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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 29, 2005
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) Identification No.)
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
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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 July 31, 2004 (the last day of the
registrant's most recently completed second fiscal quarter), based on the
closing price on July 30, 2004, was approximately $857,971,000.
As of March 24, 2005, 119,815,703 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 2005
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.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1 Business
General.......................................................... 1
Stores........................................................... 1
Merchandising and Buying......................................... 3
Marketing and Promotions......................................... 4
Proprietary Credit Card Program.................................. 5
Sourcing......................................................... 5
Distribution and Logistics....................................... 6
Competition...................................................... 6
Employees........................................................ 6
Trademarks and Servicemarks...................................... 7
Executive Offices................................................ 7
Available Information............................................ 7
Item 2 Properties....................................................... 7
Item 3 Legal Proceedings................................................ 8
Item 4 Submission of Matters to a Vote of Security Holders.............. 9
Additional Part I Information - Our Executive Officers..................... 9
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities.......... 10
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
Restatement of Financial Statements.............................. 16
Overview......................................................... 17
Critical Accounting Policies..................................... 18
Results of Operations............................................ 25
Financial Condition.............................................. 33
Market Risk...................................................... 40
Impact of Recent Accounting Pronouncements....................... 41
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 41
Item 8 Financial Statements and Supplementary Data...................... 42
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 89
Item 9A Controls and Procedures.......................................... 89
Item 9B Other Information................................................ 89
PART III
Item 10 Directors and Executive Officers of the Registrant............... 90
Item 11 Executive Compensation........................................... 90
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 90
Item 13 Certain Relationships and Related Transactions................... 91
Item 14 Principal Accountant Fees and Services........................... 91
PART IV
Item 15 Exhibits and Financial Statement Schedules....................... 92
SIGNATURES................................................................. 102
EXHIBIT INDEX.............................................................. 103
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 29, 2005
("Fiscal 2005"), 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 groups. As of January 29, 2005, we
operated 2,221 stores in 48 states. Each of our brands is designed to attract a
distinct customer.
LANE BRYANT is a widely recognized name in plus-size fashion. Through
private labels, such as VENEZIA(R), CACIQUE(R), and LANE BRYANT(R), we offer
fashionable and sophisticated apparel in plus-sizes 14 - 28, including intimate
apparel, wear-to-work, and casual sportswear, as well as accessories. 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
operates 722 stores in 46 states that average approximately 5,900 square feet.
In March 2003, we began E-commerce operations on our lanebryant.com website.
FASHION BUG stores specialize in selling a wide variety of plus-size,
misses and junior apparel, accessories, intimate apparel, and footwear. FASHION
BUG customers generally range in age from 20 to 49 years old and shop in the
low-to-moderate price range. Our 1,028 FASHION BUG stores are located in 45
states, primarily in strip shopping centers, and average approximately 8,900
square feet. In July 2004, we began E-commerce operations on our fashionbug.com
website.
CATHERINES PLUS SIZES 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 471 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.com website.
Stores
Our 2,221 stores (as of January 29, 2005) are primarily located in suburban
areas and small towns. Approximately 70% of these stores are located in strip
shopping centers, with the remainder 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 and lifestyle centers, and has demonstrated
success in such locations. Approximately 25% of our LANE BRYANT stores are
currently located in strip and lifestyle shopping centers.
1
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 and lifestyle center locations. Availability of strip and
lifestyle center retail space continues to significantly outpace mall expansion.
In addition, we benefit in strip and lifestyle 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. 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 locations that meet our financial and
operational objectives. We plan to open approximately 70-80 stores and close
approximately 50 stores during Fiscal 2006. Planned store openings by brand are
approximately 50-60 LANE BRYANT stores, 5 CATHERINES stores, and 15 FASHION BUG
stores. Planned store closings by brand are approximately 15 LANE BRYANT stores,
15 CATHERINES stores, and 20 FASHION BUG stores. Additionally, we currently plan
to relocate approximately 40 LANE BRYANT stores, 15 CATHERINES stores, and 25
FASHION BUG stores during Fiscal 2006.
Our store openings, closings, and number of locations over the past five
fiscal years are as follows:
Year Ended
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Jan. 29, Jan. 31, Feb. 1, Feb. 2, Feb. 3,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Store Activity:
Number of stores open at beginning of period 2,227 2,248 2,446 1,755 1,740
Opened during period ....................... 51 50 57 125 106
Acquired during period ..................... 0 0 0 651 0
Closed during period ....................... (57) (71) (255)(1) (85) (91)(2)
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Number of stores open at end of period ..... 2,221 2,227 2,248 2,446 1,755
====== ====== ====== ====== ======
Number of Stores by Brand:
FASHION BUG ................................ 1,028 1,051 1,083 1,252 1,230
LANE BRYANT ................................ 722 710 689 647 0
CATHERINES ................................. 471 466 467 461 414
Discontinued brands(3) ..................... 0 0 9 86 111
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Number of stores open at end of period ..... 2,221 2,227 2,248 2,446 1,755
====== ====== ====== ====== ======
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(1) Includes 124 FASHION BUG stores and 68 ADDED DIMENSIONS(R) stores that were
closed in connection with a restructuring plan announced on January 28,
2002.
(2) Includes 35 MODERN WOMANTM 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 THE ANSWER(R) and ADDED DIMENSIONS stores closed during 2003, and
MONSOON(R) and ACCESSORIZE(R) stores closed during 2004.
All stores are operated under our direct management. Each store has a
manager and an assistant manager or supervisor who is in daily operational
control of the location. We also 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
2
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 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, and assign 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.
