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CACH > SEC Filings for CACH > Form 10-Q on 14-Aug-2012All Recent SEC Filings

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Form 10-Q for CACHE INC


14-Aug-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.


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RESULTS OF OPERATIONS



The following table sets forth our results of operations for the 26-week and
13-week periods ended June 30, 2012 and July 2, 2011, respectively, expressed as
a percentage of net sales.



                                        26-Weeks Ended        13-Weeks Ended
                                      June 30,    July 2,   June 30,   July 2,
                                        2012       2011       2012      2011
Sales                                    100.0 %    100.0 %    100.0 %   100.0 %
Cost of sales                             58.7       56.0       57.2      54.3
Gross profit                              41.3       44.0       42.8      45.7
Store operating expenses                  33.6       33.4       32.6      32.2
General and administrative expenses        8.0        8.0        7.4       6.6
Operating income (loss)                   (0.3 )      2.6        2.8       6.9
Interest expense                           0.0        0.0        0.0       0.0
Interest income                            0.0        0.0        0.0       0.0
Income (loss) before income taxes         (0.3 )      2.6        2.8       6.9
Income tax provision (benefit)            (0.1 )      0.8        1.1       2.3
Net income (loss)                         (0.2 )%     1.8 %      1.7 %     4.6 %

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:

                                               26-Weeks Ended               13-Weeks Ended
                                           June 30,       July 2,      June 30,         July 2,
                                             2012          2011          2012            2011
Total store count, at end of period              264           280           264              280
Net sales increase                               4.7 %         6.9 %         2.3 %            6.5 %
Comparable store sales increase                  6.9 %         6.8 %         4.7 %            6.0 %
Average sales per transaction increase
(decrease)                                      (4.0 )%       13.1 %        (5.4 )%           6.8 %
Average number of transactions
increase (decrease)                             11.4 %        (5.6 )%       10.7 %           (0.8 )%
Net sales per average square foot         $      191     $     184    $       99      $        98
Total square footage, at end of period
(in thousands)                                   532           567           532              567

Net Sales

During the 26-week period ended June 30, 2012, net sales increased to $117.6 million from $112.4 million, an increase of $5.2 million, or 4.7%, as compared to the same 26-week period last year. The increase in net sales is primarily due to the increase in comparable store sales of approximately $7.5 million or 6.9%, which was partially offset by a $2.5 million decrease in non-comparable store sales. Included in comparable store sales are e-commerce sales of $12.6 million during the current 26-week period, as compared to $6.3 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 for the period reflected an 11.4% increase in sales transactions, partially offset by a 4.0% decrease in average dollars per transaction.

During the 13-week period ended June 30, 2012, net sales increased to $61.6 million from $60.3 million, an increase of $1.3 million, or 2.3%, as compared to the same 13-week period last year. This reflects an increase in comparable store sales of approximately $2.7 million or 4.7%, which was partially offset by a $1.4 million decrease in non-comparable store sales. Included in comparable store sales are e-commerce sales of $6.9 million during the 13-week period, as compared to $3.4 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 for the quarter reflected a 10.7% increase in sales transactions, partially offset by a 5.4% decrease in average dollars per transaction.


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Gross Profit

During the 26-week period ended June 30, 2012, gross profit decreased to $48.6 million from $49.4 million, a decrease of $855,000, or 1.7%, as compared to the same 26-week period last year. This decrease was primarily due to higher markdowns and was partially offset by an increase in net sales as described above. As a percentage of net sales, gross profit decreased to 41.3% from 44.0% for the current 26-week period, as compared to the prior year period, primarily due to an increase in markdowns and internet fulfillment and delivery expenses, which was partially offset by an increase in our initial mark-up and the leverage impact from higher sales as it relates to occupancy and operational costs in our design, production and sourcing departments.

During the 13-week period ended June 30, 2012, gross profit decreased to $26.4 million from $27.5 million, a decrease of $1.1 million, or 4.1%, as compared to the same 13-week period last year. This decrease was primarily due to higher markdowns in the current period, partially offset by an increase in net sales as described above. As a percentage of net sales, gross profit decreased to 42.8% from 45.7% for the current 13-week period, as compared to the prior year period, primarily due to an increase in markdowns and internet fulfillment and delivery expenses, which was partially offset by an increase in our initial mark-up and the leverage impact from higher sales as it relates to occupancy costs.

Store Operating Expenses

During the 26-week period ended June 30, 2012, store operating expenses increased to $39.5 million from $37.5 million, an increase of $2.0 million, or 5.1%, as compared to the same 26-week period last year. Store operating expenses increased primarily due to an increase in marketing expense of $1.5 million, an increase in e-commerce related expenses of $543,000 to support the expansion in our e-commerce, and an increase in health insurance expense of $191,000, partially offset by a decrease in depreciation expense of $406,000. The increase in marketing expense was due to an increase in e-commerce marketing efforts. The increase in health insurance was primarily due to an increase in health insurance claims. 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, for the fiscal 2012 26-week period, store operating expenses increased to 33.6% from 33.4% as compared to the prior year period, primarily due to the increase in store operating expenses in fiscal 2012.

During the 13-week period ended June 30, 2012, store operating expenses increased to $20.1 million from approximately $19.4 million, an increase of $721,000, or 3.7%, as compared to the same 13-week period last year. Store operating expenses increased primarily due to an increase in marketing expense of $823,000, an increase in e-commerce related expenses of $183,000 to support the expansion in our e-commerce, and an increase in health insurance expense of $113,000, partially offset by a decrease in depreciation expense of $221,000 as well as a decrease in payroll and payroll related costs of $189,000. The increase in marketing expense was primarily due to an increase in e-commerce marketing efforts. The decrease in depreciation 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. The decrease in payroll and payroll-related expenses was attributable to less stores and better utilization of payroll hours. As a percentage of net sales, for the fiscal 2012 13-week period, store operating expenses increased to 32.6% from 32.2%, as compared to the prior year period, primarily due to the increase in store operating expenses in fiscal 2012.

General and Administrative Expenses

During the 26-week period ended June 30, 2012, general and administrative expenses increased to $9.5 million from $9.0 million, an increase of $464,000 or 5.2% compared to the same 26-week period last year. General and administrative expenses increased primarily due to an increase in professional fees of $306,000 and outside services of $143,000. Professional fees in fiscal 2011 included an insurance reimbursement of $450,000 for legal fees in connection with a previously disclosed lawsuit resolved in April 2011. This reimbursement in fiscal 2011 is the primary driver for the increase in professional fees from last year. As a percentage of net sales, general and administrative expenses was approximately 8.0% for both fiscal years.

During the 13-week period ended June 30, 2012, general and administrative expenses increased to $4.6 million from $4.0 million, an increase of $630,000, or 15.9%, as compared to the same 13-week period last year. The increase was primarily due to an increase in professional fees of $294,000, payroll and payroll-related costs of $201,000 and outside services of $88,000. Professional fees in fiscal 2011 included an insurance reimbursement of $450,000 for legal fees in connection with a previously disclosed lawsuit resolved in April 2011. This reimbursement in fiscal 2011is the primary driver for the increase in professional fees this year. As a percentage of net sales, general and administrative expenses increased to 7.4% from 6.6%, primarily due to the increase in general and administrative expenses in fiscal 2012.


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Other Income/Expense

During the 26-week period ended June 30, 2012, net other income increased to $42,000 from $13,000, an increase of $29,000, as compared to the same 26-week period last year. This increase was primarily due to a reduction in interest expense of $31,000, as a result of the settlement of the note payable to the principals of Adrienne Victoria Designs, Inc. in December 2011.

During the 13-week period ended June 30, 2012, net other income increased $24,000 from $10,000, as compared to the same 13-week period last year primarily due to a reduction in interest expense of $13,000, 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 26-week period ended June 30, 2012, the Company recorded an income tax benefit of $127,000, as compared to an income tax provision of $885,000 during the same 26-week period last year. During the 13-week period ended June 30, 2012, the income tax provision decreased to $670,000 from $1.4 million, a decrease of $700,000, as compared to the same 13-week period last year. The estimated effective tax rate for fiscal 2012 is projected to be 42.0%, excluding discrete items, compared to the fiscal 2011 estimate of 39.8%. During the 13-week period ended July 2, 2011, the Company recorded a reversal of a state income tax reserve of $277,000, net of federal benefit, as a result of the completion of a state income tax audit.

Net Income/(Loss)

As a result of the factors discussed above, the Company recorded a net loss of $177,000 and net income of $1.0 million for the 26- and 13-week periods ended June 30, 2012, respectively. Comparatively, the Company recorded net income of $2.0 million and $2.8 million during the 26- and 13-week periods ended July 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 26-week period ended June 30, 2012, cash used in operations was $485,000, as compared to $1.0 million provided by operations 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 June 30, 2012, we had working capital of $31.9 million, which included cash and marketable securities of $24.4 million. The cash and marketable securities at June 30, 2012 included certificates of deposit of $3.0 million that have been placed by the Company as collateral against a one-year credit facility.

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

                                                            26 Weeks Ended
                                                        June 30,       July 2,
                                                          2012          2011
Net cash provided by (used in) operating activities   $   (485,000 ) $ 1,023,000
Net cash provided by (used in) investing activities     (7,690,000 )   3,464,000
Net cash used in financing activities                            -      (390,000 )
Net increase (decrease) in cash and equivalents       $ (8,175,000 ) $ 4,097,000

During the 26-week period ended June 30, 2012, cash and equivalents decreased by $8.2 million, primarily due to the purchase of equipment and leasehold improvements of $4.9 million, net purchases of investments of $3.0 million, and a decrease in accounts payable of $1.6 million, partially offset by other operating activities of $1.1 million.

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 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 $1.4 million, $2.3 million and $1.6 million at June 30, 2012, December 31, 2011 and July 2, 2011, respectively.


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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.

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 estimates 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;


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significant negative industry or economic trends;

store closings; or

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 26-week period ended June 30, 2012 and July 2, 2011. 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. The Company's earnings were impacted by an increase in employee health and welfare expense of $191,000 and $113,000 for the 26- and 13-week periods ended June 30, 2012. Adjustments to earnings resulting from changes in historical loss trends were not significant for the 26- and 13-week periods ended July 2, 2011. 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 $149,000 and $304,000 during the 26-week periods ended June 30, 2012 and July 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 decrease in sales return reserve of $165,000 and $169,000 for the 26-week periods ended June 30, 2012 and July 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 26-week periods . . .

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