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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _____________ .
Commission file number 000-07258
CHARMING SHOPPES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-1721355
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
450 Winks Lane, Bensalem, Pennsylvania 19020
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 245-9100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.10 per share)
(Title of Class)
Stock Purchase Rights
(Title of Class)
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. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] YES [ ] NO
The aggregate market value of the outstanding common stock held by
non-affiliates as of August 3, 2002 (the last day of the registrant's most
recently completed second fiscal quarter), based on the closing price on August
2, 2002, was approximately $761,588,000.
As of April 1, 2003, 112,940,265 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference herein from the registrant's definitive proxy statement for its annual
shareholders meeting, which is expected to be filed within 120 days after the
end of the fiscal year covered by this Annual Report.
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CHARMING SHOPPES, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1 Business
General......................................................... 1
Stores.......................................................... 2
Merchandising and Buying........................................ 4
Marketing and Promotions........................................ 5
Proprietary Credit Card Programs................................ 5
Sourcing........................................................ 6
Distribution and Logistics...................................... 6
Competition..................................................... 7
Monsoon and Accessorize Joint Venture........................... 7
Employees....................................................... 7
Trademarks and Servicemarks..................................... 8
Executive Offices............................................... 8
Available Information........................................... 8
Item 2 Properties...................................................... 9
Item 3 Legal Proceedings............................................... 10
Item 4 Submission of Matters to a Vote of Security Holders............. 10
Additional Part I Information - Our Executive Officers.................... 11
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 12
Item 6 Selected Financial Data......................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
Forward-Looking Statements...................................... 15
Critical Accounting Policies.................................... 17
Results of Operations........................................... 23
Recent Developments............................................. 30
Financial Condition............................................. 31
Market Risk..................................................... 38
Impact of Recent Accounting Pronouncements...................... 39
Item 7A Quantitative and Qualitative Disclosures About Market Risk...... 39
Item 8 Financial Statements and Supplementary Data..................... 40
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 78
PART III
Item 10 Directors and Executive Officers of the Registrant.............. 79
Item 11 Executive Compensation.......................................... 79
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.............................. 79
Item 13 Certain Relationships and Related Transactions.................. 79
Item 14 Controls and Procedures......................................... 79
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 81
SIGNATURES................................................................ 90
CERTIFICATIONS............................................................ 91
PART I
Item 1. Business
General
We are a leading specialty apparel retailer primarily focused on plus-size
women's apparel through our three distinct brands: Lane Bryant, Fashion Bug, and
Catherine's Plus Sizes. During Fiscal 2003, the sale of plus-size apparel
represented approximately 72% of our total net sales. We anticipate that this
percentage will approach 74% during Fiscal 2004. Through our fashion content,
store layouts, and broad merchandise assortments, we seek to appeal to customers
from a broad range of socioeconomic, demographic, and cultural profiles. As of
February 1, 2003, we operated 2,248 stores in 48 states.
In the late 1990's, our management team initiated a strategic plan aimed at
capitalizing on the anticipated growth in the market for plus-size women's
apparel. We began this process by increasing the floor space allocated to
plus-size apparel in our Fashion Bug stores. In August 1999, we acquired the
Modern Woman chain of 136 stores in 22 states, which specialized in plus-size
women's apparel. In January 2000, we acquired the Catherine's chain of stores,
which operated 436 stores in 40 states and the District of Columbia, and also
specialized in plus-size women's apparel. We have since closed or converted all
of the original Modern Woman stores into Catherine's stores. In August 2001, we
acquired Lane Bryant, Inc., which operated 651 stores across the United States.
Lane Bryant is a premier brand in the plus-size market with an established
customer base and proprietary branded labels. The acquisition of Lane Bryant
significantly accelerated our long-term growth strategy of becoming a leader in
the sale of plus-size women's apparel.
Each of our brands is designed to attract a distinct customer:
Lane Bryant. Lane Bryant is a widely recognized name in plus-size
fashion. Through private labels, such as VENEZIA JEANS CLOTHING CO.(R) and
CACIQUE(R) (a line of intimate apparel), Lane Bryant offers fashionable and
sophisticated clothes in plus-sizes 14 - 28. Lane Bryant has a loyal
customer base, generally ranging in age from 18 to 54 years old, that shops
for fashionable merchandise in the moderate price range. Primarily a
mall-based destination store for the plus-size woman, Lane Bryant currently
operates 689 stores in 46 states that average approximately 6,100 square
feet. In March 2003, we began e-commerce operations on our Lane Bryant
website.
Fashion Bug and Fashion Bug Plus. Fashion Bug and Fashion Bug Plus
stores specialize in selling a wide variety of plus-size, misses and junior
sportswear, dresses, coats, intimate apparel, accessories, and casual
footwear. Fashion Bug customers generally range in age from 20 to 49 years
old and shop in the low-to-moderate price range. Our 1,083 Fashion Bug
stores are located in 45 states, primarily in strip shopping centers, and
average approximately 9,000 square feet.
Catherine's Plus Sizes. Catherine's specializes in plus-sizes and is
particularly known for extended sizes (over size 28) and petite plus-sizes.
Catherine's offers classic apparel and accessories for career and casual
lifestyles in a one-on-one selling environment. Catherine's customers
generally range in age from 40 to 65 years old, shop in the moderate price
range, and are concerned with fit and value when purchasing clothes. Our
467 Catherine's stores are located in 45 states, primarily in strip
shopping centers in the Southeast, Mid-Atlantic, and Eastern Central
regions of the United
1
States, and average approximately 4,100 square feet. In March 2002, we
began e-commerce operations on our Catherine's website.
On January 28, 2002, we announced a restructuring plan that included a
number of initiatives designed to position our business for increased
profitability and growth. The major components of this plan included: the
closing of our The Answer/Added Dimensions chain, including the conversion of
certain Added Dimensions stores to Catherine's stores; the closing of certain
under-performing Fashion Bug stores; and the conversion of certain Fashion Bug
store locations to Lane Bryant stores.
The Answer/Added Dimensions chain, which we acquired as part of the
Catherine's transaction in January 2000, operated 77 plus-size stores in 21
states, concentrated in the Southeast and the Northeast. The square footage for
the chain was approximately 300,000 square feet, which was approximately 2% of
the total square footage under lease for all our stores. We completed these
store closings and conversions by the end of the third quarter of Fiscal 2003.
We also completed our restructuring plan for our Fashion Bug stores during
Fiscal 2003. We closed 124 under-performing Fashion Bug stores, resulting in a
reduction of 1.1 million square feet, or 6% of total square footage under lease
for all of our stores. The locations are dispersed throughout the country, and
do not significantly represent any one geographic region. We also converted 30
Fashion Bug stores to the Lane Bryant format.
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize efficiencies available to us, in order to
improve our profitability. We expect this cost reduction plan to improve
annualized pre-tax earnings by approximately $45 million, with an improvement of
approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that
the full annual pre-tax benefit of $45 million will first be realized during the
fiscal year ending January 30, 2005. Execution of the cost reduction plan is
expected to result in a pre-tax charge of approximately $10 - 12 million in
Fiscal 2004. Components of the charge include a $7 - $8 million non-cash charge,
primarily for the write-down of distribution center fixed assets, and $3 - $4
million of cash items, primarily related to severance as a result of a reduction
in work force. We expect the execution of the plan to have no material after-tax
cash impact. Further details of the plan are included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments" below.
Stores
Our 2,248 stores (as of February 1, 2003) are primarily located in suburban
areas and small towns. Approximately 65% of these stores are located in strip
shopping centers, while the balance are located in community and regional malls.
The majority of our Fashion Bug and Catherine's stores are strip-center based.
Most of our Lane Bryant stores are in malls. Over the past few years, Lane
Bryant has expanded into strip centers, and has demonstrated success in strip
center locations.
We believe that our customers visit strip shopping centers frequently as a
result of the tenant mix and convenience of strip shopping centers. Our
long-term store growth plans are to aggressively expand both Lane Bryant and
Catherine's into additional strip center locations. Availability of strip center
retail space continues to significantly outpace mall expansion. In addition, we
benefit in strip centers from substantially lower occupancy costs as compared to
occupancy costs in malls.
2
Our merchandise displays enable our customers to assemble coordinated and
complete outfits that satisfy many of their lifestyle needs. We relocate or
remodel our stores as appropriate to convey a fresh and contemporary shopping
environment. We frequently test and implement new store designs and fixture
packages aimed at providing an effective merchandise presentation. In
particular, we intend, on a targeted basis, to continue remodeling certain of
our Fashion Bug stores to present a bright, well-defined, easy to shop layout.
In addition, we emphasize customer service, including the presence of helpful
salespeople in the stores, layaway plans, 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.
We continue to seek additional new locations that meet our financial and
operational objectives. We currently plan to open 50 - 55 stores during Fiscal
2004. The breakdown by brand is approximately: 35 Lane Bryant stores (excluding
conversions), 15 Catherine's stores, and 3 Fashion Bug stores. Additionally, we
currently plan to remodel approximately 30 stores and relocate 55 - 70 stores
during Fiscal 2004.
Our store openings and closings and number of locations over the past five
fiscal years are set forth in the following table:
Fiscal Year Ended
Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Store Activity:
Number of stores open at beginning of period.. 2,446 1,755 1,740 1,135 1,135
Opened during period.......................... 57 125 106 75 65
Acquired during period........................ 0 651 0 572 0
Closed during period.......................... (255)(1) (85) (91)(2) (42) (65)
----- ----- ----- ----- -----
Number of stores open at end of period........ 2,248 2,446 1,755 1,740 1,135
===== ===== ===== ===== =====
Number of Stores by Brand:
Fashion Bug and Fashion Bug Plus.............. 1,083 1,252 1,230 1,185 1,135
Lane Bryant................................... 689 647 0 0 0
Catherine's................................... 467 461 414 452(3) 0
The Answer/Added Dimensions 0 77 110 103 0
Monsoon/Accessorize(4)........................ 9 9 1 0 0
----- ----- ----- ----- -----
Number of stores open at end of period........ 2,248 2,446 1,755 1,740 1,135
===== ===== ===== ===== =====
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(1) Includes 124 Fashion Bug stores and 68 Added Dimensions stores closed in
connection with a restructuring plan announced on January 28, 2002.