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 styles. At FASHION BUG, we offer a broad
assortment of both casual and wear-to-work apparel, in plus, misses, and junior
sizes as well as girls and 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 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 our customers. CATHERINES
features casual and career sportswear, dresses, intimate apparel, suits, and
accessories in a variety of plus-sizes, including petites and extended sizes.
CATHERINES has developed a unique expertise in the 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 attributes, we use our
distribution capabilities to stock the stores with products specifically
targeted to such attributes. 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.
3
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
maintain current and fashionable inventory, we reduce the price of slow-moving
merchandise throughout the year. Much of our merchandise is developed for one or
more of our 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 2005, as a percent of
total sales, were 25.4%, 26.2%, 23.2%, and 25.2%, respectively.
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 27.5 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. We
began E-commerce operations on our CATHERINES website in March 2002, on our LANE
BRYANT website in March 2003, and on our FASHION BUG website in July 2004. Our
CATHERINES website averaged more than 300,000 unique visitors per month during
Fiscal 2005, our LANE BRYANT website enjoys more than 1.2 million unique
visitors per month and an established on-line community, and our FASHION BUG
website has averaged more than 500,000 unique visitors per month since we
commenced E-commerce operations.
In August 2003, we launched FIGURE(R) 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 topics such
as: beauty; health and fitness; home, food and entertaining; relationships; and
social and community issues. FIGURE 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 per-issue circulation of more than 400,000 copies.
We offer our customers various loyalty card programs. Customers who 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.
4
Proprietary Credit Card Program
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 28% of
FASHION BUG retail sales in Fiscal 2005, and has approximately 1.9 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 facility.
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 2005,
and has approximately 1.6 million active accounts. The CATHERINES credit card
program accounted for approximately 29% of CATHERINES retail sales during Fiscal
2005, and has approximately 537,000 active accounts. During Fiscal 2005, we used
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 account collection services. Under non-recourse
agreements with the third-party banks, we are reimbursed with respect to sales
generated by the credit cards. In January 2004, in accordance with the terms of
the Merchant Services Agreement pursuant to which the CATHERINES proprietary
credit cards were issued, we provided one year's notice to the third party bank
in order to exercise our option to terminate the agreement and to purchase the
portfolio. Spirit of America National Bank (our wholly-owned credit card bank)
purchased the CATHERINES credit card portfolio in March 2005 for approximately
$56.6 million (subject to adjustment). The purchase was funded through our
securitization facilities, including a portion of the proceeds from the sale of
Series 2004-1 certificates under that securitization facility.
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 2005, 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 2005, overseas sourcing accounted for approximately 21% of consolidated
merchandise purchases. Overseas sourcing as a percent of merchandise purchases
by brand, was approximately 26% for FASHION BUG, 19% for LANE BRYANT, and 11%
for CATHERINES. During Fiscal 2005, 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 15% of
our total consolidated merchandise purchases and approximately 42% of
merchandise purchases for LANE BRYANT during Fiscal 2005. No other vendor
accounted for more than 3% of total consolidated merchandise purchases during
Fiscal 2005.
5
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 events such as
political instability or a natural disaster result in a disruption of normal
activities in any single country with which we do business, we believe that we
would have adequate alternative sources of supply.
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 White Marsh distribution center during Fiscal 2003 to
replace a leased distribution center in Reynoldsburg, Ohio that serviced our
LANE BRYANT stores. We completed the relocation of the Reynoldsburg distribution
center to our White Marsh distribution center in February 2004 and terminated
the lease for the Reynoldsburg distribution center and a related logistics and
transportation services agreement in accordance with early cancellation
provisions of the lease and agreement. We also consolidated a 213,000 square
foot Memphis, Tennessee distribution center that serviced our CATHERINES stores
into the White Marsh facility during Fiscal 2004.
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 attributes 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.
Employees
As of the end of Fiscal 2005, we employed approximately 27,000 associates,
which included approximately 17,800 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 106 of
our employees are represented by unions. We believe that overall our
relationship with these unions, and our employees in general, is satisfactory.
6
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(R)", "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)",
"CACIQUE(R)", "ELEMENTAL STRETCH(R)", "MODERN WOMAN(TM)", and several other
trademarks and servicemarks of lesser importance to us have been registered or
are in the process of being registered with the United States Patent and
Trademark Office and in other countries.
We also own the following internet domain name registrations:
catherines.com, charming.com, charmingshoppes.com, fashionbug.com,
fashionbugcard.com, fashionbugplus.com, figuremagazine.com, lanebryant.com,
modernwoman.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 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 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 rents based on
a percentage of sales, and payment of real estate taxes and common area charges.
7
With respect to leased stores open as of January 29, 2005, 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
------ ---------------
2005 117(1)
2006 - 2010 726
2011 - 2015 401
2016 - 2020 369
2021 - 2025 486
2026 - 2030 93
Thereafter 29
- --------------------
(1) Includes 46 stores on month-to-month leases
We own a 1,000,000 square foot distribution center in Greencastle, Indiana
that services our FASHION BUG 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 a leased distribution center in Reynoldsburg, Ohio that serviced our
LANE BRYANT stores. We relocated the Reynoldsburg distribution center in
February 2004 and terminated the lease for the Reynoldsburg distribution center
and a related logistics and transportation services agreement in accordance with
early cancellation provisions of the lease and agreement. We also consolidated a
213,000 square foot Memphis, Tennessee distribution center that serviced our
CATHERINES stores into the White Marsh facility in June 2003. During the fourth
quarter of Fiscal 2005, we entered into an agreement to lease the Memphis,
Tennessee distribution center to a third party for a three-year period.
