===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 0-7258
CHARMING SHOPPES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 245-9100
----------------------------------------------------
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
---------------------------------------------------------------------------
(Former name, former 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
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the issuer's Common Stock, as of May 5,
2001, was 101,752,292 shares.
===============================================================================
CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
May 5, 2001 and February 3, 2001 2 - 3
Condensed Consolidated Statements of Operations and
Comprehensive Income
Thirteen weeks ended May 5, 2001 and April 29, 2000 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended May 5, 2001 and April 29, 2000 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements 11
Results of Operations 12 - 14
Liquidity and Capital Resources 15 - 18
Market Risk 18 - 19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 5, February 3,
(In thousands) 2001 2001
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents........................... $103,678 $ 56,544
Available-for-sale securities, (including fair
value Adjustments of $0 and $3, respectively...... 55,067 48,817
Merchandise inventories............................. 311,606 259,127
Deferred taxes...................................... 10,678 10,678
Prepayments and other............................... 64,125 56,748
-------- --------
Total current assets............................... 545,154 431,914
-------- --------
Property, equipment, and leasehold improvements..... 529,897 504,071
Less: accumulated depreciation and amortization..... 296,193 286,208
-------- --------
Net property, equipment, and leasehold improvements 233,704 217,863
-------- --------
Available-for-sale securities (including fair value
adjustments of $78 and $77, respectively).......... 22,693 76,461
Goodwill............................................ 91,298 92,520
Other assets........................................ 29,255 34,009
-------- --------
Total asset......................................... $922,104 $852,767
======== ========
[FN]
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
May 5, February 3,
(In thousands except share amounts) 2001 2001
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................... $144,871 $ 94,881
Accrued expenses.................................... 126,609 123,690
Income taxes payable................................ 4,205 0
Current portion -- long-term debt................... 5,957 4,954
-------- --------
Total current liabilities.......................... 281,642 223,525
-------- --------
Deferred taxes...................................... 21,433 21,433
Long-term debt...................................... 117,075 113,540
Minority interest................................... 1,000 1,000
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 110,857,292 shares and
110,731,483 shares, respectively................. 11,086 11,073
Additional paid-in capital.......................... 84,284 80,977
Treasury stock at cost -- 9,105,000 shares.......... (41,537) (41,537)
Deferred employee compensation...................... (4,552) (1,629)
Accumulated other comprehensive (loss) income....... (1,006) 74
Retained earnings................................... 452,679 444,311
-------- --------
Total stockholders' equity......................... 500,954 493,269
-------- --------
Total liabilities and stockholders' equity.......... $922,104 $852,767
======== ========
[FN]
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
May 5, April 29,
(In thousands except per-share amounts) 2001 2000
---- ----
(Restated)
Net sales............................................ $394,761 $378,925
Other income......................................... 2,583 2,058
-------- --------
Total revenue........................................ 397,344 380,983
-------- --------
Cost of goods sold, buying, and occupancy expenses... 285,576 271,516
Selling, general, and administrative expenses........ 94,488 92,771
Amortization of goodwill............................. 1,222 1,200
Interest expense..................................... 2,385 2,109
-------- --------
Total expenses....................................... 383,671 367,596
-------- --------
Income before income taxes and cumulative effect of
accounting change................................... 13,673 13,387
Income tax provision................................. 5,305 5,114
-------- --------
Income before cumulative effect of accounting change 8,368 8,273
-------- --------
Cumulative effect of accounting change, net of income
tax benefit of $334................................. 0 (540)
-------- --------
Net income........................................... 8,368 7,733
-------- --------
Unrealized losses on available-for-sale securities,
net of income tax benefit of $3 and $34,respectively. (8) (63)
