UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2001
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. 0-7258
CHARMING SHOPPES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
---------------------------- -----
(Address of principal executive offices) (Zip Code)
(215) 245-9100
---------------------------------------------------
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
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(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the issuer's Common Stock, as of Novem-
ber 3, 2001, was 110,933,717 shares.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
November 3, 2001 and February 3, 2001.......................... 2 - 3
Condensed Consolidated Statements of Operations and
Comprehensive Income
Thirteen weeks ended November 3, 2001 and October 28, 2000..... 4
Thirty-nine weeks ended November 3, 2001 and October 28, 2000.. 5
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended November 3, 2001 and October 28, 2000.. 6
Notes to Condensed Consolidated Financial Statements.............. 7 - 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements........................................ 18
Recent Developments............................................... 18 - 21
Results of Operations............................................. 22 - 27
Liquidity and Capital Resources................................... 27 - 30
Market Risk....................................................... 31
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.............................................................. 31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 32 - 33
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 3, February 3,
(In thousands) 2001 2001
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents.................................... $ 56,578 $ 56,544
Available-for-sale securities, (including fair value
adjustments of $34 and $3, respectively.................... 40,964 48,817
Merchandise inventories...................................... 433,738 259,127
Deferred taxes............................................... 31,848 10,678
Prepayments and other........................................ 77,213 56,748
---------- --------
Total current assets....................................... 640,341 431,914
---------- --------
Property, equipment, and leasehold improvements.............. 648,259 504,071
Less: accumulated depreciation and amortization.............. 322,043 286,208
---------- --------
Net property, equipment, and leasehold improvements........ 326,216 217,863
---------- --------
Trademarks and other intangible assets....................... 171,967 0
Goodwill..................................................... 113,045 92,520
Available-for-sale securities (including fair value
adjustments of $8 and $77, respectively)................... 10,199 76,461
Other assets................................................. 36,450 34,009
---------- --------
Total assets................................................. $1,298,218 $852,767
========== ========
See Notes to Condensed Consolidated Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
November 3, February 3,
(In thousands except share amounts) 2001 2001
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings........................................ $ 152,503 $ 0
Accounts payable............................................. 149,433 94,881
Accrued expenses............................................. 167,553 123,690
Income taxes payable......................................... 7,965 0
Current portion -- long-term debt............................ 7,597 4,954
---------- --------
Total current liabilities.................................. 485,051 223,525
---------- --------
Deferred taxes............................................... 34,475 21,433
Long-term debt............................................... 205,198 113,540
Minority interest............................................ 1,000 1,000
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 111,349,933 shares and
110,731,483 shares, respectively......................... 11,135 11,073
Additional paid-in capital................................... 100,619 80,977
Treasury stock at cost -- 416,216 shares and
9,105,000 shares, respectively............................. (1,899) (41,537)
Deferred employee compensation............................... (4,191) (1,629)
Accumulated other comprehensive (loss) income................ (869) 74
Retained earnings............................................ 467,699 444,311
---------- --------
Total stockholders' equity................................. 572,494 493,269
---------- --------
Total liabilities and stockholders' equity................... $1,298,218 $852,767
========== ========
See Notes to Condensed Consolidated Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
----------------------
November 3, October 28,
(In thousands except per-share amounts) 2001 2000
---- ----
(Restated)
Net sales.................................................... $549,295 $363,812
-------- --------
Cost of goods sold, buying, and occupancy expenses........... 396,026 255,576
Selling, general, and administrative expenses................ 146,248 94,846
Amortization of goodwill..................................... 1,221 1,199
-------- --------
Total operating expenses..................................... 543,495 351,621
-------- --------
Income from operations....................................... 5,800 12,191
Other income, principally interest........................... 1,098 2,139
Interest expense............................................. (6,636) (2,393)
-------- --------
Income before income taxes................................... 262 11,937
Income tax provision......................................... 102 4,560
-------- --------
Net income................................................... 160 7,377
-------- --------
Unrealized (losses) gains on available-for-sale securities,
net of income taxes of $0 and ($243),respectively.......... (1) 456
Reclassification of realized losses on available-for-sale
securities, net of income tax benefit of $0 and $57,
respectively............................................... 0 104
Reclassification of amortization of deferred loss on termina-
tion of derivative, net of income tax benefit of $46....... 85 0
-------- --------
Total other comprehensive income, net of taxes............... 84 560
-------- --------
Comprehensive income......................................... $ 244 $ 7,937
======== ========
Basic net income per share................................... $.00 $.07
==== ====
Diluted net income per share................................. $.00 $.07
==== ====
Certain prior-period amounts have been reclassified to conform to the
current presentation.
See Notes to Condensed Consolidated Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirty-nine Weeks Ended
-----------------------
November 3, October 28,
(In thousands except per-share amounts) 2001 2000
---- ----
(Restated)
Net sales..................................................... $1,346,756 $1,172,395
---------- ----------
Cost of goods sold, buying, and occupancy expenses............ 973,483 823,622
Selling, general, and administrative expenses................. 324,489 276,079
Amortization of goodwill...................................... 3,664 3,595
---------- ----------
Total operating expenses...................................... 1,301,636 1,103,296
---------- ----------
Income from operations........................................ 45,120 69,099
Other income, principally interest............................ 4,503 6,252
Interest expense.............................................. (11,407) (6,595)
---------- ----------
Income before income taxes and cumulative effect of
accounting change........................................... 38,216 68,756
Income tax provision.......................................... 14,828 26,265
---------- ----------
Income before cumulative effect of accounting change.......... 23,388 42,491
Cumulative effect of accounting change, net of income
tax benefit of $334......................................... 0 (540)
---------- ----------
Net income.................................................... 23,388 41,951
---------- ----------
Unrealized (losses) gains on available-for-sale securities,
net of income taxes of $5 and ($393),respectively........... (53) 734
Reclassification of realized losses on available-for-sale
securities, net of income tax benefit of $4 and $90,
respectively................................................ 6 166
Unamortized deferred loss on termination of derivative, net
of income tax benefit of $621............................... (1,152) 0
Reclassification of amortization of deferred loss on termina-
tion of derivative, net of income tax benefit of $138....... 256 0
---------- ----------
Total other comprehensive (loss) income, net of taxes......... (943) 900
---------- ----------
Comprehensive income.......................................... $ 22,445 $ 42,851
========== ==========
Basic net income per share:
Income before cumulative effect of accounting change.......... $ .22 $ .42
Cumulative effect of accounting change, net of taxes.......... .00 (.01)
----- -----
Net income.................................................... $ .22 $ .41
===== =====
Diluted net income per share:
Income before cumulative effect of accounting change.......... $ .22 $ .40
Cumulative effect of accounting change, net of taxes.......... .00 (.01)
----- -----
Net income.................................................... $ .22 $ .39
===== =====
Certain prior-period amounts have been reclassified to conform to the
current presentation.
