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CACH > SEC Filings for CACH > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CACHE INC

Form 10-Q for CACHE INC


9-Nov-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 39-week and 13-week periods ended September 29, 2012 and October 1, 2011, respectively, expressed as a percentage of net sales.


Table of Contents

                                       39-Weeks Ended                 13-Weeks Ended
                                 September 29,    October 1,    September 29,    October 1,
                                     2012            2011           2012            2011
Net sales                                100.0 %       100.0 %          100.0 %       100.0 %
Cost of sales                             61.3          57.0             68.0          59.4
Gross profit                              38.7          43.0             32.0          40.6
Store operating expenses                  35.3          34.8             39.9          37.9
General and administrative
expenses                                   8.5           8.3              9.8           8.9
Operating loss                            (5.1 )        (0.1 )          (17.7 )        (6.2 )
Interest expense                           0.0           0.0              0.0           0.0
Interest income                            0.0           0.0              0.0           0.0
Loss before income taxes                  (5.1 )        (0.1 )          (17.7 )        (6.2 )
Income tax benefit                        (1.1 )        (0.2 )           (3.7 )        (2.5 )
Net income (loss)                         (4.0 )%        0.1 %          (14.0 )%       (3.7 )%

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:

                                            39-Weeks Ended                         13-Weeks Ended
                                   September 29,        October 1,       September 29,          October 1,
                                       2012                2011               2012                 2011
Total store count, at end of
period                                        262                279                 262                 279
Net sales increase (decrease)                 1.5 %              6.9 %              (5.9 )%              6.9 %
Comparable store sales
increase (decrease)                           4.0 %              6.4 %              (2.9 )%              5.7 %
Average sales per transaction
increase (decrease)                          (6.6 )%            11.1 %             (12.8 )%              6.8 %
Average number of transactions
increase (decrease)                          11.3 %             (4.2 )%             11.3 %              (1.1 )%
Net sales per average square
foot                              $           265     $          264    $             74      $           80
Total square footage, at end
of period (in thousands)                      528                565                 528                 565

Net sales

During the 39-week period ended September 29, 2012, net sales increased to $163.4 million from $161.0 million, an increase of $2.4 million, or 1.5%, as compared to the same 39-week period last year. The increase in net sales is primarily due to an increase in comparable store sales of $6.1 million, or 4.0%, which was partially offset by a decrease in non-comparable store sales of $4.0 million. Included in comparable store sales are e-commerce sales of $18.5 million during the 39-week period, as compared to $8.7 million in the prior year period. The increase in e-commerce business is due to our new e-commerce platform, e-commerce marketing efforts, as well as an increase in promotional activity. The increase in net sales for the period reflected an 11.3% increase in average number of transactions, partially offset by a 6.6% decrease in average dollar per transactions.

During the 13-week period ended September 29, 2012, net sales decreased to $45.8 million from $48.7 million, a decrease of $2.9 million, or 5.9%, as compared to the same 13-week period last year. The decrease in net sales is primarily due to a decrease in comparable store sales of approximately $1.3 million or 2.9% and a decrease in non-comparable store sales of $1.5 million. Included in comparable store sales are e-commerce sales of $5.9 million during the 13-week period, as compared to $2.4 million in the prior year period. The decrease in net sales for the quarter reflected a 12.8% decrease in average dollars per transaction, partially offset by an 11.3% increase in sales transactions.

Gross profit

During the 39-week period ended September 29, 2012, gross profit decreased to $63.2 million from $69.2 million, a decrease of $6.0 million, or 8.6%, as compared to the same 39-week period last year. This decrease was primarily due to higher markdowns. As a percentage of net sales, gross profit decreased to 38.7% from 43.0% for the current 39-week period, as compared to the prior year period, primarily due to an increase in markdowns.

During the 13-week period ended September 29, 2012, gross profit decreased to $14.7 million from $19.8 million, a decrease of $5.1 million, or 25.8%, as compared to the same 13-week period last year. This decrease was primarily due to a decrease in net sales as described above, as well as higher markdowns. As a percentage of net sales, gross profit decreased to 32.0% from 40.6% for the current 13-week period, as compared to the prior year period, primarily due to an increase in markdowns. The leverage impact from lower sales as it relates to occupancy and operational costs in our design, production and sourcing departments, also contributed to the decrease in gross margin for the current period.


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Store operating expenses

During the 39-week period ended September 29, 2012, store operating expenses increased to $57.7 million from $56.0 million, an increase of $1.7 million, or 3.1%, as compared to the same 39-week period last year. Store operating expenses increased primarily due to an increase in marketing expense of $1.9 million, an increase in e-commerce related expenses of $652,000 to support the expansion of our e-commerce, partially offset by a decrease in depreciation expense of $362,000 as well as a decrease in payroll and payroll-related costs of $480,000. The increase in marketing expense was primarily due to an increase in e-commerce marketing efforts. The decrease in depreciation expense was primarily due to certain assets being fully depreciated, coupled with the impairment of 14 underperforming stores during the fourth quarter of fiscal 2011. The decrease in payroll and payroll-related costs was attributable to fewer stores and better utilization of payroll hours. As a percentage of net sales, for the fiscal 2012 39-week period, store operating expenses increased to 35.3% from 34.8% as compared to the prior year period due to the increase in store operating expenses.

During the 13-week period ended September 29, 2012, store operating expenses decreased to $18.3 million from $18.5 million, a decrease of $195,000, or 1.1%, as compared to the same 13-week period last year. Store operating expenses decreased primarily due to a decrease in payroll and payroll related costs of $571,000, a decrease in credit card fees of $86,000, and a decrease in health insurance expense of $86,000, which was partially offset by an increase in marketing expense of $417,000 and e-commerce related expenses of $239,000 to support the expansion of our e-commerce business. The decrease in payroll and payroll-related costs was attributable to fewer stores and better utilization of payroll hours. The decrease in credit card fees was primarily due to the decrease in sales. The decrease in health insurance was primarily due to a decrease in health insurance claims. The increase in marketing expense was primarily due to an increase in e-commerce marketing efforts. As a percentage of net sales, store operating expenses increased to 39.9% from 37.9% for the current 13-week period, as compared to the prior year period due to the decrease in net sales.

General and administrative expenses

During the 39-week period ended September 29, 2012, general and administrative expenses increased to $14.0 million from $13.3 million, an increase of $627,000, or 4.7%, as compared to the same 39-week period last year, primarily due to an increase in professional fees of $397,000 and an increase in payroll and payroll-related costs of $138,000. Professional fees in fiscal 2011 included an insurance reimbursement of $450,000 for legal fees in connection with a previously disclosed lawsuit that was resolved in April 2, 2011. This reimbursement in fiscal 2011 is the primary driver for the increase in professional fees this year. As a percentage of net sales, general and administrative expenses increased to 8.5% from 8.3% in fiscal 2011, primarily due to the increase in general and administrative expenses in fiscal 2012.

During the 13-week period ended September 29, 2012, general and administrative expenses increased to $4.5 million from $4.3 million, an increase of $163,000, or 3.8%, as compared to the to the same 13-week period last year, primarily due to an increase in professional fees of $91,000. As a percentage of net sales, general and administrative expenses increased to 9.8% from 8.9% in fiscal 2011, primarily due to the decrease in net sales as well as the increase in general and administrative expenses in fiscal 2012.

Other income/(expense)

During the 39-week period ended September 29, 2012, net other income increased to $62,000 from $30,000, an increase of $32,000, as compared to the same 39-week period last year. This increase was primarily due to a reduction in interest expense of $38,000, 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 September 29, 2012, net other income increased to $20,000 from $17,000, an increase of $3,000, as compared to the same 13-week period last year. This increase was primarily due to a reduction in interest expense of $7,000, as a result of the settlement of the above mentioned note payable in December 2011.

Income taxes

During the 39-week period ended September 29, 2012, an income tax benefit of $1.8 million was recorded, as compared to an income tax benefit of $318,000 in the same 39-week period last year. During the 13-week period ended September 29, 2012, an income tax benefit of $1.7 million was recorded, as compared to an income tax benefit of $1.2 million in the same 13-week period last year. The estimated effective tax rate for fiscal 2012 is projected to be 37.4%, exclusive of any tax valuation allowance, as compared to the fiscal 2011 estimate of 41.1%. During the 39- week and 13-week periods ended September 29, 2012 the Company increased its valuation allowance by $1.3 million to reserve for possible non-utilization of federal and state NOL carry-forwards, which may not be utilized in future periods before the NOLs expire. During the prior year 39-week period, 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.


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Net income/(loss)

As a result of the factors discussed above, a net loss of $6.6 million and $6.4 million were recorded during the 39- and 13-week periods ended September 29, 2012, respectively. Comparatively, the Company recorded net income of $205,000 and a net loss of $1.8 million during the 39- and 13-week periods ended October 1, 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 39-week period ended September 29, 2012, we used $6.3 million of cash flow from operations, as compared to $1.4 million used 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 September 29, 2012, we had working capital of $22.8 million which included cash and marketable securities of $16.4 million. The cash and marketable securities at September 29, 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:

                                                             39-Weeks Ended
                                                      September 29,     October 1,
                                                           2012            2011
Net cash used in operating activities                 $   (6,314,000 ) $ (1,420,000 )
Net cash provided by (used in) investing activities       (5,821,000 )   11,017,000
Net cash used in financing activities                              -       (390,000 )
Net increase (decrease) in cash and equivalents       $  (12,135,000 ) $  9,207,000

During the 39-week period ended September 29, 2012, cash and equivalents decreased by $12.1 million, primarily due to the purchase of equipment and leasehold improvements of $7.0 million, and cash used in operating activities of $6.3 million, primarily driven by the net loss, partially offset by net matured investments of $1.0 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 $1.5 million, $2.3 million and $1.6 million at September 29, 2012, December 31, 2011 and October 1, 2011, respectively.

Inflation / Recession

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 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.


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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

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 39-week periods ended September 29, 2012 and October 1, 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 $105,000 for the 39-week period and decrease of $86,000 for the 13-week period ended September 29, 2012. Adjustments to earnings resulting from changes in historical loss trends were not significant for the 39- and 13-week periods ended September 29, 2012. We maintain stop-loss insurance coverage, which covers us for benefits paid in excess of limits as defined in the plan.


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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 $212,000 and $469,000 during the 39-week periods ended September 29, 2012 and October 1, 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 approximately $113,000 and $274,000 for the 39-week periods ended September 29, 2012 and October 1, 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 39-week periods ended September 29, 2012 and October 1, 2011, the Company received $316,000 and $560,000, respectively, in connection with activated credit cards. The amount of . . .

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