dELiAs, Inc. - FORM 10-Q - December 8, 2011

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EXCEL - IDEA: XBRL DOCUMENT - dELiAs, Inc.	Financial_Report.xls
EX-32.2 - CERTIFICATION UNDER SECTION 906 BY THE CHIEF FINANCIAL OFFICER - dELiAs, Inc.	d265974dex322.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - dELiAs, Inc.	d265974dex312.htm
EX-32.1 - CERTIFICATION UNDER SECTION 906 BY THE CHIEF EXECUTIVE OFFICER - dELiAs, Inc.	d265974dex321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - dELiAs, Inc.	d265974dex311.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 29, 2011

¨	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 x 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 December 6, 2011 the registrant had 31,432,531 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 October 29, 2011 (unaudited), January 29, 2011 and October 30, 2010 (unaudited)		3

	Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended October 29, 2011 (unaudited) and October 30, 2010 (unaudited)		4

	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2011 (unaudited) and October 30, 2010 (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		23

Item 4.	Controls and Procedures		24

	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.	Removed and Reserved		24

Item 5.	Other Information		24

Item 6.	Exhibits		25

	SIGNATURES
	EXHIBIT INDEX

Item 1.

Financial Statements

dELiA*s, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)


	October 29, 2011			January 29, 2011			October 30, 2010
	(unaudited)						(unaudited)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	15,778		$	28,074		$	14,356
Inventories, net		41,655			32,025			41,838
Prepaid catalog costs		3,654			1,845			3,934
Restricted cash		—			8,268			7,285
Deferred income taxes		—			—			1,138
Other current assets		3,696			12,511			12,393

TOTAL CURRENT ASSETS		64,783			82,723			80,944
PROPERTY AND EQUIPMENT, NET		44,843			49,988			52,444
GOODWILL		4,462			4,462			4,462
INTANGIBLE ASSETS, NET		2,419			2,419			2,419
OTHER ASSETS		852			111			139

TOTAL ASSETS	$	117,359		$	139,703		$	140,408


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	21,742		$	21,301		$	22,559
Accrued expenses and other current liabilities		16,653			21,788			21,257
Income taxes payable		891			742			825

TOTAL CURRENT LIABILITIES		39,286			43,831			44,641

DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES		11,964			11,828			11,633

TOTAL LIABILITIES		51,250			55,659			56,274


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; 31,432,531, 31,432,531 and 31,312,591 shares issued and outstanding, respectively		31			31			31
Additional paid-in capital		99,081			98,510			99,292
Accumulated deficit		(33,003	)		(14,497	)		(15,189	)

TOTAL STOCKHOLDERS’ EQUITY		66,109			84,044			84,134


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	117,359		$	139,703		$	140,408

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						For the Thirty-Nine Weeks Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
NET REVENUES	$	58,067		$	60,610		$	151,560		$	153,784
Cost of goods sold		39,336			39,838			104,381			104,976

GROSS PROFIT		18,731			20,772			47,179			48,808

Selling, general and administrative expenses		23,081			24,450			66,406			69,587
Impairment of goodwill		—			7,611			—			7,611
Other operating income		(122	)		(63	)		(194	)		(301	)

TOTAL OPERATING EXPENSES		22,959			31,998			66,212			76,897

OPERATING LOSS		(4,228	)		(11,226	)		(19,033	)		(28,089	)
Interest expense, net		171			91			394			261

LOSS BEFORE INCOME TAXES		(4,399	)		(11,317	)		(19,427	)		(28,350	)
Provision (benefit) for income taxes		26			(1,655	)		(921	)		(6,015	)

NET LOSS	$	(4,425	)	$	(9,662	)	$	(18,506	)	$	(22,335	)

BASIC AND DILUTED LOSS PER SHARE:
NET LOSS PER SHARE	$	(0.14	)	$	(0.31	)	$	(0.59	)	$	(0.72	)

WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING		31,209,737			31,105,983			31,209,737			31,103,574

See accompanying Notes to Condensed Consolidated Financial Statements.

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	For the Thirty-Nine Weeks Ended
	October 29, 2011			October 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss	$	(18,506	)	$	(22,335	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		8,624			7,835
Stock-based compensation		571			651
Impairment of goodwill		—			7,611
Changes in operating assets and liabilities:
Inventories		(9,630	)		(8,136	)
Prepaid catalog costs and other assets		6,265			(935	)
Restricted cash		8,268			255
Income taxes payable		149			92
Accounts payable, accrued expenses and other liabilities		(4,973	)		(6,674	)

Total adjustments		9,274			699

NET CASH USED IN OPERATING ACTIVITIES		(9,232	)		(21,636	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(3,064	)		(5,659	)

NET CASH USED IN INVESTING ACTIVITIES		(3,064	)		(5,659	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of employee stock options		—			5

NET CASH PROVIDED BY FINANCING ACTIVITIES		—			5


NET DECREASE IN CASH AND CASH EQUIVALENTS		(12,296	)		(27,290	)

CASH AND CASH EQUIVALENTS, beginning of period		28,074			41,646


CASH AND CASH EQUIVALENTS, end of period	$	15,778		$	14,356


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid during the period for interest	$	1,123		$	136

Cash paid during the period for taxes	$	167		$	171

Capital expenditures incurred not yet paid	$	817		$	184

See accompanying Notes to Condensed Consolidated Financial Statements.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In this Form 10-Q , 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. and its subsidiaries. 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.