(2) Includes 35 Modern Woman stores that were closed as a result of the
consolidation of Modern Woman stores into Catherine's during the year ended
February 3, 2001.
(3) Includes 122 Modern Woman stores that were closed or converted to the
Catherine's formats during the year ended February 3, 2001.
(4) We expect to close these stores during Fiscal 2004 (see "Monsoon and
Accessorize Joint Venture" below).
All stores are operated under our direct management. Each store has a
manager and an assistant manager or supervisor, who are in daily operational
control of their location. We employ district managers, who travel to all stores
in their district on a frequent basis, to supervise store operations. Each
district manager has responsibility for an average of 11 - 12 stores. Regional
managers, who report to a Director of Stores, supervise the district managers.
Generally, we appoint store managers from the group of assistant
3
managers, and district managers are appointed from the group of store managers.
We seek to motivate our store personnel through internal advancement and
promotion, competitive wages and various incentive, medical, and retirement
plans. We centrally develop store operations, merchandising, and buying
policies, assigning to individual store management the principal duties of
display, selling, and reporting through point-of-sale terminals.
Merchandising and Buying
We employ a merchandising and buying strategy that is focused on providing
an attractive selection of apparel and accessories that reflect the fashion
preferences of the target customer for each of our brands. Merchandise
purchasing is conducted by separate merchandise groups for each of our brands by
buyers supervised by one or more merchandise managers. We believe that
specialization of buyers within our brands enhances the distinctiveness between
the brands and their offerings. In addition, we use domestic and international
fashion market guidance, fashion advisory services, proprietary design, and
in-store testing to determine the optimal product assortments for each of our
brands. We believe that this approach results in greater success in predicting
customer preferences while reducing our inventory investment and risk. We also
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's
location. At Lane Bryant, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and career-oriented merchandise and
intimate apparel. We strive to translate the latest trends into plus-sizes and
to be first to market with our merchandise. At Fashion Bug, we offer an
assortment of both casual and career-oriented products, in plus, misses, and
junior sizes at low-to-moderate prices. Fashion Bug's plus and misses size
merchandise typically reflects established fashion trends and includes a broad
offering of ready-to-wear apparel, including knit and woven tops, dresses,
shorts, pants and skirts, as well as footwear, accessories, intimate apparel,
and seasonal items, such as outerwear. Fashion Bug's junior merchandise reflects
the latest fashion trends and includes a significant amount of third-party,
well-recognized national brands. At Catherine's, we offer a broad assortment of
plus-size merchandise in classic styles designed to provide "head-to-toe"
dressing for the 40 to 65 year-old customer. Catherine's features sportswear,
dresses, intimate apparel, suits, and accessories in a variety of plus-sizes,
including petites and extended sizes. Catherine's has developed a unique
expertise in the fit, design, and manufacturing of extended sizes, making it one
of the few retailers to emphasize these sizes.
We have distribution systems in place whereby stores that are identified as
having certain customer profiles can be stocked with products specifically
targeted to such customers. Our merchandising staffs obtain store and chain-wide
inventory information generated by merchandise information systems that use
point-of-sale terminals. Through these terminals, merchandise can be followed
from the placement of our initial order for the merchandise to the actual sale
to our customer. Based upon 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. In
addition, we continue to work to improve inventory turnover by better managing
the flow of seasonal merchandise to our stores across all geographic regions.
Our merchandising and buying philosophy, coupled with enhancements in
inventory management, helps facilitate the timely and orderly purchase and flow
of merchandise. This enables our stores to offer fresh product assortments on a
regular basis.
4
We employ a realistic pricing strategy that is aimed at setting the initial
price markup of fashion merchandise in order to increase the percentage of sales
at the original ticketed price. We believe this strategy has resulted in a
greater degree of credibility with the customer, reducing the need for
aggressive price promotions. However, our pricing strategy typically does allow
sufficient margin to permit merchandise discounts in order to stimulate customer
purchases when necessary. In the future, we expect to continue to achieve a
higher initial markup in our merchandise that is purchased through our overseas
sourcing operations.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the Easter, Labor Day, and
Christmas seasons. We generally build inventory levels before these peak selling
periods. To keep inventory current and fashionable, we reduce the price of
slow-moving merchandise throughout the year. Much of our merchandise is
developed for one or more of our six seasons: spring, summer, summer-fall
transitional, fall, holiday, and holiday-spring transitional. End-of-season
sales are conducted with the objective of carrying a minimal amount of seasonal
merchandise over from one season to another. Sales for the four quarters of
Fiscal 2003, as a percent of total sales, were 26.1%, 26.5%, 22.5%, and 24.9%,
respectively.
During the second half of Fiscal 2003, the Lane Bryant chain experienced
poor customer acceptance of, and fit and quality issues with, certain of its
products, resulting in higher levels of promotional pricing. In addition,
certain basic products were under-stocked, resulting in missed sales
opportunities. Due to product lead times, these issues are expected to
negatively impact Lane Bryant results for the Fiscal 2004 first quarter, and
could negatively impact Lane Bryant results for the Fiscal 2004 second quarter.
We are currently executing a plan to re-establish growth at Lane Bryant which
includes improved merchandise assortments for the Fall 2003 season.
Marketing and Promotions
We use several types of advertising to stimulate customer traffic. We use
targeted direct mail advertising to preferred customers selected from a database
of approximately 24 million proprietary credit card, third-party credit card,
and cash customers. We may also use radio, television, and newspaper advertising
and fashion shows to stimulate traffic at certain strategic times of the year.
We also use pricing policies, displays, store promotions, and convenient store
hours to attract customers. We believe that, with the planning and guidance of
our specialized home office personnel, each store provides such displays and
advertising as may be necessary to feature certain merchandise or certain
promotional selling prices from time to time.
We maintain websites for our Lane Bryant, Fashion Bug, and Catherine's
brands that provide information regarding current fashions and promotions. Our
Lane Bryant website enjoys more than 700,000 unique visitors per month and an
established on-line community. In March 2002, we began e-commerce operations on
our Catherine's website, and in March 2003, we began e-commerce operations on
our Lane Bryant website.
Proprietary Credit Card Programs
We seek to encourage sales through the promotion of proprietary credit
cards. We believe that our credit cards act as promotional vehicles by
engendering customer loyalty, creating a substantial base for targeted direct
mail promotion, and encouraging incremental sales.
5
Our Fashion Bug credit card program has approximately two million active
accounts, which accounted for approximately 31% of Fashion Bug retail sales in
Fiscal 2003. We control credit policies and service the Fashion Bug proprietary
credit card file, and have entered into various agreements whereby we securitize
and sell all of our credit card receivables generated by this program.
Our Lane Bryant and Catherine's brands also offer customers the convenience
of proprietary credit card programs. The Lane Bryant credit card program has
approximately one million active accounts, which accounted for approximately 28%
of Lane Bryant retail sales during Fiscal 2003. The Catherine's credit card
program has approximately one million active accounts, which accounted for
approximately 33% of Catherine's retail sales during Fiscal 2003. We use
third-party banks to finance and service the Lane Bryant and Catherine's credit
card programs. These third-party banks provide new account approval, credit
authorization, billing, and account collection services. Under non-recourse
agreements with the third-party banks, we are reimbursed with respect to sales
generated by the credit cards.
A more comprehensive description of our asset securitization process and
our commitments under the third-party bank agreements is included in "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 14. Asset Securitization" below.
Sourcing
To meet the demands of our customers, we access both the domestic and
overseas wholesale apparel marketplace for our merchandise purchases. This
allows us to maintain flexible lead times, respond quickly to current fashion
trends, and quickly replenish merchandise inventory as necessary. During Fiscal
2003, we purchased merchandise from approximately 1,100 suppliers and factories
located throughout the world. We use our overseas sourcing operations primarily
to procure fashion-basic merchandise for our brands, which generally requires
longer lead times. In Fiscal 2003, overseas sourcing accounted for approximately
25% of Fashion Bug merchandise purchases and approximately 15% of Catherine's
merchandise purchases. During Fiscal 2003, we purchased a portion of Lane Bryant
merchandise from Mast Industries, Inc. ("Mast"), a contract manufacturer and
apparel importer, which is a wholly-owned subsidiary of Limited Brands, Inc.
("Limited Brands"). These purchases from Mast accounted for approximately 10% of
our total merchandise purchases and approximately 37% of merchandise purchases
for Lane Bryant. No other vendor accounted for more than 4% of total merchandise
purchases.
We pay for merchandise purchases outside the United States via letters of
credit with third-party vendors where we are the importer of record. To date, we
have not experienced difficulties in purchasing merchandise overseas or
importing such merchandise into the United States. Should political instability
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.
Distribution and Logistics
We currently utilize three distribution centers. For our Fashion Bug
stores, we operate a distribution center in Greencastle, Indiana. Located on a
150-acre tract of land, this facility contains a building of approximately
1,000,000 square feet. We estimate that this facility has the capacity to
service up to approximately 1,800 stores. For our Catherine's stores, we operate
a 213,000 square foot distribution center in Memphis, Tennessee, which is
designed to handle up to approximately 600 stores. For our Lane Bryant stores,
we utilize a 514,000 square foot facility near Columbus, Ohio under an agreement
with Distribution Land Corp., an affiliate of Limited Brands. Under a services
agreement with Limited Brands, we receive
6
inbound and outbound logistics and transportation services and receiving,
handling, processing, storing, and distribution of all merchandise for Lane
Bryant at the Ohio distribution facility.
