Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - CACHE INC | Financial_Report.xls |
| EX-32.1 - EX-32.1 - CACHE INC | a11-25666_1ex32d1.htm |
| EX-31.2 - EX-31.2 - CACHE INC | a11-25666_1ex31d2.htm |
| EX-31.1 - EX-31.1 - CACHE INC | a11-25666_1ex31d1.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 October 1, 2011
OR
o 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: 0-10345
CACHE, INC.
(Exact name of registrant as specified in its Charter)
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Florida |
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59-1588181 |
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(State or other jurisdiction of |
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(IRS Employer Identification No.) |
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incorporation or organization) |
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1440 Broadway, New York, New York |
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10018 |
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(Address of principal executive offices) |
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(zip code) |
212-575-3200
(Registrant’s telephone number, including area code)
(Former name, address and former fiscal year, if changed since last report)
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 filing requirements for the past 90 days. Yes x No o
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 x No o
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 1, 2011, 12,854,034 common shares were outstanding.
CACHE, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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October 1, |
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January 1, |
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October 2, |
| |||
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(Unaudited) |
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(Audited) |
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(Unaudited) |
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ASSETS |
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Current assets: |
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|
|
|
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|
| |||
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Cash and equivalents |
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$ |
13,816,000 |
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$ |
4,609,000 |
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$ |
2,483,000 |
|
|
Marketable securities |
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7,563,000 |
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20,923,000 |
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21,865,000 |
| |||
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Certificates of deposit — restricted |
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3,000,000 |
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2,500,000 |
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2,500,000 |
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Receivables, net |
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2,304,000 |
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2,855,000 |
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2,020,000 |
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Income tax receivable, net |
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— |
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50,000 |
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81,000 |
| |||
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Inventories, net |
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22,232,000 |
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15,789,000 |
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19,243,000 |
| |||
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Prepaid expenses and other current assets |
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5,323,000 |
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5,029,000 |
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6,041,000 |
| |||
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Total current assets |
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54,238,000 |
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51,755,000 |
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54,233,000 |
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| |||
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Equipment and leasehold improvements, net |
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20,651,000 |
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24,753,000 |
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26,836,000 |
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Goodwill |
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— |
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— |
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9,092,000 |
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Intangible assets, net |
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102,000 |
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102,000 |
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102,000 |
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Other assets |
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9,380,000 |
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9,380,000 |
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7,965,000 |
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Total assets |
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$ |
84,371,000 |
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$ |
85,990,000 |
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$ |
98,228,000 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
11,777,000 |
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$ |
8,273,000 |
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$ |
8,949,000 |
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Note payable |
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1,463,000 |
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1,518,000 |
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1,751,000 |
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Accrued compensation |
|
1,306,000 |
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2,551,000 |
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1,222,000 |
| |||
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Accrued liabilities |
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8,697,000 |
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11,150,000 |
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9,321,000 |
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Total current liabilities |
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23,243,000 |
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23,492,000 |
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21,243,000 |
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Note payable |
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— |
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319,000 |
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476,000 |
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Other liabilities |
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12,280,000 |
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13,867,000 |
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14,103,000 |
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Commitments and contingencies |
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STOCKHOLDERS’ EQUITY |
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Common stock, par value $.01; authorized, 40,000,000 shares; issued 16,536,233, 16,481,710 and 16,475,043 |
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165,000 |
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165,000 |
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165,000 |
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Additional paid-in capital |
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48,346,000 |
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48,015,000 |
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47,888,000 |
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Retained earnings |
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40,132,000 |
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39,927,000 |
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54,148,000 |
| |||
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Treasury stock 3,682,199 shares, at cost |
|
(39,795,000 |
) |
(39,795,000 |
) |
(39,795,000 |
) | |||
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Total stockholders’ equity |
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48,848,000 |
|
48,312,000 |
|
62,406,000 |
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Total liabilities and stockholders’ equity |
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$ |
84,371,000 |
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$ |
85,990,000 |
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$ |
98,228,000 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED
(Unaudited)
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October 1, |
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October 2, |
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Net sales |
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$ |
161,024,000 |
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$ |
150,649,000 |
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Cost of sales, including buying and occupancy |
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91,829,000 |
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93,099,000 |
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Gross profit |
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69,195,000 |
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57,550,000 |
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Expenses: |
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|
|
|
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Store operating expenses |
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55,996,000 |
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55,766,000 |
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General and administrative expenses |
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13,342,000 |
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15,048,000 |
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Total expenses |
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69,338,000 |
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70,814,000 |
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Operating loss |
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(143,000 |
) |
(13,264,000 |
) | ||
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Other income (expense): |