Reclassification of realized losses on available-for-
sale securities, net of income tax benefit of $3
and $15, respectively............................... 6 29
Unamortized deferred loss on termination of
derivative, net of income tax benefit of $620........ (1,152) 0
Reclassification of amortization of deferred loss on
termination of derivative, net of income tax
benefit of $40...................................... 74 0
-------- --------
Total other comprehensive loss, net of taxes......... (1,080) (34)
-------- --------
Comprehensive income................................. $ 7,288 $ 7,699
======== ========
Net income per share:
Income before cumulative effect of accounting change. $ .08 $ .08
Cumulative effect of accounting change, net of taxes. .00 .00
----- -----
Net income........................................... $ .08 $ .08
===== =====
[FN]
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
May 5, April 29,
(In thousands) 2001 2000
---- ----
(Restated)
Operating activities
Net income........................................... $ 8,368 $ 7,733
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 12,599 11,183
Other, net.......................................... 376 232
Changes in operating assets and liabilities:
Merchandise inventories........................... (52,479) (33,809)
Accounts payable.................................. 49,990 59,037
Prepayments and other............................. (8,762) 947
Accrued expenses.................................. 2,919 (13,147)
Income taxes payable.............................. 4,205 2,127
-------- --------
Net cash provided by operating activities............ 17,216 34,303
-------- --------
Investing activities
Investment in capital assets......................... (15,511) (7,579)
Proceeds from sales of capital assets................ 0 789
Proceeds from sales of available-for-sale securities. 63,325 5,221
Gross purchases of available-for-sale securities..... (15,817) (3,100)
Increase in other assets............................. (2,293) (2,062)
-------- --------
Net cash provided by (used in) investing activities.. 29,704 (6,731)
-------- --------
Financing activities
Reduction of long-term borrowings.................... (1,272) (375)
Proceeds from exercise of stock options.............. 1,486 1,139
-------- --------
Net cash provided by financing activities............ 214 764
-------- --------
Increase in cash and cash equivalents................ 47,134 28,336
Cash and cash equivalents, beginning of period....... 56,544 34,299
-------- --------
Cash and cash equivalents, end of period............. $103,678 $ 62,635
======== ========
Non-cash financing and investing activities
Equipment acquired through capital leases............ $ 5,810 $ 0
======== ========
[FN]
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of May 5, 2001 and the con-
densed consolidated statements of operations and comprehensive income and
of cash flows for the thirteen weeks ended May 5, 2001 and April 29, 2000
have been prepared by the Company without audit. In the opinion of manage-
ment, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at May 5, 2001 and the
results of operations and cash flows for the thirteen weeks ended May 5,
2001 and April 29, 2000 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. These con-
densed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
February 3, 2001 Annual Report on Form 10-K. The results of operations for
the thirteen weeks ended May 5, 2001 and April 29, 2000 are not necessarily
indicative of operating results for the full fiscal year.
In the fourth quarter of the fiscal year ended February 3, 2001 ("Fiscal
2001"), the Company changed its method of accounting for sales returns and
layaway sales, as required by Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." The Company adopted SAB 101 effective as of the beginning of
Fiscal 2001 and restated its results of operations for the first three
quarters of Fiscal 2001. The cumulative effect of the adoption of SAB 101
as of January 30, 2000 was a decrease in income, net of taxes, of $540,000.
Results of operations for the thirteen weeks ended April 29, 2000 as previ-
ously reported, prior to restatement for the adoption of SAB 101, are as
follows:
Thirteen
Weeks Ended
(In thousands, except per-share amounts) April 29,
2000
----
Net sales.................................................... $381,334
Cost of goods sold, buying, and occupancy expenses........... 272,841
Net income................................................... 8,943
Basic net income per share................................... $.09
Diluted net income per share................................. .09
Certain components of cash flow from operating activities for the thirteen
weeks ended April 29, 2000 have been restated to reflect the adoption of
SAB 101.
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Accrued Restructuring Expenses and Restructuring Credit
On March 5, 1998, the Company's Board of Directors approved a restruc-
turing plan (the "Plan") that resulted in a pre-tax charge of $34,000,000.