See Notes to Condensed Consolidated Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
-----------------------
November 3, October 28,
(In thousands) 2001 2000
---- ----
(Restated)
Operating activities
Net income................................................... $23,388 $41,951
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............................. 43,982 35,964
Other, net................................................. 302 329
Changes in operating assets and liabilities, excluding
acquisition of Lane Bryant, Inc.:
Merchandise inventories.................................. (66,660) (47,911)
Accounts payable......................................... 29,001 47,364
Prepayments and other.................................... (10,245) 10,670
Accrued expenses......................................... 2,101 (21,556)
Income taxes payable..................................... 7,965 7,291
-------- --------
Net cash provided by operating activities.................... 29,834 74,102
-------- --------
Investing activities
Investment in capital assets................................. (48,369) (45,250)
Proceeds from sales of capital assets........................ 0 833
Acquisition of Lane Bryant, Inc., net of cash acquired....... (280,841) 0
Proceeds from sales of available-for-sale securities......... 105,931 54,285
Gross purchases of available-for-sale securities............. (31,866) (55,281)
Increase in other assets..................................... (3,481) (4,169)
-------- --------
Net cash used in investing activities........................ (258,626) (49,582)
-------- --------
Financing activities
Proceeds from short-term borrowings.......................... 370,994 0
Repayments of short-term borrowings.......................... (218,491) 0
Proceeds from long-term borrowings........................... 85,950 0
Repayments of long-term borrowings........................... (4,299) (2,503)
Payments of deferred financing costs......................... (7,541) 0
Purchases of treasury stock.................................. 0 (713)
Proceeds from exercise of stock options...................... 2,213 2,656
-------- --------
Net cash provided by (used in) financing activities.......... 228,826 (560)
-------- --------
Increase in cash and cash equivalents........................ 34 23,960
Cash and cash equivalents, beginning of period............... 56,544 34,299
-------- --------
Cash and cash equivalents, end of period..................... $ 56,578 $ 58,259
======== ========
Non-cash financing and investing activities
Common stock issued for acquisition of Lane Bryant, Inc...... $ 55,000 $ 0
======== ========
Equipment acquired through capital leases.................... $ 12,650 $ 14,331
======== ========
See Notes to Condensed Consolidated Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of November 3, 2001 and the
condensed consolidated statements of operations and comprehensive income
and of cash flows for the thirteen and thirty-nine weeks ended November 3,
2001 and October 28, 2000 have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
at November 3, 2001 and the results of operations and cash flows for the
thirteen and thirty-nine weeks ended November 3, 2001 and October 28, 2000
have been made. Certain prior-year amounts in the consolidated statements
of operations have been reclassified to conform to the current presenta-
tion.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. These con-
densed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
February 3, 2001 Annual Report on Form 10-K. The results of operations for
the thirteen and thirty-nine weeks ended November 3, 2001 and October 28,
2000 are not necessarily indicative of operating results for the full
fiscal year.
In the fourth quarter of the fiscal year ended February 3, 2001 ("Fiscal
2001"), the Company changed its method of accounting for sales returns and
layaway sales, as required by Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." The Company adopted SAB 101 effective as of the beginning of
Fiscal 2001 and restated its results of operations for the first three
quarters of Fiscal 2001. The cumulative effect of the adoption of SAB 101
as of January 30, 2000 was a decrease in income, net of taxes, of $540,000.
Results of operations for the thirteen and thirty-nine weeks ended October
28, 2000 as previously reported, prior to restatement for the adoption of
SAB 101, are as follows:
Thirteen Thirty-nine
Weeks Ended Weeks Ended
October 28, October 28,
(In thousands, except per-share amounts) 2000 2000
---- ----
Net sales.......................................... $365,690 $1,175,253
Cost of goods sold, buying, and occupancy expenses. 256,609 825,194
Net income......................................... 7,899 43,286
Basic net income per share......................... $.08 $.43
Diluted net income per share....................... .08 .41
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Condensed Consolidated Financial Statements (continued)
Certain components of cash flow from operating activities for the thirty-
nine weeks ended October 28, 2000 have been restated to reflect the adop-
tion of SAB 101.
2. Acquisition
On August 16, 2001, the Company acquired 100% of the outstanding stock of
Lane Bryant, Inc. ("Lane Bryant") from a subsidiary of The Limited, Inc.
for cash of $286,223,000, including direct costs of the acquisition, and
8,688,784 shares of the Company's Common Stock, valued at $55,000,000.
Lane Bryant operates 653 retail apparel stores in 46 states, specializing
in fashion apparel and related accessories for women wearing plus-sizes 14
and greater. Lane Bryant had net sales of $930 million in the fiscal year
ended February 3, 2001. The cash paid for the acquisition was funded with
the use of approximately $83,000,000 of the Company's existing cash and
cash equivalents, a $75,000,000 term loan, and revolving loans obtained
under a new credit facility obtained in connection with the acquisition
(see "Note 4. Debt" below). The Common Stock issued had been previously re-
acquired by the Company and was being held as treasury shares. The
Limited, Inc. is restricted from selling the Charming Shoppes, Inc. Common
Stock for a one-year period after the close of the transaction. The
acquisition has been accounted for under the purchase method of accounting,
and the results of operations of Lane Bryant are included in the Company's
results of operations from the date of acquisition. Prior-period results
have not been restated.
Assets acquired and liabilities assumed have been recorded at their estima-
ted fair values. The recorded values of assets acquired and liabilities
assumed are preliminary, and are subject to adjustment, pending final
determination of their acquisition values. The final allocation of the
purchase price is not expected to differ materially from the allocations
used to prepare these financial statements. The Company expects to
complete the final allocation of the purchase price within twelve months
from the date of acquisition. Based on a preliminary determination of the
value of the net assets acquired, the Company recognized a liability of
approximately $4.3 million for the estimated value of additional shares of
the Company's Common Stock to be issued upon final settlement of the acqui-
sition. The Company expects to determine the actual number of additional
shares to be issued by the end of the fiscal year ended February 2, 2002
("Fiscal 2002"). The number of shares of the Company's common stock issued
or to be issued in connection with the acquisition is based on a five-day
average market value as defined in the purchase agreement.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Acquisition (continued)
In accordance with the requirements of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," the Company recognized certain intangible assets
acquired, primarily trademarks, tradenames, and internet domain names, sep-
arately from goodwill. The excess of the cost of the acquisition over the
estimated fair value of the identifiable net assets acquired ($24,189,000)
has been allocated to goodwill. In accordance with the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," the goodwill, trademarks,
tradenames, and internet domain names will not be amortized. Other intan-
gible assets acquired, consisting of customer lists ($2,700,000) and a
covenant not to compete ($600,000), will be amortized over their estimated
useful life of five years.
The acquisition of Lane Bryant complements the Company's long-term growth
strategy of becoming a leader in the sale of plus-size specialty apparel.
Lane Bryant is a premier brand in the plus-size market with an established
customer base and proprietary brand names, and operates profitably in
multiple retail venues, primarily in leading malls.
The following unaudited pro forma information is based on historical data,
and gives effect to the Company's acquisition of Lane Bryant as if the
acquisition had occurred on January 30, 2000. The pro forma information
includes adjustments having a continuing impact on the consolidated company
as a result of using the purchase method of accounting for the acquisition.
Pro forma adjustments consist of additional depreciation from the step-up
in value of property, equipment, and leasehold improvements acquired,
additional amortization expense related to intangible assets acquired,
additional interest expense and amortization of deferred financing costs
related to debt incurred to finance the acquisition (see "Note 4. Debt"
below), and a reduction in interest income from the use of approximately
$83,000,000 of the Company's cash and cash equivalents to fund a portion of
the acquisition.
The unaudited pro forma information is not necessarily indicative of the
actual results of operations that would have occurred if the acquisition
had occurred as of January 30, 2000, and is not necessarily indicative of
the results that may be achieved in the future. The unaudited pro forma
information does not reflect adjustments for operating synergies that the
Company may realize as a result of the acquisition. No assurances can be
given as to the amount and timing of any financial benefits that the Com-
pany may realize as a result of the acquisition.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Acquisition (continued)
Unaudited pro forma results of operations:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 3, October 28, November 3, October 28,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net sales..................... $574,037 $579,688 $1,839,091 $1,840,146
Income before cumulative
effect of accounting change. (800) 2,059 29,485 38,678
Net income (loss)............. (800) 2,059 29,485 38,138
Income (loss) per share before
cumulative effect of
accounting change:
Basic....................... $(0.01) $0.02 $0.26 $0.35
Diluted..................... (0.01) 0.02 0.26 0.34
Net income (loss) per share:
Basic....................... $(0.01) $0.02 $0.26 $0.35
Diluted..................... (0.01) 0.02 0.26 0.34
3. Accrued Restructuring Expenses and Restructuring Credit
On March 5, 1998, the Company's Board of Directors approved a restruc-
turing plan (the "Plan") that resulted in a pre-tax charge of $34,000,000.
