<PAGE> 1
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 August 1, 1998
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 re-
quired 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 August
1, 1998, was 100,086,768 shares.
<PAGE> 2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
August 1, 1998 and January 31, 1998................................ 1-2
Condensed Consolidated Statements of Operations (Unaudited)
Thirteen weeks ended August 1, 1998 and August 2, 1997............. 3
Condensed Consolidated Statements of Operations (Unaudited)
Twenty-six weeks ended August 1, 1998 and August 2, 1997........... 4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Twenty-six weeks ended August 1, 1998 and August 2, 1997........... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Twenty-six weeks ended August 1, 1998 and August 2, 1997........... 6
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11-17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
August 1, January 31,
(In thousands) 1998 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................$ 47,174 $ 12,349
Available-for-sale securities (including fair
value adjustments of $(4) and $37, respectively)... 51,410 84,909
Merchandise inventories.............................. 194,991 175,785
Deferred taxes....................................... 6,540 863
Prepayments and other................................ 32,853 31,975
-------- --------
Total current assets................................. 332,968 305,881
Property, equipment, and leasehold improvements...... 432,866 443,017
Less: accumulated depreciation and amortization...... 258,497 257,013
-------- --------
Net property, equipment, and leasehold improvements.. 174,369 186,004
Available-for-sale securities (including fair
value adjustments of $(331) and $474, respectively) 211,393 207,191
Other assets......................................... 17,991 10,662
-------- --------
Total assets.........................................$736,721 $709,738
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(1)
<PAGE> 4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
August 1, January 31,
(In thousands except shares) 1998 1998
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.....................................$ 82,771 $ 53,623
Accrued expenses..................................... 81,158 82,911
Income taxes payable................................. 0 6,123
Accrued restructuring expenses....................... 22,839 0
Current portion -- long-term debt.................... 16 16
-------- --------
Total current liabilities............................ 186,784 142,673
Deferred taxes....................................... 12,139 12,139
Long-term debt....................................... 135,112 138,116
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 106,466,768 shares and
106,249,385 shares, respectively.................. 10,647 10,625
Additional paid-in capital........................... 65,151 64,019
Treasury stock at cost -- 6,380,000 shares and
5,580,000 shares, respectively.................... (29,162) (25,382)
Deferred employee compensation....................... (1,447) (1,073)
Unrealized (losses) gains on available-for-sale
securities (net of income tax (benefit)
expense of $(117) and $179, respectively)......... (218) 332
Retained earnings.................................... 357,715 368,289
-------- --------
Total stockholders' equity........................... 402,686 416,810
-------- --------
Total liabilities and stockholders' equity...........$736,721 $709,738
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(2)
<PAGE> 5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
August 1, August 2,
(In thousands except per-share amounts) 1998 1997
---- ----
<S> <C> <C>
Net sales...........................................$279,158 $265,696
Other income........................................ 3,792 3,675
-------- --------
Total revenue....................................... 282,950 269,371
-------- --------
Cost of goods sold, buying, and occupancy expenses.. 205,445 198,322
Selling, general, and administrative expenses....... 60,536 58,411
Interest expense.................................... 2,619 2,559
-------- --------
Total expenses...................................... 268,600 259,292
-------- --------
Income before income taxes.......................... 14,350 10,079
Income tax provision................................ 5,022 3,226
-------- --------
Net income..........................................$ 9,328 $ 6,853
======== ========
Net income per share................................ $ .09 $ .06
===== =====
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(3)
<PAGE> 6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
August 1, August 2,
(In thousands except per-share amounts) 1998 1997
---- ----
<S> <C> <C>
Net sales...........................................$523,189 $501,384
Other income........................................ 8,321 7,068
-------- --------
Total revenue....................................... 531,510 508,452
-------- --------
Cost of goods sold, buying, and occupancy expenses.. 387,897 381,273
Selling, general, and administrative expenses....... 120,641 115,266
Restructuring charge................................ 34,000 0
Interest expense.................................... 5,240 5,180
-------- --------
Total expenses...................................... 547,778 501,719
-------- --------
Income (loss) before income taxes................... (16,268) 6,733
Income tax provision (benefit)...................... (5,694) 2,222
-------- --------
Net income (loss)...................................$(10,574) $ 4,511
======== ========
Net income (loss) per share......................... $ (.11) $ .04
====== ======
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(4)
<PAGE> 7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
August 1, August 2,
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Net income (loss).................................. $(10,574) $ 4,511
-------- --------
Other comprehensive loss:
Unrealized losses on available-for-sale
securities, net of income tax benefit of $221
and $3, respectively............................ (411) (6)
Reclassification of realized gains on
available-for-sale securities, net of income
tax expense of $74 and $32, respectively........ (139) (65)
-------- --------
Total other comprehensive loss, net of taxes.... (550) (71)
-------- --------
Comprehensive income (loss)........................ $(11,124) $ 4,440
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(5)
<PAGE> 8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
August 1, August 2,
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Operating activities
Net income (loss)....................................$(10,574) $ 4,511
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 17,049 20,080
Deferred income taxes............................. (5,381) 0
Amortization of deferred compensation expense..... 382 384
Write-down of capital assets due to restructuring. 10,000 0
Gain from disposition of capital assets........... (45) (1,064)
Gain on sale of available-for-sale securities..... (213) (97)
Changes in operating assets and liabilities:
Income tax refund receivable................... 0 2,303
Prepayments and other.......................... (947) (6,359)
Merchandise inventories........................ (19,206) (6,572)
Accounts payable............................... 29,148 10,383
Accrued expenses............................... (1,753) 4,502
Income taxes payable........................... (6,123) 0
Accrued restructuring expenses................. 22,839 0
-------- --------
Net cash provided by operating activities............ 35,176 28,071
-------- --------
Investing activities
Investment in capital assets......................... (14,185) (5,402)
Proceeds from sales of capital assets................ 51 2,414
Proceeds from sales of available-for-sale securities. 248,434 125,281
Gross purchases of available-for-sale securities.....(219,813) (192,696)
(Increase) decrease in other assets.................. (8,521) 242
-------- --------
Net cash provided by (used in) investing activities.. 5,966 (70,161)
-------- --------
Financing activities
Purchases of treasury stock.......................... (3,780) 0
Reduction of long-term borrowings.................... (3,004) (4)
Proceeds from exercise of stock options.............. 467 698
-------- --------
Net cash provided by (used in) financing activities.. (6,317) 694
-------- --------
Increase (Decrease) in cash and cash equivalents..... 34,825 (41,396)
Cash and cash equivalents, beginning of period....... 12,349 78,979
-------- --------
Cash and cash equivalents, end of period.............$ 47,174 $ 37,583
======== ========
</TABLE>
[FN]
Certain prior-year amounts have been reclassified to conform to current-
year presentation
See Notes to Condensed Consolidated Financial Statements
</FN>
(6)
<PAGE> 9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of August 1, 1998 and the
condensed consolidated statements of operations, comprehensive income
(loss), and cash flows for the thirteen and twenty-six weeks ended August
1, 1998 and August 2, 1997 have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
at August 1, 1998 and the results of operations and cash flows for the
thirteen and twenty-six weeks ended August 1, 1998 and August 2, 1997 have
been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted ac-
counting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's January
31, 1998 Annual Report on Form 10-K. The results of operations for the
thirteen and twenty-six weeks ended August 1, 1998 and August 2, 1997 are
not necessarily indicative of operating results for the full fiscal year.
2. Stockholders' Equity
During the twenty-six weeks ended August 1, 1998, stockholders' equity
changed as a result of the following items: a net loss of $10,574,000; an
increase in the net unrealized loss on available-for-sale securities of
$550,000 (net of an income tax benefit of $296,000); an increase in common
stock and additional paid-in capital of $414,000 from the exercise of
options for Common Stock; a decrease in paid-in capital of $16,000 from
shares of Common Stock tendered by employees in payment of payroll taxes
due from the exercise of stock options; purchases of treasury stock of
$3,780,000; and amortization of deferred compensation expense of $382,000.
3. Revolving Credit Facility
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. On May 1,
1998, the expiration date of this facility was extended from June 1, 1998
to June 1, 1999.
(7)
<PAGE> 10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Repurchases of Common Stock and Convertible Notes
In November 1997, the Company's Board of Directors approved the repur-
chase of up to 10,000,000 shares of the Company's Common Stock. During the
thirteen weeks ended August 1, 1998, the Company repurchased 400,000 shares
of its Common Stock at an aggregate cost of $1,981,000. Subsequent to the
close of the quarter, the Company repurchased an additional 1,495,000
shares at a total cost of $7,132,000.
During the thirteen weeks ended August 1, 1998, the Company
repurchased $3,000,000 aggregate principal amount of its 7.5% Convertible
Subordinated Notes due 2006 ("the Notes") at a total cost of $2,955,000.
Subsequent to the close of the quarter, the Company repurchased an addi-
tional $12,833,000 aggregate principal amount of the Notes at a total cost
of $12,351,000. The gains or losses on the repurchases of the Notes were
not material.
5. Restructuring Charge
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
during the thirteen weeks ended May 2, 1998. The Plan includes the down-
sizing of approximately 100 stores and the closing of approximately 65
under-performing stores. The Plan was approved in conjunction with the
decision to eliminate men's merchandise from the Company's stores.
The restructuring charge includes estimates of $10,000,000 for the
write-down of store fixtures and improvements, $11,400,000 for the early
termination and amendment of store leases, $8,300,000 for the cost of
renovating vacated store space, and $4,300,000 for other costs, including
severance benefits. The Company anticipates a workforce reduction of
approximately 650 store employees. During the twenty-six weeks ended
August 1, 1998, the Company closed 18 stores and reduced store employees by
180.
(8)
<PAGE> 11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
(In thousands except August 1, August 2, August 1, August 2,
per-share amounts) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net income (loss)
per share
Net income (loss)........... $ 9,328 $ 6,853 $(10,574) $ 4,511
Weighted average shares
outstanding.............. 100,390 105,805 100,498 105,715
-------- -------- -------- --------
Basic net income (loss)
per share................ $ .09 $ .06 $(.11) $ .04
======== ======== ======== ========
Net income (loss) per share,
assuming dilution
Decrease in interest expense
from assumed conversion
of 7.5% Convertible Sub-
ordinated Notes due 2006,
net of income taxes...... $ 1,682 $ 0 $ 0 $ 0
-------- -------- -------- --------
Adjusted net income (loss).. $ 11,010 $ 6,853 $(10,574) $ 4,511
-------- -------- -------- --------
Dilutive effect of assumed
exercise of stock options 1,089 1,529 0 1,540
Dilutive effect of assumed
conversion of notes...... 18,499 0 0 0
-------- -------- -------- --------
Weighted average shares and
share equivalents
outstanding.............. 119,978 107,334 100,498 107,255
-------- -------- -------- --------
Net income (loss) per share,
assuming dilution........ $ .09 $ .06 $ (.11) $ .04
======== ======== ======== ========
</TABLE>
The assumed conversion of the 7.5% Convertible Subordinated Notes due 2006
was excluded from net income (loss) per share assuming dilution for the
thirteen weeks ended August 2, 1997 and the twenty-six weeks ended August
1, 1998 and August 2, 1997 because the effect would be antidilutive.
(9)
<PAGE> 12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
is required to be adopted by the Company as of the end of the fiscal year
ending January 30, 1999. SFAS No. 131 requires disclosure of certain
information about operating segments, products and services, geographic
areas of operations, and major customers, and the factors used by
management to determine reportable segments. The adoption of SFAS No. 131
will not affect the Company's financial position or results of operations.
Management has not completed its determination of the effect that this
statement will have on the Company's financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is required to be
adopted by the Company as of the beginning of the fiscal year ending Febru-
ary 3, 2001. SFAS No. 133 requires the recognition of all derivative
instruments as either assets or liabilities in the statement of financial
position, and the measurement of those instruments at fair value. The
statement also specifies the conditions under which derivative instruments
qualify as hedging activities, and the accounting for changes in the fair
value of derivatives designated as hedges. The Company currently manages a
portion of its interest rate risk through the use of derivative instruments
that cap a portion of the Company's interest rate risk. Management has not
completed its determination of the effect that SFAS 133 will have on the
Company's financial statements or financial statement disclosures.
(10)
<PAGE> 13
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
Results of Operations contains certain forward-looking statements con-
cerning the Company's operations, performance and financial condition,
including, in particular, certain forward-looking statements regarding
sales performance, store openings and closings, capital requirements,
conversion of information systems to be Year 2000 compliant, 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 due to a number of
factors. Such factors may include, but are not limited to, (i) rapid
changes in or miscalculation of fashion trends, (ii) extreme or unseason-
able 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 transpor-
tation, (v) competitive pressures, (vi) disruptions to operations as a
result of Year 2000 compliance issues, and other risks and uncertainties
detailed in the Company's filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1998.
1998 STORE RESTRUCTURING AND ELIMINATION OF MEN'S MERCHANDISE FROM THE
COMPANY'S FASHION BUG STORES
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
during the quarter ended May 2, 1998 ("Fiscal 1999 First Quarter"). The
Plan includes the downsizing of approximately 100 stores and the closing of
approximately 65 under-performing stores during the fiscal year ending Jan-
uary 30, 1999 ("Fiscal 1999"). The Plan was approved in conjunction with
the decision to eliminate men's merchandise from the Company's stores. In
the fall of 1997, the Company eliminated men's merchandise from approxi-
mately 300 of its stores in order to refine its product assortments. As of
August 1, 1998 the Company has closed 18 stores, with the balance of the
store closings expected to be completed by the end of Fiscal 1999. The
Company anticipates completing approximately 50 of the planned store
downsizings by the end of Fiscal 1999, with the remaining downsizings to be
completed during the fiscal year ending January 29, 2000 ("Fiscal 2000").
The Company expects that the elimination of men's merchandise will
allow for further development of product categories that are more closely
related to its existing women's apparel businesses. The Company plans to
focus on the development and expansion of its junior apparel, junior acces-
(11)
<PAGE> 14
sories, and footwear categories. These businesses are expected to yield
improved sales and gross margin productivity as compared to the men's
merchandise. The Company expects to cease selling men's merchandise by the
Fall of 1998, at which time it will begin to reposition the merchandise as-
sortments in its stores.
Net sales of men's merchandise were approximately $48,000,000 in the
fiscal year ended January 31, 1998 ("Fiscal 1998") and are planned to be
approximately $15,000,000 in Fiscal 1999. Net sales of men's merchandise
for the second quarter ended August 1, 1998 ("Fiscal 1999 Second Quarter")
were $6,400,000, a 46% decrease from sales of $11,900,000 for the second
quarter ended August 2, 1997 ("Fiscal 1998 Second Quarter"). Net sales of
men's merchandise for the first half of Fiscal 1999 were $12,900,000, a 43%
decrease from sales of $22,600,000 for the first half of Fiscal 1998. The
decline in sales of men's merchandise had a negative impact of 2.3% during
the Fiscal 1999 Second Quarter and 2.1% during the first half of Fiscal
1999 on the overall increase in comparable store sales (sales generated by
stores in operation during the same weeks of each period). The Company ex-
pects that the elimination of men's merchandise will have a negative impact
of approximately 4% and 6% on overall comparable store sales for the third
and fourth quarters of Fiscal 1999, respectively.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
items appearing in the Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying,
and occupancy expenses..... 73.6 74.6 74.1 76.0
Selling, general, and
administrative expenses.... 21.7 22.0 23.1 23.0
Restructuring charge.......... -- -- 6.5 --
Interest expense.............. 1.0 1.0 1.0 1.0
Income tax provision (benefit) 1.8 1.2 (1.1) 0.4
Net income (loss)............. 3.3 2.6 (2.0) 1.0
</TABLE>
Thirteen Weeks Ended August 1, 1998 and August 2, 1997
Net sales for the Fiscal 1999 Second Quarter were $279,158,000, a 5.1%
increase from net sales of $265,696,000 for the Fiscal 1998 Second Quarter.
The Company experienced a 2.3% increase in comparable store sales in the
Fiscal 1999 Second Quarter as compared to the Fiscal 1998 Second Quarter.
In addition, sales from new stores (sales generated by stores in operation
during the Fiscal 1999 Second Quarter that were not in operation during the
corresponding weeks of the Fiscal 1998 Second Quarter) in the Fiscal 1999
Second Quarter equaled 4.3% of Fiscal 1998 Second Quarter sales. Sales for
the Fiscal 1998 Second Quarter which were not comparable with sales for the
(12)
<PAGE> 15
Fiscal 1999 Second Quarter as a result of the closing of stores in Fiscal
1998 and Fiscal 1999 equaled 1.6% of Fiscal 1998 Second Quarter sales. The
number of retail stores increased from 1,131 at August 2, 1997 to 1,158 at
August 1, 1998.
The increase in comparable store sales was achieved in the Company's
core merchandising departments, including sportswear, dresses, footwear,
intimate apparel, and girl's. Comparable store sales decreased in the
men's department (see "1998 STORE RESTRUCTURING AND ELIMINATION OF MEN'S
MERCHANDISE FROM THE COMPANY'S FASHION BUG STORES" above).
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.0% in the Fiscal 1999 Second Quarter as
compared to the Fiscal 1998 Second Quarter. Cost of goods sold as a per-
centage of sales decreased 0.3% in the Fiscal 1999 Second Quarter as
compared to the Fiscal 1998 Second Quarter. The decrease in cost of goods
sold as a percentage of sales was primarily due to a stronger customer
response to the Summer merchandise offering, which resulted in lower mer-
chandise markdowns as compared to the prior year. Buying and occupancy
expenses expressed as a percentage of sales decreased 0.7% in the Fiscal
1999 Second Quarter as compared to the Fiscal 1998 Second Quarter. The
decrease in buying and occupancy expenses was due to a reduction in store
occupancy expenses, primarily depreciation and utility costs.
Selling, general and administrative expenses expressed as a percentage
of sales decreased 0.3% in the Fiscal 1999 Second Quarter as compared to
the Fiscal 1998 Second Quarter. This was primarily attributable to a de-
crease in advertising expenditures and corporate administrative expenses.
Interest expense expressed as a percentage of sales was unchanged in
the Fiscal 1999 Second Quarter as compared to the Fiscal 1998 Second Quar-
ter. Interest expense is primarily attributable to the Company's 7.5%
Convertible Subordinated Notes due 2006.
The income tax provision for the Fiscal 1999 Second Quarter was 35% of
the Company's pre-tax income, as compared to a provision of 32% of the pre-
tax income for the Fiscal 1998 Second Quarter. The increase in the effec-
tive tax rate is primarily attributable to an increase in the benefit
attributable to permanent differences as a percentage of the loss before
income taxes.
Twenty-six Weeks Ended August 1, 1998 and August 2, 1997
Net sales for the first half of Fiscal 1999 were $523,189,000, a 4.3%
increase from net sales of $501,384,000 for the first half of Fiscal 1998.
The Company experienced a 2.0% increase in comparable store sales in the
first half of Fiscal 1999 as compared to the first half of Fiscal 1998.
Increased sales of sportswear, dresses, footwear, intimate apparel, and
girl's clothing were partially offset by decreases in men's clothing and
outerwear (see "1998 STORE RESTRUCTURING AND ELIMINATION OF MEN'S MER-
CHANDISE FROM THE COMPANY'S FASHION BUG STORES" above). In addition, sales
from new stores for the first half of Fiscal 1999 equaled 3.7% of sales for
(13)
<PAGE> 16
the first half of Fiscal 1998. Sales for the first half of Fiscal 1998
which were not comparable with sales for the first half of Fiscal 1999 as a
result of the closing of stores in Fiscal 1998 and Fiscal 1999 equaled 1.4%
of sales for the first half of fiscal 1998.
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.9% in the first half of Fiscal 1999 as
compared to the first half of Fiscal 1998. Cost of goods sold as a per-
centage of sales decreased 1.2% in the first half of Fiscal 1999 as
compared to the first half of Fiscal 1998. The decrease in cost of goods
sold as a percentage of sales was primarily due to a stronger customer
response to the Spring and Summer merchandise offerings, which resulted in
lower merchandise markdowns as compared to the prior year. Buying and
occupancy expenses expressed as a percentage of sales decreased 0.7% in the
first half of Fiscal 1999 as compared to the first half of Fiscal 1998.
The decrease in buying and occupancy expenses was due a reduction in store
occupancy expenses, primarily depreciation and utility costs.
Selling, general and administrative expenses expressed as a percentage
of sales increased 0.1% in the first half of Fiscal 1999 as compared to the
first half of Fiscal 1998. This was primarily attributable to the effect
of Federal minimum wage legislation and increased advertising expenditures
on selling expenses for the Fiscal 1999 First Quarter.
On March 5, 1998, the Company's Board of Directors approved the
Restructuring Plan that resulted in a pre-tax charge of $34,000,000 during
the Fiscal 1999 First Quarter. The Plan includes the downsizing of approx-
imately 100 stores and the closing of approximately 65 under-performing
stores. The Plan was approved in conjunction with the decision to elimi-
nate men's merchandise from the Company's stores. The restructuring charge
includes estimates of $10,000,000 for the write-down of store fixtures and
improvements, $11,400,000 for the early termination and amendment of store
leases, $8,300,000 for the cost of renovating vacated store space, and
$4,300,000 for other costs, including severance benefits. The Company
anticipates a workforce reduction of approximately 650 store employees.
During the first half of Fiscal 1999, the Company closed 18 stores and re-
duced store employees by 180.
Interest expense expressed as a percentage of sales was unchanged in
the first half of Fiscal 1999 as compared to the first half of Fiscal 1998.
Interest expense is primarily attributable to the Company's $138 million
aggregate principal amount of 7.5% Convertible Subordinated Notes due 2006,
which were issued in July 1996.
The income tax benefit for the first half of Fiscal 1999 was 35% of
the Company's pre-tax loss, as compared to a provision of 33% of the pre-
tax income for the first half of Fiscal 1998. The increase in the effec-
tive tax rate is primarily attributable to an increase in the benefit
attributable to permanent differences as a percentage of the loss before
income taxes.
(14)
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are (i) cash flow
from operations, (ii) proprietary credit card receivables securitization
agreements, (iii) its long-term investment portfolio and (iv) its $150 mil-
lion revolving credit facility. As of August 1, 1998, the Company had
working capital of $146,184,000 as compared to $163,208,000 at January 31,
1998. Working capital at August 1, 1998 included $47,174,000 of cash and
cash equivalents, compared to cash and cash equivalents of $12,349,000 at
January 31, 1998. The ratio of current assets to current liabilities was
1.8 to 1 at August 1, 1998 and 2.1 to 1 at January 31, 1998.
Net cash provided by operating activities was $35,176,000 for the
first half of Fiscal 1999 as compared to net cash provided by operating
activities of $28,071,000 for the first half of Fiscal 1998. The reasons
for the $7,105,000 change in cash provided by operations were (i) a
decrease in the Company's net income of $15,085,000, which includes the
negative non-cash impact of a $10,000,000 write-down of capital assets due
to restructuring and a $22,839,000 accrual for restructuring expenses, and
the positive non-cash impact of a $5,381,000 increase in current deferred
income taxes and a $3,033,000 decrease in depreciation and amortization;
(ii) a decrease of $6,131,000 in the Company's investment in merchandise
inventories, net of accounts payable; (iii) a decrease of $8,426,000 in in-
come taxes receivable/payable; and (iv) other net increases of $60,000.
The Company has an agreement with a commercial finance company to
provide a revolving credit facility with a maximum availability of
$150,000,000, subject to limitations based upon eligible inventory. The
primary purpose of this facility is to enable the Company to issue letters
of credit for overseas purchases of merchandise as well as to provide for
seasonal cash borrowings. During the first half of Fiscal 1999, the expir-
ation date of this facility was extended from June 1, 1998 to June 1, 1999.
This facility is secured by merchandise inventory, furniture and fixtures
at the retail stores, and certain other Company assets. As of August 1,
1998 the availability under this facility was approximately $115,849,000,
against which the Company had outstanding letters of credit of $38,096,000.
There were no cash borrowings outstanding under this agreement as of August
1, 1998. This agreement requires that, among other things, the Company
maintain a minimum net worth of $350,000,000 and not pay dividends on its
Common Stock.
Capital expenditures of $14,185,000 during the first half of Fiscal
1999 were primarily for the construction and fixturing of new and existing
retail stores. During Fiscal 1999, the Company anticipates incurring capi-
tal expenditures of approximately $25 million, which are intended primarily
for (i) remodeling and fixturing of existing retail stores; (ii) construc-
tion and fixturing of new stores; and (iii) investment in management
information systems technology. The Company anticipates that capital ex-
penditures will be financed principally through internally-generated funds.
The Company plans to open approximately 65 new stores during Fiscal 1999,
including 28 which were acquired during January 1998 from a competitor
which had closed such locations. During the first half of Fiscal 1999, the
Company opened 41 new stores and closed 18 stores.
(15)
<PAGE> 18
In connection with the Restructuring Plan (see "1998 STORE RESTRUC-
TURING AND ELIMINATION OF MEN'S MERCHANDISE FROM THE COMPANY'S FASHION BUG
STORES" above), as of August 1, 1998, the Company had approximately
$22,839,000 of accrued, unpaid restructuring costs. These costs, the
majority of which are expected to be paid by the end of Fiscal 1999, are
included in current liabilities.
In November 1997, the Company's Board of Directors approved the repur-
chase of up to 10,000,000 shares of the Company's Common Stock. During the
thirteen weeks ended August 1, 1998, the Company repurchased 400,000 shares
of its Common Stock at an aggregate cost of $1,981,000. Subsequent to the
close of the quarter, the Company repurchased an additional 1,495,000
shares at a total cost of $7,132,000.
During the thirteen weeks ended August 1, 1998, the Company re-
purchased $3,000,000 aggregate principal amount of its 7.5% Convertible
Subordinated Notes due 2006 ("the Notes") at a total cost of $2,955,000.
Subsequent to the close of the quarter, the Company repurchased an addi-
tional $12,833,000 aggregate principal amount of the Notes at a total cost
of $12,351,000. The gains or losses on the repurchases of the Notes were
not material. The repurchases of the Notes will result in a reduction of
$962,000 in annual interest expense.
On October 2, 1995 the Company's Board of Directors announced an in-
definite suspension of dividends on the Company's Common Stock. In
addition, the Company's revolving credit facility requires the Company to
refrain from paying dividends on its Common Stock during the term of such
agreement.
IMPACT OF YEAR 2000
Many existing computer programs use only two digits to identify the
year and the date field. These programs were designed and developed with-
out considering the impact of the upcoming change in the century. If not
corrected ("Year 2000 Compliant" or "Year 2000 Compliance"), many computer
applications could fail or create erroneous results by or at the year 2000.
In 1997, the Company began the process of identifying information systems
and other systems which were not Year 2000 Compliant and developing
comprehensive plans to modify or replace such systems to make them
compliant. The Company's management has established an executive-level
committee which is responsible for monitoring the Company's progress
towards Year 2000 Compliance. It is anticipated that this program will be
completed during the fiscal year ending January 29, 2000 ("Fiscal 2000").
The Company is utilizing external resources to assist it in becoming Year
2000 Compliant. It therefore expects to be able to continue with normal
operations and strategic projects without any material adverse effect as a
result of the implementation of its Year 2000 Compliance program. However,
should the Company experience future, currently unforeseen difficulties in
achieving Year 2000 Compliance, such strategic projects could be deferred
or otherwise materially impacted.
(16)
<PAGE> 19
The Company currently plans to have all of its key internal systems
modified or replaced and ready for testing by January, 1999. During 1999,
the Company expects to do full-scale testing and further remediation as
necessary to achieve Year 2000 Compliance. The Company has also identified
its key vendors and will work closely with them to assess their readiness
and mitigate the risk to the Company if they are not Year 2000 Compliant.
These vendors primarily support the Company's payroll, credit, warehouse,
and merchandising operations. The Company has contacted these key vendors
to assess their readiness and plans to conduct on-site audits of these
vendors' Year 2000 plans and their progress towards Year 2000 Compliance.
The Company is also developing contingency plans to minimize the
impact of unforeseen delays or problems in achieving timely Year 2000
Compliance. The Company has also contracted for off-site disaster recovery
services in the event of public utility failures. In addition, the Company
is developing contingency plans for product distribution in the event that
it encounters Year 2000 Compliance problems with its warehouse management
systems. The Company is subject to the risk of other vendors not being
Year 2000 Compliant and is continuing to develop contingency plans to
minimize the potential adverse impact of these risks.
The Company currently estimates that the total cost of achieving Year
2000 Compliance will be between $1,500,000 and $2,500,000 over the period
from fiscal 1997 through Fiscal 2000. Should the Company experience unan-
ticipated problems or delays in achieving Year 2000 Compliance, the total
cost of compliance could exceed these current estimates. The Company has
incurred approximately $700,000 of costs related to Year 2000 Compliance
through August 1, 1998. The Company anticipates that Year 2000 Compliance
expenditures will be financed primarily through internally-generated funds
and will not impact the Company's other operating or investment plans.
No assurance can be given that potential problems associated with the
achievement of Year 2000 Compliance, both from the perspective of the
Company's own systems and its key vendors, will not have a material adverse
effect on the Company's operations, financial position, results of
operations, or cash flows.
(17)
<PAGE> 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on July 15,
1998.
(b) Not applicable.
(c) Joseph L. Castle, II and Laura A. Liswood were nominated for election,
in the Company's Proxy Statement, to serve three-year terms as Class B
Directors. At the Annual Meeting it was announced that Ms. Liswood would
not be standing for re-election as a Director, as she had accepted a new
position with significant additional responsibilities. The new position
would not permit Ms. Liswood the time needed to function effectively as a
member of the Company's Board of Directors. Ms. Liswood's nomination was
withdrawn from the election. With respect to the election of Joseph L.
Castle, II, 100,770,961 votes were cast in favor and 351,292 votes were
withheld. The total number of shares represented at the Annual Meeting
were 101,122,253.
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 by footnote, Exhibits that were
previously filed are incorporated by reference. For Exhibits incorporated
by reference, the location of the Exhibit in the previous filing is indi-
cated 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-K of the Registrant for the fiscal year ended January 29, 1994.
(Exhibit 3.2)
10.1 Amendment of Second Amended and Restated Loan and Security Agreement,
dated February 28, 1997 among Charming Shoppes, Inc., certain subsid-
iaries of the Company which are parties thereto, Borrower's Agent and
Congress Financial Corporation, dated as of May 1, 1998, incorporated
by reference to Form 10-Q for the quarter ended May 2, 1998. (Exhibit
10.1)
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
August 1, 1998.
(18)
<PAGE> 21
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.
<TABLE>
<S> <C>
CHARMING SHOPPES, INC.
-------------------------------------
(Registrant)
Date: September 11, 1998 DORRIT J. BERN
------------------ -------------------------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: September 11, 1998 ERIC M. SPECTER
------------------ -------------------------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
</TABLE>
(19)
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