UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
(Amendment No. 1)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE |
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For the quarterly period ended November 29, 2008 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE |
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For the transition period from to .
Commission File Number 001-31390
CHRISTOPHER & BANKS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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06 - 1195422 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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2400 Xenium Lane North, Plymouth, Minnesota |
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55441 |
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(Address of principal executive offices) |
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(Zip Code) |
(763) 551-5000
(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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
As of January 2, 2009 35,498,980 shares of the registrant’s common stock were outstanding.
CHRISTOPHER & BANKS CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
QUARTERLY PERIOD ENDED NOVEMBER 29, 2008
EXPLANATORY NOTE
The purpose of this Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”) to the Quarterly Report on Form 10-Q for the quarter ended November 29, 2008 (the “Original Form 10-Q”) of Christopher & Banks Corporation (the “Company”) is to restate the Company’s condensed consolidated financial statements as of November 29, 2008, and for the three-month and nine-month periods then ended included in the Original Form 10-Q, as filed with the Securities and Exchange Commission (the “SEC”) on January 8, 2009 (the “Original Filing Date”). On February 25, 2009, the Company’s management and Audit Committee of the Board of Directors determined that the financial statements as of November 29, 2008, and for the three-month and nine-month periods then ended, required restatement to correct an error in the provision for income taxes related to the results of operations from continuing and discontinued operations. The restatement results in an increase of approximately $5.3 million in the Company’s net income for the three-month and nine-month periods ended November 29, 2008.
As a result of the error in the provision for income taxes, income from continuing operations was understated by approximately $7.0 million, the loss from discontinued operations, net of tax, was understated by approximately $1.7 million and net income was understated by approximately $5.3 million for the three-month period ended November 29, 2008. In addition, the loss from discontinued operations was overstated by approximately $5.3 million and net income was understated by approximately $5.3 million for the nine-month period ended November 29, 2008. There was no impact on net cash provided by operating activities, the net decrease in cash and cash equivalents for the nine months ended November 29, 2008 or the balance of cash and cash equivalents as of November 29, 2008.
Please see Note 1 to the condensed consolidated financial statements for further information relating to the restatement.
For the convenience of the reader, the Form 10-Q/A sets forth the original Form 10-Q in its entirety, as amended hereby. However, this Form 10-Q/A only amends and restates Items 1, 2 and 4 of Part I of the Original Form 10-Q, in each case, solely as a result of, and to reflect, the restatement, and no other information in the Original Form 10-Q is amended hereby. Except for the restatement, the foregoing items have not been updated to reflect other events occurring after the Original Filing Date or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Form 10-Q has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Interim Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley act of 2002. The certifications of the Company’s Chief Executive Officer and Interim Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
2
CHRISTOPHER & BANKS CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
3
PART I — FINANCIAL INFORMATION
FINANCIAL STATEMENTS
CHRISTOPHER & BANKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
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November 29, |
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March 1, |
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December 1, |
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2008 |
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2008 |
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2007 |
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(Restated) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
74,086,872 |
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$ |
78,492,297 |
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$ |
46,701,459 |
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Short-term investments |
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— |
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— |
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48,300,000 |
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Accounts receivable |
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6,742,115 |
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5,222,976 |
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6,811,678 |
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Merchandise inventories |
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53,151,343 |
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43,840,338 |
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46,943,191 |
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Prepaid expenses |
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11,242,887 |
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11,597,280 |
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11,497,446 |
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Other current assets |
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16,469,492 |
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9,482,393 |
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4,582,421 |
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Total current assets |
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161,692,709 |
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148,635,284 |
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164,836,195 |
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Property, equipment and improvements, net |
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129,067,110 |
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133,598,580 |
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136,373,593 |
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Long-term investments |
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15,875,812 |
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23,350,000 |
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— |
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Goodwill |
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— |
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— |
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3,587,052 |
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Other assets |
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8,794,687 |
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6,207,858 |
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4,337,972 |
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Total assets |
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$ |
315,430,318 |
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$ |
311,791,722 |
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$ |
309,134,812 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
14,793,920 |
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$ |
15,380,692 |
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$ |
8,483,503 |
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Accrued salaries, wages and related expenses |
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8,087,824 |
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9,246,050 |
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9,529,895 |
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Other accrued liabilities |
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22,288,773 |
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28,040,623 |
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20,902,975 |
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Total current liabilities |
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45,170,517 |
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52,667,365 |
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38,916,373 |
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Non-current liabilities: |
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Deferred lease incentives |
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24,822,736 |
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24,854,278 |
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22,336,658 |
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Deferred rent obligations |
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10,037,563 |
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11,720,689 |
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11,673,329 |
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Other |
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4,219,500 |
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3,722,195 |
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3,362,258 |
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Total non-current liabilities |
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39,079,799 |
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40,297,162 |
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37,372,245 |
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Commitments |
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— |
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— |
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— |
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Stockholders’ equity: |
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Preferred stock — $0.01 par value, 1,000,000 shares authorized, none outstanding |
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— |
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— |
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— |
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Common stock — $0.01 par value, 74,000,000 shares authorized, 45,302,778, 45,050,290 and 45,052,590 shares issued and 35,498,980, 35,259,572 and 35,574,772 shares outstanding at November 29, 2008, March 1, 2008 and December 1, 2007, respectively |
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453,028 |
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450,503 |
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450,526 |
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Additional paid-in capital |
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111,930,607 |
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110,359,847 |
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109,766,765 |
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Retained earnings |
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231,655,326 |
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221,928,654 |
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232,341,185 |
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Common stock held in treasury, 9,803,798, 9,790,718 and 9,477,818 shares at cost at November 29, 2008, March 1, 2008 and December 1, 2007, respectively |
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(112,858,959 |
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(112,711,809 |
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(109,712,282 |
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Accumulated other comprehensive income (loss) |
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— |
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(1,200,000 |
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— |
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Total stockholders’ equity |
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231,180,002 |
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218,827,195 |
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232,846,194 |
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Total liabilities and stockholders’ equity |
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$ |
315,430,318 |
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$ |
311,791,722 |
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$ |
309,134,812 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
CHRISTOPHER & BANKS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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Three Months Ended |
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November 29, |
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December 1, |
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2008 |
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2007 |
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(Restated) |
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Net sales |
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$ |
143,003,908 |
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$ |
155,242,697 |
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Costs and expenses: |
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Merchandise, buying and occupancy |
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91,914,238 |
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90,522,545 |
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Selling, general and administrative |
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45,204,023 |
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42,933,371 |
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Depreciation and amortization |
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6,548,133 |
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5,430,983 |
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Total costs and expenses |
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143,666,394 |
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138,886,899 |
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Operating income (loss) |
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(662,486 |
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16,355,798 |
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Interest income |
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619,178 |
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1,163,225 |
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Income (loss) from continuing operations before income taxes |
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(43,308 |
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17,519,023 |
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Income tax provision (benefit) |
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(7,079,967 |
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6,447,001 |
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Income from continuing operations |
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7,036,659 |
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11,072,022 |
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Loss from discontinued operations, net of income tax |
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(3,077,044 |
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(833,852 |
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Net income |
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$ |
3,959,615 |
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$ |
10,238,170 |
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Basic earnings (loss) per share: |
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Continuing operations |
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$ |
0.20 |
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$ |
0.31 |
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Discontinued operations |
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(0.09 |
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(0.02 |
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Earnings per basic share |
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$ |
0.11 |
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$ |
0.29 |
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Basic shares outstanding |
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35,099,129 |
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35,447,855 |
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Diluted earnings (loss) per share: |
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Continuing operations |
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$ |
0.20 |
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$ |
0.31 |
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Discontinued operations |
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(0.09 |
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(0.02 |
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Earnings per diluted share |
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$ |
0.11 |
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$ |
0.29 |
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Diluted shares outstanding |
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35,115,745 |
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35,528,352 |
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Dividends per share |
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$ |
0.06 |
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$ |
0.06 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
CHRISTOPHER & BANKS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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Nine Months Ended |
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November 29, |
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December 1, |
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2008 |
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2007 |
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(Restated) |
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Net sales |
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$ |
426,850,378 |
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$ |
438,623,317 |
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Costs and expenses: |
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Merchandise, buying and occupancy |
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257,361,338 |
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262,171,413 |
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Selling, general and administrative |
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129,010,326 |
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120,214,677 |
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Depreciation and amortization |
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19,653,754 |
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15,702,721 |
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Total costs and expenses |
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406,025,418 |
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398,088,811 |
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Operating income |
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20,824,960 |
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40,534,506 |
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Interest income |
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2,031,770 |
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3,382,476 |
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Income from continuing operations before income taxes |
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22,856,730 |
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43,916,982 |
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Income tax provision |
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2,034,248 |
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16,161,450 |
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Income from continuing operations |
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20,822,482 |
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27,755,532 |
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Loss from discontinued operations, net of income tax |
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(4,754,570 |
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(2,452,735 |
) |
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Net income |
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$ |
16,067,912 |
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$ |
25,302,797 |
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Basic earnings (loss) per share: |
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Continuing operations |
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$ |
0.59 |
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$ |
0.78 |
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Discontinued operations |
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(0.14 |
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(0.07 |
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Earnings per basic share |
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$ |
0.46 |
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$ |
0.71 |
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Basic shares outstanding |
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35,091,041 |
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35,835,063 |
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Diluted earnings (loss) per share: |
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Continuing operations |
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$ |
0.59 |
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$ |
0.77 |
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Discontinued operations |
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(0.14 |
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(0.07 |
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Earnings per diluted share |
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$ |
0.46 |
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$ |
0.70 |
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Diluted shares outstanding |
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35,093,991 |
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35,925,734 |
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Dividends per share |
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$ |
0.18 |
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$ |
0.18 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
CHRISTOPHER & BANKS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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Nine Months Ended |
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November 29, |
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December 1, |
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2008 |
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2007 |
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(Restated) |
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Cash flows from operating activities: |
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Net income |
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$ |
16,067,912 |
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$ |
25,302,797 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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19,754,489 |
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17,391,107 |
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Impairment of store assets |
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1,220,550 |
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— |
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Deferred income taxes |
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253,923 |
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(5,585,486 |
) |
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Excess income tax benefit on exercise of stock options |
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— |
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(14,738 |
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Stock-based compensation expense |
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1,577,843 |
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1,788,292 |
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Loss on disposal of furniture, fixtures and equipment |
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553,289 |
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221,928 |
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Changes in operating assets and liabilities: |
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Increase in accounts receivable |
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(1,519,139 |
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(2,330,054 |
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(Increase) decrease in merchandise inventories |
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(9,311,005 |
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5,411,753 |
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Decrease (increase) in prepaid expenses |
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354,393 |
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(831,025 |
) |
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(Increase) decrease in prepaid income taxes and income taxes payable |
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(6,236,793 |
) |
2,091,455 |
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Decrease (increase) in other assets |
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8,993 |
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(64,541 |
) |
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Decrease in accounts payable |
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(586,772 |
) |
(7,876,176 |
) |
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(Decrease) increase in accrued liabilities |
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(7,057,224 |
) |
470,658 |
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Decrease in deferred lease incentives |
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(31,542 |
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(500,116 |
) |
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(Decrease) increase in deferred rent obligations |
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(1,683,126 |
) |
994,988 |
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Increase in other liabilities |
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497,305 |
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3,362,258 |
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Net cash provided by operating activities |
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13,863,096 |
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39,833,100 |
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Cash flows from investing activities: |
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Purchases of property, equipment and improvements |
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(16,922,724 |
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(26,868,274 |
) |
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Purchases of investments |
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— |
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(96,850,000 |
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Sales of investments |
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5,000,000 |
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96,825,000 |
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Net cash used in investing activities |
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(11,922,724 |
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(26,893,274 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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— |
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1,156,993 |
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Dividends paid |
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(6,345,797 |
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(6,445,651 |
) |
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Excess income tax benefit on exercise of stock options |
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— |
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14,738 |
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Acquisition of common stock held in treasury |
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— |
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(14,955,845 |
) |
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Net cash used in financing activities |
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(6,345,797 |
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(20,229,765 |
) |
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Net decrease in cash and cash equivalents |
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(4,405,425 |
) |
(7,289,939 |
) |
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Cash and cash equivalents at beginning of period |
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78,492,297 |
|
53,991,398 |
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Cash and cash equivalents at end of period |
|
$ |
74,086,872 |
|
$ |
46,701,459 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
CHRISTOPHER & BANKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008.