The Plan was approved in conjunction with the decision to eliminate men's
merchandise from the Company's Fashion Bug stores. As of February 3, 2001,
this restructuring plan was completed, and there were no remaining restruc-
ture accruals relating to this plan. The following table summarizes
accrued restructuring charges related to this Plan as of January 29, 2000
and payments charged against the accrual during the thirty-nine weeks ended
October 28, 2000:
Accrued At Accrued At
January October
29, 28,
(In thousands) 2000 Payments 2000
---- -------- ----
Lease terminations/amendments and
renovations of vacated store space.... $4,890 $(4,474) $ 416
Other costs............................. 1,807 (815) 992
------ ------- ------
$6,697 $(5,289) $1,408
====== ======= ======
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Accrued Restructuring Expenses and Restructuring Credit (continued)
During the fourth quarter of the fiscal year ended January 29, 2000 ("Fis-
cal 2000"), the Company recorded a restructuring charge of $1,459,000 in
connection with the Company's plan to consolidate its Modern Woman stores
into its Catherine's stores. The restructuring charge was primarily for
lease termination costs related to the closing of 11 Modern Woman stores
that geographically overlapped Catherine's stores. During Fiscal 2001, the
Company closed 10 of the 11 stores, and accrued restructuring charges of
$1,086,000 related to these stores were paid. During the thirty-nine weeks
ended November 3, 2001, the Company closed the remaining store and $373,000
was charged against this accrual. As of November 3, 2001, this restructur-
ing plan was completed, and there were no remaining restructure accruals
relating to this plan.
4. Debt
Long-term debt:
November 3, February 3,
(In thousands) 2001 2001
---- ----
7.5% Convertible subordinated notes due 2006...... $ 96,047 $ 96,047
Term loan due August 16, 2004..................... 75,000 0
Capital lease obligations......................... 24,473 15,890
7.77% mortgage note............................... 10,950 0
7.5% mortgage note................................ 6,310 6,449
Other............................................. 15 108
-------- --------
Total long-term debt............................. 212,795 118,494
Less current portion.............................. 7,597 4,954
-------- --------
$205,198 $113,540
======== ========
In connection with the acquisition of Lane Bryant, on August 16, 2001 the
Company replaced its existing $150,000,000 revolving credit facility with a
$375,000,000 credit facility pursuant to a loan and security agreement of
the same date (the "Facility" or the "Agreement"). This Facility includes
a revolving credit facility with a maximum availability of $300,000,000,
subject to borrowing limitations based on eligible inventory and the value
of certain real property, and a three-year term loan of $75,000,000. The
Facility provides for cash borrowings and enables the Company to issue up
to $150,000,000 of letters of credit for overseas purchases of merchandise.
The Facility is secured by the general assets of the Company, except for
certain assets of the Company's credit card securitization program, certain
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Debt (continued)
real properties subject to other mortgages, assets of the Company's joint
venture with Monsoon plc, and assets of the Company's non-U.S. operations.
The Facility expires on August 16, 2004, with an option to renew the
revolving credit facility for an additional year. The Company also termi-
nated its existing $20,000,000 and $10,000,000 revolving credit facilities,
which were obtained in connection with the Company's previous acquisitions
of the Catherine's and Modern Woman stores.
The interest rate on borrowings under the revolving credit line ranges from
Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus 2%
to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on the Company's Leverage Ratio or excess availability, as
defined in the Agreement. The interest rate on borrowings under the term
loan equals Prime plus 4% per annum, with minimum and maximum rates of
11.5% and 13%, respectively, per annum. As of November 3, 2001, the inter-
est rates on borrowings under the revolving credit line and term loan were
4.8% and 11.5%, respectively. There is a fee of 1-1/2% per annum on
outstanding documentary letters of credit, a fee of 2% per annum on out-
standing stand-by letters of credit, a fee of .375% to .5% per annum on the
unused portion of the revolving credit facility, and annual servicing fees
totaling $156,000. Costs incurred by the Company in obtaining the Facility
were approximately $7,541,000. These debt acquisition costs have been de-
ferred and are being amortized over the life of the Agreement.
The Agreement includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limita-
tions. The Agreement also requires, among other things, that the Company
not pay dividends on its Common Stock and maintain an Adjusted Tangible Net
Worth (as defined in the Agreement) of $228,000,000 (subject to increase or
decrease in certain circumstances). Until the term loan is paid in full,
the Company is required to maintain a minimum 12-month earnings before
interest, income taxes, depreciation, and amortization ("EBITDA") of
$140,000,000 and maintain a ratio of Total Secured Debt to EBITDA of not
greater than 3 to 1, as more fully described in the Agreement. The 12-
month EBITDA that includes periods prior to the date of the Agreement is
specifically defined in the agreement. As of November 3, 2001, the avail-
ability under the revolving credit facility was $111,170,000.
The 7.77% mortgage note, dated November 1, 2001, has a ten-year term with
119 monthly installments of principal and interest of $103,000 commencing
in January 2002 and a final payment of any remaining unpaid principal and
interest in December 2011. The mortgage note is secured by land,
buildings, fixtures, and equipment owned by the Company at its offices in
Bensalem, Pennsylvania and by leases and rents owned or received by the
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Debt (continued)
Company from tenants of the Bensalem facility. The net proceeds of
$10,851,000 from the mortgage note were used to repay a portion of the
borrowings outstanding under the $300,000,000 revolving credit facility,
discussed above.
5. Stockholders' Equity
Thirty-nine
Weeks Ended
(In thousands) November 3, 2001
----------------
Total stockholders' equity, beginning of period............. $493,269
Net income.................................................. 23,388
Market value of treasury shares issued for acquisition
of Lane Bryant, Inc....................................... 55,000
Exercises of stock options.................................. 927
Amortization of deferred compensation expense............... 853
Net unamortized deferred loss on termination of
derivative, net of income tax benefit of $483............. (896)
Net unrealized losses on available-for-sale securities...... (47)
--------
Total stockholders' equity, end of period................... $572,494
========
6. Derivative Financial Instruments
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, "Ac-
counting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," as of the beginning of Fiscal 2002. During Fiscal
2001, the Company terminated an interest rate swap agreement with a notion-
al principal amount of $50 million. In accordance with SFAS No. 133, the
deferred loss on termination of the swap as of February 4, 2001 ($1,152,000
net of a tax benefit of $621,000) has been recognized in "Accumulated other
comprehensive (loss) income" on the Company's consolidated balance sheet,
and is being amortized to selling, general, and administrative expenses
over the 44-month remaining life of the original swap period.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Customer Loyalty Card Program
During the first quarter of the current fiscal year, the Company began a
customer loyalty card program for its Fashion Bug store customers. The
program grants discounts on customer purchases over a twelve-month period
upon payment of a $20 annual fee. Revenues from the program are recognized
as sales over the life of the membership as discounts are earned. Upon
cancellation of a loyalty card, refunds of membership fees are reduced by
the amount of any discounts granted to the member under the program. Costs
incurred by the Company in connection with the program are recognized in
cost of goods sold as incurred. During the thirteen and thirty-nine weeks
ended November 3, 2001, the Company recognized $4,433,000 and $8,060,000,
respectively, of revenues in connection with this program.
