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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 January 31, 2004
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.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-1721355
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) IdentificationNo.)
450 Winks Lane, Bensalem, Pennsylvania 19020
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(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)
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(Title of Class)
Stock Purchase Rights
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(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]
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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 of the
registrant held by non-affiliates as of August 2, 2003 (the last day of the
registrant's most recently completed second fiscal quarter), based on the
closing price on August 1, 2003, was approximately $576,208,000.
As of April 1, 2004, 114,495,415 shares of the registrant's 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.
CHARMING SHOPPES, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1 Business
General.......................................................... 1
Stores........................................................... 2
Merchandising and Buying......................................... 3
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...................................... 7
Executive Offices................................................ 8
Available Information............................................ 8
Item 2 Properties....................................................... 8
Item 3 Legal Proceedings................................................ 9
Item 4 Submission of Matters to a Vote of Security Holders.............. 9
Additional Part I Information - Our Executive Officers..................... 10
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 11
Item 6 Selected Financial Data.......................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Forward-Looking Statements....................................... 14
Overview......................................................... 16
Critical Accounting Policies..................................... 17
Results of Operations............................................ 23
Financial Condition.............................................. 32
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.................................... 81
Item 9A Controls and Procedures.......................................... 81
PART III
Item 10 Directors and Executive Officers of the Registrant............... 82
Item 11 Executive Compensation........................................... 82
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................. 82
Item 13 Certain Relationships and Related Transactions................... 83
Item 14 Principal Accountant Fees and Services........................... 83
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 84
SIGNATURES................................................................. 92
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(R), FASHION
BUG(R), and CATHERINES Plus Sizes(R). During the year ended January 31, 2004
("Fiscal 2004"), the sale of plus-size apparel represented approximately 77% of
our total net sales. 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 January 31, 2004, we
operated 2,227 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 WOMANTM chain of 136 stores, which specialized in plus-size women's
apparel. In January 2000, we acquired the CATHERINES(R) chain of 436 stores,
which also specialized in plus-size women's apparel. We have since converted the
MODERN WOMAN chain into CATHERINES stores. In August 2001, we acquired the Lane
Bryant chain of 651 stores. 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(R) and CACIQUE(R) (a line
of intimate apparel), LANE BRYANT offers fashionable and sophisticated
apparel in plus-sizes 14 - 28, including wear-to-work and casual
sportswear, as well as accessories for the plus-size customer. LANE BRYANT
has a loyal customer base, generally ranging in age from 25 to 45 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 710 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
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 1,051 FASHION BUG stores are located in 45 states, primarily in
strip shopping centers, and average approximately 9,000 square feet.
FASHION BUG currently operates a marketing website offering fashion
advisories, promotional information, and a store locator. We plan to
introduce e-commerce operations on this website during the fiscal year
ending January 29, 2005 ("Fiscal 2005").
CATHERINES PLUS SIZES. CATHERINES specializes in plus-sizes and is
particularly known for extended sizes (over size 28) and petite plus-sizes.
CATHERINES offers classic apparel and accessories for wear-to-work and
casual lifestyles. CATHERINES 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 466 CATHERINES stores are located in
44 states, primarily in strip shopping centers in the Southeast,
Mid-Atlantic, and Eastern Central regions of the United States, and average
approximately 4,100 square feet. In March 2002, we began e-commerce
operations on our CATHERINES website.
1
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 certain efficiencies, in order to improve
our profitability. During Fiscal 2004, we realized cost reductions of more than
$30 million as a result of this plan. We expect this cost reduction plan to
improve annualized pre-tax earnings by a total of approximately $45 million.
Execution of the cost reduction plan resulted in a pre-tax charge of $11.5
million in Fiscal 2004. Components of the charge included a $4.2 million
non-cash charge, primarily for accelerated depreciation of the net book value of
the assets at our Memphis, Tennessee distribution center, and $7.3 million of
cash items, primarily related to lease termination costs and severance. The
costs related to the plan did not have a material after-tax cash impact in
Fiscal 2004. Additional details of the plan are included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; Results of Operations; Comparison of Fiscal 2004 to Fiscal 2003;
Expenses Related to Cost Reduction Plan" and "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 14.
Expenses Related to Cost Reduction Plan" below.
Stores
Our 2,227 stores (as of January 31, 2004) are primarily located in suburban
areas and small towns. Approximately 70% 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 CATHERINES 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. Approximately 20% of our LANE BRYANT stores are currently
located in strip shopping centers.
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 expand both LANE BRYANT and CATHERINES 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.
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 that are 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 approximately 55 stores during
Fiscal 2005. The breakdown by brand is approximately: 35 LANE BRYANT stores, 15
CATHERINES stores, and 5 FASHION BUG stores. Additionally, we currently plan to
relocate approximately 55 stores during Fiscal 2005.
2
Our store openings and closings and number of locations over the past five
fiscal years are set forth in the following table:
Year Ended
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Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
2004 2003 2002 2001 2000
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Store Activity:
Number of stores open at beginning of period 2,248 2,446 1,755 1,740 1,135
Opened during period ....................... 50 57 125 106 75
Acquired during period ..................... 0 0 651 0 572
Closed during period ....................... (71) (255) (85) (91) (42)
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(2)
Number of stores open at end of period ..... 2,227 2,248 2,446 1,755 1,740
====== ====== ====== ====== ======
Number of Stores by Brand:
FASHION BUG and FASHION BUG PLUS ........... 1,051 1,083 1,252 1,230 1,185
LANE BRYANT ................................ 710 689 647 0 0
CATHERINES ................................. 466 467 461 414 452(3)
THE ANSWER(R)/ADDED DIMENSIONS(R) .......... 0 0 77 110 103
MONSOON/ACCESSORIZE(4) ..................... 0 9 9 1 0
------ ------ ------ ------ ------
Number of stores open at end of period ..... 2,227 2,248 2,446 1,755 1,740
====== ====== ====== ====== ======
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(1) Includes 124 FASHION BUG stores and 68 ADDED DIMENSIONS stores that were
closed in connection with a restructuring plan announced on January 28,
2002.
(2) Includes 35 MODERN WOMAN stores that were closed in connection with the
conversion of MODERN WOMAN stores into CATHERINES stores during the year
ended February 3, 2001.
(3) Includes 122 MODERN WOMAN stores that were closed or converted to the
CATHERINES formats during the year ended February 3, 2001.
(4) We closed 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 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 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. Separate merchandise
groups for each of our brands conduct merchandise purchasing, using buyers
supervised by one or more merchandise managers. We believe that specialization
of buyers within our brands enhances the distinctiveness of 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.