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Interest expense |
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(38,000 |
) |
(94,000 |
) | ||
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Interest income |
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68,000 |
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117,000 |
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Total other income, net |
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30,000 |
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23,000 |
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Loss before income taxes |
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(113,000 |
) |
(13,241,000 |
) | ||
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|
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Income tax benefit |
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(318,000 |
) |
(5,030,000 |
) | ||
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|
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Net income (loss) |
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$ |
205,000 |
|
$ |
(8,211,000 |
) |
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Basic earnings (loss) per share |
|
$ |
0.02 |
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$ |
(0.64 |
) |
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Diluted earnings (loss) per share |
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$ |
0.02 |
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$ |
(0.64 |
) |
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|
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|
| ||
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Basic weighted average shares outstanding |
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12,831,000 |
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12,774,000 |
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Diluted weighted average shares outstanding |
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12,859,000 |
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12,774,000 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED
(Unaudited)
|
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October 1, |
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October 2, |
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|
|
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Net sales |
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$ |
48,659,000 |
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$ |
45,524,000 |
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|
|
|
|
|
|
| ||
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Cost of sales, including buying and occupancy |
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28,899,000 |
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29,622,000 |
| ||
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|
|
|
|
|
| ||
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Gross profit |
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19,760,000 |
|
15,902,000 |
| ||
|
|
|
|
|
|
| ||
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Expenses: |
|
|
|
|
| ||
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Store operating expenses |
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18,463,000 |
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17,959,000 |
| ||
|
General and administrative expenses |
|
4,339,000 |
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6,033,000 |
| ||
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Total expenses |
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22,802,000 |
|
23,992,000 |
| ||
|
|
|
|
|
|
| ||
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Operating loss |
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(3,042,000 |
) |
(8,090,000 |
) | ||
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|
|
|
|
|
| ||
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Other income (expense): |
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|
|
|
| ||
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Interest expense |
|
(7,000 |
) |
(27,000 |
) | ||
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Interest income |
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24,000 |
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32,000 |
| ||
|
Total other income, net |
|
17,000 |
|
5,000 |
| ||
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|
|
|
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|
| ||
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Loss before income taxes |
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(3,025,000 |
) |
(8,085,000 |
) | ||
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|
|
|
|
|
| ||
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Income tax benefit |
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(1,203,000 |
) |
(3,058,000 |
) | ||
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|
|
|
|
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| ||
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Net loss |
|
$ |
(1,822,000 |
) |
$ |
(5,027,000 |
) |
|
|
|
|
|
|
| ||
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Basic loss per share |
|
$ |
(0.14 |
) |
$ |
(0.39 |
) |
|
|
|
|
|
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| ||
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Diluted loss per share |
|
$ |
(0.14 |
) |
$ |
(0.39 |
) |
|
|
|
|
|
|
| ||
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Basic weighted average shares outstanding |
|
12,849,000 |
|
12,780,000 |
| ||
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|
|
|
|
|
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Diluted weighted average shares outstanding |
|
12,849,000 |
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12,780,000 |
| ||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
(Unaudited)
|
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|
October 1, |
|
October 2, |
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|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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|
|
|
| ||
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|
|
|
|
|
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Net income (loss) |
|
$ |
205,000 |
|
$ |
(8,211,000 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
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Depreciation and amortization |
|
5,761,000 |
|
7,040,000 |
| ||
|
Provision for sales allowance and doubtful accounts, net |
|
— |
|
(53,000 |
) | ||
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Stock-based compensation |
|
287,000 |
|
311,000 |
| ||
|
Non-cash interest expense on note payable |
|
39,000 |
|
28,000 |
| ||
|
Deferred income taxes |
|
(145,000 |
) |
(5,039,000 |
) | ||
|
Gift card breakage |
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(469,000 |
) |
(145,000 |
) | ||
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Amortization of deferred income for co-branded credit card |
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(652,000 |
) |
(490,000 |
) | ||
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Amortization of deferred rent |
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(1,352,000 |
) |
(2,067,000 |
) | ||
|
Gain from insurance proceeds |
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(41,000 |
) |
— |
| ||
|
Proceeds from insurance recovery |
|
80,000 |
|
— |
| ||
|
|
|
|
|
|
| ||
|
Change in assets and liabilities: |
|
|
|
|
| ||
|
Decrease in receivables and income tax receivables |
|
441,000 |
|
4,826,000 |
| ||
|
Increase in inventories |
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(6,443,000 |
) |
(2,685,000 |
) | ||
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Decrease (increase) in prepaid expenses and other current assets |
|
(78,000 |
) |
683,000 |
| ||
|
Increase in accounts payable |
|
3,504,000 |
|
1,325,000 |
| ||
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Decrease in accrued liabilities, accrued compensation and other liabilities |
|
(2,557,000 |
) |
(2,726,000 |
) | ||
|
|
|
|
|
|
| ||
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Net cash used in operating activities |
|
(1,420,000 |
) |
(7,203,000 |
) | ||
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|
|
|
|
|
| ||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
Purchase of marketable securities |
|
(4,087,000 |
) |
(14,501,000 |
) | ||
|
Maturities of marketable securities |
|
17,447,000 |
|
22,635,000 |
| ||
|
Proceeds from insurance recovery |
|
71,000 |
|
125,000 |
| ||
|
Certificates of deposit — restricted |
|
(500,000 |
) |
(1,000,000 |
) | ||
|
Purchase of equipment and leasehold improvements |
|
(1,914,000 |
) |
(2,455,000 |
) | ||
|
|
|
|
|
|
| ||
|
Net cash provided by investing activities |
|
11,017,000 |
|
4,804,000 |
| ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
Repayment of note payable |
|
(413,000 |
) |
(634,000 |
) | ||
|
Proceeds from the issuance of common stock |
|
23,000 |
|
— |
| ||
|
|
|
|
|
|
| ||
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Net cash used in financing activities |
|
(390,000 |
) |
(634,000 |
) | ||
|
|
|
|
|
|
| ||
|
Net increase (decrease) in cash and equivalents |
|
9,207,000 |
|
(3,033,000 |
) | ||
|
Cash and equivalents, at beginning of period |
|
4,609,000 |
|
5,516,000 |
| ||
|
Cash and equivalents, at end of period |
|
$ |
13,816,000 |
|
$ |
2,483,000 |
|
|
|
|
|
|
|
| ||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
Interest paid |
|
$ |
23,000 |
|
$ |
67,000 |
|
|
Income taxes paid |
|
$ |
295,000 |
|
$ |
119,000 |
|
|
Accrued equipment and leasehold improvements |
|
$ |
74,000 |
|
$ |
51,000 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CACHE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
References to the “Company,” “we,” “us,” or “our” mean Cache, Inc., together with its wholly-owned subsidiaries, except as expressly indicated or unless the context otherwise requires. Under the trade name “Cache”, we operated 279 women’s apparel specialty stores, as of October 1, 2011.
The following unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements include all known adjustments necessary for a fair presentation of the results of the interim periods as required by accounting principles generally accepted in the United States. These adjustments consist primarily of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Actual results may materially differ from these estimates.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended January 1, 2011, which are included in the Company’s Annual Report on Form 10-K with respect to such period filed with the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. The January 1, 2011 condensed consolidated balance sheet amounts are derived from the Company’s audited consolidated financial statements.
The Company’s fiscal year (“fiscal year” or “fiscal”) refers to the applicable 52-or 53-week period. The years ended January 1, 2011 (“fiscal 2010”) and December 31, 2011 (“fiscal 2011”) are each 52-week years.