8. Net Income Per Share
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
(In thousands except per-share November 3, October 28, November 3, October 28,
amounts) 2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated)
Basic weighted average common
shares outstanding...................... 109,579 101,155 104,067 101,042
Dilutive effect of assumed
conversion of convertible notes......... 0 0 0 12,875
Dilutive effect of stock options.......... 964 827 989 1,019
------- ------- ------- -------
Diluted weighted average common
shares and equivalents outstanding...... 110,543 101,982 105,056 114,936
======= ======= ======= =======
Income before cumulative effect
of accounting change.................... $160 $7,377 $23,388 $42,491
Decrease in interest expense
from assumed conversion of notes,
net of income taxes..................... 0 0 0 3,376
---- ------ ------- -------
Income before cumulative effect
of accounting change used to
determine diluted earnings
per share............................... 160 7,377 23,388 45,867
Cumulative effect of accounting
change, net of income taxes............. 0 0 0 (540)
---- ------ ------- -------
Net income used to determine
diluted earnings per share.............. $160 $7,377 $23,388 $45,327
==== ====== ======= =======
Options with weighted average
exercise price greater than market
price, excluded from computation of
diluted earnings per share:
Number of shares.......................... 6,417 4,559 5,593 4,014
Weighted average exercise price
per share............................... $7.32 $7.69 $7.48 $7.95
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The effect of assumed conversion of the Company's 7.5% Convertible Subor-
dinated Notes due 2006 was excluded from the computation of diluted net
income per share for the thirteen weeks ended November 3, 2001 and October
28, 2000 and the thirty-nine weeks ended October 28, 2000 because the ef-
fect would have been anti-dilutive.
Grants of stock awards under the Company's restricted stock award programs
generally require continuing employment for a specified period of time as a
condition for vesting of the award. Grants that have not vested and are
subject to a risk of forfeiture are included in the calculation of diluted
earnings per share using the treasury stock method if the impact of the
award is dilutive. Upon vesting, shares issued under these award programs
are included in the calculation of basic earnings per share.
9. Impact of Recent Accounting Pronouncements
In September 2000, The FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125. SFAS No. 140 retains most of the provisions
of SFAS No. 125, but revises the standards for accounting for securiti-
zations and other transfers of financial assets and collateral and requires
certain disclosures. SFAS No. 140 is based on application of a financial-
components approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and serv-
icing assets it controls and the liabilities it has incurred, de-recognizes
financial assets when control has been surrendered, and de-recognizes lia-
bilities when extinguished.
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001, and is
effective for recognition and reclassification of collateral and for dis-
closures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company adopted the disclosure
provisions of SFAS No. 140 as of Fiscal 2001, and will adopt the accounting
requirements of SFAS No. 140 to the extent that it issues new beneficial
interests after March 31, 2001. Adoption of SFAS No. 140 did not have a
material impact on the results of operations or financial position for the
thirteen or thirty-nine weeks ended November 3, 2001, and is not expected
to have a material impact on future operating results.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Impact of Recent Accounting Pronouncements (continued)
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires the use of the purchase method of accounting for business com-
binations initiated after June 30, 2001, and expands the definition of
intangible assets that are to be recorded separately from goodwill. For
business combinations accounted for under the purchase method which were
completed prior to July 1, 2001, previously recorded goodwill and intangi-
bles are to be evaluated against the criteria in SFAS No. 141, which may
result in the reclassification of certain intangible assets into or out of
recorded goodwill. SFAS No. 142 requires that goodwill and certain intan-
gible assets with an indefinite useful life are not to be amortized, but
are to be reviewed for impairment at least annually and written down in
periods in which the recorded value of the goodwill or intangible asset
exceeds its fair value.
For goodwill and other intangible assets acquired prior to June 30, 2001,
the Company is required to adopt the provisions of SFAS No. 141 and SFAS
No. 142 as of February 3, 2002 (the beginning of the fiscal year ended
February 1, 2003). The Company's condensed consolidated balance sheet as
of November 3, 2001 includes $88.9 million of goodwill recognized as a
result of the acquisition of Catherines Stores, Inc. ("Catherine's") in
January 2000. In accordance with the provisions of these statements, the
Company will continue to amortize the Catherine's goodwill through the end
of Fiscal 2002, recognizing approximately $4.9 million of amortization for
Fiscal 2002. Commencing February 3, 2002, the Company will no longer
amortize the Catherine's goodwill; however, subsequent impairment reviews
may result in periodic write-downs of the Catherine's goodwill. In addi-
tion, intangible assets meeting the requirement for separate disclosure
under SFAS Nos. 141 and 142 may be reclassified out of the Catherine's
goodwill as of the date of adoption of the statements, and may be sepa-
rately amortized based on their useful lives. Except for discontinuing the
amortization of goodwill, the Company has not determined the impact of
adoption of SFAS Nos. 141 and 142 with respect to the Catherine's goodwill
on the Company's financial condition or results of operations.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Impact of Recent Accounting Pronouncements (continued)
The Company is required to adopt the provisions of SFAS No. 141 for
business combinations accounted for under the purchase method that are
completed subsequent to June 30, 2001. In accordance with the transition
provisions of SFAS No. 142, the Company is required to adopt the provisions
relating to non-amortization of goodwill and recognition of intangible
assets for goodwill and intangibles acquired subsequent to June 30, 2001.
The Company is required to adopt the provisions of SFAS No. 142 in full as
of February 3, 2002. The Company adopted the provisions of SFAS No. 141
and the transition provisions of SFAS No. 142 in accounting for its acqui-
sition of Lane Bryant, Inc. (see "Note 2. Acquisition" above).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retire-
ment Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Adoption of SFAS No. 143 is not
expected to have a material impact on the Company's financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of
Long-lived Assets and Long-lived Assets to be Disposed Of." SFAS No. 144
is effective for fiscal years beginning after December 15, 2001. SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" related to the disposal of a segment of
a business. SFAS No. 144 also resolves certain implementation issues
related to SFAS No. 121. The Company is currently evaluating the effect
that adoption of SFAS No. 144 will have on the Company's financial position
or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations contains certain forward-looking statements concerning
the Company's operations, performance and financial condition. In particu-
lar, it includes forward-looking statements regarding the Company's growth,
earnings, sales performance, store openings and closings, cost savings,
capital requirements, the Company's exposure to fluctuations in interest
rates, and other matters. Such forward-looking statements are subject to
various risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements. Such
risks and uncertainties may include, but are not limited to, (i) failure to
achieve successful integrations, (ii) rapid changes in or miscalculation of
fashion trends, (iii) extreme or unseasonable weather conditions, (iv)
economic downturns, a weakness in overall consumer demand, inflation, and
cyclical variations in the retail market for women's fashion apparel, (v)
the risks attendant to the sourcing of the Company's merchandise needs
abroad, including exchange rate fluctuations, political instability, trade
sanctions or restrictions, changes in quota and duty regulations, delays in
shipping, or increased costs of transportation, (vi) the interruption of
merchandise flow to the Company's retail stores from its centralized dis-
tribution facilities, (vii) competitive pressures, (viii) the ability to
hire and train associates, (ix) the availability of suitable store
locations on appropriate terms, (x) failure to realize merger-related syn-
ergies, and (xi) the adverse effects of acts or threats of war, terrorism,
or other armed conflict on the United States and international economies.
These, and other risks and uncertainties, are detailed further in this Item
2, in "Part I, Item 1 -- Business: Cautionary Statement for Purposes of the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995" of the Company's Annual Report on Form 10-K for the fiscal year ended
February 3, 2001, and in the Company's reports filed with the Securities
and Exchange Commission from time to time.