3
We continually refine our merchandise assortments to reflect the needs and
demands of our diverse customer groups and the demographics of each store
location. At LANE BRYANT, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and wear-to-work merchandise, intimate
apparel, and accessories. We strive to translate current trends into plus-sizes
and to be first to market with our merchandise. At FASHION BUG, we offer an
assortment of both casual and wear-to-work apparel, in plus, misses, junior, and
girls sizes as well as maternity, 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 well-recognized third-party national brands. At CATHERINES, 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. CATHERINES features
sportswear, dresses, intimate apparel, suits, and accessories in a variety of
plus-sizes, including petites and extended sizes. CATHERINES has developed a
unique expertise in the fit, design, and manufacturing of extended sizes, making
it one of the few retailers to emphasize these sizes.
For stores that are identified as having certain profiles, we have
distribution systems in place that can stock the stores with products
specifically targeted to such profiles. Our merchandising staffs obtain store
and brand-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.
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.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the spring and Christmas
seasons. We generally build inventory levels before these peak sales 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 2004, as a percent of
total sales, were 24.7%, 26.5%, 23.2%, and 25.6%, respectively.
During the second half of Fiscal 2003 and the first half of Fiscal 2004,
LANE BRYANT experienced 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 during the
second half of Fiscal 2003, resulting in missed sales opportunities. As a result
of these issues, we initiated a plan to re-establish growth at LANE BRYANT. Due
to product lead times, these issues negatively affected LANE BRYANT results into
the first half of Fiscal 2004. Although LANE BRYANT continued to experience
negative comparable store sales during Fiscal 2004, the brand experienced
quarter-to-quarter improvement in comparable store sales. LANE BRYANT
4
comparable store sales increased 1% in the fourth quarter of Fiscal 2004, as
compared to comparable store sales decreases in the first three quarters of
Fiscal 2004.
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 29 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 brand 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 CATHERINES
brands that provide information regarding current fashions and promotions. Our
LANE BRYANT website enjoys more than 900,000 unique visitors per month and an
established on-line community. In March 2002, we began e-commerce operations on
our CATHERINES website, and in March 2003, we began e-commerce operations on our
LANE BRYANT website. We plan to introduce e-commerce operations on our FASHION
BUG website during Fiscal 2005.
During Fiscal 2004, we launched FIGURE(TM) magazine, a periodic fashion and
lifestyle magazine for women. The magazine features clothing and fashions from
our LANE BRYANT, FASHION BUG, and CATHERINES brands, and also covers beauty,
health and fitness, home, food and entertaining, relationships, social, and
community issues. The magazine is available by subscription, and is also sold in
all of our stores and at selected newsstands and supermarkets, including certain
national booksellers. Since its inception in August 2003, the magazine has grown
to a circulation of more than 400,000 copies.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. Additional information on our
loyalty card programs is included in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations; Critical Accounting
Policies; Revenue Recognition" below.
Proprietary Credit Card Programs
We seek to encourage sales through the promotion of our 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.
Our FASHION BUG credit card program accounted for approximately 27% of
FASHION BUG retail sales in Fiscal 2004, and has approximately two million
active accounts. We control credit policies and service the FASHION BUG
proprietary credit card file, and, through various agreements, we securitize and
sell the credit card receivables generated by this program.
Our LANE BRYANT and CATHERINES brands also offer customers the convenience
of proprietary credit card programs. The LANE BRYANT credit card program
accounted for approximately 29% of LANE BRYANT retail sales during Fiscal 2004,
and has approximately one million active accounts. The CATHERINES credit card
program accounted for approximately 30% of CATHERINES retail sales during Fiscal
2004, and has approximately 500,000 active accounts. We use third-party banks to
finance and service the LANE BRYANT and CATHERINES credit card programs. These
third-party banks provide new account approval, credit authorization, billing,
and
5
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 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; Financial Condition; Off-Balance-Sheet Arrangements" and "Item 8.
Financial Statements and Supplementary Data: Notes to Consolidated Financial
Statements; Note 16. Asset Securitization" below.
Sourcing
To meet the demands of our customers, we access both the domestic wholesale
and overseas apparel markets 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 2004, we
purchased merchandise from approximately 1,000 suppliers and factories located
throughout the world. We use our overseas sourcing operations, which generally
require longer lead times, primarily to purchase fashion-basic merchandise. In
Fiscal 2004, overseas sourcing accounted for approximately 19% of consolidated
merchandise purchases. Overseas sourcing as a percent of merchandise purchases
by brand, was approximately 26% for FASHION BUG, 13% for LANE BRYANT, and 12%
for CATHERINES. During Fiscal 2004, we purchased a portion of LANE BRYANT
merchandise from Mast Industries, Inc. ("Mast"). Mast, a contract manufacturer
and apparel importer, is a wholly-owned subsidiary of Limited Brands, Inc.
("Limited Brands"). These purchases from Mast accounted for approximately 17% of
our total merchandise purchases and approximately 40% of merchandise purchases
for LANE BRYANT during Fiscal 2004. No other vendor accounted for more than 4%
of total merchandise purchases during Fiscal 2004.
We pay for merchandise purchases outside the United States using 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 operate two 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 LANE BRYANT stores and CATHERINES stores, we
operate a distribution center in White Marsh, Maryland. Located on 29 acres of
land, the White Marsh facility contains a building of approximately 393,000
square feet, which is currently designed to service up to approximately 1,400
stores.
We acquired the 393,000 square foot White Marsh distribution center during
Fiscal 2003 at a cost of $17.3 million to replace LANE BRYANT's leased
distribution center in Columbus, Ohio. We completed the relocation of the
Columbus distribution center to our White Marsh distribution center in February
2004. The lease for the Columbus, Ohio distribution center and a related
logistics and transportation services agreement were terminated effective as of
February 29, 2004 in accordance with early cancellation provisions of the lease
and agreement. As a result of the use of automated sorting systems and improved
facility design in the White Marsh facility, we were also able to consolidate
our 213,000 square foot Memphis, Tennessee distribution center into the White
Marsh facility during Fiscal 2004. We relocated the Memphis distribution center
in June 2003. We are currently evaluating alternative uses for the Memphis
facility. The consolidation of the Memphis distribution center into the
6
White Marsh facility was part of a cost reduction plan announced in March 2003.
See "General" above, and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations; Results of Operations; Comparison
of Fiscal 2004 to Fiscal 2003; Expenses Related to Cost Reduction Plan" and
"Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 14. Expenses Related to Cost Reduction Plan" below
for details of the cost reduction plan.
Substantially all of our merchandise purchases are received at our
distribution facilities, where they are prepared for distribution to our stores.
Automated sorting systems in the distribution centers enhance the flow of
merchandise from receipt to quality control inspection, receiving, ticketing,
packing, and final shipment. Merchandise is shipped to each store principally by
common carriers. We use computerized automated distribution profiles to combine
shipments when possible and improve the efficiency of the distribution
operations.
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, fit, 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, announced on March 18,
2003 as part of our cost reduction plan, to discontinue the operation of these
stores. We closed our nine MONSOON/ACCESSORIZE stores during Fiscal 2004. See
"General" above, and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Results of Operations; Comparison of Fiscal
2004 to Fiscal 2003; Expenses Related to Cost Reduction Plan" and "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 14. Expenses Related to Cost Reduction Plan" below for details
of the cost reduction plan.
Employees
As of the end of Fiscal 2004, we employed approximately 25,000 associates,
which included approximately 16,000 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 25 of
our employees are represented by unions. We believe that overall our
relationship with these unions, and our employees in general, is satisfactory.
Trademarks and Servicemarks
We own, or are in the process of obtaining, all rights to the trademarks
and trade names we believe are necessary to conduct our business as presently
operated. "FASHION BUG(R)", "FASHION BUG PLUS(R)", "BUNDLE OF JOY(TM)", "FIGURE
(TM)", "L.A. BLUES(R)", "CATHERINES(R)", "CATHERINES PLUS SIZES(R)", "C.S.T.
STUDIO(R)", "C.S.T. SPORT(R)", "MAGGIE BARNES(R)", "ANNA MAXWELL(R)", "LIZ &
ME(R)", "SERENADA(R)", "CAPISTRANO(R)", "LANE BRYANT(R)", "VENEZIA(R)", "VENEZIA
JEANS CLOTHING CO.(R)", "CACIQUE(R)", "ELEMENTAL STRETCH(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.
7
We also own the following domain name registrations: charming.com,
charmingshoppes.com, fashionbug.com, fashionbugplus.com, fashionbugcard.com,
catherines.com, lanebryant.com, figuremagazine.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. See
"PART III; Item 10. Directors and Executive Officers of the Registrant" below
for additional information that is available on our Internet website.
Item 2. Properties
We lease all our stores, with the exception of four stores that 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 January 31, 2004, 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
------ ---------------
2004 68(1)
2005 - 2009 794
2010 - 2014 386
2015 - 2019 323
2020 - 2024 459
2025 - 2029 154
Thereafter 39
- ---------------
(1) Includes 32 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 393,000 square
foot distribution center in White Marsh, Maryland that services our LANE BRYANT
and CATHERINES stores. We acquired the White Marsh distribution center during
Fiscal 2003 to replace our leased distribution center in Columbus, Ohio. We
relocated the Columbus distribution center in February 2004. The lease for the
Columbus, Ohio distribution center and a related logistics and transportation
services agreement were terminated effective as of February 29, 2004 in
accordance with early
8
cancellation provisions of the lease and agreement. As a result of the use of
automated sorting systems and improved facility design in the White Marsh
facility, we were also able to consolidate our 213,000 square foot Memphis,
Tennessee distribution center into the White Marsh facility. We relocated the
Memphis distribution center in June 2003. We are currently evaluating
alternative uses for the Memphis facility.
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 63,000 square foot facility in Memphis,
Tennessee that houses our CATHERINES corporate offices. We also lease 130,000
square feet of office space near Columbus, Ohio that houses our LANE BRYANT
corporate offices. Our credit operations, including Spirit of America National
Bank, our wholly-owned credit card bank subsidiary, occupy 30,000 square feet of
leased office space in Miami Township, Ohio. We also maintain offices in New
York City that 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 December 22, 2003, the Superior Court of California, County of Los
Angeles dismissed a suit filed on April 17, 2003 by Donald Brown, Thomas Lamore,
and Sau Yeung against 109 entities, including Lane Bryant, Inc. The named
plaintiffs purported to represent a class of applicants for employment against
the 109 defendants, alleging, among other things, violations of California state
laws regarding the questioning of job applicants about certain illegal
drug-related criminal convictions.
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. This case was settled on March 17,
2004, and did not have a material impact on our results of operations for the
year ended January 31, 2004.
There have been no other material developments in legal proceedings
involving the Company or its subsidiaries since those reported in our Quarterly
Reports on Form 10-Q for the quarters ended May 3, 2003 and November 1, 2003.
Other than ordinary routine litigation incidental to our business, there
are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, 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.
9
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, 53, 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, 56, has served as Executive Vice President and Chief
Operating Officer since March 2002. Before 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.
Michel Bourlon, 44, has served as Executive Vice President - Sourcing since
March 2004. Before that, he served as Managing Director of Eddie Bauer
International (Hong Kong) Ltd., from September 1997 to February 2004.
Anthony A. DeSabato, 55, has served as Executive Vice President - Corporate
and Labor Relations, Business Ethics, and Loss Prevention since July 2003.
Before that, he 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, 46, 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, 55, 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.
Gale H. Varma, 53, has served as Executive Vice President - Human Resources
since July 2003. Before that, she served as Division Vice President - Human
Resources and Ethics Officer for the Prudential Institutional Employee Benefits
division of Prudential Financial Services, a division of Prudential Insurance
Company of America, from September 1997 to April 2003.
Erna Zint, 60, has served as Executive Vice President - Sourcing since
January 1996, and will assume the position of Executive Vice President - Quality
Assurance/Control and Technical Design in June 2004.
Jonathon Graub, 45, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
John J. Sullivan, 57, has served as Vice President - Corporate Controller
since October 1998.
10
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 ("NASDAQ") under the symbol "CHRS," and is listed and
traded on the Chicago Board Options Exchange ("CBOE") under the symbol "QSR."
The following table sets forth the high and low sale prices for our common stock
during the indicated periods, as reported by NASDAQ.
Fiscal 2004 Fiscal 2003
----------- -----------
High Low High Low
1st Quarter.... $4.75 $2.70 $9.14 $5.46
2nd Quarter.... 5.72 3.94 8.90 5.74
3rd Quarter.... 6.80 4.89 7.42 3.86
4th Quarter.... 6.85 5.09 5.47 3.30
The approximate number of holders of record of our common stock as of April
1, 2004 was 2,259. 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 near 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; Long-term Debt and Equity Financing" and "Item
8. Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 7. Debt" below).
11
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of January 29, 2000 through January 31, 2004. 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
Year Ended
----------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
(Dollars in thousands, except per share amounts) 2004 2003 2002(1) 2001(1)(2) 2000(1)
---- ---- ------ --------- ------
Operating Statement Data:
Net sales...................................... $2,285,680 $2,412,409 $1,993,843 $1,607,079 $1,196,529
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and occupancy
expenses................................... 1,642,065 1,721,052 1,455,601 1,134,554 854,774
Selling, general, and administrative expenses.. 554,884 603,502 486,204 382,398 281,637
Amortization of goodwill....................... 0 0 4,885 4,885 0
Expenses related to cost reduction plan........ 11,534(3) 0 0 0 0
Restructuring charge (credit).................. 0 (4,813)(4) 37,708(4) 0 (3,471)(5)
Non-recurring gain from demutualization of
insurance company.......................... 0 0 0 0 (6,700)(6)
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 2,208,483 2,319,741 1,984,398 1,521,837 1,126,240
---------- ---------- ---------- ---------- ----------
Income from operations......................... 77,197 92,668 9,445 85,242 70,289
Other income, principally interest............. 2,050 2,328 4,730 8,304 9,594(7)
Interest expense............................... (15,609) (20,292) (18,701) (8,894) (7,308)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, minority
interest, and cumulative effect of
accounting changes......................... 63,638 74,704 (4,526) 84,652 72,575
Income tax provision (benefit)................. 23,141 29,055 (120) 33,014 27,516(7)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of accounting changes.... 40,497 45,649 (4,406) 51,638 45,059
Minority interest in net loss of consolidated
subsidiary................................. 142 679 0 0 0
Cumulative effect of accounting changes,
net of tax................................. 0 c (49,098)(8) 0 (540)(9) 0
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 40,639 $ (2,770) $ (4,406) $ 51,098 $ 45,059
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of accounting
changes............................... $ .36 $ .41 $(.04) $ .51 $ .46
Net income (loss).......................... .36 (.02) (.04) .50 .46
Basic weighted average common shares
outstanding............................... 112,491 113,810 105,842 101,119 98,609
Net income (loss) per share, assuming dilution:
Before cumulative effect of accounting
changes............................... $ .35 $ .39 $(.04) $ .49 $ .43
Net income (loss).......................... .35 .01 (.04) .48 .43
Diluted weighted average common shares and
equivalents outstanding.................... 128,558 130,937 105,842 115,027 115,888
Balance Sheet Data(10):
Total assets................................... $1,164,879 $1,131,886 $1,137,147 $846,772 $779,612
Current portion - long-term debt............... 17,278 12,595 9,379 4,954 1,920
Long-term debt................................. 202,819 203,045 208,491 113,540 105,213
Working capital................................ 271,915 193,517 141,839 208,389 161,376
Stockholders' equity........................... 605,085 561,634 549,802 493,269 436,263
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
Year Ended
----------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
2004 2003 2002(1) 2001(1)(2) 2000(1)
---- ---- ------ --------- -------
Performance Data:
Including cumulative effect of accounting changes:
Net return on average stockholders' equity.. 7.0% (0.5)% (0.8)% 11.0% 11.0%
Net return on average total assets.......... 3.6 (0.2) (0.4) 6.3 6.2
Before cumulative effect of accounting changes:
Net return on average stockholders' equity.. 6.4% 7.9% (0.8)% 11.1% 11.0%
Net return on average total assets.......... 3.4 3.9 (0.4) 6.4 6.2
- --------------------
(1) Includes the results of operations of Lane Bryant, Inc., acquired August
16, 2001; 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 March 2003, we announced a cost reduction plan designed to take
advantage of the centralization of corporate administrative services and to
realize certain efficiencies, in order to improve profitability. For
details of the program, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations; Results of Operations;
Comparison of Fiscal 2004 to Fiscal 2003; Expenses Related to Cost
Reduction Plan" and "Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements; Note 14. Expenses Related to
Cost Reduction Plan" below.
(4) In January 2002, our Board of Directors approved a restructuring plan that
included the closing of THE ANSWER/ADDED DIMENSIONS chain of 77 stores; the
conversion of approximately 20% of the ADDED DIMENSIONS stores to
CATHERINES stores; the closing of 130 under-performing FASHION BUG stores;
and the conversion of 44 FASHION BUG stores to LANE BRYANT stores. This
restructuring plan 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.
(5) 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. 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 connection with the consolidation of the
MODERN WOMAN chain of stores into the CATHERINES brand.
(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.
13
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 CATHERINES 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, we
recognized a charge of $5,123,000, net of income taxes of $2,758,000, 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." This charge 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:
Year Ended
-----------------------------
Feb. 2, Feb. 3, Jan. 29,
(In thousands, except per share amounts) 2002 2001 2000
---- ---- ----
Pro forma net income (loss)........................ $(5,189) $51,309 $44,600
Basic net income (loss) per share.................. (.05) .51 .45
Net income (loss) per share, assuming dilution..... (.05) .48 .43
(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.
(10) Certain prior-year amounts reflect reclassifications to conform to the
current-year presentation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used in
this report, the terms "Fiscal 2004," "Fiscal 2003," and "Fiscal 2002" refer to
our fiscal years ended January 31, 2004, February 1, 2003, and February 2, 2002,
respectively. The term "Fiscal 2005" refers to our fiscal year which will end on
January 29, 2005.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, cost reductions, capital expenditures, liquidity, financing needs or
plans, and plans for future operations, 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.
14
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the future.
o A slowdown in the United States economy and an uncertain economic outlook
could lead to reduced consumer demand for our apparel and accessories 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-size women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-size 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 generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability, imposition of, or changes
in, duties or quotas, increased security requirements applicable to
imports, delays in shipping, increased costs of transportation, and issues
relating to compliance with domestic or international labor standards.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods, or
in the availability of working capital during the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have a negative impact on
our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
15
o We may be unable to hire and retain a sufficient number of 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 implement our plan to re-establish growth
and improve merchandise assortments in our LANE BRYANT brand.
o The carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse change in
interest rates or other factors could have a significant impact on the
results of the valuation tests, resulting in a write-down of the carrying
value or acceleration of amortization of acquired intangible assets.
OVERVIEW
We are a specialty apparel retailer primarily focused on serving the
plus-size woman through three distinct brands: LANE BRYANT, FASHION BUG, and
CATHERINES PLUS SIZES. We currently represent 40% of the women's plus-size
specialty retail apparel market, and are the third largest specialty apparel
retailer in the United States based on store count. Through our varied plus-size
fashion concepts, we cater to customers from a broad range of socioeconomic,
demographic, and cultural profiles. As of January 31, 2004, we operated 2,227
stores in 48 states.
The apparel industry is highly competitive and is continuously faced with
new and existing competitors seeking areas of growth to expand their business.
Our strategy of focusing on the growing plus-size market through our three
brands has allowed us to gain increased market share in the women's plus-size
apparel market. Americans continue to gain weight in all age groups, with an
estimated 65% of American adults being overweight and half of American women
wearing size 14 or larger. Through our three brands, we offer plus-size women's
apparel to all age groups, with varied fashion tastes and income levels, in
multiple shopping venues. By focusing on the plus-size market, we believe that
we are well-positioned to meet the demands of this growing segment. Our plans
are to increase our store base at our LANE BRYANT and CATHERINES brands through
expansion into under-penetrated markets, focusing primarily on strip and
lifestyle center formats. An important challenge for us will be to maintain and
increase our market share through growth in our store base as well as to extend
into other direct-to-consumer channels to reach our customers. We are further
challenged by competitors that enter into the plus-size market and offer similar
apparel at lower prices. We believe that our fit initiative will differentiate
us from our competitors. The goal of this initiative is to be the fit
specialists for plus-size women by offering products with improved fit.
Our sales performance over the last three years has been negatively
affected by the general slowdown in the U. S. economy, reduced levels of
consumer confidence, and the unstable geopolitical climate. In addition, sales
performance at our LANE BRYANT brand during the second half of Fiscal 2003 and
the first half of Fiscal 2004 was negatively affected by a combination of poor
customer acceptance of, and fit and quality issues with, certain of its
products, and under-stocking of certain basic products. As a result, we had to
maintain higher levels of promotional pricing during those periods. We
implemented a plan in Fiscal 2003 to improve merchandise
16
assortments at LANE BRYANT, which began to show a positive impact in Fiscal
2004, with a 1.0% increase in comparable store sales in the fourth quarter,
following six quarters of negative comparable store sales performance. In
addition, we experienced increased unit sales and improved sales performance at
Lane Bryant during the latter half of Fiscal 2004. Our challenge will be to
continue improvements at LANE BRYANT in Fiscal 2005.
We also expect the deflationary pricing environment to continue to impact
the apparel industry. In addition, the anticipated elimination of quota on
imports in 2005 may create further downward pressure on retail prices.
In addition to our continued focus on controlling expenses, two other areas
of focus for us in Fiscal 2005 are maintaining control over inventories while
improving gross margins at our three brands.
We estimate that our cost reduction initiative, which began in 2003, will
save us a total of approximately $45 million of expenses on an annualized basis.
The success of this initiative enabled us to reduce operating expenses by over
$30 million in Fiscal 2004. The expense savings from our cost reduction
initiative coupled with other cost control related savings enabled us to offset
declines in sales that we experienced in Fiscal 2004. We expect to achieve the
remaining $15 million of cost savings in Fiscal 2005. Of the remaining $15
million, approximately $8 million of the savings are anticipated from
efficiencies we expect to gain from the consolidation of our CATHERINES and LANE
BRYANT distribution centers into our new White Marsh distribution center, which
we completed in February 2004.
We offer e-commerce at our CATHERINES and LANE BRYANT websites and plan to
offer e-commerce at our FASHION BUG website during Fiscal 2005. Our Fiscal 2005
plan is to double our Fiscal 2004 e-commerce sales volume through continuing to
broaden category offerings at our websites. Our e-commerce sales in Fiscal 2004
and our planned e-commerce sales in Fiscal 2005 are less than one percent of our
consolidated net sales. Our websites currently offer basic merchandise, and we
see opportunities to offer and provide expanded product offerings on our
websites, such as intimate apparel and hard-to-find sizes. This provides us
opportunities to offer more merchandise categories than we are able to provide
in our 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 our financial statements and
accompanying notes. These estimates and assumptions are based on historical
experience, analysis of current trends, and various other factors that we
believe to be reasonable under the circumstances. Actual results could differ
from those estimates under different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and
estimates and make adjustments when facts and circumstances warrant.
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 and related
assumptions 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. Revenues from our e-commerce business include shipping and
handling fees billed to customers. We record a reserve for estimated future
sales returns based on an analysis of actual returns and we defer recognition of
layaway sales to
17
the date of delivery. A change in our actual rates of sales returns and layaway
sales experience would affect the level of revenue recognized.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in cost
of goods sold as incurred.
During Fiscal 2004, we introduced a new FASHION BUG customer loyalty card
program that we operate under our FASHION BUG proprietary credit card program.
This program provides customers with the option to cancel their membership
within 90 days, entitling them to a full refund of their annual fee.
Additionally, after 90 days, customers that cancel their membership are entitled
to a pro rata fee refund based on the number of months remaining on the annual
membership. Accordingly, we recognize 25% of the annual membership fee as
revenue after 90 days, with the remaining fee recognized on a pro rata basis
over nine months.
Under a previous FASHION BUG customer loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. We discontinued
the issuance of new cards under this program in December 2002, and we terminated
the program during the second quarter of Fiscal 2004.
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 is 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 the resulting gross margins. Events such as store
closings, liquidations, and a weak general economic environment for retail
apparel sales could result in an increase in the level of markdowns. Such an
increase in the level of markdowns could result in lower inventory values and
increases to cost of goods sold as a percentage of net sales in future periods
under the RIM. Also, 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 2004 and Fiscal 2003, in addition to markdowns
that had been recorded in inventory, an additional $10.1 million and $9.6
million, respectively, of markdowns representing markdowns not yet taken on aged
inventory was recorded in order to properly reflect inventory at the lower of
cost or market.
In connection with our restructuring plan announced on January 28, 2002
(see "RESULTS OF OPERATIONS; Comparison of Fiscal 2003 to Fiscal 2002;
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 THE ANSWER/ADDED DIMENSIONS stores that we closed
during the first half of Fiscal 2003.
18
We elected to adopt the provisions of Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") Issue No. 02-16 (see "Accounting
for Cash Consideration Received From a Vendor" below) as of the beginning of
Fiscal 2003. As of January 31, 2004 and February 1, 2003, $9.5 million and $8.1
million, respectively, of cash received from vendors was deferred into inventory
to 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 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 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.
In accordance with the provisions of SFAS No. 144, we recorded a $2.7
million write-down of under-performing assets related to our consolidated
MONSOON joint venture during Fiscal 2003. The write-down is included in
occupancy expenses in our consolidated statement of operations. The amount of
the write-down was the same as what we would have 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;
Comparison of Fiscal 2003 to Fiscal 2002; 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
were 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 CATHERINES acquisition (which included the value of
intangible assets we did not separately account for at the date of the
CATHERINES acquisition) exceeded the estimated fair value of the goodwill under
SFAS No. 142. We determined the estimated fair value of the CATHERINES goodwill
using the present value of expected future cash flows associated with the
CATHERINES assets. We recorded a write-down, which was 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 was attributable to the
value of unrecorded trademarks. We also evaluated our goodwill, trademarks,
tradenames, and internet domain names related to our LANE BRYANT acquisition
19
as of February 3, 2002 in accordance with the provisions of SFAS No. 142, and
determined that there was no impairment of those assets. We have included the
write-down of the CATHERINES goodwill 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. Our 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. We believe that
the estimates and assumptions we used were reasonable and appropriate.
In accordance with the provisions of SFAS No. 142, we re-evaluate goodwill
and other intangible assets for impairment at least annually or more frequently
if there is an indication of possible impairment. We performed this annual
review during the fourth quarters of Fiscal 2003 and Fiscal 2004, and determined
that there has been no additional impairment of these assets.
Acquisitions - Purchase Price Allocation
We account for acquisitions in accordance with the provisions of SFAS No.
141, "Business Combinations." 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, if any, 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 amount 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.
Asset Securitization
Asset securitization is a practice commonly used in the retail industry
that allows companies with proprietary credit card programs to finance credit
card receivables at attractive rates. Asset securitization primarily involves
the sale of proprietary credit card receivables to a special purpose entity,
which in turn transfers the receivables to a trust (the "Trust") that is a
qualified special purpose entity ("QSPE") and is administered by an independent
trustee. We use asset securitization 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. Because
the Trust qualifies as a QSPE, its assets and liabilities are not consolidated
in our balance sheet.
Investors purchase various forms of certificates or credit card receivable
interests (the "Certificates") issued by the Trust that represent undivided
interests in the Trust's underlying assets. The Trust pays to the Certificate
holders a portion of future scheduled cash flows from the credit card
receivables under preset terms and conditions. Payments to Certificate holders
are dependent upon actual cash flows generated by the underlying Trust assets.
We retain certain subordinated interests in each securitization transaction
that effectively serve as a form of credit enhancement to the Certificates sold
to outside investors. To the extent that cash flows to the Trust from the credit
card receivables remain available after repayment of the outside investors'
interests, such 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.
20
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 we expect to receive over the period
the receivables are outstanding. These cash flows essentially represent finance
charges and late fees in excess of amounts paid to Certificate holders, credit
losses, and service fees, and are referred to as the interest-only strip ("I/O
strip"). In addition to the I/O strip, we recognize a servicing liability, since
the servicing fees we expect to receive from the securitizations do not provide
adequate compensation for servicing the receivables. The servicing liability
represents the present value of the excess of the costs of servicing over the
servicing fees we expect to receive, and is recorded at estimated fair value.
Since quoted market prices are generally not available, we determine the fair
value of the costs of servicing by calculating all costs associated with
billing, collecting, maintaining, and providing customer service during the
expected life of the securitized credit card receivable balances. We discount
the costs in excess of the servicing fees we expect to collect over the
estimated life of the receivables sold. The discount rate and estimated life
assumptions used in valuing the servicing liability are equivalent to those used
in valuing the I/O strip. We amortize the I/O strip and the servicing liability
on a straight-line basis over the expected life of the credit card receivables.
We use certain key valuation assumptions related to the average life of the
receivables sold, the finance charges net of interest to be earned by
certificate holders, and anticipated credit losses, as well as the appropriate
market discount rate in determining the estimated value of the I/O strip and the
servicing liability. We estimate the values for these assumptions using
historical data, the impact of the current economic environment on the
performance of the receivables sold, and the impact of the potential volatility
of the current market for similar instruments in assessing the fair value of the
retained interests. Changes in the average life of the receivables sold,
discount rate, and credit-loss percentage could cause actual results to differ
materially from the estimates, and changes in circumstances could result in
significant future changes to the assumptions currently being used. The
following table presents the decrease in our I/O strip receivable that would
result from hypothetical adverse changes of 10% and 20% in the assumptions used
to determine the fair value of the I/O strip:
(In millions) 10% Change 20% Change
---------- ----------
Payment rate............................ $0.7 $1.3
Residual cash flows discount rate....... 0.1 0.2
Credit loss percentage.................. 1.1 2.3
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
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, we are required to recognize liabilities for
costs associated with an exit or disposal activity initiated after December 31,
2002 when the liabilities are incurred. Commitment to a plan, by itself, does
not create an obligation that meets the definition of a liability. Under SFAS
No. 146, we are 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 is
recognized as employees render service over the future service period, even if
the benefit formula used to calculate an employee's termination benefit is based
on length of service. Fair value should be used for initial measurement of
liabilities under SFAS No. 146. Adoption of SFAS No. 146 results in the deferral
of recognition of certain costs for restructuring plans
21
initiated subsequent to December 31, 2002, from the date of commitment 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 RESULTS OF OPERATIONS; Comparison of Fiscal 2004 to Fiscal 2003; Expenses
Related to Cost Reduction Plan" below). Costs incurred in connection with the
implementation of this plan are being 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. We
adopted 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, for 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 January 31, 2004 and February 1, 2003, $9.5 million and $8.1
million, respectively, 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 that 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 on a straight-line
basis 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. For purposes of determining our pro forma disclosures
of the effect of adopting the fair value method, we use the Black-Scholes
option-pricing model and various assumptions that 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 use of different option-pricing models and different estimates
or assumptions could result in materially different estimates of compensation
expense under the fair value method.
22
Insurance Liabilities
We use a combination of third-party insurance and/or self-insurance for
certain risks, including workers' compensation, medical, dental, automobile, and
general liability claims. Our insurance liabilities are a component of "Accrued
expenses" on our consolidated balance sheet, and represent our estimate of the
ultimate cost of uninsured claims incurred as of the balance sheet date. In
estimating our self-insurance liabilities, we use independent actuarial
estimates of expected losses, which are based on statistical analyses of
historical data. Loss estimates are adjusted based upon actual claim settlements
and reported claims. Although we do not expect the amounts ultimately paid to
differ significantly from our estimates, self-insurance liabilities could be
affected if future claim experience differs significantly from the historical
trends and the actuarial assumptions. We evaluate the adequacy of these
liabilities on a regular basis, modifying our assumptions as necessary, updating
our records of historical experience, and adjusting our liabilities as
appropriate.
RESULTS OF OPERATIONS
Financial Summary
The following table shows our results of operations 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
2004 2003 2002 2004-2003 2003-2002
---- ---- ---- --------- ---------
Net sales...................................... 100.0% 100.0% 100.0% (5.3)% 21.0%
Cost of goods sold, buying, and occupancy...... 71.8 71.3 73.0 (4.6) 18.2
Selling, general, and administrative........... 24.3 25.0 24.4 (8.1) 24.1
Expenses related to cost reduction plan........ 0.5 -- -- -- --
Restructuring charge (credit).................. -- (0.2) 1.9 ** **
Amortization of goodwill....................... -- -- 0.2 -- (100.0)
Income from operations......................... 3.4 3.8 0.5 (16.7) 881.1
Other income, principally interest............. 0.1 0.1 0.2 (11.9) (50.8)
Interest expense............................... 0.7 0.8 0.9 (23.1) 8.5
Income tax provision (benefit)................. 1.0 1.2 -- (20.4) **
Minority interest in net loss of subsidiary.... 0.0 0.0 -- (79.1) **
Cumulative effect of accounting changes........ -- (2.0) -- ** **
Net income (loss).............................. 1.8 (0.1) (0.2) ** (37.1)
- --------------------
** Not meaningful
Results may not add due to rounding
23
The following table shows our net sales by store brand:
Year Ended Year Ended Year Ended
January 31, 2004 February 1, 2003 February 2, 2002
---------------- ---------------- ----------------
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(In millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
FASHION BUG........................... $1,057.1 $259.2 $1,156.0 $288.9 $1,164.0 $303.4
LANE BRYANT........................... 903.6 251.0 906.9 236.1 445.3(1) 254.1
CATHERINES(2)......................... 323.3 75.5 345.2 74.6 381.7 88.0
MONSOON/ACCESSORIZE(3)................ 1.7 0.0 4.3 1.5 2.8 1.6
-------- ------ -------- ------ -------- ------
Total net sales....................... $2,285.7 $585.7 $2,412.4 $601.1 $1,993.8 $647.1
======== ====== ======== ====== ======== ======
- --------------------
(1) Sales from the date of acquisition on August 16, 2001.
(2) Includes sales of ADDED DIMENSIONS stores, which were closed or converted
to CATHERINES stores during the first half of Fiscal 2003.
(3) The MONSOON/ACCESSORIZE stores were closed during the first half of Fiscal
2004.
The following table shows additional information related to changes in our
net sales:
Year Ended Year Ended
January 31, 2004 February 1, 2003
---------------- ----------------
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
(Decrease) increase in comparable store sales(1):
Consolidated Company...................................... (2)% (1)% (2)% (5)%
FASHION BUG............................................... 0 (4) 0 1
CATHERINES(2)............................................. (1) 0 0 0
LANE BRYANT(3)............................................ (6) 1 (6) (12)
Sales from new stores as a percentage of total consolidated
prior-period sales:
FASHION BUG............................................... 1 1 2 1
CATHERINES(2)............................................. 1 1 2 1
LANE BRYANT............................................... 3 2 25 2
Prior-period sales from closed stores as a percentage of
total consolidated prior-period sales:
FASHION BUG............................................... (4) (3) (3) (4)
CATHERINES(2)............................................. (2) 0 (4) (3)
LANE BRYANT............................................... (1) (1) (0) (1)
Increase (decrease) in total sales............................. (5)% (3)% 21% (7)%
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
(2) Includes sales of ADDED DIMENSIONS stores, which were closed or converted
to CATHERINES stores during the first half of Fiscal 2003.
(3) Comparable store sales for LANE BRYANT for fiscal year ended February 1,
2003 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.
24
The following table sets forth information with respect to store activity
for Fiscal 2004 and planned store activity for Fiscal 2005:
FASHION LANE MONSOON/
BUG BRYANT CATHERINES ACCESSORIZE Total
Fiscal 2004:
Stores at February 1, 2003 ... 1,083 689 467 9 2,248
------ ------ ------ ------ ------
Stores opened ................ 2 34 10 0 46
Stores converted(1) .......... (2) 8 (2) 0 4
Stores closed ................ (32) (21) (9) (9) (71)
------ ------ ------ ------ ------
Net changes in stores ........ (32) 21 (1) (9) (21)
------ ------ ------ ------ ------
Stores at January 31, 2004 ... 1,051 710 466 0 2,227
====== ====== ====== ====== ======
Stores relocated during period 19 21 16 -- 56
Stores remodeled during period 3 10 1 -- 14
Fiscal 2005:
Planned store openings ....... 5 35 15 -- 55
Planned store relocations .... 20 20 15 -- 55
Planned store closings ....... 25 10 15 -- 50
- --------------------
(1) Four FASHION BUG stores that were converted to LANE BRYANT stores during
Fiscal 2004 were closed during Fiscal 2003.
Comparison of Fiscal 2004 to Fiscal 2003
Net Sales
The decrease in net sales from Fiscal 2003 to Fiscal 2004 resulted
primarily from a decrease in the number of operating stores at our FASHION BUG
brand and the closing of our THE ANSWER/ADDED DIMENSIONS stores following our
Fiscal 2003 store restructuring initiative, and negative comparable store sales
results at our LANE BRYANT brand. We operated 2,227 retail stores at the end of
Fiscal 2004, as compared to 2,248 stores at the end of Fiscal 2003.
FASHION BUG stores experienced mixed results in comparable store sales
during Fiscal 2004, with flat comparable store sales for the year. The average
number of transactions and average number of units sold per customer ("UPC")
increased 1% and 3%, respectively, in our FASHION BUG stores, while the average
dollar sale and average retail value per unit sold decreased 1% and 3%,
respectively. FASHION BUG stores experienced increases in sales of plus
sportswear, accessories, intimate apparel, and footwear, which were partially
offset by decreases in sales of junior sportswear and dresses.
CATHERINES stores also experienced mixed results in comparable store sales
during Fiscal 2004, with a 1% decrease in comparable store sales for the year.
The average dollar sale and average UPC each increased 3% in our CATHERINES
stores, while the average number of transactions and average retail value per
unit sold decreased 2% and 1%, respectively. Increased sales of denim, which
performed strongly as a result of the brand's fit initiative, and intimate
apparel were offset by decreases in sales of dresses, career sportswear, suits,
sweaters, and hosiery.
25
Although LANE BRYANT stores experienced quarter-over-quarter improvements
in comparable store sales during Fiscal 2004, they experienced an overall
decrease of 6% in comparable store sales for the year. Although the average UPC
increased 11% for LANE BRYANT stores, the average dollar sale and average retail
value per unit sold decreased 4% and 14% respectively, reflecting the brand's
higher level of promotional pricing. The average number of transactions at LANE
BRYANT stores decreased 3%. For LANE BRYANT, decreases in sales of sweaters,
casual woven tops, and denim separates were partially offset by increases in
sales of knit and active separates, intimate apparel, and casual woven
separates. The LANE BRYANT brand experienced poor customer acceptance of, and
fit and quality issues with, certain of its products during the second half of
Fiscal 2003 and the first half of Fiscal 2004, resulting in higher levels of
promotional pricing. In addition, certain basic products were under-stocked
during the second half of Fiscal 2003, resulting in missed sales opportunities.
Improved merchandise assortments resulted in increased unit sales and improved
sales performance for the LANE BRYANT brand during the second half of Fiscal
2004.
Cost of Goods Sold, Buying, and Occupancy
The decrease in cost of goods sold, buying, and occupancy expenses from
Fiscal 2003 to Fiscal 2004 principally reflects the decrease in net sales. Cost
of goods sold as a percentage of net sales was unchanged from Fiscal 2003 to
Fiscal 2004. Improvements in merchandise margins in our FASHION BUG brand were
offset by lower merchandise margins in our LANE BRYANT and CATHERINES brands.
Higher levels of promotional activity and poor customer acceptance of certain
LANE BRYANT products, as discussed above, also negatively affected merchandise
margins in both years. Cost of goods sold for Fiscal 2003 included $5.1 million
of costs related to the valuation of LANE BRYANT inventories. The $5.1 million
related to markdowns for inventory on hand as a result of the poor customer
acceptance of, and fit and quality issues with, certain of LANE BRYANT's
products, which resulted in higher levels of promotional pricing to liquidate
the product. Cost of goods sold includes merchandise costs net of discounts and
allowances, freight, inventory shrinkage, and shipping and handling costs
associated with our e-commerce business. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 0.5%
in Fiscal 2004 as compared to Fiscal 2003. 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, particularly in our LANE BRYANT brand. Occupancy expenses for
Fiscal 2003 included a $2.7 million write-down of under-performing assets
related to our MONSOON/ACCESSORIZE stores. 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
The decrease in selling, general, and administrative expenses from Fiscal
2003 to Fiscal 2004 was primarily a result of reductions in store payroll and
the realization of cost reduction initiatives, including improved management of
controllable expenses (see "Expenses Related to Cost Reduction Plan" below).
Selling expenses decreased 0.2% as a percentage of net sales. General and
administrative expenses decreased 0.5% as a percentage of net sales. General and
administrative expenses for Fiscal 2003 were negatively affected by costs
associated with transitional service agreements related to the LANE BRYANT
acquisition. We completed the integration of LANE BRYANT's information systems
during Fiscal 2003.
26
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. See "Item 8. Financial Statements and Supplementary Data; Notes
to Consolidated Financial Statements; NOTE 14. EXPENSES RELATED TO COST
REDUCTION PLAN" below for details of this program. The cost reduction plan was
substantially completed during Fiscal 2004. We did not experience a material
after-tax cash impact from execution of this plan. e expect this cost reduction
plan to improve annualized pre-tax earnings by a total of approximately $45
million. During Fiscal 2004, we realized cost reductions of more than $30
million as a result of this plan. We expect to realize the remaining benefits of
the cost reduction plan by the end of Fiscal 2005.
Expenses incurred in connection with the plan, payments/settlements of
those expenses for Fiscal 2004, and the remaining accrual at January 31, 2004,
were as follows:
Year Ended Accrued at
January 31, Payments/ January 31,
(In millions) 2004 Settlements 2004
---- ----------- ----
Workforce reduction costs............ $ 3.0 $(3.0) $0.0
Lease termination and related costs.. 3.7 (1.1) 2.6
Accelerated depreciation costs
(non-cash charge)............... 4.2 (4.2) 0.0
Other facility closure costs......... 0.6 (0.6) 0.0
----- ----- ----
Total................................ $11.5 $(8.9) $2.6
===== ===== ====
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the first
quarter of Fiscal 2004. During Fiscal 2004, we terminated 349 employees in
connection with workforce reductions at our corporate and divisional home
offices and the closing of our Memphis, Tennessee distribution center, our
Hollywood, Florida credit operations, and our remaining MONSOON stores. We
accrued the severance benefit in accordance with SFAS No. 146 and recognized
retention bonuses ratably over the employees' remaining service period. Lease
termination and related costs mainly represent the estimated fair value of the
remaining lease obligations at the Hollywood, Florida facility, reduced by
estimated sublease income. In accordance with SFAS No. 146, we recognized the
present value of the remaining lease obligation less estimated sublease income
related to the Hollywood, Florida facility in June 2003 when we closed the
facility. Accelerated depreciation costs represent the acceleration of
depreciation of the net book value of the assets at our Memphis distribution
center and our Hollywood credit operations, which were closed in June 2003, to
their estimated net realizable values.
During the first quarter of Fiscal 2004, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset to its estimated net realizable value as of its then-expected
cease-use date of June 2003. During the third quarter of Fiscal 2004, we began
to evaluate alternative uses for the facility, and began to depreciate the
then-current carrying amount of the asset over its estimated useful life.
Other Income/Interest Expense
The decrease in other income from Fiscal 2003 to Fiscal 2004 resulted from
a $0.8 million decrease in interest income. Interest income decreased as a
result of a decrease in the average yield on investments during Fiscal 2004 as
compared to Fiscal 2003. The decrease in interest expense from Fiscal 2003 to
Fiscal 2004 resulted primarily from lower interest rates on borrowings during
Fiscal 2004 as compared to Fiscal 2003. Interest expense for Fiscal 2003 also
included a write-off of $1.0 million of unamortized deferred financing costs
related to a $67.5
27
million term loan that was repaid during Fiscal 2003. During Fiscal 2003, we
replaced a $67.5 million 11.5% term loan and $96.0 million of 7.5% Convertible
Subordinated Notes with $150.0 million of 4.75% Senior Convertible Notes (see
"Financing" below).
Income Tax Provision
The effective income tax rate was 36.4% in Fiscal 2004 as compared to 38.9%
in Fiscal 2003. The lower effective tax rate in Fiscal 2004 was due primarily to
changes in previously estimated full-year amounts, including our tax liability
related to insurance programs.
Comparison of Fiscal 2003 to Fiscal 2002
Net Sales
The increase in net sales from Fiscal 2002 to Fiscal 2003 was primarily a
result of our acquisition of LANE BRYANT in August 2001. We operated 2,248
stores at the end of Fiscal 2003, as compared to 2,446 stores at the end of
Fiscal 2002. 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.
In Fiscal 2003, LANE BRYANT stores experienced comparable store sales
decreases in sweaters, denim, and intimate apparel. In particular, the LANE
BRYANT brand 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 at
LANE BRYANT were under-stocked, resulting in missed sales opportunities. Due to
product lead times, these issues negatively affected LANE BRYANT results into
the first half of Fiscal 2004 (see "Comparison of Fiscal 2004 to Fiscal 2003;
Net Sales" above). 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 CATHERINES
stores, comparable store sales increases in casual sportswear were offset by
declines in other merchandise categories. During Fiscal 2003, we discontinued
the ADDED DIMENSIONS brand, closed the remaining ADDED DIMENSIONS stores, and
liquidated the remaining ADDED DIMENSIONS store inventory.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses increased from Fiscal
2002 to Fiscal 2003, primarily as a result of the increase in net sales, but
decreased as a percentage of net sales. 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 CATHERINES brands and benefits from our restructuring plan (see
"Restructuring Charge/Credit" below), partially offset by declining margins in
the LANE BRYANT brand. 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 for Fiscal 2003 included
$5.1 million of costs related to the valuation of LANE BRYANT inventories. The
$5.1 million related to markdowns for inventory on hand as a result of the poor
customer acceptance of, and fit and quality issues with, certain of LANE
BRYANT's products, which resulted in higher levels of promo