The Plan was approved in conjunction with the decision to eliminate men's
merchandise from the Company's Fashion Bug stores. As of February 3, 2001,
this restructuring plan was completed, and there were no remaining restruc-
ture accruals relating to this plan. The following table summarizes
accrued restructuring charges related to this Plan as of January 29, 2000
and payments charged against the accrual during the thirteen weeks ended
April 29, 2000:
Accrued At Accrued At
January 29, April 29,
(In thousands) 2000 Payments 2000
---- -------- ----
Lease termination costs................. $4,890 $(3,147) $1,743
Other costs............................. 1,807 (56) 1,751
------ ------- ------
$6,697 $(3,203) $3,494
====== ======= ======
During the fourth quarter of the fiscal year ended January 29, 2000 ("Fis-
cal 2000"), the Company recorded a restructuring charge of $1,459,000 in
connection with the Company's plan to consolidate its Modern Woman stores
into its Catherine's stores. The restructuring charge was primarily for
lease termination costs related to the closing of 11 Modern Woman stores
that geographically overlapped Catherine's stores. During Fiscal 2001, the
Company closed 10 of the 11 stores, and accrued restructuring charges of
$1,086,000 related to these stores were paid. During the thirteen weeks
ended May 5, 2001, $219,000 was charged against this accrual. As of May 5,
2001, $154,000 of accrued restructuring charges were unpaid. The Company
anticipates that the unpaid accrued restructuring charges will be paid by
the end of the current fiscal year.
3. Long-term Debt
May 5, February 3,
(In thousands) 2001 2001
---- ----
7.5% Convertible subordinated notes due 2006....... $ 96,047 $ 96,047
Capital lease obligations.......................... 20,477 15,890
7.5% mortgage note................................. 6,403 6,449
Other.............................................. 105 108
-------- --------
Total long-term debt.............................. 123,032 118,494
Less current portion............................... 5,957 4,954
-------- --------
$117,075 $113,540
======== ========
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Stockholders' Equity
Thirteen
Weeks Ended
(In thousands) May 5, 2001
-----------
Total stockholders' equity, beginning of period............. $493,269
Net income.................................................. 8,368
Exercises of stock options.................................. 101
Amortization of deferred compensation expense............... 296
Net unamortized deferred loss on termination of
derivative, net of income tax benefit of $581............. (1,078)
Net unrealized losses on available-for-sale securities...... (2)
--------
Total stockholders' equity, end of period................... $500,954
========
5. Derivative Financial Instruments
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, "Ac-
counting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," as of the beginning of the fiscal year ending February
2, 2002 ("Fiscal 2002"). During Fiscal 2001, the Company terminated an in-
terest rate swap agreement with a notional principal amount of $50 million.
In accordance with SFAS No. 133, the deferred loss on termination of the
swap as of February 4, 2001 ($1,152,000 net of a tax benefit of $621,000)
has been recognized in "Other comprehensive income" on the Company's
consolidated balance sheet, and is being amortized to selling, general, and
administrative expenses over the 44-month remaining life of the original
swap period.
6. Customer Loyalty Card Program
During the thirteen weeks ended May 5, 2001, the Company began a customer
loyalty card program for its Fashion Bug store customers. The program
grants discounts on customer purchases over a twelve-month period upon
payment of a $20 annual fee. Revenues from the program are recognized as
sales over the life of the membership as discounts are earned. Upon can-
cellation of a loyalty card, refunds of membership fees are reduced by the
amount of any discounts earned. Costs incurred by the Company in connec-
tion with the program are recognized in cost of goods sold as incurred.
During the thirteen weeks ended May 5, 2001, the Company recognized
$745,000 of revenues in connection with this program.
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Net Income Per Share
Thirteen Weeks Ended
May 5, April 29,
(In thousands, except per-share amounts) 2001 2000
---- ----
Basic weighted average common shares outstanding... 101,155 100,850
Dilutive effect of stock options................... 827 1,279
------- -------
Diluted weighted average common shares and
equivalents outstanding........................... 101,982 102,129
======= =======
Options with weighted average exercise price
greater than market price, excluded from
computation of diluted earnings per share:
Number of shares................................... 5,653 2,849
Weighted average exercise price per share.......... $7.43 $8.77
For the thirteen weeks ended May 5, 2001 and April 29, 2000, net income per
share assuming dilution was equal to basic net income per share.
The effect of an assumed conversion of the Company's 7.5% Convertible Notes
into 12.9 million shares of Common Stock was excluded from the computation
of diluted net income per share for the thirteen weeks ended May 5, 2001
and April 29, 2000 because the effect would have been antidilutive.
Grants of stock awards under the Company's restricted stock award programs
generally require continuing employment for a specified period of time as a
condition for vesting of the award. Grants that have not vested and are
subject to a risk of forfeiture are included in the calculation of diluted
earnings per share using the treasury stock method if the impact of the
award is dilutive. Upon vesting, shares issued under these award programs
are included in the calculation of basic earnings per share.
8. Impact of Recent Accounting Pronouncements
In September 2000, The FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125. SFAS No. 140 retains most of the provisions
of SFAS No. 125, but revises the standards for accounting for securitiza-
tions and other transfers of financial assets and collateral and requires
certain disclosures. SFAS No. 140 is based on application of a financial-
components approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and serv-
icing assets it controls and the liabilities it has incurred, de-recognizes
financial assets when control has been surrendered, and de-recognizes lia-
bilities when extinguished.
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001, and is
effective for recognition and reclassification of collateral and for dis-
closures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company adopted the disclosure
provisions of SFAS No. 140 as of Fiscal 2001, and will adopt the accounting
requirements of SFAS No. 140 to the extent that it issues new beneficial
interests after March 31, 2001. Adoption of SFAS No. 140 did not have a
material impact on the results of operations or financial position for the
thirteen weeks ended May 5, 2001, and is not expected to have a material
impact on future operating results.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations contains certain forward-looking statements concerning
the Company's operations, performance and financial condition. In particu-
lar, it includes forward-looking statements regarding the Company's growth,
expense reduction initiatives, earnings, sales performance, store openings
and closings, cost savings, capital requirements, the Company's exposure to
fluctuations in interest rates, and other matters. Such forward-looking
statements are subject to various risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-
looking statements. Such risks and uncertainties may include, but are not
limited to, (i) rapid changes in or miscalculation of fashion trends, (ii)
extreme or unseasonable weather conditions, (iii) economic downturns, a
weakness in overall consumer demand, inflation, and cyclical variations in
the retail market for women's fashion apparel, (iv) the risks attendant to
the sourcing of the Company's merchandise needs abroad, including exchange
rate fluctuations, political instability, trade sanctions or restrictions,
changes in quota and duty regulations, delays in shipping, or increased
costs of transportation, (v) the interruption of merchandise flow to the
Company's retail stores from its centralized distribution facilities, (vi)
competitive pressures, and (vii) failure to realize merger-related syner-
gies. These, and other risks and uncertainties, are detailed further in
this Item 2, in "Part I, Item 1 -- Business: Cautionary Statement for
Purposes of the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995" of the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 2001, and in the Company's reports filed with
the Securities and Exchange Commission from time to time.
11
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a per
centage of net sales:
Thirteen Weeks Ended
May 5, April 29,
2001 2000
---- ----
Net sales............................................ 100.0% 100.0%
Other income......................................... 0.7 0.5
Cost of goods sold, buying, and occupancy expenses... 72.4 71.6
Selling, general, and administrative expenses........ 23.9 24.5
Amortization of goodwill............................. 0.3 0.3
Interest expense..................................... 0.6 0.6
Income tax provision................................. 1.4 1.3
Income before cumulative effect of accounting change. 2.1 2.2
Net income........................................... 2.1 2.0
The following table sets forth certain information related to the Company's
net sales:
Thirteen Weeks Ended
May 5, April 29,
2001 2000
---- ----
Decrease (increase) in comparable Fashion Bug
store sales(1)(2).................................... (3.4)% 2.3%
Sales from new Fashion Bug stores as a percentage
of total prior-period sales(2)....................... 6.4 7.7
Prior-period sales from closed Fashion Bug stores
as a percentage of total prior-period sales(2)....... (3.1) (3.0)
Increase in comparable Catherine's store sales(1)(2).. 1.4 --
Sales from new Catherine's stores as a percentage
of total prior-period sales(2)....................... 4.3 --
Prior-period sales from closed Catherine's stores(2).. (5.8) --
Increase in sales from Catherine's and Modern Woman
stores as a percentage of total prior-period sales(3) -- 40.3
Increase in total sales............................... 4.2 47.3
--------------------
[FN]
(1) Sales from stores in operation during both periods. Stores are added
to the comparable store base after 13 full months of operation.
(2) Based on equivalent 13-week periods. Results for 13 weeks ended May
5, 2001 may not be equivalent to change in total sales.
(3) Sales from Catherine's stores acquired in January 2000 and Modern
Woman stores acquired in August 1999.
12
Thirteen Weeks Ended May 5, 2001 and April 29, 2000
Net sales for the quarter ended May 5, 2001 ("Fiscal 2002 First Quarter")
totaled $394.8 million as compared to net sales of $378.9 million for the
quarter ended April 29, 2000 ("Fiscal 2001 First Quarter"). Net sales for
the Fiscal 2002 First Quarter include $289.8 million in sales from the
Company's Fashion Bug stores and $105.0 million in sales from Catherine's
Stores. Net sales for the Fiscal 2001 First Quarter include $274.8 million
in sales from the Company's Fashion Bug stores and $104.1 million in sales
from Catherine's Stores. Fashion Bug comparable store sales decreased pri-
marily as a result of a decrease in sales of girls merchandise. In January
2001, the Company announced plans to support growth in large-size apparel
and eliminate girls apparel from Fashion Bug stores, effective at the end
of the 2000-2001 winter season. For Catherine's Stores, an increase in
comparable store sales of casual sportswear was offset by decreases in com-
parable store sales of career-wear and dresses. As of May 5, 2001, the
Company operated 1,244 Fashion Bug stores, 530 Catherine's stores, and 2
Monsoon/Accessorize stores, as compared to 1,192 Fashion Bug stores and 549
Catherine's/Modern Woman stores as of April 29, 2000.
On June 7, 2001, the Company issued a press release reporting that the
Company's total sales for the four weeks and seventeen weeks ended June 2,
2001 decreased 13% and 1%, respectively, from the four weeks and seventeen
weeks ended May 27, 2000. Comparable store sales for the four weeks and
seventeen weeks ended June 2, 2001 decreased 10% and 4%, respectively from
the comparable prior-year periods. The decrease for the four weeks ended
June 2, 2001 occurred primarily in sales of Fashion Bug summer merchandise.
Other income expressed as a percentage of sales increased 0.2% in the
Fiscal 2002 First Quarter as compared to the Fiscal 2001 First Quarter,
primarily as a result of an increase in interest income. Interest income
increased as a result of higher levels of invested funds during the Fiscal
2002 First Quarter as compared to the Fiscal 2001 First Quarter.
Cost of goods sold, buying, and occupancy expenses expressed as a percent-
age of sales increased 0.8% in the Fiscal 2002 First Quarter as compared to
the Fiscal 2001 First Quarter. Cost of goods sold as a percentage of sales
increased 0.2% in the Fiscal 2002 First Quarter as compared to the Fiscal
2001 First Quarter. The slight reduction in merchandise margins was
primarily a result of costs related to exiting the girls business in the
Company's Fashion Bug stores, which were partially offset by improved gross
margins at the Company's Catherine's stores and strong management of in-
season inventory levels. Cost of goods sold as a percentage of sales for
the Company's Fashion Bug stores increased 0.6% in the Fiscal 2002 First
Quarter as compared to the Fiscal 2001 First Quarter. Cost of goods sold
includes merchandise costs, net of discounts and allowances, freight, and
inventory shrinkage. Net merchandise costs and freight are capitalized as
inventory costs. Buying and occupancy expenses expressed as a percentage
of sales increased 0.6% in the Fiscal 2002 First Quarter as compared to the
Fiscal 2001 First Quarter. The increase in buying and occupancy expenses
as a percentage of sales was primarily attributable to the lack of leverage
13
on relatively fixed occupancy costs as a result of a decline in comparable
store sales. Increased utilities expenses and relatively higher occupancy
expenses for new and relocated stores as compared to the Company's existing
stores also contributed to the increase in buying and occupancy expenses as
a percentage of sales. Buying expenses include payroll, payroll related
costs, and operating expenses for the Company's buying departments and
warehouses. Occupancy expenses include rent, real estate taxes, insurance,
common area maintenance, utilities, maintenance, and depreciation for the
Company's stores and warehouse facilities and equipment. Buying and occu-
pancy costs are treated as period costs and are not capitalized as part of
inventory.
Selling, general, and administrative expenses expressed as a percentage of
sales decreased 0.6% in the Fiscal 2002 First Quarter as compared to the
Fiscal 2001 First Quarter. Selling expenses decreased 0.3% as a percentage
of sales, and general and administrative expenses decreased 0.3% as a
percentage of sales. These decreases were primarily as a result of cost
containment initiatives implemented during the Fiscal 2002 First Quarter,
which favorably impacted selling and corporate administrative expenses.
Additionally, selling expenses in the Fiscal 2002 First Quarter benefited
from a reduced rate of increase in wages in the Company's stores. Selling,
general, and administrative expenses exclude goodwill amortization related
to the acquisition of the Catherine's stores.
Interest expense expressed as a percentage of sales increased 0.1% in the
Fiscal 2002 First Quarter as compared to the Fiscal 2001 First Quarter.
Interest expense increased as a result of an increase in long-term lease
financing. During the Fiscal 2002 First Quarter, the Company acquired $5.8
million of point-of-sale equipment for its stores under long-term capital
leases.
The income tax provision for the Fiscal 2002 First Quarter was 38.8% of the
Company's pre-tax income, as compared to 38.2% for the Fiscal 2001 First
Quarter. The increase in the effective tax rate for the Fiscal 2001 First
Quarter is primarily as a result of an increase in the tax provision
related to one of the Company's employee insurance programs.
Net income per share, assuming dilution, for the Fiscal 2002 First Quarter
was $.08 as compared to $.08 for the Fiscal 2001 First Quarter. Diluted
net income per share excluding goodwill amortization (cash earnings per
share) was $.09 for both the Fiscal 2002 First Quarter and the Fiscal 2001
First Quarter.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from opera-
tions, its proprietary credit card receivables securitization agreements,
its investment portfolio, and its credit facilities. The following table
highlights certain information related to the Company's liquidity and
capital resources:
May 5, February 3,
(Dollars in thousands) 2001 2001
---- ----
Working capital..................................... $263,512 $208,389
Cash and cash equivalents........................... 103,678 56,544
Available-for-sale securities....................... 77,760 125,278
Current ratio....................................... 1.9 1.9
Long-term debt to equity (%)........................ 23.4 23.0
Net cash provided by operating activities was $17.2 million for the Fiscal
2002 First Quarter, as compared to $34.3 million for the Fiscal 2001 First
Quarter. Cash provided by operating activities for the Fiscal 2001 First
Quarter benefited from an increase in trade accounts payable resulting from
improved credit terms for the Company's Catherine's Stores. Cash provided
by operating activities for the Fiscal 2002 First Quarter benefited from a
net decrease in payments of prepaid and accrued expenses. As a result of
the recent decline in interest rates, a portion of the Company's invest-
ments in U. S. government agency bonds with early redemption provisions
were called for redemption during the Fiscal 2002 First Quarter. The $47.1
million decrease in available-for-sale securities during the Fiscal 2002
First Quarter was primarily a result of these redemptions. The Company
invested the proceeds from these early redemptions in money market funds
pending evaluation of alternative investment strategies, which resulted in
an increase in cash and cash equivalents.
The Company has an agreement with a commercial finance company to provide a
revolving credit facility with a maximum availability of $150 million,
subject to limitations based upon eligible inventory. The facility, which
expires June 30, 2004, enables the Company to issue letters of credit for
overseas purchases of merchandise and provides for seasonal cash borrow-
ings, if necessary. The facility is secured by merchandise inventory,
furniture and fixtures at the Fashion Bug retail stores, and certain other
Company assets. The interest rate on borrowings is 0.5% above the Prime
rate. There is a fee of .25% on the unused portion of the first $105
million of the facility, and a $100 thousand annual servicing fee. As of
May 5, 2001, the availability under this facility was approximately $149.6
million, against which the Company had outstanding letters of credit of
$51.0 million. There were no cash borrowings outstanding under this agree-
ment as of May 5, 2001. The agreement requires, among other things, that
the Company maintain a minimum net worth of $350 million and not pay
dividends on its Common Stock.
15
As a result of the Catherine's Stores acquisition, the Company has an
agreement with a bank to provide a revolving credit facility with a maximum
availability of $20 million. The facility, which expires June 29, 2001,
enables the Company to issue letters of credit for overseas purchases of
merchandise and provides for seasonal cash borrowings, if necessary, by
utilizing a $5 million swingline credit facility. The agreement is secured
by inventory, general intangibles, patents, trademarks, and proceeds of the
foregoing. The interest rate on borrowings is equal to the agent bank's
prime rate. As of May 5, 2001, the combined availability under the working
capital and swingline facilities was $20.0 million, against which the Com-
pany had outstanding letters of credit of $0.8 million. The Company is
currently negotiating the extension of this agreement. Should this agree-
ment not be extended, the Company's working capital availability would not
be adversely affected.
As a result of the acquisition of Modern Woman, the Company also has an
agreement with a bank to provide a revolving credit facility with a maximum
availability of $10 million. As of May 5, 2001, $5.0 million was available
under this agreement, against which the Company had outstanding letters of
credit of $0.1 million. The Company has pledged $5 million of available-
for-sale securities as security for the line of credit.
During the Fiscal 2002 First Quarter, pursuant to a program to replace its
existing POS equipment, the Company acquired $5.8 million of POS equipment
for its Fashion Bug and Catherine's Stores under capital leases. These
leases generally have an initial lease term of 60 months and contain a
bargain purchase option. The Company anticipates acquiring additional POS
equipment at a total cost of approximately $10.0 million over the next 12-
15 months, which will be financed through the use of capital leases.
As of May 5, 2001, the Company has current debt maturity payments of $6.0
million, which are primarily for amounts due under the Company's capital
lease obligations and the Catherine's Stores 7.5% Mortgage Note.
Capital expenditures (excluding equipment acquired through capital leases)
were $15.5 million during the Fiscal 2002 First Quarter. During Fiscal
2002, the Company anticipates incurring additional capital expenditures of
approximately $35-40 million. These capital expenditures will primarily be
for the construction, remodeling, and fixturing of new and existing retail
stores, investments in management information systems technology, and
improvements to the Company's corporate offices and distribution centers.
The Company expects to finance these capital expenditures principally
through internally-generated funds.
16
The Company plans to open 110-120 new stores, remodel 45-50 stores, and re-
locate 75-80 stores during the fiscal year ended February 2, 2002 ("Fiscal
2002"). The following table sets forth information with respect to store
activity for the Fiscal 2002 First Quarter:
Fashion Monsoon/
Bug Catherine's Accessorize
Stores Stores Stores Total
------ ------ ------ -----
Stores at February 3, 2001....... 1,230 524 0 1,754
----- --- - -----
Stores opened.................... 20 9 2 31
Stores closed.................... (6) (3) 0 (9)
----- --- - -----
Net change in stores............. 14 6 2 22
----- --- - -----
Stores at May 5, 2001............ 1,244 530 2 1,776
===== === = =====
Stores relocated during period... 9 8 17
Stores remodeled during period... 10 5 15
The Company has formed a trust to which the Company's credit card bank has
transferred, at face value, its interest in receivables created under the
Company's Fashion Bug proprietary credit card program. The Company,
together with the trust, has entered into various agreements whereby it can
sell, on a revolving basis, interests in these receivables for a specified
term. When the revolving period terminates, an amortization period begins
during which principal payments are made to the party with whom the trust
has entered into the securitization agreement.
Charming Shoppes Receivables Corp. and Charming Shoppes, Street, Inc.,
wholly-owned indirect subsidiaries of the Company, are separate special-
purpose corporations. At May 5, 2001, Charming Shoppes Receivables Corp.
had $38.6 million of Charming Shoppes Master Trust Certificates, and Charm-
ing Shoppes Street, Inc. had $1.1 million of cash. These assets will be
available first and foremost to satisfy the claims of the respective
creditors of these separate corporate entities, including certain claims of
investors in the Charming Shoppes Master Trust. The providers of the cred-
it enhancements and trust investors have no other recourse to the Company.
The Company does not receive collateral from any party to the securiti-
zation, and the Company does not have any risk of counter-party non-
performance.
The Company has a non-recourse agreement to permit a third party to provide
an accounts receivable proprietary credit card sales funding program for
its Catherine's Stores. This funding program expires in January 2005.
Under this agreement, the third party reimburses the Company daily with
respect to the proprietary credit card sales generated by the Catherine's
Stores credit card accounts.
17
The securitization and funding agreements improve the overall liquidity of
the Company by providing short-term sources of funding. Additional
information regarding these programs is included in "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Financial Condition; Liquidity and Capital Resources" of the
Company's Annual Report on Form 10-K for the fiscal year ended February 3,
2001.
The Company adopted the provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as of the beginning of Fiscal 2002. During the fiscal year
ended February 3, 2001 ("Fiscal 2001"), the Company terminated an interest
rate swap agreement with a notional principal amount of $50 million. In
accordance with SFAS No. 133, the deferred loss on termination of the swap
as of February 4, 2001 ($1,152,000 net of a tax benefit of $621,000) has
been recognized in "Other comprehensive income" on the Company's consoli-
dated balance sheet, and is being amortized to selling, general, and admin-
istrative expenses over the 44-month remaining life of the original swap
period.
The Company believes that cash flow from operations, its proprietary credit
card receivables securitization and funding agreements, its investment
portfolio, and its credit facilities are sufficient to support current
operations.
MARKET RISK
The Company manages its Fashion Bug proprietary credit card program through
various operating entities that are wholly owned by the Company. The
primary activity of these entities is to service the proprietary credit
card portfolio, the balances of which are sold to a trust under a credit
card securitization program. Under the securitization program, the Company
can be exposed to fluctuations in interest rates to the extent that
interest rates charged to its customers vary from the rates paid on
certificates issued by the trust. Finance charges on all accounts are
billed using a floating rate index (the Prime lending rate), subject to a
floor and limited by legal maximums. The floating rate index on all of the
certificates is either one-month LIBOR or the commercial paper rate,
depending on the issue. The Company has exposure in the movement of basis
risk between the floating rate index on the certificates and the Prime
rate. As of May 5, 2001, the floating rate finance charge rate was below
the contractual floor rate, thus exposing the Company to a portion of
interest-rate risk. To the extent that short-term interest rates were to
increase by one percentage point by the end of Fiscal 2002, an increase of
approximately $500 thousand in selling, general, and administrative ex-
penses would result.
18
The Company is not subject to material foreign exchange risk, as the Com-
pany's foreign transactions are primarily U. S. Dollar-denominated and the
Company's foreign operations do not constitute a material part of its busi-
ness.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; Market Risk," above.
19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the
location of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994.
(Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit
3.2)
(b) Reports on Form 8-K
On May 11, 2001, the Company filed a report on Form 8-K dated March 13,
2001. The Form 8-K was filed to report, under "Item 9. Regulation FD
Disclosure," the restatement of the Company's results of operations for the
fiscal quarters ended April 29, 2000, July 29, 2000, and October 28, 2000
to reflect the adoption of Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." As permitted by SAB 101, the Company adopted the guidelines
of SAB 101 related to recognition of sales revenue and cost of sales on
layaway sales and sales returns as of the fourth quarter of the fiscal year
ended February 3, 2001 ("Fiscal 2001") and restated interim results for the
first three quarters of Fiscal 2001.
20
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.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: June 14, 2001 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: June 14, 2001 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
21