2. STOCK BASED COMPENSATION
Stock-based compensation expense for all stock-based awards programs, including grants of stock options, is recorded in accordance with “Compensation-Stock Compensation”, Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”). During the 39- and 13-week periods ended October 1, 2011, the Company recognized approximately $287,000 and $83,000, respectively, in stock-based compensation expense and for the same periods ended October 2, 2010, the Company recognized approximately $311,000 and $113,000 respectively. The grant date fair value for stock options is calculated using the Black-Scholes option valuation model. The Company granted no options during the 39-week period ended October 1, 2011, as compared to 40,000 options being granted during the 39-week period ended October 2, 2010. No excess tax benefits were recognized from the exercise of stock options during fiscal 2011 and fiscal 2010. During the first quarter of fiscal 2011, 21,200 shares of the Company’s common stock were issued for services to its board members. The total fair value of the issued common stock was approximately $86,000 of which, approximately $64,000 and $21,000 were included in stock-based compensation expense for the 39-and 13-week periods ended October 1, 2011, respectively. The remaining cost is expected to be recognized over the remainder of fiscal 2011. Comparatively, during the first quarter of fiscal 2010, 20,000 shares of the Company’s common stock were issued for services to its board members. The total fair value of the issued common stock was approximately $92,000, of which approximately $69,000 and $23,000 were included in stock-based compensation expense for the 39- and 13-week periods ended October 2, 2010, respectively.
During the 39- and 13- week periods ended October 1, 2011, the Company granted restricted stock awards representing 52,000 and 6,000 shares respectively, of the Company’s common stock, which had a weighted-average grant date fair value of $4.54 and $5.53 respectively. Comparatively, during the 39 and 13-week periods ended October 2, 2010, the Company granted restricted stock awards representing 214,000 and 202,000 shares, respectively, of the Company’s common stock, which had a weighted average grant date fair value of $5.52 and $5.48, respectively. Two-thirds of these restricted stock awards will contingently vest over a three-year period, based on the Company meeting performance goals, and one-third will vest over the requisite service period. The Company made no grants of restricted stock awards during the third quarter of fiscal 2011.
The weighted-average grant date fair value of options granted during the 39-week period ended October 2, 2010 was $1.79. The grant date fair value is calculated using the Black-Scholes option valuation model. The following assumptions were used during the 39-week period ended October 2, 2010:
|
Expected dividend rate |
|
$ |
0.00 |
|
|
Expected volatility |
|
59.53 - 59.61 |
% | |
|
Risk free interest rate |
|
1.48 - 1.50 |
% | |
|
Expected lives (years) |
|
3.00 |
| |
3. BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings (loss) per share has been computed based upon the weighted average of common shares outstanding. Diluted earnings (loss) per share also includes the dilutive effect of potential common shares (dilutive stock options and unvested restricted stock awards) outstanding during the period. Income (loss) per common share has been computed as follows:
|
|
|
39-Weeks Ended |
|
13-Weeks Ended |
| |||||||||
|
|
|
October 1, |
|
October 2, |
|
October 1, |
|
October 2, |
| |||||
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| |||||
|
Net income (loss) |
|
$ |
205,000 |
|
$ |
(8,211,000 |
) |
$ |
(1,822,000 |
) |
$ |
(5,027,000 |
) | |
|
Basic weighted number of average shares outstanding |
|
12,831,000 |
|
12,774,000 |
|
12,849,000 |
|
12,780,000 |
| |||||
|
Incremental shares from assumed issuances of stock options and restricted stock awards |
|
28,000 |
|
— |
|
— |
|
— |
| |||||
|
Diluted weighted average number of shares outstanding |
|
12,859,000 |
|
12,774,000 |
|
12,849,000 |
|
12,780,000 |
| |||||
|
|
|
|
|
|
|
|
|
|
| |||||
|
Net income (loss) per share |
- Basic |
|
$ |
0.02 |
|
$ |
(0.64 |
) |
$ |
(0.14 |
) |
$ |
(0.39 |
) |
|
|
- Diluted |
|
$ |
0.02 |
|
$ |
(0.64 |
) |
$ |
(0.14 |
) |
$ |
(0.39 |
) |
Options to purchase 736,675 common shares were excluded from the computation of diluted earnings per share for the 39-week period ended October 1, 2011, due to the anti-dilutive effect caused by the exercise price exceeding the average market price. Unvested restricted common shares of 149,997 were excluded from the computation of diluted earnings per share for the 39-week period ended October 1, 2011, due to contingent restricted shares not meeting their performance goals.
Options and unvested restricted common shares of 1,008,008 and 1,069,001 were excluded from the computation of diluted loss per share for the 13-week periods ended October 1, 2011 and October 2, 2010, respectively, because of the net loss incurred by the Company.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2011, FASB issued ASU No. 2011-08, Intangibles— Goodwill and Other (ASC Topic 350) -Testing Goodwill for Impairment. ASU No. 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Under this amendment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendment includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this guidance will have a significant impact on its consolidated financial statements.
In June 2011, FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance requires changes in presentation only and will have no significant impact on the Company’s consolidated financial statements.
In May 2011, FASB issued ASU No. 2011-04, Fair Value Measurement (ASC Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The changes to the ASC as a result of this update are effective prospectively for interim and annual periods beginning after December 15, 2011. The Company does not expect that the adoption of this guidance will have a significant impact on its consolidated financial statements.
5. FAIR VALUE MEASUREMENT
“Fair Value Measurements and Disclosures”, Topic 820 of the FASB ASC, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Topic 820 of the FASB ASC establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
· Level 1 — Unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
· Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
· Level 3 — Unobservable inputs that reflect assumptions about what market participants would use in pricing assets or liabilities based on the best information available.
As of October 1, 2011, the Company’s marketable securities primarily consist of short-term United States Treasury bills. The Company classifies its short-term investments as held-to-maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the securities until maturity. Because the Company’s held-to-maturity securities mature within one year of the purchase date, the securities are classified as short-term marketable securities. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts and such carrying values approximate fair value.
A decline in the market value of any held-to-maturity security below cost, that is deemed to be other than temporary, results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.
“Financial Instruments”, Topic 825 of the FASB ASC, provides entities the option to measure many financial instruments and certain other items at fair value. Entities that choose the fair value option will recognize unrealized gains and losses on items for which the fair value option was elected in earnings at each subsequent reporting date. The Company has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with Topic 825 of the FASB ASC.