RECENT DEVELOPMENTS
On August 16, 2001, the Company acquired 100% of the outstanding stock of
Lane Bryant, Inc. ("Lane Bryant") from a subsidiary of The Limited, Inc.
("The Limited") for cash of $286,223,000 and 8,688,784 shares of the Com-
pany's Common Stock, valued at $55,000,000. Lane Bryant operates 653
retail apparel stores in 46 states, specializing in fashion apparel and
related accessories for women wearing plus-sizes 14 and greater. Lane
Bryant had net sales of $930 million in the fiscal year ended February 3,
2001. The cash paid for the acquisition was funded with the use of
approximately $83,000,000 of the Company's existing cash and cash equiva-
lents, a $75,000,000 term loan, and revolving loans obtained under a new
credit facility obtained in connection with the acquisition (discussed
below). The Common Stock issued had been previously re-acquired by the
Company and was being held as treasury shares. The Limited, Inc. is
restricted from selling the Charming Shoppes, Inc. Common Stock for a one-
year period after the close of the transaction. The acquisition has been
accounted for under the purchase method of accounting, and the results of
operations of Lane Bryant are included in the Company's results of opera-
tions from the date of acquisition. Prior-period results have not been
restated.
Assets acquired and liabilities assumed have been recorded at their estima-
ted fair values. The recorded values of assets acquired and liabilities
assumed are preliminary, and are subject to adjustment, pending final
determination of their acquisition values. The final allocation of the
purchase price is not expected to differ materially from the allocations
used to prepare these financial statements. The Company expects to
complete the final allocation of the purchase price within twelve months
from the date of acquisition. Based on a preliminary determination of the
value of the net assets acquired, the Company recognized a liability of
approximately $4.3 million for the estimated value of additional shares of
the Company's Common Stock to be issued upon final settlement of the acqui-
sition. The Company expects to determine the actual number of additional
shares to be issued by the end of the fiscal year ended February 2, 2002
("Fiscal 2002"). The number of shares of the Company's common stock issued
or to be issued in connection with the acquisition is based on a five-day
average market value as defined in the purchase agreement.
In accordance with the requirements of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," the Company recognized certain intangible assets
acquired, primarily trademarks, tradenames, and internet domain names, sep-
arately from goodwill. The excess of the cost of the acquisition over the
estimated fair value of the identifiable net assets acquired ($24,189,000)
has been allocated to goodwill. In accordance with the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," the goodwill, trademarks,
tradenames, and internet domain names will not be amortized. Other intan-
gible assets acquired, consisting of customer lists ($2,700,000) and a
covenant not to compete ($600,000), will be amortized over their estimated
useful life of five years.
In connection with the acquisition of Lane Bryant, on August 16, 2001 the
Company replaced its existing $150,000,000 revolving credit facility with a
$375,000,000 credit facility pursuant to a loan and security agreement of
the same date (the "Facility" or the "Agreement"). This Facility includes
a revolving credit facility with a maximum availability of $300,000,000,
subject to borrowing limitations based on eligible inventory and the value
of certain real property, and a three-year term loan of $75,000,000. The
Facility provides for cash borrowings and enables the Company to issue up
to $150,000,000 of letters of credit for overseas purchases of merchandise.
The Facility is secured by the general assets of the Company, except for
certain assets of the Company's credit card securitization program, certain
real properties subject to other mortgages, assets of the Company's joint
venture with Monsoon plc, and assets of the Company's non-U.S. operations.
The Facility expires on August 16, 2004, with an option to renew the
revolving credit facility for an additional year. The Company also
terminated its existing $20,000,000 and $10,000,000 revolving credit
facilities, which were obtained in connection with the Company's previous
acquisitions of the Catherine's and Modern Woman stores.
The interest rate on borrowings under the revolving credit line ranges from
Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus 2%
to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on the Company's Leverage Ratio or excess availability, as
defined in the Agreement. The interest rate on borrowings under the term-
loan equals Prime plus 4% per annum, with minimum and maximum rates of
11.5% and 13%, respectively, per annum. As of November 3, 2001, the inter-
est rates on borrowings under the revolving credit line and term loan were
4.8% and 11.5%, respectively. There is a fee of 1-1/2% per annum on
outstanding documentary letters of credit, a fee of 2% per annum on out-
standing stand-by letters of credit, a fee of .375% to .5% per annum on the
unused portion of the revolving credit facility, and annual servicing fees
totaling $156,000. Costs incurred by the Company in obtaining the Facility
were approximately $7,541,000. These debt acquisition costs have been de=
ferred and are being amortized over the life of the Agreement.
The Agreement includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limita-
tions. The Agreement also requires, among other things, that the Company
not pay dividends on its Common Stock and maintain an Adjusted Tangible Net
Worth (as defined in the Agreement) of $228,000,000 (subject to increase or
decrease in certain circumstances). Until the term loan is paid in full,
the Company is required to maintain a minimum twelve-month earnings before
interest, income taxes, depreciation, and amortization ("EBITDA") of
$140,000,000 and maintain a ratio of Total Secured Debt to EBITDA of not
greater than 3 to 1, as more fully described in the Agreement. The 12-
month EBITDA that includes periods prior to the date of the Agreement is
specifically defined in the agreement.
The acquisition of Lane Bryant complements the Company's long-term growth
strategy of becoming one of the leading specialty retailers of plus-size
apparel. Lane Bryant is a premier brand in the plus-size market with an
established customer base and proprietary brand names, and operates profit-
ably in multiple retail venues, primarily in leading malls.
On September 11, 2001, major terrorist attacks occurred against the World
Trade Center in New York City and the Pentagon Building in Washington, D.C.
These attacks adversely affected the United States economy, which was
already slowing and showing signs of a recession prior to September 11,
2001. The Company did not experience any direct instances of destruction
or impairment of its assets. However, the Company believes that the
effects of the terrorist incidents on the United States economy had an
adverse impact on the Company's results of operations during the quarter
ended November 3, 2002.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a per-
centage of net sales:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Net sales......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying, and
occupancy expenses.............. 72.1 70.2 72.3 70.3
Selling, general, and
administrative expenses......... 26.7 26.1 24.1 23.5
Amortization of goodwill.......... 0.2 0.3 0.3 0.3
Income from operations............ 1.0 3.4 3.3 5.9
Other income, principally interest 0.2 0.6 0.3 0.5
Interest expense.................. 1.2 0.7 0.8 0.6
Income tax provision.............. 0.0 1.3 1.1 2.2
Income before cumulative effect
of accounting change............ 0.0 2.0 1.7 3.6
Net income........................ 0.0 2.0 1.7 3.6
The following table sets forth certain comparative sales data:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
(Decrease) increase in
comparable store sales(1)(2):
Fashion Bug...................... (7.2)% 1.2% (6.3)% 1.0%
Catherine's...................... (3.8) -- (1.5) --
Sales from new stores as a
percentage of total
prior-period sales(2):
Fashion Bug...................... 5.2 8.0 5.7 7.8
Catherine's...................... 1.9 26.1(3) 3.2 33.0(3)
Lane Bryant...................... 52.6 16.3
Monsoon/Accessorize.............. 0.2 -- 0.1 --
Prior-period sales from closed
stores as a percentage of total
prior-period sales(2):
Fashion Bug...................... (3.0) (3.3) (3.0) (3.2)
Catherine's stores............... (1.4) -- (4.0) --
(Decrease) increase in total sales 51.0 31.6 14.9 38.6
--------------------
(1) Sales from stores in operation during both periods. Stores are added
to the comparable store base after 13 full months of operation.
(2) Based on equivalent periods. Results for thirteen and thirty-nine
weeks ended November 3, 2001 may not be equivalent to change in total
sales.
(3) Includes sales from Modern Woman stores acquired in August 1999.