Substantially all of our merchandise purchases are received at our
distribution facilities, where they are prepared for distribution to our stores.
In the Greencastle, Indiana distribution center, automated sorting systems
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 profiles to combine shipments when possible and improve the
efficiency of the distribution operations. These profiles provide information
not only about the quantity of merchandise to be distributed to each store, but
also about the type of merchandise to be shipped, and enable the distribution
operations to include various customer profiles in each store's plan.
On September 24, 2002, we acquired a 393,000 square foot distribution
center on 29 acres of land in White Marsh, Maryland. As a result of the use of
automated sorting systems and improved facility design in the White Marsh
facility, we will be able to consolidate both the Memphis and the Columbus
facilities into the White Marsh facility. We estimate that the White Marsh
facility will initially have the capacity to service up to approximately 1,400
stores. We plan to relocate the Memphis distribution center by June 2003 and the
Columbus distribution center by the end of December 2003. The lease for the
Columbus distribution center and the related logistics and transportation
services agreement, which were originally scheduled to terminate in August 2004,
were terminated effective as of December 31, 2003 in accordance with early
cancellation provisions of the lease and agreement.
Competition
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including department stores, specialty apparel stores,
discount stores, and mail-order and e-commerce companies. We cannot reasonably
estimate the number of our competitors due to the large number of companies
selling women's apparel. The primary elements of competition are merchandise
style, size, selection, quality, display, and price, as well as store location,
design, advertising, and promotion and personalized service to the customers.
Monsoon and Accessorize Joint Venture
In October 2000, we announced the signing of a joint venture agreement with
Monsoon plc, in order to bring the United Kingdom's apparel and accessories
concepts of MONSOON(R) and ACCESSORIZE(R) stores to the United States. We tested
the concept in the United States during 2001 and 2002. The performance of the
stores opened during the test period did not meet our expectations. Higher than
anticipated lease costs led to our decision to discontinue the operation of
these stores. We plan to close the 9 Monsoon/Accessorize stores during Fiscal
2004 (see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Developments" below).
Employees
As of the end of Fiscal 2003, we employed approximately 24,000 associates,
which included approximately 15,000 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 60 of
our employees are represented by unions, including approximately 35 employees at
our Memphis, Tennessee distribution center. We believe that overall our
relationship with these unions, and our employees generally, is satisfactory.
7
On March 18, 2003, we announced a cost reduction plan, which included
reductions in our corporate, divisional, distribution center, and credit
operations workforces. This plan, when fully implemented, is expected to result
in a net reduction in our workforce of approximately 285 employees.
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(R)", "Fashion Bug PLUS(R)", "L.A. BLUES(R)",
"Catherines(R)", "Catherine's PLUS SIZES(R)", "C.S.T. STUDIO(R)", "C.S.T.
SPORT(R)", "MAGGIE BARNES(R)", "ANNA MAXWELL(R)", "LIZ & ME(R)", "Lane
Bryant(R)", "VENEZIA(R)", "VENEZIA JEANS CLOTHING CO.(R)", "CACIQUE(R)",
"ELEMENTAL STRETCH(R)", "PLUS SIZE SPECIALIST(TM)", "FASHION BUG FASHION CHOICES
FASHION SAVINGS(TM)", "SERENADA(TM)", "CAPISTRANO(R)", 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 domain name registrations: charming.com,
charmingshoppes.com, fashionbug.com, fashionbugplus.com, catherines.com,
lanebryant.com and others of lesser importance.
Executive Offices
Charming Shoppes, Inc., was incorporated in Pennsylvania in 1969. Our
principal offices are located at 450 Winks Lane, Bensalem, Pennsylvania 19020.
Our telephone number is (215) 245-9100.
Available Information
We maintain an Internet website at www.charmingshoppes.com. As of March 25,
2003, 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 this website 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 accessed directly from the SEC's website at www.sec.gov.
8
Item 2. Properties
We lease all our stores, with the exception of four stores, which we own.
Typically, store leases have initial terms of 5 to 20 years and generally
contain provisions for co-tenancies, renewal options, additional rentals based
on a percentage of sales, and payment of real estate taxes and common area
charges.
With respect to leased stores open as of February 1, 2003, the following
table shows the number of store leases expiring during the calendar periods
indicated, assuming the exercise of our renewal options:
Number of
Period Leases Expiring
------ ---------------
2003 127(1)
2004 - 2008 739
2009 - 2013 394
2014 - 2018 326
2019 - 2023 393
2024 - 2028 220
Thereafter 45
- --------------------
(1) Includes 66 stores on month-to-month leases
We own a 1,000,000 square foot distribution center in Greencastle, Indiana
that services our Fashion Bug and Fashion Bug Plus stores and a 213,000 square
foot distribution center in Memphis, Tennessee that services our Catherine's
stores. We also lease a 514,000 square foot distribution center near Columbus,
Ohio that services our Lane Bryant stores under an agreement with an affiliate
of Limited Brands to use the Ohio distribution center and receive related
distribution services.
On September 24, 2002, we acquired a 393,000 square foot distribution
center on 29 acres of land in White Marsh, Maryland. As a result of the use of
automated sorting systems and improved facility design in the White Marsh
facility, we will be able to consolidate both the Memphis and the Columbus
facilities into the White Marsh facility. As part of our cost reduction plan
(see "Item 1. General" above), we plan to relocate the Memphis distribution
center by June 2003. We plan to relocate the Columbus distribution center by
December 2003. The lease for the Columbus, Ohio distribution center and the
related logistics and transportation services agreement, which were originally
scheduled to terminate in August 2004, were terminated effective as of December
31, 2003 in accordance with early cancellation provisions of the lease and
agreement.
We lease 105,000 square feet of office space in Bensalem, Pennsylvania that
houses our corporate headquarters and certain Fashion Bug operations. We also
own approximately 22 acres in Bensalem with a 145,000 square foot office
building that houses our primary data processing facility and additional
administrative offices. We own a 99,000 square foot facility in Memphis,
Tennessee that houses our Catherine's corporate offices. We also lease 130,000
square feet of office space near Columbus, Ohio that houses our Lane Bryant
corporate offices. Spirit of America National Bank, our wholly owned credit card
bank subsidiary, occupies 30,000 square feet of leased office space in Miami
Township, Ohio and 48,000 square feet of leased space for a credit card
processing facility in Hollywood, Florida. As part of our cost reduction plan
(see "Item 1. General" above), we expect to move most of the functions performed
at the Hollywood, Florida facility to the Miami Township, Ohio facility by June
2003. We also maintain offices in New York City that
9
occupy 13,000 square feet of leased space, and we own or lease a total of 43,000
square feet of office and warehouse space in Asia.
Item 3. Legal Proceedings
On October 26, 2001, a terminated employee filed a purported class action
suit in Alameda Superior Court, California against Lane Bryant, Inc. alleging
that she and all Lane Bryant store sales managers in California were
misclassified as exempt employees, and are actually nonexempt employees and
entitled to be paid overtime which they had not received. The plaintiff alleges
violations of Labor Code Sections 1194 and 515 and related claims, and seeks
back pay and injunctive relief for the misclassification, and reimbursement and
disgorgement of profits. The issue as to whether the case would be appropriate
for class treatment has not yet been joined.
On March 13, 2003, a former employee of Fashion Bug filed a purported class
action suit in Los Angeles County Superior Court, California against Charming
Shoppes and Fashion Bug of California, Inc. The allegations and claims in this
case are similar to those of the October 26, 2001 lawsuit. As of March 28, 2003,
the case has not yet been served on Charming Shoppes or Fashion Bug, and an
answer has not yet been prepared.
Charming Shoppes, Lane Bryant, and Fashion Bug intend to vigorously and
aggressively oppose class certification and the merits of the class cases should
either be certified, or the individual case should a class not be certified.
Although the ultimate outcome of these matters cannot be predicted with any
certainty at this stage, we do not believe that the cases will have a material
impact on our financial condition or results of operations based on the
information we presently have.
Other than ordinary routine litigation incidental to our business, there
are no other pending legal proceedings to which we or any of our subsidiaries
are a party, and there are no other proceedings that are expected to have a
material adverse effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
10
Additional Part I Information - Our Executive Officers
The following list contains certain information relative to our executive
officers. There are no family relationships among any of our executive officers.
Dorrit J. Bern, 52, has served as Chairman of the Board of Directors since
January 1997. She has also served as President and Chief Executive Officer since
September 1995. Ms. Bern's term as a Director expires in 2005.
Joseph M. Baron, 55, has served as Executive Vice President and Chief
Operating Officer since March 2002. Prior to that, he served as President and
Chief Executive Officer of Homelife Corporation from February 1999 to October
2001, and as President of Sears Homelife Furniture from 1996 to February 1999.
Homelife Corporation filed a bankruptcy petition under Chapter 11 of the U. S.
Bankruptcy Code during July 2001.
Anthony A. DeSabato, 54, has served as Executive Vice President and
Corporate Director of Human Resources since 1990, and he has been employed by us
since 1987.
Eric M. Specter, 45, has served as Executive Vice President - Chief
Financial Officer since January 1997, and he has been employed by us since 1983.
He also served as Treasurer from February 1998 to March 2000.
Colin D. Stern, 54, 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.
Erna Zint, 59, has served as Executive Vice President - Sourcing since
January 1996.
Jonathon Graub, 44, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
Carmen Monaco, 56, has served as Vice President - Marketing since May 1997.
Prior to that, he served as Senior Vice President - Marketing/Advertising for
Goody's Family Clothing Inc. from August 1992 to May 1997.