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting of only normal adjustments except as otherwise stated in these notes, necessary to present fairly the Company’s financial position as of November 29, 2008 and December 1, 2007, and its results of operations and cash flows for the three and nine month periods ended November 29, 2008 and December 1, 2007.
Restatement:
The Company has determined that the financial statements as of November 29, 2008, and for the three-month and nine-month periods then ended, require restatement to correct an error in the provision for income taxes related to the results of operations from continuing and discontinued operations.
As a result of the error in the provision for income taxes, income from continuing operations was understated by approximately $7.0 million, the loss from discontinued operations, net of tax, was understated by approximately $1.7 million and net income was understated by approximately $5.3 million for the three-month period ended November 29, 2008. In addition, the loss from discontinued operations was overstated by approximately $5.3 million and net income was understated by approximately $5.3 million for the nine-month period ended November 29, 2008. There was no impact on net cash provided by operating activities or the net decrease in cash and cash equivalents for the nine months ended November 29, 2008.
A summary of the effects of the restatement on the Company’s consolidated financial statements as of November 29, 2008, and for the three-month and nine-month periods ended November 29, 2008, is as follows:
8
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
November 29, 2008 |
|
November 29, 2008 |
|
||||||||
|
|
|
As Reported |
|
As Restated |
|
As Reported |
|
As Restated |
|
||||
|
Income (loss) from continuing operations before income taxes |
|
$ |
(43,308 |
) |
$ |
(43,308 |
) |
$ |
22,856,730 |
|
$ |
22,856,730 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income tax provision (benefit) |
|
(3,855 |
) |
(7,079,967 |
) |
2,034,248 |
|
2,034,248 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) from continuing operations |
|
(39,453 |
) |
7,036,659 |
|
20,822,482 |
|
20,822,482 |
|
||||
|
Loss from discontinued operations, net of income tax |
|
(1,334,013 |
) |
(3,077,044 |
) |
(10,087,651 |
) |
(4,754,570 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
(1,373,466 |
) |
$ |
3,959,615 |
|
$ |
10,734,831 |
|
$ |
16,067,912 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Continuing operations |
|
$ |
— |
|
$ |
0.20 |
|
$ |
0.59 |
|
$ |
0.59 |
|
|
Discontinued operations |
|
(0.04 |
) |
(0.09 |
) |
(0.28 |
) |
(0.14 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) per basic share |
|
$ |
(0.04 |
) |
$ |
0.11 |
|
$ |
0.31 |
|
$ |
0.46 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic shares outstanding |
|
35,099,129 |
|
35,099,129 |
|
35,091,041 |
|
35,091,041 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Continuing operations |
|
$ |
— |
|
$ |
0.20 |
|
$ |
0.59 |
|
$ |
0.59 |
|
|
Discontinued operations |
|
(0.04 |
) |
(0.09 |
) |
(0.28 |
) |
(0.14 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) per diluted share |
|
$ |
(0.04 |
) |
0.11 |
|
$ |
0.31 |
|
$ |
0.46 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted shares outstanding |
|
35,099,129 |
|
35,115,745 |
|
35,093,991 |
|
35,093,991 |
|
||||
(1) Amounts do not add due to rounding.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
|
|
|
November 29, 2008 |
|
||||
|
|
|
As Reported |
|
As Restated |
|
||
|
|
|
|
|
|
|
||
|
Other current assets |
|
$ |
11,136,411 |
|
$ |
16,469,492 |
|
|
Total current assets |
|
156,359,628 |
|
161,692,709 |
|
||
|
Total assets |
|
310,097,237 |
|
315,430,318 |
|
||
|
Retained earnings |
|
226,322,245 |
|
231,655,326 |
|
||
|
Total stockholders’ equity |
|
225,846,921 |
|
231,180,002 |
|
||
|
Total liabilities and stockholders’ equity |
|
310,097,237 |
|
315,430,318 |
|
||
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
|
November 29, 2008 |
|
||||
|
|
|
As Reported |
|
As Restated |
|
||
|
|
|
|
|
|
|
||
|
Net income |
|
$ |
10,734,831 |
|
$ |
16,067,912 |
|
|
(Increase) decrease in prepaid income taxes and income taxes payable |
|
(903,712 |
) |
(6,236,793 |
) |
||
9
On July 31, 2008, the Company announced its decision to exit its Acorn business when management concluded, after a comprehensive review and evaluation, that the concept had not demonstrated the potential to deliver an acceptable long-term return on the Company’s investment. On July 30, 2008, the Company’s Board of Directors authorized a plan to close all of the Company’s 36 Acorn stores by December 31, 2008, allowing the Company to focus its resources on its two core brands, Christopher & Banks and C.J. Banks.
The Company closed 29 of its 36 Acorn stores during its third fiscal quarter ended November 29, 2008 and closed its seven remaining Acorn stores on December 24, 2008. The operating results of all Acorn stores have been presented as discontinued operations, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), in the Condensed Consolidated Statement of Operations for the three and nine month periods ended November 29, 2008 as the impact of the remaining stores open as of November 29, 2008 were not material to the results of operations for these periods and because, upon closure of the remaining stores, the results of operations for all periods would be retroactively included in discontinued operations.
In addition to store-level operating losses, the loss from discontinued operations for the nine months ended November 29, 2008 includes approximately $3.9 million of lease termination costs, $1.2 million of long-lived asset impairment charges and $0.3 million of severance costs incurred in connection with exiting the Acorn division business. The Company expects to incur approximately $0.7 million of additional charges related to closing the seven remaining Acorn stores during the fourth quarter of fiscal 2009.
The operating results of the discontinued operations are summarized below.
|
|
|
Three Months Ended |
|
||||
|
|
|
November 29, |
|
December 1, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Net sales |
|
$ |
3,015,273 |
|
$ |
4,733,459 |
|
|
Loss before income tax benefit |
|
(4,712,733 |
) |
(1,404,169 |
) |
||
|
|
|
Nine Months Ended |
|
||||
|
|
|
November 29, |
|
December 1, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Net sales |
|
$ |
10,448,260 |
|
$ |
11,851,788 |
|
|
Loss before income tax benefit |
|
(7,499,321 |
) |
(3,106,018 |
) |
||
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN No. 18”). The income tax benefit attributable to continuing operations for the three-month period ended November 29, 2008 results from a reduction of the estimated annual effective tax rate on continuing operations from 39.8%, at the end of the second quarter of fiscal 2009, to an estimated annual effective rate of 8.9%. The reduction in the estimated annual effective tax rate resulted from the reduced forecasted amount for operating results from continuing operations for the full year and the resulting impact of permanent differences on the estimated annual effective tax rate. Pursuant to the requirements of FIN No.18, the impact of the change in the estimated annual effective tax rate is reflected in the period in which the change arises.
Income taxes allocated to the loss from discontinued operations for the three-month and nine-month periods ended November 29, 2008, are determined on the basis of a with/without computation using the estimated effective annual tax rate for income from continuing operations and actual income and income taxes from discontinued operations.
The balance sheet impact of the discontinued operations included current assets and current liabilities of approximately $600,000 each as of November 29, 2008.
10
For comparison purposes, the Company’s results from continuing and discontinued operations for the quarters ended March 1, 2008, May 31, 2008 and August 30, 2008 have been provided below.
|
|
|
Three Months Ended |
|
|||||||
|
|
|
March 1, |
|
May 31, |
|
August 30, |
|
|||
|
(in thousands) |
|
2008 |
|
2008 |
|
2008 |
|
|||
|
|
|
|
|
(Restated) |
|
(Restated) |
|
|||
|
Net sales |
|
$ |
122,289 |
|
$ |
155,395 |
|
$ |
128,451 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|||
|
Merchandise, buying and occupancy |
|
79,756 |
|
86,734 |
|
78,715 |
|
|||
|
Selling, general and administrative |
|
40,965 |
|
43,565 |
|
40,241 |
|
|||
|
Depreciation and amortization |
|
6,472 |
|
6,408 |
|
6,696 |
|
|||
|
Total costs and expenses |
|
127,193 |
|
136,707 |
|
125,652 |
|
|||
|
Operating income (loss) |
|
(4,904 |
) |
18,688 |
|
2,799 |
|
|||
|
Interest income |
|
1,279 |
|
827 |
|
586 |
|
|||
|
Income (loss) from continuing operations before income taxes |
|
(3,625 |
) |
19,515 |
|
3,385 |
|
|||
|
Income tax provision (benefit) |
|
(1,334 |
) |
7,767 |
|
1,347 |
|
|||
|
Income (loss) from continuing operations |
|
(2,291 |
) |
11,748 |
|
2,038 |
|
|||
|
Loss from discontinued operations, net of income tax |
|
(5,993 |
) |
(475 |
) |
(1,202 |
) |
|||
|
Net income (loss) |
|
$ |
(8,284 |
) |
$ |
11,273 |
|
$ |
836 |
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|||
|
Continuing operations |
|
$ |
(0.06 |
) |
$ |
0.33 |
|
$ |
0.06 |
|
|
Discontinued operations |
|
(0.17 |
) |
(0.01 |
) |
(0.03 |
) |
|||
|
Earnings (loss) per basic share |
|
$ |
(0.23 |
) |
$ |
0.32 |
|
$ |
0.02 |
(1) |
|
Basic shares outstanding |
|
35,287 |
|
35,071 |
|
35,099 |
|
|||
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|||
|
Continuing operations |
|
$ |
(0.06 |
) |
$ |
0.33 |
|
$ |
0.06 |
|
|
Discontinued operations |
|
(0.17 |
) |
(0.01 |
) |
(0.03 |
) |
|||
|
Earnings (loss) per diluted share |
|
$ |
(0.23 |
) |
$ |
0.32 |
|
$ |
0.02 |
(1) |
|
Diluted shares outstanding |
|
35,287 |
|
35,138 |
|
35,122 |
|
|||
(1) Amounts do not add due to rounding.
