Charming Shoppes Reports Second Quarter Results

Wednesday, August 26, 2009 7:01 AM

BENSALEM, Pa., Aug. 26 /PRNewswire-FirstCall/ -- Charming Shoppes, Inc. (Nasdaq: CHRS) a leading multi-brand apparel retailer specializing in women's plus-size apparel, today reported sales and operating results for the three and six month periods ended August 1, 2009.

Recent Developments

On August 13, 2009, Charming Shoppes announced it had entered into an agreement for the sale of its credit card receivables program to Alliance Data Systems Corporation, and expects to receive net cash proceeds of approximately $110 million related to the transaction at closing. Charming Shoppes and Alliance Data have also entered into a ten-year operating agreement for the servicing of Charming Shoppes' private label credit card receivables program. The benefits of the transaction include the removal of financing risk associated with the credit card receivable securitization program and the credit risk of the underlying credit card portfolio. The Company expects the transaction to be non-dilutive, and to close before the end of the year, subject to attaining certain customary regulatory approvals.
On August 3, 2009, Charming Shoppes announced it had entered into a three-year loan agreement through July 2012 for a new senior secured revolving credit facility in the amount of $225 million.

Results for the quarter, compared to the same quarter of the prior year, include:

A net sales decrease of $121.4 million or 18.7%, reflecting a 14% decrease in comparable store sales and the impact of net store closings. Same store inventories decreased 18%;
Gross Profit was $263.9 million in the quarter, a decrease of $39.0 million, related to lower net sales, and somewhat offset by improvement in gross margin. Gross margin improved 330 basis points to 50.0% of sales, compared to 46.7% in the year ago period;
Decreases in total operating expenses (excluding restructuring charges) of $39.5 million or 13.5%;
Income from operations was $10.3 million, excluding restructuring charges of $7.8 million, reflecting a year over year increase of 5.7% compared to income from operations of $9.8 million, excluding restructuring charges of $14.9 million, in the prior year period (refer to GAAP to non-GAAP reconciliation, below);
Net income was $5.0 million in the quarter, or $0.04 per diluted share, compared to a net loss of $(10.7) million or $(0.09) per diluted share in the year ago period. The current year's results include restructuring charges offset by a gain on the repurchase of debt; the prior year's results include restructuring charges and a loss from discontinued operations.
Total liquidity was $316 million, including $117 million in cash and $199 million of net availability on the Company's undrawn committed line of credit;
The repurchase of $38.2 million face value of the Company's 1.125% Convertible Notes due 2014 (the "Notes") during the quarter, at a cost of $21.0 million. In aggregate, as of August 25, 2009, the Company has repurchased $51.7 million of Notes at a cost of $26.6 million.

Jim Fogarty, President and Chief Executive Officer of Charming Shoppes, Inc., said, "In August, we were pleased to announce the completion of two key initiatives - the signing of an agreement to sell our credit card business and the completion of our revolver refinancing. In addition, last week, we launched brand new websites at lanebryant.com, fashionbug.com, and catherines.com. The new online stores represent fresh and upgraded e-commerce platforms to support our core brands.

Fogarty continued, "Our consolidated results for the quarter continued to reflect a difficult retail environment, delivering both disappointing comparable store sales and earning power. Our sales reflected negative but generally improving comps to last quarter at our Lane Bryant and Catherines brands, as we made progress on more balanced and compelling assortments. Our Fashion Bug brand had a difficult second quarter with spring and summer assortments that were not compelling to our consumer; however, our assortments did not yet reflect our new product leadership. On profitability for the quarter, we were able to offset volume declines with disciplined inventory management, gross margin improvement, and reductions in both SG&A and Occupancy expense. Finally, we are positioned for the third quarter with much less seasonal carry-over inventory than in the prior year.

"We are focused on continuing improvements in our Lane Bryant and Catherines businesses and on stabilizing our Fashion Bug brand. Further, we remain committed to our five key priorities:

Focus on the Consumer;
Stabilize and Begin to Grow Profitable Revenue;
Increase EBITDA;
Increase Cash Flow, and;
Employee Empowerment with Accountability."

Beginning with the three and six month periods ended August 1, 2009, the Company has changed its financial statement presentation to report Cost of Goods Sold, Occupancy and Buying, and Depreciation and Amortization separately.

Additionally, the Company's fiscal year designations will now be aligned with the calendar years. Results for the current fiscal year ending January 30, 2010 are reported as Fiscal Year 2009. Results for the last fiscal year ended January 31, 2009 refer to Fiscal Year 2008, and so forth.

Second Quarter Consolidated Results

Net sales from continuing operations for the three months ended August 1, 2009 decreased $121.4 million or 18.7% to $527.2 million, compared to $648.6 million for the three months ended August 2, 2008. The decrease in sales was primarily as a result of a comparable store sales decrease of 14% and the impact of 120 store closings and 21 store openings during the last four quarters. Comparable store sales declined 13%, 18% and 9% at the Company's Lane Bryant, Fashion Bug and Catherines brands, respectively.
Gross Profit decreased $39.0 million or 12.9% to $263.9 million in the second quarter, compared to $302.8 million in the same quarter last year, primarily related to lower sales volumes, somewhat offset by improvement in the gross margin rate. Gross margin improved by 330 basis points to 50.0% for the quarter ended August 1, 2009, compared to 46.7% for the quarter ended August 2, 2008, as a result of lean inventories and reduced markdowns on spring and summer seasonal merchandise.
Occupancy and Buying expense decreased $5.5 million, or 5.2%, related to the operation of fewer stores and occupancy reductions secured, somewhat offset by increases in buying costs.
Selling, general and administrative expense decreased $30.2 million or 18.4% to $134.3 million in the second quarter, compared to $164.5 million in the same quarter last year, primarily related to expense reduction initiatives and the closing of under-performing stores. SG&A expense, as a percent of sales, was 25.5% and essentially flat year over year.
Depreciation and Amortization expense decreased $3.8 million or 16.5% to $19.2 million in the quarter, compared to $23.0 million in the same quarter last year, primarily related to operating fewer stores than in the year ago period. D&A expense, as a percent of sales, was 3.6% and essentially flat year over year.
Restructuring charges of $7.8 million recorded during the quarter ended August 1, 2009 primarily represented costs related to the Company's transformational initiatives and accelerated depreciation on discontinued or divested catalog businesses. $3.3 million of these charges were non-cash charges. Restructuring charges of $14.9 million recorded during the quarter ended August 2, 2008 primarily included charges related to the severance agreement between Charming Shoppes and its former Chief Executive Officer and to previously announced consolidation and streamlining initiatives.
Income from operations was $10.3 million, excluding restructuring charges of $7.8 million, and represented a 5.7% year over year increase on an 18.7% sales decline. The prior year period was $9.8 million, excluding restructuring charges of $14.9 million. (Refer to GAAP to non-GAAP reconciliation, below.)
The Company's interest expense of $4.5 million included $2.6 million of non-cash interest expense, related to the adoption of FSP APB 14-1 during the first quarter of the current fiscal year.
The tax provision for the second quarter primarily represents certain state and foreign income taxes, as well as required deferred taxes, due to the Company continuing to have a valuation allowance recorded against its net deferred tax assets.
Net income was $5.0 million, or $0.04 per diluted share, compared to a net loss of $(10.7) million or $(0.09) per diluted share in the year ago period. The current year's results include restructuring charges offset by a gain on the repurchase of debt; the prior year's results include restructuring charges of $14.9 million ($9.3 million, after-tax) or $(0.08) per diluted share and a loss from discontinued operations of $5.2 million or $(0.05) per diluted share.

Commenting on the quarter and the Company's liquidity, Eric M. Specter, Executive Vice President and Chief Financial Officer, said, "Effective with today's quarterly report, we have changed the presentation of our financial statements to provide additional detail about our operating performance. This change is intended to improve transparency and disclosure.

"Our balance sheet remained strong, and our total liquidity increased to $316 million. Our strong liquidity allowed us to opportunistically repurchase $38.2 million of Notes at a 45% discount for a cash purchase price of $21.0 million. Our liquidity at the end of the quarter includes $117 million in cash and net availability of $199 million on our fully committed and undrawn $225 million line of credit. We remain vigilant in the management of our inventories and operating expenses, and continue to take a conservative planning approach during this difficult economic environment."

For the six months ended August 1, 2009, the Company reported a loss from continuing operations of $(1.6) million or $(0.01) per diluted share, which includes net charges of $(0.04) per diluted share related to restructuring charges and a gain on the repurchase of debt. This compares to a loss from continuing operations for the six months ended August 2, 2008 of $(6.5) million or $(0.06) per diluted share, which included restructuring charges of $(0.10) per diluted share. Non-cash interest expense, related to the adoption of FSP APB 14-1, represented $(0.05) per diluted share in the six month period ended August 1, 2009 and $(0.03) per diluted share in the six month period ended August 2, 2008.

Sales results for the three month periods ended August 1, 2009 and August 2, 2008 were:


                              Net Sales     Net Sales   Total Comparable Store
                               for the       for the     Net    Sales Change
                            Three Months  Three Months  Sales      for the
                            Ended 8/1/09  Ended 8/2/08  Change  Three Months
                           -------------- ------------  ------  Ended 8/1/09
                           ($in millions)($in millions)  (%)   ---------------
    Lane Bryant Stores(1)      $246.9        $285.4      -13%        -13%
    Fashion Bug Stores          189.4         246.9      -23%        -18%
    Catherines Stores            77.1          83.6       -8%         -9%
    Catalog Sales                 6.3          22.5      -72%         NA
    Other (2)                     7.5          10.2      -26%         NA
    ------------                  ---          ----      ---          --
    Consolidated               $527.2        $648.6      -19%        -14%

Sales results for the six month periods ended August 1, 2009 and August 2, 2008 were:


                              Net Sales    Net Sales    Total Comparable Store
                               for the      for the      Net    Sales Change
                             Six Months    Six Months   Sales      for the
                            Ended 8/1/09  Ended 8/2/08  Change   Six Months
                           -------------- ------------  ------  Ended 8/1/09
                           ($in millions)($in millions)  (%)   ---------------
    Lane Bryant Stores(1)      $500.7        $582.4      -14%        -14%
    Fashion Bug Stores          368.1         468.8      -21%        -16%
    Catherines Stores           155.9         170.0       -8%         -9%
    Catalog Sales                25.8          49.5      -48%         NA
    Other (2)                    14.8          19.3      -23%         NA
    ------------                 ----          ----      ---          --
    Consolidated             $1,065.3      $1,290.0      -17%        -14%
    (1) Includes Lane Bryant Outlet Stores; (2)Includes Petite Sophisticate
        Retail and Outlet Stores, Corporate and Other.

Charming Shoppes, Inc. will host its second quarter earnings conference call today at 9:15 am Eastern time. To listen to the conference call, please dial 877-407-8293 approximately 10 minutes prior to the scheduled event.

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