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CACH > SEC Filings for CACH > Form 10-Q on 11-May-2012All Recent SEC Filings

Show all filings for CACHE INC

Form 10-Q for CACHE INC


11-May-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained in this Form 10-Q, the matters addressed herein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements represent the Company's expectation or belief concerning future events. Without limiting the foregoing, the words "believes," "thinks," "anticipates," "estimates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that forward-looking statements are subject to risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially, or otherwise, from those expressed or implied in the forward-looking statements, including, without limitation, macroeconomic factors that have affected the retail sector, including changes in national, regional and local economic conditions, employment levels and consumer spending patterns, and the other risks detailed from time to time in the Company's most recent Form 10-K, Forms 10-Q and other reports filed with the Securities and Exchange Commission. Any weakening of the economy generally or in a number of our markets could adversely affect our financial position and results of operations, cause us to reduce the number and frequency of new store openings, slow our re-modeling of existing locations or cause us to increase store closings. Other unknown or unpredictable factors also could harm the Company's business, financial condition and results. Consequently, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws.

RESULTS OF OPERATIONS



The following table sets forth our results of operations for the 13-week periods
ended March 31, 2012 and April 2, 2011, respectively, expressed as a percentage
of net sales.



                                         13 Weeks Ended
                                      March 31,    April 2,
                                        2012         2011
Sales                                     100.0 %     100.0 %
Cost of sales                              60.4        57.9
Gross profit                               39.6        42.1
Store operating expenses                   34.5        34.8
General and administrative expenses         8.7         9.7
Operating loss                             (3.6 )      (2.4 )
Interest expense                           (0.0 )      (0.0 )
Interest income                             0.0         0.0
Loss before income taxes                   (3.6 )      (2.4 )
Income tax benefit                         (1.4 )      (0.9 )
Net loss                                   (2.2 )%     (1.5 )%


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We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:

                                                             13 Weeks Ended
                                                        March 31,       April 2,
                                                           2012           2011
Total store count, at end of period                            268            280
Net sales increase                                             7.5 %          7.3 %
Comparable store sales increase                                9.4 %          7.7 %
Average sales per transaction increase (decrease)             (2.5 )%        20.3 %
Average number of transactions increase (decrease)            12.2 %        (10.5 )%
Net sales per average square foot                       $       91      $      86
Total square footage, at end of period (in thousands)          540            567

Net Sales

During the 13-week period ended March 31, 2012, net sales increased to $56.0 million from $52.1 million, an increase of $3.9 million, or 7.5%, as compared to the same 13-week period last year. This reflects an increase in comparable store sales of approximately $4.8 million or 9.4%, which was partially offset by a $1.1 million decrease in non-comparable store sales. Included in comparable store sales are e-commerce sales of $5.7 million during the current 13-week period as compared to $2.9 million in the prior year period. The increase in e-commerce business as a result of our new e-commerce platform and e-commerce marketing efforts as well as an increase in promotional activity contributed to the increase in sales. The increase in net sales at our stores for the quarter reflected an increase of 12.2% in sales transactions partially offset by a 2.5% decrease in average dollars per transaction.

Gross Profit

During the 13-week period ended March 31, 2012, gross profit increased to $22.2 million from $21.9 million, an increase of $276,000 or 1.3%, as compared to the same 13-week period last year. This increase was primarily due an increase in net sales as described above partially offset by higher markdowns. As a percentage of net sales, gross profit decreased to 39.6% from 42.1% for the current 13-week period, as compared to the prior year period, primarily due to an increase in markdowns, as a percentage of sales due to an earlier transition to spring merchandise which was partially offset by an increase in our initial mark-up.

Store Operating Expenses

During the 13-week period ended March 31, 2012, store operating expenses increased to $19.3 million from $18.1 million, an increase of $1.2 million or 6.6%, as compared to the same 13-week period last year. Store operating increased primarily due to an increase in marketing expense of $635,000, an increase e-commerce related expenses of $360,000 to support the growth in e-commerce business, and an increase in payroll and payroll-related expenses of $280,000, partially offset by a decrease in depreciation expense of $185,000. The increase in marketing expenses was due to the increase in e-commerce and other marketing efforts. Payroll and payroll-related costs increased primarily due to our maximizing store coverage during high customer traffic periods. The decrease in depreciation expense was primarily due to certain assets being fully depreciated as of December 31, 2011, coupled with the impairment of 14 underperforming stores during the fourth quarter of fiscal 2011. As a percentage of net sales, store operating expenses decreased to 34.5% from 34.8% for the fiscal 2012 13-week period, as compared to the prior year period, primarily due to the increase in net sales.

General and Administrative Expenses

During the 13-week period ended March 31, 2012, general and administrative expenses decreased to $4.9 million from $5.0 million, a decrease of $166,000, or 3.3%, as compared to the same 13-week period last year. General and administrative expenses decreased primarily due to a decrease in payroll and payroll-related costs of $106,000. As a percentage of net sales, general and administrative expenses decreased to 8.7% from 9.7% in fiscal 2011, primarily due to the increase in net sales in fiscal 2012.


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Other Income/Expense

During the 13-week period ended March 31, 2012, net other income increased to $18,000 from $3,000, an increase of $15,000 as compared to the same 13-week period last year. This increase was primarily due to the elimination of interest expense as a result of the settlement of the note payable to the principals of Adrienne Victoria Designs, Inc. in December 2011.

Income Taxes

During the 13-week period ended March 31, 2012, income tax benefit increased to $797,000 from $485,000, an increase of approximately $312,000, as compared to the same 13-week period last year. The income tax benefits recorded in fiscal year 2012 and 2011 were attributable to the operating losses incurred by the Company in both periods, as discussed above. The estimated effective tax rate for fiscal 2012 is projected to be 39.8%, as compared to the fiscal 2011 estimate of 38.6%.

Net Loss

As a result of the factors discussed above, net losses of $1.2 million and $772,000 were recorded during the 13-week periods ended March 31, 2012 and April 2, 2011, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash requirements are primarily for working capital, inventory for new stores, construction of new stores, remodeling of existing stores and to improve and enhance our information technology systems. We have historically satisfied our cash requirements principally through cash flow from operations. During the 13-week period ended March 31, 2012, we used $7.3 million of cash flow from operations, as compared to $5.6 million during the same period in fiscal 2011. We expect to continue to meet our operating cash requirements primarily through cash flows from operating activities, existing cash and equivalents, and short-term investments. At March 31, 2012, we had working capital of $31.8 million and cash and marketable securities of $20.7 million. The cash and marketable securities at March 31, 2012, included certificates of deposit of $3.0 million, that have been placed by the Company as collateral against its one-year credit facility.

The following table sets forth our cash flows for the periods indicated:

                                                             13 Weeks Ended
                                                        March 31,       April 2,
                                                          2012            2011
Net cash used in operating activities                 $  (7,267,000 ) $ (5,558,000 )
Net cash provided by (used in) investing activities      (4,532,000 )    3,258,000
Net cash used in financing activities                             -       (413,000 )
Net decrease in cash and equivalents                  $ (11,799,000 ) $ (2,713,000 )

During the 13-week period ended March 31, 2012, cash and equivalents decreased by $11.8 million, primarily as a result of an increase in inventories of $5.3 million, purchases of marketable securities of $3.0 million, purchases of equipment and leasehold improvements of $1.7 million and due to a decrease in accrued liabilities of $1.0 million. Seasonal fluctuations resulted in an increase in inventories.

The Company had a credit facility with the Bank of America (the "Bank") of $3.0 million which expired on May 1, 2012. On May 1, 2012, the Company amended its credit facility with the Bank for another year to allow the Company to issue letters of credit up to $3.0 million, which is collateralized by granting to the Bank a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank, amounting to a total of $3.0 million. This one-year credit facility will expire on April 30, 2013.

The Company had outstanding letters of credit of $687,000, $2.3 million and $2.3 million at March 31, 2012, December 31, 2011 and April 2, 2011, respectively.

Inflation

The Company does not believe that its sales revenue or operating results have been materially impacted by inflation during the past two fiscal years. There can be no assurance, however, that our sales revenue or operating results will not be impacted by inflation in the future.


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Ongoing macroeconomic conditions may continue to affect the sales volume and profitability levels of our Company. Furthermore, we believe that continuing limitations on the availability of consumer credit, especially of credit cards, continue to adversely affect customer demand for our products, which adversely affects our business, financial condition and results of operations.

Many of our suppliers rely on working capital financing to fund their operations. As a result of current economic conditions, lenders continue to maintain stringent credit standards and terms. To the extent that any of our suppliers are unable to obtain adequate credit or their borrowing costs increase, the suppliers may cease operations, we may experience delays in obtaining products, the suppliers may increase their wholesale prices to us or they may modify payment terms in a manner that is unfavorable to us. Any of the foregoing or other unforeseen circumstances could adversely affect our net sales or gross margins, which could adversely affect our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of our business, we enter into operating leases for store locations and utilize letters of credit principally for the importation of merchandise. Other than operating lease commitments and letters of credit, we are not a party to any material off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in our fiscal 2011 Form 10-K. As disclosed in Note 1 of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. We evaluate our estimates and judgments on an ongoing basis, and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these under different assumptions or conditions.

The Company's management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Inventories. Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost, as well as the resulting gross margins. We take markdowns due to changes in fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any significant change in our markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation which results in a carrying value at the lower of cost or market. Inventories other than finished goods at retail stores, called production inventory, primarily consist of piece goods, trim and work-in-process. The Company values production inventory at lower of cost or market value using first-in-first-out valuation method. The Company reviews the inventory for factors such as age, obsolescence, potential use, or other factors that may indicate a decline in its value. The Company records a reserve against the cost of the production inventory to account for any decline in its value.

Finite long-lived assets. The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable and exceeds the fair market value. Factors we consider important which could trigger an impairment review include the following:

significant changes in the manner of our use of assets or the strategy for our overall business;

significant negative industry or economic trends;

store closings; or


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underperforming business trends.

The Company evaluates finite long-lived assets in accordance with "Impairment or Disposal of Long-Lived Assets" under Topic 360 "Property, Plant and Equipment" of the FASB ASC. Finite-lived assets are evaluated for recoverability in accordance with Topic 360 of the FASB ASC whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset, is recognized. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates. No impairment charges were recorded during the 13-week period ended March 31, 2012. The Company recorded an impairment charge of $719,000 for 14 underperforming stores during the fourth quarter of fiscal 2011.

Self Insurance. The Company is self-insured for losses and liabilities related primarily to employee health and welfare claims up to certain thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for the 13-week periods ended March 31, 2012 and April 2, 2011. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. We maintain stop-loss insurance coverage, which covers us for benefits paid in excess of limits as defined in the plan.

Gift Cards, Gift Certificates and Credits. The Company sells gift cards and gift certificates ("Gift Cards") and issues credits to its customers when merchandise is returned ("Merchandise Credits"), which do not expire. The Company recognizes sales from Gift Cards when they are redeemed by the customer and income when the likelihood of the Gift Card and Merchandise Credit being redeemed by the customer is remote ("Gift Card breakage"), since the Company has determined that it does not have a legal obligation to remit the unredeemed value to the relevant jurisdiction as abandoned property. The Company determines Gift Card breakage income based upon historical redemption patterns of its Merchandise Credits and Gift Cards. The Company has determined based on these historical redemption rates that approximately 5% of its Merchandise Credits issued and approximately 3% of its Gift Cards issued will remain unredeemed. The Company is recognizing the estimated unredeemed Merchandise Credits and Gift Cards over a fourteen-quarter period with 64% recognized in the first quarter to 0.03% in the fourteenth quarter subsequent to the issue date. The Company has determined that redemption would be remote based on the fact that, by the fourteenth quarter since issue date, the redemption rate approximated 0%, indicating that the probability of such merchandise credits and gift cards being redeemed is remote. As such, we have recorded breakage income based upon the above criteria which is reviewed on a quarterly basis for propriety. Breakage income represents the balance of Gift Cards and Merchandise Credits for which the Company believes the likelihood of redemption by the customer is remote.

The Company recorded breakage income of $74,000 and $146,000 during the 13-week periods ended March 31, 2012 and April 2, 2011, respectively.

Revenue Recognition. Sales are recognized at the "point of sale," which occurs when merchandise is sold in an "over-the-counter" transaction or upon receipt by a customer. Sales of merchandise via our website are recognized at the expected time of delivery to the customer. Our customers have the right to return merchandise. Sales are reported net of actual and estimated returns. We maintain a reserve for potential product returns and record, as a reduction to sales, a provision for estimated product returns, which is determined based on historical experience. The Company recorded a net increase in sales return reserve of approximately $74,000 and $150,000 for the 13-week periods ended March 31, 2012 and April 2, 2011, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred at our stores for shipping and handling are included in cost of sales. The Company records revenues net of applicable sales tax.

The Company's co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract. During the 13-week periods ended March 31, 2012 and April 2, 2011, the Company received approximately $206,000 and $178,000, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards was $272,000 and $199,000 for the 13-week periods ended March 31, 2012 and April 2, 2011, respectively.

The Company also receives from the issuing bank and Visa U.S.A. Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program, the sales royalties earned in connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by


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the issuing bank and Visa U.S.A. Inc. The amount of sales royalty income recorded was $100,000 and $92,000 for the 13-week periods ended March 31, 2012 and April 2, 2011, respectively.

The Company also offers its card holders a program whereby points can be earned on net purchases made with the co-branded credit card. Five reward points are awarded for each dollar spent at Cache and one reward point is awarded for each dollar spent at non-Cache businesses. A cardholder whose credit card account is not delinquent, in default or closed will be automatically eligible to receive a $25 Cache gift card upon accrual of 2,500 reward points. The issuing bank bears the cost of the reward program and is responsible for the administration and management of the program.

Income Taxes. The Company accounts for income taxes in accordance with "Income Taxes", Topic 740 of the FASB ASC. This guidance requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. At December 31, 2011, the Company maintained $8.8 million of net deferred tax assets, of which approximately $5.1 million related to federal tax operating loss carry-forwards and $1.6 million related to state tax NOL carry-forwards. In addition, during the 13-week period ended March 31, 2012, the Company recorded an income tax benefit of $797,000, primarily related to the net loss incurred. The Company established a federal valuation allowance of $4.6 million at December 31, 2011. For state income tax purposes, the Company had a valuation allowance in the amount of $538,000 at December 31, 2011, primarily to reserve for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. These amounts remained unchanged at March 31, 2012.

At March 31, 2012 and April 2, 2011, the current portion of deferred tax assets and liabilities of $363,000 and $251,000, respectively, were included in prepaid expenses and other current assets, while the non-current portion of deferred tax assets and liabilities of $9.3 million and $9.5 million, respectively were included in other assets on the Company's accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowance discussed above.

When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company's best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of March 31, 2012 and December 31, 2011, the Company has no reserve recorded for potential tax contingencies. As of April 2, 2011, the Company reported a reserve balance of $271,000 net of federal benefit for potential tax contingencies.

Seasonality. The Company experiences seasonal and quarterly fluctuations in net sales and operating income. Quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of new store openings, fashion trends, shifts in timing of certain holidays, economic conditions and competition. Our business is subject to seasonal influences, characterized by highest sales generally during the fourth quarter (October, November and December) and lowest sales generally during the third quarter (July, August and September).

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