Thirteen Weeks Ended November 3, 2001 and October 28, 2000
Net sales for the quarter ended November 3, 2001 ("Fiscal 2002 Third Quar-
ter") totaled $549.3 million as compared to net sales of $363.8 million for
the quarter ended October 28, 2000 ("Fiscal 2001 Third Quarter"). Net
sales for the Fiscal 2002 Third Quarter include $265.3 million in sales
from Fashion Bug stores, $191.2 million in sales from Lane Bryant stores,
$92.2 million in sales from Catherine's Stores, and $0.6 million in sales
from Monsoon/Accessorize stores. Sales from Lane Bryant stores are for the
period from August 16, 2001 (the date of acquisition) through November 3,
2001. Net sales for the Fiscal 2001 Third Quarter include $271.5 million
in sales from Fashion Bug stores and $92.3 million in sales from Cath-
erine's Stores. In line with overall consumer shopping trends and a
generally weak retail sales environment, the Company experienced year-over-
year decreases in store traffic levels across all of the Company's chains.
For Fashion Bug stores, improvements in junior sportswear were more than
offset by declines in other merchandise categories. Fashion Bug comparable
store sales were also negatively affected by a decrease in sales of girls
merchandise. In January 2001, the Company announced plans to support
growth in large-size apparel and eliminate girls apparel from Fashion Bug
stores, effective at the end of the 2000-2001 winter season. For Cather-
ine's Stores, increases in sales of casual sportswear and coats were more
than offset by decreases in sales of other merchandise categories. For
Lane Bryant stores, sales of sweaters, knit tops, and jeans benefited from
a strong back-to-school season in the first half of the quarter. Although
Lane Bryant's results prior to August 16, 2001 are not included in the
Company's results of operations and comparable store sales calculations,
Lane Bryant's same-store sales for the Fiscal 2002 Third Quarter were
comparable to the Fiscal 2001 Third Quarter.
As of November 3, 2001, the Company operated 1,268 Fashion Bug and Fashion
Bug Plus stores, 659 Lane Bryant stores, 559 Catherine's stores, and 9
Monsoon/Accessorize stores, as compared to 1,237 Fashion Bug and Fashion
Bug Plus stores and 535 Catherine's stores as of October 28, 2000.
Cost of goods sold, buying, and occupancy expenses expressed as a percent-
age of sales increased 1.9% in the Fiscal 2002 Third Quarter as compared to
the Fiscal 2001 Third Quarter. Cost of goods sold as a percentage of sales
decreased 0.8% in the Fiscal 2002 Third Quarter as compared to the Fiscal
2001 Third Quarter. Higher merchandise margins in the Lane Bryant stores
were partially offset by decreased margins in the Fashion Bug and Cather-
ine's stores as a result of higher levels of promotional activity in
response to slower sales activity. Cost of goods sold includes merchandise
costs, net of discounts and allowances, freight, and inventory shrinkage.
Net merchandise costs and freight are capitalized as inventory costs.
Buying and occupancy expenses expressed as a percentage of sales increased
2.7% in the Fiscal 2002 Third Quarter as compared to the Fiscal 2001 Third
Quarter. The increase in buying and occupancy expenses as a percentage of
sales was primarily attributable to the lack of leverage on relatively
fixed occupancy costs as a result of a decline in comparable store sales
and relatively higher occupancy expenses for the Lane Bryant stores.
Buying expenses increased slightly as a percentage of sales, primarily as a
result of buying costs for Lane Bryant stores, which are relatively higher
due to the product development and design process that supports a 100%
private-label business. Buying expenses include payroll, payroll-related
costs, and operating expenses for the Company's buying departments and
warehouses. Occupancy expenses include rent, real estate taxes, insurance,
common area maintenance, utilities, maintenance, and depreciation for the
Company's stores and warehouse facilities and equipment. Buying and
occupancy costs are treated as period costs and are not capitalized as part
of inventory.
Selling, general, and administrative expenses increased 0.6% as a percent-
age of sales. Selling expenses in the Fiscal 2002 Third Quarter increased
1.9% as a percentage of sales as compared to the Fiscal 2001 Third Quarter.
The increase was attributable to the lack of leverage on relatively fixed
store payroll expenses as a result of the decline in comparable store
sales. An increase in credit income (a component of selling expenses) in
the Fiscal 2002 Third Quarter was offset by increased delinquencies in the
Company's proprietary credit card program. Administrative expenses
decreased 1.3% as a percentage of sales, primarily as a result of the
synergistic effect of a larger sales base on corporate administrative
expenses. Selling, general, and administrative expenses exclude goodwill
amortization related to the acquisition of the Catherine's stores.
Other income expressed as a percentage of sales decreased 0.4% in the
Fiscal 2002 Third Quarter as compared to the Fiscal 2001 Third Quarter,
primarily as a result of a decrease in interest income. Interest income
decreased as a result of lower levels of invested funds during the Fiscal
2002 Third Quarter as compared to the Fiscal 2001 Third Quarter. During
the Fiscal 2002 Third Quarter, the Company used $83,000,000 of cash and
investments in connection with the acquisition of Lane Bryant (see "RECENT
DEVELOPMENTS" above).
Interest expense expressed as a percentage of sales increased 0.5% in the
Fiscal 2002 Third Quarter as compared to the Fiscal 2001 Third Quarter.
The increase was primarily a result of increased borrowings in connection
with the acquisition of Lane Bryant (see "RECENT DEVELOPMENTS" above).
Interest expense also increased as a result of an increase in capital lease
financing obligations in the Fiscal 2002 Third Quarter as compared to the
Fiscal 2001 Third Quarter.
The income tax provision for the Fiscal 2002 Third Quarter was 38.8% of the
Company's pre-tax income, as compared to 38.2% for the Fiscal 2001 Third
Quarter. The increase in the effective tax rate is primarily attributable
to an increase in the tax provision related to one of the Company's
employee insurance programs.
Net income per share, assuming dilution, for the Fiscal 2002 Third Quarter
was $.00 as compared to $.07 for the Fiscal 2001 Third Quarter. Diluted
net income per share excluding goodwill amortization (cash earnings per
share) was $.01 for the Fiscal 2002 Third Quarter as compared to $.08 for
the Fiscal 2001 Third Quarter.
Thirty-nine Weeks Ended November 3, 2001 and October 28, 2000
Net sales for the thirty-nine weeks ended November 3, 2001 ("first three
quarters of Fiscal 2002") totaled $1,346.8 million as compared to net sales
of $1,172.4 million for the thirty-nine weeks ended October 28, 2000
("first three quarters of Fiscal 2001"). Net sales for the first three
quarters of Fiscal 2002 include $860.7 million in sales from the Company's
Fashion Bug stores, $191.2 million in sales from Lane Bryant stores, $293.7
million in sales from Catherine's Stores, and $1.2 million in sales from
Monsoon/Accessorize stores. Sales from Lane Bryant stores are for the
period from August 16, 2001 (the date of acquisition) through November 3,
2001. Net sales for the first three quarters of Fiscal 2001 include $872.3
million in sales from the Company's Fashion Bug stores and $300.1 million
in sales from Catherine's Stores. Fashion Bug comparable store sales
decreased primarily as a result of a progressively weaker general retail
sales environment during the first three quarters of Fiscal 2002. Improve-
ments in junior and plus sportswear were more than offset by declines in
other merchandise categories. Fashion Bug comparable store sales were also
negatively affected by a decrease in sales of girls merchandise as a result
of the Company's plans to support growth in large-size apparel and elimi-
nate girls apparel from Fashion Bug stores. For Catherine's Stores, which
have also been negatively affected by the generally weaker retail sales
environment, an increase in sales of casual sportswear was more than offset
by declines in other merchandise categories. Although Lane Bryant's
results prior to August 16, 2001 are not included in the Company's results
of operations and comparable store sales calculations, Lane Bryant's year-
to-date comparable store sales increased 2%.