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 home office. We also lease 130,000 square
feet of office space near Reynoldsburg, Ohio that houses our LANE BRYANT home
office. In January 2005, we entered into an amendment to the lease on the
Reynoldsburg facility to extend the term of the lease from December 2005 to
February 2006. We also entered into an agreement with a separate third party
that provides for the leasing of a 135,000 square foot facility in Columbus,
Ohio, which will serve as a new LANE BRYANT home office. We expect to occupy the
Columbus facility by the first quarter of Fiscal 2007. 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 40,000 square feet of office and
warehouse space in Asia.
Item 3. Legal Proceedings
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, or of which any of their property is the subject.
There are no proceedings that are expected to have a material adverse effect on
our financial condition or results of operations.
8
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.
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, 54, 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, 57, 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. Homelife Corporation filed a bankruptcy petition under Chapter 11 of the
U. S. Bankruptcy Code during July 2001.
Michel Bourlon, 45, 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, 56, 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, 47, 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, 56, 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, 54, 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, 61, served as Executive Vice President - Sourcing from January
1996 to March 2004.
Jonathon Graub, 46, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
John J. Sullivan, 58, has served as Vice President - Corporate Controller
since October 1998.
9
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
Our common stock is traded on the over-the-counter market and quoted on the
NASDAQ National Market ("NASDAQ") under the symbol "CHRS," and is listed and
traded on the Chicago Board Options Exchange ("CBOE") and Pacific Stock Exchange
("PCX") 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 2005 Fiscal 2004
----------- -----------
High Low High Low
---- --- ---- ---
1st Quarter ........ $8.22 $5.70 $4.75 $2.70
2nd Quarter ........ 9.19 6.48 5.72 3.94
3rd Quarter ........ 7.73 6.23 6.80 4.89
4th Quarter ........ 9.64 7.55 6.85 5.09
The approximate number of holders of record of our common stock as of March
24, 2005 was 2,059. 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 prohibits 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).
10
Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
Total Maximum
Number Number of
of Shares Shares that
Total Purchased as May Yet be
Number Average Part of Publicly Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs(2) or Programs(2)
------ --------- --------- ----------- -----------
October 31, 2004 through
November 27, 2004............ - - -
November 28, 2004 through
January 1, 2005.............. - - -
January 2, 2005 through
January 29, 2005............. 635(1) $8.01(1) -
--- -----
Total............................ 635 $8.01 -
=== =====
- --------------------
(1) The shares of common stock we purchased during the four-week period ended
January 29, 2005 were shares withheld for the payment of payroll taxes on
employee stock awards that vested during the period.
(2) In Fiscal 1998, we publicly announced that our Board of Directors granted
authority to repurchase up to 10,000,000 shares of our common stock. In
Fiscal 2000, we publicly announced that our Board of Directors granted
authority to repurchase up to an additional 10,000,000 shares of our common
stock. In Fiscal 2003, the Board of Directors granted an additional
authorization to repurchase 6,350,662 shares of common stock issued to
Limited Brands in connection with our acquisition of LANE BRYANT. From
Fiscal 1998 through Fiscal 2003, we repurchased a total of 21,370,993
shares of common stock, which included shares purchased on the open market
as well as shares repurchased from Limited Brands. As of January 29, 2005,
4,979,669 shares of our common stock remain available for repurchase under
these programs. Our ability to exercise this authority is subject to
certain restrictions under the terms of our revolving credit facility. As
conditions may allow, and if any required consent is granted, we may from
time to time acquire additional shares of our common stock under these
programs. Such shares, if purchased, would be held as treasury shares. No
shares were acquired under these programs during the three months ended
January 29, 2005. The repurchase programs have no expiration date.
11
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of February 3, 2001 through January 29, 2005. Certain
amounts for fiscal years 2001 through 2004 have been restated (see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; RESTATEMENT OF FINANCIAL STATEMENTS" and "Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS" below). 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
------------------------------------------------------------------
(Dollars in thousands, Jan. 29, Jan. 31, Feb. 1, Feb. 2, Feb. 3,
except per share amounts) 2005 2004 2003 2002(1) 2001(1)(2)
---- ---- ---- ------- ----------
Operating Statement Data:
Net sales............................... $2,332,334 $2,285,680 $2,412,409 $1,993,843 $1,607,079
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and
occupancy expenses................. 1,640,248 1,642,816(3) 1,726,306 1,460,256 1,136,530
Selling, general, and
administrative expenses............ 577,301 558,248(3) 603,502 486,204 382,398
Amortization of goodwill................ 0 0 0 4,885 4,885
Expenses related to cost
reduction plan..................... 605(4) 11,534(4) 0 0 0
Restructuring charge (credit)........... 0 0 (4,813)(5) 37,708(5) 0
---------- ---------- ---------- ---------- ----------
Total operating expenses................ 2,218,154 2,212,598 2,324,995 1,989,053 1,523,813
---------- ---------- ---------- ---------- ----------
Income from operations.................. 114,180 73,082 87,414 4,790 83,266
Other income, principally
interest........................... 3,098 2,050 2,328 4,730 8,304
Interest expense........................ (15,610) (15,609) (20,292) (18,701) (8,894)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
minority interest, and
cumulative effect of
accounting changes................. 101,668 59,523 69,450 (9,181) 82,676
Income tax provision (benefit).......... 37,142 21,623 27,117 (1,838) 32,286
---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and cumulative effect
of accounting changes.............. 64,526 37,900 42,333 (7,343) 50,390
Minority interest in net loss of
consolidated subsidiary............ 0 142 679 0 0
Cumulative effect of accounting
changes, net of tax................ 0 0 (49,098)(6) 0 (540)(7)