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 retail stores. Through our catalogs and e-commerce web pages, we sell many name brand products, along with our own proprietary brand products, directly to consumers, including apparel, accessories, footwear and room furnishings. Our mall-based 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 October 29, 2011 and October 30, 2010 and for the thirteen week and thirty-nine week periods ended October 29, 2011 and October 30, 2010 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 29, 2011 and related information presented in the footnotes have been derived from audited consolidated statements at that date.

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

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.

2. Recent Accounting Pronouncements

Recently Adopted Standard

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”). ASU 2010-06 amends Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820”), 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. During fiscal 2010, the Company adopted the disclosure requirements effective for the first interim or annual reporting period beginning on or after December 15, 2009. The Company adopted the remaining disclosure requirements in the first quarter of fiscal 2011. The adoption of the remaining disclosure requirements of ASU 2010-06 did not have a material impact on our condensed consolidated financial statements.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Recently Issued Standard

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 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. ASU 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption will have a material impact on its condensed consolidated financial statements.

3. Fair Value of Financial Instruments

We follow the guidance in ASC 820 as it relates to financial and nonfinancial assets and liabilities. 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 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 that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts of our financial instruments, including cash and cash equivalents, receivables, payables, and other accrued liabilities approximated fair value due to the short maturity of these financial instruments.

There were no impairment charges in the thirteen and thirty-nine weeks ended October 29, 2011, however, there was a $7.6 million goodwill impairment charge related to our direct marketing reporting unit in the thirteen and thirty-nine weeks ended October 30, 2010.

4. 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 October 29, 2011, January 29, 2011 and October 30, 2010 were approximately $1.5 million, $1.3 million and $1.9 million, respectively.

5. Inventories

Inventories, which consist of finished goods, including certain capitalized expenses, 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 rate 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 in subsequent periods.

6. 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.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The total weighted average number of potential shares of common stock 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 and thirty-nine week periods ended October 29, 2011 and October 30, 2010:


	For Thirteen Weeks Ended				For Thirty-Nine Weeks Ended
	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Options, warrants and restricted shares		4,336,879		6,948,934		4,336,879		6,951,344
Conversion of 5.375% Convertible Debentures		—		873		—		873

Total		4,336,879		6,949,807		4,336,879		6,952,217

7. Other Current Assets

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


	October 29, 2011		January 29, 2011		October 30, 2010
	October 29, 2011		January 29, 2011		October 30, 2010
Income taxes receivable	$	250	$	9,965	$	6,394
Other current assets		3,446		2,546		5,999

	$	3,696	$	12,511	$	12,393

8. Property and Equipment, net

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


	October 29, 2011			January 29, 2011			October 30, 2010
	October 29, 2011			January 29, 2011			October 30, 2010
Construction in progress	$	1,235		$	789		$	383
Computer equipment		11,593			11,066			11,073
Machinery and equipment		125			125			125
Office furniture		20,017			19,765			20,392
Leasehold improvements		54,633			52,449			54,363
Building		7,559			7,559			7,559
Land		500			500			500

		95,662			92,253			94,395
Less: accumulated depreciation and amortization		(50,819	)		(42,265	)		(41,951	)

	$	44,843		$	49,988		$	52,444

Depreciation and amortization expense related to property and equipment was approximately $2.9 million and $8.6 million for the thirteen and thirty-nine week periods ended October 29, 2011, respectively, and $2.7 million and $7.8 million for the thirteen and thirty-nine weeks periods ended October 30, 2010, respectively.

9. Credit Facility

dELiA*s, Inc. and certain of its wholly-owned subsidiaries were parties to a letter of credit agreement (“Letter of Credit Agreement”) with Wells Fargo Retail Finance II, LLC (“Wells Fargo”). The Letter of Credit Agreement, which was terminated on May 26, 2011, provided for the issuance of letters of credit to finance the acquisition of inventory from suppliers, to provide standby letters of credit to factors, landlords 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, had been pledged as collateral for these obligations.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 was 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. At October 30, 2010, the cash collateral required to secure the Company’s obligations under the Letter of Credit Agreement, as amended, was approximately $7.3 million. The cash collateral, which was shown as restricted cash on the accompanying condensed consolidated balance sheet, was included in current assets as of October 30, 2010 since the restriction related to the Letter of Credit Agreement was to expire within one year.