John J. Sullivan, 56, has served as Vice President - Corporate Controller
since October 1998. Prior to that, he served as Senior Vice President and Chief
Financial Officer for National Media Corp. from January 1998 to October 1998,
and as Senior Vice President of Administration for National Media Corp. from
April 1995 to January 1998.
11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on the over-the-counter market and quoted on the
Nasdaq National Market 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.
Fiscal 2003 Fiscal 2002
High Low High Low
1st Quarter............... $9.14 $5.46 $7.13 $4.62
2nd Quarter............... 8.90 5.74 7.05 5.18
3rd Quarter............... 7.42 3.86 7.00 4.48
4th Quarter............... 5.47 3.30 6.70 4.73
The approximate number of holders of record of our common stock as of April
1, 2003 was 2,252. 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. In addition,
our existing credit facility and one of our agreements with Limited Brands
restrict the payment of dividends on our common stock. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financing" and "Item 8. Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 7.
Debt").
12
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of January 30, 1999 through February 1, 2003. The selected
financial data is taken from our audited financial statements and should be read
in conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and
accompanying notes included under "Item 8. Financial Statements and
Supplementary Data."
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
Fiscal Year Ended
Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
(in thousands, except per-share amounts) 2003(1) 2002(1) 2001(1)(2) 2000(1) 1999
---- ---- ---- ---- ----
Operating Statement Data:
Net sales...................................... $2,412,409 $1,993,843 $1,607,079 $1,196,529 $1,035,160
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and occupancy
expenses................................... 1,721,052 1,455,601 1,134,554 854,774 771,107
Selling, general, and administrative expenses.. 603,502 486,204 382,398 281,637 245,164
Amortization of goodwill....................... 0 4,885 4,885 0 0
Restructuring charge (credit).................. (4,813)(3) 37,708(3) 0 (3,471)(4) 54,246(5)
Non-recurring gain from demutualization of
insurance company.......................... 0 0 0 (6,700)(6) 0
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 2,319,741 1,984,398 1,521,837 1,126,240 1,070,517
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.................. 92,668 9,445 85,242 70,289 (35,357)
Other income, principally interest............. 2,328 4,730 8,304 9,594(7) 14,420
Interest expense............................... (20,292) (18,701) (8,894) ( 7,308) (10,052)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, minority
interest, and cumulative effect of
accounting changes......................... 74,704 (4,526) 84,652 72,575 (30,989)
Income tax provision (benefit)................. 29,055 (120) 33,014 27,516(7) (10,854)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of accounting changes.... 45,649 (4,406) 51,638 45,059 (20,135)
Minority interest in net loss of consolidated
subsidiary................................. 679 0 0 0 0
Cumulative effect of accounting changes,
net of tax................................. (49,098)(8) 0 (540)(9) 0 0
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ (2,770) $ (4,406) $ 51,098 $ 45,059 $ (20,135)
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of accounting
changes................................ $ .41 $(.04) $.51 $.46 $(.20)
Net income (loss).......................... (.02) (.04) .50 .46 (.20)
Basic weighted average common shares
outstanding................................ 113,810 105,842 101,119 98,609 99,441
Net income (loss) per share, assuming dilution:
Before cumulative effect of accounting
changes................................ $.39 $(.04) $.49 $.43 $(.20)
Net income (loss).......................... .01 (.04) .48 .43 (.20)
Diluted weighted average common shares and
equivalents outstanding.................... 130,937 105,842 115,027 115,888 99,441
Balance Sheet Data:
Total assets................................... $1,139,156 $1,143,917 $852,767 $784,796 $684,649
Current portion - long-term debt............... 12,595 9,379 4,954 1,920 16
Long-term debt................................. 203,045 208,491 113,540 105,213 119,475
Working capital................................ 196,725 145,047 208,389 161,376 192,274
Stockholders' equity........................... 561,634 549,802 493,269 436,263 383,572
13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
Fiscal Year Ended
Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2003(1) 2002(1) 2001(1)(2) 2000(1) 1999
---- ---- ---- ---- ----
Performance Data:
Including cumulative effect of accounting changes:
Net return on average stockholders' equity.. (0.5)% (0.8)% 11.0% 11.0% (5.0)%
Net return on average total assets.......... (0.2) (0.4) 6.2 6.1 (2.9)
Excluding cumulative effect of accounting changes:
Net return on average stockholders' equity.. 9.1% (0.9)% 11.2% 11.0% (5.0)%
Net return on average total assets.......... 3.9 (0.4) 6.3 6.1 (2.9)
- --------------------
(1) Results for Fiscal 2003 and Fiscal 2002 include the results of Lane Bryant,
Inc., acquired August 16, 2001, from the date of acquisition. Results for
Fiscal 2003, Fiscal 2002, Fiscal 2001, and Fiscal 2000 include the results
of Catherines Stores Corporation, acquired January 7, 2000, and Modern
Woman Holdings, Inc., acquired August 2, 1999, from the dates of their
respective acquisitions.
(2) Fiscal 2001 consisted of 53 weeks.
(3) In January 2002, our Board of Directors approved a restructuring plan which
included the closing of The Answer/Added Dimensions chain of 77 stores, the
conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, the closing of 130 under-performing Fashion Bug stores,
and the conversion of 44 Fashion Bug stores to Lane Bryant stores, which
resulted in a pre-tax charge of $37,708,000 in Fiscal 2002. We completed
the restructuring plan by the end of Fiscal 2003, and recognized a pre-tax
restructuring credit of $4,813,000, primarily as a result of favorable
negotiations of lease terminations.
(4) During Fiscal 2000, we revised our estimates of costs recognized during
Fiscal 1999 relating to the closing of our Bensalem distribution center and
the elimination of our men's business (see note (5) below). As a result, we
recognized pre-tax restructuring credits of $2,834,000 relating to the
closing of our distribution center and $2,096,000 relating to the
elimination of our men's business. In addition, we recognized a pre-tax
restructuring charge of $1,459,000 in Fiscal 2000 in conjunction with the
consolidation of the Modern Woman chain of stores into the Catherine's
chain.
(5) During Fiscal 1999, our Board of Directors approved a restructuring plan in
conjunction with the elimination of our men's business, which resulted in a
pre-tax charge of $34,000,000. In addition, our Board of Directors approved
a restructuring plan in conjunction with the decision to consolidate our
distribution center operations, which resulted in a pre-tax charge of
$20,246,000.
(6) During Fiscal 2000, we received a stock distribution from one of our mutual
insurance carriers in connection with the carrier's conversion to a
publicly held corporation (demutualization). We recorded the distribution
at its fair value and recognized the resulting non-recurring gain in income
from operations.
(7) During Fiscal 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 requires gains
and losses on extinguishments of debt to be classified as income from
continuing operations rather than as extraordinary items as previously
required under SFAS No. 4. In accordance with the early adoption provisions
of SFAS No. 145, we reclassified an extraordinary gain on early retirement
of debt of $1,232,000, net of income taxes of $664,000, for Fiscal 2000 to
income from continuing operations.
14
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
(8) In Fiscal 2003, we fully adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets." In accordance with the transition provisions
of SFAS No. 142, we tested goodwill related to our Catherine's acquisition
for impairment, and recorded a write-down of $43,975,000 to reduce the
carrying value of the goodwill to its estimated fair value. In addition, in
connection with the adoption of FASB Emerging Issues Task Force ("EITF")
Issue 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor," we recognized a charge of
$5,123,000, net of income taxes of $2,758,000, that represents a reduction
in inventory cost for the cumulative effect of cash received from vendors
as of the beginning of Fiscal 2003. Pro forma net income (loss) and per
share information as if we had applied the provisions of EITF Issue 02-16
for all years presented is as follows:
Fiscal Year Ended
Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2002(1) 2001(1)(2) 2000(1) 1999
---- ---- ---- ----
Pro forma net income (loss)...................... $(5,189) $51,309 $44,600 $(20,186)
Basic net income (loss) per share................ (.05) .51 .45 (.20)
Net income (loss) per share, assuming dilution... (.05) .48 .43 (.20)
(9) We changed our method of accounting for sales returns and layaway sales in
accordance with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101") effective as of January 30, 2000.
The cumulative effect of the change as of January 30, 2000 was a reduction
in income of $540,000, net of a tax benefit of $334,000.
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 should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used in
this report, the terms "Fiscal 2003," "Fiscal 2002," and "Fiscal 2001" refer to
our fiscal years ended February 1, 2003, February 2, 2002, and February 3, 2001,
respectively. Fiscal 2003 and Fiscal 2002 consisted of 52 weeks, while Fiscal
2001 consisted of 53 weeks. The term "Fiscal 2004" refers to our fiscal year
which will end on January 31, 2004.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, capital expenditures and cost reductions, plans for future operations,
and financing needs or plans, as well as assumptions relating to the foregoing.
The words "expect," "project," "estimate," "predict," "anticipate," "plan,"
"believes," and similar expressions are also intended to identify
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results, performance, and achievements could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements. We assume no obligation to update any forward-looking statement to
reflect actual results or changes in, or additions to, the factors affecting
such forward-looking statements.
15
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict
rapidly changing fashion trends, customer preferences and other
fashion-related factors, which we may not be able to successfully
accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel
and accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive
and we may be unable to compete successfully against existing or
future competitors.
o We cannot assure the successful implementation of our business plan
for increased profitability and growth in our plus-sized women's
apparel business.
o Our business plan is largely dependent upon the continued growth in
the plus-sized women's apparel market which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
o We depend on our distribution centers and could incur significantly
higher costs and longer lead times associated with distributing our
products to our stores if any of these distribution centers were to
shut down for any reason.
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and
on our credit card securitization program. If we were unable to obtain
sufficient financing at affordable cost, our ability to merchandise
our stores would be adversely affected.
o We rely significantly on foreign sources of production and face a
variety of risks (including political instability, imposition of
duties or quotas, increased security requirements applicable to
imports, delays in shipping, increased costs of transportation, and
issues relating to compliance with domestic or international labor
standards) generally associated with doing business in foreign markets
and importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales
periods, or in the availability of working capital needed in the
months preceding such periods, could have a material adverse effect on
our business. In addition, extreme or unseasonable weather conditions
may have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
16
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual
property rights, which we believe are important to our success and our
competitive position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our cost reduction plan
described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise
to us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip
centers and malls in which our stores are located, and our future
growth is dependent upon the availability of suitable locations for
new stores.
o We may be unable to successfully integrate Lane Bryant into our
current operating structure, or implement our plan to re-establish
growth and improve merchandise assortments in our Lane Bryant stores,
and we currently rely on logistics services from Limited Brands, Inc.
("Limited Brands") with respect to our Lane Bryant stores.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial statements and accompanying notes included
elsewhere in this report in conformity with accounting principles generally
accepted in the United States. This requires us to make estimates and
assumptions that affect the amounts reported in the 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.
Historically, actual results have not differed materially from those determined
using required estimates. Our significant accounting policies are described in
the notes accompanying the financial statements included elsewhere in this
report. However, we consider the following accounting policies to be more
critical to, and involve the most significant management judgments and estimates
in, the preparation of our financial statements and accompanying notes.
Revenue Recognition
Our revenues from merchandise sales are net of returns and allowances and
exclude sales tax. We have adopted Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," effective as of the beginning of Fiscal 2001. As a result of
adoption of SAB 101, we established a reserve for estimated future sales returns
based on an analysis of actual returns and we began deferring 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.
17
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program provides discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership as
discounts are earned by the customer. If a customer does not earn discounts in
an amount that exceeds the card fee, such difference is recognized as revenue
upon the expiration of the annual period. Upon early cancellation of a loyalty
card, refunds of membership fees are reduced by the amount of any discounts
granted to the member under the program. We recognize our costs of administering
the program in cost of goods sold as incurred. Revenues recognized from card
fees offset discounts granted under the program. An increase in the level of
refunds of membership fees could impact the level of revenue recognized. As of
December 1, 2002, we discontinued the issuance of new cards under this program
and will introduce a new customer loyalty card program during Fiscal 2004 that
will be operated under our proprietary credit card program.
Inventories
We value our merchandise inventories at the lower of cost or market under
the retail inventory method (average cost basis), which is an averaging method
that has been widely used in the retail industry. Under the retail inventory
method ("RIM"), the valuation of inventories at cost and the resulting gross
margins are adjusted in proportion to markdowns and shrinkage on our retail
inventories. The use of the RIM will result in valuing inventories at the lower
of cost or market if markdowns are currently taken as a reduction of the retail
value of inventories. The RIM calculation involves certain significant
management judgments and estimates including, among others, merchandise markon,
markup, markdowns, and shrinkage, which significantly affect the ending
inventory valuation at cost as well as resulting gross margins. Events such as
store closings, liquidations, and the general economic environment for retail
apparel sales could result in an increase in the level of markdowns, which under
the RIM could result in lower inventory values and increases to cost of goods
sold as a percentage of net sales in future periods. In addition, failure to
properly estimate markdowns currently can result in an overstatement of
inventory cost under the lower of cost or market principle. At the end of Fiscal
2003, for purposes of valuing our inventory, we recognized markdowns that had
not been taken and which reduced inventories by approximately $9.6 million.
In connection with our restructuring plan announced on January 28, 2002
(see "RESULTS OF OPERATIONS - Restructuring Charge/Credit" below), we recognized
additional markdowns of $3.0 million in the fourth quarter of Fiscal 2002. The
markdowns were related to the valuation of inventory for stores that we closed
during the first half of Fiscal 2003.
We elected to adopt the provisions of FASB EITF Issue 02-16 (see
"Accounting for Cash Consideration Received From a Vendor" below) as of the
beginning of Fiscal 2003. As of February 1, 2003, $8.1 million of cash received
from vendors has been deferred into inventory and will be recognized as
inventory is sold.
Impairment of Long-Lived Assets
Prior to Fiscal 2003, we evaluated the recoverability of our long-lived
assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." In August 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121 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
18
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 resolved certain implementation issues related to SFAS No.
121. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 related to
the recognition and measurement of the impairment of long-lived assets to be
held and used and provides additional guidance on estimating cash flows when
testing for recoverability. SFAS No. 141 also requires that long-lived assets to
be disposed of other than by sale (such as by abandonment) be classified as held
and used until disposal, and establishes more restrictive criteria for
classifying assets as held for sale.
Under SFAS No. 144, we are required to assess our long-lived assets for
recoverability whenever events or changes in circumstances indicate that the
carrying amounts of long-lived assets may not be recoverable. We consider
historical performance and future estimated results in our evaluation of
potential impairment and then 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, based
on a number of assumptions and estimates.
During Fiscal 2003, we recorded a $2.7 million write-down of under-
performing assets related to our joint venture in accordance with the provisions
of SFAS No. 144. The amount of the write-down is the same as what would have
been recorded under SFAS No. 121. The adoption of SFAS No. 144 did not have a
material impact on our financial position or results of operations in Fiscal
2003. In connection with our restructuring plan announced on January 28, 2002
(see "RESULTS OF OPERATIONS - Restructuring Charge/Credit" below), we recognized
a write-down of store fixed assets of approximately $17.8 million during Fiscal
2002 in accordance with the provisions of SFAS No. 121. We believe that the
estimates and assumptions used in determining these impairment charges are
reasonable and appropriate.
We fully adopted SFAS No. 142, "Goodwill and Other Intangible Assets" as of
the beginning of Fiscal 2003. In accordance with the transition provisions of
SFAS No. 142, we performed a review of our goodwill and other intangible assets
for possible impairment. As a result, we determined that the carrying value of
goodwill related to our Catherine's acquisition (including the value of
intangible assets we did not separately account for at the date of the
Catherine's acquisition) exceeded the estimated fair value of the Catherine's
goodwill under SFAS No. 142. We determined the estimated fair value of the
Catherine's goodwill using the present value of expected future cash flows
associated with the Catherine's assets, and we recorded a write-down, which is
not deductible for income tax purposes, of $44.0 million to reduce the carrying
value of the goodwill to its estimated fair value. The majority of the
write-down is attributable to the value of unrecorded trademarks. We also
evaluated our goodwill, trademarks, tradenames, and internet domain names
related to our Lane Bryant acquisition as of February 3, 2002 in accordance with
the provisions of SFAS No. 142, and determined that there has been no impairment
of these assets. The write-down of the Catherine's goodwill has been presented
as the cumulative effect of an accounting change as of February 3, 2002 in our
Consolidated Statement of Operations and Comprehensive Income (Loss) for Fiscal
2003. The calculation of the estimated fair value of the goodwill and other
intangible assets required estimates, assumptions, and judgments, and results
might have been materially different if different estimates, assumptions, and
judgments had been used.
In accordance with the provisions of SFAS No. 142, we are required to
re-evaluate goodwill and other intangible assets at least annually, or more
frequently if there is an indication of possible impairment. We performed this
annual review during the fourth quarter of Fiscal 2003, and determined that
there has been no additional impairment of these assets.
19
Acquisitions - Purchase Price Allocation
In accordance with SFAS No. 141, "Business Combinations," we allocate the
cost of acquisitions to the assets acquired and liabilities assumed. We assign
to all identifiable assets acquired (including intangible assets), and to all
identifiable liabilities assumed, a portion of the cost of the acquired company
equal to the estimated fair value of such assets and liabilities at the date of
acquisition. We record the excess of the cost of the acquired company over the
sum of the amounts assigned to identifiable assets acquired less liabilities
assumed as goodwill. We make the initial purchase price allocation based on the
evaluation of information and estimates available at the date of the financial
statements. As final information regarding the fair value of assets acquired and
liabilities assumed is evaluated and estimates are refined, we make appropriate
adjustments to the amounts allocated to those assets and liabilities and make
corresponding changes to the amounts allocated to goodwill. We use all available
information to make these fair value determinations and, for major business
acquisitions, typically engage an outside appraisal firm to assist in the fair
value determination of the acquired long-lived assets. We have, if necessary, up
to one year after the closing date of an acquisition to finish these fair value
determinations and finalize the purchase price allocation.
In connection with the acquisition of Lane Bryant on August 16, 2001, we
recorded a liability of $4.6 million for estimated costs related to an
unfavorable service contract. During the first quarter of Fiscal 2003, we
revised our estimate of costs related to the contract to $2.3 million, which
resulted in a decrease in the goodwill recognized in connection with our Lane
Bryant acquisition of $1.4 million, net of deferred income taxes of $0.9
million. During the second quarter of Fiscal 2003, we recorded a liability for
severance in accordance with an agreement entered into with an affiliate of
Limited Brands at the time of the acquisition to use the existing Lane Bryant
distribution center and receive related distribution services on a transition
basis, which resulted in an increase in Lane Bryant goodwill of $0.6 million,
net of deferred income taxes of $0.4 million. During the third quarter of Fiscal
2003, we reduced the acquisition value assigned to equipment and leasehold
improvements in the existing Lane Bryant distribution center, which will be
abandoned at the end of the transition period as a result of our acquisition of
a replacement distribution center in White Marsh, Maryland. During the third
quarter of Fiscal 2003, we also increased a liability for future claims related
to Lane Bryant's pre-acquisition operations and decreased deferred tax assets as
a result of a correction of the effective tax rate used to determine deferred
taxes related to certain assets acquired. These third-quarter adjustments
resulted in an increase in Lane Bryant goodwill of $3.7 million, including net
deferred income taxes of $0.7 million. During the fourth quarter of Fiscal 2003,
we finalized the unfavorable service contract and other liabilities, which
resulted in a decrease in Lane Bryant goodwill of $0.6 million, net of deferred
income taxes of $0.2 million.
Asset Securitization
We use an asset securitization program to fund the credit card receivables
generated by our Fashion Bug credit card program. The Fashion Bug credit cards
are issued by Spirit of America National Bank, one of our subsidiaries. Asset
securitization is a practice commonly used in the retail industry which allows
companies with proprietary credit card programs to finance credit card
receivables at attractive rates. Asset securitization involves the sale of the
bank's Fashion Bug proprietary credit card receivables to a special purpose
entity, which in turn transfers the receivables to a qualified special purpose
entity (the "Trust") which is administered by an independent trustee. Because
the Trust qualifies as a qualifying special purpose entity ("QSPE"), its assets
and liabilities are not consolidated in our balance sheet.
The Trust issues to investors various forms of certificates or credit card
receivable interests (the "Certificates") that represent interests in the
underlying Trust assets. The Trust pays to the holders of
20
Certificates a portion of future scheduled cash flows under preset terms and
conditions, the receipt of which is dependent upon cash flows generated by the
underlying performance of the Trust assets.
In each securitization transaction, we retain certain subordinated
interests, which effectively serve as a form of credit enhancement to the
Certificates sold to outside investors. To the extent amounts remain available
after repayment to the outside investors, the amounts are paid to us. Neither
the investors nor the Trust have recourse against us beyond the combination of
Trust assets and our subordinated interests, other than for breaches of certain
customary representations, warranties and covenants. These representations,
warranties, covenants, and related indemnities do not protect the Trust or the
outside investors against credit-related losses on the receivables.
In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," we record an interest in
the estimated present value of cash flows to be received by us over the expected
outstanding period of the receivables. These cash flows essentially represent
finance charges and late fees in excess of the amounts paid to Certificate
holders, credit losses, and service fees, and are referred to as the
interest-only strip ("I/O strip"). We use certain valuation assumptions related
to the average lives of the receivables sold and anticipated credit losses, as
well as the appropriate market discount rate, in determining the estimated
present value of the I/O strip. Changes in the average life of the receivables
sold, discount rate, and credit-loss percentage could adversely impact the
actual value of the I/O strip. Accordingly, actual results could differ
materially from the estimates, and changes in circumstances could result in
significant future changes to the assumptions currently being used.
Costs Associated With Exit or Disposal Activities
We have traditionally recognized certain costs associated with
restructuring plans as of the date of commitment to the plan, in accordance with
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." In July 2002, the FASB
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which nullified EITF Issue No. 94-3. Under SFAS No. 146, for
disposal activities initiated after December 31, 2002 we are required to
recognize liabilities for costs associated with an exit or disposal activity
when the liabilities are incurred. Our commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability. Under SFAS No.
146, we would be required to recognize severance pay over time rather than "up
front" if the benefit arrangement requires employees to render future service
beyond a "minimum retention period." The liability for severance pay would be
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. Fair value should be used for initial measurement of
liabilities under SFAS No. 146. Adoption of SFAS No. 146 could result in the
deferral of recognition of certain costs for restructuring plans that we
initiate subsequent to December 31, 2002 from the date we commit to such a plan
to the date that costs are incurred under the plan.
On March 18, 2003, we announced the implementation of a cost reduction plan
(see "RECENT DEVELOPMENTS" below). Costs incurred in connection with the
implementation of this plan will be accounted for in accordance with the
provisions of SFAS No. 146.
Accounting for Cash Consideration Received From a Vendor
EITF Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor," addresses the accounting for cash
consideration received from a vendor, including both a reseller of the vendor's
products and an entity that purchases the vendor's products from a reseller.
21
We elected to adopt the provisions of EITF Issue No. 02-16 as of the beginning
of Fiscal 2003. We recognized a charge of $5.1 million, net of income taxes of
$2.8 million, that represents the cumulative effect of the deferral of cash
received from vendors as of the beginning of Fiscal 2003. The impact of the
adoption of EITF 02-16 on the year ended February 1, 2003 was an increase in
cost of goods sold of $0.2 million. As of February 1, 2003, $8.1 million of cash
received from vendors has been deferred into inventory and will be recognized as
a reduction of cost of goods sold as inventory is sold.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
allows two alternatives for accounting for stock-based compensation: the
"intrinsic value method" in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," or the "fair value"
method in accordance with SFAS No. 123. Companies electing to adopt the
intrinsic value method are required to provide pro forma disclosures of the
effect of adopting the fair value method.
We account for stock-based compensation using the intrinsic value method.
We recognize compensation expense for stock options and stock awards which have
an exercise price less than the market price of our common stock at the date of
grant of the option or award. We measure compensation expense based on the
difference between the market price and the exercise price of an option or award
at the date of grant. This compensation expense is recognized over the vesting
period of each option or award. We do not recognize compensation expense for
options having an exercise price equal to the market price on the date of grant
or for shares purchased under our Employee Stock Purchase Plan.
Under the fair value method, we would be required to recognize compensation
expense for all stock options and stock awards. Compensation would be measured
based on an estimated fair value of the option or award, using an option pricing
model, such as the Black-Scholes or binomial pricing model. These models require
estimates or assumptions as to the dividend yield and price volatility of the
underlying stock, the expected life of the option or award, and a relevant
risk-free interest rate. Under the fair value method, our after-tax compensation
expense would have increased by $5.1 million ($.03 per diluted share), $2.6
million ($.03 per diluted share), and $1.9 million ($.01 per diluted share) for
Fiscal 2003, 2002, and 2001, respectively. For purposes of determining these
amounts, we used the Black-Scholes option-pricing model and various assumptions
which are detailed in "Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - Common Stock Plans" below. The effect of using the fair
value method for determining stock-based compensation expense might have been
materially different if different estimates, assumptions, and judgments had been
used.
22
RESULTS OF OPERATIONS
Financial Summary
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
Percentage Increase
(Decrease)
Percentage of Net Sales From Prior Year
Fiscal Fiscal Fiscal Fiscal Fiscal
2003 2002 2001 2003-2002 2002-2001
---- ---- ---- --------- ---------
Net sales..................................... 100.0% 100.0% 100.0% 21.0% 24.1%
Cost of goods sold, buying, and occupancy..... 71.3 73.0 70.6 18.2 28.3
Selling, general, and administrative.......... 25.0 24.4 23.8 24.1 27.1
Restructuring charge (credit)................. (0.2) 1.9 -- ** **
Amortization of goodwill...................... -- 0.2 0.3 (100.0) 0.0
Income from operations........................ 3.9 0.5 5.3 881.1 (88.9)
Other income, principally interest............ 0.1 0.2 0.5 (50.8) (43.0)
Interest expense.............................. 0.8 0.9 0.5 8.5 110.3
Income tax provision (benefit)................ 1.2 -- 2.1 ** (100.4)
Minority interest in net loss of subsidiary... 0.0 -- -- ** --
Cumulative effect of accounting changes....... (2.0) -- (0.0) ** **
Net income (loss)............................. (0.0) (0.2) 3.2 (37.1) (108.6)
- --------------------
** Not meaningful
The following table sets forth our net sales by store brand:
Year Ended Year Ended Year Ended
February 1, 2003 February 2, 2002 February 3, 2001
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(in millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
Fashion Bug............ $1,156.0 $288.9 $1,164.0 $303.4 $1,213.1 $340.8
Lane Bryant............ 906.9 236.1 445.3(1) 254.1 0.0 0.0
Catherine's(2)......... 345.2 74.6 381.7 88.0 394.0 93.9
Monsoon/Accessorize.... 4.3 1.5 2.8 1.6 0.0 0.0
-------- ------ -------- ------ -------- ------
Total net sales........ $2,412.4 $601.1 $1,993.8 $647.1 $1,607.1 $434.7
======== ====== ======== ====== ======== ======
- --------------------
(1) Sales from the date of acquisition on August 16, 2001.
(2) Includes sales of Added Dimensions stores, which have been closed or
converted to Catherine's stores.
23
The following table sets forth certain additional information related to
changes in our net sales:
Year Ended Year Ended
February 1, 2003 February 2, 2002
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
(Decrease) increase in comparable store sales(1)(2):
Fashion Bug....................................... 0 % 1 % (7)% (8)%
Catherine's(3).................................... 0 0 (2) (5)
Lane Bryant....................................... (6) (12) -- --
Sales from new stores as a percentage of total
consolidated prior-period sales:
Fashion Bug....................................... 2 1 5 4
Catherine's....................................... 2 1 3 2
Lane Bryant....................................... 25 2 28 58
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
Fashion Bug....................................... (3) (4) (3) (3)
Catherine's(3).................................... (4) (3) (3) (1)
Lane Bryant....................................... (0) (1) (0) --
Increase (decrease) in total sales..................... 21 % (7)% 24 % 49 %
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
(2) Comparable store sales for Lane Bryant are based on historical data, giving
effect to our acquisition of Lane Bryant as if it had occurred on February
4, 2001. Results may not be equivalent to the change in total sales.
(3) Includes sales of Added Dimensions stores, which have been closed or
converted to Catherine's stores.
Comparison of Fiscal 2003 to Fiscal 2002
Net Sales
Net sales were $2,412.4 million in Fiscal 2003, an increase of 21.0% from
$1,993.8 million in Fiscal 2002, primarily due to our acquisition of Lane Bryant
in August 2001. The number of retail stores in operation at the end of Fiscal
2003 was 2,248, compared to 2,446 at the end of Fiscal 2002. For details
regarding store activity, see the table included in "FINANCIAL CONDITION -
Liquidity and Capital Resources" below. Had we acquired Lane Bryant as of the
beginning of Fiscal 2002, we would have experienced an overall comparable store
sales decrease of 2.0% from Fiscal 2002. Lane Bryant stores had comparable store
sales decreases in sweaters, denim, and intimate apparel. In particular, the
Lane Bryant chain experienced poor customer acceptance of, and fit and quality
issues with, certain of its products during the second half of Fiscal 2003,
resulting in higher levels of promotional pricing. In addition, certain basic
products were under-stocked, resulting in missed sales opportunities. Due to
product lead times, these issues are expected to negatively impact Lane Bryant
results for the Fiscal 2004 first quarter, and could negatively impact Lane
Bryant results for the Fiscal 2004 second quarter. We are currently executing a
plan to re-establish growth at Lane Bryant which includes improved merchandise
assortments for the Fall 2003 season.
24
For Fashion Bug stores, comparable store sales increases in junior and plus
sportswear, footwear, intimate apparel, and accessories were offset by declines
in other missy sportswear, dresses, and coats. For Catherine's stores,
comparable store sales increases in casual sportswear were offset by declines in
other merchandise categories. During Fiscal 2003, we discontinued the Added
Dimensions chain, closed the remaining stores in the chain, and liquidated the
remaining Added Dimensions store inventory. We continue to be affected by a weak
economy and an uncertain geopolitical climate. During the first two months of
Fiscal 2004, we experienced a 12% decrease in Lane Bryant comparative store
sales and a 7% decrease in overall comparative store sales.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers (see "CRITICAL ACCOUNTING POLICIES - Revenue Recognition"
above). We recognized $23.2 million of revenues in Fiscal 2003 and $13.6 million
of revenues in Fiscal 2002 in connection with this program. We offset revenues
recognized from card fees by discounts granted under the program. As of December
1, 2002 we discontinued the issuance of new cards under this program and will
introduce a new customer loyalty card program during Fiscal 2004 that will be
operated under our proprietary credit card program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,721.1 million in
Fiscal 2003, an increase of 18.2% from $1,455.6 million in Fiscal 2002,
principally reflecting the increase in net sales. As a percentage of net sales,
these costs decreased 1.7% in Fiscal 2003 as compared to Fiscal 2002.
Cost of goods sold as a percentage of net sales decreased 3.0% in Fiscal
2003 as compared to Fiscal 2002. The higher merchandise margins reflected
improved inventory management in the Fashion Bug and Catherine's chains and
benefits from our restructuring plan (see "Restructuring Charge/Credit" below),
partially offset by declining margins in the Lane Bryant chain. Markdowns taken
in connection with liquidation of Added Dimensions inventories during Fiscal
2003 were offset by $3.0 million of costs accrued at the end of Fiscal 2002
related to the valuation of inventory for stores to be closed as the result of
our restructuring plan. Merchandise margins for Fiscal 2003 were negatively
impacted by higher levels of promotional activity during the second half of the
fiscal year as a result of a generally sluggish Christmas holiday season and
poor customer acceptance of certain Lane Bryant products, as discussed above.
Cost of goods sold includes merchandise costs, net of discounts and allowances,
freight, and inventory shrinkage. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 1.3%
in Fiscal 2003 as compared to Fiscal 2002. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of negative comparable
store sales. Occupancy expenses for Fiscal 2003, as a percentage of net sales,
increased 1.2% from Fiscal 2002. Relatively higher occupancy expenses for the
Lane Bryant stores and a $2.7 million write-down of under-performing assets
related to our joint venture (see "RECENT DEVELOPMENTS" below) contributed to
the increase in occupancy expenses as a percentage of net sales. Buying expenses
for Fiscal 2003, as a percentage of net sales, increased 0.1% from Fiscal 2002.
Buying expenses include payroll, payroll related costs, and operating expenses
for our buying departments and warehouses. Occupancy expenses include rent, real
estate taxes, insurance, common area maintenance, utilities, maintenance, and
depreciation for our stores and warehouse facilities and equipment. Buying and
occupancy costs are treated as period costs and are not capitalized as part of
inventory.
25
Selling, General, and Administrative
Selling, general, and administrative expenses were $603.5 million in Fiscal
2003, an increase of 24.1% from $486.2 million in Fiscal 2002, principally
reflecting the acquisition of Lane Bryant. As a percentage of net sales, these
costs increased by 0.6% in Fiscal 2003 as compared to Fiscal 2002. Selling
expenses increased 0.4% as a percentage of net sales. The increase was
attributable to a number of factors, including higher store payroll and benefit
costs, new point-of-sales systems at Fashion Bug, and an increase in direct
marketing expenses in the Catherine's and Lane Bryant chains. General and
administrative expenses increased 0.2% as a percentage of net sales in Fiscal
2003, primarily as a result of increased employee benefit costs, costs
associated with transitional service agreements related to the Lane Bryant
acquisition, and the lack of leverage on fixed costs, particularly at Lane
Bryant. During Fiscal 2003, we completed the integration of Lane Bryant's
information systems, which we expect will result in future cost synergies for
the Company.
Restructuring Charge/Credit
On January 28, 2002, we announced a restructuring plan, including a number
of initiatives designed to position us for increased profitability and growth in
the women's plus-size apparel business. The major components of the plan
included (1) the closing of The Answer/Added Dimensions chain of 77 stores,
including the conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, (2) the closing of 130 under-performing Fashion Bug stores,
and (3) the conversion of 44 Fashion Bug store locations to Lane Bryant stores.
The restructuring plan resulted in a pre-tax charge of $37.7 million in the
fourth quarter of Fiscal 2002. The restructuring charge included a $17.8 million
non-cash write-down of fixed assets (primarily store fixtures and improvements)
in the stores to be closed, $18.5 million of anticipated payments to landlords
for the early termination of existing store leases, $800 thousand for severance
costs, and $600 thousand for sign removal and other costs.
During Fiscal 2003, we completed the restructuring plan, and we recognized
a pre-tax restructuring credit of $4.8 million. The restructuring credit was
primarily a result of our ability to negotiate lease terminations on terms more
favorable than our original estimates. Because a majority of the store closings
occurred during the second half of Fiscal 2003, the full benefit of the
restructuring plan will not occur until Fiscal 2004.
Amortization of Goodwill
We recognized $4.9 million of amortization of goodwill during Fiscal 2002
related to our Catherine's acquisition. We adopted the provisions of SFAS No.
142 as of February 3, 2002, and we are no longer amortizing the Catherine's
goodwill. However, the Catherine's goodwill and goodwill related to our
acquisition of Lane Bryant are subject to periodic impairment reviews in
accordance with the provisions of SFAS No. 142 (see "CRITICAL ACCOUNTING
POLICIES - Impairment of Long-Lived Assets" above and "Cumulative Effect of
Accounting Changes" below).
Other Income
Other income was $2.3 million in Fiscal 2003, a decrease of 50.8% from $4.7
million in Fiscal 2002. This decrease was primarily caused by a decrease in
interest income. Interest income decreased as a result of a decrease in the
average yield on investments during Fiscal 2003 as compared to Fiscal 2002.
26
Interest Expense
Interest expense was $20.3 million in Fiscal 2003, an increase of 8.5% from
$18.7 million in Fiscal 2002. This increase was primarily a result of
amortization of fees related to our credit facility, and to a lesser extent, a
result of additional long-term mortgage borrowings and acquisitions of
point-of-sale equipment under long-term capital leases. In addition, a write-off
of $951 thousand of unamortized deferred financing costs related to our $67.5
million term loan, which was repaid during the period (see "FINANCING" below),
resulted in additional interest expense in Fiscal 2003. These increases were
partially offset by reduced interest expense in Fiscal 2003 as compared to
Fiscal 2002 as a result of relatively lower interest rates on borrowings and
reduced levels of borrowings. During Fiscal 2003, we converted or redeemed $96.0
million of 7.5% Convertible Subordinated Notes due 2006, repaid a $67.5 million
11.5% term loan, and issued $150.0 million of 4.75% Senior Convertible Notes Due
2012 (see "FINANCING" below).
Income Tax Provision
The income tax provision for Fiscal 2003 was $29.1 million, resulting in a
38.9% effective tax rate, as compared to an income tax benefit for Fiscal 2002
of $120 thousand, resulting in a (2.7)% effective tax rate. The unusual Fiscal
2002 effective tax rate was a result of the effect of a $1.8 million provision
related to one of our employee insurance programs on a relatively small pre-tax
loss.
Cumulative Effect of Accounting Changes
We adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" in full as of February 3, 2002. In accordance with the transition
provisions of SFAS No. 142, we tested goodwill related to our Catherine's
acquisition for impairment during Fiscal 2003, and recorded a write-down of
$44.0 million to reduce the carrying value of the goodwill to its estimated fair
value. We also elected to adopt the provisions of EITF Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Cash Consideration Received
from a Vendor" as of the beginning of Fiscal 2003. The cumulative effect at the
beginning of Fiscal 2003 from deferring the recognition of cash received from
vendors was a charge of $5.1 million, net of income taxes of $2.8 million. The
write-down of goodwill and the deferral of cash received from vendors have been
presented as the cumulative effect of accounting changes as of February 3, 2002
in our Consolidated Statement of Operations and Comprehensive Income (Loss) for
Fiscal 2003 (see "CRITICAL ACCOUNTING POLICIES - Impairment of Long-Lived
Assets" and "CRITICAL ACCOUNTING POLICIES - Accounting for Cash Consideration
Received From a Vendors" above).
Comparison of Fiscal 2002 to Fiscal 2001
Net Sales
Net sales were $1,993.8 million in Fiscal 2002, an increase of 24.1% from
$1,607.1 million in Fiscal 2001, primarily due to our acquisition of Lane Bryant
in August 2001. The number of retail stores in operation at the end of Fiscal
2002 was 2,446 (including 647 Lane Bryant stores), compared to 1,755 at the end
of Fiscal 2001. In line with overall consumer shopping trends and a generally
weak retail sales environment, we experienced a year-over-year decrease in
overall comparable store sales in Fiscal 2002 of 4.0%. For Fashion Bug stores,
improvements in junior sportswear were offset by declines in other merchandise
categories. In January 2001, we announced plans to support growth in plus-size
apparel, and eliminated girls apparel from Fashion Bug stores effective at the
end of the 2000 - 2001 winter season. Sales of Fashion Bug
27
girls apparel were approximately $38.0 million during Fiscal 2001. For
Catherine's stores, an increase in Fiscal 2002 sales of casual sportswear was
offset by declines in other merchandise categories.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers (see "CRITICAL ACCOUNTING POLICIES - Revenue Recognition"
above). We recognized $13.6 million of revenues from card fees in connection
with this program in Fiscal 2002.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,455.6 million in
Fiscal 2002, an increase of 28.3% from $1,134.6 million in Fiscal 2001,
principally reflecting the increase in net sales. As a percentage of net sales,
these costs increased by 2.4% in Fiscal 2002 as compared to Fiscal 2001.
Cost of goods sold as a percentage of net sales increased 0.4% in Fiscal
2002 as compared to Fiscal 2001. Reduced merchandise margins in our Fashion Bug
and Catherine's stores as a result of an increased level of promotional activity
during Fiscal 2002, and costs related to exiting the girls business in our
Fashion Bug stores, were partially offset by higher merchandise margins for our
Lane Bryant stores and to a lesser extent by close 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 as a percentage of net sales increased 2.0%
in Fiscal 2002 as compared to Fiscal 2001. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of the decline in
comparable store sales. Increased utilities expenses, relatively higher
occupancy expenses for new and relocated stores as compared to our existing
stores, and relatively higher occupancy expenses for our Lane Bryant stores also
contributed to the increase in buying and occupancy expenses as a percentage of
net sales. Buying expenses increased slightly as a percentage of net sales,
primarily as a result of buying costs for Lane Bryant stores, which are
relatively higher due to the product development and design process required to
support a 100% private-label business. Buying expenses include payroll, payroll
related costs, and operating expenses for our buying departments and warehouses.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities, maintenance, and depreciation for our stores and
warehouse facilities and equipment. Buying and occupancy costs are treated as
period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $486.2 million in Fiscal
2002, an increase of 27.1% from $382.4 million in Fiscal 2001, principally
reflecting the acquisition of Lane Bryant. As a percentage of net sales, these
costs increased by 0.6% in Fiscal 2002 as compared to Fiscal 2001. Selling
expenses increased 0.8% as a percentage of net sales. The relative 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 our
credit operations (a component of selling expenses) as a result of reduced
interest rates related to our asset securitization program was partially offset
by increased delinquencies in our proprietary credit card program during the
latter part of Fiscal 2002. General and administrative expenses decreased 0.2%
as a percentage of net sales in Fiscal 2002, primarily as a result of the
synergistic effect of a larger sales base on corporate administrative expenses
and the favorable impact of cost reduction initiatives. Selling, general, and
administrative expenses exclude goodwill amortization related to our acquisition
of Catherine's.
28
Other Income
Other income was $4.7 million in Fiscal 2002, a decrease of 43.0% from $8.3
million in Fiscal 2001. This decrease was primarily caused by a decrease in
interest income. Interest income decreased as a result of lower levels of
invested funds and a decrease in the average yield on investments during Fiscal
2002 as compared to Fiscal 2001. During Fiscal 2002, investments in marketable
securities were converted into cash and cash equivalents, and we used $83.0
million of cash and cash equivalents in connection with the acquisition of Lane
Bryant.
Interest Expense
Interest expense was $18.7 million in Fiscal 2002, an increase of 110.3%
from $8.9 million in Fiscal 2001. This increase was primarily the result of
short-term and long-term borrowings incurred in connection with the Lane Bryant
acquisition, and to a lesser extent, the result of additional long-term mortgage
borrowings and acquisitions of point-of-sale equipment under long-term capital
leases.
Income Tax Provision (Benefit)
The income tax benefit for Fiscal 2002 was $120 thousand resulting in a
(2.7)% effective tax rate, as compared to an income tax provision for Fiscal
2001 of $33.0 million, resulting in a 39% effective tax rate. The unusual Fiscal
2002 effective tax rate was a result of the effect of a $1.8 million provision
related to one of our employee insurance programs on a relatively small pre-tax
loss.
Comparison of Fourth Quarter 2003 to Fourth Quarter 2002
Net Sales
Net sales in the fourth quarter of Fiscal 2003 were $601.2 million, a
decrease of 7.1% from net sales of $647.1 million in the fourth quarter of
Fiscal 2002. The decrease in sales was primarily attributable to negative
comparative store sales at our Lane Bryant chain and a decrease in the number of
stores in operation during the Fiscal 2003 fourth quarter as a result of our
store closing initiative (see "Comparison of Fiscal 2003 to Fiscal 2002 -
Restructuring Charge/Credit" above). We experienced a quarter-over-quarter
decrease of 5% in overall comparable store sales in the fourth quarter of Fiscal
2003. Lane Bryant experienced a 12% decrease in comparable store sales as a
result of poor customer acceptance of, and fit and quality issues with, certain
of its products, which resulted in higher levels of promotional pricing. In
addition, certain basic products were under-stocked, resulting in missed sales
opportunities. Due to product lead times, these issues are expected to
negatively impact Lane Bryant results for the Fiscal 2004 first quarter, and
could negatively impact results for the Fiscal 2004 second quarter.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $451.3 million in
the fourth quarter of Fiscal 2003, a decrease of 6.4% from $482.1 million in the
fourth quarter of Fiscal 2002. As a percentage of net sales, these costs
increased by 0.6% in the fourth quarter of Fiscal 2003 as compared to the fourth
quarter of Fiscal 2002. Cost of goods sold, as a percentage of net sales,
decreased 0.3% in the fourth quarter of Fiscal 2003 as compared to the fourth
quarter of Fiscal 2002. Significantly improved margins in our Fashion Bug and
Catherine's stores were offset by reduced gross margins from the higher levels
of promotional pricing at our Lane Bryant stores. Cost of goods sold for the
fourth quarter of Fiscal 2003
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included $5.1 million of costs related to the valuation of Lane Bryant
inventories. Cost of goods sold for the fourth quarter of Fiscal 2002 included
$3.0 million of costs related to the valuation of inventory for stores to be
closed during the first half of Fiscal 2003 as a result of the restructuring
plan announced on January 28, 2002. Buying and occupancy expenses, expressed as
a percentage of net sales, increased 0.9% in the fourth quarter of Fiscal 2003
as compared to the fourth quarter of Fiscal 2002. The increase in buying and
occupancy expenses was primarily attributable to the lack of leverage on
relatively fixed occupancy costs as a result of negative overall comparable
store sales, particularly at the Lane Bryant chain.
Selling, General, and Administrative
Selling, general, and administrative expenses were $144.6 million in the
fourth quarter of Fiscal 2003, a decrease of 10.6% from $161.7 million in the
fourth quarter of Fiscal 2002. As a percentage of net sales, these costs
decreased by 0.9% in the fourth quarter of Fiscal 2003 as compared to the fourth
quarter of Fiscal 2002. The decrease is primarily a result of cost efficiencies
from integration efforts and home office expense reductions at Lane Bryant,
partially offset by the lack of leverage from negative comparable store sales
and increases in employee benefit costs.
Interest Expense
Interest expense was $3.1 million in Fiscal 2003, a decrease of 56.9% from
$7.3 million in Fiscal 2002. The decrease was primarily the result of relatively
lower interest rates on borrowings and reduced levels of borrowings. During
Fiscal 2003, we replaced $96.0 million of 7.5% Convertible Subordinated Notes
due 2006 and a $67.5 million 11.5% term loan with $150.0 million of 4.75% Senior
Convertible Notes Due 2012 and paid down our short-term borrowings (see
"FINANCING" below).
RECENT DEVELOPMENTS
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve our profitability. We expect this cost reduction plan to improve
annualized pretax earnings by approximately $45 million, with an improvement of
approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that
the full annual pre-tax benefit of $45 million will first be realized during the
fiscal year ending January 30, 2005. Execution of the cost reduction plan is
expected to result in a pre-tax charge of approximately $10 - $12 million in
Fiscal 2004. Components of the charge include a $7 - $8 million non-cash charge,
primarily for the write-down of distribution center fixed assets, and $3 - $4
million of cash items, primarily related to severance as a result of a reduction
in work force. We expect the execution of the plan to have no material after-tax
cash impact. The components of the cost reduction plan are as follows:
o Reduction in Corporate Operating Expenses. Our ability to realize
efficiencies by streamlining processes and gaining optimal pricing through
the consolidation of vendors will reduce costs. We will continue to
centralize finance, human resources, and other administrative functions in
order to leverage the efficiency of our shared services organization.
o Reduction in Corporate and Divisional Workforce. We implemented a workforce
reduction at our corporate and divisional home offices of 160 positions, or
approximately 14%.
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o Consolidation of Distribution Center Operations. In September 2002, we
announced the purchase of a distribution center in White Marsh, Maryland,
to replace an existing distribution center in Columbus, Ohio, during Fiscal
2004 (see "FINANCIAL CONDITION - Liquidity and Capital Resources" below).
As part of the cost reduction plan, we will also consolidate our Memphis,
Tennessee distribution center in the White Marsh facility. This
consolidation is expected to result in a net workforce reduction of
approximately 50 positions.
o Consolidation of Credit Operations. We plan to consolidate our Hollywood,
Florida credit operations into our Milford, Ohio facility, which is
expected to result in a net workforce reduction of approximately 75
positions.
o Closing of 9 Monsoon/Accessorize stores which we operate under a joint
venture with Monsoon plc. In October 2000, we announced the signing of a
joint venture agreement with Monsoon plc, in order to bring the Un