---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ 64,526 $ 38,042 $ (6,086) $ (7,343) $ 49,850
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of
accounting changes........... $ .56 $ .34 $ .38 $(.07) $ .50
Net income (loss).................. .56 .34 (.05) (.07) .49
Basic weighted average common shares
outstanding... 116,196 112,491 113,810 105,842 101,119
Net income (loss) per share,
assuming dilution:
Before cumulative effect of
accounting changes........... $ .52 $ .33 $ .36 $(.07) $ .48
Net income (loss).................. .52 .33 (.01) (.07) .47
Diluted weighted average common
shares and equivalents
outstanding........................ 133,174 128,558 130,937 105,842 115,027
(Table continued on next page)
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
Year Ended
------------------------------------------------------------------
Jan. 29, Jan. 31, Feb. 1, Feb. 2, Feb. 3,
(Dollars in thousands) 2005 2004 2003 2002(1) 2001(1)(2)
---- ---- ---- ------- ----------
Balance Sheet Data:
Total assets............................ $1,303,771 $1,173,070 $1,139,564 $1,147,911 $866,869
Current portion - long-term debt........ 16,419 17,278 12,595 9,379 4,954
Long-term debt.......................... 208,645 202,819 203,045 208,491 113,540
Working capital......................... 413,989 266,178 190,797 119,873 189,642
Stockholders' equity.................... 694,464 587,409 546,555 538,039 484,443
Performance Data:
Including cumulative effect of
accounting changes:
Net return on average
stockholders' equity.......... 10.1% 6.7% (1.1)% (1.4)% 10.9%
Net return on average
total assets.................. 5.2 3.3 (0.5) (0.7) 6.0
Before cumulative effect of
accounting changes:
Net return on average
stockholders' equity.......... 10.1% 6.7% 7.6% (1.4)% 11.0%
Net return on average
total assets.................. 5.2 3.3 3.7 (0.7) 6.1
- --------------------
(1) Includes the results of operations of Lane Bryant, Inc., acquired August
16, 2001, and Catherines Stores Corporation, acquired January 7, 2000, from
the dates of their respective acquisitions.
(2) Fiscal 2001 consisted of 53 weeks.
(3) Includes reclassifications to conform to the current-year presentation.
(4) 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.
(5) 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.
(6) 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,
In thousands, except per share amounts) 2002 2001
---- ----
(Restated) (Restated)
Pro forma net income (loss)...................... $(8,126) $50,061
Basic net income (loss) per share................ (.08) .50
Net income (loss) per share, assuming dilution... (.08) .47
(7) 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.
13
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 2005," "Fiscal 2004," and "Fiscal 2003" refer to
our fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003,
respectively. The term "Fiscal 2006" refers to our fiscal year which will end on
January 28, 2006. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, 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," "should," "project," "estimate," "predict,"
"anticipate," "plan," "believes," and similar expressions are also intended to
identify forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, some of which we cannot predict or quantify.
Future events and actual results, performance, and achievements could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. We assume no obligation to update any
forward-looking statement to reflect actual results or changes in, or additions
to, the factors affecting such forward-looking statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the future.
o A slowdown in the United States economy, an uncertain economic outlook, and
escalating energy costs could lead to reduced consumer demand for our
apparel and accessories in the future.
o Our business could be negatively affected by a deflationary pricing
environment in the apparel industry.
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 continued growth in the
plus-size women's apparel market, which may not occur.
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 operations at any of these distribution centers were to be
disrupted for any reason.
14
o We depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents, and on our
credit card securitization facility. If we were unable to obtain sufficient
financing at an 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, trade restrictions, 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 Natural disasters, as well as 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.
o We may be unable to hire and retain a sufficient number of suitable sales
associates at our stores.
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 improve merchandise
assortments in our brands.
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.
o Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to include our assessment of the effectiveness of our internal control over
financial reporting in our annual reports. Our independent registered
public accounting firm is also required to attest to whether or not our
assessment is fairly stated in all material respects and to separately
report on whether or not they believe that we maintained, in all material
respects, effective internal control over financial reporting. If we are
unable to maintain effective internal control over financial reporting, or
if our independent registered public accounting firm is unable to timely
attest to our assessment, we could be subject to regulatory sanctions and a
possible loss of public confidence in the reliability of our financial
reporting. Such a failure could result in our inability to provide timely
and/or reliable financial information and could adversely affect our
business.
15
RESTATEMENT OF FINANCIAL STATEMENTS
Our system of internal controls over financial reporting includes the
monitoring of emerging accounting issues and the reviewing of industry and peer
group filings and news releases. As a result of the publicity on the restaurant
industry financial statement restatements related to leases, we commenced a
review of certain of our accounting policies related to leases during January
2005. Subsequently, on February 7, 2005, the Office of the Chief Accountant of
the Securities and Exchange Commission ("SEC") issued a letter to the American
Institute of Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under generally
accepted accounting principles in the United States of America ("GAAP"). Based
on our internal review, and after consultation with the Audit Committee of our
Board of Directors and our independent registered public accounting firm, we
restated our financial statements for years prior to Fiscal 2005 to correct our
accounting for landlord allowances, calculation of straight-line rent expense,
recognition of rent holiday periods, and depreciation of leasehold improvements
for our retail stores.