Cost of goods sold, buying, and occupancy expenses expressed as a percent-
age of sales increased 2.0% in the first three quarters of Fiscal 2002 as
compared to the first three quarters of Fiscal 2001. Cost of goods sold as
a percentage of sales was unchanged in the first three quarters of Fiscal
2002 as compared to the first three quarters of Fiscal 2001. Reduced mer-
chandise margins in the Company's Fashion Bug and Catherine's stores as a
result of an increased level of promotional activity during the first three
quarters of Fiscal 2002 and costs related to exiting the girls business in
the Company's Fashion Bug stores were primarily offset by higher merchan-
dise margins in the Lane Bryant stores and to a lesser extent by strong
management of in-season inventory levels. Cost of goods sold includes
merchandise costs, net of discounts and allowances, freight, and inventory
shrinkage. Net merchandise costs and freight are capitalized as inventory
costs.
Buying and occupancy expenses expressed as a percentage of sales increased
2.0% in the first three quarters of Fiscal 2002 as compared to the first
three quarters of Fiscal 2001. The increase in buying and occupancy
expenses as a percentage of sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of a decline in
comparable store sales. Increased utilities expenses and relatively higher
occupancy expenses for new and relocated stores as compared to the
Company's existing stores also contributed to the increase in buying and
occupancy expenses as a percentage of sales. Buying expenses increased
slightly as a percentage of sales, primarily as a result of buying costs
for Lane Bryant stores, which are relatively higher due to the product
development and design process that supports a 100% private-label business.
Buying expenses include payroll, payroll related costs, and operating
expenses for the Company's buying departments and warehouses. Occupancy
expenses include rent, real estate taxes, insurance, common area mainten-
ance, utilities, maintenance, and depreciation for the Company's stores and
warehouse facilities and equipment. Buying and occupancy costs are treated
as period costs and are not capitalized as part of inventory.
Selling, general, and administrative expenses expressed as a percentage of
sales increased 0.6% in the first three quarters of Fiscal 2002 as compared
to the first three quarters of Fiscal 2001. Selling expenses increased
1.1% as a percentage of sales. The increase was attributable to the lack
of leverage on relatively fixed store payroll expenses as a result of the
decline in comparable store sales. An improvement in the Company's credit
operations (which are included in selling expenses) as a result of reduced
interest rates related to the Company's asset securitization program was
partially offset by increased delinquencies in the Company's proprietary
credit card program during the latter part of the current-year period.
Administrative expenses decreased 0.5% as a percentage of sales, primarily
as a result of the synergistic effect of a larger sales base on corporate
administrative expenses. Selling, general, and administrative expenses
exclude goodwill amortization related to the acquisition of the Catherine's
stores.
Other income expressed as a percentage of sales decreased 0.2% in the first
three quarters of Fiscal 2002 as compared to the first three quarters of
Fiscal 2001, primarily as a result of a decrease in interest income.
Interest income decreased as a result of lower levels of invested funds
during the first three quarters of Fiscal 2002 as compared to the first
three quarters of Fiscal 2001. During the first three quarters of Fiscal
2002, the Company converted investments in marketable securities to cash
and cash equivalents and used $83,000,000 of cash and cash equivalents in
connection with the acquisition of Lane Bryant (see "RECENT DEVELOPMENTS"
above).
Interest expense expressed as a percentage of sales increased 0.2% in the
first three quarters of Fiscal 2002 as compared to the first three quarters
of Fiscal 2001. The increase was a result of increased borrowings in
connection with the acquisition of Lane Bryant (see "RECENT DEVELOPMENTS"
above) and an increase in capital lease financing obligations.
The income tax provision for the first three quarters of Fiscal 2002 was
38.8% of the Company's pre-tax income, as compared to 38.2% for the first
three quarters of Fiscal 2001. The increase in the effective tax rate is
primarily attributable to an increase in the tax provision related to one
of the Company's employee insurance programs.
Net income per share, assuming dilution, for the first three quarters of
Fiscal 2002 was $.22 as compared to $.39 for the first three quarters of
Fiscal 2001. Diluted net income per share excluding goodwill amortization
(cash earnings per share) was $.26 for the first three quarters of Fiscal
2002 as compared to $.43 for the first three quarters of Fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from opera
tions, its proprietary credit card receivables securitization agreements,
its investment portfolio, and its credit facilities. The following table
highlights certain information related to the Company's liquidity and
capital resources:
November 3, February 3,
(Dollars in thousands) 2001 2001
---- ----
Working capital................................... $155,290 $208,389
Cash and cash equivalents......................... 56,578 56,544
Available-for-sale securities..................... 51,163 125,278
Current ratio..................................... 1.3 1.9
Long-term debt to equity (%)...................... 35.8 23.0
Net cash provided by operating activities was $29.8 million for the first
three quarters of Fiscal 2002, as compared to $74.1 million for the first
three quarters of Fiscal 2001. Cash provided by operating activities for
the first three quarters of Fiscal 2002 was negatively impacted by reduced
operating income, an increase in merchandise inventories, and an increase
in prepaid expenses, which were partially offset by a net decrease in
payments of accrued expenses. As a result of the recent decline in
interest rates, a portion of the Company's investments in U. S. government
agency bonds with early redemption provisions were called for redemption
during the first three quarters of Fiscal 2002. The $74.1 million decrease
in available-for-sale securities during the first three quarters of Fiscal
2002 was primarily a result of these redemptions. The Company invested the
proceeds from these early redemptions in cash equivalents pending their use
in connection with the acquisition of Lane Bryant in August 2002 (see
"RECENT DEVELOPMENTS" above).
In connection with the acquisition of Lane Bryant, on August 16, 2001 the
Company replaced its existing $150,000,000 revolving credit facility with a
$375,000,000 credit facility pursuant to a loan and security agreement of
the same date. See "RECENT DEVELOPMENTS" above for a description of the
$375,000,000 credit facility. The Company also entered into various agree-
ments with The Limited under which The Limited will provide certain
transitional services. The agreements range from 1 month to 36 months, and
the Company expects to pay approximately $6,900,000, $10,600,000, and
$1,400,000 during the fiscal years ended February 2, 2002, February 1,
2003, and January 31, 2004, respectively, to The Limited under these agree-
ments. The Company may terminate these agreements prior to their expira-
tion dates with notice
In addition, Lane Bryant has subleased approximately 205 properties from
The Limited pursuant to a Master Sublease. The stores subject to the
Master Sublease were operated as Lane Bryant stores prior to the closing of
the acquisition. The Company has guaranteed the obligations of Lane Bryant
under the Master Sublease, and, in connection with such guaranty, has
entered into an agreement with The Limited, which requires the Company to
comply with certain financial covenants, as more fully described in the
covenant agreement with The Limited. Lane Bryant has also leased office
space and warehouse distribution space from an affiliate of The Limited
pursuant to a lease agreement.
During the first three quarters of Fiscal 2002, pursuant to a program to
replace its existing POS equipment, the Company acquired $12.7 million of
POS equipment for its Fashion Bug and Catherine's Stores under capital
leases. These leases generally have an initial lease term of 60 months and
contain a bargain purchase option. The Company anticipates acquiring
additional POS equipment at a total cost of approximately $3.0 million over
the next 9-12 months, which will be financed through the use of capital
leases.
As of November 3, 2001, the Company has current debt maturity payments of
$7.6 million, which are primarily for amounts due under the Company's
capital lease obligations and mortgage notes.