The Letter of Credit Agreement called 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 did not contain any financial covenants with which the Company or any of its subsidiaries or affiliates had to comply during the term of the Letter of Credit Agreement.

On May 26, 2011, the Company and certain of its wholly-owned subsidiaries entered into a new credit agreement (the “Credit Agreement”) with General Electric Capital Corporation (“GE Capital”), as a lender and as agent for the financial institutions from time to time party to the Credit Agreement (together with GE Capital in its capacity as a lender, the “Lenders”). The Credit Agreement provides for a total aggregate commitment of the Lenders of $25,000,000, including a $15,000,000 sublimit for the issuance of letters of credit and a swingline loan facility of $5,000,000. Under the Credit Agreement, the Company has the right to request, subject to the agreement of the Lenders, that the Lenders increase their revolving commitments up to an additional $25,000,000. The Credit Agreement has a term of five years and matures on May 26, 2016. The obligations of the borrowers under the Credit Agreement are secured by substantially all property and assets of the Company and certain of its subsidiaries.

As of October 29, 2011, there were approximately $10.8 million of outstanding letters of credit under the Credit Agreement, and unused availability of approximately $14.2 million.

The Credit Agreement calls for the payment by the Company of a fee of 0.375% per annum on the average unused portion of the Credit Agreement, a letter of credit fee calculated using a per annum rate equal to the Applicable Margin with respect to letters of credit (as defined in the Credit Agreement) multiplied by the average outstanding face amount of letters of credit issued under the Credit Agreement, as well as other customary fees and expenses. The Credit Agreement does not contain any financial covenants with which the Company or any of its subsidiaries or affiliates has to comply during the term of the Credit Agreement.

Interest accrues on the outstanding principal amount of the revolving credit loans at an annual rate equal to LIBOR (as defined in the Credit Agreement) or the Base Rate (as defined in the Credit Agreement), plus an applicable margin which is subject to periodic adjustment based on average excess availability under the Credit Agreement. Interest on each swingline loan is calculated using the Base Rate.

The Credit Agreement contains customary representations and warranties, as well as customary covenants that, among other things, restricts the ability of the Company and its subsidiaries to incur liens, consolidate or merge with other entities, incur certain additional indebtedness and guaranty obligations, pay dividends or make certain other restricted payments. The Credit Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties and covenants, cross defaults to other material indebtedness, and bankruptcy and insolvency matters.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

10. Accrued Expenses and Other Current Liabilities

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


	October 29, 2011		January 29, 2011		October 30, 2010
	October 29, 2011		January 29, 2011		October 30, 2010
Accrued sales tax	$	489	$	1,349	$	673
Accrued payroll, bonus, taxes and withholdings		445		1,425		668
Accrued professional services		503		533		547
Credits due to customers		9,570		10,617		11,523
Allowance for sales returns		870		1,004		1,027
Accrued capital expenditures		617		296		184
Other accrued expenses		4,159		6,564		6,635

	$	16,653	$	21,788	$	21,257

11. Deferred Credits and Other Long-Term Liabilities

Deferred credits and other long-term liabilities consist primarily of long-term portions of deferred rent and tenant allowances. We occupy our retail stores, home office and call center facility under operating leases generally with terms of seven to ten years. Some of these retail store leases have early cancellation clauses, which permit the lease to be terminated if certain sales levels are not met in specific periods. Most of the store leases require payment of a specified minimum rent, plus a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold. Most of the lease agreements have defined escalating rent provisions, which are reported as a deferred rent liability and expensed on a straight-line basis over the term of the related lease, commencing with date of possession. This includes any lease renewals deemed to be probable. In addition, we receive cash allowances from our landlords on certain properties and have reported these amounts as tenant allowances which are amortized to rent expense over the term of the lease, also commencing with date of possession. Included in deferred credits at October 29, 2011, January 29, 2011 and October 30, 2010 was approximately $6.0 million, $5.7 million, and $5.9 million, respectively, of deferred rent liability, and approximately $5.0 million, $5.1 million, and $5.4 million, respectively, of tenant allowances.

12. 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 $163,000 and $571,000 for the thirteen and thirty-nine week periods ended October 29, 2011, respectively, and $177,000 and $651,000 for the thirteen and thirty-nine week periods ended October 30, 2010, respectively, related to employee stock options and restricted stock.

The per share weighted average fair value of stock options granted during the thirty-nine weeks ended October 29, 2011 was $0.95. The fair value of each option grant is estimated on the date of grant with the following weighted average assumptions:


	October 29, 2011
Dividend yield		—
Risk-free interest rate		2.3	%
Expected life (in years)		6.25
Historical volatility		60	%

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 29, 2011		5,656,568		$	6.80
Options granted		628,000			1.63
Options exercised		—			—
Options cancelled		(3,042,731	)		7.78


Options outstanding at October 29, 2011		3,241,837		$	4.89


Options exercisable at October 29, 2011		2,219,650		$	6.32

As of October 29, 2011, there was $546,000 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.

13. 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. 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 were 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, none of which have been issued. 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. The warrants are due to expire on January 28, 2012.

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 had 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. There were 4,136,441 shares of dELiA*s, Inc. common stock issued in connection with conversions of the Debentures, leaving 873 debentures outstanding to be converted. During the fourth quarter of fiscal 2010, Alloy, Inc. was acquired by an investor group led by Zelnick Media and is no longer a public company. As a result of such transaction, the above 873 debentures are no longer outstanding.

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 and thirty-nine weeks ended October 29, 2011 or October 30, 2010.

14. Interest Expense, Net

Interest expense and income are presented net in the condensed consolidated statements of operations. Interest income is derived from cash balances in money market accounts. Interest expense for thirteen and thirty-nine weeks ended October 29, 2011 relates to costs associated with our Credit Agreement and our former Letter of Credit Agreement. Interest expense for thirteen and thirty-nine weeks ended October 30, 2010 relates to costs associated with our former Letter of Credit Agreement. Interest expense for the thirteen and thirty-nine week periods ended October 29, 2011 was $171,000 and $397,000, respectively, and for the thirteen and thirty-nine week periods ended October 30, 2010 was $95,000 and $275,000, respectively. Interest income for the thirteen and thirty-nine week periods ended October 29, 2011 was $ -0- and $3,000, respectively, and for thirteen and thirty-nine week periods ended October 30, 2010 was $4,000 and $14,000 respectively.

15. 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. originally arranged these advertising services on our behalf, through a Media Services Agreement (the “Original Agreement”) 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.

On November 16, 2010, the Company entered into an Amended and Restated Media Services Agreement (the “A/R Media Services Agreement”) with Alloy, Inc. The A/R Media Services Agreement replaces the Original Agreement, which expired by its terms on December 19, 2010, and became effective on December 20, 2010, upon expiration of the Original Agreement. The A/R Media Services Agreement provides, among other things, that Alloy, Inc. will serve as our exclusive sales agent for the purpose of providing the following media and marketing related services to the Company and its subsidiaries: license of websites, internet advertising, direct segment upsell arrangements, catalog advertisements and insertions, sampling and in-store promotions, and database collection and marketing. The A/R Media Services Agreement expires on December 20, 2015. Effective May 6, 2011, the Company and Alloy, Inc. amended the A/R Media Services Agreement to remove the sampling and in-store promotion services therefrom.

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, 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. The Media Placement Services Agreement expires on February 1, 2012.

16. Income Taxes

The provision (benefit) for income taxes is based on the current estimate of the annual effective rate and is adjusted as necessary for quarterly events. The effective income tax rate for the thirteen and thirty-nine weeks ended October 29, 2011 was an expense of 0.6% and a benefit of 4.7%, respectively. Although the Company expects to generate a net operating loss (“NOL”) for fiscal 2011, the Company did not generate taxable income during the two-year carry-back period, and therefore cannot recognize a federal tax benefit related to the NOL. As a result, the effective income tax rate is lower than what would be expected if the federal statutory rate were applied to loss before income taxes. In the third quarter of fiscal 2011, the Company recognized tax expense related to certain state taxes. In the thirty-nine weeks ended October 29, 2011, the Company recognized a benefit for adjustments related to the filing of the Company’s 2010 income tax return.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

For the thirteen and thirty-nine weeks ended October 30, 2010 the effective income tax rate was a benefit of 14.6% and 21.2%, respectively. During fiscal 2010, the Company recorded a federal tax benefit related to the carry-back of the fiscal 2010 NOL. The effective income tax rate was lower than what would be expected if the federal statutory rate were applied to loss before income taxes primarily because of the goodwill impairment charge deducted for financial reporting purposes that was not deductible for tax purposes.

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 October 29, 2011, the Company had a liability for unrecognized tax benefits of $396,000 all of which would favorably affect the Company’s effective tax rate if recognized. Included within the $396,000 is an accrual of $123,000 for the payment of related interest and penalties. There were no material changes to the Company’s unrecognized tax benefits during the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 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, 2008, 2009 and 2010. 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.

17. 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.

18. 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 our most recent Form 10-K. Reportable data for our operating segments were as follows:

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)


	Direct Marketing Segment		Retail Store Segment		Total
	(in thousands)
Total Assets
October 29, 2011	$	48,230	$	69,129	$	117,359
January 29, 2011		69,943		69,760		139,703
October 30, 2010		59,068		81,340		140,408
Capital Expenditures (accrual basis)
October 29, 2011—39 weeks ended	$	292	$	3,213	$	3,505
October 30, 2010—39 weeks ended		185		4,752		4,937
Depreciation and Amortization
October 29, 2011—39 weeks ended	$	832	$	7,792	$	8,624
October 30, 2010—39 weeks ended		956		6,879		7,835
Goodwill
October 29, 2011	$	4,462	$	—	$	4,462
January 29, 2011		4,462		—		4,462
October 30, 2010		4,462		—		4,462


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
	(in thousands)						(in thousands)
Net revenues:
Retail store	$	36,186		$	37,203		$	89,589		$	87,538
Direct marketing		21,881			23,407			61,971			66,246

Total net revenue	$	58,067		$	60,610		$	151,560		$	153,784

Operating loss:
Retail store	$	(2,680	)	$	(1,944	)	$	(14,583	)	$	(16,220	)
Direct marketing		(1,548	)		(9,282	)		(4,450	)		(11,869	)

Operating loss	$	(4,228	)	$	(11,226	)	$	(19,033	)	$	(28,089	)

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 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), our catalogs, our e-commerce web pages, and our mall-based dELiA*s retail stores are designed to appeal directly to consumers. We reach our customers through our direct marketing segment, which consists of our catalog and e-commerce businesses, and our retail stores.

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

We expect that improved productivity in each segment of our business will be the key element of our overall growth strategy. Our current focus is to improve productivity in our retail store base, to invest in alternative methods to drive additional traffic to our websites and to improve the productivity of catalogs distributed. As productivity improves and market conditions allow, we plan to continue to expand the dELiA*s retail store base over the long term. 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.

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, and implementation of web, mobile and social media based initiatives;

•

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 increased customer conversion, 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;

•

monitoring and opportunistically closing underperforming stores; and

•

expanding the dELiA’s retail store base over the long-term.

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 average order value and demand generated by book, with demand defined as the amount customers seek to purchase without regard to merchandise availability;

•

web metrics such as site visits, carts opened and carts converted;

•

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 31st. The fiscal year ended January 29, 2011 was a 52-week fiscal year, and fiscal year ending January 28, 2012 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						Thirty-Nine Weeks Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
STATEMENTS OF OPERATIONS DATA:
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		67.7	%		65.7	%		68.9	%		68.3	%

Gross profit		32.3	%		34.3	%		31.1	%		31.7	%

Operating expenses:
Selling, general and administrative expenses		39.7	%		40.3	%		43.8	%		45.2	%
Impairment of goodwill		0.0	%		12.6	%		0.0	%		4.9	%
Other operating income		(0.2	%)		(0.1	%)		(0.1	%)		(0.2	%)

Total operating expenses		39.5	%		52.8	%		43.7	%		49.9	%

Operating loss		(7.3	%)		(18.5	%)		(12.6	%)		(18.2	%)
Interest expense, net		0.3	%		0.1	%		0.3	%		0.2	%

Loss before income taxes		(7.6	%)		(18.6	%)		(12.8	%)		(18.4	%)
Provision (benefit) for income taxes		0.0	%		(2.7	%)		(0.6	%)		(3.9	%)

Net loss		(7.6	%)		(15.9	%)		(12.2	%)		(14.5	%)

Thirteen Weeks Ended October 29, 2011 Compared to Thirteen Weeks Ended October 30, 2010

Revenues

Total Revenues. Total revenues decreased 4.2% to $58.1 million in the quarter ended October 29, 2011 from $60.6 million in the quarter ended October 30, 2010.

Direct Marketing Revenues. Direct marketing revenues decreased 6.5% to $21.9 million in the quarter ended October 29, 2011 from $23.4 million in the quarter ended October 30, 2010. The revenue decrease was primarily due to a reduction in catalog circulation from the prior year period.

Retail Store Revenues. Retail store revenues decreased 2.7% to $36.2 million in the quarter ended October 29, 2011 from $37.2 million in the quarter ended October 30, 2010. The revenue decrease was primarily due to a comparable store sales decrease of 1.7% over the prior year period. During the quarter ended October 29, 2011, we remodeled one store and closed one store, ending the period with 114 stores in operation, as compared to 115 stores in operation as of October 30, 2010.

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


	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	October 29, 2011			October 30, 2010		October 29, 2011			October 30, 2010
Channel net revenues (in thousands):
Retail	$	36,186		$	37,203	$	89,589		$	87,538
Direct		21,881			23,407		61,971			66,246

Total net revenues	$	58,067		$	60,610	$	151,560		$	153,784


Catalogs Mailed (in thousands)		9,356			11,488		25,940			29,150

Number of Stores:
Beginning of period		115			115		114			109
Stores opened		1	*		—		3	*		9	**
Stores closed		2	*		—		3	*		3	**

End of Period		114			115		114			115

Total Gross Sq. Ft. End of Period (in thousands)		437.2			440.4		437.2			440.4

*	Totals include one store that was closed, remodeled and reopened in the second quarter of fiscal 2011, and one store that was closed, remodeled and reopened in the third quarter of fiscal 2011.

**	Totals include one store that was closed, remodeled and reopened in the second quarter of fiscal 2010, and one store that was closed and relocated to an alternative site in the same mall during the second quarter of fiscal 2010.

Gross Profit

Total Gross Profit. Total gross profit for the quarter ended October 29, 2011 was $18.7 million or 32.3% of revenues as compared to $20.8 million or 34.3% of revenues in the quarter ended October 30, 2010.

Direct Marketing Gross Profit. Direct marketing gross profit for the quarter ended October 29, 2011 was $9.3 million or 42.7% of revenues as compared to $9.9 million or 42.2% of revenues for the quarter ended October 30, 2010. The increase in gross profit, as a percentage of sales, primarily resulted from increased merchandise margins.

Retail Store Gross Profit. Retail store gross profit for the quarter ended October 29, 2011 was $9.4 million or 26.0% of revenues as compared to $10.9 million or 29.3% of revenues for the quarter ended October 30, 2010. The decrease in gross profit, as a percentage of sales, resulted from lower merchandise margins and the deleveraging of occupancy costs.

Selling, General and Administrative

Total Selling, General and Administrative. As a percentage of revenues, total selling, general and administrative expenses (SG&A) decreased to 39.7% for the quarter ended October 29, 2011 from 40.3% for the quarter ended October 30, 2010. In total dollars, SG&A decreased to $23.1 million in the quarter ended October 29, 2011 from $24.5 million in the quarter ended October 30, 2010.

Direct Marketing SG&A. Direct marketing SG&A decreased to $10.9 million in the quarter ended October 29, 2011 compared to $11.6 million in the quarter ended October 30, 2010. As a percentage of related revenues, the direct marketing SG&A increased to 50.0% from 49.5% for the quarter ended October 30, 2010. The decrease in SG&A, in dollars, reflects planned overhead cost savings and reduced selling expenses driven by a reduction in catalog circulation. The increase in SG&A, as a percentage of sales, reflects the deleveraging of selling expense on lower sales.

Retail Store SG&A. Retail SG&A decreased to $12.1 million in the quarter ended October 29, 2011 from $12.9 million in the quarter ended October 30, 2010. As a percentage of related revenues, retail SG&A decreased to 33.5% in the quarter ended October 29, 2011 from 34.6% for the quarter ended October 30, 2010. The decrease in SG&A, in dollars and as a percentage of sales, was driven by selling and overhead expense reductions.

Impairment of goodwill

In the third quarter of fiscal 2010, we recorded a non-cash goodwill impairment charge of $7.6 million related to the direct marketing reporting unit.

Other Operating Income

Other operating income, which represents breakage income, was $122,000 for the third quarter of fiscal 2011 compared to $63,000 in third quarter of fiscal 2010.

Operating Loss

Total Operating Loss. Our total operating loss was $4.2 million for the quarter ended October 29, 2011 as compared to a loss of $11.2 million for the quarter ended October 30, 2010. Included in the fiscal 2010 operating loss was the aforementioned goodwill impairment charge of $7.6 million.

Direct Marketing Operating Loss. Direct marketing operating loss was $1.5 million for the quarter ended October 29, 2011 as compared to a loss of $9.3 million for the quarter ended October 30, 2010. The prior year period included the aforementioned goodwill impairment charge of $7.6 million.

Retail Store Operating Loss. Operating loss from retail stores was $2.7 million for the quarter ended October 29, 2011 as compared to a loss of $1.9 million for the quarter ended October 30, 2010.

Interest expense, net

We recorded net interest expense of $171,000 in the quarter ended October 29, 2011 compared to $91,000 for the quarter ended October 30, 2010. Interest expense for the quarter ended October 29, 2011 related to costs associated with our Credit Agreement. Interest expense for the quarter ended October 30, 2010 related to our former Letter of Credit Agreement.

Provision (benefit) for income taxes

We recorded an income tax provision of $26,000 for the fiscal quarter ended October 29, 2011 and an income tax benefit of $1.7 million for the fiscal quarter ended October 30, 2010. The Company does not expect to recognize any additional tax benefit for federal taxes for the remainder of the year, since the Company did not generate taxable income during the two-year carry-back period for the fiscal 2011 NOL.

Thirty-Nine Weeks Ended October 29, 2011 Compared to Thirty-Nine Weeks Ended October 30, 2010

Revenues

Total Revenues. Total revenues decreased 1.4% to $151.6 million in the thirty-nine weeks ended October 29, 2011 from $153.8 million in the thirty-nine weeks ended October 30, 2010.

Direct Marketing Revenues. Direct marketing revenues decreased 6.5% to $62.0 million in the thirty-nine weeks ended October 29, 2011 from $66.2 million in the thirty-nine weeks ended October 30, 2010. The revenue decrease was primarily due to a reduction in catalog circulation from the prior year period.

Retail Store Revenues. Retail store revenues increased 2.3% to $89.6 million in the thirty-nine weeks ended October 29, 2011 from $87.5 million in the thirty-nine weeks ended October 30, 2010. The revenue increase was driven by a comparable store sales increase of 1.6% over the prior year period. During the thirty-nine weeks ended October 29, 2011, we opened three new stores, including one remodel and one relocation, closed one store, and ended with 114 stores in operation as compared to 115 stores in operation as of October 30, 2010.

Gross Profit

Total Gross Profit. Total gross profit for the thirty-nine weeks ended October 29, 2011 was $47.2 million or 31.1% of revenues as compared to $48.8 million or 31.7% of revenues in the thirty-nine weeks ended October 30, 2010.

Direct Marketing Gross Profit. Direct marketing gross profit for the thirty-nine weeks ended October 29, 2011 was $26.9 million or 43.5% of revenues as compared to $28.8 million or 43.5% of revenues for the thirty-nine weeks ended October 30, 2010. The decrease in gross profit, in dollars, primarily resulted from lower sales volume.

Retail Store Gross Profit. Retail store gross profit for the thirty-nine weeks ended October 29, 2011 was $20.2 million or 22.6% of revenues as compared to $20.0 million or 22.8% of revenues for the thirty-nine weeks ended October 30, 2010. The decrease in gross profit, as a percentage of sales, reflects decreased merchandise margins partially offset by occupancy cost leverage.

Selling, General and Administrative

Total Selling, General and Administrative. As a percentage of revenues, total selling, general and administrative expenses (SG&A) decreased to 43.8% for the thirty-nine weeks ended October 29, 2011 from 45.2% for the thirty-nine weeks ended October 30, 2010. In total dollars, SG&A decreased to $66.4 million in the thirty-nine weeks ended October 29, 2011 from $69.6 million in the thirty-nine weeks ended October 30, 2010.

Direct Marketing SG&A. Direct marketing SG&A decreased to $31.5 million in the thirty-nine weeks ended October 29, 2011 from $33.2 million in the thirty-nine weeks ended October 30, 2010. As a percentage of related revenues, the direct marketing SG&A increased to 50.8% in the thirty-nine weeks ended October 29, 2011 from 50.1% in the thirty-nine weeks ended October 30, 2010. The reduction in dollars was driven by planned reductions in overhead costs and selling expenses, partially offset by an increased investment in alternative web-marketing vehicles. The increase in SG&A, as a percentage of sales, reflects the deleveraging of selling expense on lower sales.

Retail Store SG&A. Retail SG&A decreased to $34.9 million in the thirty-nine weeks ended October 29, 2011 from $36.4 million in the thirty-nine weeks ended October 30, 2010. As a percentage of related revenues, retail SG&A decreased to 39.0% in the thirty-nine weeks ended October 29, 2011 from 41.6% for the thirty-nine weeks ended October 30, 2010. The decrease in SG&A, in dollars and as a percentage of sales, reflects selling and overhead expense reductions.

Impairment of Goodwill

In the thirty-nine weeks ended October 30, 2010, we recorded a non-cash goodwill impairment charge of $7.6 million related to the direct marketing reporting unit.

Other Operating Income

Other operating income of $194,000 and $301,000 for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively, represents breakage income.

Operating Loss

Total Operating Loss. Our total operating loss was $19.0 million for the thirty-nine weeks ended October 29, 2011 as compared to a loss of $28.1 million for the thirty-nine weeks ended October 30, 2010. Included in the thirty-nine weeks of fiscal 2010 was the aforementioned non-cash goodwill impairment charge of $7.6 million.

Direct Marketing Operating Loss. Direct marketing operating loss was $4.5 million for the thirty-nine weeks ended October 29, 2011 as compared to a loss of $11.9 million for the thirty-nine weeks ended October 30, 2010. Included in the thirty-nine weeks of fiscal 2010 was the aforementioned non-cash goodwill impairment charge of $7.6 million.

Retail Store Operating Loss. Operating loss from retail stores was $14.6 million for the thirty-nine weeks ended October 29, 2011 as compared to a loss of $16.2 million for the thirty-nine weeks ended October 30, 2010.

Interest expense, net

We recorded net interest expense of $394,000 in the thirty-nine weeks ended October 29, 2011 as compared with net interest expense of $261,000 in the thirty-nine weeks ended October 30, 2010. Interest expense for the thirty-nine weeks ended October 29, 2011 related to costs associated with our Credit Agreement and our former Letter of Credit Agreement. Interest expense for the thirty-nine weeks ended October 30, 2010 related to our former Letter of Credit Agreement. 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 $0.9 million in the thirty-nine weeks ended October 29, 2011 and an income tax benefit of $6.0 million for the thirty-nine weeks ended October 30, 2010.

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 third quarter and through the beginning of our fourth fiscal quarter, our working capital requirements increase and have typically been funded by our cash balances as well as utilization of our former Letter of Credit Agreement and, during this year, the Credit Agreement. 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 Credit Agreement will be sufficient to meet our cash requirements for operations and planned capital expenditures at least through the next twelve months. However, if we decide to accelerate growth of our retail operations beyond the ranges in our present retail strategy, or if cash balances, cash flow from operations, or availability under the new credit facility 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 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.

dELiA*s, Inc. and certain of its wholly-owned subsidiaries were parties to the Letter of Credit Agreement with Wells Fargo. The Letter of Credit Agreement, which was terminated on May 26, 2011, provided for the issuance of letters of credit to finance the acquisition of inventory from suppliers, to provide standby letters of credit to factors, landlords 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, had been pledged as collateral for these obligations.

On January 28, 2010, the Company entered into the First Amendment. 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 was 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. At October 30, 2010, the cash collateral required to secure the Company’s obligations under the Letter of Credit Agreement, as amended, was approximately $7.3 million. The cash collateral, which was shown as restricted cash on the accompanying condensed consolidated balance sheet, was included in current assets as of October 30, 2010 since the restriction related to the Letter of Credit Agreement was to expire within one year.

On May 26, 2011, the Company and certain of its wholly-owned subsidiaries entered into the Credit Agreement with GE Capital, as a lender and as agent for the Lenders. The Credit Agreement provides for a total aggregate commitment of the Lenders of $25,000,000, including a $15,000,000 sublimit for the issuance of letters of credit and a swingline loan facility of $5,000,000. Under the Credit Agreement, the Company has the right to request, subject to the agreement of the Lenders, that the Lenders increase their revolving commitments up to an additional $25,000,000. The Credit Agreement has a term of five years and matures on May 26, 2016. The obligations of the borrowers under the Credit Agreement are secured by substantially all property and assets of the Company and certain of its subsidiaries.

As of October 29, 2011, there were approximately $10.8 million of outstanding letters of credit under the Credit Agreement, and unused availability of approximately $14.2 million.

Operating Activities

Net cash used in operating activities was $9.2 million in the thirty-nine weeks ended October 29, 2011, compared with $21.6 million in the thirty-nine weeks ended October 30, 2010. The cash used in operating activities for the thirty-nine weeks ended October 29, 2011 was due primarily to funding the net operating loss, inventory purchases, and the timing of vendor payments, partially offset by the return of restricted cash and the receipt of a tax refund. The cash used in operating activities for the thirty-nine weeks ended October 30, 2010 was due primarily to funding the net operating loss, inventory purchases, and settlements of credits due customers.

Investing Activities

Cash used in investing activities was $3.1 million in the thirty-nine weeks ended October 29, 2011, compared with $5.7 million in the thirty-nine weeks ended October 30, 2010. 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 $-0- in the thirty-nine weeks ended October 29, 2011, compared with $5,000 in the thirty-nine weeks ended October 30, 2010, related to the exercise of employee stock options.

Contractual Obligations

The following table presents our significant contractual obligations as of October 29, 2011 (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)	$	107,931	$	18,032		33,498	$	31,209	$	25,192
Purchase Obligations (2)		18,709		18,709		—		—		—
Future Severance-Related Payments (3)		2,150		2,150		—		—		—

Total	$	128,790	$	38,891	$	33,498	$	31,209	$	25,192

(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.

Critical Accounting Policies

Management has determined that our most critical accounting policies are those related to revenue recognition, catalog costs, inventory valuation, goodwill and other indefinite-lived intangible assets and long-lived asset impairment, and income taxes. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies as discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

Recent Accounting Pronouncements

Recently Adopted Standard

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. During fiscal 2010, the Company adopted the disclosure requirements effective for the first interim or annual reporting period beginning on or after December 15, 2009. The Company adopted the remaining disclosure requirements in the first quarter of fiscal 2011. The adoption of the remaining disclosure requirements of ASU 2010-06 did not have a material impact on our condensed consolidated financial statements.

Recently Issued Standard

Off-Balance Sheet Arrangements

We entered into letters of credit issued under the Letter of Credit Agreement and now enter into letters of credit issued under the Credit Agreement in each instance to finance the acquisition of inventory from suppliers, to provide standby letters of credit to factors, landlords and other parties for business purposes, and for other general corporate purposes.

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, cotton, 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 difficult economic environment and 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; 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 at financial institutions that may be 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 October 29, 2011, 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 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, October 29, 2011, 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 October 29, 2011 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 17 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 29, 2011.

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.

Removed and Reserved

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.*

101. INS		XBRL Instance Document**

101.SCH		XBRL Taxonomy Extension Schema Document**

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB		XBRL Taxonomy Extension Label Linkbase Document**

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

*	Filed herewith.

**	Furnished with this report.

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: December 8, 2011	By	/s/ Walter Killough
		Walter Killough
		Chief Executive Officer

Date: December 8, 2011	By	/s/ David J. Dick
		David J. Dick
		Chief Financial Officer

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