We lease substantially all of our stores under non-cancelable operating
lease agreements. These lease agreements generally include standard language on
landlord allowances for costs relating to the design, construction, fixturing,
and opening of stores. Construction allowances vary by store, and represent a
reimbursement from the landlord for a portion of the leasehold improvement costs
we incur. Historically, we classified construction allowances as a reduction of
property, equipment, and leasehold improvements on our consolidated balance
sheets and as a reduction of capital expenditures on our consolidated statements
of cash flows. In addition, when accounting for leases with renewal options, we
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term, beginning with the lease commencement date. However,
we depreciated leasehold improvements over their estimated useful life of ten
years, which, in many cases, may have included both the initial non-cancelable
lease term and option renewal periods provided for in the lease. Also, we
historically recognized rent holiday periods on a straight-line basis over the
lease term commencing with the initial occupancy date, or the opening date of
the stores. Management re-evaluated FASB Technical Bulletin No. 85-3,
"Accounting for Operating leases with Scheduled Rent Increases," and determined
that the lease term should commence on the date we take possession of the leased
space for construction purposes, which is generally two months prior to a store
opening date.
As a result of the restatement, construction allowances have been recorded
as a deferred rent liability on our consolidated balance sheets instead of being
recorded as a reduction of the cost of leasehold improvements. In our
consolidated statements of cash flows, we have recognized construction
allowances as an operating activity instead of recognizing them as a reduction
of our investment in capital assets. In addition, the construction allowances
will be amortized over the related lease term as a reduction of rent expense
rather than as a reduction of depreciation expense commencing on the date we
take possession of the leased space for construction purposes.
We also corrected the lease term used to determine straight-line rent
expense and depreciation of leasehold improvements to include lease option
renewal periods only in instances in which the exercise of the option period is
reasonably assured and the failure to exercise such an option would result in an
economic penalty. Depreciation of leasehold improvements has been recognized
over the shorter of the corrected lease term or the assets' estimated useful
lives. Lease terms used to determine straight-line rent expense include
pre-opening store build-out periods (commonly referred to as "rent holidays"),
where applicable. These corrections resulted in the accelerated recognition of
certain annual rent expense and depreciation expense on leasehold improvements.
As a result of the above corrections, we recorded additional deferred rent
in "accrued expenses" and "deferred taxes and other non-current liabilities" and
we adjusted "retained earnings" on the consolidated balance sheet. We also
corrected amortization in "cost of goods sold, buying, and occupancy expenses"
on the consolidated statements of operations and comprehensive income (loss) for
each of our three fiscal years in the period ended
16
January 29, 2005. These accounting changes resulted in a decrease in retained
earnings of $11.8 million for the cumulative effect as of the beginning of
Fiscal 2003, and decreases in retained earnings of $3.3 million and $2.6 million
for Fiscal 2003 and Fiscal 2004, respectively. These corrections did not have
any impact on our previously reported comparable store sales, net sales, cash
flow, and actual lease payments, or on the economic value of our leasehold
improvements.
See "Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS"
below for further details of the restatement.
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 approximately 40% of the women's
plus-size specialty retail apparel market, and we are the third largest
specialty apparel retailer in the United States. Through our varied plus-size
fashion concepts, we cater to customers from a broad range of socioeconomic,
demographic, and cultural groups. As of January 29, 2005, we operated 2,221
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 businesses.
Our strategy focuses on increasing our market share in the growing plus-size
women's apparel market through our three brands. 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 a broad range of 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 demographic.
Our long-term plans are to continue to expand our market position in the
women's plus-size specialty apparel market. These plans include the addition of
new stores (primarily at our LANE BRYANT brand), continued growth in E-commerce,
entry into the catalog business, international expansion, and increasing our
relevance to our customer. In Fiscal 2005, we more than doubled our sales volume
in our E-commerce channel and expanded E-commerce into Canada. We view the
direct-to-consumer channels, including catalogs, to be disproportionately
important to the plus-size customer and a significant growth opportunity. In
October 2007, the Lane Bryant catalog trademark, which is currently licensed by
a third party, will revert back to Lane Bryant. We are currently building our
direct-to-consumer business organization for entry into catalog sales. We view
the growth in our store base and the extension into other direct-to-consumer
channels as an opportunity for us to maintain and increase our market share. We
continue to pursue ways to increase our relevance to our customer, and believe
that through factors such as our expertise in plus-size fit and our FIGURE
magazine (America's leading plus-size fashion and lifestyle magazine) we are
differentiating ourselves from our competitors.
With the addition of E-commerce at our FASHION BUG website in Fiscal 2005,
we now offer E-commerce at each of our three brands. Our Fiscal 2006 plan is to
increase our E-commerce sales volume more than 50% by continuing to broaden
category offerings at our websites. Our E-commerce sales in Fiscal 2004 and
Fiscal 2005 were less than one percent and two percent, respectively, of our
consolidated net sales, and we expect our E-commerce sales in Fiscal 2006 to
increase to more than two percent of consolidated net sales. Although our
websites primarily offer basic merchandise assortments, we see opportunities to
expand our product offerings into additional categories, such as hard-to-find
sizes. This will allow us to offer a greater variety of merchandise categories
than those currently offered in our stores.
17
Over the last three years, the retail apparel industry has been negatively
affected by the general slowdown in the U.S. economy, reduced levels of consumer
confidence, and the unstable geopolitical climate. We expect the deflationary
pricing environment to continue to impact the apparel industry. In addition, the
elimination of quota on imports in 2005 may create further downward pressure on
retail prices.
In Fiscal 2004 we initiated a cost reduction plan that decreased expenses
by a total of approximately $45 million on an annualized basis. In Fiscal 2005,
we completed the cost reduction initiative with the consolidation of our
CATHERINES and LANE BRYANT distribution centers into our new White Marsh
distribution center. In addition to our continuing focus on maintaining control
over expenses and inventories, another area of focus in Fiscal 2006 is the
continued improvement of gross margins at our three brands through improved
product mix and reduced markdowns.
We made significant progress in Fiscal 2005, particularly at our LANE
BRYANT brand. An improvement of 160 basis points in our consolidated gross
margin in Fiscal 2005 contributed to a 70% increase in our net income over the
prior year. The positive results achieved in Fiscal 2005 are primarily
attributable to plans implemented in Fiscal 2004 to improve merchandise
assortments at our LANE BRYANT brand. In Fiscal 2005, LANE BRYANT experienced a
3% increase in comparable store sales. However, our FASHION BUG brand
experienced only a modest 1% increase in comparable store sales, while our
CATHERINES brand experienced a 6% decrease in comparable store sales. Our Fiscal
2005 results were negatively impacted by disappointing sales performances at
each of our brands during the fourth quarter, mainly as a result of our lack of
a timely response to the competitive promotional environment that developed
during the 2004 Christmas holiday season. Our challenge in Fiscal 2006 will be
to improve the performance of our FASHION BUG and CATHERINES brands while
continuing to enhance our LANE BRYANT brand's performance.
Another area we focused on in Fiscal 2005 was inventory management.
Improved management of inventory during Fiscal 2005 resulted in a decrease in
inventory of $25 million, which allowed us to utilize our working capital more
effectively, while concurrently increasing comparable store sales. As a result,
we strengthened our balance sheet and increased our cash flows.
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.
18
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101 ("SAB 101"), "Revenue Recognition in the Financial Statements" (as amended
by SAB 104). Our revenues from merchandise sales are net of returns and
allowances and exclude sales tax. We record a reserve for estimated future sales
returns based on an analysis of actual returns and we defer recognition of
layaway sales to the date of delivery. A change in our actual rates of sales
returns and layaway sales experience would affect the level of revenue
recognized.
Revenues from our E-commerce business include shipping and handling fees
billed to customers. E-commerce revenues are recognized after the following have
occurred: execution of the customer's order, authorization of the customer's
credit card has been received, and the product has been shipped and received by
the customer. We record a reserve for estimated future E-commerce sales returns
based on an analysis of actual returns.
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 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, markups,
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 or understatement of inventory cost under the lower of cost
or market
19
principle. At the end of Fiscal 2005 and Fiscal 2004, in addition to markdowns
that had been recorded in inventory, an additional $9.5 million and $10.1
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.
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 29, 2005 and January 31, 2004, $6.5 million and $9.5
million, respectively, of cash received from vendors was deferred into inventory
to be recognized as inventory is sold.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." 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 estimated future
results in our evaluation of potential impairment, and compare the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. If the estimated future undiscounted cash
flows are less than the carrying amount of the asset, we write down the asset to
its estimated fair value and recognize an impairment loss. Our estimate of fair
value is generally based on either appraised value or the present value of
future cash flows, 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.
We 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 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
other 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 2005, Fiscal 2004, and Fiscal 2003
and determined that there has been no additional impairment of these assets.
20
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.
Subsequent to the end of Fiscal 2005, Spirit of America National Bank acquired
the CATHERINES proprietary credit card portfolio and the right to operate the
program, and added the CATHERINES credit card receivables to the Trust. 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 subordinated interests in certain securitization transactions
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. 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
21
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 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
---------- ----------
Assumption:
Payment rate................................. $0.9 $1.7
Residual cash flows discount rate............ 0.0 0.1
Credit loss percentage....................... 0.9 1.7
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 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 have been accounted for in accordance with the
provisions of SFAS No. 146.
22
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. As of January 29, 2005 and January 31, 2004,
$6.5 million and $9.5 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 currently 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.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), a revision of SFAS No. 123. SFAS No. 123R supersedes
APB Opinion No. 25, and amends SFAS No. 95, "Statement of Cash Flows." We will
be required to adopt the provisions of SFAS No. 123R as of the beginning of the
third quarter of Fiscal 2006. See "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES; Impact of Recent Accounting Pronouncements"
for a further discussion of SFAS No. 123R.
23
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.
Operating Leases
We lease substantially all of our store properties and account for our
store leases in accordance with SFAS No. 13, "Accounting for Leases." A majority
of our store leases contain lease options that we can unilaterally exercise. The
lease term we use for such operating leases includes lease option renewal
periods only in instances in which the failure to exercise such options would
result in an economic penalty for us and exercise of the renewal option is
therefore reasonably assured at the lease inception date.
Store leasehold improvement assets are depreciated over the shorter of
their useful life or the lease term, as determined above.
For leases that contain rent escalations, the lease term for recognition of
straight-line rent expense commences on the date we take possession of the
leased property for construction purposes, which is generally two months prior
to a store opening date. Similarly, landlord incentives or allowances under
operating leases (tenant improvement allowances) are recorded as a deferred rent
liability and recognized as a reduction of rent expense on a straight-line basis
over the lease term commencing on the date we take possession of the leased
property for construction purposes.
24
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
2005 2004 2003 2005-2004 2004-2003
---- ---- ---- --------- ---------
Net sales.................................... 100.0% 100.0% 100.0% 2.0% (5.3)%
Cost of goods sold, buying, and occupancy.... 70.3 71.9 71.6 (0.2) (4.8)
Selling, general, and administrative......... 24.8 24.4 25.0 3.4 (7.5)
Expenses related to cost reduction plan...... 0.0 0.5 -- (94.8)
Restructuring charge (credit)................ -- -- (0.2) -- **
Income from operations....................... 4.9 3.2 3.6 56.2 (16.4)
Other income, principally interest........... 0.1 0.1 0.1 51.1 (11.9)
Interest expense............................. 0.7 0.7 0.8 0.0 (23.1)
Income tax provision (benefit)............... 1.6 0.9 1.1 71.8 (20.3)
Minority interest in net loss of subsidiary.. -- 0.0 0.0 (100.0) (79.1)
Cumulative effect of accounting changes...... -- -- (2.0) -- **
Net income (loss)............................ 2.8 1.7 (0.3) 69.6 **
- --------------------
** Not meaningful
Results may not add due to rounding
The following table shows our net sales by store brand:
Year Ended Year Ended Year Ended
January 29, 2005 January 31, 2004 February 1, 2003
---------------- ---------------- ----------------
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(In millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
FASHION BUG ... $1,045.4 $255.5 $1,057.1 $259.2 $1,156.0 $288.9
LANE BRYANT ... 974.2 259.4 903.6 251.0 906.9 236.1
CATHERINES .... 312.7 71.2 323.3 75.4 345.2 74.6
Other(1) ...... 0.0 0.0 1.7 0.0 4.3 1.5
-------- ------ -------- ------ -------- ------
Total net sales $2,332.3 $586.1 $2,285.7 $585.6 $2,412.4 $601.1
======== ====== ======== ====== ======== ======
- --------------------
(1) Sales attributable to MONSOON/ACCESSORIZE stores, which were closed during
the first half of Fiscal 2004.
25
The following table shows additional information related to changes in our
net sales:
Year Ended Year Ended
January 29, 2005 January 31, 2004
---------------- ----------------
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
Increase (decrease) in comparable store sales(1):
Consolidated Company ........................... 1% (2)% (2)% (1)%
FASHION BUG .................................... 1 (1) 0 (4)
LANE BRYANT .................................... 3 (1) (6) 1
CATHERINES ..................................... (6) (9) (1) 0
Sales from new stores as a percentage of total
consolidated prior-period sales:
FASHION BUG .................................... 1 1 1 1
LANE BRYANT .................................... 3 3 3 2
CATHERINES ..................................... 1 1 1 1
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
FASHION BUG .................................... (2) (2) (4) (3)
LANE BRYANT .................................... (1) (1) (1) (1)
CATHERINES ..................................... (1) 0 (2) 0
Increase (decrease) in total sales .................. 2% 0% (5)% (3)%
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation. Internet sales are
excluded from the computation of comparable store sales.
The following table sets forth information with respect to store activity
for Fiscal 2005 and planned store activity for Fiscal 2006:
FASHION LANE
BUG BRYANT CATHERINES Total
--- ------ ---------- -----
Fiscal 2005:
Stores at January 31, 2004 ... 1,051 710 466 2,227
----- --- --- -----
Stores opened ................ 5 31 15 51
Stores closed ................ (28) (19) (10) (57)
----- --- --- -----
Net changes in stores ........ (23) 12 5 (6)
----- --- --- -----
Stores at January 29, 2005 ... 1,028 722 471 2,221
===== === === =====
Stores relocated during period 23 15 9 47
Stores remodeled during period 4 9 0 13
Fiscal 2006:
Planned store openings ....... 15 50-60 5 70-80
Planned store relocations .... 25 40 15 80
Planned store closings ....... 20 15 15 50
26
Comparison of Fiscal 2005 to Fiscal 2004
Net Sales
Net sales increased from Fiscal 2004 to Fiscal 2005 primarily as a result
of sales from new stores, positive comparable store sales at our LANE BRYANT and
FASHION BUG brands, and increased E-commerce sales. These increases were
partially offset by negative comparable store sales results at our CATHERINES
brand.
LANE BRYANT stores experienced an increase in the average dollar sale per
transaction, which was partially offset by a decrease in the average number of
transactions per store. The average dollar sale per transaction benefited from
increases in both the average retail value per unit sold, reflecting reduced
levels of promotional pricing for the brand as compared to the prior-year
period, and the average number of units sold per customer ("UPC"). Except for
casual wear, LANE BRYANT experienced comparable store sales increases in all
major merchandise categories, especially wear-to-work and intimate apparel.
During Fiscal 2004, LANE BRYANT experienced poor customer acceptance of, and fit
and quality issues with, its product offering and had to maintain higher levels
of promotional pricing. Improvements in the merchandise assortments offered at
LANE BRYANT during Fiscal 2005 resulted in the brand's improved sales
performance during Fiscal 2005.
For FASHION BUG stores, an increase in the average number of transactions
per store during Fiscal 2005 was partially offset by a slightly lower average
dollar sale per transaction. For Fiscal 2005, an increase in the average UPC was
offset by a decrease in the average retail value per unit sold. FASHION BUG
stores experienced comparable store sales increases in plus-size sportswear and
accessories, which were offset by sales decreases in other categories. FASHION
BUG store sales for Fiscal 2005 also benefited from sales of maternity and
girls, two new categories added to the brand at the end of Fiscal 2004.
CATHERINES stores experienced a decrease in the average number of
transactions per store and a lower average dollar sale per transaction during
Fiscal 2005. An increase in the average UPC was more than offset by a decrease
in the average retail value per unit sold, reflecting higher levels of
promotional pricing during Fiscal 2005. The decrease in sales at CATHERINES was
primarily a result of disappointing performance in the dress and wear-to-work
categories.
During Fiscal 2005, we recognized revenues of $7.6 million in connection
with our FASHION BUG customer loyalty card program that we introduced during
Fiscal 2004, as compared to revenues of $7.8 million for Fiscal 2004. During
Fiscal 2005 and Fiscal 2004, we also recognized revenues of $7.5 million and
$7.5 million, respectively, in connection with our CATHERINES loyalty card
program. In addition, during Fiscal 2004, we recognized revenues of $6.4 million
in connection with a previous FASHION BUG loyalty card program that we
terminated during Fiscal 2004.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses for Fiscal 2005 were
approximately equal to Fiscal 2004, and were 1.6% lower as a percentage of sales
in the current year as compared to the prior year. Cost of goods sold as a
percentage of net sales was 1.0% lower in Fiscal 2005 as compared to Fiscal
2004. Improved merchandise margins, primarily at our LANE BRYANT brand and, to a
lesser extent, at our FASHION BUG brand, were partially offset by a decrease in
merchandise margins at our CATHERINES brand. Margins at the CATHERINES brand for
Fiscal 2005 were negatively affected by increased promotional activity that
resulted from reduced traffic levels and poor customer acceptance of CATHERINES
product offerings during the current year. As discussed above, Fiscal 2004
margins at our LANE BRYANT brand were negatively affected by higher levels of
promotional activity. Cost of goods sold includes merchandise costs net of
discounts and allowances, freight, inventory
27
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 were 0.6% lower
in Fiscal 2005 as compared to Fiscal 2004, primarily a result of leverage on
increased sales at LANE BRYANT and cost savings from the consolidation of our
LANE BRYANT and CATHERINES distribution operations into our White Marsh,
Maryland facility. Buying expenses include payroll, payroll-related costs, and
operating expenses for our buying departments and warehouses. Occupancy expenses
include rent, real estate taxes, insurance, common area maintenance, utilities,
maintenance, and depreciation for our stores and warehouse facilities and
equipment. Buying and occupancy costs are treated as period costs and are not
capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses increased in Fiscal 2005 as
compared to Fiscal 2004, and were 0.3% higher as a percentage of net sales.
Selling expenses for Fiscal 2005 were 0.3 % lower as a percentage of net sales,
while general and administrative expenses were 0.6% higher as a percentage of
net sales. The increase in selling, general, and administrative expenses was
primarily a result of higher expenses related to incentive-based employee
compensation programs and the purchase during the Fiscal 2005 Third Quarter of
life insurance policies for certain executives to replace split-dollar life
insurance policies that were terminated as a result of the Sarbanes-Oxley Act of
2002, which prohibits loans to executive officers. As a result of terminating
the split-dollar program, the Company will receive the cash surrender value of
the policies. In return, we agreed to provide each of the affected executives
with an unconditional bonus to enable them to purchase a replacement life
insurance policy. This bonus will be payable in five equal annual installments
in an amount equal to the annual insurance premiums paid by the executive for
the new policy, plus a tax gross-up amount. These increases in selling, general,
and administrative expenses were partially offset by improved performance of our
FASHION BUG credit card operations, including favorable trends in delinquencies
during the current-year period. General and administrative expenses for Fiscal
2004 benefited from reduced medical benefits costs as a result of reduced
medical claims by employees covered by our self-insured employee benefit
program.
Expenses Related to Cost Reduction Plan
In March 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 "Comparison of Fiscal 2004 to Fiscal 2003" below). 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. At the
time we announced the plan, we expected this cost reduction plan to improve our
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. During Fiscal 2005, we realized the remaining benefits of the plan.
As of January 31, 2004, there was $2.6 million of accrued lease termination
costs related to the closing of our Hollywood, Florida credit facility. In
October 2004, in accordance with SFAS No. 146, we revised our estimated sublease
income on the remaining lease obligation for the Hollywood facility and
recognized an additional expense of $0.6 million. During the fourth quarter of
Fiscal 2005, we settled our remaining lease obligation for the Hollywood
facility for approximately $3.2 million. Also, during the fourth quarter of
Fiscal 2005, we entered into an agreement to lease the Memphis, Tennessee
distribution center to a third party for a three-year period.
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Income Tax Provision
The effective income tax rate was 36.5% in Fiscal 2005, as compared to
36.3% in Fiscal 2004. On October 22, 2004, the President of the United States of
America signed into law H.R. 4250, "The American Jobs Creation Act of 2004" (the
"Act"), which includes among its provisions certain tax benefits related to the
repatriation to the United States of profits from a company's international
operations. The Act provides for the repatriation of profits from international
operations at a tax rate not to exceed 5.25% for approximately a one-year
period. These tax benefits are subject to various limitations, and, as of
January 29, 2005, the U.S. Treasury Department has not issued final guidelines
for applying the repatriation provisions of the Act. We are currently evaluating
the effects of the Act, and have not determined the effect, if any, that it will
have on our financial condition and results of operations. As of January 29,
2005, our consolidated cash balance of $273.0 million included approximately
$39.5 million of cash held by our international operations. We will finalize our
analysis before the end of Fiscal 2006.
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 comparable store sales increases in
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. Comparable store sales increases in
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.
Although LANE BRYANT stores experienced quarter-over-quarter improvements
in comparable store sales results during Fiscal 2004, they experienced an
overall decrease of 6% in comparable store sales for the year. The average UPC
increased 11% for LANE BRYANT stores, while 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%. LANE BRYANT experienced comparable store
sales decreases primarily in sweaters, casual woven tops, and denim separates,
which were partially offset by comparable store sales increases in other
merchandise categories. 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, its product offering, 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
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assortments resulted in increased unit sales and improved sales performance for
the LANE BRYANT brand during the second half of Fiscal 2004.