Capital expenditures (excluding equipment acquired through capital leases)
were $48.4 million during the first three quarters of Fiscal 2002. During
the remainder of Fiscal 2002, the Company anticipates incurring additional
capital expenditures of approximately $10 million. These capital expen-
ditures will primarily be for the construction, remodeling, and fixturing
of new and existing retail stores, investments in management information
systems technology, and improvements to the Company's corporate offices and
distribution centers. The Company expects to finance these capital expen-
ditures principally through internally-generated funds. As a result of the
uncertain current economic environment, the Company is reevaluating store
expansion plans and presently intends to limit capital expenditures for the
fiscal year ending February 1, 2003 ("Fiscal 2003") to approximately $50
million. The number of new store openings could change as the Company con-
tinues to assess its outlook. The Company continues to evaluate individual
store performance, which could lead to increased store closings in the near
term.
The Company plans to open approximately 126 new stores, remodel 35-40
stores, and relocate 50-55 stores during the fiscal year ended February 2,
2002 ("Fiscal 2002"). The following table sets forth information with
respect to store activity for the first three quarters of Fiscal 2002:
Fashion Lane Monsoon/
Bug Bryant Catherine's Accessorize
Stores Stores Stores Stores Total
------ ------ ------ ------ -----
Stores at February 3, 2001.... 1,230 524 0 1,754
----- --- - -----
Stores acquired............... 651 651
Stores opened................. 60 9 48 9 126
Stores closed................. (22) (1) (13) 0 (36)
----- --- --- - -----
Net change in stores.......... 38 659 35 9 741
----- --- --- - -----
Stores at November 3, 2001.... 1,268 659 559 9 2,495
===== === === = =====
Stores relocated during period 26 20 46
Stores remodeled during period 24 11 35
The Company has a trust to which the Company sells, at face value, its
interest in receivables created under the Company's Fashion Bug proprietary
credit card program. The Company, together with the trust, has entered
into various agreements whereby it can sell, on a revolving basis,
interests in these receivables for a specified term. When the revolving
period terminates, an amortization period begins during which principal
payments are made to the party with whom the trust has entered into the
securitization agreement.
Charming Shoppes Receivables Corp. and Charming Shoppes, Street, Inc.,
wholly owned indirect subsidiaries of the Company, are separate special-
purpose corporations. At November 3, 2001, Charming Shoppes Receivables
Corp. had $33.6 million of Charming Shoppes Master Trust Certificates, and
Charming Shoppes Street, Inc. had $1.1 million of cash. These assets will
be available first and foremost to satisfy the claims of the respective
creditors of these separate corporate entities, including certain claims of
investors in the Charming Shoppes Master Trust. The providers of the cred-
it enhancements and trust investors have no other recourse to the Company.
The Company does not receive collateral from any party to the securitiza-
tion, and the Company does not have any risk of counter-party non-
performance.
The Company has non-recourse agreements pursuant to which third parties
provide accounts receivable proprietary credit card sales funding programs
for both its Catherine's and Lane Bryant stores. These funding programs
expire in January 2005 for Catherine's and in January 2006 for Lane Bryant.
Under these agreements, the third parties reimburse the Company daily with
respect to the proprietary credit card sales generated by the respective
store's credit card accounts.
The securitization and funding agreements improve the overall liquidity of
the Company by providing short-term sources of funding. Additional
information regarding these programs is included in "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Financial Condition; Liquidity and Capital Resources" of the
Company's Annual Report on Form 10-K for the fiscal year ended February 3,
2001.
The Company adopted the provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as of the beginning of Fiscal 2002. During the fiscal year
ended February 3, 2001 ("Fiscal 2001"), the Company terminated an interest
rate swap agreement with a notional principal amount of $50 million. In
accordance with SFAS No. 133, the deferred loss on termination of the swap
as of February 4, 2001 ($1,152,000 net of a tax benefit of $621,000) has
been recognized in "Other comprehensive income" on the Company's consoli-
dated balance sheet, and is being amortized to selling, general, and admin-
istrative expenses over the 44-month remaining life of the original swap
period.
The Company believes that cash flow from operations, its proprietary credit
card receivables securitization and funding agreements, its investment
portfolio, and its credit facilities are sufficient to support current
operations.
MARKET RISK
The Company manages its Fashion Bug proprietary credit card program through
various operating entities that are wholly owned by the Company. The
primary activity of these entities is to service the proprietary credit
card portfolio, the balances of which are sold to a trust under a credit
card securitization program. Under the securitization program, the Company
can be exposed to fluctuations in interest rates to the extent that
interest rates charged to its customers vary from the rates paid on
certificates issued by the trust. Finance charges on all accounts are
billed using a floating rate index (the Prime lending rate), subject to a
floor and limited by legal maximums. The floating rate index on all of the
certificates is either one-month LIBOR or the commercial paper rate,
depending on the issue. The Company has exposure in the movement of basis
risk between the floating-rate index on the certificates and the Prime
rate. As of November 3, 2001, the floating rate finance charge rate was
below the contractual floor rate, thus exposing the Company to a portion of
interest-rate risk. To the extent that short-term interest rates were to
increase by one percentage point by the end of Fiscal 2002, an increase of
approximately $500,000 in selling, general, and administrative expenses
would result.
The Company is not subject to material foreign exchange risk, as the Com-
pany's foreign transactions are primarily U. S. Dollar-denominated and the
Company's foreign operations do not constitute a material part of its busi-
ness.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; Market Risk," above.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the
location of the Exhibit in the previous filing is indicated in parenthesis.
2.1 Stock Purchase Agreement dated as of July 9, 2001 among Charming
Shoppes, Inc., Venice Acquisition Corporation, LFAS, Inc. and The
Limited, Inc., incorporated by reference to Form 8-K of the Registrant
dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.1)
2.2 Services Agreement dated as of August 16, 2001 between LBH, Inc. and
The Limited, Inc., incorporated by reference to Form 8-K of the Regis-
trant dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.2)
2.3 Covenant Agreement dated as of August 16, 2001 between Charming
Shoppes, Inc. and The Limited, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 2.3)
2.4 Master Sublease dated as of August 16, 2001 between The Limited, Inc.
and Lane Bryant, Inc. , incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit
2.4)
2.5 Lease Agreement dated as of August 16, 2001 by and between Distribu-
tion Land Corp. and Lane Bryant, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.5)
2.6 Loan and Security Agreement dated as of August 16, 2001 by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Indus-
tries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner,
J.P. Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named therein, as
Lenders, incorporated by reference to Form 8-K of the Registrant dated
August 16, 2001, filed on August 31, 2001. (Exhibit 2.6)
3.1 Restated Articles of Incorporation, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994.
(Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit
3.2)
4.1 Registration Agreement dated as of August 16, 2001 between Charming
Shoppes, Inc. and The Limited, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 4.1)
(b) Reports on Form 8-K
On October 30, 2001, the Company filed an amendment on Form 8-K/A to a
report on Form 8-K dated August 16, 2001. The Form 8-K was filed to
report, under "Item 2. Acquisition or Disposition of Assets," the
acquisition by Venice Acquisition Corporation, a subsidiary of the Company,
of all of the outstanding capital stock of LBH, Inc. from a subsidiary of
The Limited, Inc. LBH, Inc. owns all of the outstanding capital stock of
Lane Bryant, Inc. and certain other entities that hold assets used in Lane
Bryant's business. In accordance with Items 7(a)(4) and 7(b)(2) of Form 8-
K, the amendment on Form 8-K/A was filed to provide the financial
statements and pro forma financial information required by "Item 7.
Financial Statements, Pro Forma Financial Information, and Exhibits" of
Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: December 17, 2001 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: December 17, 2001 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer