 2011, was approximately $474,087,252.
As of March 14, 2012, 116,630,045 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Form 10-K is incorporated by reference herein from the registrant's Report on Form 10-K/A, which will be filed within 120 days after the end of the fiscal year covered by this Annual Report.
CHARMING SHOPPES, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Schedule II | | |
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PART I
Item 1. Business
GENERAL
We are a specialty apparel retailer with a leading market share in women's plus-size specialty apparel. During our fiscal year ended January 28, 2012 (“Fiscal 2011”) our business operations consisted primarily of three distinct core brands: LANE BRYANT®, FASHION BUG®, and CATHERINES PLUS SIZES®. These core brands operate retail stores and store-related e-commerce websites under our Retail Stores segment. Through our multiple channels, fashion content, and broad merchandise assortments, we seek to appeal to customers from a broad range of socioeconomic, demographic, and cultural groups. During Fiscal 2011 the sale of plus-size apparel represented approximately 84% of our total net sales. In addition to our Retail Stores segment we also derive revenues from sales of food and gifts through our FIGI'S® catalog and website, which operate under our Direct-to-Consumer segment.
LANE BRYANT is a widely recognized brand name in plus-size fashion. Through private labels such as LANE BRYANT and CACIQUE®, and select national brands, we offer fashionable and sophisticated apparel in plus-sizes 12-32, including intimate apparel, wear-to-work and casual sportswear, accessories, select footwear, and social occasion apparel. LANE BRYANT has a loyal customer base, generally ranging in age from 35 to 55 years old, which shops for fashionable merchandise in the moderate price range. Our 685 LANE BRYANT retail stores comprise 4.0 million square feet of real estate and are located in 46 states, in a combination of destination malls, lifestyle centers, and strip shopping centers. Our average LANE BRYANT store size is approximately 5,800 square feet. During Fiscal 2011 our lanebryant.com website averaged 2.7 million unique visitors per month with an established on-line community.
Our LANE BRYANT intimate apparel side-by-side store pairs LANE BRYANT's casual and wear-to-work sportswear assortments with an expanded line of CACIQUE intimates as well as additional national brands, presented in a double store-front. This larger footprint of approximately 7,200 square feet per combined store compares with the full-line LANE BRYANT store average footprint of approximately 5,500 square feet. Included in the 685 stores operated by LANE BRYANT as of January 28, 2012 are 136 stores operated in the side-by-side format.
LANE BRYANT OUTLET® is a national chain offering women's plus-size apparel in the outlet sales channel. Through our private labels we offer fashionable and sophisticated apparel in plus-sizes 12-32, including intimate apparel, wear-to-work and casual sportswear, accessories, select footwear, and social occasion apparel. Our 117 LANE BRYANT OUTLET retail stores comprise 0.7 million square feet of real estate and are located in 37 states throughout the country in outlet centers. Our average LANE BRYANT OUTLET store size is approximately 5,800 square feet.
FASHION BUG stores specialize in selling plus-size, misses, and junior apparel in sizes 6-30, serving women's lifestyle needs from weekend to business wear, as well as accessories, intimate apparel, and footwear. FASHION BUG customers generally range in age from 30 to 50 years old and shop in the low-to-moderate price range. Our 620 FASHION BUG retail stores comprise 5.4 million square feet of real estate and are located in 40 states, primarily in strip shopping centers. Our average FASHION BUG store size is approximately 8,600 square feet. During Fiscal 2011 our fashionbug.com website averaged 1.4 million unique visitors per month.
In December 2011 we announced that we are undertaking a comprehensive strategic and financial review of our operations to determine how best to enhance shareholder value. This review is continuing. As part of these efforts, we announced our plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT brand. We cannot assure that this review will result in any specific course of action or that the planned divestiture of FASHION BUG will occur. We have not reported a time frame for the completion of this strategic review. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; RECENT DEVELOPMENTS" and "OVERVIEW” below for further discussion of our management initiatives.
CATHERINES PLUS SIZES carries a full range of plus sizes (16-34 and 0X-5X) and is particularly known for extended sizes (28-34). CATHERINES® offers classic apparel and accessories for wear-to-work and casual lifestyles. CATHERINES customers are generally in the 45 years old and older age group, shop in the moderate price range, and are concerned with comfort, fit, and value. Our 435 CATHERINES retail stores comprise 1.8 million square feet of real estate and are located in 44 states, primarily in strip shopping centers. Our average CATHERINES store size is approximately 4,100 square feet. Included in the 435 stores operated by CATHERINES as of January 28, 2012 are 15 stores operated in outlet locations. In March 2011 we announced our plans to close the 30 CATHERINES stores operating in outlet locations. We closed 15 of these stores during Fiscal 2011 and expect to close the remainder during Fiscal 2012. During Fiscal 2011 our catherines.com website averaged more than 0.8 million unique visitors per month.
During Fiscal 2011 we further enhanced our Retail Stores segment e-commerce operations by offering an expanded selection of new brands through our SONSI® website and the launch of new online outfitting technology that makes personalized style and fit recommendations. Our customers can use these recommendations within the outfitting tool to facilitate viewing and buying of complete outfits. In addition, we announced the launch of an international shipping program that enables customers in over 100 countries and territories worldwide to shop our brands online.
FIGI'S markets food and specialty gift products through its Figi's Gifts in Good Taste® catalog, its figis.com e-commerce website, and through third-party retailers' stores and e-commerce websites. FIGI'S specializes in dairy cheeses, smokehouse meats, holiday fare, bakery, chocolates, nuts, sweets, and snacks. FIGI'S also offers special gift assortments, collectibles, and exclusive and personalized items. FIGI'S® Gallery offers home decor, bedding, housewares, jewelry, garden accents, apparel, collectibles, gifts and other items through its catalog and figisgallery.com e-commerce website.
Financial information by business segment for each of our last three fiscal years is included in “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements; NOTE 16. SEGMENT REPORTING” below.
RETAIL STORES SEGMENT
Stores
Our store openings, closings, and number of locations over the past three fiscal years are as follows:
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| January 28, 2012 | | January 29, 2011 | | January 30, 2010 |
Store Activity: | | | | | |
Number of stores open at beginning of period | 2,064 |
| | 2,121 |
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Stores opened | 7 |
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Stores converted(1) | — |
| | 28 |
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Stores closed(2) | (214 | ) | | (94 | ) | | (160 | ) |
Number of stores open at end of period | 1,857 |
| | 2,064 |
| | 2,121 |
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Number of Stores Open at End of Period by Brand: | |
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LANE BRYANT(3) | 802 |
| | 846 |
| | 860 |
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FASHION BUG | 620 |
| | 743 |
| | 801 |
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CATHERINES | 435 |
| | 475 |
| | 460 |
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Number of stores open at end of period | 1,857 |
| | 2,064 |
| | 2,121 |
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(1) | During Fiscal 2009 we decided to close our 49 PETITE SOPHISTICATE OUTLET stores and convert a majority of the locations to CATHERINES stores in outlet locations. We completed the conversion of 5 stores during Fiscal 2009 and completed the remaining 28 conversions in February 2010. During Fiscal 2010 we also converted 5 FASHION BUG locations to LANE BRYANT OUTLET locations and converted 1 FASHION BUG location to a LANE BRYANT location. |
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(2) | Includes 124 FASHION BUG, 49 LANE BRYANT, 1 LANE BRYANT OUTLET, and 40 CATHERINES stores (including 15 CATHERINES stores in outlet locations) in Fiscal 2011; 52 FASHION BUG, 27 LANE BRYANT, 1 LANE BRYANT OUTLET, and 14 CATHERINES stores in Fiscal 2010; and 22 FASHION BUG and 10 LANE BRYANT stores in Fiscal 2009 closed in connection with our store closing initiatives. |
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(3) | Includes LANE BRYANT OUTLET stores as follows: 117 in Fiscal 2011, 115 in Fiscal 2010, and 106 in Fiscal 2009. |
Our retail stores are currently located primarily in suburban areas and small towns. Approximately 80% of our retail stores are strip-center based, with the remainder located in community and regional malls. Approximately 57% of our LANE BRYANT stores are located in power-strip and lifestyle shopping centers, with the remaining stores located primarily in malls. We continually evaluate additional store locations that meet our financial and operational objectives.
In conjunction with our announcement in December 2011 that we plan to divest our FASHION BUG business we also announced that we intend to focus on the growth of our LANE BRYANT brand. Our plans for LANE BRYANT over the next few years include approximately 125 new locations and 125 relocations from malls into power-strip and lifestyle centers with stronger operating metrics, while closing approximately 50 stores through natural lease expirations. We plan to increase the percentage of LANE BRYANT stores located in strip and lifestyle centers to approximately 80% over the next few years. We believe that operating LANE BRYANT stores in power-strip and lifestyle centers will support our expectation of increased profitability, with projected increases in sales and decreases in occupancy expenses as compared to malls. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; OVERVIEW” and “RESULTS OF OPERATIONS” below for additional information regarding our actual and planned store activities.
Our retail store merchandise displays enable our customers to assemble coordinated and complete outfits that satisfy their lifestyle needs. We test and implement new store designs and fixture packages that are aimed at providing an effective merchandise presentation. We relocate or remodel our stores as appropriate to convey a fresh and contemporary shopping environment. We emphasize customer service, including the presence of helpful salespeople in the stores, layaway plans, customer loyalty programs, and acceptance of merchandise returns for cash or credit within a reasonable time period. Typically, our stores are open seven days per week, eleven hours per day Monday through Saturday and seven hours on Sunday.
Our retail stores operate under direct local management with guidance from our management operations team. Each store has a manager who is in daily operational control of and manages the specific location, including overseeing the duties of display, selling, and reporting through point-of-sale terminals. We employ district managers who regularly travel to all stores in their district to view store operations and provide guidance. Each district manager works with an average of 12 stores. Regional managers, who report to a Vice President of Stores, supervise the district managers. Generally, district managers are promoted from the pool of store managers and store managers are promoted from the pool of assistant store managers. Store management is motivated through internal advancement and promotion, competitive compensation, and various incentive, medical, and retirement plans. Store management also has access to centrally-developed resources on store operations, merchandising, and buying policies.
Merchandising and Buying
We employ a brand-specific merchandising and buying strategy that is focused on providing an attractive selection of plus-size apparel and accessories that reflect the fashion preferences of the core customer for each of our retail store brands. We believe that the specialization of marketers and buyers within each brand enhances each brand's identity and distinctiveness. We also use domestic and international fashion market guidance, fashion advisory services, and proprietary design. We seek to maintain high quality standards with respect to merchandise fabrication, construction, and fit.
We continually refine our merchandise assortments to reflect the needs and demands of our diverse customer groups and the demographics of each store location. At LANE BRYANT we offer a combination of fashion basics and current fashions in casual and wear-to-work apparel, footwear, and accessories and our CACIQUE brand of intimate apparel, as well as other national brand sportswear and shapewear that are designed to translate current trends into appropriate products for our customer. LANE BRYANT OUTLET features products developed exclusively for our outlet stores, which include updated key items and best-sellers from our full-line LANE BRYANT brand. Selected expanded categories, such as intimate apparel, footwear, social occasion, and accessories are also offered at LANE BRYANT OUTLET. At FASHION BUG we offer a broad assortment of weekend and business-wear apparel in plus, misses, junior, and junior plus sizes at low-to-moderate prices. FASHION BUG's merchandise typically reflects established fashion trends and includes a broad offering of ready-to-wear apparel as well as footwear, accessories, intimate apparel, and seasonal items, such as swimwear and outerwear. At CATHERINES we offer a broad assortment of plus-size merchandise in classic styles designed to provide “head-to-toe” dressing for our customers. CATHERINES features casual and career sportswear, dresses, intimate apparel, suits, and accessories in a variety of plus-sizes, including petites and extended sizes. CATHERINES has developed a unique expertise in the comfort, fit, design, and manufacturing of extended sizes, making it one of the few retailers to emphasize these sizes.
We use our distribution capabilities to stock our stores with products specifically targeted to the store's customer demographics. Our merchandising staff obtains store-wide and brand-wide inventory information generated by merchandise information systems that use our point-of-sale terminals. The status of our merchandise can be tracked from the placement of our initial order for the merchandise to the actual sale to our customer. Based on this data, our merchandise managers compare budgeted-to-actual sales and make merchandising decisions as needed, including re-order, markdowns, and changes in the buying plans for upcoming seasons.
Our stores typically experience peak sales during the Easter, Memorial Day, and December holiday seasons. We generally build inventory levels before these peak sales periods. To maintain current and fashionable inventory we reduce the price of slow-moving merchandise throughout the year. Much of our merchandise is developed for one or more of our four seasons: Spring, Summer, Fall, and Holiday. End-of-season sales are conducted with the objective of carrying an appropriate amount of seasonal merchandise over from one season to another. Retail Stores segment sales for the four quarters of Fiscal 2011, as a percent of annual Retail Stores segment sales, were 26.2%, 26.3%, 22.3%, and 25.1%, respectively.
Marketing and Promotions
We use several types of advertising to stimulate retail store customer traffic. We primarily use targeted direct-mail and e-mail advertising to preferred customers selected from a database of approximately 23.4 million private-label credit card, third-party credit card, and cash customers who have purchased merchandise from us within the past three years. We may also use radio, television, newspaper, internet advertising, fashion shows, social media, and other “grassroots” campaigns to stimulate traffic at certain strategic times of the year. We also use pricing policies, displays, store promotions, and convenient store hours and locations to attract customers. We maintain websites for our LANE BRYANT, FASHION BUG, and CATHERINES brands that provide information regarding current fashions and promotions and also provide internet shopping.
We offer our LANE BRYANT, FASHION BUG, and CATHERINES retail store customers various loyalty card programs. Customers who join these programs are entitled to various benefits, including discounts on purchases during the membership period. Customers join some of these programs by paying an annual membership fee. Other programs are offered that do not require the payment of a membership fee but allow cardholders to earn points for purchases using a private-label credit card, which may be redeemed for merchandise coupons upon the accumulation of a specified number of points. Additional information on our loyalty card programs is included in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies; Loyalty Card Programs” and “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements; NOTE 8. CUSTOMER LOYALTY CARD PROGRAMS” below.
Sourcing
To meet the demands of our customers we access both the overseas and domestic wholesale markets for our Retail Stores segment merchandise purchases. We primarily source from outside of the United States and source merchandise both through our overseas sourcing operation, where we are the importer of record, and from domestic vendors that also source merchandise from overseas. This allows us to maintain flexible lead times, respond quickly to current fashion trends, and replenish merchandise inventory as necessary. During Fiscal 2011 we purchased merchandise from approximately 420 suppliers located throughout the world. We also purchase a portion of our LANE BRYANT merchandise from Mast Industries, Inc. (“Mast”), a contract manufacturer and apparel importer that is an affiliate of Limited Brands, Inc. These purchases from Mast accounted for approximately 5% of our total Retail Stores merchandise purchases and approximately 10% of merchandise purchases for LANE BRYANT and LANE BRYANT OUTLET during Fiscal 2011. No other vendor accounted for more than 3% of total Retail Stores segment merchandise purchases during Fiscal 2011.
We pay for a majority of our merchandise purchases outside the United States on an open account basis. We pay for the remainder of our purchases outside the United States primarily through corporate-issued letters of credit where we are the importer of record. The geographic diversification of our sourcing network provides us with the flexibility to locate alternate sources for our products in order to meet our pricing targets.
To date, we have not experienced difficulties in purchasing merchandise overseas or importing such merchandise into the United States. Should events such as political instability or a natural disaster result in a disruption of normal activities in any single country with which we do business, we believe that we would have adequate alternative sources of supply.
See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; OVERVIEW” below for a discussion of the impact on our operations of cost increases associated with cotton-based raw materials.
Distribution and Logistics
We currently operate two distribution centers for our Retail Stores segment. For our LANE BRYANT (including CACIQUE) and LANE BRYANT OUTLET stores we operate a distribution center in Greencastle, Indiana. This facility is located on 126 acres of land and contains a building of approximately 865,000 square feet. We estimate that this facility has the capacity to service up to approximately 1,800 stores. For our FASHION BUG and CATHERINES stores we operate a distribution center in White Marsh, Maryland. The White Marsh facility is located on 28 acres of land and contains a building of approximately 513,000 square feet that is currently designed to service up to approximately 1,600 stores.
The vast majority of our merchandise purchases are received at these distribution facilities, where they are prepared for distribution to our stores. Automated sorting systems in the distribution centers enhance the flow of merchandise from receipt to quality control inspection, receiving, ticketing, packing, and final shipment. Merchandise is shipped to each store principally by common carriers. We use computerized automated distribution attributes to combine shipments when possible and improve the efficiency of the distribution operations.
During Fiscal 2011 we realigned our distribution center operations to support opportunities for operational efficiencies and cost reductions. We moved the servicing of our LANE BRYANT stores from White Marsh to Greencastle and the servicing of our FASHION BUG stores from Greencastle to White Marsh, which was completed during January 2012. We also plan to move the servicing of our CATHERINES stores from White Marsh to Greencastle, which we expect to complete by the end of April 2012. The realignment does not affect the distribution of products for our e-commerce operations.
We expect this realignment to result in cost savings through transportation cost reductions and faster shipments to stores, as our distribution center operations will be closer to the geographic center of each brand's operations. In addition, combining LANE BRYANT and LANE BRYANT OUTLET operations in Greencastle allows for brand synergies, including shared inventory where possible, in support of our "One Brand One Vision" initiative.
The realignment also supports our decision to divest our FASHION BUG operations. Subsequent to moving the servicing of the CATHERINES stores, White Marsh will service only the FASHION BUG stores, while servicing of the LANE BRYANT and CATHERINES stores will be located in Greencastle. We expect that this will facilitate inclusion of the White Marsh facility in the anticipated FASHION BUG divestiture should the need arise.
Inventory and fulfillment activities for our store-related e-commerce operations are handled by a third-party warehouse facility in Indianapolis, Indiana, using approximately 310,000 square feet of space for merchandise receipt, storage, picking, packing, shipping, and returns processing. Approximately half of the merchandise received by this third-party facility is shipped from our Greencastle and White Marsh distribution centers.
Once the inventory arrives in our stores, our point-of-sale systems, software, and data networks enable us to track inventory from store receipt to final sale. During Fiscal 2012 we plan to invest approximately $30 million for a complete upgrade of distribution center equipment; store technology, including point-of-sale hardware, software, and data networks; the installation of a core merchandising platform, including enhanced planning and inventory capabilities; a new warehouse management system; and new purchasing and financial software. We expect to finance these capital expenditures through internally-generated funds. Such an upgrade has the potential to temporarily impair our ability to capture, process, and ship customer orders or may result in the incurrence of additional costs.
DIRECT-TO-CONSUMER SEGMENT
Our Direct-to-Consumer segment consists primarily of the operations of our FIGI'S business, which markets food and specialty gift products through our Figi's Gifts in Good Taste catalog and related e-commerce website as well as through third-party retailers' stores and e-commerce websites. We also operate FIGI'S Gallery, which offers home decor, bedding, housewares, jewelry, garden accents, apparel, collectibles, gifts, and other items through its catalog and e-commerce website.
FIGI'S peak sales period is during the December holiday season, with approximately 75% of its annual sales occurring during our fourth quarter. FIGI'S offers interest-free, three-payment credit terms over three months to its customers, with the first payment due on a defined date 30 to 60 days after a stated holiday.
We own a 125,000 square-foot automated distribution center facility in Marshfield, Wisconsin that serves as the main distribution area for our FIGI'S operations and ships approximately 2,400,000 packages per year. A 122,000 square-foot leased facility in Stevens Point, Wisconsin and a 46,000 square-foot owned facility in Neillsville, Wisconsin also service FIGI'S. We believe that these facilities will continue to provide adequate capacity for our FIGI'S operations for the foreseeable future.
COMPETITION
The women's specialty retail apparel business is highly competitive, with numerous competitors, including individual and chain fashion specialty stores, department stores, discount stores, catalog retailers, and internet-based retailers, some of which may have greater financial resources, marketing capabilities, or brand recognition than we have. We cannot reasonably estimate the number of our competitors due to the large number of women's apparel retailers. The primary elements of competition are merchandise style, size, selection, fit, quality, display, and price; attractive website layout; efficient fulfillment of website mail orders; and personalized service to our customers. For our retail stores, store location, design, advertising, and promotion are also significant elements of competition.
EMPLOYEES
As of the end of Fiscal 2011 we employed approximately 23,000 associates, which included approximately 17,000 part-time employees. In addition, we hire a number of temporary employees during the December holiday season. As of the end of Fiscal 2011, 87 of our employees were represented by a union whose contract is currently due to expire in August 2012 and 14 of our employees were represented by a union whose contract is currently due to expire in August 2014. We believe that our overall relationship with these unions and our associates in general is satisfactory.
TRADEMARKS AND SERVICEMARKS
We own, or are in the process of obtaining, all rights to the trademarks and trade names we believe are necessary to conduct our business as presently operated. “FASHION BUG®”, “FASHION BUG PLUS®”, “L.A. BLUES®”, “STUDIO 1940®”, “RIGHT FIT BY FASHION BUG®”, “CATHERINES®”, “CATHERINES PLUS SIZES®”, “MAGGIE BARNES®”, “ANNA MAXWELL®”, “LIZ&ME®”, “SERENADA®”, “RIGHT FIT BY CATHERINES®”, “LANE BRYANT®”, “LANE BRYANT OUTLET®”, “LANE BRYANT WOMAN®”, “VENEZIA®”, “CACIQUE®”, “RIGHT FIT BY LANE BRYANT®”, “FIGI'S®”, "GIFTS IN GOOD TASTE®", “SONSI®”, "SONSILIVING®", “INSIDE CURVE®”, “ADDED DIMENSIONS®”, “FIGI'S® GALLERY”, “PASSPORT COLLECTION BY LANE BRYANT®”, “LOOP18™”, "T3-TIGHTER TUMMY TECHNOLOGY®", "SECRET SLIMMER®", "FASHION GENIUS™", and several other trademarks and servicemarks of lesser importance to us have been registered or are in the process of being registered with the United States Patent and Trademark Office and in other countries.
We also own the following internet domain name registrations: cacique.com, catherines.com, charming.com, charmingshoppes.com, fashionbug.com, fashionbugplus.com, lanebryant.com, figis.com, sonsi.com, sonsiliving.com, figisgallery.com, loop18.com, and others of lesser importance.
EXECUTIVE OFFICES
Charming Shoppes, Inc. was incorporated in Pennsylvania in 1969. Our principal offices are located at 3750 State Road, Bensalem, Pennsylvania 19020. Our telephone number is (215) 245-9100.
AVAILABLE INFORMATION
Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our website at www.charmingshoppes.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our historical filings can also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 or can be accessed directly from the SEC's website at http://www.sec.gov. Information on the operation of the Public Reference Room can be obtained by calling the SEC at (800) 732-0330. See “PART III; Item 10. Directors, Executive Officers, and Corporate Governance” below for additional information that is available on our internet website.
Item 1A. Risk Factors
You should carefully consider and evaluate all of the information in this annual report on Form 10-K and the documents incorporated by reference into this report, including the risk factors listed below. Any of these risks could materially and adversely affect our business, financial condition, and results of operations, and could cause our actual results to differ materially from our plans, projections, or other forward-looking statements included in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” below and elsewhere in this Report on Form 10-K, and in our other public filings. The occurrence of one or more of these risks could also materially and adversely affect the price of our common stock.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Ongoing economic conditions have adversely affected, and may continue to adversely affect, our business and results of operations.
Consumer spending habits, including spending for our products, are affected by, among other things, prevailing economic conditions, levels of employment, salary levels, wage rates, availability of consumer credit, consumer confidence, fluctuating fuel and energy costs, and consumer perception of economic conditions. Consumer discretionary spending, including purchases of women's apparel, tends to decline during periods of high unemployment, which can have an adverse impact on our results of operations. We could be required to take additional markdowns in response to lower-than-anticipated levels of demand for our products, and promotional activity by our competitors could have a further adverse impact on our results of operations.
We cannot reliably predict the extent to which current or future economic conditions will affect our business. A prolonged continuation of reduced consumer demand for our products could have a material adverse effect on our business, financial condition, and results of operations.
Our business is dependent upon our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors.
Customer tastes and fashion trends are volatile and tend to change rapidly, particularly for women's apparel. Our success depends in part on our ability to effectively predict and respond to quickly changing fashion tastes and consumer demands, and to translate market trends into appropriate, salable product offerings. These risks may increase as we shift a higher proportion of our product from third-party vendors and domestic sourcing to internally-designed merchandise and overseas sourcing. The increased lead times associated with overseas sourcing could increase our risk of misjudging fashion trends or styles. If we are unable to successfully predict or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales will be lower and we may be faced with a substantial amount of unsold inventory or missed sales opportunities. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations. This could also impact our reputation with our customers, which could diminish brand loyalty.
Existing and increased competition in the women's retail apparel and direct-to-consumer markets may reduce our net revenues, profits, and market share.
The women's specialty retail apparel and direct-to-consumer markets are highly competitive. Our competitors include individual and chain fashion specialty stores, department stores, discount stores, catalog retailers, and internet-based retailers. As a result of this competition we are required to effectively market and competitively price our products to consumers in diverse markets, and we typically experience pricing pressures, which may require us to incur increased marketing expenditures. Our failure to effectively market our product could lower our sales and lead to loss of market share. Existing and increased competition could result in reduced sales and margins, which could have a material adverse effect on our business, financial condition, and results of operations.
We believe that the principal bases upon which we compete are merchandise style, size, selection, fit, quality, display, and price; attractive website layout; efficient fulfillment of website mail orders; and personalized service to our customers, as well as store location, design, advertising, and promotion. Other women's apparel and direct-to-consumer companies with greater financial resources, marketing capabilities, or brand recognition are our competitors in the plus-size business and they may be able to devote greater resources to the marketing and sale of their products, implement more aggressive pricing policies, introduce new products more quickly, and respond and adapt to future economic downturns more effectively. Additional competitors may also enter this market. We cannot give assurance that we will be able to compete successfully against existing or future competitors.
Our business plan is largely dependent upon continued growth in the plus-size women's apparel market.
Our business is primarily focused on sales of plus-size women's apparel, which represents a majority of our total net sales. Our results of operations could be adversely affected by a lack of continued growth in the plus-size women's apparel market.
We depend on key personnel and may not be able to retain or replace these employees or recruit additional qualified personnel.
Our success and our ability to execute our business strategy depend largely on the efforts and abilities of our executive officers and our management teams and our ability to attract, hire, and retain officers and management. We also must motivate employees to remain focused on our strategies and goals. If we cannot hire and retain effective management, we may be unable to compete effectively with other retailers. We do not maintain key-person life insurance policies with respect to any of our employees.
We may be unable to successfully execute on our business plans.
We cannot assure the successful execution and the realization of the benefits of our business plans, which may vary materially based on various factors. Our effort to improve our competitive position and results of operations are based on certain assumptions that may prove to be inaccurate. Our business plans are subject to numerous risks and uncertainties that may change over time, and we may not achieve the desired results.
In December 2011 we announced that we are undertaking a comprehensive strategic and financial review of our operations to determine how to best enhance shareholder value. As part of these efforts, we announced plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT brand. We cannot assure the successful implementation of, or management of the risks associated with, these plans or additional courses of action, if any, that may result from our planned comprehensive strategic review. In the meantime, the uncertainty associated with this process may adversely affect our employees, or may make them more susceptible to recruitment by our competitors or others, which could have an adverse effect on our operations.
We cannot assure the realization of the planned cost savings, operational efficiencies, and brand synergies as a result of our Fiscal 2011 realignment of our distribution center operations in Greencastle and White Marsh or our planned transformation of our information technology and distribution infrastructure. The failure to successfully manage the implementation of our planned transformational initiatives could result in a disruption of our operations or the incurrence of additional costs.
Improving our operating margins is dependent on our ability to successfully control our operating costs.
In order to improve our operating margins we need to successfully manage our operating costs. Our inability to successfully manage labor costs, occupancy costs, transportation costs, or other operating costs, or our inability to take advantage of opportunities to reduce operating costs, could decrease our operating margins and could adversely affect our results of operations. In addition, we may be unable to obtain adequate insurance coverage for our operations at a reasonable cost.
Certain key raw materials in our products, such as cotton, wool, and synthetic fabrics, are subject to availability constraints and price volatility. An increase in the cost or decrease in the availability of such raw materials could adversely affect our operating margins and our results of operations.
We are subject to the Fair Labor Standards Act and various state and Federal laws and regulations governing such matters as minimum wages, exempt status classification, overtime, and employee benefits. Changes in Federal or state laws or regulations regarding minimum wages, unionization, or other employee benefits could cause us to incur additional wage and benefit costs, which could adversely affect our results of operations.
We may not be able to obtain sufficient working capital financing on terms acceptable to us.
Our business requires substantial investment in our inventory for several months before sales of that inventory occur. Consequently, we require significant amounts of working capital financing. We depend on the availability of credit to fund our working capital, including credit we receive from our bankers, our factors, our suppliers and their agents, and on our ongoing payments from our strategic alliance related to private-label credit card sales. If we or our vendors are unable to obtain sufficient financing at an affordable cost, our ability to merchandise our retail stores or e-commerce businesses could be adversely affected.
We cannot assure that we will realize the expected benefits from our private-label credit card programs.
We cannot assure that we will realize the expected benefits from the private-label credit card operating agreements with Alliance Data. A significant portion of our sales revenues is generated through our private-label credit cards. Therefore, changes in the private-label credit card programs that adversely impact our ability to facilitate customer credit may adversely impact our results of operations. Alliance Data has discretion over certain policies and arrangements with the cardholders and may change these policies and arrangements in ways that could affect our relationship with the cardholders. Any such changes could adversely affect our private-label credit card sales and our results of operations. Our ability to continue to offer private-label credit card programs to our customers will depend on the success of our strategic alliance with Alliance Data.
Credit card operations are subject to numerous Federal and state laws, including, in particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010, that impose disclosure and other requirements upon the origination, servicing, and enforcement of credit accounts, and limitations on the amount of finance charges and fees that may be charged by a credit card provider. Alliance Data may be subject to regulations that may adversely impact its operation of the private-label credit card programs. To the extent that such limitations or regulations materially limit the availability of credit or increase the cost of credit to our cardholders or negatively impact provisions which affect our revenue streams associated with the private-label credit card operating agreements, our results of operations could be adversely affected. In addition, changes in credit card use, payment patterns, or default rates could be affected by a variety of economic, legal, social, or other factors over which we have no control and cannot predict with certainty. Such changes could also negatively impact the availability of credit or increase the cost of credit to our cardholders or negatively impact provisions that affect our revenue streams associated with the operating agreements.
Our operating results fluctuate from season to season.
Our retail store and direct-to-consumer operations experience seasonal fluctuations in net sales and consequently in operating income, with peak sales typically occurring during the Easter, Memorial Day, and December holiday seasons for our Retail Stores segment and in the December holiday season for our Direct-to-Consumer segment. In addition, extreme or unseasonable weather can affect our sales. Any decrease in net sales or margins during our peak selling periods, or in the availability of working capital needed in the months before these periods, could have a material adverse effect on our business, financial condition, and results of operations.
We usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, including perishable products for our FIGI'S food and gifts operations, before the peak selling periods. If we are not successful in selling our inventory, especially during our peak selling periods, we may be forced to rely on markdowns or promotional sales to dispose of the inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business, financial condition, and results of operations.
Our operating results are dependent in part on our ability to effectively manage our inventory levels.
We must maintain the right mix and level of inventory to operate our business successfully. Excess inventory creates pricing pressures, while insufficient inventory could lead to decreased sales and a loss of customers. We continually evaluate our market and our customers' economic environments to determine our optimal inventory levels. If we do not correctly anticipate the demand for one or more of our products or delay placing seasonal inventory in our stores for too long, our results of operations and business could be adversely affected.
Certain of our business processes that are dependent on technology are outsourced.
Certain of our business processes that are dependent on technology are outsourced to third parties. Such processes include payroll processing, credit card authorization and processing, our e-commerce platform, and certain other information technology functions. Although we make a diligent effort to ensure that all providers of outsourced services observe proper internal control practices and procedures, we cannot assure that failures will not occur. The failure of such third parties to provide adequate services could adversely affect our customers' shopping experience, our results of operations, liquidity, or our ability to provide adequate financial and management reporting.
As part of our announced transformational initiatives, we plan to upgrade our information technology infrastructure. Such technology systems changes are complex and could cause disruptions that may adversely affect our business. Although we strive to ensure the orderly implementation of various information technology systems upgrades, we may not be able to successfully execute these changes without potentially incurring a significant disruption to our business. Even if we are successful with implementation, we may not achieve the expected benefits from these initiatives, despite having expended significant capital. We may also determine that additional investment is required to bring our systems to their desired state, which could result in a significant additional investment of time and money and increased implementation risk. Furthermore, we intend to rely on third parties to fulfill contractual obligations related to some of these system upgrades. Failure of these third parties to fulfill their contractual obligations could lead to significant expenses or losses due to a disruption in business operations.
We could be materially and adversely affected if any of our distribution or fulfillment centers are shut down.
We operate distribution and fulfillment centers in Greencastle, Indiana; White Marsh, Maryland; Marshfield, Wisconsin; Stevens Point, Wisconsin; and Neillsville, Wisconsin and use a third-party fulfillment center in Indianapolis, Indiana that services our e-commerce operations. In addition, we use third-party freight consolidators and service providers in Los Angeles, California and North Bergen, New Jersey. Most of the merchandise we purchase is shipped either directly or via freight consolidators to our distribution and fulfillment centers. If any of our distribution centers, fulfillment centers, or freight consolidators were to shut down or lose significant capacity for any reason, the other locations may not be able to adequately support the resulting additional distribution demands, in part because of capacity constraints and in part because not all brands are supported at each location. As a result, we could incur significantly higher costs and experience longer lead times associated with distributing our products to our stores or customers during the time it takes for us to reopen or replace the affected distribution center, fulfillment center, or freight consolidator. Should the third-party fulfillment center that services our e-commerce operations cease providing fulfillment services the resultant failure to deliver e-commerce orders promptly could adversely affect our e-commerce operations and our results of operations.
Natural disasters, war, acts of terrorism, or other armed conflict may negatively impact the availability of merchandise and otherwise adversely impact our business.
The occurrence of, or threat of, a natural disaster, war, acts of terrorism, or other armed conflict on the United States or international economies could negatively affect our ability to obtain merchandise for sale. A significant portion of our merchandise is imported from other countries. If imported goods become difficult or impossible to bring into the United States and we cannot obtain such merchandise from other sources at similar costs, our net sales and profit margins may be adversely impacted. If commercial transportation is curtailed or substantially delayed our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers, fulfillment centers, freight consolidators, stores, or our direct-to-consumer customers. As a result of the occurrence of, or threat of, a natural disaster or acts of terrorism in the United States we may be required to suspend operations in some or all of our stores, which could have a material adverse impact on our business, financial condition, and results of operations.
Our inability to successfully manage customer service or fulfillment for our e-commerce websites could adversely impact our results of operations.
Successful operation of our e-commerce websites and our catalog business is dependent on our ability to maintain efficient and uninterrupted customer service and fulfillment operations. Inadequate systems capacity, a disruption or slowdown in telecommunications services, changes in technology, changes in government regulations, systems issues, security breaches, or customer privacy issues could result in reduced sales or increases in operating expenses as a result of our efforts or our inability to remedy such issues.
We rely on foreign sources of production.
We purchase a significant portion of our apparel directly in foreign markets and indirectly through domestic vendors with foreign sources. We face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad. Such risks include (but are not necessarily limited to):
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• | increased security requirements applicable to imported goods; |
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• | imposition of or changes in duties, quotas, taxes, and other charges on imports; |
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• | currency and exchange risks; |
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• | issues relating to compliance with domestic or international labor standards; |
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• | inability of our vendors to manufacture or deliver merchandise in a timely manner or to meet our quality standards; |
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• | increased costs of transportation; or |
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• | other events, such as outbreaks of influenza or Severe Acute Respiratory Syndrome, that are outside of our control. |
New governmental requirements could be proposed that would have an impact on the trading status of certain countries and could include retaliatory duties or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries.
Our purchasing patterns are dictated by our seasonal inventory requirements. We typically enter into purchase commitments with our vendors for seasonal inventories up to six months ahead of when we take delivery of those products. Our purchase commitments with foreign vendors are primarily denominated in U.S. dollars and are settled in U.S. dollars. These arrangements tend to provide a natural hedge to the impacts of changes in the value of the U.S. dollar relative to the foreign currencies during the period from when we enter into purchase commitments with our vendors to when we take delivery of the products in the countries from which we source our products. However, changes in the value of the U.S. dollar relative to other currencies can impact the negotiated pricing for products when comparing one seasonal buying period to another. We have a network of countries and vendors from which we can source our product, but a weakening of the U.S. dollar in relation to those foreign currencies could increase the cost of our foreign-sourced products. The future performance of our business depends on our foreign suppliers and may be adversely affected by the factors listed above, which are beyond our control.
Issues of global workplace conditions may adversely affect our business.
If any one of our manufacturers or vendors fails to operate in compliance with applicable laws and regulations, is perceived by the public as failing to meet certain United States labor standards, or employs unfair labor practices, our business could be adversely affected. Current global workplace concerns of the public include wages, working conditions, age of employees, and various other employment standards. These globalization issues may affect the available supply of certain manufacturers' products, which may result in increased costs to us. Furthermore, a negative customer perception of any of our key vendors or their products may result in a lower customer demand for our apparel.
We may be unable to protect our trademarks and other intellectual property rights.
Our trademarks and servicemarks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and servicemarks on a worldwide basis. Nevertheless, there can be no assurance that the actions we have taken to establish and protect our trademarks and servicemarks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of their trademarks, servicemarks, or proprietary rights. Other retailers have been subject to unauthorized imitation, and imitation of our names, concepts, store designs, or merchandise in a manner that projects lesser quality or carries a negative connotation of our image could adversely affect our business, financial condition, and results of operations. Also, others may assert rights in, or ownership of, our trademarks and other proprietary rights and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.
We may be subject to litigation and other regulatory proceedings that may negatively impact our results of operations.
From time to time, we are subject to litigation and regulatory actions relating to our business. We may also become subject to litigation trends, such as class-action suits brought under various consumer protection and employment laws, intellectual property infringement suits, or suits resulting from sales or acquisitions of business operations. The initiation or defense of litigation or regulatory actions requires us to make certain expenditures and can divert the attention of our management away from operating our business. In addition, an unfavorable decision or outcome could result in further, potentially significant, expenditures. See “Item 3. Legal Proceedings” below for a discussion of current legal proceedings in which we are involved.
We depend on strip shopping center and mall traffic and our ability to identify suitable store locations for our Retail Stores segment.
Our long-term growth plan for our Retail Stores segment depends on our ability to open and profitably operate new retail stores, to convert, where applicable, the formats of existing stores on a profitable basis, and to continue to expand our outlet distribution channel. In addition, we will need to identify, hire, and retain a sufficient number of qualified personnel to work in our stores.
Our sales are dependent in part on a high volume of strip shopping center and mall traffic. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor stores, or changes in customer shopping preferences. A decline in the popularity of strip shopping center or mall shopping among our target customers could have a material adverse effect on our business. To take advantage of customer traffic and the shopping preferences of our customers we need to maintain or acquire stores in desirable locations. We cannot assure that desirable store locations will continue to be available. In addition, the timely opening of new store locations could be adversely affected by delays in obtaining necessary permits and approvals, lack of availability of construction materials and labor, natural disasters, adverse weather conditions, or work stoppages. Our ability to acquire or maintain desirable store locations could be adversely affected by financial difficulties encountered by strip shopping center or mall landlords or by competition with other retailers for prime locations.
Acquisition of additional store locations and our ability to profitably operate existing store locations are dependent on our ability to successfully negotiate lease terms for such locations. Our ability to operate successfully is dependent upon our ability to develop and maintain good relationships with our landlords. Consolidation in the commercial retail real estate industry could limit our future ability to negotiate favorable rental terms for new or existing store locations or to close under-performing stores on favorable terms. Should a significant consolidation occur, a large proportion of our store base could be concentrated with one or a few entities that could then be in a position to dictate unfavorable terms to us due to the significant leverage they would possess. If we are unable to negotiate favorable rental terms with these entities and are therefore unable to profitably operate our existing stores, our business, financial condition, and results of operations could be materially and adversely affected.
We may acquire or divest businesses or enter into joint ventures or strategic alliances, which may materially affect our business, financial condition, and results of operations.
We continually evaluate our portfolio of businesses and may decide to buy businesses or enter into joint ventures or other strategic alliances. Significant acquisitions and alliances may increase demands on management by diverting their attention away from running our core business, as well as on financial resources, information systems, and internal control systems. Our success with respect to acquisitions and alliances will depend, in part, on our ability to manage and integrate acquired businesses and alliances with our existing businesses and to successfully implement, improve, and expand our systems, procedures, and controls.
In addition, we may divest existing businesses, which would cause a decline in revenues and may cause our financial results to be more volatile. A divestiture could also divert management attention away from running our core business or negatively affect the price of our common stock, and could increase our reliance on growth in our remaining core business operations. In December 2011 we announced that we are undertaking a comprehensive strategic and financial review of our operations to enhance shareholder value. As part of these efforts, we announced our plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT brand. We may be unsuccessful in our efforts to divest FASHION BUG on a satisfactory basis and this could impede our efforts to focus on our LANE BRYANT brand.
If we fail to integrate and manage acquired businesses successfully or to manage the risks associated with divestitures (such as our planned divestiture of FASHION BUG), joint ventures, or other alliances, our business, financial condition, and results of operations could be materially and adversely affected.
OTHER RISKS
Anti-takeover provisions in our governing documents and Pennsylvania law may discourage other companies from attempting to acquire us.
Some provisions of our articles of incorporation and bylaws and of Pennsylvania law may discourage some transactions where we would otherwise experience a change in control, such as provisions that:
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• | do not permit cumulative voting; |
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• | permit our board to issue “blank check” preferred stock without shareholder approval; |
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• | require certain advance notice procedures with regard to the nomination of candidates for election as directors, other than nominations by or at the direction of our board; |
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• | prevent our directors from being removed without cause except upon super-majority shareholder approval; and |
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• | prevent a holder of 20% or more of our common stock from taking certain actions without certain approvals. |
Failure to comply with the provisions of the Sarbanes-Oxley Act of 2002 could adversely affect our business.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 we are required to include our assessment of the effectiveness of our internal control over financial reporting in our annual reports. Our independent registered public accounting firm is required to report on whether or not they believe that we maintained, in all material respects, effective internal control over financial reporting. If we are unable to maintain effective internal control over financial reporting we could be subject to regulatory sanctions and a possible loss of public confidence in the reliability of our financial reporting. Such a failure could result in our inability to provide timely and/or reliable financial information and could adversely affect our business.
We could be required to repurchase our 1.125% Senior Convertible Notes due May 1, 2014 for cash prior to maturity of the notes.
The holders of the outstanding principal amount of our 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125% Notes”) could require us to repurchase the principal amount of the notes for cash before maturity upon the occurrence of a “fundamental change” as defined in the prospectus filed in connection with the 1.125% Notes (see “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 5. LONG-TERM DEBT” below). Such a repurchase would require significant amounts of cash, would be subject to important limitations on our ability to repurchase, such as the risk of our inability to obtain funds for such repurchase, and could adversely affect our financial condition.
New accounting rules or regulations or changes in existing rules or regulations could adversely impact our reported results of operations.
Changes to existing accounting rules or the adoption of new rules could have an adverse effect on our reported results of operations or financial condition, which could also have an adverse effect on the market price of our common stock.
Changes in estimates related to our evaluation of property, plant, equipment, goodwill, or intangible assets for impairment could adversely affect our reported results of operations.
We make certain significant assumptions, estimates, and projections related to the useful lives and valuation of our property, plant, and equipment and the valuation of goodwill and other intangible assets related to acquisitions. The carrying amount and/or useful life of these assets are subject to periodic and/or annual valuation tests for impairment. Impairment results when the carrying value of an asset exceeds the undiscounted (or for goodwill and indefinite-lived intangible assets the discounted) future cash flows associated with the asset. If actual experience were to differ materially from the assumptions, estimates, and projections used to determine useful lives or the valuation of property, plant, equipment, goodwill, or intangible assets, a write-down for impairment of the carrying value of the assets, or acceleration of depreciation or amortization of the assets, could result. Such a write-down or acceleration of depreciation or amortization could have an adverse impact on our reported results of operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease all of our stores. Typically, our store leases have initial terms of 5 to 10 years and generally contain provisions for co-tenancies, renewal options, additional rents based on a percentage of sales, and payment of real estate taxes and common area charges. In addition, we lease certain of our corporate office, distribution center, warehouse, and other administrative facilities. Additional information with respect to our real estate leases is included in “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements; NOTE 15. LEASES” below. Additional information with respect to our planned store closings during Fiscal 2012 is included in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; OVERVIEW” and “RESULTS OF OPERATIONS” below.
With respect to leased stores open as of January 28, 2012 the following table shows the number of store leases expiring during the calendar periods indicated, assuming the exercise of our renewal options:
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Period | Number of Leases Expiring |
2012(1) | 139 |
2013–2017 | 729 |
2018–2022 | 408 |
2023–2027 | 425 |
2028–2032 | 129 |
2033–2037 | 23 |
Thereafter | 3 |
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(1) | Includes 31 stores on month-to-month leases. |
Additional information with respect to facilities that we own or lease is as follows:
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| | | |
Size in Sq. Feet | Location | Leased/ Owned | Description |
865,000 | Greencastle, IN | Owned | LANE BRYANT and LANE BRYANT OUTLET distribution center |
513,000 | White Marsh, MD | Owned | FASHION BUG and CATHERINES distribution center |
288,000 | Tucson, AZ | Leased | Currently idle(1) |
145,000 | Bensalem, PA | Owned | Corporate headquarters, technology center, and administrative offices |
142,000 | Bensalem, PA | Leased | FASHION BUG, CATHERINES, and LANE BRYANT OUTLET home offices and corporate administrative offices |
135,000 | Columbus, OH | Leased | LANE BRYANT home office |
125,000 | Marshfield, WI | Owned | FIGI’S distribution center |
122,000 | Stevens Point, WI | Leased | FIGI’S distribution and call centers |
71,000 | Marshfield, WI | Owned | FIGI’S warehouse |
64,000 | Marshfield, WI | Owned | FIGI’S administrative offices and call center |
52,000 | Tucson, AZ | Leased | Currently idle(1) |
46,000 | Neillsville, WI | Owned | FIGI’S distribution center |
40,000 | Marshfield, WI | Owned | FIGI’S warehouse |
27,000 | Hong Kong, PRC | Leased | International sourcing offices |
16,000 | Marshfield, WI | Owned | FIGI’S manufacturing facility |
15,000 | Tucson, AZ | Leased | Currently idle(1) |
10,000 | Tucson, AZ | Leased | Currently idle(1) |
9,000 | Bensalem, PA | Leased | Storage facility |
8,000 | Hangzhou, PRC | Leased | International sourcing offices |
7,000 | New Delhi, India | Leased | International sourcing offices |
5,000 | Tucson, AZ | Leased | Currently idle(1) |
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(1) | Facilities retained in connection with the sale of our non-core catalog business in Fiscal 2008. In connection with the sale we retained certain components of their infrastructure and entered into transitional service agreements. Subsequent to the transitional period we discontinued the use of the facilities. With the exception of the 10,000 sq. ft. facility, which has a lease expiration date of January 31, 2019 with an option for an earlier buyout, the leases on these facilities expire on August 31, 2013. |
Item 3. Legal Proceedings
In August 2009, former Store Sales Managers ("SSMs") Sharon Bates and Tamara Baggett, on behalf of themselves and similarly situated Catherines store managers, filed a collective action Complaint with the United States District Court, District of Connecticut ("Court"), against Catherines, Inc. (“Catherines”). The Complaint, as amended, alleged that the store managers were unlawfully denied overtime compensation. Ms. Bates' individual overtime claim was brought under the Connecticut Minimum Wage Act (“CMWA”) and Ms. Baggett's individual overtime claim was brought under the New York Minimum Wage Act (“NYMWA”). In addition, both Plaintiffs asserted claims on behalf of themselves and other purportedly similarly-situated current and former SSMs under the Fair Labor Standards Act (“FLSA”). The Plaintiffs sought unpaid overtime wages, liquidated damages, interest and costs, attorneys' fees, an order enjoining Catherines from continuing its alleged illegal practices in violation of the FLSA, NYMWA and CMWA as to current and future SSMs, and such other relief as the Court deemed equitable. Catherines denied the allegations in the Complaint.
On July 15, 2011 the Court entered an order granting preliminary approval to a settlement reached by the parties and on July 27, 2011 the parties signed a formal Settlement Agreement and Release. The Settlement Agreement received final court approval on November 21, 2011 and the settlement proceeds were fully distributed in January 2012. The settlement did not have a material impact on our financial condition or results of operations.
Except for ordinary routine litigation incidental to our business, there are no other material pending legal proceedings that we or any of our subsidiaries are a party to, or of which any of their property is the subject. There are no proceedings that, if adversely determined, are expected to have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not Applicable.
Additional Part I Information - Executive Officers of the Registrant
The following list contains certain information relative to our executive officers. There are no family relationships among any of our executive officers.
Anthony M. Romano, 49, has served as President and Chief Executive Officer since March 2011. Before that he served as Chief Operating Officer and performed the function of Chief Executive Officer subsequent to the resignation of our former Chief Executive Officer from October 2010 to March 2011, and served as Executive Vice President - Global Sourcing and Business Transformation from February 2009 to March 2011. Before that he served as Executive Vice President, Chief Supply Chain Officer for Ann Taylor, Inc. from May 2005 through July 2008.
Bryan Q. Eshelman, 40, has served as Executive Vice President, Chief Supply Chain Officer since December 2011 and as Senior Vice President, Operations from October 2010 to December 2011. Before that he served as a Managing Director of AlixPartners, LLP from October 2008 to October 2010. Before that he served as Vice President, Practice Management Director from December 2007 to September 2008 and as National Director, Merchandising Technology from January 2006 to December 2007 for Kurt Salmon Associates, Inc.
Frederick Lamster, 58, has served as Executive Vice President, Human Resources since March 2010. Before that he served as Senior Vice President and Chief Human Resources Officer for Southpole, Inc. from February 2008 to March 2010 and as Senior Vice President, Human Resources for Aeropostale, Inc. from August 2005 to August 2007.
Eric M. Specter, 54, has served as Executive Vice President and Chief Financial Officer since January 1997, and he has been employed by us since 1983.
Colin D. Stern, 63, has served as Executive Vice President and General Counsel since 1990, and he has been employed by us since 1989. He has also served as Secretary since February 1998.
Brian P. Woolf, 62, has served as Group President - Lane Bryant, Lane Bryant Outlet, and Cacique since March 2011 and as President - Lane Bryant from July 2008 to March 2011. Before that he served as Chairman of the Board and Chief Executive Officer for Caché, a women's specialty retailer, from October 2000 to January 2008.
MaryEllen MacDowell, 61, has served as President - Fashion Bug since June 2010 and as President - Charming Outlets from January 2009 to June 2010. Before that she served as Senior Vice President and General Merchandise Manager of Apparel, Accessories, and Product Development for Lane Bryant from February 2007 to January 2009 and as Vice President and Divisional Merchandise Manager for Plus Sportswear, Dresses, and Swimwear for Fashion Bug from December 2002 to February 2007.
Carol L. Williams, 63, has served as President - Catherines since October 2008. Before that she served as a consultant for Global Concepts from March 2006 to October 2008 and as President for May Department Stores International from November 2002 to March 2006.
John Lee, 44, has served as Vice President - Chief Accounting Officer since June 2010 and as Vice President - Corporate Accounting from October 2001 to June 2010.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our common stock is traded on the over-the-counter market and quoted on the NASDAQ Global Select Market (“NASDAQ”) and on the Chicago Stock Exchange (“CHX”) under the symbol “CHRS.” The following table sets forth the high and low sale prices for our common stock during the indicated periods, as reported by NASDAQ:
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| | | | | | | | | | | | | | | |
| Fiscal 2011 | | Fiscal 2010 |
| High | | Low | | High | | Low |
1st Quarter | $ | 4.93 |
| | $ | 2.88 |
| | $ | 6.91 |
| | $ | 4.94 |
|
2nd Quarter | 4.63 |
| | 3.57 |
| | 6.14 |
| | 3.27 |
|
3rd Quarter | 4.20 |
| | 2.29 |
| | 4.60 |
| | 2.84 |
|
4th Quarter | 5.15 |
| | 3.23 |
| | 3.96 |
| | 3.02 |
|
The approximate number of holders of record of our common stock as of March 14, 2012 was 1,475. This number excludes individual stockholders holding stock under nominee security position listings.
We have not paid any dividends since 1995, and we do not expect to declare or pay any dividends on our common stock in the foreseeable future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon our future earnings, if any, our capital requirements, our financial condition, and other relevant factors. Our revolving credit facility allows the payment of dividends on our common stock subject to maintaining a minimum level of “Excess Availability” (as defined in the facility agreement) for six months preceding the payment of such dividends, as of the date of payment of such dividends, and on a projected pro forma basis for the 12 consecutive fiscal months thereafter. (See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; FINANCIAL CONDITION; Financing; Revolving Credit Facility” and “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 5. LONG-TERM DEBT” below).
Information regarding our equity compensation plans appears in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below.
On November 8, 2007 we publicly announced that our Board of Directors granted authority to repurchase shares of our common stock up to an aggregate value of $200,000,000. Shares may be purchased in the open market or through privately-negotiated transactions, as market conditions allow. During Fiscal 2008 we repurchased a total of 505,406 shares of stock ($5.21 average price paid per share) in the open market under this program. We have not repurchased any shares of our common stock under this program since Fiscal 2008. As of January 28, 2012, $197,365,000 was available for future repurchases under this program. This repurchase program has no expiration date.
The following graph shows a five-year comparison of cumulative total returns on our common stock, the Russell 2000 Composite Index, and the Dow Jones U.S. Retailers - Apparel Index:
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
Among Charming Shoppes, Inc., The Russell 2000 Index
And The Dow Jones U.S. Retailers - Apparel Index
*Assumes $100 invested on February 3, 2007 in Charming Shoppes, Inc. common stock, the Russell 2000 Index, or the Dow Jones U.S. Retailers - Apparel Index, including reinvestment of dividends.
The above chart was plotted using the following data:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 02/03/07 | | 02/02/08 |
| | 01/31/09 |
| | 01/30/10 |
| | 01/29/11 |
| | 01/28/12 |
|
Charming Shoppes, Inc. | $ | 100 |
| | $ | 52 |
| |
| $8 |
| | $ | 44 |
| | $ | 23 |
| | $ | 37 |
|
Russell 2000 Composite Index | 100 |
| | 91 |
| | 56 |
| | 78 |
| | 101 |
| | 106 |
|
Dow Jones U.S. Retailers – Apparel Index | 100 |
| | 79 |
| | 42 |
| | 79 |
| | 98 |
| | 116 |
|
Item 6. Selected Financial Data
The tables on the following two pages present selected financial data taken from our audited financial statements for our five fiscal years ended as of February 2, 2008 through January 28, 2012 and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” below.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended | |
(In thousands, except per share amounts and percents) | January 28, 2012 | | January 29, 2011 | | January 30, 2010 | | January 31, 2009 | | February 2, 2008 | |
Operating Statement Data: | | | | | | | | | | |
Net sales | $ | 1,992,371 |
| | $ | 2,061,819 |
| | $ | 2,064,602 |
| | $ | 2,474,898 |
| | $ | 2,722,462 |
| |
Cost of goods sold | 993,237 |
| | 1,046,824 |
| | 1,040,985 |
| | 1,327,387 |
| | 1,420,159 |
| |
Gross profit | 999,134 |
| | 1,014,995 |
| | 1,023,617 |
| | 1,147,511 |
| | 1,302,303 |
| |
Occupancy and buying expenses | 340,198 |
| | 365,691 |
| | 390,225 |
| | 427,841 |
| | 441,580 |
| |
Selling, general, and administrative expenses | 577,520 |
| | 599,130 |
| | 582,941 |
| | 690,095 |
| | 717,393 |
| |
Depreciation and amortization | 56,681 |
| | 68,339 |
| | 76,302 |
| | 93,741 |
| | 94,470 |
| |
Sale of proprietary credit card receivables programs(1) | — |
| | — |
| | 14,237 |
| | — |
| | — |
| |
Impairment of store assets, goodwill, and trademarks | — |
| | 17,054 |
| (2) | 15,741 |
| (2) | 81,498 |
| (3) | 27,197 |
| (3) |
Gain from sale of office premises | (5,185 | ) | | — |
| | — |
| | — |
| | — |
| |
Restructuring and other charges | 11,238 |
| (4) | 8,776 |
| (5) | 31,719 |
| (6) | 33,145 |
| (7) | 5,332 |
| (8) |
Total operating expenses | 980,452 |
| | 1,058,990 |
| | 1,111,165 |
| | 1,326,320 |
| | 1,285,972 |
| |
Income/(loss) from operations | 18,682 |
| | (43,995 | ) | | (87,548 | ) | | (178,809 | ) | | 16,331 |
| |
Other income | 431 |
| | 1,119 |
| | 834 |
| | 4,430 |
| | 8,793 |
| |
Gain on repurchases of 1.125% Senior Convertible Notes | — |
| | 1,907 |
| | 13,979 |
| | — |
| | — |
| |
Interest expense | (14,087 | ) | | (15,887 | ) | | (18,799 | ) | | (19,460 | ) | | (18,049 | ) | |
Income/(loss) from continuing operations before income taxes and extraordinary item | 5,026 |
| | (56,856 | ) | | (91,534 | ) | | (193,839 | ) | | 7,075 |
| |
Income tax (benefit)/provision | 7,043 |
| | (2,874 | ) | | (13,572 | ) | | (13,488 | ) | | 11,238 |
| |
Loss from continuing operations before extraordinary item | (2,017 | ) | | (53,982 | ) | | (77,962 | ) | | (180,351 | ) | | (4,163 | ) | |
Loss from discontinued operations, net of Income taxes(9) | | | — |
| | — |
| | (74,922 | ) | | (85,039 | ) | |
Extraordinary item, net of income taxes | — |
| | — |
| | — |
| | — |
| | 912 |
| |
Net loss | $ | (2,017 | ) | | $ | (53,982 | ) | | $ | (77,962 | ) | | $ | (255,273 | ) | | $ | (88,290 | ) | |
Basic loss per share: | |
| | |
| | |
| | |
| | |
| |
Continuing operations before extraordinary item | $ | (0.02 | ) | | $ | (0.47 | ) | | $ | (0.67 | ) | | $ | (1.57 | ) | | $ | (0.03 | ) | |
Discontinued operations, net of income taxes | — |
| | — |
| | — |
| | (0.65 | ) | | (0.70 | ) | |
Extraordinary item, net of income taxes | — |
| | — |
| | — |
| | — |
| | 0.01 |
| |
Net loss(10) | $ | (0.02 | ) | | $ | (0.47 | ) | | $ | (0.67 | ) | | $ | (2.23 | ) | | $ | (0.73 | ) | |
Basic weighted average common shares outstanding | 116,691 |
| | 115,829 |
| | 115,626 |
| | 114,690 |
| | 121,160 |
| |
Diluted loss per share: | |
| | |
| | |
| | |
| | |
| |
Continuing operations before extraordinary item | $ | (0.02 | ) | | $ | (0.47 | ) | | $ | (0.67 | ) | | $ | (1.57 | ) | | $ | (0.03 | ) | |
Discontinued operations, net of income taxes | — |
| | — |
| | — |
| | (0.65 | ) | | (0.70 | ) | |
Extraordinary item, net of income taxes | — |
| | — |
| | — |
| | — |
| | 0.01 |
| |
Net loss(10) | $ | (0.02 | ) | | $ | (0.47 | ) | | $ | (0.67 | ) | | $ | (2.23 | ) | | $ | (0.73 | ) | |
Diluted weighted average common shares and equivalents outstanding | 116,691 |
| | 115,829 |
| | 115,626 |
| | 114,690 |
| | 121,160 |
| |
| | | | | | | | | | |
Performance Data(11): | |
| | |
| | |
| | |
| | |
| |
Net return on average stockholders’ equity | (0.5 | )% | | (12.3 | )% | | (15.6 | )% | | (26.7 | )% | | (0.5 | )% | |
Net return on average total assets | (0.2 | ) | | (5.0 | ) | | (6.4 | ) | | (13.0 | ) | | (0.3 | ) | |
Adjusted EBITDA(12) | $ | 81,416 |
| | $ | 50,174 |
| | $ | 50,451 |
| | $ | 29,575 |
| | $ | 143,330 |
| |
| | | | | | | | | | |
(Table continued on next page) | |
| | |
| | |
| | |
| | |
| |
| |
(1) | See “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 9. SALE OF PROPRIETARY CREDIT CARD RECEIVABLES PROGRAMS” below. |
| |
(2) | See “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 10. IMPAIRMENT OF STORE ASSETS” below. |
| |
(3) | Fiscal 2008 includes $43,230 impairment charge related to CATHERINES goodwill, $36,792 impairment charge related to 272 under-performing stores, and $1,476 impairment charge related to certain acquired trademarks and tradenames. Fiscal 2007 includes $18,172 impairment charge related to FIGI'S goodwill and $9,025 impairment charge related to 136 under-performing stores. |
| |
(4) | See “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; “NOTE 11. RESTRUCTURING AND OTHER CHARGES” below. |
| |
(5) | Includes $3,210 impairment charge related to closing of 30 CATHERINES stores in outlet locations; $3,058 of severance and retention costs (including $2,898 related to departure of former CEO); $2,194 of lease termination charges related to the closing of under-performing stores; and other net restructuring charges of $314. |
| |
(6) | Includes $17,985 of accelerated depreciation and lease termination charges related to divestiture of non-core misses apparel assets; $8,087 of professional fees, severance, and retention costs related to transformational initiatives announced in Fiscal 2008; $3,197 of accelerated depreciation and lease termination charges related to closing of PETITE SOPHISTICATE and PETITE SOPHISTICATE OUTLET stores; $1,342 for severance and accelerated depreciation related to shutdown of LANE BRYANT WOMAN catalog; and other restructuring charges of $1,108. |
| |
(7) | Includes $13,319 of severance costs (including $9,446 related to resignation of former CEO); $7,600 for lease termination costs and accelerated depreciation related to the closing of PETITE SOPHISTICATE stores; $3,388 for accelerated depreciation and asset write-downs related to divestiture of non-core misses apparel assets; $2,817 for asset write-downs, accelerated depreciation, relocation costs and severance related to relocation of CATHERINES operations; $2,491 for severance and accelerated depreciation related to shutdown of LANE BRYANT WOMAN catalog; and $3,530 of costs related to other initiatives. |
| |
(8) | Includes $3,033 of severance, retention, and relocation costs related to consolidation of operating functions; and $2,299 for accelerated depreciation related to the closing of our CATHERINES facility in Memphis, Tennessee. |
| |
(9) | We sold our Crosstown Traders non-core misses apparel catalog titles during Fiscal 2008 and reported their results as discontinued operations. The loss for Fiscal 2008 includes a $28,186 loss from discontinued operations and a $46,736 loss on disposition. The loss for Fiscal 2007 includes impairment charges of $75,740 (net of a tax benefit of $4,307) related to Crosstown Traders goodwill and trademarks and a loss from discontinued operations of $9,299 (net of a tax benefit of $5,934). |
| |
(10) | Results may not add due to rounding. |
| |
(11) | Based on net income/(loss) from continuing operations. |
| |
(12) | See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; RESULTS OF OPERATIONS; EBITDA and Adjusted EBITDA” below for a further discussion of EBITDA and Adjusted EBITDA, including a reconciliation of net loss to EBITDA and Adjusted EBITDA for Fiscal 2011, Fiscal 2010, and Fiscal 2009. A reconciliation of loss from continuing operations before extraordinary item to EBITDA and Adjusted EBITDA for Fiscal 2008 and Fiscal 2007 is as follows: |
|
| | | | | | | |
| Year Ended |
(In thousands) | January 31, 2009 | | February 2, 2008 |
Loss from continuing operations before extraordinary item | $ | (180,351 | ) | | $ | (4,163 | ) |
Income tax (benefit)/provision | (13,488 | ) | | 11,238 |
|
Net interest expense and other income | 15,030 |
| | 9,256 |
|
Depreciation and amortization | 93,741 |
| | 94,470 |
|
EBITDA | (85,068 | ) | | 110,801 |
|
Restructuring and other charges | 33,145 |
| | 5,332 |
|
Impairment of store assets, goodwill, and trademarks | 81,498 |
| | 27,197 |
|
Adjusted EBITDA | $ | 29,575 |
| | $ | 143,330 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As Of |
(In thousands) | January 28, 2012 | | January 29, 2011 | | January 30, 2010 | | January 31, 2009 | | February 2, 2008(1) |
Balance Sheet Data: | | | | | | | | | |
Total assets | $ | 1,017,926 |
| | $ | 1,022,658 |
| | $ | 1,157,489 |
| | $ | 1,277,141 |
| | $ | 1,611,013 |
|
Current portion – long-term debt | 4,682 |
| | 11,449 |
| | 6,265 |
| | 6,746 |
| | 8,827 |
|
Long-term debt | 133,639 |
| | 128,350 |
| | 171,558 |
| | 232,722 |
| | 222,224 |
|
Working capital | 297,340 |
| | 276,576 |
| | 331,427 |
| | 382,024 |
| | 495,096 |
|
Stockholders’ equity | 416,946 |
| | 414,420 |
| | 464,934 |
| | 536,855 |
| | 812,495 |
|
| |
(1) | Includes discontinued operations (see footnote (9) to the table above). |
Item 7. 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 ("MD&A") should be read in conjunction with the financial statements and accompanying notes included in "Item 8. Financial Statements and Supplementary Data" below. As used in this management’s discussion and analysis, the terms “Charming Shoppes,” “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated subsidiaries except where the context otherwise requires or as otherwise indicated.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the following analysis and elsewhere in this report, including information incorporated herein by reference, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of revenues, income or loss, cost reductions, capital expenditures, liquidity, divestitures, financing needs or plans, store closings and openings, merchandise strategy, and plans for future operations, as well as assumptions relating to the foregoing. The words “expect,” “could,” “should,” “project,” “estimate,” “predict,” “anticipate,” “plan,” “intend,” “believes,” and similar expressions are also intended to identify forward-looking statements.
We operate in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors that may affect us. 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, which speak only as of the date on which they were made. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. 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, those discussed in this MD&A, in “PART I Item 1A. Risk Factors,” above, and in our other filings with the Securities and Exchange Commission. We assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial statements and accompanying notes included in Item 8 of this report in conformity with United States generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates and assumptions are based on historical experience, analysis of current trends, and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Our significant accounting policies are described in the notes accompanying the financial statements included in Item 8 of this report. However, we consider the following accounting policies and related assumptions to be more critical to the preparation of our financial statements and accompanying notes and involve the most significant management judgments and estimates.
Revenue Recognition
Our revenues from merchandise sales are net of sales discounts, returns, and allowances and exclude sales tax. We record a reserve for estimated future sales returns based on an analysis of actual returns and we defer recognition of layaway sales to the date of delivery. A change in our actual rates of sales returns and layaway sales experience would affect the level of revenue recognized.
Catalog and e-commerce revenues include shipping and handling fees billed to customers. These revenues are recognized after all of the following have occurred: execution of the customer’s order, authorization of the customer’s credit card has been received, and the product has been shipped to and received by the customer. We defer recognition of revenue for product shipped but not yet received by the customer based on an estimate of the number of days the shipments are in-transit. A change in the time it takes for customers to receive our products would affect the level of revenue recognized.
We sell gift cards to our Retail Stores segment customers through our stores, store-related websites, and through third parties. We recognize revenue from gift cards when the gift card is redeemed by the customer. Our gift cards do not contain expiration dates or inactivity fees. We recognize gift card breakage (unused gift card balances for which we believe the likelihood of redemption is remote) as net sales based on an analysis of historical redemption patterns. A change in the historical pattern of gift card redemptions would affect the level of revenue recognized.
Loyalty Card Programs
We offer our customers various loyalty card programs. Customers that join these programs are entitled to various benefits, including discounts on purchases, during the membership period. Customers join some of these programs by paying an annual membership fee. For these programs we recognize revenue as a component of net sales over the life of the membership period based on when the customer earns the benefits and when the fee is no longer refundable. Certain loyalty card customers earn points for purchases which may be redeemed for merchandise coupons upon the accumulation of a specified number of points. No membership fees are charged in connection with these programs. We recognize an accrual for discounts earned and not yet issued and discounts issued but not yet redeemed based on an analysis of historical redemption patterns. Costs we incur in connection with administering these programs are recognized in selling, general, and administrative expenses as incurred.
Accounts Receivable
Our FIGI’S food and gifts business offers credit to its customers using interest-free three-payment credit terms over three months, with the first payment due on a defined date 30 to 60 days after a stated holiday. A substantial portion of the FIGI’S business is conducted during the December holiday season. We evaluate the collectibility of our accounts receivable based on a combination of factors, including analysis of historical trends, aging of accounts receivable, write-off experience, past history of recoveries, and expectations of future performance. Significant changes in future performance relative to our historical experience could have an impact on the levels of our accounts receivable valuation reserves.
Inventories
We value our merchandise inventories at the lower of cost or market using the retail inventory method (average cost basis). We adjust the valuation of inventories at cost and the resulting gross margins in proportion to markdowns and shrinkage on our retail inventories. The retail inventory method results in the valuation of inventories at the lower of cost or market when markdowns are currently taken as a reduction of the retail value of inventories. The majority of these “permanent markdowns,” and the resulting adjustments to the carrying cost of our inventories, are recorded in our inventory costing system when the actual ticketed selling price of an item is reduced and are therefore not subject to significant estimates on the part of management. However, at the end of each quarter we perform a review of merchandise that is currently on promotional markdowns (which is considered a “temporary markdown”) and identify the merchandise that will not be sold again above its current promotional price. Because we have not yet recorded such promotional markdowns in our perpetual inventory system as permanent markdowns, we record a markdown reserve to properly record the inventory at the lower of cost or market using the retail inventory method.
Our estimation of markdown reserves involves certain management judgments and estimates that can significantly affect the ending inventory valuation at cost, as well as the resulting gross margins. The markdown reserve will fluctuate depending on the level of seasonal merchandise on-hand, the level of promotional activity, and management’s estimate of our ability to liquidate such promotional inventory above its current promotional price in the future. Our failure to properly estimate markdowns currently could result in an overstatement or understatement of inventory cost under the lower of cost or market principle. Our total reserves for these types of markdowns were $16.4 million as of January 28, 2012 and $19.5 million as of January 29, 2011. Historically, we have not had significant variances between our estimates of these markdown reserves and the actual markdown experience for which these reserves were established.
We perform physical inventory observations at least once annually at each of our stores. For stores with higher-than-average inventory loss rates, we may perform physical inventory observations more frequently. Actual inventory losses are recorded in our financial statements at the time these physical inventory observations are performed. During the periods between our physical inventory observations and our period-end reporting dates, we record a reserve for estimated inventory losses (shrinkage). Our estimates for shrinkage are based on actual inventory losses identified from the results of physical inventory counts at our stores and distribution centers. Historically, our physical inventory losses have averaged between 1% and 2% of our net sales. Our reserves for estimated inventory shrinkage were $2.0 million as of January 28, 2012 and $1.8 million as of January 29, 2011.
We defer into inventory cash received from vendors and recognize these amounts as a reduction of cost of goods sold as the inventory is sold. We defer the recognition of cash received from vendors during interim periods in order to better match the recognition of the cash consideration to the period the inventory is sold.
Impairment of Property, Plant, and Equipment, Intangible Assets, and Goodwill
We assess our property, plant, and equipment and amortizable intangible assets for recoverability whenever events or changes in circumstances indicate that the carrying amounts of these long-lived assets may not be recoverable. We consider historical performance and estimated future results in our evaluation of potential impairment and compare the carrying amount of the asset to the estimated future undiscounted cash flows expected to result from the use of the asset. If the estimated future undiscounted cash flows are less than the carrying amount of the asset, we write down the asset to its estimated fair value and recognize an impairment loss. Our estimate of fair value is generally based on either appraised value or the present value of future cash flows. The estimates and assumptions that we use to evaluate possible impairment require certain significant assumptions regarding factors such as future sales growth and operating performance, and they may change as new events occur or as additional information is obtained.
We test goodwill and other intangible assets for impairment at least annually or more frequently if there is an indication of possible impairment. We perform our annual impairment analysis during the fourth quarter of our fiscal year because our fourth quarter results of operations are significant to us and are an integral part of our analyses. In addition, we prepare our financial plan for the following fiscal year, which is an important part of our impairment analyses, during the fourth quarter of our fiscal year.
The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. Changes in the significant assumptions and estimates that we use to determine fair values for purposes of our impairment analysis could result in a material effect on our consolidated financial position or results of operations.
We principally use an income approach to estimate the fair value of our reporting units. We have consistently applied this methodology in previous goodwill impairment tests because we have concluded that the methodology is the most appropriate measure of fair value and is a methodology that market participants would use in valuing these reporting units. The income approach values a business enterprise by estimating annual future debt-free net cash flows available to the providers of the invested capital and discounting these cash flows to their present value at a discount rate that reflects both the current return requirements of the market and the risks inherent in the specific investment. The most significant assumptions used in estimating the fair value of our reporting units are the discount rate, the terminal value, and expected future revenues, gross margins, and operating margins, which vary among our reporting units.
For purposes of our annual impairment test of our goodwill performed as of January 28, 2012 we used a discount rate of 11.4%. Our estimates of future cash flows are based on our current budgets and are reflective of our current expectations as to sales growth rates and profitability. We believe that our estimates are appropriate under the circumstances. If actual results differ materially from our estimates, we may be required to recognize additional goodwill impairments. Given the significant excess of fair value over the book value of our reporting unit as reflected in our impairment analysis we have determined, based on the performance of various sensitivity analyses, that our conclusion would not be affected by other outcomes that are reasonably likely to occur.
Our identifiable intangible assets consist primarily of trademarks. These intangible assets arise primarily from the allocation of the purchase price of businesses acquired to identifiable intangible assets based on their respective fair market values at the date of acquisition. Amounts assigned to identifiable intangible assets, and their related useful lives, are derived from established valuation techniques and management estimates.
Consistent with prior periods and with the methodology used to initially establish and record the fair value of the trademarks noted above, we have applied the “relief-from-royalty” method of the income approach in measuring the fair value of our trademarks for the current-year impairment test. Under this method it is assumed that a company without the rights to the trademarks would license the right to use them for business purposes. The fair value of the trademarks is estimated by discounting the hypothetical royalty payments to their present value over the estimated economic life of the asset. These estimates can be affected by a number of factors including, but not limited to, general economic conditions and availability of market information, as well as our profitability. The most significant assumptions we use to evaluate the fair value of our trademarks are the discount rate, the royalty rate, and estimated future revenues associated with the use of the trademarks.
For purposes of our annual impairment test of our trademarks performed as of January 28, 2012 we used a discount rate of 11.4% and a royalty rate in the range of 4% –5%. Our estimates of future revenues associated with our trademarks are based on our current budgets and are reflective of our current expectations as to sales growth rates. We believe that our estimates are appropriate under these circumstances. Given the significant excess of fair value over the book value of our trademarks as reflected in our impairment analyses we have determined, based on the performance of various sensitivity analyses, that our conclusion would not be affected by other outcomes that are reasonably likely to occur.
Although we believe we have sufficient current and historical information available to us to test for impairment, it is possible that actual cash flows could differ from the estimated cash flows used in our impairment tests.
See “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; “NOTE 10. IMPAIRMENT OF STORE ASSETS” below for information regarding impairment losses recognized during Fiscal 2010 and Fiscal 2009.
Costs Associated With Exit or Disposal Activities
We recognize liabilities for costs associated with an exit or disposal activity when the liabilities are incurred. Commitment to a plan by itself does not create an obligation that meets the definition of a liability. We recognize one-time benefit payments over time rather than “up front” if the benefit arrangement requires employees to render future service beyond a “minimum retention period.” The liability for one-time benefits is recognized as employees render service over the future service period, even if the benefit formula used to calculate an employee’s termination benefit is based on length of service. We use fair value for the initial measurement of liabilities associated with exit or disposal activities. Severance payments that are offered in accordance with an on-going benefit arrangement are recorded no later than the period when it becomes probable that the costs will be incurred and the costs can be reasonably estimated.
Stock-Based Compensation
We recognize the fair value of stock-based payments as compensation expense in our financial statements. Current grants of stock-based compensation consist primarily of stock appreciation rights (“SARs”) and restricted stock units ("RSUs"). We use the Black-Scholes valuation model to estimate the fair value of SARs. We recognize the related expense for stock-based compensation on a straight-line basis over the service period of the underlying awards except for awards that include a market condition, which are amortized on a graded vesting basis over their derived service period. Our initial estimates of compensation cost are based on the number of awards for which we expect the requisite service period to be completed. These initial estimates are revised if subsequent information indicates that the number of awards expected to vest differs from our initial estimates. We recognize the cumulative effect of such a change in estimated compensation expense in the period of the change.
The Black-Scholes model requires estimates or assumptions as to the dividend yield and price volatility of the underlying stock, the expected life of the award, and a relevant risk-free interest rate. Periodic amortization of compensation expense requires estimates as to the number of awards expected to be forfeited prior to completion of the requisite service period. The use of different option-pricing models and different estimates or assumptions could result in different estimates of compensation expense.
See “Item 8. Financial Statements and Supplementary Data; NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES; Stock-based Compensation” and “NOTE 7. STOCK-BASED COMPENSATION PLANS” below for further information on our stock-based compensation expense.
Insurance Liabilities
We use a combination of third-party insurance and/or self-insurance for certain risks, including workers’ compensation, medical, dental, automobile, and general liability claims. Our insurance liabilities are a component of “accrued expenses” on our consolidated balance sheet, and represent our estimate of the ultimate cost of uninsured claims incurred as of the balance sheet date. In estimating our self-insurance liabilities we use estimates of expected losses, which are based on analyses of historical data. Loss estimates are adjusted based upon actual claim settlements and reported claims. Although we do not expect the amounts ultimately paid to differ significantly from our estimates, self-insurance liabilities could be affected if future claim experience differs significantly from the historical trends and the actuarial assumptions usedbn . We evaluate the adequacy of these liabilities on a regular basis, modifying our assumptions as necessary, updating our records of historical experience, and adjusting our liabilities as appropriate.
Operating Leases
We lease all of our store properties as well as certain of our other facilities. A majority of our store leases contain lease options that we can unilaterally exercise. The lease term we use for such operating leases includes lease option renewal periods only in instances in which the failure to exercise such options would result in an economic penalty for us and exercise of the renewal option is therefore reasonably assured at the lease inception date. Store leasehold improvement assets are depreciated over the shorter of their useful life or the lease term.
For leases that contain rent escalations, the lease term for recognition of straight-line rent expense commences on the date we take possession of the leased property for construction purposes, which for stores is generally two months prior to a store opening date. Similarly, landlord incentives or allowances under operating leases (tenant improvement allowances) are recorded as a deferred rent liability and recognized as a reduction of rent expense on a straight-line basis over the lease term, commencing on the date we take possession of the leased property for construction purposes.
Senior Convertible Notes
Our cash-settled 1.125% Senior Convertible Notes (the “1.125% Notes”) are separated into their debt and equity components at issuance. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature. As a result, the debt is recorded at a discount to adjust its below-market coupon interest rate to the market coupon interest rate for a similar debt instrument without the conversion feature. The difference between the proceeds for the convertible debt and the amount reflected as the debt component represents the value of the conversion feature and is recorded as additional paid-in capital. The debt is subsequently accreted to its par value over its expected life with an offsetting non-cash increase in interest expense on the income statement to reflect interest expense at the market rate for the debt component at the date of issuance.
Concurrent with the issuance of the 1.125% Notes we entered into privately negotiated common stock call options and warrants with affiliates of the initial purchasers. We accounted for the call options and warrants as equity instruments. Accordingly, the cost of the call options and the proceeds from the sale of the warrants are included in additional paid-in capital in our consolidated balance sheets.
The 1.125% Notes will have no impact on our diluted net income per share until the price of our common stock exceeds the conversion price of $15.379 per share. Prior to conversion we will include any dilutive effect of the 1.125% Notes or the warrants in the calculation of diluted net income per share using the treasury stock method. The call options are excluded from the calculation of diluted net income per share because their effect would be anti-dilutive.
We monitor certain provisions of the 1.125% Notes, the call options, and the warrants for their ongoing treatment as equity instruments on a quarterly basis. Should the issuance of the 1.125% Notes, the purchase of the call options, or the sale of the warrants fail to continue to qualify as equity instruments, we would be required to recognize derivative instruments in connection with the transaction, include the effects of the transaction in assets or liabilities instead of equity, and recognize changes in the fair values of the assets or liabilities in consolidated net income as they occur until the requirements for treatment as equity instruments are again met.
See “Item 8. Financial Statements and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 5. LONG-TERM DEBT” below for further information regarding our 1.125% Notes and related call options and warrants.
Income Taxes
We recognize a tax benefit associated with uncertain tax positions when a tax position is more-likely-than-not to be sustained upon examination, based solely on its technical merits. We measure the recognized benefit as the largest amount of benefit which is more-likely-than-not to be realized on ultimate settlement, based on a cumulative probability basis. We recognize a tax position failing to qualify for initial recognition in the first interim period in which it meets the recognition standard described above, or is resolved through negotiation, litigation, or upon expiration of the statute of limitations. We de-recognize a previously recognized tax position if we subsequently determine that the tax position no longer meets the more-likely-than-not threshold of being sustained. We consider a tax position to be “effectively settled” upon completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled we recognize the full amount of the tax benefit, even if (1) the tax position is not considered more-likely-than-not to be sustained solely on the basis of its technical merits, and (2) the statute of limitations remains open.
We recognize deferred tax assets for temporary differences that will result in deductible amounts in future years and for net operating loss and credit carryforwards. We recognize a valuation allowance to reduce deferred tax assets if, based on existing facts and circumstances, it is more-likely-than-not that some portion or all of our deferred tax assets will not be realized. During Fiscal 2008 we evaluated our assumptions regarding the recoverability of our deferred tax assets. Based on all available evidence we determined that the recoverability of our deferred tax assets is more-likely-than-not limited to our available tax loss carrybacks. Accordingly, we established a valuation allowance against our net deferred tax assets. In future periods we will continue to recognize a valuation allowance until such time as the certainty of future tax benefits can be reasonably assured. When our results of operations demonstrate a pattern of future profitability the valuation allowance may be adjusted, which would result in the reinstatement of all or a part of the net deferred tax assets.
RECENT DEVELOPMENTS
In December 2011 we announced that we are undertaking a comprehensive strategic and financial review of our operations to determine how best to enhance shareholder value. This review is continuing. As part of these efforts, we announced plans to divest our FASHION BUG business and focus on the growth of our LANE BRYANT brand. This review is expected to focus on optimizing the use of our strong cash position to drive the potential of the LANE BRYANT brand, as well as evaluating other alternatives to further enhance shareholder value. The results of operations of our FASHION BUG business are not reported as discontinued operations as the requirements for treating the business as held-for-sale were not met as of January 28, 2012. During the Fiscal 2011 Fourth Quarter we also announced our plans for realignment of our distribution center operations and transformational initiatives for our information technology and distribution infrastructure.
Our Board of Directors and management are exploring a full range of strategic alternatives for the Company, and have engaged Barclays Capital as a financial advisor to assist in the process. We cannot assure that this process will result in any specific course of action beyond the planned divestiture of FASHION BUG. Further, there can be no assurance that this review will result in any specific course of action or that the planned divestiture of FASHION BUG will occur. A time frame for the divestiture of FASHION BUG or the completion of the strategic review has not yet been determined. Additional discussion of our management initiatives is included in "OVERVIEW; Management Initiatives" below.
OVERVIEW
This overview of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) presents a summary of more detailed information contained elsewhere in this Report on Form 10-K. The intent of this overview is to put this detailed information into perspective and to introduce the discussion and analysis contained in this MD&A. Accordingly, this overview should be read in conjunction with the remainder of this MD&A and with the financial statements and other detailed information included in this Report on Form 10-K and should not be separately relied upon.
Results of Operations
Our Fiscal 2011 Fourth Quarter operating results reflect continuing progress on our efforts to reduce operating expenses. Consolidated Adjusted EBITDA for the Fiscal 2011 Fourth Quarter increased by $2.0 million to $12.7 million as compared to the prior-year period (see “RESULTS OF OPERATIONS; EBITDA and Adjusted EBITDA” below for a reconciliation of EBITDA and Adjusted EBITDA measurements, which are not defined under Generally Accepted Accounting Principles ("GAAP"), to net loss, which is defined under GAAP). This increase was driven primarily by decreases in operating expenses as a result of the closing of under-performing stores, partially offset by a reduction in net sales and gross profit from the closing of under-performing stores and the impact on gross profit of increased promotional activity in the Fiscal 2011 Fourth Quarter. The $2.0 million increase in EBITDA was below our expectations as we were unable to hold higher retail prices that were needed to offset higher product costs at our LANE BRYANT brand, resulting in increased promotional activity at LANE BRYANT to drive traffic and sell-through seasonal merchandise. However, we were able to absorb the impact of the promotional environment through the decreases in operating expenses.
The decrease in consolidated net sales for the Fiscal 2011 Fourth Quarter reflected the impact of 207 net store closings during the preceding 12-month period in connection with our store closing programs, partially offset by a 17% increase in e-commerce net sales as compared to the Fiscal 2010 Fourth Quarter and an increase of 1% in consolidated comparable store sales. The inclusion of e-commerce sales with the bricks and mortar comparable store sales would have resulted in a comparable sales increase of 3% for the Fiscal 2011 Fourth Quarter. Our December holiday seasonal fashion inventory assortments were generally well received by our customers, resulting in improved average unit retails, average dollar sales, and conversion rates during the Fiscal 2011 Fourth Quarter as compared to the prior-year period. However, Fiscal 2011 Fourth Quarter sales were negatively impacted by planned reductions in levels of clearance inventory as compared to the prior-year period as we continued to execute against our plan for tightly controlled inventories to drive higher gross margins.
Consolidated gross margin decreased for the Fiscal 2011 Fourth Quarter as compared to the Fiscal 2010 Fourth Quarter. Gross margin at our FASHION BUG and CATHERINES brands increased as a result of reduced promotional activity in the current-year period as compared to the prior-year period, particularly at FASHION BUG, as well as improved seasonal assortments and more disciplined inventory management. However, these increases were offset by the increased promotional activity at our LANE BRYANT brand. The decline in gross profit was primarily driven by the net closure of 207 stores over the preceding 12 months in connection with our store closing program. We continue to seek the proper balance of full-price, promotional, and clearance inventories. Early customer response to our Spring merchandise offerings was strong at the end of the Fiscal 2011 Fourth Quarter and we are confident in our merchandising assortments and operating strategies for the Spring season. However, we expect that the promotional environment that we experienced during the Fiscal 2011 Fourth Quarter will continue to a lesser extent into the Fiscal 2012 First Quarter as we cycle through our higher-priced product.
Our operating expenses (excluding current year restructuring and other charges of $6.4 million and prior year restructuring charges of $4.0 million and impairment charges of $17.1 million) decreased by $18.5 million for the Fiscal 2011 Fourth Quarter, driven primarily by the impact of 207 net store closures and expense reductions across all of our brands. Our occupancy and buying expenses decreased both in dollar amount and as a percentage of net sales as compared to the prior-year period, primarily related to lower rent expense as a result of the operation of fewer stores and the result of lease negotiations. Selling, general, and administrative expenses decreased in dollar amount as compared to the prior-year period, primarily as a result of a combination of lower store payroll attributable to operating fewer stores and lower advertising expenses, but decreased only slightly as a percentage of net sales, primarily as a result of the lack of leverage from a small increase in consolidated comparable store sales.
Depreciation and amortization expenses decreased by $4.0 million for the Fiscal 2011 Fourth Quarter as compared to the prior-year period primarily as a result of the operation of fewer stores and the write-down of store assets during the Fiscal 2010 Fourth Quarter.
Restructuring and other charges for the Fiscal 2011 Fourth Quarter were primarily for professional fees and retention costs related to our announced plans to divest our FASHION BUG business and to undertake a comprehensive strategic and financial review (see "RECENT DEVELOPMENTS" above), and for net lease termination costs in connection with our under-performing store closing programs. Fiscal 2010 Fourth Quarter charges were primarily for non-cash charges for the impairment of long-term assets related to the closing of 30 CATHERINES stores in outlet locations, as well as lease termination costs for the closing of under-performing stores.
As discussed in prior quarters of Fiscal 2011, our product pricing was affected by inflation in cotton costs that mostly impacted our Fall and December holiday seasons. Our Fiscal 2011 Fourth Quarter average unit retail selling price increased approximately 9%, which did not completely cover the increased product cost. At each of our brands we had been planning reduced levels of inventory and a shift from year-round merchandise to a higher level of seasonal, faster-turning styles, while being conservative in our expectations of our customers' willingness to pay higher prices. However, higher initial price points at the beginning of the Fiscal 2011 Fourth Quarter in response to the increase in cotton prices largely were not acceptable to our customers, which resulted in decreased traffic and increased promotional activity at LANE BRYANT at the end of the quarter in order to drive traffic and sell-through seasonal merchandise.
Although we are pleased with our progress on our initiatives to drive sustainable productivity and profitability, our results remain below our expectations. We will continue our efforts to achieve better results through the execution of core fundamentals, including fashionable, trend-right assortments coupled with disciplined inventory management, gross margin expansion, and additional decreases in operating expenses, along with our longer-term initiatives discussed in "Management Initiatives" below.
Financial Position and Liquidity
We ended Fiscal 2011 with $168.6 million of cash as compared to $117.5 million as of the end of Fiscal 2010 and ended Fiscal 2011 with a net cash position as compared to a net debt position as of the end of Fiscal 2010. Our cash position increased primarily as a result of improved operating results during Fiscal 2011, more disciplined inventory management, improved sell-through of our seasonal merchandise, and proceeds of $7.5 million from the sale of our Hong Kong office premises. Our inventory management efforts resulted in an 8% decrease in inventory at cost on a comparable store basis at the end of Fiscal 2011 as compared to the end of the prior-year period.
As we continue to rationalize our store base, we expect to close approximately 90-105 unprofitable stores during Fiscal 2012. The majority of these stores have natural lease expirations in 2012. Lease termination costs for Fiscal 2012 are projected to be approximately $4 million. During Fiscal 2011,we closed 214 stores, including 124 FASHION BUG stores.
On July 14, 2011 we entered into an amended and restated loan and security agreement for a $200 million senior secured revolving credit facility, which replaced our $225 million senior secured revolving credit facility and provides for committed revolving credit availability through July 14, 2016. See “FINANCING; Revolving Credit Facility” below for further discussion of the amended agreement. We ended Fiscal 2011 with no borrowings against the revolving credit facility and a total liquidity position of $305.3 million ($168.6 million of cash plus $136.7 million of available borrowing capacity under our revolving credit facility).
Management Initiatives
As previously announced, we are currently engaged in a number of initiatives that we believe will improve our business and enhance shareholder value (see "RECENT DEVELOPMENTS" above). The first substantive step is the divestiture of our FASHION BUG business. Although we have made progress in improving FASHION BUG's profitability, we believe that it does not fit within our future strategic plan. Concurrent with this process, we are assessing the appropriate expense structure that incorporates the planned divestiture of FASHION BUG.
We believe that our financial and operational resources are better spent on focusing on our more profitable LANE BRYANT brand. We expect to invest in and focus on that business, using its strong consumer franchise and leading market position to drive our sales and profits. We expect to achieve our vision for the LANE BRYANT brand as the premier brand for women's fashion plus apparel through a number of initiatives, including:
| |
• | offering fashionable, on-trend, lifestyle merchandise collections; |
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• | enhanced CACIQUE intimate apparel brand awareness and merchandise offerings; |
| |
• | expansion to approximately 900 stores over the next few years, resulting in approximately 750 full-line LANE BRYANT stores and 150 LANE BRYANT OUTLET locations; and |
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• | innovative digital sales initiatives like our recently launched Fashion Genius™ online outfitting technology. |
Our plans for the next few years include approximately 125 new locations and 125 relocations from malls into power-strip and lifestyle centers with stronger operating metrics, while closing approximately 50 stores through natural lease expirations. Our current mix of LANE BRYANT stores in strip centers to malls is approximately 55% to 45%, and we plan to improve this mix to approximately 80% to 20% over the next few years. We believe that operating LANE BRYANT stores in power-strip and lifestyle centers will support increased profitability, with projected increases in sales and decreases in occupancy expenses as compared to malls.
Additionally, we are currently developing a new store design for the LANE BRYANT brand, reflective of our vision for LANE BRYANT as the premier brand for women's fashion plus apparel. The new store design will include visual packages that promote lifestyle storytelling experiences, and will be simplified for easy navigation to enhance our customers' shopping experience. We expect to launch our first new store under this design in Fall 2012. Following the execution of our broader plans for new and relocated stores, nearly one-third of our LANE BRYANT stores will be repositioned and represented by our fresh new store design.
Our CACIQUE intimate apparel brand, which offers key intimates categories and complementary products, has grown to approximately one-third of sales at our full-line LANE BRYANT chain. We are seeking to further grow CACIQUE revenue through enhanced product assortments. Further into the future we expect to explore additional sales distribution channels, such as potential mall-based stand-alone stores, sister brands, and international growth.
We are also executing on initiatives to simplify and continuously improve our business processes. These initiatives include investments in the transformation of our information technology and distribution infrastructure, which will support both our planned growth for LANE BRYANT and more efficient processes for our current business. During Fiscal 2012, in addition to investments in store growth at LANE BRYANT we plan to invest approximately $30 million for a complete upgrade of distribution center equipment; store technology, including point-of-sale hardware, software, and data networks; the installation of a core merchandising platform, including enhanced planning and inventory capabilities; a new warehouse management system; and new purchasing and financial software.
Over the next few years, we expect our investments in the growth of LANE BRYANT to increase sales and reduce costs, driving incremental EBITDA of $35 million. We expect the transformation of our information technology and distribution infrastructure to result in cost reductions of approximately $25-$30 million when fully realized in 2014.
RESULTS OF OPERATIONS
EBITDA and Adjusted EBITDA
We define EBITDA as net income/(loss) before (i) income taxes; (ii) net interest expense/other income; and (iii) depreciation and amortization, except for amortization of stock-based compensation, which is a component of selling, general, and administrative expenses. We define Adjusted EBITDA as EBITDA before certain items, such as (i) gain on repurchases of 1.125% Senior Convertible Notes; (ii) restructuring and other charges; (iii) impairment of store assets, goodwill, and trademarks; (iv) gain from sale of office premises; and (v) sale of proprietary credit card receivables programs. EBITDA and Adjusted EBITDA are not defined under Generally Accepted Accounting Principles (“GAAP”) and our computation may not be comparable to similar measures reported by other companies.
We believe that Adjusted EBITDA, along with other measures, provides a useful pretax measure of our ongoing operating performance and our ability to meet debt service and capital requirements on a comparable basis excluding the impact of certain items and capital-related non-cash charges. We use Adjusted EBITDA to monitor and evaluate the performance of our business operations and we believe that it enhances our investors’ ability to analyze trends in our business, compare our performance to other companies in our industry, and evaluate our ability to service our debt and capital needs. In addition, we use Adjusted EBITDA as a component of our compensation programs.
Although Adjusted EBITDA provides useful information on an operating cash flow basis, it is a limited measure in that it excludes the impact of cash requirements for interest expense, income taxes, capital expenditures, and certain other items requiring cash outlays. Therefore, Adjusted EBITDA should be used as a supplement to results of operations and cash flows as reported under GAAP and should not be used as a singular measure of operating performance or as a substitute for GAAP results.
The tables on the following five pages show details of our consolidated net sales and a reconciliation of our income/(loss) from continuing operations to EBITDA and Adjusted EBITDA for the periods indicated.
Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
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| | | | | | | | | | | | | | | |
(In millions) | LANE BRYANT(1) | | FASHION BUG | | CATHERINES | | Total Retail Stores |
Year Ended January 28, 2012 | | | | | | | |
Net sales | $ | 991.8 |
| | $ | 581.6 |
| | $ | 297.7 |
| | $ | 1,871.1 |
|
| | | | | | | |
Net loss | 80.8 |
| | 16.3 |
| | 13.3 |
| | 110.4 |
|
Income tax provision | — |
| | — |
| | — |
| | — |
|
Net interest expense and other income | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 30.0 |
| | 7.4 |
| | 5.7 |
| | 43.1 |
|
EBITDA | 110.8 |
| | 23.7 |
| | 19.0 |
| | 153.5 |
|
Gain from sale of office premises | — |
| | — |
| | — |
| | — |
|
Restructuring and other credits | — |
| | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 110.8 |
| | $ | 23.7 |
| | $ | 19.0 |
| | $ | 153.5 |
|
Adjusted EBITDA as a % of net sales | 11.2 | % | | 4.1 | % | | 6.4 | % | | 8.2 | % |
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(1) | Includes LANE BRYANT OUTLET® stores, with net sales of $124.1 and Adjusted EBITDA of $17.0. |
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| | | | | | | | | | | |
(In millions) | Direct-to- Consumer(2) | | Corporate And Other | | Consolidated |
Year Ended January 28, 2012 | | | | | |
Net sales | $ | 121.3 |
| | $ | — |
| | $ | 1,992.4 |
|
| | | | | |
Net loss | 6.2 |
| | (118.6 | ) | | (2.0 | ) |
Income tax provision | — |
| | 7.0 |
| | 7.0 |
|
Net interest expense and other income | — |
| | 13.7 |
| | 13.7 |
|
Depreciation and amortization | 1.1 |
| | 12.5 |
| | 56.7 |
|
EBITDA | 7.3 |
| | (85.4 | ) | | 75.4 |
|
Gain from sale of office premises | — |
| | (5.2 | ) | | (5.2 | ) |
Restructuring and other credits | — |
| | 11.2 |
| | 11.2 |
|
Adjusted EBITDA | $ | 7.3 |
| | $ | (79.4 | ) | | $ | 81.4 |
|
Adjusted EBITDA as a % of net sales | 6.0 | % | | — |
| (3) | 4.1 | % |
| |
(2) | Primarily FIGI’S catalog business. |
Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
(Continued)
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| | | | | | | | | | | | | | | |
(In millions) | LANE BRYANT(1) | | FASHION BUG | | CATHERINES | | Total Retail Stores |
Year Ended January 29, 2011 | | | | | | | |
Net sales | $ | 977.9 |
| | $ | 668.7 |
| | $ | 300.0 |
| | $ | 1,946.6 |
|
| | | | | | | |
Net loss | 60.0 |
| | (7.1 | ) | | 0.7 |
| | 53.6 |
|
Income tax benefit | — |
| | — |
| | — |
| | — |
|
Net interest expense and other income | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 34.7 |
| | 11.4 |
| | 8.4 |
| | 54.5 |
|
EBITDA | 94.7 |
| | 4.3 |
| | 9.1 |
| | 108.1 |
|
Gain on repurchases of 1.125% Senior Convertible Notes | — |
| | — |
| | — |
| | — |
|
Restructuring and other charges | — |
| | — |
| | — |
| | — |
|
Impairment of store assets | — |
| | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 94.7 |
| | $ | 4.3 |
| | $ | 9.1 |
| | $ | 108.1 |
|
Adjusted EBITDA as a % of net sales | 9.7 | % | | 0.6 | % | | 3.0 | % | | 5.6 | % |
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(1) | Includes LANE BRYANT OUTLET stores, with net sales of $115.9 and Adjusted EBITDA of $15.2. |
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| | | | | | | | | | | |
(In millions) | Direct-to- Consumer(2) | | Corporate And Other | | Consolidated |
Year Ended January 29, 2011 | | | | | |
Net sales | $ | 115.2 |
| | $ | — |
| | $ | 2,061.8 |
|
| | | | | |
Net loss | 8.9 |
| | (116.5 | ) | | (54.0 | ) |
Income tax benefit | — |
| | (2.9 | ) | | (2.9 | ) |
Net interest expense and other income | — |
| | 14.8 |
| | 14.8 |
|
Depreciation and amortization | 1.1 |
| | 12.7 |
| | 68.3 |
|
EBITDA | 10.0 |
| | (91.9 | ) | | 26.2 |
|
Gain on repurchases of 1.125% Senior Convertible Notes | — |
| | (1.9 | ) | | (1.9 | ) |
Restructuring and other charges | — |
| | 8.8 |
| | 8.8 |
|
Impairment of store assets | — |
| | 17.1 |
| | 17.1 |
|
Adjusted EBITDA | $ | 10.0 |
| | $ | (67.9 | ) | | $ | 50.2 |
|
Adjusted EBITDA as a % of net sales | 8.7 | % | | — |
| (3) | 2.4 | % |
| |
(2) | Primarily FIGI’S catalog business. |
Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
(Continued)
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| | | | | | | | | | | | | | | | | | | |
(In millions) | LANE BRYANT(1) | | FASHION BUG | | CATHERINES | | Other Retail Stores(2) | | Total Retail Stores |
Year Ended January 30, 2010 | | | | | | | | | |
Net sales | $ | 945.9 |
| | $ | 692.1 |
| | $ | 292.9 |
| | $ | 16.7 |
| | $ | 1,947.6 |
|
| | | | | | | | | |
Net loss | 61.5 |
| | (7.3 | ) | | 11.6 |
| | (0.5 | ) | | 65.3 |
|
Income tax benefit | — |
| | — |
| | — |
| | — |
| | — |
|
Net interest expense and other income | — |
| | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 36.5 |
| | 15.2 |
| | 7.9 |
| | 0.1 |
| | 59.7 |
|
EBITDA | 98.0 |
| | 7.9 |
| | 19.5 |
| | (0.4 | ) | | 125.0 |
|
Gain on repurchases of 1.125% Senior Convertible Notes | — |
| | — |
| | — |
| | — |
| | — |
|
Restructuring and other charges | — |
| | — |
| | — |
| | — |
| | — |
|
Impairment of store assets | — |
| | — |
| | — |
| | — |
| | — |
|
Sale of proprietary credit card receivables programs | — |
| | — |
| | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 98.0 |
| | $ | 7.9 |
| | $ | 19.5 |
| | $ | (0.4 | ) | | $ | 125.0 |
|
Adjusted EBITDA as a % of net sales | 10.4 | % | | 1.1 | % | | 6.7 | % | | (2.4 | )% | | 6.4 | % |
| |
(1) | Includes LANE BRYANT OUTLET stores, with net sales of $116.2 and Adjusted EBITDA of $18.3. |
| |
(2) | Includes PETITE SOPHISTICATE OUTLET stores, which began operations in September 2006 and were closed in the Fiscal 2009 Fourth Quarter. |
|
| | | | | | | | | | | |
(In millions) | Direct-to- Consumer(3) | | Corporate And Other | | Consolidated |
Year Ended January 30, 2010 | | | | | |
Net sales | $ | 116.6 |
| | $ | 0.4 |
| (4) | $ | 2,064.6 |
|
| | | | | |
Net loss | 2.6 |
| | (145.9 | ) | | (78.0 | ) |
Income tax benefit | — |
| | (13.5 | ) | | (13.5 | ) |
Net interest expense and other income | — |
| | 18.0 |
| | 18.0 |
|
Depreciation and amortization | 1.3 |
| | 15.3 |
| | 76.3 |
|
EBITDA | 3.9 |
| | (126.1 | ) | | 2.8 |
|
Gain on repurchases of 1.125% Senior Convertible Notes | — |
| | (14.0 | ) | | (14.0 | ) |
Restructuring and other charges | — |
| | 31.7 |
| | 31.7 |
|
Impairment of store assets | — |
| | 15.8 |
| | 15.8 |
|
Sale of proprietary credit card receivables programs | — |
| | 14.2 |
| | 14.2 |
|
Adjusted EBITDA | $ | 3.9 |
| | $ | (78.4 | ) | | $ | 50.5 |
|
Adjusted EBITDA as a % of net sales | 3.3 | % | | — |
| (5) | 2.4 | % |
| |
(3) | Includes FIGI’S, with net sales of $105.3 and Adjusted EBITDA of $8.7. Also includes net sales of $11.3 and Adjusted EBITDA of $(4.8) related primarily to our LANE BRYANT WOMAN catalog business that we shut down in the Fiscal 2009 Second Quarter. |
| |
(4) | Revenues related to our figure® magazine, which was discontinued in the Fiscal 2009 First Quarter. |
Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
(Continued)
|
| | | | | | | | | | | | | | | |
(In millions) | LANE BRYANT(1) | | FASHION BUG | | CATHERINES | | Total Retail Stores |
Thirteen Weeks Ended January 28, 2012 | | | | | | | |
Net sales | $ | 256.1 |
| | $ | 143.5 |
| | $ | 70.4 |
| | $ | 470.0 |
|
| | | | | | | |
Net loss | 2.8 |
| | (1.3 | ) | | (0.2 | ) | | 1.3 |
|
Income tax provision | — |
| | — |
| | — |
| | — |
|
Net interest expense and other income | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 7.6 |
| | 1.8 |
| | 1.3 |
| | 10.7 |
|
EBITDA | 10.4 |
| | 0.5 |
| | 1.1 |
| | 12.0 |
|
Restructuring and other charges | — |
| | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 10.4 |
| | $ | 0.5 |
| | $ | 1.1 |
| | $ | 12.0 |
|
Adjusted EBITDA as a % of net sales | 4.1 | % | | 0.3 | % | | 1.6 | % | | 2.6 | % |
| |
(1) | Includes LANE BRYANT OUTLET stores, with net sales of $30.2 and Adjusted EBITDA of $1.8. |
|
| | | | | | | | | | | |
(In millions) | Direct-to- Consumer(2) | | Corporate And Other | | Consolidated |
Thirteen Weeks Ended January 28, 2012 | | | | | |
Net sales | $ | 89.1 |
| | $ | — |
| | $ | 559.1 |
|
| | | | | |
Net loss | 15.3 |
| | (29.8 | ) | | (13.2 | ) |
Income tax provision | — |
| | 2.2 |
| | 2.2 |
|
Net interest expense and other income | — |
| | 3.1 |
| | 3.1 |
|
Depreciation and amortization | 0.3 |
| | 3.2 |
| | 14.2 |
|
EBITDA | 15.6 |
| | (21.3 | ) | | 6.3 |
|
Restructuring and other charges | — |
| | 6.4 |
| | 6.4 |
|
Adjusted EBITDA | $ | 15.6 |
| | $ | (14.9 | ) | | $ | 12.7 |
|
Adjusted EBITDA as a % of net sales | 17.5 | % | | — |
| (3) | 2.3 | % |
| |
(2) | Primarily FIGI’S catalog business. A substantial portion of FIGI’s sales occur during the December holiday season. |
Net Sales and Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
(Continued)
|
| | | | | | | | | | | | | | | |
(In millions) | LANE BRYANT(1) | | FASHION BUG | | CATHERINES | | Total Retail Stores |
Thirteen Weeks Ended January 29, 2011 | | | | | | | |
Net sales | $ | 255.1 |
| | $ | 163.6 |
| | $ | 69.7 |
| | $ | 488.4 |
|
| | | | | | | |
Net loss | 10.6 |
| | (10.7 | ) | | (3.6 | ) | | (3.7 | ) |
Income tax benefit | — |
| | — |
| | — |
| | — |
|
Net interest expense and other income | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | 8.9 |
| | 3.1 |
| | 2.5 |
| | 14.5 |
|
EBITDA | 19.5 |
| | (7.6 | ) | | (1.1 | ) | | 10.8 |
|
Restructuring and other charges | — |
| | — |
| | — |
| | — |
|
Impairment of store assets | — |
| | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 19.5 |
| | $ | (7.6 | ) | | $ | (1.1 | ) | | $ | 10.8 |
|
Adjusted EBITDA as a % of net sales | 7.6 | % | | (4.6 | )% | | (1.6 | )% | | 2.2 | % |
| |
(1) | Includes LANE BRYANT OUTLET stores, with net sales of $28.9 and Adjusted EBITDA of $1.8. |
|
| | | | | | | | | | | |
(In millions) | Direct-to- Consumer(2) | | Corporate And Other | | Consolidated |
Thirteen Weeks Ended January 29, 2011 | | | | | |
Net sales | $ | 87.4 |
| | $ | — |
| | $ | 575.8 |
|
| | | | | |
Net loss | 16.7 |
| | (43.4 | ) | | (30.4 | ) |
Income tax benefit | — |
| | (1.6 | ) | | (1.6 | ) |
Net interest expense and other income | — |
| | 3.4 |
| | 3.4 |
|
Depreciation and amortization | 0.3 |
| | 3.4 |
| | 18.2 |
|
EBITDA | 17.0 |
| | (38.2 | ) | | (10.4 | ) |
Restructuring and other charges | — |
| | 4.0 |
| | 4.0 |
|
Impairment of store assets | — |
| | 17.1 |
| | 17.1 |
|
Adjusted EBITDA | $ | 17.0 |
| | $ | (17.1 | ) | | $ | 10.7 |
|
Adjusted EBITDA as a % of net sales | 19.5 | % | | — |
| (3) | 1.9 | % |
| |
(2) | Primarily FIGI’S catalog business. A substantial portion of FIGI’s sales occur during the December holiday season. |
The following table shows information related to changes in our Retail Stores segment net sales:
|
| | | | | | | | | | | |
| Year Ended | | Year Ended |
| January 28, 2012 | | January 29, 2011 |
| Fiscal Year | | Fourth Quarter | | Fiscal Year | | Fourth Quarter |
Increase/(decrease) in comparable store sales(1) : | | | | | | | |
Consolidated Retail Stores: | | | | | | | |
Consolidated Retail Stores | — | % | | 1 | % | | 3 | % | | 9 | % |
Consolidated Retail Stores e-commerce | 16 |
| | 17 |
| | 38 |
| | 41 |
|
Total Consolidated Retail Stores | 1 |
| | 3 |
| | 5 |
| | 11 |
|
LANE BRYANT:(2) | < |