dELiAs, Inc. - FORM 10-Q

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EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - dELiAs, Inc.	dex312.htm
EX-32.1 - CERTIFICATION UNDER SECTION 906 BY THE CHIEF EXECUTIVE OFFICER - dELiAs, Inc.	dex321.htm
EX-32.2 - CERTIFICATION UNDER SECTION 906 BY THE CHIEF FINANCIAL OFFICER - dELiAs, Inc.	dex322.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - dELiAs, Inc.	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 1, 2010

¨	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: 000-51648

dELiA*s, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-3397172

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

50 West 23^rd Street, New York, NY 10010

(Address of Principal Executive Offices) (Zip Code)

(212) 590-6200

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 8, 2010 the registrant had 31,310,091 shares of common stock, $.001 par value per share, outstanding.

dELiA*s, Inc.

TABLE OF CONTENTS


		Page No.
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at May 1, 2010 (unaudited), January 30, 2010 and May 2, 2009 (unaudited)	3

	Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended May 1, 2010 (unaudited) and May 2, 2009 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 1, 2010 (unaudited) and May 2, 2009 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	23

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults upon Senior Securities	24

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

	SIGNATURES
	EXHIBIT INDEX
	EX-31.1
	EX-31.2
	EX-32.1
	EX-32.2

Item 1.

Financial Statements

dELiA*s, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)


	May 1, 2010		January 30, 2010		May 2, 2009
	(unaudited)				(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	26,671	$	41,646	$	51,690
Inventories, net		31,536		33,702		29,082
Prepaid catalog costs		1,762		2,354		2,024
Deferred income taxes		1,138		1,138		2,000
Other current assets		14,935		12,954		7,719

TOTAL CURRENT ASSETS		76,042		91,794		92,515

PROPERTY AND EQUIPMENT, NET		55,183		55,342		54,282
GOODWILL		12,073		12,073		12,073
INTANGIBLE ASSETS, NET		2,419		2,419		2,434
RESTRICTED CASH		8,584		7,540		9,350
OTHER ASSETS		186		223		406

TOTAL ASSETS	$	154,487	$	169,391	$	171,060

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	16,732	$	24,562	$	14,414
Current portion of mortgage note payable		—		—		2,150
Accrued expenses and other current liabilities		24,621		26,173		28,862
Income taxes payable		783		733		1,554

TOTAL CURRENT LIABILITIES		42,136		51,468		46,980

DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES		12,063		12,110		12,158

TOTAL LIABILITIES		54,199		63,578		59,138

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Preferred Stock; $.001 par value, 25,000,000 shares authorized, none issued		—		—		—
Common Stock; $.001 par value, 100,000,000 shares authorized; 31,310,091, 31,309,216 and 31,199,889 shares issued and outstanding, respectively		31		31		31
Additional paid-in capital		98,936		98,636		97,955
Retained earnings		1,321		7,146		13,936

TOTAL STOCKHOLDERS’ EQUITY		100,288		105,813		111,922

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	154,487	$	169,391	$	171,060

See accompanying Notes to Condensed Consolidated Financial Statements.

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	For the Thirteen Weeks Ended
	May 1, 2010			May 2, 2009
NET REVENUES	$	49,961		$	52,097
Cost of goods sold		34,312			35,238

GROSS PROFIT		15,649			16,859

Selling, general and administrative expenses		23,591			22,166
Other operating income		(144	)		—

TOTAL OPERATING EXPENSES		23,447			22,166

OPERATING LOSS		(7,798	)		(5,307	)
Interest (expense) income, net		(87	)		9

LOSS BEFORE INCOME TAXES		(7,885	)		(5,298	)
Benefit for income taxes		(2,060	)		(1,664	)

NET LOSS	$	(5,825	)	$	(3,634	)

BASIC AND DILUTED LOSS PER SHARE:
NET LOSS PER SHARE	$	(0.19	)	$	(0.12	)

WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING		31,099,303			31,029,651

See accompanying Notes to Condensed Consolidated Financial Statements.

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	For the Thirteen Weeks Ended
	May 1, 2010			May 2, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,825	)	$	(3,634	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,452			2,408
Stock-based compensation		299			227
Changes in operating assets and liabilities:
Inventories		2,166			4,860
Prepaid catalog costs and other assets		(1,352	)		(1,479	)
Restricted cash		(1,044	)		(9,350	)
Income taxes payable		50			(23,689	)
Accounts payable, accrued expenses and other liabilities		(10,192	)		(8,003	)

Total adjustments		(7,621	)		(35,026	)

NET CASH USED IN OPERATING ACTIVITIES		(13,446	)		(38,660	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(1,530	)		(2,107	)

NET CASH USED IN INVESTING ACTIVITIES		(1,530	)		(2,107	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of mortgage note payable		—			(55	)
Proceeds from the exercise of employee stock options		1			—

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		1			(55	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(14,975	)		(40,822	)
CASH AND CASH EQUIVALENTS, beginning of period		41,646			92,512

CASH AND CASH EQUIVALENTS, end of period	$	26,671		$	51,690

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest	$	42		$	60

Cash paid during the period for taxes	$	43		$	23,786

Capital expenditures incurred not yet paid	$	1,670		$	2,187

See accompanying Notes to Condensed Consolidated Financial Statements.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In the discussion and analysis below, when we refer to “Alloy, Inc.” we are referring to Alloy, Inc., our former parent corporation, and when we refer to “Alloy” we are referring to the Alloy-branded direct marketing and merchandising business that we operate. Similarly, when we refer to “dELiA*s” we are referring to the dELiA*s-branded direct marketing, merchandising and retail store business that we operate, when we refer to “dELiA*s, Inc.,” the “Company” “we,” “us,” or “our,” we are referring to dELiA*s, Inc., its subsidiaries and its predecessors, and when we refer to the “Spinoff”, we are referring to the December 19, 2005 spinoff of the outstanding common shares of dELiA*s, Inc. to the Alloy, Inc. shareholders. The accompanying financial information for the periods ended May 1, 2010 and May 2, 2009 is unaudited. The accompanying condensed consolidated balance sheet information at January 30, 2010 was derived from the audited consolidated balance sheet at January 30, 2010.

1. Basis of Presentation

We are a direct marketing and retail company comprised of two lifestyle brands primarily targeting teenage girls and young women. Our two lifestyle brands—dELiA*s and Alloy—generate revenue by selling to consumers through the integration of direct mail catalogs, e-commerce websites and, for dELiA*s, mall-based specialty retail stores. Through our catalogs and e-commerce web pages, we sell many name brand products, along with our own proprietary brand products in key spending categories, directly to consumers, including apparel, accessories, footwear and room furnishings. Our mall-based specialty retail stores derive revenue primarily from the sale of apparel and accessories to teenage girls.

The accompanying unaudited condensed consolidated financial statements (the “financial statements”) of dELiA*s, Inc. at May 1, 2010 and May 2, 2009 and for the thirteen week periods ended May 1, 2010 and May 2, 2009 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain notes and other information have been condensed or omitted from the financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the most recent dELiA*s, Inc. Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet at January 30, 2010 and related information presented in the footnotes have been derived from audited consolidated statements at that date.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

In preparing the financial statements, management makes routine estimates and judgments in determining the net realizable value of inventory, prepaid expenses, fixed assets, stock-based compensation, intangible assets and goodwill. Some of the more significant estimates include the allowance for sales returns, the reserve for inventory valuation, the expected future revenue stream of catalog mailings, risk-free interest rates, expected life, expected volatility assumptions used for calculating stock-based compensation expense, the expected useful lives of fixed assets and the valuation of intangible assets and goodwill. Actual results may differ from these estimates under different assumptions and conditions.

We evaluate our estimates on an ongoing basis and make revisions as new information and experience warrants.

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to January 31. References to “fiscal 2009” represent the 52-week period ended January 30, 2010. In addition, references to “fiscal 2010” represent the 52-week period ending January 29, 2011, and to “fiscal 2011” as the 52-week period ending January 28, 2012.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Principles of Consolidation

The financial statements include the accounts of dELiA*s, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

We follow the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement Disclosures” (“ASC 820”) as it relates to financial and nonfinancial assets and liabilities. We currently have no financial assets or liabilities that are measured at fair value. Our non-financial assets, which include property and equipment, goodwill and indefinite-lived intangibles, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and we are required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the fair value. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2—inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3—unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The carrying amounts of our financial instruments, including cash and cash equivalents, receivables, payables, other accrued liabilities and obligations under capital leases approximated fair value due to the short maturity of these financial instruments. The carrying amount of the mortgage note payable at May 2, 2009 approximated fair value as this debt had a variable interest rate that fluctuated with the market rate.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, credit card receivables and highly liquid investments with original maturities of three months or less. Credit card receivable balances included in cash and cash equivalents as of May 1, 2010, January 30, 2010 and May 2, 2009 were approximately $1.3 million, $635,000 and $1.1 million, respectively.

Valuation of Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment review include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. In the event future store performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow so as not to trigger impairment charges, material changes in results could result in future impairment charges. There was no impairment charge recorded for the thirteen weeks ended May 1, 2010 and May 2, 2009.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding during the period. When the effects are not anti-dilutive, diluted earnings per share is computed by dividing the Company’s net earnings by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options, restricted stock and convertible debentures. The dilutive impact of stock options and restricted stock is determined by applying the “treasury stock” method.

The total weighted average number of potential common shares with an anti-dilutive impact excluded from the calculation of diluted net income (loss) per share is detailed in the following table for the thirteen week periods ended May 1, 2010 and May 2, 2009:


	For Thirteen Weeks Ended
	May 1, 2010	May 2, 2009
Options, warrants and restricted shares	7,447,154	7,151,855
Conversion of 5.375% Convertible Debentures	873	873

Total	7,448,027	7,152,728

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Income taxes

The Company reviews the annual effective tax rate on a quarterly basis and makes necessary changes if information or events merit. The annual effective rate is forecasted quarterly using actual historical information and forward-looking estimates.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 amends ASC 820-10, Fair Value Measurements and Disclosures, and requires new disclosures surrounding certain fair value measurements. ASU 2010-06 is effective for the first interim or annual reporting period beginning on or after December 15, 2009, except for certain disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for the first interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted the disclosure requirements effective for the first interim or annual reporting period beginning on or after December 15, 2009. The adoption did not have a material impact on our condensed consolidated financial statements. The Company intends to adopt the remaining disclosure requirements when they become effective in the first quarter of the fiscal 2011. The Company is in the process of evaluating these additional disclosure requirements and does not expect they will have a significant impact on its condensed consolidated financial statements.

3. Other Current Assets

Other current assets consisted of the following (in thousands):


	May 1, 2010		January 30, 2010		May 2, 2009
Income taxes receivable	$	9,428	$	7,235	$	2,121
Other current assets		5,507		5,719		5,598

	$	14,935	$	12,954	$	7,719

4. Property and Equipment, net

Property and equipment, net, consisted of the following (in thousands):


	May 1, 2010			January 30, 2010			May 2, 2009
Construction in progress	$	2,736		$	1,760		$	3,773
Computer equipment		10,413			10,057			8,395
Machinery and equipment		125			125			125
Office furniture		19,147			19,086			16,316
Leasehold improvements		51,271			50,371			43,606
Building		7,559			7,559			7,559
Land		500			500			500

		91,751			89,458			80,274
Less: accumulated depreciation and amortization		(36,568	)		(34,116	)		(25,992	)

	$	55,183		$	55,342		$	54,282

Depreciation and amortization expense related to property and equipment was approximately $2.5 million and $2.4 million for the thirteen week periods ended May 1, 2010 and May 2, 2009, respectively.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

5. Intangible Assets

Intangible assets consisted of the following (in thousands):


	May 1, 2010				January 30, 2010				May 2, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
Mailing lists	$	78	$	78	$	78	$	78	$	78	$	77
Noncompetition agreements		390		390		390		390		390		390
Websites		689		689		689		689		689		689
Leaseholds		190		190		190		190		190		176

	$	1,347	$	1,347	$	1,347	$	1,347	$	1,347	$	1,332

Nonamortizable intangible assets:
Trademarks	$	2,419	$	—	$	2,419	$	—	$	2,419	$	—

Amortization expense was approximately $-0- and $6,000 for the thirteen week periods ended May 1, 2010 and May 2, 2009, respectively.

6. Credit Facility

dELiA*s, Inc. and certain of its wholly-owned subsidiaries were parties to a Second Amended and Restated Loan and Security Agreement (the “Restated Credit Facility”) with Wells Fargo Retail Finance II, LLC (“Wells Fargo”) which expired by its terms on June 26, 2009. The Restated Credit Facility was a secured revolving credit facility that the Company could draw upon for working capital and capital expenditure requirements and had an initial credit limit of $25 million, which was subsequently increased to $30 million. The Restated Credit Facility allowed for letters of credit up to an aggregate amount of $15 million, as amended.

Upon the expiration of the Restated Credit Facility on June 26, 2009, the Company entered into a letter of credit agreement (“Letter of Credit Agreement”) with Wells Fargo. The Letter of Credit Agreement, which has a maturity date of June 26, 2011, provides for the issuance of letters of credit to finance the acquisition of inventory from suppliers, to provide standby letters of credit to factors, landlords, insurance providers and other parties for business purposes, and for other general corporate purposes. Aggregate letters of credit issued and to be issued under the Letter of Credit Agreement at any one time outstanding could not exceed the lesser of $15 million or an amount equal to a certain percentage of cash collateral held by Wells Fargo to secure repayment of the Company’s and the Subsidiaries’ respective obligations to Wells Fargo under the Letter of Credit Agreement and related letter of credit documents. The Company had secured these obligations by the pledge to Wells Fargo of cash collateral in the amount of $15.8 million. None of the other assets or properties of the Company, or any of its subsidiaries or affiliates, have been pledged as collateral for these obligations.

The Letter of Credit Agreement calls for the payment by the Company of an unused line fee of 0.75% per annum on the average unused portion of the Letter of Credit Agreement, a letter of credit fee of 2.00% per annum on the average outstanding face amount of letters of credit issued under the Letter of Credit Agreement, as well as other customary fees and expenses generally charged by the letter of credit issuer. The Letter of Credit Agreement does not contain any financial covenants with which the Company or any of its subsidiaries or affiliates must comply during the term of the Letter of Credit Agreement.

On January 28, 2010, the Company entered into a First Amendment to Letter of Credit Agreement (the “First Amendment”) with Wells Fargo. Pursuant to the First Amendment, the Letter of Credit Agreement was amended at the Company’s request to, among other things, reduce the maximum aggregate face amount of letters of credit that may be issued under the Letter of Credit Agreement, to the lesser of (a) $10,000,000 or (b) an amount equal to a specified percentage of cash collateral held by Wells Fargo. In addition, cash collateral is now only required in an amount equal to 105% of the face amount of outstanding letters of credit issued under the Letter of Credit Agreement, as amended.

As of May 1, 2010, there were approximately $8.2 million of outstanding letters of credit under the Letter of Credit Agreement, and cash collateral required to secure the Company’s obligations under the Letter of Credit Agreement, as amended, was approximately $8.6 million which is shown as restricted cash in non-current assets on the accompanying condensed consolidated balance sheet.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	May 1, 2010		January 30, 2010		May 2, 2009
Accrued sales tax	$	575	$	618	$	1,064
Accrued payroll, bonus, taxes and withholdings		497		1,445		613
Accrued professional services		330		486		922
Credits due to customers		12,761		13,349		15,421
Allowance for sales returns		964		1,100		923
Accrued construction in progress		1,485		785		1,855
Other accrued expenses		8,009		8,390		8,064

	$	24,621	$	26,173	$	28,862

8. Mortgage Note Payable

We were a party to a mortgage loan agreement related to the purchase of our distribution center in Hanover, Pennsylvania. The mortgage note amortized on a fifteen-year schedule and was to originally mature with a balloon payment of $2.3 million in September 2008, but was subsequently extended to mature in September 2009. The loan bore interest at LIBOR plus 225 basis points and was subject to quarterly financial covenants. The mortgage loan was secured by the distribution center and related property. The Company paid off the remaining balance of the mortgage, which was approximately $2.1 million, on September 30, 2009.

9. Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718 Compensation-Stock Compensation, which requires share-based compensation related to stock options to be measured based on estimated fair values at the date of grant using an option-pricing model.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of stock option grants and expected future stock price volatility over the expected term.

Included in selling, general and administrative expense in the financial statements was stock-based compensation expense of approximately $299,000 and $227,000 for the thirteen week periods ended May 1, 2010 and May 2, 2009, respectively, related to employee stock options and restricted stock.

The per share weighted average fair value of stock options granted during the thirteen weeks ended May 1, 2010 was $1.22. The fair value of each option grant is estimated on the date of grant with the following weighted average assumptions:


	Thirteen Weeks Ended May 1, 2010
Dividend yield	—
Risk-free interest rate	3.2	%
Expected life (in years)	6.25
Historical volatility	63	%

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

A summary of the Company’s stock option activity and weighted average exercise prices is as follows:


	Options		Weighted Average Exercise Price
Options outstanding at January 30, 2010	6,106,229		$	7.01
Options granted	335,750			2.00
Options exercised	(875	)		1.59
Options cancelled	(83,236	)		6.86

Options outstanding at May 1, 2010	6,357,868		$	6.73

Options exercisable at May 1, 2010	4,894,118		$	8.07

As of May 1, 2010, there was $694,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 1.6 years.

10. Stockholders’ equity

Rights Offering

On December 30, 2005, we filed a prospectus under which we distributed to persons who were holders of our common stock on December 28, 2005 transferable rights to purchase up to an aggregate of 2,691,790 shares of our common stock at a cash subscription price of $7.43 per share. The rights offering was made to fund the costs and expenses of our retail store expansion plan and to provide funds for general corporate purposes following the Spinoff. MLF Investments, LLC (“MLF”), which was controlled by Matthew L. Feshbach, our former Chairman of the Board, agreed to backstop the rights offering, meaning MLF agreed to purchase all shares of our common stock that remained unsold upon completion of the rights offering at the same $7.43 subscription price per share. The rights offering was completed in February 2006 with $20 million of gross proceeds. The stockholders exercised subscription rights to purchase 2,040,570 shares of dELiA*s, Inc. common stock, of the 2,691,790 shares offered in the rights offering, raising a total of $15,161,435. On February 24, 2006, MLF purchased the remaining 651,220 shares for a total of $4,838,565. Excluding MLF, 90% of the rights were exercised. MLF received as compensation for its backstop commitment a nonrefundable fee of $50,000 and ten-year warrants to purchase 215,343 shares of our common stock at an exercise price of $7.43 per share. The warrants had a grant date fair value of approximately $900,000 and were recorded as a cost of raising capital. The MLF warrants were subsequently split so that MLF Offshore Portfolio Company, LP owned warrants to purchase 206,548 shares of our common stock and MLF Partners 100, LP owned warrants to purchase 8,795 shares of our common stock. Such warrants were distributed on a pro-rata basis to investors as part of the winding up of operations of MLF and its affiliated funds.

Warrants and Convertible Debentures

Prior to the Spinoff, Alloy, Inc. had warrants outstanding for the purchase of 1,326,309 shares in the aggregate of Alloy, Inc. common stock that had been issued to certain purchasers of (i) Alloy, Inc. common stock in a private placement transaction completed on January 25, 2002, and (ii) Alloy, Inc.’s Series A Convertible Preferred Stock (collectively the “Warrants”). Upon consummation of the Spinoff, the Warrants became exercisable into both the number of shares of Alloy, Inc. common stock into which such Warrants otherwise were exercisable and one-half that number of shares, or 663,155 shares, of our common stock. We have agreed with Alloy, Inc. that we will issue shares of our common stock, without compensation, on behalf of Alloy, Inc. to holders of the Warrants as and when required in connection with any exercise of the Warrants. All other outstanding Alloy, Inc. warrants were unaffected by the Spinoff.

At the time of the Spinoff, Alloy, Inc. had outstanding $69.3 million of 5.375% convertible senior debentures due 2023 (the “Debentures”). The outstanding Debentures were convertible into 8,274,628 shares of Alloy, Inc. common stock. As a result of the Spinoff, the Debentures were convertible into 8,274,628 shares of Alloy, Inc. common stock (before consideration of a subsequent reverse stock split by Alloy, Inc.) and 4,137,314 shares of our common stock if and when the conditions to conversion are satisfied. We have agreed with Alloy, Inc. that we would issue shares of our common stock, without compensation, on behalf of Alloy, Inc. to holders of the Debentures as and when required in connection with any conversion of the Debentures. On July 30, 2008, debentures were converted into 82,508 shares of dELiA*s, Inc. common stock, which were recorded as a component of stockholders’ equity and had no impact on our statement of operations. As of May 1, 2010, 4,136,441 shares of dELiA*s, Inc. common stock have been issued in connection with conversions of the Debentures. When the remaining conversions occur, the remaining 873 related shares will also be recorded as a component of stockholders’ equity and have no impact on our statement of operations.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Restricted Stock

The Company issues shares of restricted stock, which are subject to vesting requirements, primarily to outside board members. These shares are charged to stock-based compensation expense ratably over the vesting period, which is generally three years. No restricted shares were issued during the thirteen weeks ended May 1, 2010.

11. Interest (Expense) Income, Net

Interest income and expense is presented net in the condensed consolidated statements of operations. Interest income is derived from cash balances in money market accounts. Interest income for the thirteen week periods ended May 1, 2010 and May 2, 2009 was $5,400 and $129,000, respectively. Interest expense for the first quarter of fiscal 2010 relates to costs associated with our Letter of Credit Agreement with Wells Fargo. Interest expense for the first quarter of fiscal 2009 related to our Restated Credit Facility with Wells Fargo and the mortgage note for our Hanover, Pennsylvania distribution center (which was paid off in September 2009). Interest expense for the thirteen week periods ended May 1, 2010 and May 2, 2009 was $92,000 and $120,000, respectively.

12. Spinoff Related Transactions

Services and Revenues

We recognize other revenues that consist primarily of advertising provided for third parties in our catalogs, on our e-commerce web pages, in our outbound packages, and in our retail stores pursuant to specific pricing arrangements with Alloy, Inc. Alloy, Inc. arranges these advertising services on our behalf, through a media services agreement, as amended, entered into in connection with the Spinoff. Revenue under these arrangements is recognized, net of commissions and agency fees, when the underlying advertisement is published or otherwise delivered pursuant to the terms of each arrangement. We recorded revenues of $73,000 and $112,000 for the thirteen week periods ended May 1, 2010 and May 2, 2009, respectively, in our financial statements in accordance with the terms of the media services agreement.

Prior to the Spinoff, we and Alloy, Inc. entered into the following agreements that were to define our ongoing relationships after the Spinoff: a distribution agreement, tax separation agreement, trademark agreement, information technology and intellectual property agreement, media services agreement, as amended, and an On Campus Marketing call center agreement. In addition, as part of the transaction involving the sale of our former CCS business, we entered into a Media Placement Services Agreement with Alloy, Inc. pursuant to which we agreed to purchase specified media services over a three year period for $3.3 million. We have compensated Alloy, Inc. approximately $335,000 and $359,000 for the thirteen week periods ended May 1, 2010 and May 2, 2009, respectively, in relation to the services provided under these agreements.

13. Income Taxes

The (benefit) provision for income taxes is based on the current estimate of the annual effective rate and is adjusted as necessary for quarterly events.

The Company follows ASC 740-10 Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For this benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes interest accrued for increases in the net liability for unrecognized income tax benefits in interest expense and any related penalties in income tax expense.

At May 1, 2010, the Company had a liability for unrecognized tax benefits of $391,000, all of which would favorably affect the Company’s effective tax rate if recognized. Included within the $391,000 is an accrual of $110,000 for the payment of related interest and penalties. There were no material changes to the Company’s unrecognized tax benefits during the thirteen weeks ended May 1, 2010. The Company does not believe there will be any material changes in the unrecognized tax positions over the next twelve months.

The Company’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the fiscal years 2006 onward. The Company is currently under examination by the Internal Revenue Service. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective returns. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is periodically subject to state income tax examinations.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

14. Litigation

The Company is involved from time to time in litigation incidental to the business and, from time to time, the Company may make provisions for potential litigation losses. The Company follows ASC 450 Contingencies when assessing pending or potential litigation. The Company believes that there is no claim or litigation pending, the outcome of which could have a material adverse effect on its financial condition or operating results.

15. Segment Reporting

The Company’s executive management, being its chief operating decision makers, works together to allocate resources and assess the performance of the Company’s business. The Company’s executive management manages the Company as two distinct operating segments—direct marketing and retail stores. Although offering customers substantially similar merchandise, the Company’s direct and retail operating segments have distinct management, marketing and operating strategies and processes.

The Company’s executive management assesses the performance of each operating segment based on operating income (loss), which is defined as net sales less the cost of goods sold and selling, general and administrative expenses both directly identifiable and allocable. For the direct segment, these operating costs, in addition to the cost of merchandise sold, primarily consist of catalog development, production and circulation costs, order processing costs, direct personnel costs and allocated overhead expenses. For the retail segment, these operating costs, in addition to the cost of merchandise sold, primarily consist of store selling expenses, direct labor costs and allocated overhead expenses. Allocated overhead expenses are costs associated with general corporate expenses and shared departmental services (e.g., executive, facilities, accounting, data processing, legal and human resources).

Operating segment assets are those directly used in or clearly allocable to an operating segment’s operations. For the retail segment, these assets primarily include inventory, fixtures and leasehold improvements. For the direct segment, these assets primarily include inventory and prepaid catalog costs, together with goodwill. Corporate and other assets include corporate headquarters, distribution and contact center facilities, shared technology infrastructure as well as corporate cash and cash equivalents and prepaid expenses. Operating segment depreciation and amortization and capital expenditures are recorded directly to each operating segment. Corporate and other depreciation and amortization and corporate and other capital expenditures are allocated to each operating segment. The accounting policies of the segments are the same as those described in Note 2. Reportable data for our operating segments were as follows:


	Direct Segment		Retail Store Segment		Total
			(in thousands)
Total Assets
May 1, 2010	$	79,308	$	75,179	$	154,487
January 30, 2010		94,935		74,456		169,391
May 2, 2009		103,092		67,968		171,060
Capital Expenditures (accrual basis)
May 1, 2010—13 weeks ended	$	43	$	2,250	$	2,293
May 2, 2009—13 weeks ended		31		3,489		3,520
Depreciation and Amortization
May 1, 2010—13 weeks ended	$	334	$	2,118	$	2,452
May 2, 2009—13 weeks ended		375		2,033		2,408
Goodwill
May 1, 2010	$	12,073	$	—	$	12,073
January 30, 2010		12,073		—		12,073
May 2, 2009		12,073		—		12,073


	Thirteen Weeks Ended
	May 1, 2010			May 2, 2009
	(in thousands)
Net revenues:
Retail store	$	25,981		$	25,234
Direct marketing		23,980			26,863

Total net revenue	$	49,961		$	52,097

Operating loss:
Retail store	$	(6,599	)	$	(4,918	)
Direct marketing		(1,199	)		(389	)

Operating loss	$	(7,798	)	$	(5,307	)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this report on Form 10-Q and in conjunction with our audited financial statements and related notes in our most recent Form 10-K. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so incorporated or included. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth below in this Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Forward Looking Statements”.

Results of Operations and Financial Condition

Executive Summary

dELiA*s, Inc. is a multi-channel, specialty retailer of apparel and accessories comprised of two lifestyle brands—dELiA*s and Alloy. Our merchandise assortment (which includes many name brand products along with our own proprietary brand products), catalogs, e-commerce web pages, and mall-based dELiA*s specialty retail stores are designed to appeal directly to our core customers. We reach our customers through our direct marketing segment, which consists of our catalog and e-commerce businesses, and our growing base of dELiA*s retail stores.

Our strategy is to improve upon our strong competitive position as a direct marketing company; to improve productivity in our existing dELiA*s specialty retail stores; to expand our retail store base; and to carry out such strategy while controlling costs.

We believe that improving productivity in both the retail and direct channels will be the key element in driving short-term growth. We expect to slow our growth of retail store net square footage to a single digit rate until we see consistent productivity in both channels. As market conditions allow, we plan to continue to expand the dELiA*s retail store base over the long term, perhaps to as many as 350–400 stores. In addition, as store performance and market conditions allow, we may plan on accelerating our growth in gross square footage. Should we accelerate our growth, we may need additional equity or debt financing.

dELiA*s, Inc. formerly was an indirect, wholly-owned subsidiary of Alloy, Inc. By virtue of the completion of the Spinoff, Alloy, Inc. does not own any of our outstanding shares of common stock. In addition, we entered into various agreements with Alloy, Inc. prior to or in connection with the Spinoff. These agreements, as subsequently amended, govern various interim and ongoing relationships between Alloy, Inc. and us following the Spinoff.

Goals

We believe that focusing on our brands and implementing the following initiatives should lead to profitable growth and improved results from operations:

•

Delivering low-to mid-single digit comparable store sales growth in our dELiA*s retail stores over the long term;

•

Driving low-to mid-single digit top-line growth in direct marketing, through targeted circulation in productive mailing segments;

•

Improving gross profit margins each year by 50 basis points;

•

Developing retail merchandising assortments that emphasize key sportswear categories more effectively;

•

Improving our retail store metrics through increased focus on the selling culture, with emphasis on key item selling, and thereby improving productivity;

•

Implementing profit-improving inventory planning and allocation strategies such as seasonal carry-in reduction, better store-planning, targeted replenishment by size, tactical fashion investment, and vendor consolidation, to create inventory turn improvement;

•

Leveraging our current expense infrastructure and taking additional operating costs out of the business;

•

Increasing retail store net square footage by approximately 6% in fiscal 2010, and by a single digit rate annually thereafter until improved productivity is achieved; and

•

Monitoring and opportunistically closing underperforming stores.

Key Performance Indicators

The following measurements are among the key business indicators that management reviews regularly to gauge the Company’s results:

•

store metrics such as comparable store sales, sales per gross square foot, average retail price per unit sold, average transaction values, average units per transaction, traffic conversion rates, and store contribution margin (defined as store gross profit less direct costs of running the store);

•

direct marketing metrics such as demand generated by book, with demand defined as the amount customers seek to purchase without regard to merchandise availability;

•

fill rate, which is the percentage of any particular order we are able to ship for our direct marketing business, from available on-hand inventory or future inventory orders;

•

gross profit;

•

operating income;

•

inventory turnover and average inventory per store; and

•

cash flow and liquidity determined by the Company’s cash provided by (used in) operations.

The discussion below includes references to “comparable stores.” We consider a store comparable after it has been open for fifteen full months without closure for more than seven consecutive days and whose square footage has not been expanded or reduced by more than 25% within that period. If a store is closed during a fiscal period, it is removed from the computation of comparable store sales for that fiscal quarter.

Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to January 31. The fiscal year ended January 30, 2010 was a 52-week fiscal year, and the fiscal year ending January 29, 2011 will also be a 52-week fiscal year.

Consolidated Results of Operations

The following table sets forth our statements of operations data for the periods indicated, reflected as a percentage of revenues:


	Thirteen Weeks Ended
	May 1, 2010		May 2, 2009
STATEMENTS OF OPERATIONS DATA:
Total revenues	100.0	%	100.0	%
Cost of goods sold	68.7	%	67.6	%

Gross profit	31.3	%	32.4	%

Operating expenses:
Selling, general and administrative expenses	47.2	%	42.5	%
Other operating income	(0.3	)%	0.0	%

Total operating expenses	46.9	%	42.5	%

Operating loss	(15.6	)%	(10.2	)%
Interest (expense) income, net	(0.2	)%	0.0	%

Loss before income taxes	(15.8	)%	(10.2	)%
Benefit for income taxes	(4.1	)%	(3.2	)%

Net loss	(11.7	)%	(7.0	)%

Thirteen Weeks Ended May 1, 2010 Compared to Thirteen Weeks Ended May 2, 2009

Revenues

Total Revenues. Total revenues decreased 4.1% to $50.0 million in the quarter ended May 1, 2010 from $52.1 million in the quarter ended May 2, 2009.

Direct Marketing Revenues. Direct marketing revenues decreased 10.7% to $24.0 million in the quarter ended May 1, 2010 from $26.9 million in the quarter ended May 2, 2009. The sales decrease was primarily due to a reduction in clearance sales.

Retail Store Revenues. Retail store revenues increased 3.0% to $26.0 million in the quarter ended May 1, 2010 from $25.2 million in the quarter ended May 2, 2009. The revenue increase was driven by new store openings offset by a comparable store sales decrease of 8.6% over the prior year period. During the quarter ended May 1, 2010, we opened two new stores and ended with 111 stores in operation as compared to the 99 stores in operation as of May 2, 2009.

The following table sets forth select operating data in connection with the revenues of our Company:


	Thirteen Weeks Ended
	May 1, 2010		May 2, 2009
Channel net revenues (in thousands):
Retail	$	25,981	$	25,234
Direct		23,980		26,863
Total net revenues		49,961		52,097
Catalogs Mailed (in thousands)		9,100		9,330
Number of Stores:
Beginning of period		109		97
Stores opened		2		3	*
Stores closed		—		1	*

End of Period		111		99
Total Gross Sq. Ft. End of Period (in thousands)		425.1		378.1

*	Totals include one store that was closed, remodeled and reopened in the first quarter of fiscal 2009.

Gross Profit

Total Gross Profit. Total gross profit for the quarter ended May 1, 2010 was $15.6 million or 31.3% of revenues as compared to $16.9 million or 32.4% of revenues in the quarter ended May 2, 2009.

Direct Marketing Gross Profit. Direct marketing gross profit for the quarter ended May 1, 2010 was $10.6 million or 44.1% of revenues as compared to $11.2 million or 41.8% of revenues for the quarter ended May 2, 2009. The improvement in gross profit, as a percentage of sales, was primarily attributable to an increase in merchandise margin resulting from reduced clearance sales.

Retail Store Gross Profit. Retail store gross profit for the quarter ended May 1, 2010 was $5.1 million or 19.6% of revenues as compared to $5.6 million or 22.3% of revenues for the quarter ended May 2, 2009. The decrease in gross profit, as a percentage of sales, was primarily due to the deleveraging of occupancy costs.

Operating Expenses

Total Selling, General and Administrative. As a percentage of revenues, total selling, general and administrative expenses (SG&A) increased to 47.2% for the quarter ended May 1, 2010 from 42.5% for the quarter ended May 2, 2009. In total dollars, selling, general and administrative expenses increased to $23.6 million in the quarter ended May 1, 2010 from $22.2 million in the quarter ended May 2, 2009. Included in the first quarter of fiscal 2010 is a pre-tax severance charge of $1.4 million. SG&A excluding the aforementioned severance charge was $22.1 million, or 44.3% of sales. The increase in SG&A expenses as a percentage of sales reflects the deleveraging of selling, overhead and depreciation expenses.

Direct Marketing Selling, General and Administrative. Direct marketing selling, general and administrative expenses, which include a severance charge of $0.7 million, increased to $11.8 million in the quarter ended May 1, 2010 from $11.6 million in the quarter ended May 2, 2009. As a percentage of related revenues, the direct marketing selling, general and administrative expenses increased to 49.3% in the quarter ended May 1, 2010 from 43.3% in the quarter ended May 2, 2009. The increase in SG&A as a percentage of sales reflects the deleveraging of selling and overhead expenses.

Retail Store Selling, General and Administrative. Retail selling, general and administrative expenses, which include a severance charge of $0.7 million, increased to $11.8 million in the quarter ended May 1, 2010 from $10.5 million in the quarter ended May 2, 2009. As a percentage of related revenues, retail selling, general and administrative expenses increased to 45.3% in the quarter ended May 1, 2010 from 41.8% for the quarter ended May 2, 2009. The increase in SG&A as a percentage of sales reflects the deleveraging of selling expenses.

Other Operating Income

Other operating income of $144,000 for the first quarter of fiscal 2010 represents breakage income. There was no breakage income recorded in the first quarter of fiscal 2009.

Operating Loss

Total Operating Loss. Our total operating loss, which includes the aforementioned pre-tax severance charge of $1.4 million, was $7.8 million for the quarter ended May 1, 2010 as compared to a loss of $5.3 million for the quarter ended May 2, 2009.

Direct Marketing Operating Loss. Direct marketing operating loss, adjusted to exclude the aforementioned severance charge, was $0.4 million for the quarter ended May 1, 2010 as compared to a loss of $0.4 million for the quarter ended May 2, 2009.

Retail Store Operating Loss. Operating loss from retail stores, adjusted to exclude the aforementioned severance charge, was $5.9 million for the quarter ended May 1, 2010 as compared to a loss of $4.9 million for the quarter ended May 2, 2009.

Interest (expense) income, net

We recorded net interest expense of $87,000 in the quarter ended May 1, 2010 as compared with interest income of $9,000 in the quarter ended May 2, 2009. Interest expense for first quarter of fiscal 2010 was related to costs associated with our Letter of Credit Agreement with Wells Fargo. Interest expense for the first quarter of fiscal 2009 related to our Restated Credit Facility with Wells Fargo and the mortgage note for our Hanover, Pennsylvania distribution center. Interest income was earned from cash balances in money market accounts.

Benefit for income taxes

Our income tax benefit reflects our anticipated annual effective tax rate and is adjusted as necessary for quarterly events. We recorded an income tax benefit of $2.1 million in the quarter ended May 1, 2010 and an income tax benefit of $1.7 million for the quarter ended May 2, 2009.

Seasonality and Quarterly Fluctuation

Our historical revenues and operating results have varied significantly from quarter to quarter due to seasonal fluctuations in consumer purchasing patterns. Sales of apparel, accessories and footwear through our e-commerce web pages, catalogs and retail stores have generally been higher in our third and fourth fiscal quarters, which contain the key back-to-school and holiday selling seasons, than in our first and second fiscal quarters. Starting in the second quarter and through the beginning of our fourth fiscal quarter, our working capital requirements increase and have typically been funded by our cash balances and in past years by borrowing under the Restated Credit Facility. Quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the relative proportion of our new stores to mature stores, fashion trends and changes in consumer preferences, calendar shifts of holiday or seasonal periods, changes in merchandise mix, timing of promotional events, fuel, postage and paper prices, general economic conditions, competition and weather conditions.

Liquidity and Capital Resources

Our capital requirements include construction, fixture and inventory costs related to the opening of new retail stores, maintenance and remodeling expenditures for existing stores, and information technology, distribution and other infrastructure related investments. Future capital requirements will depend on many factors, including, but not limited to, the pace of new store openings, the availability of suitable locations for new stores, the size of the specific stores we open and the nature of arrangements negotiated with landlords. In that regard, our net investment to open new stores is likely to vary significantly in the future.

We expect our current cash balance, cash flow from operations and availability under our Letter of Credit Agreement will be sufficient to meet our cash requirements for operations and planned capital expenditures at least through the end of our current fiscal year. However, if we decide to accelerate growth of our retail operations beyond the ranges in our present retail strategy, or if cash balances and cash flow from operations are not sufficient to meet our capital requirements, then we may be required to obtain additional equity or debt financing in the future. Such equity or debt financing may not be available to us when we need it (particularly in light of a substantial contraction generally in the availability of financing due to the current financial crisis and the continuing difficult economic conditions) or, if available, may not be on terms that will be satisfactory to us or may be dilutive to our stockholders. If financing is not available when required or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

Upon the expiration of the Restated Credit Facility on June 26, 2009, the Company entered into a letter of credit agreement (“Letter of Credit Agreement”) with Wells Fargo. The Letter of Credit Agreement, which has a maturity date of June 26, 2011, provides for the issuance of letters of credit to finance the acquisition of inventory from suppliers, to provide standby letters of credit to factors, landlords, insurance providers and other parties for business purposes, and for other general corporate purposes. Aggregate letters of credit issued and to be issued under the Letter of Credit Agreement at any one time outstanding could not exceed the lesser of $15,000,000 or an amount equal to a certain percentage of cash collateral held by Wells Fargo to secure repayment of the Company’s and the Subsidiaries’ respective obligations to Wells Fargo under the Letter of Credit Agreement and related letter of credit documents. The Company had secured these obligations by the pledge to Wells Fargo of cash collateral in the amount of $15,750,000. None of the other assets or properties of the Company, or any of its subsidiaries or affiliates, have been pledged as collateral for these obligations.

Operating Activities

Net cash used in operating activities was $13.4 million in the thirteen weeks ended May 1, 2010, compared with $38.7 million in the thirteen weeks ended May 2, 2009. The cash used in operating activities in the thirteen weeks ended May 1, 2010 was due primarily to funding the net operating loss and the timing of vendor payments. The cash used in operating activities in the thirteen weeks ended May 2, 2009 was due primarily to the payment of income taxes, the funding of a restricted cash account to support outstanding letters of credit and funding the net operating loss.

Investing Activities

Cash used in investing activities was $1.5 million in the thirteen weeks ended May 1, 2010, compared with $2.1 million in the thirteen weeks ended May 2, 2009. The cash used in investing activities was primarily due to capital expenditures associated with the construction of our new retail stores.

Financing Activities

Cash provided by financing activities was $1,000 in the thirteen weeks ended May 1, 2010, related to the exercise of employee stock options. Cash used in financing activities in the thirteen weeks ended May 2, 2009 was $55,000, related to payments on the mortgage note payable.

Contractual Obligations

The following table presents our significant contractual obligations as of May 1, 2010 (in thousands):


	Payments Due By Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations
Operating Lease Obligations (1)	$	127,103	$	17,472	$	33,901	$	32,041	$	43,689
Purchase Obligations (2)		39,408		38,658		750		—		—
Future Severance-Related Payments (3)		1,785		1,785		—		—		—

Total	$	168,296	$	57,915	$	34,651	$	32,041	$	43,689

(1)	Our operating lease obligations are primarily related to dELiA*s retail stores and our corporate headquarters.

(2)	Our purchase obligations are primarily related to inventory commitments and service agreements.

(3)	Our future severance-related payments consist of severance agreements with existing employees.

We have long-term non-cancelable operating lease commitments for retail stores, office space, contact center facilities and equipment. We also have long-term, non-cancelable capital lease commitments for equipment.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses, among other things, our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to product returns, bad debts, inventories, investments, intangible assets and goodwill, income taxes, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following policies are most critical to the portrayal of the Company’s financial condition and results of operations.

Revenue Recognition

Direct marketing revenues are recognized at the time of shipment to customers. These revenues are net of any promotional price discounts and an allowance for sales returns. The allowance for sales returns is estimated based upon our direct marketing return policy, historical experience and evaluation of current sales and returns trends. Direct marketing revenues also include shipping and handling fees billed to customers.

Retail store revenues are recognized at the point of sale, net of any promotional price discounts and an allowance for sales returns. The allowance for sales returns is estimated based upon our retail return policy, historical experience and evaluation of current sales and returns trends.

We recognize other revenues that consist primarily of advertising provided for third parties in our catalogs, on our e-commerce web pages, in our outbound packages, and in our retail stores, pursuant to specific pricing arrangements with Alloy, Inc. Alloy, Inc. arranges these advertising services on our behalf through a media services agreement (see Note 12 to our condensed consolidated financial statements) entered into in connection with the Spinoff. Revenue under these arrangements is recognized, net of commissions and agency fees, when the underlying advertisement is published or otherwise delivered pursuant to the terms of each arrangement. We also recognize revenue from the sale of offline magazine subscriptions to our telephone direct marketing customers at the time of purchase. We recorded revenues of $73,000 and $112,000 for the thirteen week periods ended May 1, 2010 and May 2, 2009, respectively, in our financial statements in accordance with the terms of the media services agreement.

Catalog Costs

Catalog costs consist of catalog production, including paper and mailing costs. These costs are capitalized and expensed over the expected future revenue stream, which is customarily two to four months from the date the catalogs are mailed.

An estimate of the future sales dollars to be generated from each individual catalog mailing serves as the foundation for our catalog costs policy. The estimate of future sales is calculated for each mailing using historical trends for catalogs mailed in similar prior periods as well as the overall current sales trend for each individual direct marketing brand. This estimate is compared with the actual sales generated-to-date for the catalog mailing to determine the percentage of total catalog costs to be capitalized as prepaid expenses on our consolidated balance sheets.

Inventories

Inventories, which consist of finished goods, are stated at the lower of cost (first-in, first-out method) or market value. Inventories may include items that have been written down to our best estimate of their net realizable value. Our decisions to write-down and establish valuation allowances against our merchandise inventories are based on our current rates of sale, the age of the inventory and other factors. Actual final sales prices to customers may be higher or lower than our estimated sales prices and could result in a fluctuation in gross profit. The cost of inventories includes the cost of merchandise, freight in, duties, and certain buying, merchandising and warehousing costs. Store occupancy costs, including rent and common area maintenance, are treated as period costs.

Goodwill and Other Indefinite-Lived Intangible Assets

The Company follows the provisions of ASC-350-10, Intangibles-Goodwill and Other, which requires testing for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company last performed an annual impairment test as of January 30, 2010, which indicated no impairment.

Determining the fair value of our direct marketing reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of that reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of our indefinite-lived intangible assets, primarily trademarks. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge.

We perform valuation analyses and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions including projected future cash flows (including timing), discount rates reflecting the risk inherent in future cash flows, revenue growth rates, projected long-term growth rates, royalty rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

Considerable management judgment is necessary to estimate the fair value of our direct marketing reporting unit and indefinite-lived intangible assets which may be impacted by future actions taken by us or our competitors and the economic environment in which we operate. These estimates affect the balance of goodwill as well as intangible assets on our consolidated balance sheets and operating expenses on our consolidated statements of operations.

Impairment of Long-Lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open for a period of time sufficient to reach maturity. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under impairment of long-lived assets.

We measure fair value by discounting estimated future cash flows using an appropriate discount rate. Considerable judgment by us is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows and the discount rate selected to measure the risks inherent in future cash flows.

For the thirteen weeks ended May 1, 2010, we recorded no impairment charge in our condensed consolidated statements of operations.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures. ASU 2010-06 amends ASC 820-10, Fair Value Measurements and Disclosures, and requires new disclosures surrounding certain fair value measurements. ASU 2010-06 is effective for the first interim or annual reporting period beginning on or after December 15, 2009, except for certain disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for the first interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted the disclosure requirements effective for the first interim or annual reporting period beginning on or after December 15, 2009. The adoption did not have a material impact on our condensed consolidated financial statements. However, the Company intends to adopt the remaining disclosure requirements when they become effective in the first quarter of the fiscal 2011. The Company is in the process of evaluating these additional disclosure requirements and does not expect they will have a significant impact on its condensed consolidated financial statements.

Off-Balance Sheet Arrangements

We enter into letters of credit issued under the Letter of Credit Agreement to facilitate the purchase of merchandise.

dELiA*s Brand, LLC, one of our subsidiaries, entered into a license agreement in 2003 with JLP Daisy that grants JLP Daisy exclusive rights (except for our rights) to use the dELiA*s trademarks to advertise, promote and market the licensed products, and to sublicense to permitted sublicensees the right to use the trademarks in connection with the manufacture, sale and distribution of the licensed products to approved wholesale customers.

We do not maintain any other off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Guarantees

We have no significant financial guarantees.

Inflation

In general, our costs, some of which include postage, paper, freight and energy costs, are affected by inflation and we may experience the effects of inflation in future periods. We believe, however, that such effects have not been material to us during the past.

Forward-Looking Statements

In order to keep stockholders and investors informed of our future plans, this Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains and, from time to time, other reports and oral or written statements issued by us may contain, statements expressing our expectations and beliefs regarding our future results, goals, performance and objectives that are or may be deemed to be “forward-looking statements” within the meaning of applicable securities laws. Our ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. When used in this document, the words “anticipate”, “may”, “could”, “plan”, “project”, “should”, “would”, “predict”, “believe”, “estimate”, “expect” and “intend” and similar expressions are intended to identify such forward-looking statements.

Our forward-looking statements are based upon management’s current expectations and beliefs. They are subject to a number of known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements as a result of various factors, including, but not limited to, the impact of general economic and business conditions, including the currently difficult economic environment and recent turmoil in financial and credit markets; our inability to realize the full value of merchandise currently in inventory as a result of underperforming sales; unanticipated increases in mailing and printing costs; the cost of additional overhead that may be required to expand our brands; our inability to implement our retail store expansion strategy as a result of unexpected or increased costs or delays in the development and expansion of our retail chain or our inability to fund our retail expansion with operating cash as a result of either lower sales, higher than anticipated costs, and/or other factors; our inability to refinance the Letter of Credit Agreement; changing customer tastes and buying trends; the inherent difficulty in forecasting consumer buying patterns and trends, and the possibility that any improvements in our product margins, or in customer response to our merchandise, may not be sustained; uncertainties related to our multi-channel model, and, in particular, the effects of shifting patterns of e-commerce or retail purchases versus catalog purchases; any significant variations between actual amounts and the amounts estimated for those matters identified as our critical accounting estimates or our other accounting estimates made in the preparation of our financial statements; as well as the various other risk factors set forth in our periodic and other reports filed with the Securities and Exchange Commission. Accordingly, while we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. You are urged to consider all such factors. Except as required by law, we assume no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We have significant amounts of cash and cash equivalents (money market funds) at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits. As of May 1, 2010, we did not hold any marketable securities and do not own any derivative financial instruments in our portfolio, thus we do not believe there is any material market risk exposure with respect to these items.

Item 4.

Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, May 1, 2010, that our disclosure controls and procedures were effective to ensure both that (i) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Exchange Act, and (ii) information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended May 1, 2010 identified in connection with the evaluation thereof by our Chief Executive Officer and Chief Financial Officer that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We are involved from time to time in litigation incidental to our business and, from time to time, we may make provisions for potential litigation losses. We follow ACS 450 Contingencies when assessing pending or potential litigation.

The information set forth in Part I, Note 14 to the Notes to Condensed Consolidated Financial Statements contained on page 13 under the caption “Litigation” is incorporated herein by reference.

Item 1A.

Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

Risk factors and the other information are set forth in our most recent Annual Report on Form 10-K and our other periodic reports filed with the Securities Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, and results of operations. Other than response to rules and regulations promulgated by the Securities and Exchange Commission, we assume no obligation (and specifically disclaim any such obligation) to update our risk factors or any other forward-looking statements to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits


(A)		Exhibits

31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*

31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*

32.1		Certification under section 906 by the Chief Executive Officer.*

32.2		Certification under section 906 by the Chief Financial Officer.*

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	dELiA*s, Inc.

Date: June 9, 2010	By:	/S/ WALTER KILLOUGH
		Walter Killough
		Chief Executive Officer

Date: June 9, 2010	By:	/S/ DAVID J. DICK
		David J. Dick
		Chief Financial Officer

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