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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 2, 2002
[ ] 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 Identification No.)
Incorporation or Organization)
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]
As of April 29, 2002, 113,013,331 shares of common stock were outstanding.
The aggregate market value of the common stock (based upon the closing price on
April 29, 2002), held by non-affiliates was approximately $953,231,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference herein from registrant's definitive proxy statement for its annual
shareholders meeting, which is expected to be filed within 120 days after the
end of the fiscal year covered by this Annual Report.
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CHARMING SHOPPES, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
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Item 1 Business
General ......................................................... 1
Stores .......................................................... 2
Merchandising and Buying ........................................ 3
Marketing and Promotions ........................................ 4
Sourcing ........................................................ 5
Distribution and Logistics ...................................... 6
Competition ..................................................... 6
Monsoon and Accessorize Joint Venture ........................... 6
Employees ....................................................... 7
Trademarks and Servicemarks ..................................... 7
Executive Offices ............................................... 7
Item 2 Properties ...................................................... 8
Item 3 Legal Proceedings ............................................... 9
Item 4 Submission of Matters to a Vote of Security Holders ............. 9
Additional Part I Information - Our Executive Officers .................... 10
PART II
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Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters ........................................... 11
Item 6 Selected Financial Data ......................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 14
Forward-Looking Statements .............................. 14
Critical Accounting Policies ............................ 15
Results of Operations ................................... 18
Recent Developments ..................................... 23
Financial Condition ..................................... 26
Market Risk ............................................. 32
Impact of Recent Accounting Pronouncements .............. 32
Item 7A Quantitative and Qualitative Disclosures About Market Risk ...... 32
Item 8 Financial Statements and Supplementary Data ..................... 33
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ...................................... 67
PART III
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Item 10 Directors and Executive Officers of the Registrant .............. 68
Item 11 Executive Compensation .......................................... 68
Item 12 Security Ownership of Certain Beneficial Owners and Management .. 68
Item 13 Certain Relationships and Related Transactions .................. 68
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K . 69
PART I
Item 1. Business
General
We are a leading specialty apparel retailer primarily focused on plus-size
women's apparel through our three distinct brands: Lane Bryant, Fashion Bug, and
Catherine's Plus Sizes. During Fiscal 2002, the sale of plus-size apparel
represented approximately 66% of our total net sales. We anticipate that this
percentage will exceed 70% during Fiscal 2003. Through our fashion content,
store layouts, and broad merchandise assortments, we seek to appeal to customers
from a broad range of socioeconomic, demographic, and cultural profiles. As of
February 2, 2002, we operated 2,446 stores in 48 states.
In the late 1990's, our management team initiated a strategic plan aimed at
capitalizing on the anticipated growth in the market for plus-size women's
apparel. We began this process by increasing the floor space allocated to
plus-size apparel in our Fashion Bug stores. In August 1999, we acquired the
Modern Woman chain of 136 stores in 22 states, which specialized in plus-size
women's apparel. In January 2000, we acquired the Catherine's chain of stores,
which operated 436 stores in 40 states and the District of Columbia that also
specialized in plus-size women's apparel. We have since converted all of the
original Modern Woman stores into Catherine's stores. In August 2001, we
acquired Lane Bryant, Inc., which operated 651 stores across the United States.
Lane Bryant is a premier brand in the plus-size market with an established
customer base and proprietary branded labels. The acquisition of Lane Bryant
significantly accelerated our long-term growth strategy of becoming a leader in
the sale of plus-size women's apparel.
We operate the following differentiated brands, each of which is designed
to attract a distinct customer:
Lane Bryant. Lane Bryant is a widely recognized name in plus-size
fashion. Through private labels, such as Venezia Clothing Co.(R) and
Cacique(TM) (a line of intimate apparel), Lane Bryant offers
fashionable and sophisticated clothes in plus-sizes 14-28. Lane Bryant
has a loyal customer base, ranging in age from 18 to 54 years old, that
shops for fashionable merchandise in the moderate price range.
Primarily a mall-based destination store for the plus-size woman, Lane
Bryant currently operates 647 stores in 46 states that average
approximately 6,100 square feet.
Fashion Bug and Fashion Bug Plus. Fashion Bug and Fashion Bug Plus
stores specialize in selling a wide variety of plus-size, misses and
junior sportswear, dresses, coats, lingerie, accessories, and casual
footwear. Fashion Bug customers range in age from 20 to 49 years old
and shop in the low-moderate price range. The majority of the 1,252
Fashion Bug stores are located in strip shopping centers across the
United States and average approximately 8,900 square feet.
Catherine's Plus Sizes. Catherine's also specializes in plus-sizes
and is particularly known for extended sizes (over size 28) and petite
plus-sizes. Catherine's has also developed its proprietary body basics
fit program, which is designed to help a woman choose merchandise
styles that most flatter her figure. Catherine's offers classic apparel
and accessories for career and casual lifestyles in a one-on-one
selling environment, and its customers 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 461 Catherine's stores are located
in 45 states, primarily in the Southeast, Mid-Atlantic, and Eastern
Central regions of the United States and average approximately 3,900
square feet.
1
On January 28, 2002, we announced a restructuring plan that includes a
number of initiatives designed to position our business for increased
profitability and growth. The major components of this plan include:
o The closing of our The Answer/Added Dimensions chain and its 77 stores,
including the conversion of approximately 20% of the Added Dimensions
stores to Catherine's stores;
o The closing of 130 under-performing Fashion Bug stores; and
o The conversion of 44 Fashion Bug store locations to Lane Bryant stores.
The Answer/Added Dimensions, which was acquired as part of the Catherine's
transaction in January 2000, operates 77 plus-size stores in 21 states,
concentrated in the Southeast and the Northeast. The square footage for the
chain is approximately 300,000 square feet, which is approximately 2% of the
total square footage under lease for all our stores. These store closings and
conversions are expected to be completed by the end of the second quarter of
Fiscal 2003.
The majority of the 130 under-performing Fashion Bug stores will close
during the fourth quarter of Fiscal 2003, resulting in a reduction of 1.1
million square feet, or 6% of total square footage under lease for all our
stores. The locations are dispersed throughout the country, and do not
significantly represent any one geographic region.
The Company also plans to convert 44 Fashion Bug stores to the Lane Bryant
format. These conversions will enable us to enhance profitability and accelerate
our strip center store opening strategy for Lane Bryant.
Stores
Our 2,446 stores (as of February 2, 2002) are primarily located in suburban
areas and small towns. Approximately 65% of these stores are located in strip
shopping centers, while the balance are located in community and regional malls.
Most of our Lane Bryant stores are in malls. In many locations, Lane Bryant is
the only plus-size women's specialty apparel store in the mall. Lane Bryant has
also recently demonstrated success in strip center locations. We believe that a
significant opportunity exists to aggressively expand both Lane Bryant and
Catherine's into additional strip center locations. We believe that our
customers visit strip shopping centers more frequently than malls as a result of
the tenant mix and convenience of strip shopping centers. In addition, we
benefit in strip centers from substantially lower occupancy costs as compared to
occupancy costs in malls.
Our merchandise displays enable our customers to assemble coordinated and
complete outfits that satisfy many of their lifestyle needs. We relocate or
remodel our stores as appropriate to convey a fresh and contemporary shopping
environment. We frequently test and implement new store designs and fixture
packages aimed at providing an effective merchandise presentation. In
particular, we intend, on a targeted basis, to continue remodeling certain of
our Fashion Bug stores to present a bright, well-defined, easier to shop layout.
In addition, we emphasize customer service, including the presence of helpful
salespeople in the stores, lay-away 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.
Store unit growth during Fiscal 2003 is projected to be approximately 50-60
stores. The breakdown by store format is approximately: 25 Lane Bryant stores
(excluding conversions), 25 Catherine's stores, and 8 Fashion Bug stores.
Additionally, we plan to remodel approximately 45-50 stores, and relocate
approximately 75-80 stores during Fiscal 2003. We continue to seek additional
new locations that meet our financial and operational objectives.
2
Our store openings and closings and number of locations over the past five
fiscal years are set forth in the following table:
Fiscal Year Ended
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002 2001 2000 1999 1998
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Number of stores open at beginning of period ................1,755 1,740 1,135 1,135 1,134
Opened during period ........................................ 125 106 75 65 25
Acquired during period ...................................... 651 0 572 0 0
Closed during period ........................................ (85) (91)(1) (42) (65) (24)
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2,446 1,755 1,740 1,135 1,135
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Store Brand
Fashion Bug and Fashion Bug Plus ............................1,252 1,230 1,185 1,135 1,135
Lane Bryant ................................................. 647 0 0 0 0
Catherine's/The Answer/Added Dimensions ..................... 538 524 555(2) 0 0
Monsoon/Accessorize(3) ...................................... 9 1 0 0 0
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2,446 1,755 1,740 1,135 1,135
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(1) Includes 35 Modern Woman stores that were closed as a result of the
consolidation of Modern Woman stores into Catherine's during the year ended
February 3, 2001.
(2) Includes 122 Modern Woman stores that were closed or converted to the
Catherine's formats during the year ended February 3, 2001.
(3) See "Monsoon and Accessorize Joint Venture" below.
All stores are operated under our direct management. Each store has a
manager and an assistant manager, who are in daily operational control of their
location. We employ district managers, who travel to all stores in their
district on a frequent basis, to supervise store operations. Each district
manager has responsibility for an average of approximately eleven stores.
Regional managers, who report to a Director of Stores, supervise the district
managers. Generally, we appoint store managers from the group of assistant
managers, and district managers are appointed from the group of store managers.
We seek to motivate our store personnel through promotions from within,
competitive wages and various incentive, medical, and retirement plans. We
centrally develop store operations, merchandising, and buying policies, leaving
individual store management with the principal duties of display, selling, and
reporting through point-of-sale terminals.
Merchandising and Buying
We employ a merchandising and buying strategy that is focused on providing
an attractive selection of apparel and accessories that reflect the fashion
preferences of the target customer for each of our brands. Merchandise
purchasing is conducted by separate merchandise groups for each of our brands by
buyers supervised by one or more merchandise managers. We believe that
specialization of buyers within particular brands enhances the distinctiveness
between the brands and their offerings. In addition, we use domestic and
international fashion market guidance, fashion advisory services, proprietary
design, and in-store testing to determine the optimal product assortments for
each of our brands. We believe that this approach results in greater success in
predicting customer preferences while reducing our inventory investment and
risk. We also seek to maintain high quality standards with respect to
merchandise fabrication, construction, and fit.
3
At Lane Bryant, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and career-oriented merchandise and
intimate apparel. We strive to translate the latest trends into plus-sizes and
to be first to market with our merchandise. At Fashion Bug, we offer an
assortment of both casual and career-oriented products, in plus, misses, and
junior sizes at attractive prices. Fashion Bug's plus and misses size
merchandise typically reflects established fashion trends and includes a broad
offering of ready-to-wear apparel, including knit and woven tops, dresses,
shorts, pants and skirts, as well as footwear, accessories, intimate apparel,
and seasonal items, such as outerwear. Fashion Bug's junior merchandise reflects
the latest fashion trends and includes a significant amount of third-party,
well-recognized national brands. At Catherine's, we offer a broad assortment of
plus-size merchandise in classic styles designed to provide "head-to-toe"
dressing for the 40 to 65 year-old customer. Catherine's features sportswear,
dresses, intimate apparel, suits and accessories in a variety of plus-sizes,
such as petites and extended sizes. Catherine's has developed a unique expertise
in the fit, design and manufacturing of extended sizes, making it one of the few
retailers to emphasize these sizes.
We continue to refine our merchandise assortments to reflect the needs and
demands of our diverse customer groups and the demographics of each store's
location. We have distribution systems in place whereby stores that are
identified as having certain customer profiles can be stocked with products
specifically targeted to such customers. 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 staffs obtain store and chain-wide inventory information
generated by merchandise information systems that use point-of-sale terminals.
Through these terminals, merchandise can be followed from the placement of our
initial order for the merchandise to the actual sale to our customer. Based upon
this data, our merchandise managers compare budgeted-to-actual sales and make
merchandising decisions, as needed, including re-order, markdowns, and changes
in the buying plans for upcoming seasons.
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 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 typically does allow sufficient margin to
permit merchandise discounts in order to stimulate customer purchases when
necessary. In the future, we expect to continue to achieve a higher initial
markup in our merchandise that is purchased through our overseas sourcing
operations.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the Easter, Labor Day, and
Christmas seasons. We generally build inventory levels before these peak selling
periods. To keep inventory current and fashionable, we reduce the price of
slow-moving merchandise throughout the year. Much of our merchandise is
developed for one or more of our six seasons: spring, summer, summer-fall
transitional, fall, holiday, and holiday-spring transitional. End-of-season
sales are conducted with the objective of carrying a minimal amount of seasonal
merchandise over from one season to another. Sales for the four quarters of
Fiscal 2002, as a percent of total sales, were 19.8%, 20.2%, 27.6%, and 32.4%,
respectively. Sales for the third and fourth quarters of Fiscal 2002 include the
results of Lane Bryant, Inc., acquired on August 16, 2001. On a pro forma basis,
had the acquisition of Lane Bryant occurred as of the beginning of Fiscal 2002,
sales for the four quarters of Fiscal 2002, as a percent of total sales, would
have been 25.4%, 25.5%, 23.1%, and 26.0%, respectively.
Marketing and Promotions
We use several types of advertising to stimulate customer traffic, such as
targeted direct mail advertising to preferred customers. These customers are
selected from a database of more than 26 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. With the planning
and guidance of specialized home
4
office personnel, each store provides such displays and advertising as may be
necessary to feature certain merchandise or certain promotional selling prices
from time to time.
We maintain websites for our Lane Bryant and Catherine's brands that
provide information regarding current fashions and promotions. Our Lane Bryant
website enjoys more than 500,000 unique visitors per month and an established
on-line community. We are presently developing e-commerce capabilities on this
site. In March 2002, we launched an e-commerce pilot for our Catherine's brand.
A grand opening of this site will be marketed later in 2002.
We also seek to encourage sales through our proprietary and private-label
credit cards. We believe that these credit cards act as promotional vehicles by
engendering customer loyalty, creating a substantial base for targeted direct
mail promotion, and encouraging incremental sales.
Our proprietary Fashion Bug credit card program has approximately four
million active accounts, which accounted for approximately 33% of Fashion Bug
retail sales in Fiscal 2002. We control and service the entire Fashion Bug
proprietary credit card file and have entered into various agreements whereby we
securitize and sell all of our credit card receivables generated by this
program. Under these agreements, we continue to service the receivables and
control credit policies. This allows us to continue to fund receivable growth,
provide customer service, and collect past-due accounts. Accordingly, our
relationship with our credit card customers is not affected by these
securitization agreements. Our Fashion Bug proprietary credit card portfolio is
originated by Spirit of America National Bank, a national banking association
and our wholly owned subsidiary. Spirit of America National Bank approves credit
applications and a third party performs all billing and collection activities.
Lane Bryant and Catherine's also offer customers the convenience of a
private-label credit card. We use third-party banks to finance and service these
private-label 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 private-label credit cards. These third-party
agreements may require us to repurchase receivables from the third-party banks
under certain conditions.
Sourcing
To meet the demands of our customers, we access both the domestic and
overseas wholesale apparel marketplace for our merchandise purchases. This
allows us to maintain short lead times, respond quickly to current fashion
trends, and quickly replenish merchandise inventory as necessary. During Fiscal
2002, we purchased merchandise from approximately 1,100 suppliers and factories
located throughout the world. We use our overseas sourcing operations primarily
to procure fashion-basic merchandise for our brands, which generally requires
longer lead times and in Fiscal 2002 accounted for approximately 30% of the
Fashion Bug merchandise and approximately 20% of Catherine's merchandise. During
Fiscal 2002, we purchased a portion of Lane Bryant merchandise from Mast
Industries, Inc., a contract manufacturer and apparel importer, which is a
wholly-owned subsidiary of The Limited, Inc. On a pro forma basis, if the
acquisition of Lane Bryant had occurred as of the beginning of Fiscal 2002,
purchases from Mast would have accounted for approximately 16% of our total
merchandise purchases and approximately 39% of merchandise purchases for Lane
Bryant. No more than 7% of goods purchased originated from any single
manufacturer or factory.
We pay for merchandise purchases outside the United States via letters of
credit with third party vendors where we are the importer of record. To date, we
have not experienced difficulties in purchasing merchandise overseas or
importing such merchandise into the United States. Should political instability
result in a disruption of normal activities in any single country with which we
do business, we believe that we would have adequate alternative sources of
supply.
5
Distribution and Logistics
We utilize three distribution centers. For our Fashion Bug stores, we
operate a distribution center in Greencastle, Indiana. Located on a 150-acre
tract of land, this facility contains a building of approximately 1,000,000
square feet. We estimate that this facility has the capacity to service 1,800
stores. For our Catherine's stores, we operate a 213,000 square foot
distribution center in Memphis, Tennessee, which is designed to handle up to
approximately 600 stores. For our Lane Bryant stores, we utilize a 514,000
square foot facility near Columbus, Ohio under an agreement with Distribution
Land Corp., an affiliate of The Limited, Inc. Under a services agreement with
The Limited, we receive inbound and outbound logistics and transportation
services and receiving, handling, processing, storing, and distribution of all
merchandise for Lane Bryant at the Ohio distribution facility. The lease and
related logistics and transportation services will terminate in August 2004,
although we have the right to terminate the services earlier upon notice.
Most of our merchandise purchases are received at these three distribution
facilities, where they are prepared for distribution to our stores. The
automated sorting systems in these 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 models to combine
shipments when possible and improve the efficiency of the distribution
operations. These models enable the distribution operations to reflect various
customer profiles into each store's plan. These profiles provide information not
only about the quantity of merchandise to be distributed to each store, but also
about the type of merchandise to be shipped.
Our merchandising and buying philosophy coupled with enhancements in
inventory management help facilitate the timely and orderly purchase and flow of
merchandise. This enables our stores to offer fresh product assortments on a
regular basis. We are also currently analyzing our existing distribution
network, and we expect shortly to make a decision whether to lease or purchase
an additional distribution facility.
Competition
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including department stores, specialty apparel stores,
discount stores, and mail-order and e-commerce companies. We cannot reasonably
estimate the number of our competitors due to the large number of companies
selling women's apparel. The primary elements of competition are merchandise
style, size, selection, quality, display, and price, as well as store location,
design, advertising, and promotion and personalized service to the customers.
Monsoon and Accessorize Joint Venture
In October 2000, we entered into a joint venture with Monsoon plc. of
London to bring its successful apparel and accessories retail stores concepts,
Monsoon and Accessorize, from the United Kingdom to the United States. The
Monsoon concept is a women's apparel specialty store in the moderate-better
price range, with locations in premier malls. All merchandise is marketed under
private label and is created by Monsoon's team of designers and buyers using
manufacturing resources throughout the world. Product offerings include leading
fashions in both career and special-occasion dressing. The target customer is 25
to 55 years old. Accessorize specializes in women's accessories in the moderate
price range. Merchandise is also private label and is sourced from around the
world using Accessorize's design, buying, and development teams. Product
offerings include bags, necklaces, bracelets, earrings, hair accessories, hats,
purses, scarves, sunglasses, and sarongs, among others. The target customer is
16 to 45 years old. We opened eight Monsoon and/or Accessorize stores during
Fiscal 2002 and will be evaluating the performance of these stores in developing
a longer-term growth strategy for these brands.
6
Employees
As of the end of Fiscal 2002, we employed approximately 24,000 associates,
which included approximately 15,000 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 60 of
our employees are represented by unions, including approximately 35 employees at
our Memphis, Tennessee distribution center. We believe that our relationship
with these unions, and our employees overall, is satisfactory.
Trademarks and Servicemarks
We own, or are in the process of obtaining, all rights to the trademarks
and trade names we believe are necessary to conduct our business as presently
operated. "Fashion Bug(R)", "Fashion Bug PLUS(R)", "L.A. BLUES(R)",
"Catherine's(R)", "Catherine's PLUS SIZES(R)", "CST STUDIO(R)", "CST SPORT(R)",
"MAGGIE BARNES(R)", "ANNA MAXWELL(R)", "LIZ & ME(R)", "Lane Bryant(R)", "VENEZIA
CLOTHING CO.(R)", "ELEMENTAL STRETCH(TM)", "PLUS SIZE SPECIALIST(TM)", "FASHION
CHOICES FASHION SAVINGS Fashion Bug(TM)", and "CACIQUE(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 domain name registrations: charming.com,
charmingshoppes.com, fashionbug.com, fashionbugplus.com, catherines.com,
lanebryant.com and others of lesser importance.
Executive Offices
Charming Shoppes, Inc., was incorporated in Pennsylvania in 1969. Our
principal offices are located at 450 Winks Lane, Bensalem, Pennsylvania 19020.
Our telephone number is (215) 245-9100.
7
Item 2. Properties
We lease all our stores, with the exception of five stores, which we own.
Typically, store leases have initial terms of 5 to 20 years and generally
contain provisions for renewal options, additional rental charges based on sales
performance, and payment of real estate taxes and common area charges.
With respect to leased stores open as of February 2, 2002, the following
table shows the number of store leases expiring during the periods indicated,
assuming the exercise of our renewal options:
Number of
Period Leases Expiring
------ ---------------
2002 139
2002 - 2007 728
2008 - 2012 499
2013 - 2017 338
2018 - 2022 416
2023 - 2027 269
Thereafter 52
We own a 1,000,000 square foot distribution center in Greencastle, Indiana
that services our Fashion Bug and Fashion Bug Plus stores and a 213,000 square
foot distribution center in Memphis, Tennessee that services our Catherine's
stores. We also lease a 514,000 square foot distribution center near Columbus,
Ohio that services our Lane Bryant stores pursuant to a lease with an affiliate
of The Limited that will terminate in 2004.
We lease 91,000 square feet of office space in Bensalem, Pennsylvania that
houses our corporate headquarters and Fashion Bug operations. We also own
approximately 22 acres in Bensalem with a 145,000 square foot office building
that houses our primary data processing facility and additional administrative
offices. We own a 99,000 square foot facility in Memphis, Tennessee that houses
our Catherine's operations and an additional data processing facility. We also
lease a 130,000 square foot facility near Columbus, Ohio that houses our Lane
Bryant operations. Spirit of America National Bank, our wholly owned credit card
bank subsidiary, occupies 30,000 square feet of leased office space in Miami
Township, Ohio and 48,000 square feet of leased space for a credit card
processing facility in Hollywood, Florida. We also maintain offices in New York
City that occupy 13,000 square feet of leased space, and we own or lease a total
of 43,000 square feet of office and warehouse space in Asia.
8
Item 3. Legal Proceedings
On October 24, 2001, a terminated employee filed a purported class action
suit in Alameda Superior Court, California against Lane Bryant, Inc. alleging
that she was misclassified as an exempt employee and that she was entitled to be
paid overtime which she had not received. She further asserted that all of the
Lane Bryant store sales managers in California were also misclassified and
entitled to overtime. Because the investigation of the case and the discovery
phase of the proceedings are at their initial stages, it is premature to
speculate on the potential risk this suit presents to Lane Bryant. We intend to
vigorously defend this suit.
There are no other pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we or any of our subsidiaries is
a party or of which our property or the property of any of our subsidiaries is
the subject that are expected to have a material adverse effect on our financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
9
Additional Part I Information - Our Executive Officers
The following list contains certain information relative to our executive
officers. There are no family relationships among any of our executive officers.
Dorrit J. Bern, 52, has served as Chairman of the Board of Directors since
January 1997. She has also served as President and Chief Executive Officer since
September 1995. Ms. Bern's term as a Director expires in 2002.
Joseph M. Baron, 54, has served as Executive Vice President and Chief
Operating Officer since March 2002. Prior to that, he served as President and
Chief Executive Officer of Homelife Corporation from February 1999 to October
2001, and as President of Sears Homelife Furniture from 1996 to February 1999.
Homelife Corporation filed a bankruptcy petition under Chapter 11 of the U. S.
Bankruptcy Code during July 2001.
Anthony A. DeSabato, 53, has served as Executive Vice President and
Corporate Director of Human Resources since 1990, and he has been employed by us
since 1987.
Eric M. Specter, 44, 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, 53, has served as Executive Vice President and General
Counsel since 1990, and he has been employed by us since 1989. He has also
served as Secretary since February 1998.
Erna Zint, 58, has served as Executive Vice President - Sourcing since
January 1996.
Jonathon Graub, 43, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
Jeffery A. Warzel, 45, has served as Senior Vice President - Infrastructure
Operations and Strategic Planning since January 2000. Prior to that, he served
as Vice President - Operations Support and Business Development for Western
Auto, a subsidiary of Sears Roebuck & Co., from August 1996 to December 1999.
Carmen Monaco, 55, has served as Vice President - Marketing since May 1997.
Prior to that, he served as Senior Vice President - Marketing/Advertising for
Goody's Family Clothing Inc. from August 1992 to May 1997.
John J. Sullivan, 55, has served as Vice President - Corporate Controller
since October 1998. Prior to that, he served as Senior Vice President and Chief
Financial Officer for National Media Corp. from January 1998 to October 1998,
and as Senior Vice President of Administration for National Media Corp. from
April 1995 to January 1998.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on the over-the-counter market and quoted on the
Nasdaq National Market under the symbol "CHRS." The following table sets forth
the high and low sale prices for our common stock during the indicated periods,
as reported by Nasdaq.
Fiscal 2002 Fiscal 2001
----------- -----------
High Low High Low
---- --- ---- ---
1st Quarter ....................$7.13 $4.62 $8.00 $4.94
2nd Quarter .................... 7.05 5.18 7.03 4.63
3rd Quarter .................... 7.00 4.48 6.19 4.88
4th Quarter .................... 6.70 4.73 7.13 5.38
The approximate number of holders of record of our common stock as of
April 29, 2002 was 2,408. This number excludes individual stockholders holding
stock under nominee security position listings.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. In addition,
our existing credit facility and one of our agreements with The Limited, Inc.
restrict the payment of dividends on our common stock. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financing" and "Item 8. Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Debt").
On August 16, 2001, we acquired 100% of the outstanding capital stock of
Lane Bryant, Inc. from a subsidiary of The Limited, Inc. for cash of $286.2
million, including direct costs of the acquisition of $6.2 million and 8,688,784
shares of our common stock, valued at $55.0 million. On December 10, 2001, based
on the final determination of the value of the Lane Bryant net assets acquired,
we issued an additional 837,209 shares of our common stock, valued at $4.3
million, to a subsidiary of The Limited in connection with the acquisition. The
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. The Limited has made certain
representations to us as to investment intent, receipt of all information
necessary or appropriate in deciding whether to purchase the shares, and
knowledge and experience in financial or business matters. No offers to sell the
shares were made by any form of general solicitation or general advertisement.
The shares were issued subject to restrictions on transfer absent registration
under the Securities Act and, in any event, The Limited is restricted from
selling the shares for a one-year period after the close of the transaction.
Pursuant to a Registration Agreement, we have agreed to provide certain
registration rights with respect to the shares after the one-year period.
11
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of January 31, 1998 through February 2, 2002. The selected
financial data is taken from our audited financial statements and should be read
in conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and
accompanying notes included under "Item 8. Financial Statements and
Supplementary Data."
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
Fiscal Year Ended
-----------------
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
(in thousands, except share amounts) 2002(1) 2001(1)(2) 2000(1) 1999 1998
---- ---- ---- ---- ----
Operating Statement Data:
Net sales .......................................... $1,993,843 $1,607,079 $1,196,529 $1,035,160 $1,016,537
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and occupancy
expenses ...................................... 1,455,601 1,134,554 854,774 771,107 772,709
Selling, general, and administrative expenses ...... 486,204 382,398 281,637 245,164 231,476
Amortization of goodwill ........................... 4,885 4,885 0 0 0
Restructuring charge (credit) ...................... 37,708(3) 0 (3,471)(4) 54,246(5) 0
Non-recurring gain from demutualization of
insurance company ............................. 0 0 (6,700)(6) 0 0
Non-recurring gain from asset securitization ....... 0 0 0 0 (13,018)(7)
---------- ---------- ---------- ---------- ----------
Total operating expenses .......................... 1,984,398 1,521,837 1,126,240 1,070,517 991,167
---------- ---------- ---------- ---------- ----------
Income (loss) from operations ...................... 9,445 85,242 70,289 (35,357) 25,370
Other income, principally interest ................. 4,730 8,304 7,698 14,420 14,442
Interest expense ................................... (18,701) (8,894) (7,308) (10,052) (10,390)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary item, and cumulative
effect of accounting change ................... (4,526) 84,652 70,679 (30,989) 29,422
Income tax provision (benefit) ..................... (120) 33,014 26,852 (10,854) 10,088
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting change ........ (4,406) 51,638 43,827 (20,135) 19,334
Extraordinary gain on early retirement of debt,
net of tax .................................... 0 0 1,232 0 0
Cumulative effect of accounting change, net of tax . 0 (540)(8) 0 0 0
---------- ---------- ---------- ---------- ----------
Net income (loss) .................................. $ (4,406) $ 51,098 $ 45,059 $ (20,135) $ 19,334
========== ========== ========== =========== ==========
Basic net income (loss) per share .................. $(.04) $.50 $.46 $(.20) $.18
Basic weighted average common shares outstanding ... 105,842 101,119 98,609 99,441 105,678
Net income (loss) per share, assuming dilution ..... $(.04) $.48 $.43 $(.20) $.18
Diluted weighted average common shares and
equivalents outstanding ....................... 105,842 115,027 115,888 99,441 107,081
Balance Sheet Data:
Total assets ....................................... $1,132,677 $852,767 $784,796 $684,649 $709,738
Current portion - long-term debt ................... 9,379 4,954 1,920 16 16
Long-term debt ..................................... 208,491 113,540 105,213 119,475 138,116
Working capital .................................... 145,047 208,389 161,376 192,274 163,208
Stockholders' equity ............................... 549,802 493,269 436,263 383,572 416,810
12
Fiscal Year Ended
-----------------
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002(1) 2001(1)(2) 2000(1) 1999 1998
---- ---- ---- ---- ----
Performance Data:
Including restructuring charge (credit) and non-recurring items:
Net return on average stockholders' equity ...................... (0.8)% 11.0% 11.0% (5.0)% 4.6%
Net return on average total assets .............................. (0.4) 6.2 6.1 (2.9) 2.7
Excluding restructuring charge (credit) and non-recurring items:
Net return on average stockholders' equity ...................... 3.6 10.6 8.6 3.7 2.6
Net return on average total assets .............................. 2.0 6.2 5.3 2.2 1.5
- --------------------
(1) Results for Fiscal 2002 include the results of Lane Bryant, Inc., acquired
August 16, 2001, from the date of acquisition. Results for Fiscal 2002,
Fiscal 2001, and Fiscal 2000 include the results of Catherines Stores
Corporation, acquired January 7, 2000, and Modern Woman Holdings, Inc.,
acquired August 2, 1999, from the dates of their respective acquisitions.
(2) Fiscal 2001 consisted of 53 weeks.
(3) In January 2002, our Board of Directors approved a restructuring plan which
included the closing of The Answer/Added Dimensions chain of 77 stores, the
conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, the closing of 130 under-performing Fashion Bug stores,
and the conversion of 44 Fashion Bug stores to Lane Bryant stores, which
resulted in a pre-tax charge of $37,708,000.
(4) During Fiscal 2000, we revised our estimates of costs recognized during
Fiscal 1999 relating to the closing of our Bensalem distribution center and
the elimination of our men's business (see note (5) below). As a result, we
recognized pre-tax restructuring credits of $2,834,000 relating to the
closing of our distribution center and $2,096,000 relating to the
elimination of our men's business. In addition, we recognized a pre-tax
restructuring charge of $1,459,000 in Fiscal 2000 in conjunction with the
consolidation of the Modern Woman chain of stores into the Catherine's
chain.
(5) During Fiscal 1999, our Board of Directors approved a restructuring plan in
conjunction with the elimination of our men's business, which resulted in a
pre-tax charge of $34,000,000. In addition, our Board of Directors approved
a restructuring plan in conjunction with the decision to consolidate our
distribution center operations, which resulted in a pre-tax charge of
$20,246,000.
(6) During Fiscal 2000, we received a stock distribution from one of our mutual
insurance carriers in connection with the carrier's conversion to a
publicly held corporation (demutualization). We recorded the distribution
at its fair value and recognized the resulting non-recurring gain in income
from operations.
(7) During Fiscal 1998, we adopted Statement of Financial Accounting Standards
("SFAS") No. 125, which included the valuing of an "I/O Strip" representing
a payment stream consisting of excess finance charges and past-due fees
over the sum of the return paid to certificate holders and credit losses.
As a result, we eliminated our loss reserve related to our retained
interest and related recourse provisions of our credit card certificates,
and recognized a non-recurring gain of $13,018,000.
(8) 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 should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used
herein, the terms "Fiscal 2002," "Fiscal 2001," and "Fiscal 2000" refer to our
fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000,
respectively. Fiscal 2001 consisted of 53 weeks, while Fiscal 2002 and Fiscal
2000 each consisted of 52 weeks.
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, and capital expenditures, plans for future operations, and financing
needs or plans, as well as assumptions relating to the foregoing. The words
"expect," "project," "estimate," "predict," "anticipate," "believes," and
similar expressions are also intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance, and achievements could differ materially from those set
forth in, contemplated by, or underlying the forward-looking statements. We
assume no obligation to update any forward-looking statement to reflect actual
results or changes in or additions to the factors affecting such forward-looking
statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately
predict rapidly changing fashion trends, customer preferences
and other fashion-related factors, which we may not be able to
successfully accomplish in the future.
o The general slowdown in the United States economy and the
uncertain economic outlook has led to reduced consumer demand
for our apparel and accessories and may continue to do so in
the future.
o The women's specialty retail apparel industry is highly
competitive and we may be unable to compete successfully
against existing or future competitors.
o We cannot assure the successful implementation of our business
plan for increased profitability and growth in our plus-sized
women's apparel business.
o Our business plan is largely dependent upon the continued
growth in the plus-sized women's apparel market which may not
continue.
o We depend on key personnel, particularly our Chief Executive
Officer, Dorrit J. Bern, and we may not be able to retain or
replace these employees or recruit additional qualified
personnel.
o We depend on our distribution centers and could incur
significantly higher costs and longer lead times associated
with distributing our products to our stores if any of these
distribution centers were to shut down for any reason.
o We depend for our working capital needs on the availability of
credit, including credit we receive from our suppliers and
their agents, and on our credit card securitization program.
If we were
14
unable to obtain sufficient financing at affordable cost, our
ability to merchandise our stores would be adversely affected.
o We rely significantly on foreign sources of production and
face a variety of risks (including political instability,
imposition of duties or quotas, increased security
requirements applicable to imports, delays in shipping,
increased costs of transportation, and issues relating to
compliance with domestic or international labor standards)
generally associated with doing business in foreign markets
and importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and
operating income. Any decrease in sales or margins during our
peak sales periods, or in the availability of working capital
needed in the months preceding such periods, could have a
material adverse effect on our business. In addition, extreme
or unseasonable weather conditions may have an impact on our
sales.
o War, acts of terrorism, or the threat of either may negatively
impact availability of merchandise, customer traffic to our
stores and otherwise adversely impact 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 we believe are important
to our success and our competitive position.
o We may be unable to hire and retain suitable sales associates
at our stores.
o We may be unable to successfully implement our restructuring
plan described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver
merchandise to us in a timely manner or to meet our quality
standards.
o Our sales are dependent upon a high volume of traffic in the
strip centers and malls in which our stores are located and
our future growth is dependent upon the availability of
suitable locations for new stores.
o We may be unable to successfully integrate Lane Bryant into
our current operating structure, and we currently rely on
management information systems and logistics services from The
Limited with respect to our Lane Bryant stores.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial statements and accompanying notes included
elsewhere in this report in conformity with United States generally accepted
accounting principles. This requires us to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
These estimates and assumptions are based on historical experience, analysis of
current trends, and various other factors that we believe to be reasonable under
the circumstances. Actual results could differ from those estimates under
different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and
estimates and make adjustments when facts and circumstances warrant.
Historically, actual results have not differed materially from those determined
using required estimates. Our significant accounting policies are described in
the notes accompanying the financial
15
statements included elsewhere in this report. However, we consider the following
accounting policies to be more critical to the preparation of our financial
statements and accompanying notes.
Revenue Recognition
Our revenues from merchandise sales are net of returns and allowances and
exclude sales tax. We have adopted Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," effective as of the beginning of Fiscal 2001. As a result of
adoption of SAB 101, we established a reserve for estimated future sales returns
based on an analysis of actual returns received following the end of each fiscal
period and we began deferring recognition of layaway sales to the date of
delivery. A change in our actual rates of sales returns and layaway sales
experience would affect the level of revenue recognized.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program provides discounts on customer purchases over a
twelve-month period upon payment of a $20 annual fee. We recognize revenues from
card fees as sales over the life of the membership dependent upon discounts
being earned by the customer. If a customer does not earn discounts in an amount
that exceeds the card fee, such difference is recognized as revenue upon the
expiration of the annual period. Upon early cancellation of a loyalty card,
refunds of membership fees are reduced by the amount of any discounts granted to
the member under the program. We recognize our costs of administering the
program in cost of goods sold as incurred. We offset revenues recognized from
card fees by discounts granted under the program. An increase in the level of
refunds of membership fees could impact the level of revenue recognized.
Inventories
We value our merchandise inventories at the lower of cost or market under
the retail inventory method (average cost basis), which is an averaging method
that has been widely used in the retail industry. Under the retail inventory
method ("RIM"), the valuation of inventories at cost and the resulting gross
margins are adjusted in proportion to markdowns and shrinkage on our retail
inventories. The use of the RIM will result in valuing inventories at the lower
of cost or market if markdowns are currently taken as a reduction of the retail
value of inventories. The RIM calculation involves certain significant
management judgments and estimates including, among others, merchandise markon,
markup, markdowns, and shrinkage, which significantly affect the ending
inventory valuation at cost as well as resulting gross margins. Events such as
store closings, liquidations, and the general economic environment for retail
apparel sales could result in an increase in the level of markdowns, which under
the RIM could result in lower inventory values and increases to cost of goods
sold as a percentage of net sales in future periods. In addition, failure to
estimate markdowns currently can result in an overstatement of inventory cost
under the lower of cost or market principle. At the end of Fiscal 2002, for
purposes of valuing our inventory, we recognized markdowns that had not been
taken and which reduced inventories by approximately $4.5 million.
In connection with our restructuring plan announced on January 28, 2002
(see "RECENT DEVELOPMENTS - Restructuring Charges" below), we recognized
additional markdowns of $3.0 million in the fourth quarter of Fiscal 2002. The
markdowns were related to the valuation of inventory for the stores we expect to
close during the first half of Fiscal 2003.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires us to assess these assets for recoverability whenever
events or changes in circumstances indicate that the carrying amounts of
long-lived tangible and intangible assets may not be recoverable. We consider
historical performance and future estimated results in our evaluation of
potential
16
impairment and then compare the carrying amount of the asset to the estimated
future undiscounted cash flows expected to result from the use of the asset. If
the estimated future undiscounted cash flows are less than the carrying amount
of the asset, the asset is written down to its estimated fair value and an
impairment loss is recognized. Our estimation of fair value is generally based
on either appraised value or measured by discounting future cash flows, based on
a number of assumptions and estimates.
In connection with our restructuring plan announced on January 28, 2002
(see "RECENT DEVELOPMENTS - Restructuring Charges" below), we recognized a
write-down of store fixed assets of approximately $17.8 million in accordance
with the provisions of SFAS No. 121. We believe that the estimates and
assumptions used in determining this impairment charge are reasonable and
appropriate.
At February 2, 2002, we evaluated the recoverability of goodwill and other
long-lived assets by comparing carrying values to undiscounted cash flows. When
we fully adopt SFAS No. 142, "Goodwill and Other Intangible Assets" in Fiscal
2003, impairment for goodwill and indefinite-lived intangible assets will be
determined by comparing carrying values and fair values. Indefinite-lived
intangible assets must be tested during the first quarter. The initial step in
testing goodwill must be completed by the end of the second quarter. We
currently believe that upon adoption of SFAS No. 142, we may be required to
write-down a significant portion of Catherine's goodwill, which totaled $87.2
million at the end of Fiscal 2002. Any such write-down would be presented as the
cumulative effect of an accounting change in the Fiscal 2003 Consolidated
Statement of Operations and Comprehensive Income(Loss).
Acquisitions - Purchase Price Allocation
We allocate the cost of acquisitions to the assets acquired and liabilities
assumed. We assign to all identifiable assets acquired, including intangible
assets, and all identifiable liabilities assumed a portion of the cost of the
acquired company equal to the estimated fair value of such assets and
liabilities at the date of acquisition. We record the excess of the cost of the
acquired company over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed as goodwill. We make the initial purchase
price allocation based on the evaluation of information and estimates available
at the date of the financial statements. As final information regarding the fair
value of assets acquired and liabilities assumed is evaluated and estimates are
refined, we make appropriate adjustments to the amounts allocated to those
assets and liabilities and change the amounts allocated to goodwill. We use all
available information to make these fair value determinations and, for major
business acquisitions, typically engage an outside appraisal firm to assist in
the fair value determination of the acquired long-lived assets. We have, if
necessary, up to one year after the closing date of an acquisition to finish
these fair value determinations and finalize the purchase price allocation.
Asset Securitizations
We use an asset securitization program to fund substantially all of the
credit card receivables generated by our Fashion Bug credit card program. The
Fashion Bug credit cards are issued by Spirit of America National Bank, one of
our subsidiaries. Asset securitization is a practice commonly used in the retail
industry which allows companies with proprietary credit card programs to finance
credit card receivables at attractive rates. Asset securitization involves the
sale of the bank's Fashion Bug proprietary credit card receivables to a special
purpose entity, which in turn transfers the receivables to a qualified special
purpose entity (the "Trust") which is administered by an independent trustee.
Because the Trust qualifies as a qualifying special purpose entity ("QSPE"), its
assets and liabilities are not consolidated in our balance sheet.
The Trust issues to investors various forms of certificates or credit card
receivable interests (the "Certificates") that represent interests in the
underlying Trust assets. The Trust pays to the holders of Certificates a portion
of future scheduled cash flows under preset terms and conditions, the receipt of
which is dependent upon cash flows generated by the underlying performance of
the Trust assets.
17
In each securitization transaction, we retain certain subordinated
interests, which effectively serve as a form of credit enhancement to the
Certificates sold to outside investors. To the extent amounts remain available
after repayment to the outside investors, the amounts are paid to us. Neither
the investors nor the Trust have recourse against us beyond the combination of
Trust assets and our subordinated interests, other than for breaches of certain
customary representations, warranties and covenants. These representations,
warranties, covenants and related indemnities do not protect the Trust or the
outside investors against credit-related losses on the receivables.
In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," we record an interest in
the estimated present value of cash flows to be received by us over the expected
outstanding period of the receivables. These cash flows essentially represent
finance charges and past due fees in excess of the amounts paid to Certificate
holders and credit losses, and are referred to as the "I/O strip." We use
certain valuation assumptions related to the average lives of the receivables
sold and anticipated credit losses, as well as the appropriate market discount
rate, in determining the estimated present value of the I/O strip. Changes in
the average life of the receivables sold, loan payment rate, discount rate, and
credit loss percentage could adversely impact the actual value of the I/O strip.
Accordingly, actual results could differ materially from the estimates, and
changes in circumstances could result in significant future changes to the
assumptions currently being used.
RESULTS OF OPERATIONS
Financial Summary
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
Percentage Increase
(Decrease)
Percentage of Net Sales From Prior Year
----------------------- ---------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2002 2001 2000 2002-2001 2001-2000
---- ---- ---- --------- ---------
Net sales ........................................... 100.0% 100.0% 100.0% 24.1% 34.3%
Cost of goods sold, buying, and occupancy ........... 73.0 70.6 71.4 28.3 32.7
Selling, general, and administrative ................ 24.4 23.8 23.5 27.1 35.8
Amortization of goodwill ............................ 0.2 0.3 -- -- **
Restructuring charge (credit) ....................... 1.9 -- (0.3) ** (100.0)
Non-recurring gain from demutualization of
insurance company .............................. -- -- 0.6 -- (100.0)
Income from operations .............................. 0.5 5.3 5.9 (88.9) 21.3
Other income, principally interest .................. 0.2 0.5 0.6 (43.0) 7.9
Interest expense .................................... 0.9 0.5 0.6 110.3 21.7
Income tax provision (benefit) ...................... -- 2.1 2.2 (100.4) 22.9
Income (loss) before extraordinary item and
cumulative effect of accounting change ......... (0.2) 3.2 3.7 (108.5) 17.8
Gain on early retirement of debt, net of taxes ...... -- -- 0.1 -- **
Net income (loss) ................................... (0.2) 3.2 3.8 (108.6) 13.4
- --------------------
** Not meaningful
18
The following table sets forth our net sales by store brand:
Year Ended Year Ended Year Ended
February 2, 2002 February 3, 2001 January 29, 2000
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(in millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
Fashion Bug $1,164.0 $303.4 $1,213.1 $340.8 $1,138.3 $310.8
Lane Bryant 445.3(1) 254.1 0.0 0.0 0.0 0.0
Catherine's, including Modern
Woman 381.7 88.0 394.0 93.9 58.2(2)(3) 37.6(2)
Monsoon/Accessorize 2.8 1.6 0.0 0.0 0.0 0.0
-------- ------ -------- ------ -------- ------
Total net sales $1,993.8 $647.1 $1,607.1 $434.7 $1,196.5 $348.4
======== ====== ======== ====== ======== ======
- --------------------
(1) Sales from the date of acquisition on August 16, 2001.
(2) Includes Catherine's sales from the date of acquisition on January 7, 2000.
(3) Includes Modern Woman sales from the date of acquisition on August 2, 1999.
The following table sets forth certain additional information related to
changes in our net sales:
Year Ended Year Ended
February 2, 2002 February 3, 2001
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
(Decrease) increase in comparable store sales(1)(2):
Fashion Bug ................................................. (7)% (8)% 1% (1)%
Catherine's ................................................. (2) (5) -- --
Sales from new stores as a percentage of total
consolidated prior-period sales(2):
Fashion Bug ................................................. 5 4 8 7
Catherine's ................................................. 3 2 28(3) 14(3)
Lane Bryant ................................................. 28 58 -- --
Monsoon/Accessorize ......................................... -- -- -- --
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales(2):
Fashion Bug ................................................. (3) (3) (3) (3)
Catherine's ................................................. (3) (1) -- --
Increase in sales from additional week in Fiscal 2001 ............ -- -- 2 8
Increase in total sales .......................................... 24 % 49 % 34 % 25 %
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
(2) Pro forma for Fiscal 2001 as if based on comparable 52-week fiscal years
and 13-week fiscal quarters. Results for the fourth quarter and fiscal year
ended February 2, 2002 may not be equivalent to the change in total sales.
(3) Includes sales from Modern Woman stores acquired in August 1999.
19
Comparison of Fiscal 2002 to Fiscal 2001
Net Sales
Net sales were $1,993.8 million in Fiscal 2002, an increase of 24.1% from
$1,607.1 million in Fiscal 2001, primarily due to our acquisition of Lane Bryant
in August 2001. The number of retail stores in operation at the end of Fiscal
2002 was 2,446 (including 647 Lane Bryant stores), compared to 1,755 at the end
of Fiscal 2001. In line with overall consumer shopping trends and a generally
weak retail sales environment, we experienced a year-over-year decrease in
overall comparable store sales in Fiscal 2002 of 4.0%. For Fashion Bug stores,
improvements in junior sportswear were offset by declines in other merchandise
categories. In January 2001, we announced plans to support growth in plus-size
apparel, and eliminated girls apparel from Fashion Bug stores effective at the
end of the 2000-2001 winter season. Sales of Fashion Bug girls apparel were
approximately $38.0 million during Fiscal 2001. For Catherine's stores, an
increase in Fiscal 2002 sales of casual sportswear was offset by declines in
other merchandise categories.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers (see "CRITICAL ACCOUNTING POLICIES - Revenue Recognition"
above). We recognized $13.6 million of revenues from card fees in connection
with this program in Fiscal 2002.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,455.6 million in
Fiscal 2002, an increase of 28.3% from $1,134.6 million in Fiscal 2001,
principally reflecting the increase in net sales. As a percentage of net sales,
these costs increased by 2.4% in Fiscal 2002 as compared to Fiscal 2001.
Cost of goods sold as a percentage of net sales increased 0.4% in Fiscal
2002 as compared to Fiscal 2001. Reduced merchandise margins in our Fashion Bug
and Catherine's stores as a result of an increased level of promotional activity
during Fiscal 2002, and costs related to exiting the girls business in our
Fashion Bug stores, were partially offset by higher merchandise margins for our
Lane Bryant stores and to a lesser extent by close management of in-season
inventory levels. We include in cost of goods sold merchandise costs, net of
discounts and allowances, freight, and inventory shrinkage. Net merchandise
costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 2.0%
in Fiscal 2002 as compared to Fiscal 2001. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of the decline in
comparable store sales. Increased utilities expenses, relatively higher
occupancy expenses for new and relocated stores as compared to our existing
stores, and relatively higher occupancy expenses for our Lane Bryant stores also
contributed to the increase in buying and occupancy expenses as a percentage of
net sales. Buying expenses increased slightly as a percentage of net sales,
primarily as a result of buying costs for Lane Bryant stores, which are
relatively higher due to the product development and design process required to
support a 100% private-label business. Buying expenses include payroll, payroll
related costs, and operating expenses for our buying departments and warehouses.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities, maintenance, and depreciation for our stores and
warehouse facilities and equipment. Buying and occupancy costs are treated as
period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $486.2 million in Fiscal
2002, an increase of 27.1% from $382.4 million in Fiscal 2001, principally
reflecting the acquisition of a large number of new stores in connection with
the Lane Bryant transaction. As a percentage of net sales, these costs increased
by 0.6% in Fiscal
20
2002 as compared to Fiscal 2001. Selling expenses increased 0.8% as a percentage
of net sales. The relative increase was attributable to the lack of leverage on
relatively fixed store payroll expenses as a result of the decline in comparable
store sales. An improvement in our credit operations (which are included in
selling expenses) as a result of reduced interest rates related to our asset
securitization program was partially offset by increased delinquencies in our
proprietary credit card program during the latter part of Fiscal 2002. General
and administrative expenses decreased 0.2% as a percentage of net sales in
Fiscal 2002, primarily as a result of the synergistic effect of a larger sales
base on corporate administrative expenses and the favorable impact of cost
reduction initiatives. Selling, general, and administrative expenses exclude
goodwill amortization related to our acquisition of Catherine's.
Other Income
Other income was $4.7 million in Fiscal 2002, a decrease of 43.0% from $8.3
million in Fiscal 2001. This decrease was primarily caused by a decrease in
interest income. Interest income decreased as a result of lower levels of
invested funds and a decrease in the average yield on investments during Fiscal
2002 as compared to Fiscal 2001. During Fiscal 2002, investments in marketable
securities were converted into cash and cash equivalents, and we used $83.0
million of cash and cash equivalents in connection with the acquisition of Lane
Bryant.
Interest Expense
Interest expense was $18.7 million in Fiscal 2002, an increase of 110.3%
from $8.9 million in Fiscal 2001. This increase was primarily the result of
short-term and long-term borrowings incurred in connection with the Lane Bryant
acquisition, and to a lesser extent, the result of additional long-term mortgage
borrowings and acquisitions of point-of-sale equipment under long-term capital
leases.
Income Tax Provision (Benefit)
The income tax benefit for Fiscal 2002 was $120 thousand resulting in a
(2.7)% effective tax rate, as compared to an income tax provision for Fiscal
2001 of $33.0 million, resulting in a 39% effective tax rate. The Fiscal 2002
net tax benefit was negatively affected by a $1.8 million provision related to
one of our employee insurance programs.
Comparison of Fiscal 2001 to Fiscal 2000
Net Sales
Net sales were $1,607.1 million in Fiscal 2001, an increase of 34.3% from
net sales of $1,196.5 million for Fiscal 2000, primarily due to our acquisition
of Catherine's and Modern Woman. Net sales for Fiscal 2001 include $394.0
million of sales from Catherine's and Modern Woman stores compared to net sales
of $58.2 million from Catherine's and Modern Woman stores in Fiscal 2000. We
experienced a year-over-year increase in overall comparable store sales in
Fiscal 2001 of 1.0%.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,134.6 million in
Fiscal 2001, an increase of 32.7% from $854.8 million in Fiscal 2000, reflecting
the increase in net sales. As a percentage of net sales, these costs decreased
by 0.8% in Fiscal 2001 as compared to Fiscal 2000. Cost of goods sold as a
percentage of net sales decreased 1.2% in Fiscal 2001 as compared to Fiscal
2000. The improvement in merchandise margins was primarily a result of the
effect of relatively higher gross margins for our Catherine's stores, although
cost of goods sold for our Fashion Bug stores also decreased as a percentage of
net sales in Fiscal 2001 as compared to Fiscal 2000. Buying and occupancy
expenses, expressed as a percentage of net sales, increased 0.4% in Fiscal 2001
as
21
compared to Fiscal 2000. The increase in buying and occupancy expenses was
primarily a result of increased utilities expenses and relatively higher
occupancy expenses for new and relocated stores as compared to our existing
stores.
Selling, General, and Administrative
Selling, general, and administrative expenses were $382.4 million in Fiscal
2001, an increase of 35.8% from $281.6 million in Fiscal 2000, principally
reflecting the acquisition of a large number of new stores in connection with
the Catherine's and Modern Woman transactions. As a percentage of net sales,
these costs increased by 0.3% in Fiscal 2001 as compared to Fiscal 2000. The
relative increase reflects relatively higher expenses for Catherine's as a
percentage of net sales. Selling, general, and administrative expenses for the
Fashion Bug stores were relatively unchanged as a percentage of net sales.
Selling expenses were constant as a percentage of net sales. Increases in
payroll costs were offset by lower marketing expenses as a percentage of sales
and a reduction in the cost of our proprietary credit card program. General and
administrative expenses increased 0.3% as a percentage of net sales in Fiscal
2001, primarily as a result of the lack of sales leverage and relatively higher
expenses for Catherine's, which have been partially offset by improvements
arising from the integration and consolidation of Catherine's.
Other Income
Other income was $8.3 million in Fiscal 2001, an increase of 7.9% from $7.7
million in Fiscal 2000. This increase was primarily caused by a decrease in net
realized losses on sales of available-for-sale securities in Fiscal 2001 as
compared to Fiscal 2000. During the second half of Fiscal 2000, we incurred
realized losses from sales of available-for-sale securities to finance the
Catherine's and the Modern Woman acquisitions. Interest income also decreased as
a result of reduced levels of available-for-sale securities during Fiscal 2001
as compared to Fiscal 2000.
Interest Expense
Interest expense was $8.9 million in Fiscal 2001, an increase of 21.7% from
$7.3 million in Fiscal 2000. This increase was primarily the result of an
increase in long-term capital lease financing.
Income Tax Provision (Benefit)
The income tax provision for Fiscal 2001 was $33.0 million, resulting in a
39% effective tax rate, as compared to an income tax provision for Fiscal 2000
of $26.9 million, resulting in a 38% effective tax rate. Included in the Fiscal
2001 and Fiscal 2000 tax provisions are $3.5 million and $2.0 million,
respectively, related to one of our employee insurance programs. The increase in
the effective tax rate from Fiscal 2000 to Fiscal 2001 is also the result of the
non-deductibility for tax purposes of goodwill related to our Catherine's
acquisition.
Non-recurring Gain From Demutualization of Insurance Company
During Fiscal 2000, we received a stock distribution from one of our mutual
insurance carriers in connection with the carrier's conversion to a
publicly-held corporation (demutualization). In accordance with the consensus
reached in Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock
Received from the Demutualization of A Mutual Insurance Company," we recorded
the distribution at its fair value and recognized the resulting non-recurring
gain of $6.7 million in income from operations, and subsequently sold the
securities received.
22
Gain on Early Retirement of Debt
During Fiscal 2000, we repurchased $23.3 million aggregate principal amount
of our 7.5% Convertible Subordinated Notes due 2006 at a total cost of $21.0
million. The notes had an aggregate carrying value of $22.9 million as of the
repurchase dates. The repurchases resulted in an extraordinary gain of $1.2
million, net of income taxes of $0.7 million.
Comparison of Fourth Quarter 2002 to Fourth Quarter 2001
Net Sales
Net sales in the fourth quarter of Fiscal 2002 were $647.1 million, an
increase of 48.9% from net sales of $434.7 million in the fourth quarter of
Fiscal 2001, primarily due to our acquisition of Lane Bryant. Net sales for the
fourth quarter of Fiscal 2002 include $254.1 million of sales from Lane Bryant
stores. We experienced a quarter-over-quarter decrease in overall comparable
store sales in the fourth quarter of Fiscal 2002 of 3.0%.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $482.1 million in
the fourth quarter of Fiscal 2002, an increase of 55.1% from $310.9 million in
the fourth quarter of Fiscal 2001, reflecting the increase in net sales over the
period. As a percentage of net sales, these costs increased by 3.0% in the
fourth quarter of Fiscal 2002 as compared to the fourth quarter of Fiscal 2001.
Cost of goods sold, as a percentage of net sales, increased 0.7% in the fourth
quarter of Fiscal 2002 as compared to the fourth quarter of Fiscal 2001.
Decreased margins in our Fashion Bug and Catherine's stores as a result of
higher levels of promotional activity in response to slower sales activity were
partially offset by relatively higher gross margins for our Lane Bryant stores.
Cost of goods sold for the fourth quarter of Fiscal 2002 also included $3.0
million of costs related to the valuation of inventory for stores to be closed
during the first half of Fiscal 2003 as a result of the restructuring plan
announced on January 28, 2002. Buying and occupancy expenses, expressed as a
percentage of net sales, increased 2.3% in the fourth quarter of Fiscal 2002 as
compared to the fourth quarter of Fiscal 2001. The increase in buying and
occupancy expenses was primarily attributable to the lack of leverage on
relatively fixed occupancy costs as a result of the decline in comparable store
sales and relatively higher occupancy expenses for our Lane Bryant stores.
Selling, General, and Administrative
Selling, general, and administrative expenses were $161.7 million in the
fourth quarter of Fiscal 2002, an increase of 52.1% from $106.3 million in the
fourth quarter of Fiscal 2001, principally reflecting the acquisition of a large
number of new stores in connection with the Lane Bryant transaction. As a
percentage of net sales, these costs increased by 0.5% in the fourth quarter of
Fiscal 2002 as compared to the fourth quarter of Fiscal 2001. Improvements in
selling expense as a result of the net reduction in the cost of our proprietary
credit card program and a decrease in store payroll expenses at our Fashion Bug
and Catherine's stores were offset by increased delinquencies in our proprietary
credit card program and the negative effect of the lack of leverage on fixed
expenses caused by the decline in comparable store sales.
RECENT DEVELOPMENTS
Acquisition of Lane Bryant
On August 16, 2001, we acquired 100% of the outstanding stock of Lane
Bryant, Inc. from a subsidiary of The Limited, Inc. for cash of $286.2 million,
including direct costs of the acquisition of $6.2 million, and 8.7 million
shares of our common stock, valued at $55.0 million. As of the date of
acquisition, Lane Bryant operated 651 retail apparel stores in 46 states,
specializing in fashion apparel and related accessories for women wearing
23
plus-sizes 14 and greater. Lane Bryant had net sales of $930.0 million in Fiscal
2001. The cash we paid for the acquisition was funded with approximately $83.0
million from our existing cash and cash equivalents, a $75.0 million term loan,
and revolving loans under a new credit facility obtained in connection with the
acquisition. Based on a final determination of the value of the Lane Bryant net
assets acquired, on December 10, 2001, we issued to a subsidiary of The Limited
an additional 837,209 shares of our common stock valued at $4.3 million. Of the
aggregate total of 9.5 million shares issued to The Limited, 9.1 million shares
had been previously held by us as treasury shares. The Limited, Inc. is
restricted from selling our shares for one year after the close of the
transaction. We have accounted for this acquisition under the purchase method of
accounting, and have included the results of operations of Lane Bryant in our
results of operations from the date of acquisition. Prior-period results have
not been restated.
Concurrent with the acquisition of Lane Bryant, we began a detailed
evaluation of Lane Bryant's operations, resulting in a plan for the closing of
14 under-performing Lane Bryant stores and the termination of approximately 140
store employees. As of February 2, 2002, we had finalized our plan to close the
under-performing stores and to terminate the store employees. As a result, we
recorded a liability of $3.8 million as part of the purchase price allocation,
which was primarily for estimated lease termination payments. In addition, we
recorded an accrual of $390 thousand for severance of store employees.
In connection with the acquisition, we entered into a services agreement
with The Limited and certain of its affiliates under which we receive certain
transitional services, including data center processing of Lane Bryant business
applications such as store polling and support of store systems, continuation of
contract services with vendors for voice and data networks, and conversion
services, through October 2, 2002. We have begun moving all of the Lane Bryant
business applications and processes from The Limited to our platform and expect
the transition to be completed by October 2, 2002. Other transitional services
provided by The Limited have terms ranging from one month to 36 months, and we
expect to pay approximately $25.7 million and $19.6 million during Fiscal 2003
and Fiscal 2004, respectively, to The Limited under these agreements. The cost
of the services to be provided by The Limited is intended to approximate The
Limited's cost in providing the services. We may terminate these agreements
before their expiration dates with notice.
We also entered into a lease agreement with Distribution Land Corp., an
affiliate of The Limited, under which Lane Bryant has leased a distribution
center and office space near Columbus, Ohio for a period of three years. The
current monthly rental is $393 thousand and is subject to annual Consumer Price
Index adjustments. In addition, Lane Bryant subleased 207 retail properties from
The Limited under a Master Sublease. The stores subject to the Master Sublease
had been operated as Lane Bryant stores before the acquisition. We have
guaranteed the obligations of Lane Bryant under the Master Sublease. In
connection with such guaranty, we agreed with The Limited to certain limitations
on our ability to incur debt, make distributions to our shareholders, and
purchase our own shares. These limitations will continue until The Limited's
liability for the leases falls below a certain level or in certain other
circumstances.
Restructuring Charges
Closing/Conversion of The Answer/Added Dimension and Fashion Bug Stores
On January 28, 2002, we announced a restructuring plan, including a number
of initiatives designed to position us for increased profitability and growth in
the women's plus-size apparel business. The major components of the plan include
(1) the closing of The Answer/Added Dimensions chain of 77 stores, including the
conversion of approximately 20% of the Added Dimensions stores to Catherine's
stores, (2) the closing of 130 under-performing Fashion Bug stores, and (3) the
conversion of 44 Fashion Bug store locations to Lane Bryant stores. The
restructuring plan resulted in a pre-tax charge of $37.7 million ($24.5 million
after-tax, or $.23 per share) in the fourth quarter of Fiscal 2002. The
restructuring charge includes a $17.8 million non-cash write-down of fixed
assets (primarily store fixtures and improvements) in the stores to be closed,
$18.5 million of anticipated payments
24
to landlords for the early termination of existing store leases, $800 thousand
for severance costs, and $600 thousand for signage removal and other costs.
The fixtures and improvements have no alternative use or salvage value, and
we expect them to be scrapped when the stores are closed. Our estimate of
anticipated lease termination payments is based on our prior experience.
However, the actual payment amount will depend on the results of our
negotiations with many landlords, which could result in future adjustments to
this estimate. We do not expect that any such adjustments would be material.
Our estimated net after-tax cash cost of the restructuring is approximately
$6.7 million. Our balance sheet at February 2, 2002 reflects the fixed asset
write-down and the accrued lease termination, severance, and other costs. We
expect to substantially complete the restructuring plan by the end of Fiscal
2003 and anticipate that this will thereafter improve our annualized pre-tax
earnings by approximately $12.0 million. Because a majority of the store
closings will occur during the second half of Fiscal 2003, the full impact of
the completion of the restructuring plan is expected to first benefit the fiscal
year ending January 31, 2004.
Store Restructuring and Elimination of Men's Merchandise From Fashion Bug Stores
On March 5, 1998, our Board of Directors approved a restructuring plan that
resulted in a pre-tax charge of $34.0 million. The plan was approved in
conjunction with the decision to eliminate men's merchandise from our Fashion
Bug stores. We closed 72 stores and downsized 100 stores in connection with the
plan. Elimination of the men's merchandise from the stores was completed in
October 1998, the balance of the men's inventory was sold, and the selling space
used for men's merchandise was re-merchandised. In Fiscal 2000, we determined
that 21 of the stores originally included in the plan would remain open as a
result of negotiations with landlords and changes in economic conditions. As a
result, we reversed reserves related to these stores and recognized a pre-tax
restructuring credit of $2.1 million in Fiscal 2000. This restructuring plan was
completed as of February 3, 2001, and there are no remaining restructure
accruals relating to this plan.
The restructuring charge included a $10.0 million write-off of the carrying
value of fixtures and improvements in the stores to be reduced in size or
closed. The fixtures and improvements had no alternative use or salvage value,
and were expected to be scrapped at the time of the closing or downsizing of the
stores. The restructuring charge also included accruals for anticipated payments
to landlords for the early termination of existing store leases of $19.7
million, severance payments of $320 thousand, costs to remove store signs and
entrances of $3.3 million, costs of supplies to be scrapped of $400 thousand,
and legal and architectural fees of $280 thousand. The accrual for severance
payments was for 650 store employees expected to be terminated as a result of
the store closings. The number of employees actually terminated was reduced to
590 as a result of the 21 stores that remained open, as discussed above, and the
excess severance accrual was reversed as part of the restructuring credit of
$2.1 million recognized in Fiscal 2000. During Fiscal 2001, we closed one store
and completed the downsizing of 28 stores in connection with the plan.
Distribution Center Restructuring
On December 10, 1998, our Board of Directors approved a plan to close our
Bensalem, Pennsylvania distribution center and sell the facility. The plan was
approved in conjunction with the decision to consolidate the Bensalem
distribution center operations into our Greencastle, Indiana distribution
center. The plan resulted in a pre-tax restructuring charge of $20.2 million
during Fiscal 1999.
The restructuring charge included a $18.0 million write-down of the cost of
the Bensalem facilities from a carrying value of $23.6 million to a net
realizable value of $5.7 million, based on an independent appraisal. The
restructuring charge also included an accrual of $1.5 million for severance
costs resulting from the termination of 90 warehouse and distribution personnel
and eleven management employees. In addition, the restructuring charge included
an accrual of $721 thousand for incremental warehouse handling costs,
outplacement services for
25
terminated employees, legal fees related to the sale of the facility, and other
non-recurring costs relating to the closure.
The Bensalem distribution center closed on December 10, 1998, and we
completed the sale of the Bensalem facility during Fiscal 2000. Upon completion
of the sale of the facility, we recognized a pre-tax restructuring credit of
$2.8 million in Fiscal 2000, which primarily represented sales proceeds in
excess of the estimated net realizable value of the Bensalem facility. As of
February 3, 2001, this restructuring plan has been completed, and there are no
remaining restructure accruals relating to this plan.
Closing of Modern Woman Stores
During the fourth quarter of Fiscal 2000, we recorded a restructuring
charge of $1.5 million in connection with our acquisitions of Modern Woman and
Catherine's. At the time of the Catherine's acquisition, we had planned to
consolidate Modern Woman stores into the Catherine's division. The restructuring
charge was primarily for lease termination costs related to the closing of
eleven Modern Woman stores that geographically overlapped Catherine's stores.
During Fiscal 2001, we closed ten of the eleven stores, and paid lease
termination costs of $1.1 million related to the closed stores. As of February
3, 2001, $400 thousand of accrued restructuring charges related to the remaining
store were unpaid. We closed the remaining store during Fiscal 2002, utilizing
the remaining accrual.
Other Recent Developments
On September 11, 2001, major terrorist attacks occurred against the World
Trade Center in New York City and the Pentagon in Washington, D.C. These attacks
adversely affected the United States economy, which was already slowing and
showing signs of a recession before September 11, 2001. We did not experience
any direct instances of destruction or impairment of our assets. However, many
strip centers and malls in which we have stores were closed, in some cases for
more than one day, and since then the government has reported threats of further
attacks against United States locations including malls. We believe that the
effects of the terrorist incidents had an adverse impact on our results of
operations during Fiscal 2002.
FINANCIAL CONDITION
Liquidity and Capital Resources
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facilities described below. The following table
highlights certain information related to our liquidity and capital resources:
Fiscal Fiscal Fiscal
- ----------- 2002 2001 2000
(dollars in thousands) ---- ---- ----
Cash and cash equivalents ............. $ 36,640 $ 56,544 $ 34,299
Available-for-sale securities ......... 70,366 125,278 115,829
Cash provided by operating activities . 142,865 93,269 57,894
Working capital ....................... 145,047 208,389 161,376
Current ratio ......................... 1.4 1.9 1.7
Long-term debt to equity ratio ........ 37.9% 23.0% 24.1%
Our cash provided by operating activities increased $49.6 million in Fiscal
2002 as compared to Fiscal 2001, from $93.3 million to $142.9 million. Earnings
before interest, taxes, depreciation, and amortization and a non-cash write-down
of fixed assets decreased $46.9 million from Fiscal 2001 to Fiscal 2002, from
$141.8 million to $94.9 million. Excluding the acquisition of Lane Bryant, our
investment in inventories, net of accounts payable,
26
decreased $46.3 million in Fiscal 2002 as compared to Fiscal 2001 as a result of
certain inventory management initiatives. Accrued restructuring costs increased
$19.4 million in Fiscal 2002 as compared to a decrease of $7.8 million in
accrued restructuring costs during Fiscal 2001.
As a result of the recent decline in interest rates, a portion of our
investments in U. S. government agency bonds with early redemption provisions
were called for redemption during the first half of Fiscal 2002. The decrease in
available-for-sale securities during Fiscal 2002 was primarily a result of these
redemptions. We invested the proceeds from these early redemptions in cash
equivalents until we used them in connection with our acquisition of Lane Bryant
in August 2001.
Our cash provided by operating activities increased $35.4 million in Fiscal
2001 as compared to Fiscal 2000, from $57.9 million to $93.3 million. Earnings
before interest, taxes, depreciation, and amortization and excluding
non-recurring gains increased by $41.0 million from Fiscal 2000 to Fiscal 2001,
from $100.8 million to $141.8 million. This increase was primarily attributable
to the acquisitions of Catherine's and Modern Woman in Fiscal 2000. A reduced
level of growth in inventories from Fiscal 2000 to Fiscal 2001 was substantially
offset by increased payments of prepaid and accrued expenses.
Our capital expenditures were $63.0 million, $57.9 million, and $39.2
million in Fiscal 2002, 2001, and 2000, respectively. These expenditures were
primarily for the construction, remodeling, and fixturing of new and existing
retail stores, loss-prevention equipment, and systems technology. Fiscal 2000
expenditures included approximately $6.1 million for expansion of our
Greencastle, Indiana distribution center.
During Fiscal 2003, we anticipate capital expenditures of approximately
$55.0-$65.0 million. These expenditures will primarily be for construction and
fixturing of new stores, remodeling and fixturing of existing stores,
investments in management information systems technology, and improvements to
our corporate offices and distribution centers. It is anticipated that the funds
required for capital expenditures will be financed principally through
internally generated funds.
27
The following table sets forth information with respect to store activity
for Fiscal 2002 and planned store activity for Fiscal 2003:
Fashion Monsoon/
Bug Lane Bryant Catherine's Accessorize Total
--- ----------- ----------- ----------- -----
Fiscal 2002:
Stores at February 3, 2001 ............. 1,230 -- 524 1 1,755
----- --- --- --- -----
Stores acquired ........................ -- 651 -- -- 651
Stores opened .......................... 60 9 48 8 125
Stores closed .......................... (38) (13) (34) -- (85)
....................................... --- --- --- -- ----
Net changes in stores .................. 22 647 14 8 691
--- --- --- -- ----
Stores at February 2, 2002 ............. 1,252 647 538 9 2,446
===== === === == =====
Stores relocated during period ......... 27 -- 21 -- 48
Stores remodeled during period ......... 22 -- 13 -- 35
Fiscal 2003:
Planned store openings ................. 8 69(1) 35(2) -- 112
Planned store relocations .............. 25 25 25 -- 75
Planned store closings ................. 174(1) 15 84(3) -- 273
- ---------
(1) Includes conversion of 44 Fashion Bug stores to Lane Bryant stores.
(2) Includes conversion of 10 Added Dimension stores to Catherine's stores.
(3) Includes the closing of 77 The Answer/Added Dimension stores, including 10
stores to be converted to Catherine's stores.
During Fiscal 2002 and Fiscal 2001, pursuant to a program to replace our
existing point-of-sale ("POS") equipment, we acquired $24.7 million and $14.9
million, respectively, of POS equipment for our Fashion Bug and Catherine's
stores under capital leases. These leases generally have an initial lease term
of 60 months and contain a bargain purchase option. During Fiscal 2002, we
re-negotiated the terms of certain of our existing POS equipment capital leases.
The re-negotiated leases were combined into a new lease with a 60-month term and
a lower interest rate. The effect of the re-negotiation was a net (decrease)
increase in total lease payments as follows: Fiscal 2002 - ($25 thousand);
Fiscal 2003 - ($149 thousand); Fiscal 2004 - $235 thousand; Fiscal 2005 - $337
thousand; Fiscal 2006 - $6 thousand; Fiscal 2007 - $2.1 million.
28
At February 2, 2002, our commitments for future principal payments under
our short-term and long-term debt obligations, and minimum lease payments under
our capital leases and operating leases, were as follows:
Fiscal Year Ended
(in millions) 2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Short-term debt ........... $ 54.3
Long-term debt ............ 1.8 $ 1.9 $ 70.7 $ 6.1 $ 96.6 $ 8.5
Capital leases ............ 9.6 9.6 8.5 5.7 3.8 --
Operating leases(1) ....... 212.2 183.5 150.0 112.7 79.6 170.4
------ ------ ------ ------ ------ ------
Total ..................... $277.9 $195.0 $229.2 $124.5 $180.0 $178.9
====== ====== ====== ====== ====== ======
- --------------------
(1) Commitments under operating leases include $92.9 million payable under the
Lane Bryant master sublease with The Limited, which we have guaranteed.
We are currently analyzing our existing distribution network, and we are
considering whether to purchase or lease an additional distribution center,
either of which alternatives would require additional capital expenditures and
will require approval under our existing credit arrangements. We are also
presently evaluating various alternatives to our current capital structure,
including whether to refinance a portion of our existing long-term debt. There
can be no assurance as to the terms and conditions of any such refinancing or
whether any such refinancing will be accomplished.
We have formed a trust called the Charming Shoppes Master Trust to which
Spirit of America National Bank, our credit card bank, has transferred through a
special purpose entity its interest in credit card receivables created under our
Fashion Bug proprietary credit card program. We, together with the trust, have
entered into various agreements under which the trust can sell, on a revolving
basis, interests in these receivables for a specified term. When the revolving
period terminates, an amortization period begins during which principal payments
are made to the parties with whom the trust has entered into the securitization
agreement. We securitized $423.1 million and $437.7 million of credit card
receivables in Fiscal 2002 and Fiscal 2001, respectively, and had $303.7 million
of securitized credit card receivables outstanding as of February 2, 2002. We
held retained interests in our securitizations of $47.2 million as of the end of
Fiscal 2002, which were generally subordinated in right of payment to
certificates issued by the trust to third-party investors. Our obligation to
repurchase receivables sold to the trust is limited to those receivables that,
at the time of their transfer, fail to meet the trust's eligibility standards
under normal representations and warranties. To date, we have repurchased only a
small amount of receivables pursuant to this obligation. A securitization series
in the aggregate principal amount of $83.5 million is scheduled to mature prior
to the end of Fiscal 2003. We are currently considering various alternatives to
replace this series. No assurance can be given that we will be successful in
securing such replacement financing.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly owned indirect subsidiaries, are separate special purpose
entities created for the securitization program. At February 2, 2002, Charming
Shoppes Receivables Corp. held $38.5 million of Charming Shoppes Master Trust
Certificates (which are included in the $47.2 million of retained interests we
held at February 2, 2002) and Charming Shoppes Seller, Inc. held retained
interests of $1.6 million. These assets are first and foremost available to
satisfy the claims of the respective creditors of these separate corporate
entities, including certain claims of investors in the Charming Shoppes Master
Trust. We could be affected by certain events that would cause the trust to
require additional enhancement from proceeds within the trust that would
otherwise be available to be paid to us with respect to our subordinated
interests. Specifically, if either we or the trust fail to meet certain
financial performance standards, a credit enhancement condition would occur and
the trust would be required to retain amounts otherwise payable to us. During
Fiscal 2002, credit card receivable credit loss percentages exceeded a specified
threshold percentage, which obligates the trust to accumulate $9.5 million into
such an enhancement account, which if not required to be paid to the other
certificate holders, will be available to us at the termination of the
securitization series. As of February 2, 2002, the Charming Shoppes Master Trust
had $3.0 million segregated for such additional enhancement purposes. We do not
expect the requirement to materially affect our liquidity or results of
operations. We have no obligation to directly fund these enhancement accounts of
the trust, other than
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for breaches of customary representations, warranties and covenants. These
representations, warranties, covenants and related indemnities do not protect
the trust or investors in the trust against credit-related losses on the
receivables. The providers of the credit enhancements and trust investors have
no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. See "CRITICAL ACCOUNTING
POLICIES - Asset Securitizations" above, "MARKET RISK" below, and "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Asset Securitization" for further discussion of our asset
securitization program.
We also have non-recourse agreements under which