The fair value of our marketable securities, which was determined based upon Level 1 inputs, totaled $7.6 million, $20.9 million and $21.9 million, as of October 1, 2011, January 1, 2011 and October 1, 2010, respectively. For the fiscal periods ended October 1, 2011, January 1, 2011 and October 2, 2010, the aggregate amount of marketable securities (maturing greater than 90 days and less than one year) totaled approximately $7.6 million, $20.9 million and $21.9 million, respectively. The Company noted small variances between the book value and fair value due to the remaining unamortized premiums. As a result, no impairment has occurred for the fiscal periods presented herein. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity investments. Interest income is recognized when earned.
Fair Value of Financial Instruments
The carrying amounts of certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximate their estimated fair values due to their short-term nature. The Company’s note payable includes imputed interest at 5% as the fair market value of this note is not readily determinable because comparable instruments do not exist. The 5% imputed interest represented the Company’s average return on its investment portfolio at the inception of the note.
6. RECEIVABLES
|
|
|
October 1, |
|
January 1, |
|
October 2, |
| |||
|
|
|
2011 |
|
2011 |
|
2010 |
| |||
|
Construction allowances |
|
$ |
56,000 |
|
$ |
370,000 |
|
$ |
126,000 |
|
|
Third party credit cards |
|
1,658,000 |
|
1,664,000 |
|
1,598,000 |
| |||
|
Other |
|
590,000 |
|
821,000 |
|
296,000 |
| |||
|
|
|
$ |
2,304,000 |
|
$ |
2,855,000 |
|
$ |
2,020,000 |
|
At October 1, 2011, the Company had no income tax receivable. At October 2, 2010, the Company’s income tax receivable was $81,000, which represented the federal and state income tax refunds the Company expected to receive from its fiscal 2009 tax returns.
7. INVENTORIES
|
|
|
October 1, |
|
January 1, |
|
October 2, |
| |||
|
|
|
2011 |
|
2011 |
|
2010 |
| |||
|
Raw materials |
|
$ |
1,305,000 |
|
$ |
1,347,000 |
|
$ |
1,410,000 |
|
|
Work-in-process |
|
2,526,000 |
|
1,831,000 |
|
1,631,000 |
| |||
|
Finished goods |
|
18,401,000 |
|
12,611,000 |
|
16,202,000 |
| |||
|
|
|
$ |
22,232,000 |
|
$ |
15,789,000 |
|
$ |
19,243,000 |
|
8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
|
|
|
October 1, |
|
January 1, |
|
October 2, |
| |||
|
|
|
2011 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Leasehold improvements |
|
$ |
51,304,000 |
|
$ |
51,074,000 |
|
$ |
51,315,000 |
|
|
Furniture, fixtures and equipment |
|
35,300,000 |
|
34,585,000 |
|
34,648,000 |
| |||
|
|
|
86,604,000 |
|
85,659,000 |
|
85,963,000 |
| |||
|
Less: accumulated depreciation and amortization |
|
(65,953,000 |
) |
(60,906,000 |
) |
(59,127,000 |
) | |||
|
|
|
$ |
20,651,000 |
|
$ |
24,753,000 |
|
$ |
26,836,000 |
|
9. ACCRUED LIABILITIES
|
|
|
October 1, |
|
January 1, |
|
October 2, |
| |||
|
|
|
2011 |
|
2011 |
|
2010 |
| |||
|
Gift cards, merchandise credit cards and other customer deposits and credits |
|
$ |
3,623,000 |
|
$ |
4,114,000 |
|
$ |
3,338,000 |
|
|
Taxes, including income taxes |
|
1,686,000 |
|
3,047,000 |
|
2,025,000 |
| |||
|
Operating expenses |
|
1,501,000 |
|
1,830,000 |
|
2,301,000 |
| |||
|
Deferred income — co-branded credit card program |
|
956,000 |
|
769,000 |
|
724,000 |
| |||
|
Sales return reserve |
|
273,000 |
|
547,000 |
|
385,000 |
| |||
|
Group insurance |
|
584,000 |
|
513,000 |
|
497,000 |
| |||
|
Leasehold additions |
|
74,000 |
|
330,000 |
|
51,000 |
| |||
|
|
|
$ |
8,697,000 |
|
$ |
11,150,000 |
|
$ |
9,321,000 |
|
Leasehold additions generally represent a liability to general contractors for a final 10% payable on construction contracts for store construction or renovations.
10. OTHER LIABILITIES
The Company’s other liabilities are comprised of the following:
|
|
|
October 1, |
|
January 1, |
|
October 2, |
| |||
|
Deferred rent |
|
$ |
10,766,000 |
|
$ |
12,073,000 |
|
$ |
12,232,000 |
|
|
Deferred income — co-branded credit card program |
|
1,514,000 |
|
1,794,000 |
|
1,871,000 |
| |||
|
|
|
$ |
12,280,000 |
|
$ |
13,867,000 |
|
$ |
14,103,000 |
|
11. CREDIT FACILITY
The Company had a credit facility with the Bank of America (the “Bank”) of $2.5 million which expired on May 1, 2011. On April 29, 2011, the Company amended its credit facility with the Bank for another year to allow the Company to issue letters of credit up to $3.0 million, which is collateralized by granting to the Bank a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank amounting to a total of $3.0 million. This one-year credit facility will expire on May 1, 2012. There were outstanding letters of credit under this facility of $1.6 million at October 1, 2011.
Any certificates of deposit collateralized against this line of credit are reported as restricted funds. Based on the expiry dates of the letters of credits issued, the restricted cash has been reported as either current or non-current. When the expiry date is within one year of the reporting period end date, then the certificates of deposit are reported as current, and when the expiry date is beyond one year, the certificates of deposit are reported as non-current.
12. INCOME TAXES
The Company accounts for income taxes in accordance with “Income Taxes”, Topic 740 of the FASB ASC. This guidance requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. At January 1, 2011, the Company maintained $9.3 million of net deferred tax assets, of which approximately $5.7 million related to federal tax operating loss carry-forwards and $1.7 million related to state tax net operating loss carry-forwards. In addition, during the 39-week period ended October 1, 2011, the Company recorded an income tax benefit of $41,000, primarily related to the net loss incurred. The Company established a federal valuation allowance of $5.1 million at January 1, 2011. For state income tax purposes, the Company had a valuation allowance in the amount of $650,000 at January 1, 2011, primarily to reserve for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. These amounts remain unchanged at October 1, 2011.
At October 1, 2011 and October 2, 2010, the current portion of deferred tax assets and liabilities of $281,000 and $2.0 million, respectively, were included in prepaid expenses and other current assets, while the non-current portion of deferred tax assets and liabilities of $9.0 million and $7.6 million, respectively, were included in other assets on the Company’s accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowance discussed above.
When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company’s best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of January 1, 2011, the Company had recorded a $271,000 reserve, net of federal benefit for potential tax contingencies. During the 39-week period ended October 1, 2011, the Company recorded a reversal of the state income tax reserve of $277,000, net of federal benefit based upon the completion of a state income tax audit of the Company’s state income tax returns. As of October 2, 2010, the Company reported a reserve balance of $368,000, net of federal benefit.
13. COMMITMENTS AND CONTINGENCIES
On September 23, 2009, the Company entered into a separation agreement with two of its then executive officers. Pursuant to one of these separation agreements, a former executive may receive contingent payments of up to $500,000 in the aggregate, based on the achievement by the Company of certain annual net income targets set forth in the agreement through fiscal 2013. As of October 1, 2011, no accrual was recorded for this earn-out provision.
The Company is exposed to a number of asserted and unasserted potential claims. Management does not believe it is reasonably possible that resolution of these matters will result in a material loss. The Company had no guarantees, subleases or assigned lease obligations as of October 1, 2011, January 1, 2011 or October 2, 2010.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained in this Form 10-Q, the matters addressed herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements represent the Company’s expectation or belief concerning future events. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “estimates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. The Company cautions that forward-looking statements are subject to risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially, or otherwise, from those expressed or implied in the forward-looking statements, including, without limitation, macroeconomic factors that have affected the retail sector, including changes in national, regional and local economic conditions, employment levels and consumer spending patterns, and the other risks detailed from time to time in the Company’s most recent Form 10-K, Forms 10-Q and other reports filed with the Securities and Exchange Commission. Any weakening of the economy generally or in a number of our markets could adversely affect our financial position and results of operations, cause us to reduce the number and frequency of new store openings, slow our re-modeling of existing locations or cause us to increase store closings. Other unknown or unpredictable factors also could harm the Company’s business, financial condition and results. Consequently, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws.
RESULTS OF OPERATIONS
The following table sets forth our results of operations for the 39-week and 13-week periods ended October 1, 2011 and October 2, 2010, respectively, expressed as a percentage of net sales.
|
|
|
39-Weeks Ended |
|
13-Weeks Ended |
| ||||
|
|
|
October 1, |
|
October 2, |
|
October 1, |
|
October 2, |
|
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Cost of sales |
|
57.0 |
|
61.8 |
|
59.4 |
|
65.1 |
|
|
Gross profit |
|
43.0 |
|
38.2 |
|
40.6 |
|
34.9 |
|
|
Store operating expenses |
|
34.8 |
|
37.0 |
|
37.9 |
|
39.4 |
|
|
General and administrative expenses |
|
8.3 |
|
10.0 |
|
8.9 |
|
13.3 |
|
|
Operating loss |
|
(0.1 |
) |
(8.8 |
) |
(6.2 |
) |
(17.8 |
) |
|
Interest expense |
|
0.0 |
|
(0.1 |
) |
0.0 |
|
(0.1 |
) |
|
Interest income |
|
0.0 |
|
0.1 |
|
0.0 |
|
0.1 |
|
|
Loss before income taxes |
|
(0.1 |
) |
(8.8 |
) |
(6.2 |
) |
(17.8 |
) |
|
Income tax benefit |
|
(0.2 |
) |
(3.3 |
) |
(2.5 |
) |
(6.7 |
) |
|
Net income (loss) |
|
0.1 |
% |
(5.5 |
)% |
(3.7 |
)% |
(11.1 |
)% |
We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:
|
|
|
39-Weeks Ended |
|
13-Weeks Ended |
| ||||||||
|
|
|
October 1, |
|
October 2, |
|
October 1, |
|
October 2, |
| ||||
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
Total store count, at end of period |
|
279 |
|
281 |
|
279 |
|
281 |
| ||||
|
Net sales increase (decrease) |
|
6.9 |
% |
(2.7 |
)% |
6.9 |
% |
1.3 |
% | ||||
|
Comparable store sales increase (decrease) |
|
6.4 |
% |
(0.6 |
)% |
5.7 |
% |
(0.2 |
)% | ||||
|
Average sales per transaction increase (decrease) |
|
11.1 |
% |
(5.5 |
)% |
6.8 |
% |
4.5 |
% | ||||
|
Average number of transactions increase (decrease) |
|
(4.2 |
)% |
5.3 |
% |
(1.1 |
)% |
(4.4 |
)% | ||||
|
Net sales per average square foot |
|
$ |
264 |
|
$ |
248 |
|
$ |
80 |
|
$ |
75 |
|
|
Total square footage, at end of period (in thousands) |
|
565 |
|
568 |
|
565 |
|
568 |
| ||||
Net sales
During the 39-week period ended October 1, 2011, net sales increased to $161.0 million from $150.6 million, an increase of $10.4 million, or 6.9%, as compared to the same 39-week period last year. The increase in net sales is primarily due to an increase in comparable store sales of $9.5 million, or 6.4% and an increase in non-comparable store sales of $456,000. We continue to believe
that our merchandising and design strategies, which were implemented during fiscal 2010 are contributing to the increase in net sales. The increase in net sales at our stores for the 39-week period reflected a 11.1% increase in average dollars per transaction, partially offset by a 4.2% decrease in sales transactions.
During the 13-week period ended October 1, 2011, net sales increased to $48.7 million from $45.5 million, an increase of $3.1 million, or 6.9%, as compared to the same 13-week period last year. The increase in net sales is primarily due to an increase in comparable store sales of approximately $2.5 million or 5.7% and an increase in non-comparable store sales of $417,000. The increase in net sales at our stores for the quarter reflected a 6.8% increase in average dollars per transaction, partially offset by a 1.1% decrease in sales transactions.
Gross profit
During the 39-week period ended October 1, 2011, gross profit increased to $69.2 million from $57.6 million, an increase of $11.6 million, or 20.2%, as compared to the same 39-week period last year. This increase was primarily due to an increase in net sales, as described above, as well as an increase in initial mark-up. As a percentage of net sales, gross profit increased to 43.0% from 38.2% for the current 39-week period, as compared to the prior year period. This increase was primarily due to an increase in full-price sales, an increase in our initial mark-up and a decrease in markdowns as a percentage of sales, as well as the impact from higher sales, as it relates to occupancy and operational costs in our design, production and sourcing departments.
During the 13-week period ended October 1, 2011, gross profit increased to $19.8 million from $15.9 million, an increase of $3.9 million, or 24.3%, as compared to the same 13-week period last year. This increase was primarily due to an increase in net sales as described above, as well as an increase in initial mark-up. As a percentage of net sales, gross profit increased to 40.6% from 34.9% for the current 13-week period, as compared to the prior year period. This increase was primarily due to an increase in full-price sales, an increase in our initial mark-up and a decrease in markdowns as a percentage of sales, as well as the impact from higher sales, as it relates to occupancy and operational costs in our design, production and sourcing departments.
Store operating expenses
During the 39-week period ended October 1, 2011, store operating expenses increased to $56.0 million from $55.8 million, an increase of $230,000, or 0.4%, as compared to the same 39-week period last year. Store operating expenses increased primarily due to an increase in payroll and payroll-related tax expenses of $1.6 million, health insurance of $424,000 and outside services of $308,000, which primarily consisted of internet support services. These increases were partially offset by a decrease in marketing expense of $1.2 million and depreciation expense of $921,000. The increase in payroll and payroll-related costs was primarily due to our maximizing store coverage during high customer traffic periods. The increase in health insurance was primarily due to an increase in health insurance claims. The decrease in marketing expense was primarily due to a reduction in spending on direct mail and production costs related to printed materials. The decrease in depreciation expense was primarily due to certain assets being fully depreciated, coupled with the impairment of 15 underperforming stores during the fourth quarter of fiscal 2010. As a percentage of net sales, store operating expenses decreased to 34.8% from 37.0% for the current 39-week period, as compared to the prior year period, primarily due to the increase in net sales.
During the 13-week period ended October 1, 2011, store operating expenses increased to $18.5 million from $18.0 million, an increase of $504,000, or 2.8%, as compared to the same 13-week period last year. Store operating expenses increased primarily due to an increase in payroll and payroll related tax expenses of $763,000, as well as an increase in health insurance expense of $368,000, which was partially offset by a decrease in marketing expense of $441,000 and depreciation expense of $364,000. The increase in payroll and payroll-related costs was primarily due to our maximizing store coverage during high customer traffic periods. The increase in health insurance was primarily due to an increase in health insurance claims. The decrease in marketing expense was primarily due to a reduction in spending on direct mail and production costs related to printed materials. The decrease in depreciation expense was primarily due to certain assets being fully depreciated, coupled with the impairment of 15 underperforming stores during the fourth quarter of fiscal 2010. As a percentage of net sales, store operating expenses decreased to 37.9% from 39.4% for the current 13-week period, as compared to the prior year period.
General and administrative expenses
During the 39-week period ended October 1, 2011, general and administrative expenses decreased to $13.3 million from $15.0 million, a decrease of $1.7 million, or 11.3%, primarily due to a decrease in professional fees of $1.7 million. Professional fees decreased primarily due to the reduction in legal fees of $2.0 million in connection with the previously disclosed Chico’s lawsuit, which was amicably resolved in April 2011. The reduction in legal fees included an insurance reimbursement of $450,000 for legal fees in connection with the previously disclosed Chico’s lawsuit. Payroll and payroll-related costs increased $258,000 and hiring costs increased $163,000, which were offset by decreases in depreciation expense of $197,000 and consulting services of $191,000. As a
percentage of net sales, general and administrative expenses decreased to 8.3% from 10.0% in fiscal 2010, primarily due to the increase in net sales in fiscal 2011.
During the 13-week period ended October 1, 2011, general and administrative expenses decreased to $4.3 million from $6.0 million, a decrease of $1.7 million, or 28.1%, primarily due to a decrease in professional fees of $1.6 million. Professional fees decreased primarily due to the reduction in legal fees of $1.5 million in connection with the previously disclosed Chico’s lawsuit. As a percentage of net sales, general and administrative expenses decreased to 8.9% from 13.3% in fiscal 2010, primarily due to the decrease in legal fees, as well as the increase in net sales.
Other income/(expense)
During the 39-week period ended October 1, 2011, other income (expense) increased to $30,000 from $23,000, an increase of $7,000, as compared to the same 39-week period last year. This increase was due to a reduction in interest expense of $56,000, partially offset by a reduction in interest income of $49,000.
During the 13-week period ended October 1, 2011, other income (expense) increased to $17,000 from $5,000, an increase of $12,000, as compared to the same 13-week period last year. This increase was due to a reduction in interest expense of $20,000, partially offset by a reduction in interest income of $8,000.
Income taxes
During the 39-week period ended October 1, 2011, an income tax benefit of $318,000 was recorded, as compared to an income tax benefit of $5.0 million in the same 39-week period last year. During the 13-week period ended October 1, 2011, an income tax benefit of $1.2 million was recorded, as compared to an income tax benefit of $3.1 million in the same 13-week period last year. The estimated effective tax rate for fiscal 2011 is projected to be 41.1%, as compared to the fiscal 2010 estimate of 38.3%. During the current year 39-week period, the Company recorded a reversal of a state income tax reserve of $277,000, net of federal benefit, as a result of the completion of a state income tax audit.