The Company’s investments consist of the following:
|
|
|
November 29, |
|
March 1, |
|
December 1, |
|
|||
|
Description |
|
2008 |
|
2008 |
|
2007 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Tax-advantaged, auction rate, trading securities: |
|
|
|
|
|
|
|
|||
|
Short-term |
|
$ |
— |
|
$ |
— |
|
$ |
48,300,000 |
|
|
Long-term |
|
15,875,812 |
|
23,350,000 |
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
$ |
15,875,812 |
|
$ |
23,350,000 |
|
$ |
48,300,000 |
|
As of November 29, 2008, the Company had approximately $15.9 million of long-term investments, which consisted solely of $19.6 million of auction rate securities (“ARS”) at cost, less a fair value adjustment of $3.7 million. Fair value was based on management’s analysis of impairment factors taking into account the credit quality of the underlying securities and reflects the lack of liquidity of the Company’s investments. All of the Company’s ARS are collateralized by student loans and currently have AAA (S&P) or Aaa (Moody’s) credit ratings. As of November 29, 2008, the repayment of approximately 80% of the student loans, which serve as collateral for the ARS held by the Company, is substantially backed by the United States government. Until February 2008, the ARS market was liquid and auctions for ARS held by the Company did not fail. However, beginning in February 2008, auctions for the ARS held by the Company began to fail and have continued to fail up to and as of the date of this report.
11
Based on current market conditions, management believes that it is likely that auctions related to the Company’s ARS will continue to be unsuccessful for the near term. Unsuccessful auctions have limited the Company’s ability to access these funds. Management anticipates the liquidity of the ARS will continue to be restricted until there is a successful auction, until such time as another market for the ARS develops, until the ARS are called by the issuer or until they are redeemed as described below. The Company reclassified its ARS to long-term investments at March 1, 2008 to reflect the lack of liquidity of these investments.
All of the ARS owned by the Company were purchased from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, by UBS. In August 2008, UBS announced a settlement in principle with the Securities and Exchange Commission, the New York Attorney General and other state regulatory agencies to restore liquidity to remaining clients who hold ARS. On October 7, 2008, UBS issued a prospectus to the Company formalizing the settlement offer and offering the Company certain ARS rights. Under the settlement, these ARS rights provide the Company the ability to redeem its ARS at par during a two-year time period beginning June 30, 2010. During this time, the Company may choose to continue to hold some or all of its ARS and earn interest or sell some or all of them to UBS at par plus accrued interest. The ARS rights are not transferable, tradeable or marginable and will not be listed or quoted on any securities exchange or any electronic communications network.
On November 7, 2008, the Company’s Board of Directors accepted the UBS settlement offer. Consequently, the Company reclassified the ARS from available-for-sale to trading securities and elected, pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), to record the ARS rights at fair value on a recurring basis utilizing significant unobservable inputs in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).
The Company determined the fair value of the ARS rights to be approximately $3.7 million, which substantially offset the unrealized loss recorded within selling, general and administrative expense related to the fair value adjustment on the ARS. The ARS rights were recorded within other non-current assets on the consolidated balance sheet. Please see Note 12 for further disclosure regarding the Company’s accounting for fair value measurements.
Merchandise inventories consisted of the following:
|
|
|
November 29, |
|
March 1, |
|
December 1, |
|
|||
|
Description |
|
2008 |
|
2008 |
|
2007 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Merchandise - in store |
|
$ |
51,859,445 |
|
$ |
37,303,879 |
|
$ |
43,885,126 |
|
|
Merchandise - in transit |
|
1,291,898 |
|
6,536,459 |
|
3,058,065 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
$ |
53,151,343 |
|
$ |
43,840,338 |
|
$ |
46,943,191 |
|
The Company does not have long-term purchase commitments or arrangements with any of its suppliers or agents. The Company purchased approximately 17% and 19% of its merchandise from its largest overseas supplier during the first nine months of fiscal 2009 and 2008, respectively. Although the Company has an established operating history with its largest vendor, there can be no assurance that this relationship can be maintained in the future or that the vendor will continue to supply merchandise to the Company. If there should be any significant disruption in the supply of merchandise from this vendor, management believes that it will be able to shift production to other suppliers so as to continue to secure the required volume of product. Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on the Company’s financial position or results of operations.
In the three and nine month periods ended November 29, 2008, the Company purchased approximately 20% and 32% of its merchandise, respectively, through one buying agent (the “Agent”). The Company has continued the process of establishing relationships with additional primary suppliers, which are intended to reduce its reliance on the Agent. The Agent also has informed the Company that it desires to cease serving as an intermediary with manufacturers on behalf of the Company. Therefore, the Company and the Agent agreed to
12
terminate their arrangement as of the end of December 2008. While management believes the actions it is taking to mitigate the risks of reliance on the Agent will be successful, any significant disruption in supply from vendors working through the Agent could have a material adverse impact on the Company’s financial position or results of operations.
Property, equipment and improvements, net consisted of the following:
|
|
|
Estimated |
|
November 29, |
|
March 1, |
|
December 1, |
|
|||
|
Description |
|
Useful Life |
|
2008 |
|
2008 |
|
2007 |
|
|||
|
Land |
|
— |
|
$ |
1,596,898 |
|
$ |
1,596,898 |
|
$ |
1,596,898 |
|
|
Corporate office, distribution center and related building improvements |
|
25 years |
|
12,020,131 |
|
12,014,667 |
|
11,856,863 |
|
|||
|
Store leasehold improvements |
|
Term of related lease, typically 10 years |
|
97,497,444 |
|
97,525,439 |
|
92,834,115 |
|
|||
|
Store furniture and fixtures |
|
Three to 10 years |
|
115,404,408 |
|
113,585,852 |
|
107,502,097 |
|
|||
|
Computer hardware and software |
|
Three to five years |
|
32,138,294 |
|
21,595,000 |
|
18,172,079 |
|
|||
|
Corporate office and distribution center furniture, fixtures and equipment |
|
Seven years |
|
3,162,791 |
|
3,055,898 |
|
2,902,305 |
|
|||
|
Construction in progress |
|
— |
|
5,408,364 |
|
9,474,738 |
|
16,239,065 |
|
|||
|
|
|
|
|
267,228,330 |
|
258,848,492 |
|
251,103,422 |
|
|||
|
Less accumulated depreciation and amortization |
|
|
|
138,161,220 |
|
125,249,912 |
|
114,729,829 |
|
|||
|
Net property, equipment and improvements |
|
|
|
$ |
129,067,110 |
|
$ |
133,598,580 |
|
$ |
136,373,593 |
|
The Company reviews long-lived assets with definite lives at least annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with SFAS No. 144. While the Company recorded no impairments of long-lived assets employed in continuing operations in the three and nine month periods ended November 29, 2008, the current challenging economic environment, combined with the continued instability in the housing, credit, stock and financial markets, and increasing general economic uncertainty affecting the retail industry, make it reasonably possible that long-lived asset impairments could be identified and recorded in future periods.
Other accrued liabilities consisted of the following:
|
|
|
November 29, |
|
March 1, |
|
December 1, |
|
|||
|
Description |
|
2008 |
|
2008 |
|
2007 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Gift card, certificate and store credit liabilities |
|
$ |
7,687,104 |
|
$ |
13,545,500 |
|
$ |
8,411,824 |
|
|
Accrued un-invoiced merchandise inventory receipts |
|
5,314,893 |
|
4,949,370 |
|
3,290,751 |
|
|||
|
Accrued workers compensation self-insurance liability |
|
2,444,385 |
|
2,252,571 |
|
2,011,514 |
|
|||
|
Accrued income, sales and other taxes payable |
|
2,899,986 |
|
2,161,038 |
|
3,202,595 |
|
|||
|
Accrued occupancy-related expenses |
|
1,126,467 |
|
992,584 |
|
2,612,302 |
|
|||
|
Other |
|
2,815,938 |
|
4,139,560 |
|
1,373,989 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
$ |
22,288,773 |
|
$ |
28,040,623 |
|
$ |
20,902,975 |
|
The Company maintains an Amended and Restated Revolving Credit Facility (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility provides the Company with revolving credit loans and letters of credit of up to $50.0 million, in the aggregate, subject to a borrowing base formula based on inventory levels.
13
In the first quarter of fiscal 2009, the Company and Wells Fargo entered into a Third Amendment to the Credit Facility (the “Third Amendment”). The Third Amendment extended the maturity date of the Credit Facility by three years from June 30, 2008 to June 30, 2011. In addition, the Third Amendment reduced the interest rate under the Credit Facility from the prime rate plus 0.25% to the prime rate minus 0.25%. As of November 29, 2008, Wells Fargo’s prime rate was 4.0%. The Third Amendment also provided the Company with the ability to borrow under the Credit Facility at an interest rate tied to the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29, 2008.
Interest under the Credit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unused portion as defined in the agreement, and a collateral monitoring fee. For the nine months ended November 29, 2008, fees related to the Credit Facility totaled $21,082. Borrowings under the Credit Facility are collateralized by the Company’s equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights. The Company had no revolving credit loan borrowings under the Credit Facility during the first nine months of fiscal 2009. Historically, the Credit Facility has been utilized by the Company only to open letters of credit to facilitate the import of merchandise. The borrowing base at November 29, 2008 was $36.2 million. As of November 29, 2008, the Company had outstanding letters of credit in the amount of $4.2 million. Accordingly, the availability of revolving credit loans under the Credit Facility was $32.0 million at November 29, 2008.
The Credit Facility contains certain restrictive covenants, including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants. As of November 29, 2008, the most recent measurement date, the Company was in compliance with all of these restrictive covenants under the Credit Facility.
In fiscal 2008, the Company’s Board of Directors authorized and subsequently announced a one-year stock repurchase program enabling the Company to purchase up to $20.0 million of its common stock, subject to market conditions. As of May 24, 2008, the expiration date of the repurchase program, the Company had repurchased 948,800 shares of its common stock under the program for a total cost, including commissions, of approximately $12.1 million. No repurchases were made under the program in the first nine months of fiscal 2009.
The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”). Under this method, stock-based compensation expense recognized for share-based awards includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, February 25, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based compensation awards granted subsequent to February 25, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Total pre-tax compensation expense related to stock-based awards for the three months ended November 29, 2008 and December 1, 2007 was approximately $420,000 and $847,000, respectively. For the nine months ended November 29, 2008 and December 1, 2007, pre-tax stock-based compensation expense totaled approximately $1.6 million and $1.8 million, respectively. Stock-based compensation expense was included in merchandise, buying and occupancy expenses for the Company’s buying and distribution employees and in selling, general and administrative expenses for all other employees.
Methodology Assumptions
The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for grants to its employees and non-employee directors. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting, is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on the historical volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience. The expected term assumption incorporates the contractual term of an option grant, as well as the vesting period of an award. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.
14
The weighted average assumptions relating to the valuation of the Company’s stock option grants for the three and nine month periods ended November 29, 2008 and December 1, 2007 were as follows:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
|
November 29, |
|
December 1, |
|
November 29, |
|
December 1, |
|
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
Expected divdend yield |
|
2.74 |
% |
1.79 |
% |
2.36 |
% |
1.38 |
% |
|
Expected volatility |
|
51.05 |
% |
45.14 |
% |
49.37 |
% |
44.79 |
% |
|
Risk-free interest rate |
|
2.92 |
% |
4.15 |
% |
2.72 |
% |
4.49 |
% |
|
Expected term in years |
|
5.00 |
|
4.75 |
|
4.40 |
|
4.20 |
|
Stock-Based Compensation Activity
The following table presents a summary of the Company’s stock option activity for the nine months ended November 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|||
|
|
|
|
|
Weighted |
|
|
|
|
|
Average |
|
|||
|
|
|
Number |
|
Average |
|
Aggregate |
|
Weighted |
|
Remaining |
|
|||
|
|
|
of |
|
Exercise |
|
Intrinsic |
|
Average |
|
Contractual |
|
|||
|
|
|
Shares |
|
Price |
|
Value |
|
Fair Value |
|
Life |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Outstanding, beginning of period |
|
1,889,454 |
|
$ |
18.83 |
|
$ |
— |
|
$ |
6.79 |
|
|
|
|
Vested |
|
1,485,011 |
|
19.34 |
|
— |
|
6.83 |
|
|
|
|||
|
Unvested |
|
404,443 |
|
16.97 |
|
— |
|
6.63 |
|
|
|
|||
|
Granted |
|
409,250 |
|
9.96 |
|
— |
|
3.58 |
|
|
|
|||
|
Exercised |
|
— |
|
— |
|
— |
|
— |
|
|
|
|||
|
Canceled - Vested |
|
(405,163 |
) |
20.73 |
|
— |
|
7.09 |
|
|
|
|||
|
Canceled - Unvested (Forfeited) |
|
(88,829 |
) |
15.85 |
|
— |
|
5.94 |
|
|
|
|||
|
Outstanding, end of period |
|
1,804,712 |
|
16.56 |
|
— |
|
6.04 |
|
6.02 |
|
|||
|
Vested |
|
1,204,222 |
|
18.67 |
|
— |
|
6.74 |
|
4.49 |
|
|||
|
Unvested |
|
600,490 |
|
12.34 |
|
— |
|
4.63 |
|
9.07 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Exercisable, end of period |
|
1,204,222 |
|
18.67 |
|
— |
|
6.74 |
|
4.49 |
|
|||
The Company may also grant shares of restricted stock to its employees and non-employee members of its Board of Directors. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions. In addition, certain of the Company’s restricted stock awards have performance-based vesting provisions and are subject to forfeiture if these performance conditions are not achieved. The Company assesses, on an ongoing basis, the probability of whether the performance criteria are projected to be achieved and, if it is deemed probable, recognizes compensation expense over the relevant performance period. For those awards not subject to performance criteria, the Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period. The fair market value of the Company’s restricted stock is determined based on the closing price of the Company’s common stock on the grant date.
The following table presents a summary of the Company’s restricted stock activity for the nine months ended November 29, 2008:
|
|
|
Number |
|
Aggregate |
|
Weighted |
|
||
|
|
|
of |
|
Intrinsic |
|
Average |
|
||
|
|
|
Shares |
|
Value |
|
Fair Value |
|
||
|
|
|
|
|
|
|
|
|
||
|
Unvested, beginning of period |
|
118,484 |
|
$ |
399,291 |
|
$ |
16.26 |
|
|
Granted |
|
318,483 |
|
1,073,288 |
|
9.71 |
|
||
|
Vested |
|
(41,666 |
) |
461,595 |
|
12.28 |
|
||
|
Canceled - Unvested (Forfeited) |
|
(47,950 |
) |
161,592 |
|
14.65 |
|
||
|
Unvested, end of period |
|
347,351 |
|
1,170,573 |
|
10.96 |
|
||
15
As of November 29, 2008, the Company’s liability for unrecognized tax benefits associated with uncertain tax positions was approximately $4.2 million and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2.4 million. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. At November 29, 2008, the Company had accrued approximately $0.9 million for the potential payment of interest and penalties.
The Company and its subsidiaries are subject to U.S. federal income tax and the income tax of various state and local jurisdictions. The Internal Revenue Service has completed its audit for tax years through fiscal 2006. The Company is not subject to state income tax examination by taxing authorities for taxable years prior to fiscal 2004. At November 29, 2008, the Company did not expect its liability for unrecognized tax benefits to significantly increase or decrease in the remainder of fiscal 2009 or in fiscal 2010.
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN No. 18”). The income tax benefit attributable to continuing operations for the three-month period ended November 29, 2008 results from a reduction of the estimated annual effective tax rate on continuing operations from 39.8%, at the end of the second quarter of fiscal 2009, to an estimated annual effective rate of 8.9%. The reduction in the estimated annual effective tax rate resulted from the reduced forecasted amount for operating results from continuing operations for the full year and the resulting impact of permanent differences on the estimated annual effective tax rate. Pursuant to the requirements of FIN No.18, the impact of the change in the estimated annual effective tax rate is reflected in the period in which the change arises.
Income taxes allocated to the loss from discontinued operations for the three-month and nine-month periods ended November 29, 2008, are determined on the basis of a with/without computation using the estimated effective annual tax rate for income from continuing operations and actual income and income taxes from discontinued operations.
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the applicable periods, while diluted EPS is computed based on the weighted average number of shares of common stock and common equivalent shares outstanding. The Company’s reconciliation of EPS includes the individual share effects of all securities affecting EPS which consist solely of the effects of dilution from awards granted under the Company’s stock-based compensation plans.
The following is a reconciliation of the number of shares and per share amounts used in the basic and diluted EPS computations:
|
|
|
Three Months Ended |
|
||||||||
|
|
|
November 29, 2008 |
|
December 1, 2007 |
|
||||||
|
|
|
(Restated) |
|
|
|
|
|
||||
|
|
|
|
|
Net |
|
|
|
Net |
|
||
|
|
|
|
|
Income |
|
|
|
Income |
|
||
|
|
|
Shares |
|
Per Share |
|
Shares |
|
Per Share |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Basic |
|
35,099,129 |
|
$ |
0.11 |
|
35,447,855 |
|
$ |
0.29 |
|
|
Effect of dilution from stock-based compensation plans |
|
16,616 |
|
— |
|
80,497 |
|
— |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Diluted |
|
35,115,745 |
|
$ |
0.11 |
|
35,528,352 |
|
$ |
0.29 |
|
|
|
|
Nine Months Ended |
|
||||||||
|
|
|
November 29, 2008 |
|
December 1, 2007 |
|
||||||
|
|
|
(Restated) |
|
|
|
|
|
||||
|
|
|
|
|
Net |
|
|
|
Net |
|
||
|
|
|
|
|
Income |
|
|
|
Income |
|
||
|
|
|
Shares |
|
Per Share |
|
Shares |
|
Per Share |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Basic |
|
35,091,041 |
|
$ |
0.46 |
|
35,835,063 |
|
$ |
0.71 |
|
|
Effect of dilution from stock-based compensation plans |
|
2,950 |
|
— |
|
90,671 |
|
(0.01 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Diluted |
|
35,093,991 |
|
$ |
0.46 |
|
35,925,734 |
|
$ |
0.70 |
|
16
Stock options of 1,944,630 and 1,897,740 were excluded from the shares used in the computation of diluted EPS for the three and nine month periods ended November 29, 2008, respectively, as they were anti-dilutive. Stock options of 1,815,600 and 1,643,100 were excluded from the shares used in the computation of diluted EPS for the three and nine month periods ended December 1, 2007 as they were anti-dilutive.
NOTE 12 — FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157, “Fair Value Measurements,” (as impacted by FSP Nos. 157-1 and 157-2) effective March 1, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.
Under SFAS No. 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. SFAS No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For the three and nine month periods ended November 29, 2008, fair value under SFAS No. 157 (as impacted by FSP Nos. 157-1 and 157-2) applied to the Company’s ARS and ARS rights. These financial assets are carried at fair value in accordance with SFAS No. 159 following the requirements of SFAS No. 157. (PwC)
Following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value:
ARS and ARS rights:
As discussed in Note 3, auctions for ARS held by the Company failed beginning in February 2008, and have continued to fail through the date of this report. As a result, investments in ARS are valued to reflect the current lack of liquidity of these investments while taking into account the credit quality of the underlying securities. As also discussed in Note 3, on November 7, 2008, the Company accepted UBS’s ARS settlement offer. This resulted in the Company receiving ARS rights, which the Company has elected to account for at fair value.
The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No. 157, on a recurring basis.
|
|
|
|
|
Fair Value Measurements |
|
||||||||
|
|
|
Fair Value at |
|
Using Inputs Considered as |
|
||||||||
|
Description |
|
November 29, 2008 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
||||
|
ARS |
|
$ |
15,875,812 |
|
$ |
— |
|
$ |
— |
|
$ |
15,875,812 |
|
|
ARS rights |
|
$ |
3,674,188 |
|
$ |
— |
|
$ |
— |
|
$ |
3,674,188 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Liabilities: |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
17
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).
|
|
|
ARS |
|
|
|
Beginning balance, March 1, 2008 |
|
$ |
23,350,000 |
|
|
Total gains (losses): |
|
|
|
|
|
Included in earnings |
|
(3,674,188 |
) |
|
|
Included in other comprehensive income |
|
1,200,000 |
|
|
|
Purchases, issuances and settlements |
|
(5,000,000 |
) |
|
|
Transfers in and/or out of Level 3 |
|
— |
|
|
|
Ending balance, November 29, 2008 |
|
$ |
15,875,812 |
|
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
During the nine months ended November 29, 2008, the Company had no measurements of assets or liabilities at fair value (as defined in SFAS No. 157) on a nonrecurring basis subsequent to their initial recognition.
The aspects of SFAS No. 157 for which the effective date for the Company was deferred under FSP No. 157-2 until March 1, 2009, relate to nonfinancial assets and liabilities that are measured at fair value but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.
NOTE 13 — COMPREHENSIVE INCOME
Comprehensive income consisted of the following.
|
|
|
Three Months Ended |
|
||||
|
|
|
November 29, |
|
December 1, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
(Restated) |
|
|
|
||
|
Net income |
|
$ |
3,959,615 |
|
$ |
10,238,170 |
|
|
Unrealized losses on investments reclassified to earnings |
|
1,200,000 |
|
— |
|
||
|
Net loss |
|
|
|
|
|
||
|
Total comprehensive income |
|
$ |
5,159,615 |
|
$ |
10,238,170 |
|
|
|
|
Nine Months Months Ended |
|
||||
|
|
|
November 29, |
|
December 1, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
(Restated) |
|
|
|
||
|
Net income |
|
$ |
16,067,912 |
|
$ |
25,302,797 |
|
|
Unrealized losses on investments reclassified to earnings |
|
1,200,000 |
|
— |
|
||
|
Net loss |
|
|
|
|
|
||
|
Total comprehensive income |
|
$ |
17,267,912 |
|
$ |
25,302,797 |
|
18
NOTE 14 — COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, any such liability is not expected to have a material adverse impact on the Company’s financial position or results of operations.
The Company operates in the retail apparel industry in which it primarily designs, sources and sells women’s apparel catering to customers generally ranging in age from 40 to 60 who are typically part of a segment of the female baby boomer demographic. The Company has identified two operating segments (Christopher & Banks and C.J. Banks) as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The Company’s Christopher & Banks and C.J. Banks operating segments have been aggregated into one reportable segment based on the similar nature of products sold, methods of sourcing, merchandising and distribution processes involved, target customers, and economic characteristics of the two brands. The Company previously reported the results of its Acorn stores as a separate reportable segment. Beginning in the third quarter of fiscal 2009, the results of all Acorn stores have been removed from continuing operations and presented as discontinued operations.
In the table below, the “Christopher & Banks/C.J. Banks” reportable segment includes activity generated by the Company’s Christopher & Banks and C.J. Banks operations. The “Corporate/Administrative” column, which primarily represents operating activity at the Company’s corporate office and distribution center facility, is presented to allow for reconciliation of segment-level net sales, operating income (loss) and total assets to the Company’s consolidated net sales, operating income and total assets. Segment operating income (loss) includes only net sales, merchandise gross margin and direct store expenses with no allocation of corporate overhead. Net sales and operating income (loss) are the two components of segment operations reviewed by the Company’s chief operating decision maker.
Segment Reporting:
|
|
|
Christopher & Banks/ |
|
Corporate/ |
|
|
|
|||
|
|
|
C.J. Banks |
|
Administrative |
|
Consolidated |
|
|||
|
|
|
|
|
(Restated) |
|
(Restated) |
|
|||
|
Three Months Ended November 29, 2008: |
|
|
|
|
|
|
|
|||
|
Net sales |
|
$ |
143,003,908 |
|
$ |
— |
|
$ |
143,003,908 |
|
|
Operating income (loss) |
|
16,355,841 |
|
(17,018,327 |
) |
(662,486 |
) |
|||
|
Total assets |
|
145,258,338 |
|
170,171,980 |
|
315,430,318 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Three Months Ended December 1, 2007: |
|
|
|
|
|
|
|
|||
|
Net sales |
|
$ |
155,242,697 |
|
$ |
— |
|
$ |
155,242,697 |
|
|
Operating income (loss) |
|
31,760,970 |
|
(15,405,172 |
) |
16,355,798 |
|
|||
|
Total assets |
|
187,273,596 |
|
121,861,216 |
|
309,134,812 |
|
|||
|
|
|
Christopher & Banks/ |
|
Corporate/ |
|
|
|
|||
|
|
|
C.J. Banks |
|
Administrative |
|
Consolidated |
|
|||
|
|
|
|
|
(Restated) |
|
(Restated) |
|
|||
|
Nine Months Ended November 29, 2008: |
|
|
|
|
|
|
|
|||
|
Net sales |
|
$ |
426,850,378 |
|
$ |
— |
|
$ |
426,850,378 |
|
|
Operating income (loss) |
|
70,490,850 |
|
(49,665,890 |
) |
20,824,960 |
|
|||
|
Total assets |
|
145,258,338 |
|
170,171,980 |
|
315,430,318 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Nine Months Ended December 1, 2007: |
|
|
|
|
|
|
|
|||
|
Net sales |
|
$ |
438,623,317 |
|
$ |
— |
|
$ |
438,623,317 |
|
|
Operating income (loss) |
|
83,667,025 |
|
(43,132,519 |
) |
40,534,506 |
|
|||
|
Total assets |
|
187,273,596 |
|
121,861,216 |
|
309,134,812 |
|
|||
19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q and the consolidated financial statements, notes and MD&A contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008.
Executive Overview
Christopher & Banks Corporation, a Delaware corporation, is a Minneapolis-based retailer of women’s apparel, which operates retail stores through its wholly-owned subsidiaries. The Company was incorporated in 1986 to acquire Braun’s Fashions, Inc., which had operated as a family-owned business since 1956. In July 2000, the Company’s stockholders approved a change in the Company’s name from Braun’s Fashions Corporation to Christopher & Banks Corporation.
As of November 29, 2008, the Company operated 828 stores in 46 states, including 553 Christopher & Banks stores, 268 C.J. Banks stores and seven Acorn stores. The Company also operates two e-commerce enabled websites at www.christopherandbanks.com and www.cjbanks.com. The Company’s Christopher & Banks brand offers distinctive fashions featuring exclusively designed, coordinated assortments of women’s apparel in sizes 4 to 16. The Company’s C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 24W.
On July 31, 2008, the Company announced plans to close all 36 of its Acorn stores by December 31, 2008. Beginning in the third quarter of fiscal 2009, the Company reported the results of it Acorn division as discontinued operations.
Fiscal 2009 Third Quarter Summary
The Company’s results of operations for the third fiscal quarter were significantly impacted by the extremely challenging macro-economic environment. Consumer spending patterns, particularly for discretionary retail purchases, were materially negatively effected, as compared to the third quarter of fiscal 2008. The Company recorded net income from continuing operations of $7.0 million, or $0.20 per share, in the third quarter of fiscal 2009, as compared to net income from continuing operations of $11.1 million, or $0.31 per diluted share, for the third quarter of fiscal 2008. The loss from Acorn’s discontinued operations was $0.09 per share for the third quarter of fiscal 2009. Same-store sales from continuing operations declined 14%. The significant decline in the number of transactions per average store encountered in the first half of fiscal 2009 continued throughout the third quarter. The Company utilizes traffic counters in approximately 50% of its stores and calculates its customer traffic metrics based on traffic counts from these stores. In an effort to minimize the negative top line impact of reduced customer traffic, the Company increased promotional activity in the third quarter, which resulted in an approximate 400 basis point decline in merchandise margins and a decline in the average transaction value over the third quarter of fiscal 2008. The Company ended the quarter with inventory levels up approximately 8.6% on a per-store basis over the prior year.
In the third quarter, the Company opened three new Christopher & Banks stores and three new C.J. Banks stores. The Company closed two Christopher & Banks stores, one C.J. Banks store, and 29 Acorn stores during the quarter. On July 31, 2008, the Company announced its decision to exit its Acorn division business when the Company’s Board of Directors and management concluded, after a comprehensive review and evaluation, that the concept had not demonstrated the potential to deliver an acceptable long-term return on the Company’s investment. On July 30, 2008, the Company’s Board of Directors authorized a plan to close all of the Company’s 36 Acorn stores by December 31, 2008. This decision will enable the Company to focus its resources on its two core brands, Christopher & Banks and C.J. Banks. During the three months ended November 29, 2008, the Company recorded approximately $4.2 million of charges within the results of discontinued operations, including lease termination fees and severance related to the exit of the Acorn division. The Company expects to incur approximately $0.7 million of additional charges during the fourth quarter to complete the exit of its Acorn business. Such charges will be included in the results of discontinued operations.
20
Fiscal 2009 and 2010 Outlook
The Company recorded income from continuing operations of $20.8 million, or $0.59 per share, in the first nine months of fiscal 2009, as compared to net income from continuing operations of $27.8 million, or $0.77 per diluted share, for the first nine months of fiscal 2008. The loss from Acorn’s discontinued operations was $0.14 per share for the three quarters ended November 29, 2008. Same-store sales from continuing operations declined 9%.
In the first nine months of fiscal 2009, the Company’s results were impacted by the extremely challenging domestic macro-economic environment. Continued and growing instability in the housing, credit, stock and financial markets, and increasing general economic uncertainty, have placed pressure on consumer spending patterns. Weak customer traffic encountered in the first nine months of the fiscal year has continued into December and the Company anticipates that this weak traffic trend, and corresponding negative impact on sales and earnings, will likely persist throughout the fourth quarter of fiscal 2009 and into fiscal 2010. The Company also anticipates that the heavily promotional environment will continue for the remainder of fiscal 2009 and into fiscal 2010 resulting in ongoing pressures of merchandise margins.
Given the uncertain economic environment, the Company is approaching the balance of fiscal 2009 and all of fiscal 2010 with an increased focus on expense controls, inventory discipline and decreased capital expenditures. The Company expects per-store inventory balances to decline by the end of the fourth quarter to levels down mid single digits compared to the prior year. In fiscal 2010, the Company anticipates inventory per-store will continue to decline to levels modestly below fiscal 2009. In addition, the Company continues to approach its real estate growth strategy cautiously. The Company opened 15 new Christopher & Banks stores and 14 new C.J. Banks locations during the first nine months of Fiscal 2009. The Company does not plan to open any new stores in the fourth quarter of fiscal 2009. Going forward, the Company plans to proceed cautiously with new store growth. The Company currently plans to open a total of three to five new stores in fiscal 2010 including one dual store concept.
Key Business Initiatives
During the first nine months fiscal 2009, the Company continued to make progress related to a number of key business initiatives as described below.
The Company launched two separate e-commerce websites in February 2008 for its Christopher & Banks and C.J. Banks brands. These websites give customers the ability to view and purchase the Company’s merchandise online at www.christopherandbanks.com and www.cjbanks.com. The Company currently sells essentially the same selection of merchandise on its websites that it features in its Christopher & Banks and C.J. Banks stores. The Company’s customers have responded favorably to its two e-commerce sites in the first nine months of fiscal 2009 and, in response, the Company has adjusted inventory levels for its online businesses to match anticipated demand for the remainder of the year. In the second half of fiscal 2009, the Company began offering a greater selection of sizes through its e-commerce websites than are currently available in its stores. Management believes that its websites provide the Company with an opportunity to generate incremental sales and offer convenience and product research capabilities to its customers.
Management plans to continue to make upgrades to critical components of its information systems. In the first quarter the Company completed the installation of new point-of-sale registers in 550 of its stores. The new registers provide the Company with updated point-of-sale technology. Management anticipates these new registers will help improve operating efficiencies and provide enhanced communication abilities with its stores. In the third quarter of fiscal 2009, the Company continued the installation of a new merchandise planning and allocation system. The system allows enhanced product allocation models which give the Company increased flexibility regarding product distribution by store sales volume, climate and customer size and fashion preferences. In addition, the financial planning modules of this system have begun to provide the Company with more in-depth product analysis capabilities. Management expects to realize financial benefits from this system beginning in late fiscal 2009, with additional benefits expected to be realized in fiscal 2010. The Company also substantially completed the implementation of a new suite of financial software in the third quarter of fiscal 2009.
21
The Company also continues to analyze, realign and strengthen its merchandise sourcing structure. In the three and nine month periods ended November 29, 2008, the Company purchased approximately 20% and 32% of its merchandise, respectively, through one buying agent (the “Agent”). The Company has continued the process of establishing relationships with additional primary suppliers, which are intended to reduce its reliance on the Agent. The Agent also has informed the Company that it desires to cease serving as an intermediary with manufacturers on behalf of the Company. Therefore, the Company and the Agent agreed to terminate their arrangement as of the end of December 2008. While management believes the actions it is taking to mitigate the risks of reliance on the Agent will be successful, any significant disruption in supply from vendors working through the Agent could have a material adverse impact on the Company’s financial position or results of operations.
In order to increase awareness of its brands, the Company plans to continue expanding its marketing efforts in the remainder of fiscal 2009. The Company plans to spend approximately 1.5% of its net sales on marketing-related expenditures in fiscal 2009, compared to approximately 1.0% of sales in fiscal 2008. The Company plans to continue its efforts to expand its customer relationship management database and, in particular, focus on increasing its number of customer e-mail contacts.
While the Company believes the retail and macro-economic environments will remain challenging for the foreseeable future, it also believes that it is taking actions to position the Company for stronger operating performance when economic conditions become more favorable.
Key Performance Indicators
The Company’s management evaluates the following items, which are considered key performance indicators, in assessing the Company’s performance:
Same-store sales
The Company’s same-store sales data is calculated based on the change in net sales for stores that have been open for more than 13 full months and includes stores, if any, that have been relocated within the same mall, though the Company typically does not expand or relocate stores within a mall. Stores where square footage has been changed by more than 25 percent within the past 13 months are excluded from the same-store sales calculation. Stores closed during the year are included in the same-store sales calculation only for the full months of the year the stores were open.
Management considers same-store sales to be an important indicator of the Company’s performance. Same-store sales results are important in achieving leveraging of costs, including store payroll, store occupancy, depreciation and other general and administrative expenses. Year-over-year increases in same-store sales contribute to greater leveraging of costs, while declining same-store sales contribute to deleveraging of costs. Same-store sales results also have a direct impact on the Company’s total net sales, cash and cash equivalents and working capital.
Merchandise, buying and occupancy costs, exclusive of depreciation and amortization
Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, measure whether the Company is appropriately optimizing the price of its merchandise. Merchandise, buying and occupancy costs include the cost of merchandise, markdowns, shrink, freight into and out of the Company’s distribution center, buyer and distribution center salaries, buyer travel, rent and other occupancy-related costs, various merchandise design and development costs, miscellaneous merchandise expenses and other costs related to the Company’s distribution network.
Operating income
The Company’s management views operating income as a key indicator of the Company’s success. The key drivers of operating income are same-store sales; merchandise, buying and occupancy costs; and the Company’s ability to control its other operating costs.
Store productivity
Store productivity measures, including sales per square foot, average unit retail selling price, number of transactions per store, number of units per transaction, average retail dollars per transaction, customer traffic and conversion rates (the percentage of customers who enter the Company’s stores and make a purchase) are evaluated by management in assessing the operational performance of individual stores and of the Company.
22
Inventory turnover
The Company’s management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Declining rates of inventory turnover are important as they signal that inventory is becoming slow-moving.
Cash flow and liquidity
Management evaluates cash flow from operations, investing activities and financing activities in determining the sufficiency of the Company’s cash position. Cash flow from operations has historically been sufficient to cover the Company’s uses of cash. The Company expects its cash and cash equivalents, combined with cash flows from operations, to be sufficient to fund anticipated capital expenditures, working capital and other requirements for liquidity during the remainder of fiscal 2009 and all of fiscal 2010.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are more fully described in Note 1 of the notes to consolidated financial statements contained within the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008. There have been no material changes in the Company’s critical accounting policies or estimates in the nine months ended November 29, 2008. Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
On an ongoing basis, the Company evaluates its estimates, including those related to customer product returns, inventories, income taxes, medical and workers’ compensation claims and contingencies. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company reviews long-lived assets with definite lives at least annually, or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with SFAS No. 144. While the Company recorded no impairments of long-lived assets employed in continuing operations in the three and nine month periods ended November 29, 2008, the current challenging economic environment, combined with the continued instability in the housing, credit, stock and financial markets, and increasing general economic uncertainty affecting the retail industry, make it reasonably possible that long-lived asset impairments could be identified and recorded in future periods.
Results of Operations (Restated)
The following table sets forth consolidated operating statement data expressed as a percentage of net sales for the periods indicated.
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
|
November 29, |
|
December 1, |
|
November 29, |
|
December 1, |
|
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
(Restated) |
|
|
|
(Restated) |
|
|
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Merchandise, buying and occupancy costs, exclusive of depreciation and amortization |
|
64.3 |
|
58.3 |
|
60.3 |
|
59.8 |
|
|
Selling, general and administrative expenses |
|
31.6 |
|
27.7 |
|
30.2 |
|
27.4 |
|
|
Depreciation and amortization |
|
4.6 |
|
3.5 |
|
4.6 |
|
3.6 |
|
|
Operating income (loss) |
|
(0.5 |
) |
10.5 |
|
4.9 |
|
9.2 |
|
|
Interest income |
|
0.5 |
|
0.8 |
|
0.5 |
|
0.8 |
|
|
Income tax provision (benefit) |
|
(5.0 |
) |
4.2 |
|
0.5 |
|
3.7 |
|
|
Income from continuing operations |
|
5.0 |
|
7.1 |
|
4.9 |
|
6.3 |
|
|
Loss on discontinued operations, net of tax |
|
(2.2 |
) |
(0.5 |
) |
(1.1 |
) |
(0.5 |
) |
|
Net income |
|
2.8 |
% |
6.6 |
% |
3.8 |
% |
5.8 |
% |
23
Three Months Ended November 29, 2008 Compared to Three Months Ended December 1, 2007 (Restated)
Net Sales. Net sales from continuing operations for the three months ended November 29, 2008 were $143.0 million, a decrease of $12.2 million, or approximately 8%, from $155.2 million for the three months ended December 1, 2007. The decrease in net sales from continuing operations was a result of a decline in same-store sales, partially offset by sales generated from an increase in the number of stores operated by the Company. The Company also had sales from its two e-commerce websites in the third quarter of fiscal 2009, which were not operating in the third quarter of fiscal 2008.
The Company’s same-store sales from continuing operations for the third quarter of fiscal 2009 declined 14% when compared to the corresponding period in fiscal 2008. The decline in same-store sales resulted from an approximate 9% decrease in the average number of transactions per store, combined with an approximate 5% decrease in the average value per transaction. Units sold per transaction were essentially flat in the third quarter of fiscal 2009 compared to the prior year period.
In the third quarter of fiscal 2009, management believes the Company’s sales were negatively impacted by the extremely challenging domestic macro-economic environment. Continued and growing instability in the housing, credit, stock and financial markets, and increasing general economic uncertainty, have placed pressure on consumer spending patterns, which resulted in reduced customer traffic and a lower average number of transactions per store. The decreased customer traffic encountered in the first nine months of the fiscal year has continued into December and the Company anticipates that this weak traffic trend, and corresponding negative impact on sales, will likely persist throughout the fourth quarter of fiscal 2009 and into fiscal 2010. In an effort to minimize the negative impact on sales, management responded aggressively to the declining number of average transactions per store by significantly increasing the level of promotional activity during its third fiscal quarter.
Excluding Acorn, the Company operated approximately 2% more stores during the third quarter of fiscal 2009 compared to the same period in fiscal 2008, which partially offset the 14% decline in same-store sales. At November 29, 2008, the Company operated 821 Christopher & Banks and C.J. Banks stores, compared to 802 Christopher & Banks and C.J. Banks stores at December 1, 2007.
Merchandise, Buying and Occupancy Costs, exclusive of depreciation and amortization. Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $91.9 million, or 64.3% of net sales, during the third quarter of fiscal 2009, compared to $90.5 million, or 58.3% of net sales, during the same period in fiscal 2008. This resulted in approximately 600 basis points of negative leverage compared to the prior year period. Merchandise margins declined by approximately 400 basis points primarily due to increased markdowns. During the quarter, the Company responded aggressively to increased top line pressure resulting from reduced customer traffic by significantly increasing its promotional activity. In addition to reduced merchandise margins, occupancy and buying expenses experienced approximately 200 basis points of negative leverage in connection with the 14% decline in same-store sales during the quarter. On a per-store basis, inventory increased approximately 9% at the end of the third quarter of fiscal 2009 compared to the same period in fiscal 2008. In spite of the increase in inventory levels, the Company’s inventory turnover on a trailing twelve month basis improved slightly over the prior year. The Company’s retail inventory turnover increased to 3.2 for the twelve months ended November 29, 2008 from 3.1 for the twelve months ended December 1, 2007.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended November 29, 2008 were $45.2 million, or 31.6% of net sales, compared to $42.9 million, or 27.7% of net sales, for the three months ended December 1, 2007. The increase in selling, general and administrative expenses in the third quarter of fiscal 2009 was primarily a result of increased marketing expenditures related to the Company’s ongoing initiative to build brand awareness, higher self-insured medical costs, expenses associated with the Company’s two e-commerce websites which were not operating in the comparable period last year and increased information technology support fees related to the Company’s efforts to upgrade and enhance critical components of its information systems.
Depreciation and Amortization. Depreciation and amortization was $6.5 million, or 4.6% of net sales, in the third quarter of fiscal 2009, compared to $5.4 million, or 3.5% of net sales, in the third quarter of fiscal 2008. The increase in depreciation and amortization expense was a result of capital expenditures made by the Company over the past year. The Company opened 29 new stores in the first nine months of fiscal 2009, installed new point-of-sale registers at 550 of its stores in the first quarter, and made other information technology-related improvements at its corporate office and distribution center facility in the first, second and third quarters. The Company also opened 69 new stores and made upgrades to certain of its information technology systems in fiscal 2008.
24
Operating Income (Loss). Based on the foregoing, the Company recorded an operating loss of $662,000, or 0.5% of net sales for the quarter ended November 29, 2008, compared to operating income of $16.4 million, or 10.5% of net sales for the quarter ended December 1, 2007.
Interest Income. For the three months ended November 29, 2008, interest income was $619,000 compared to $1.2 million for the three months ended December 1, 2007. The decrease resulted from lower interest rates on cash, cash-equivalents and investments in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008.
Income Taxes. Income tax benefit in the third quarter of fiscal 2009 was $7.1 million, compared to income tax expense of $6.4 million in the third quarter of fiscal 2008.
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN No. 18”). The income tax benefit attributable to continuing operations for the three-month period ended November 29, 2008 results from a reduction of the estimated annual effective tax rate on continuing operations from 39.8%, at the end of the second quarter of fiscal 2009, to an estimated annual effective rate of 8.9%. The reduction in the estimated annual effective tax rate resulted from the reduced forecasted amount for operating results from continuing operations for the full year and the resulting impact of permanent differences on the estimated annual effective tax rate. Pursuant to the requirements of FIN No.18, the impact of the change in the estimated annual effective tax rate is reflected in the period in which the change arises.
Income taxes allocated to the loss from discontinued operations for the three-month and nine-month periods ended November 29, 2008, are determined on the basis of a with/without computation using the estimated effective annual tax rate for income from continuing operations and actual income and income taxes from discontinued operations.
Income from Continuing Operations. As a result of the foregoing factors, the Company reported income from continuing operations of $7.0 million or 5.0% of net sales, for the three months ended November 29, 2008, compared to income from continuing operations of $11.1 million, or 7.1% of net sales, for the three months ended December 1, 2007.
Loss on Discontinued Operations, Net of Tax. The Company reported a pre-tax loss on discontinued operations of $4.7 million for the three months ended November 29, 2008, compared to $1.4 million for the three months ended December 1, 2007. Net of tax, the loss on discontinued operations was $3.1 million, or 2.2% of net sales, for the third quarter of fiscal 2009, compared to $834,000, or 0.5% of net sales, for the third quarter of fiscal 2008. Please see the discussion above under the section Income Taxes regarding the allocation of taxes to income from continuing operations and loss from discontinued operations. In addition to higher store operating losses, the increase in loss on discontinued operations for the third quarter of fiscal 2009, compared to the third quarter of fiscal 2008, resulted from lease termination-related costs and severance charges, of approximately $4.2 million in the aggregate, recorded in the third quarter of fiscal 2009 in conjunction the Company’s exit of its Acorn business.
Net Income. As a result of the foregoing factors, the Company recorded net income of $4.0 million, or 2.8% of net sales and $0.11 per share, for the three months ended November 29, 2008, compared to net income of $10.2 million, or 6.6% of net sales and $0.29 per diluted share, for the three months ended December 1, 2007.
Nine Months Ended November 29, 2008 Compared to Nine Months Ended December 1, 2007 (Restated)
Net Sales. Net sales from continuing operations for the nine months ended November 29, 2008 were $426.9 million, a decrease of $11.7 million, or approximately 2.7%, from $438.6 million for the nine months ended December 1, 2007. The decrease in net sales from continuing operations was a result of a decline in same-store sales, partially offset by sales generated from an increase in the number of stores operated by the Company. The Company also had sales from its two e-commerce websites in the first three quarters of fiscal 2009, which were not operating in the same period of fiscal 2008.
25
The Company’s same-store sales from continuing operations for the nine months ended November 29, 2008 declined 9% when compared to the nine months ended December 1, 2007. An approximate 13% decrease in the average number of transactions per store was partially offset by an approximate 4% increase in the average value per transaction, which was attributable to a higher average retail price per unit and slightly more units sold per transaction. In the first nine months of fiscal 2009, the decline in sales was primarily attributable to reduced customer traffic and a lower average number of transactions per store resulting from the challenging macro-economic environment. This was partially offset by strong customer response to the Company’s “Friends and Family” promotional event held in April. In an effort to minimize the negative impact on sales, management responded aggressively to the declining number of average transactions per store by significantly increasing the level of promotional activity in the third quarter of fiscal 2009.
Excluding Acorn, the Company operated approximately 2% more stores during the first three quarters of fiscal 2009 compared to the same period in fiscal 2008, which partially offset the 9% decline in same-store sales. At November 29, 2008, the Company operated 821 Christopher & Banks and C.J. Banks stores, compared to 802 Christopher & Banks and C.J. Banks stores at December 1, 2007.
Merchandise, Buying and Occupancy Costs, exclusive of depreciation and amortization. Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $257.4 million, or 60.3% of net sales, during the first nine months of fiscal 2009, compared to $262.2 million, or 59.8% of net sales, during the same period in fiscal 2008. This resulted in approximately 50 basis points of negative leverage compared to the prior nine-month period. Merchandise margins improved by approximately 60 basis points, primarily resulting from a lower level of markdowns in the first and second quarters, partially offset by increased promotional activity in the third quarter. The Company responded aggressively to increased top line pressure resulting from reduced customer traffic in the third quarter by significantly increasing promotional activity. The positive leverage gained in merchandise margins was offset by approximately 110 basis points of negative leverage of occupancy and buying expenses in connection with the 9% decline in same-store sales.
On a per-store basis, inventory increased approximately 9% at the end if the third quarter of fiscal 2009 compared to the same period in fiscal 2008. In spite of the increase in inventory levels, the Company’s inventory turnover on a trailing twelve month basis improved slightly over the prior year. The Company’s retail inventory turnover increased to 3.2 for the twelve months ended November 29, 2008 from 3.1 for the twelve months ended December 1, 2007.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended November 29, 2008 were $129.0 million, or 30.2% of net sales, compared to $120.2 million, or 27.4% of net sales, for the nine months ended December 1, 2007. The increase in selling, general and administrative expenses in the first nine months of fiscal 2009 was primarily a result of increased marketing expenditures related to the Company’s ongoing initiative to build brand awareness, higher self-insured medical costs, expenses associated with the Company’s two e-commerce websites which were not operating in the comparable period last year, increased information technology support fees related to the Company’s efforts to upgrade and enhance critical components of its information systems and higher store-level and administrative salaries. Offsetting these factors, the Company incurred $2.1 million of CEO transition-related expenses in the first nine months of fiscal 2008, with no comparable costs incurred in the first nine months of fiscal 2009.
Depreciation and Amortization. Depreciation and amortization was $19.7 million, or 4.6% of net sales, in the first nine months of fiscal 2009, compared to $15.7 million, or 3.6% of net sales, in the first nine months of fiscal 2008. The increase in depreciation and amortization expense was a result of capital expenditures made by the Company over the past year. The Company opened 29 new stores in the first nine months of fiscal 2009, installed new point-of-sale registers at 550 of its stores in the first quarter, and made other information technology-related improvements at its corporate office and distribution center facility in the first, second and third quarters. The Company also opened 69 new stores and made upgrades to certain of its information technology systems in fiscal 2008.
Operating Income. As a result of the foregoing factors, operating income for the nine months ended November 29, 2008 was $20.8 million, or 4.9% of net sales, compared to operating income of $40.5 million, or 9.2% of net sales, for the nine months ended December 1, 2007.
26
Interest Income. For the nine months ended November 29, 2008, interest income was $2.0 million compared to $3.4 million for the nine months ended December 1, 2007. The decrease resulted from lower interest rates on cash, cash-equivalents and investments in the first three quarters of fiscal 2009 compared to the same period in fiscal 2008.
Income Taxes. Income tax expense for the first nine months of fiscal 2009 was $2.0 million, with an effective tax rate of 8.9%, compared to income tax expense of $16.2 million, with an effective tax rate of 36.8%, for the first nine months of fiscal 2008. The decrease in effective tax rate primarily resulted from the impact of permanent timing differences, state income taxes and the proximity of the Company’s loss from continuing operations in the third quarter to breakeven.
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN No. 18”). The income tax benefit attributable to continuing operations for the three-month period ended November 29, 2008 results from a reduction of the estimated annual effective tax rate on continuing operations from 39.8%, at the end of the second quarter of fiscal 2009, to an estimated annual effective rate of 8.9%. The reduction in the estimated annual effective tax rate resulted from the reduced forecasted amount for operating results from continuing operations for the full year and the resulting impact of permanent differences on the estimated annual effective tax rate. Pursuant to the requirements of FIN No.18, the impact of the change in the estimated annual effective tax rate is reflected in the period in which the change arises.
Income taxes allocated to the loss from discontinued operations for the three-month and nine-month periods ended November 29, 2008, are determined on the basis of a with/without computation using the estimated effective annual tax rate for income from continuing operations and actual income and income taxes from discontinued operations.
Income from Continuing Operations. As a result of the foregoing factors, the Company reported income from continuing operations of $20.8 million, or 4.9% of net sales, for the nine months ended November 29, 2008, compared to income from continuing operations of $27.8 million, or 6.3% of net sales, for the nine months ended December 1, 2007.
Loss on Discontinued Operations, Net of Tax. The Company reported a pre-tax loss on discontinued operations of $7.5 million for the nine months ended November 29, 2008, compared to $3.1 million for the nine months ended December 1, 2007. Net of tax, the loss on discontinued operations was $4.8 million, or 1.1% of net sales, for the first three quarters of fiscal 2009, compared to $2.5 million, or 0.5% of net sales, for the first three quarters of fiscal 2008. Please see the discussion above under the section Income Taxes regarding the allocation of taxes to income from continuing and loss from discontinued operations. In addition to higher store operating losses, the increase in loss on discontinued operations for the first three quarters of fiscal 2009, compared to the first three quarters of fiscal 2008, resulted from lease termination-related costs and severance charges, of approximately $4.2 million in the aggregate, recorded in the third quarter of fiscal 2009 in conjunction the Company’s exit of its Acorn business.
Net Income (Loss). As a result of the foregoing factors, the Company recorded net income of $16.1 million, or 3.8% of net sales and $0.46 per diluted share, for the nine months ended November 29, 2008, compared to net income of $25.3 million, or 5.8% of net sales and $0.70 per diluted share, for the nine months ended December 1, 2007.
Liquidity and Capital Resources
The Company’s principal on-going cash requirements are to finance the construction of new stores and the remodeling of certain existing stores, to make technology-related and other capital expenditures, to purchase merchandise inventory and to fund other working capital requirements. Merchandise purchases vary on a seasonal basis, peaking in the fall. As a result, the Company’s cash requirements historically reach their peak in October or November, during the Company’s third fiscal quarter. Conversely, cash balances peak in the fourth fiscal quarter in January, after the holiday season is completed.
Net cash provided by operating activities
Net cash provided by operating activities totaled $13.9 million in the first nine months of fiscal 2009, a decrease of $25.9 million from $39.8 million for the first nine months of fiscal 2008.
27
Significant fluctuations in the Company’s working capital accounts included a $9.3 million increase in inventory and a $7.1 million decrease in accrued liabilities. The Company’s inventory levels were up approximately 9% on a per-store basis at November 29, 2008 compared to December 1, 2007, while they were down approximately 22% on a per-store basis at the beginning of fiscal 2009 compared to the beginning of fiscal 2008. The Company anticipates inventory levels will decline to levels consistent with the prior year on a per-store basis by the end of fiscal 2009. The decrease in accrued liabilities primarily resulted from a decline in the amount of outstanding gift cards at November 29, 2008 compared to March 1, 2008.
The remainder of the change in cash provided by operating activities was substantially the result of net income earned during the first nine months of fiscal 2009, after adjusting for non-cash charges, including depreciation expense, asset impairment charges, deferred income taxes, stock-based compensation expense, loss on the disposal of furniture, fixtures and equipment and various other changes in the Company’s other operating assets and liabilities.
Net cash used in investing activities
Net cash used in investing activities in the first nine months of fiscal 2009 included approximately $16.9 million of capital expenditures, partially offset by $5.0 million of redemptions of investments. The Company opened 29 new stores, completed remodeling of eight existing stores and installed new point-of-sale registers in 550 of its stores in the first nine months of fiscal 2009. The Company also made other information technology-related investments at its stores, corporate office and distribution center facility during the nine months ended November 29, 2008.
The Company expects to fund approximately $2.0 million of additional capital expenditures in the fourth quarter of fiscal 2009. The Company is not opening any additional stores in the fourth quarter, though some capital spending in the fourth quarter relating to stores planned to open in the first quarter of fiscal 2010 is expected to occur. In addition, the Company plans to continue to make further information-technology related improvements at its stores in the fourth quarter of fiscal 2009.
The Company plans to spend approximately $10 million on capital expenditures in fiscal 2010 to open a maximum of five new stores, to make further information-technology related improvements at its stores and to invest in improving the efficiency of its distribution center facility. The Company anticipates its cash and cash equivalents, combined with cash flows from operations, to be sufficient to meet its capital expenditure, working capital and other requirements for liquidity in the fourth quarter of fiscal 2009 and all of fiscal 2010.
Net cash used in financing activities
Net cash of $6.3 million was used in financing activities in the first nine months of fiscal 2009. The Company declared and paid three quarterly cash dividends together totaling approximately $6.3 million.
The Company maintains an Amended and Restated Revolving Credit Facility (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility provides the Company with revolving credit loans and letters of credit of up to $50.0 million, in the aggregate, subject to a borrowing base formula based on inventory levels.
In the first quarter of fiscal 2009, the Company and Wells Fargo entered into a Third Amendment to the Credit Facility (the “Third Amendment”). The Third Amendment extended the maturity date of the Credit Facility by three years from June 30, 2008 to June 30, 2011. In addition, the Third Amendment reduced the interest rate under the Credit Facility from the prime rate plus 0.25% to the prime rate minus 0.25%. As of November 29, 2008, Wells Fargo’s prime rate was 4.0%. The Third Amendment also provided the Company with the ability to borrow under the Credit Facility at an interest rate tied to the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29, 2008.
Interest under the Credit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unused portion as defined in the agreement, and a collateral monitoring fee. For the nine months ended November 29, 2008, fees related to the Credit Facility totaled $21,082. Borrowings under the Credit Facility are collateralized by the Company’s equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights.
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The Company had no revolving credit loan borrowings under the Credit Facility during the first nine months of fiscal 2009. Historically, the Credit Facility has been utilized by the Company only to open letters of credit to facilitate the import of merchandise. The borrowing base at November 29, 2008 was $36.2 million. As of November 29, 2008, the Company had outstanding letters of credit in the amount of $4.2 million. Accordingly, the availability of revolving credit loans under the Credit Facility was $32.0 million at November 29, 2008.
The Credit Facility contains certain restrictive covenants, including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants. As of November 29, 2008, the most recent measurement date, the Company was in compliance with all of these restrictive covenants under the Credit Facility.
Auction Rate Securities
As of November 29, 2008, the Company had approximately $15.9 million of long-term investments, which consisted solely of $19.6 million of auction rate securities (“ARS”) at cost, less a fair value adjustment of $3.7 million. Fair value was based on management’s analysis of impairment factors taking into account the credit quality of the underlying securities and reflects the lack of liquidity of the Company’s investments. All of the Company’s ARS are collateralized by student loans and currently have AAA (S&P) or Aaa (Moody’s) credit ratings. As of November 29, 2008, the repayment of approximately 80% of the student loans, which serve as collateral for the ARS held by the Company, is substantially backed by the United States government. Until February 2008, the ARS market was liquid and auctions for ARS held by the Company did not fail. However, beginning in February 2008, auctions for the ARS held by the Company began to fail and have continued to fail up to and as of the date of this report.
Based on current market conditions, management believes that it is likely that auctions related to the Company’s ARS will continue to be unsuccessful for the near term. Unsuccessful auctions have limited the Company’s ability to access these funds. Management anticipates the liquidity of the ARS will continue to be restricted until there is a successful auction, until such time as another market for the ARS develops, until the ARS are called by the issuer or until they are redeemed as described below. The Company reclassified its ARS to long-term investments at March 1, 2008 to reflect the lack of liquidity of these investments.
All of the ARS owned by the Company were purchased from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, by UBS. In August 2008, UBS announced a settlement in principle with the Securities and Exchange Commission, the New York Attorney General and other state regulatory agencies to restore liquidity to remaining clients who hold ARS. On October 7, 2008, UBS issued a prospectus to the Company formalizing the settlement offer and offering the Company certain ARS rights. Under the settlement, these ARS rights provide the Company the ability to redeem its ARS at par during a two-year time period beginning June 30, 2010. During this time, the Company may choose to continue to hold some or all of its ARS and earn interest or sell some or all of them to UBS at par plus accrued interest. The ARS rights are not transferable, tradeable or marginable and will not be listed or quoted on any securities exchange or any electronic communications network.
On November 7, 2008, the Company’s Board of Directors accepted the UBS settlement offer. Consequently, the Company reclassified the ARS from available-for-sale to trading securities and elected, pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), to record the ARS rights at fair value on a recurring basis utilizing significant unobservable inputs in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).
The Company determined the fair value of the ARS rights to be approximately $3.7 million, which substantially offset the unrealized loss recorded within selling, general and administrative expense related to the fair value adjustment on the ARS. The ARS rights were recorded within other non-current assets on the consolidated balance sheet. Please see Note 12 in the Notes to Condensed Consolidated Financial Statements for further disclosure regarding the Company’s accounting for fair value measurements.
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Merchandise Sourcing
The Company directly imported approximately 43% and 59% of its total merchandise purchases in the three and nine-month periods ended November 29, 2008, respectively. Substantially all of its remaining merchandise purchases were made from U.S.-based companies who import the goods from overseas. This reliance on sourcing from foreign countries may cause the Company to be exposed to certain risks as indicated below and as discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 1, 2008.
Import restrictions, including tariffs and quotas, and changes in such restrictions, could affect the import of apparel and might result in increased costs, delays in merchandise receipts or reduced supplies of apparel available to the Company, and could have an adverse effect on the Company’s business, financial condition and results of operations. The Company’s merchandise flow could also be adversely affected by political instability in any of the countries where its merchandise is manufactured or by changes in the United States’ governmental policies toward such foreign countries. In addition, merchandise receipts could be delayed due to interruptions in air, ocean and ground shipments.
A substantial portion of the Company’s directly imported merchandise is manufactured in Southeast Asia. The majority of these goods are currently produced in China, Hong Kong, Indonesia and Singapore. The Company is not presently importing merchandise produced in the Middle East.
The Company purchased approximately 17% and 19% of its merchandise from its largest overseas supplier during the first nine months of fiscal 2009 and 2008, respectively. Although the Company has an established operating history with its largest vendor, there can be no assurance that this relationship can be maintained in the future or that the vendor will continue to supply merchandise to the Company. If there should be any significant disruption in the supply of merchandise from this vendor, management believes that it will be able to shift production to other suppliers so as to continue to secure the required volume of product. Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on the Company’s financial position or results of operations.
In the three and nine month periods ended November 29, 2008, the Company purchased approximately 20% and 32% of its merchandise, respectively, through one buying agent (the “Agent”). The Company has continued the process of establishing relationships with additional primary suppliers, which are intended to reduce its reliance on the Agent. The Agent also has informed the Company that it desires to cease serving as an intermediary with manufacturers on behalf of the Company. Therefore, the Company and the Agent agreed to terminate their arrangement as of the end of December 2008. While management believes the actions it is taking to mitigate the risks of reliance on the Agent will be successful, any significant disruption in supply from vendors working through the Agent could have a material adverse impact on the Company’s financial position or results of operations.
Quarterly Results and Seasonality
The Company’s quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, timing of promotional events and new store openings, adverse weather conditions, shifts in the timing of certain holidays and customer response to the Company’s seasonal merchandise mix.
Inflation
As the operations of the Company are influenced by general economic conditions, the Company’s management believes that rising prices, resulting particularly from higher gasoline and food costs, had a negative effect on the Company’s results of operations during first and second quarters if fiscal 2009. Management does not believe that inflation had a material effect on the Company’s results of operations in the third quarter of fiscal 2009 or during the three and nine month periods ended December 1, 2007.
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Forward-Looking Statements
The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008, which could cause actual results to differ materially from historical results or those anticipated.
The words or phrases “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “believe,” “expect, “ “anticipate,” “forecast,” “plans to,” “intend,” “intends” and similar expressions are intended to identify forward-looking statement within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, the Company wishes to advise readers that the factors listed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008, as well as other factors, could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed about such future performance or results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The market risk inherent in the Company’s financial instruments and in its financial position represents the potential loss arising from adverse changes in interest rates. The Company’s results of operations could be negatively impacted by decreases in interest rates on its investments, including its investments in Auction Rate Securities. Please see Note 3 to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operation for further information regarding the Company’s investments in Auction Rate Securities.
The Company is potentially exposed to market risk from changes in interest rates relating to its Credit Facility with Wells Fargo Bank. Loans under the Credit Facility bear interest at Wells Fargo’s prime rate, 4.0% as of November 29, 2008, less 0.25%, or at an interest rate tied to the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29, 2008. However, the Company had no revolving credit loan borrowings under the Wells Fargo Revolver during the first nine months of fiscal 2009 or fiscal 2008. Given its existing liquidity position, the Company does not expect to utilize the Credit Facility in the reasonably foreseeable future other than to use letters of credit to support the import of merchandise.
The Company enters into certain purchase obligations outside the United States, which are denominated and settled in U.S. dollars. Therefore, the Company has only minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that its foreign currency exchange risk is immaterial. The Company does not have any derivative financial instruments and does not hold any derivative financial instruments for trading purposes.
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CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and interim Chief Financial Officer (“CFO”), the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of November 29, 2008, the end of the period covered by this Quarterly Report on Form 10-Q/A. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and that such information is accumulated and communicated to the Company’s management, including its CEO and CFO, to allow timely decisions regarding the required disclosures.
At the time the Company’s Quarterly Report on Form 10-Q for the quarter ended November 29, 2008 was filed on January 8, 2009, the Company’s CEO and CFO concluded that its disclosure controls and procedures were effective as of November 29, 2008. Subsequent to that evaluation, the Company’s management, including its CEO and CFO, concluded that the Company’s disclosure controls and procedures were not effective as of November 29, 2008, because of the material weakness in the design of its internal control over financial reporting related to complex tax accounting matters with respect to discontinued operations. This control deficiency resulted in the restatement of the Company’s Quarterly Report on Form 10-Q for the period ended November 29, 2008, as described in Note 1 to the condensed consolidated financial statements.
Notwithstanding this material weakness, the Company’s management, based in part upon the work performed during the restatement process, has concluded the Company’s condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q/A are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.
(b) Internal Control Over Financial Reporting.
As described above, there were changes in the Company’s internal control over financial reporting that occurred during the quarter ended November 29, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Subsequent to November 29, 2008, the Company has completed an evaluation of the design of the procedures and controls surrounding complex tax accounting matters related to discontinued operations and has implemented procedures designed to ensure that matters of this nature are analyzed and recorded appropriately in the financial statements. Remediation of the material weakness is expected to be completed before the end of the Company’s fourth quarter.
ITEM 1.
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, any such liability is not expected to have a material adverse impact on the Company’s financial position or results of operations.
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ITEM 1A.
The factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 1, 2008 should be carefully considered as they could materially affect the Company’s business, financial condition or future results.
ITEM 2.
UNREGISTERED
SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
In fiscal 2008, the Company’s Board of Directors authorized and subsequently announced a one-year stock repurchase program enabling the Company to purchase up to $20.0 million of its common stock, subject to market conditions. No repurchases were executed under the program in the first nine months of fiscal 2009. As of May 24, 2008, the expiration date of the repurchase program, the Company had repurchased 948,800 shares of its common stock under the program for a total cost, including commissions, of approximately $12.1 million.
ITEM 3.
DEFAULTS
UPON
SENIOR SECURITIES
None.
ITEM 4.
A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
None.
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ITEM 6.
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10.1 |
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Separation Agreement and Release Letter between Christopher & Banks Corporation and Andrew K. Moller, dated December 2, 2008 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 4, 2008) |
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31.1* |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2* |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1* |
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2* |
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed with this report.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CHRISTOPHER & BANKS CORPORATION |
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Dated: |
February 26, 2009 |
By |
/S/ LORNA E. NAGLER |
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Lorna E. Nagler |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Dated: |
February 26, 2009 |
By |
/S/ MICHAEL J. LYFTOGT |
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Michael J. Lyftogt |
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Vice President, Finance and Interim Chief Financial Officer |
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(Principal Financial Officer) |
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CHRISTOPHER & BANKS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
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Exhibit No. |
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Description |
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10.1 |
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Separation Agreement and Release Letter between Christopher & Banks Corporation and Andrew K. Moller, dated December 2, 2008 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 4, 2008) |
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31.1* |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2* |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1* |
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2* |
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed with this report.
36