Net income/(loss)
As a result of the factors discussed above, net income of $205,000 and a net loss of $1.8 million were recorded during the 39 and 13-week periods ended October 1, 2011, respectively. Comparatively, the Company recorded a net loss of $8.2 million and $5.0 million during the 39 and 13-week periods ended October 2, 2010, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash requirements are primarily for working capital, inventory for new stores, construction of new stores, remodeling of existing stores and to improve and enhance our information technology systems. We have historically satisfied our cash requirements principally through cash flow from operations. During the 39-week period ended October 1, 2011, we used $1.4 million of cash flow from operations, as compared to $7.2 million used during the same period in fiscal 2010, primarily due to improved operating results in fiscal 2011. We expect to continue to meet our operating cash requirements primarily through cash flows from operating activities, existing cash and equivalents, and short-term investments. At October 1, 2011, we had working capital of $31.0 million, cash and marketable securities of $24.4 million and $1.5 million in third party debt outstanding. The cash and marketable securities at October 1, 2011, included certificates of deposit of $3.0 million, that have been placed by the Company as collateral against a one year credit facility.
The following table sets forth our cash flows for the periods indicated:
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39-Weeks Ended |
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October 1, |
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October 2, |
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Net cash used in operating activities |
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$ |
(1,420,000 |
) |
$ |
(7,203,000 |
) |
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Net cash provided by investing activities |
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11,017,000 |
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4,804,000 |
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Net cash used in financing activities |
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(390,000 |
) |
(634,000 |
) | ||
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Net increase (decrease) in cash and equivalents |
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$ |
9,207,000 |
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$ |
(3,033,000 |
) |
During the 39-week period ended October 1, 2011, cash and equivalents increased by $9.2 million, primarily as a result of net matured investments of $13.3 million, operating activities of $3.7 million and an increase in accounts payable of $3.5 million. These increases
were partially offset by a seasonal increase in inventories of $6.4 million, a decrease in accrued liabilities, accrued compensation and other liabilities of $2.6 million and capital expenditure purchases of $1.9 million.
The Company had a credit facility with the Bank of America (the “Bank”) of $2.5 million which expired on May 1, 2011. On April 29, 2011, the Company amended its credit facility with the Bank for another year to allow the Company to issue letters of credit up to $3.0 million, which is collateralized by granting to the Bank a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank amounting to a total of $3.0 million. This one-year credit facility will expire on May 1, 2012.
The Company had outstanding letters of credit of $1.6 million, $1.5 million and $1.7 million at October 1, 2011, January 1, 2011 and October 2, 2010, respectively.
Inflation / Recession
The Company does not believe that its sales revenue or operating results have been materially impacted by inflation during the past two fiscal years. There can be no assurance, however, that our sales revenue or operating results will not be impacted by inflation in the future.
The Company believes that ongoing macroeconomic conditions continue to affect our sales volume and profitability levels. Furthermore, we believe that continuing limitations on the availability of consumer credit, especially of credit cards, continue to adversely affect customer demand for our products, which adversely affect our business, financial condition and results of operations.
Many of our suppliers rely on working capital financing to fund their operations. As a result of current economic conditions, lenders continue to maintain stringent credit standards and terms. To the extent that any of our suppliers are unable to obtain adequate credit or their borrowing costs increase, the suppliers may cease operations, we may experience delays in obtaining products, the suppliers may increase their wholesale prices to us or they may modify payment terms in a manner that is unfavorable to us. Any of the foregoing or other unforeseen circumstances could adversely affect our net sales or gross margins, which could adversely affect our business, financial condition and results of operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of our business, we enter into operating leases for store locations and utilize letters of credit principally for the importation of merchandise. Other than operating lease commitments, letters of credit, and a separation agreement (see Note 13 to Condensed Consolidated Financial Statements) with two of our former executive officers, we are not a party to any material off-balance sheet financing arrangements.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in our fiscal 2010 Form 10-K. As disclosed in Note 1 of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these under different assumptions or conditions.
The Company’s management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.
Inventories. Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of 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. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any significant change in our markdown strategy that would cause a significant change in our earnings. We
believe that our RIM provides an inventory valuation, which results in a carrying value at the lower of cost or market. Inventories other than finished goods at retail stores, called production inventory, primarily consist of piece goods, trim and work-in-process. Work-in-process also includes inventory at our third party distribution centers. It is the Company’s policy to value the production inventory, which makes up approximately 17.2% of Company’s total inventory, at lower of cost or market value using first-in-first-out valuation method. The Company reviews the inventory for factors such as age, obsolescence, potential use, or other factors that may indicate a decline in its value. The Company records a reserve against the cost of the production inventory to account for any decline in its value.
Finite long-lived assets. The Company’s judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable and exceeds the fair market value. Factors we consider important which could trigger an impairment review include the following:
· significant changes in the manner of our use of assets or the strategy for our overall business;
· significant negative industry or economic trends;
· store closings; or
· underperforming business trends.
The Company evaluates finite long-lived assets in accordance with “Impairment or Disposal of Long-Lived Assets” under Topic 360 “Property, Plant and Equipment” of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”). Finite-lived assets are evaluated for recoverability in accordance with Topic 360 of the FASB ASC whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates. No impairment charges were recorded during the 39-week periods ended October 1, 2011 and October 2, 2010. The Company recorded an impairment charge of $974,000 for 15 underperforming stores during the fourth quarter of fiscal 2010.
Goodwill and Intangible Assets. The Company evaluates its intangible assets in accordance with “Intangibles -Goodwill and Other”, Topic 350 of the FASB ASC. No impairment charges were recorded during the 39-week periods ended October 1, 2011 and October 2, 2010. An impairment charge of $9.1 million was recorded against the remaining carrying value of the Company’s goodwill during the fourth quarter of fiscal 2010.
Self Insurance. The Company is self-insured for losses and liabilities related primarily to employee health and welfare claims up to certain thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. The Company’s earnings were impacted by an increase in employee health and welfare expense of $424,000 and $368,000 for the 39- and 13-week periods ended October 1, 2011, respectively as compared to the same periods last year. Adjustments to earnings resulting from changes in historical loss trends were insignificant for 2010. We maintain stop-loss insurance coverage, which covers us for benefits paid in excess of limits as defined in the plan. Therefore we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings.
Gift Cards, Gift Certificates and Credits. The Company sells gift cards and gift certificates (“Gift Cards”) and issues credits to its customers when merchandise is returned (“Merchandise Credits”), which do not expire. The Company recognizes sales from Gift Cards when they are redeemed by the customer and income when the likelihood of the Gift Card and Merchandise Credit being redeemed by the customer is remote (“Gift Card breakage”), since the Company has determined that it does not have a legal obligation to remit the unredeemed value to the relevant jurisdiction as abandoned property. The Company determines Gift Card breakage income based upon historical redemption patterns of its Merchandise Credits and Gift Cards. The Company has determined based on these historical redemption rates that approximately 5% of its Merchandise Credits issued and approximately 3% of its Gift Cards issued will remain unredeemed. The Company is recognizing the estimated unredeemed Merchandise Credits and Gift Cards over a fourteen-quarter period with 64% recognized in the first quarter to 0.03% in the fourteenth quarter subsequent to the issue date. The Company has determined that redemption would be remote based on the fact that, by the fourteenth quarter since issue date, the redemption rate approximated 0%, indicating that the probability of such merchandise credits and gift cards being redeemed is remote. As such, we have recorded breakage income based upon the above criteria which is reviewed on a quarterly basis for propriety.
Breakage income represents the balance of Gift Cards and Merchandise Credits for which the Company believes the likelihood of redemption by the customer is remote.
The Company recorded breakage income of $469,000 and $145,000 during the 39-week periods ended October 1, 2011 and October 2, 2010, respectively.
Revenue Recognition. Sales are recognized at the “point of sale,” which occurs when merchandise is sold in an “over-the-counter” transaction or upon receipt by a customer. Sales of merchandise via our website are recognized at the expected time of delivery to the customer. Our customers have the right to return merchandise. Sales are reported net of actual and estimated returns. We maintain a reserve for potential product returns and record, as a reduction to sales, a provision for estimated product returns, which is determined based on historical experience. The Company recorded a net reduction to its sales return reserve of approximately $274,000 and $85,000 for the 39-week periods ended October 1, 2011 and October 2, 2010, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred at our stores for shipping and handling are included in cost of sales. The Company records revenues net of applicable sales tax.
The Company’s co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract. During the 39-week periods ended October 1, 2011 and October 2, 2010, the Company received $560,000 and $623,000, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards was $652,000 and $490,000 for the 39-week periods ended October 1, 2011 and October 2, 2010, respectively.
The Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program, the sales royalties earned in connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. The amount of sales royalty income recorded was $307,000 and $267,000 for the 39-week periods ended October 1, 2011 and October 2, 2010, respectively.
The Company also offers its card holders a program whereby points can be earned on net purchases made with the co-branded credit card. Five reward points are awarded for each dollar spent at Cache and one reward point is awarded for each dollar spent at non-Cache businesses. A cardholder whose credit card account is not delinquent, in default or closed will be automatically eligible to receive a $25 Cache gift card upon accrual of 2,500 reward points. The issuing bank bears the cost of the reward program and is responsible for the administration and management of the program.
Income Taxes. The Company accounts for income taxes in accordance with “Income Taxes”, Topic 740 of the FASB ASC. This guidance requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. At January 1, 2011, the Company maintained $9.3 million of net deferred tax assets, of which approximately $5.7 million related to federal tax operating loss carry-forwards and $1.7 million related to state tax net operating loss carry-forwards. In addition, during the 39-week period ended October 1, 2011, the Company recorded an income tax benefit of $41,000 primarily related to the net loss generated, which reduced the net deferred tax assets previously recorded by the Company. The Company established a federal valuation allowance of $5.1 million at January 1, 2011. For state income tax purposes, the Company had a valuation allowance in the amount of $650,000 at January 1, 2011, primarily to reserve for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. These amounts remained unchanged as of October 1, 2011.
At October 1, 2011 and October 2, 2010, the current portion of deferred tax assets and liabilities of $281,000 and $2.0 million, respectively, were included in prepaid expenses and other current assets, while the non-current portion of deferred tax assets and liabilities of $9.0 million and $7.6, respectively, were included in other assets, on the Company’s accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowance discussed above.
When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company’s best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of January 1, 2011, the Company had recorded a $271,000 reserve, net of federal benefit for potential tax contingencies. During the 39-week period ended October 1, 2011, the Company recorded a reversal of the state income tax reserve of $277,000, net of federal benefit, based on the completion of a state income tax audit of the Company’s state income tax returns. As of October 2, 2010, the Company reported a reserve balance of $368,000, net of federal benefit.
Seasonality. The Company experiences seasonal and quarterly fluctuations in net sales and operating income. Quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of new store openings, fashion trends, shifts in timing of certain holidays, economic conditions and competition. Our business is subject to seasonal influences, characterized by highest sales generally during the fourth quarter (October, November and December) and lowest sales generally during the third quarter (July, August and September).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk relates primarily to changes in interest rates. The interest rate risk involves the short-term investment of excess cash in short-term, investment-grade interest-bearing securities. These investments are included in cash and equivalents, marketable securities, and certificates of deposit — restricted on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company is committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework to evaluate the effectiveness of the Company’s internal controls. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
During the 39-week period ended October 1, 2011 there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
The Company is exposed to a number of asserted and unasserted potential claims. Management does not believe that the resolution of any of these matters will result in a material loss. The Company had no guarantees, subleases or assigned lease obligations as of October 1, 2011, January 1, 2011 or October 2, 2010.
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31.1* |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1* |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 |
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The following materials from Cache Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of October 1, 2011, January 1, 2011 and October 2, 2010, (ii) the Condensed Consolidated Statements of Operations for the Thirty-Nine Weeks Ended October 1, 2011 and October 2, 2010, (iii) the Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended October 1, 2011 and October 2, 2010, (iv) the Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 1, 2011 and October 2, 2010, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
* Filed herewith
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.
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Dated: November 4, 2011 | |
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CACHE, INC. | |
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BY: |
/s/ Thomas E. Reinckens |
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Thomas E. Reinckens |
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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BY: |
/s/ Margaret Feeney |
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Margaret Feeney |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |