Summary of PERFUMANIA HOLDINGS, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As discussed in Note 2 to the unaudited condensed consolidated financial statements, on April 18, 2012, the Company consummated its acquisition of Parlux Inc. For US GAAP reporting, the accompanying results of operations and cash flows for the thirty-nine weeks ended October 27, 2012 contain Parlux's results beginning as of the date of acquisition, while the prior year only includes the results of the Company.
The Company's board of directors and management believes that the acquisition of Parlux Inc. will provide substantial benefits to the Company's stockholders since it has created a larger, independent, national, vertically integrated manufacturer, wholesale distributor and specialty retailer of perfumes and fragrances that is well-positioned to compete in the marketplace and drive growth, as well as to benefit from increased operating scale and licensing opportunities.
The operations and results of the historical Parlux Inc. business are significant to the Company's consolidated financial statements. At the end of the last reported fiscal year of the respective companies immediately preceding the merger (January 28, 2012 for the Company and March 31, 2011 for Parlux Inc.), the total assets were approximately $287 million for Perfumania, compared to approximately $113 million for Parlux Inc., and total net sales were approximately $494 million for Perfumania compared to approximately $123 million for Parlux Inc. Management is currently working with Parlux personnel to integrate the Parlux business, to maximize operating efficiencies and cost savings, and to update operating and capital forecasts. Management believes that the merger will have a significant effect on the Company's future sales, expenses and operating results as compared to its historical results. Subsequent to the end our fiscal third quarter, some of our Perfumania stores and SOW retail consignment stores were impacted by Hurricane Sandy and were closed for several days. Our two distribution centers were also closed for several days. However, none of our stores or our distribution centers sustained material damage. While we cannot yet fully assess the impact of Hurricane Sandy and its aftermath, at this time we do not anticipate that it will have a material negative impact on our results of operations or cash flows for the fourth quarter ending February 2, 2013.

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Comparison of the Thirteen Weeks Ended October 27, 2012 with the Thirteen Weeks
Ended October 29, 2011.

Net Sales

                                                                                                                                                       Percent
                                                                                                                                                       Change
                  Thirteen Weeks      Percentage     Thirteen Weeks      Percentage                  Dollar Change due                                Excluding
                       Ended              of              Ended              of         Dollar           to Parlux        Dollar Change Excluding      Parlux
                 October 27, 2012     Net Sales     October 29, 2011     Net Sales      Change          Acquisition         Parlux Acquisition       Acquisition
                                         ($ in thousands)
Retail          $          73,529       52.7%      $          72,888       60.7%      $     641     $               -     $            641               0.9  %
Wholesale                  65,972       47.3%                 47,237       39.3%         18,735                26,202               (7,467 )           (15.8 )%
Total net sales $         139,501       100.0%     $         120,125       100.0%     $  19,376     $          26,202     $         (6,826 )            (5.7 )%

Net sales increased 16.1% from $120.1 million in the thirteen weeks ended October 29, 2011 to $139.5 million in the thirteen weeks ended October 27, 2012. The increase in sales included a $18.8 million increase in wholesale sales and a $0.6 million increase in retail sales. Excluding the results of Parlux, net sales decreased by $6.8 million or 5.7%.
Retail sales increased by 0.9% from $72.9 million in the thirteen weeks ended October 29, 2011 to $73.5 million in the thirteen weeks ended October 27, 2012. The increase included an increase in SOW's consignment sales of $0.8 million offset by a decrease in Perfumania's retail sales of $0.2 million. Perfumania's retail sales decreased from $59.6 million in the thirteen weeks ended October 29, 2011 to $59.4 million in the thirteen weeks ended October 27, 2012. The average number of stores operated was 345 in the thirteen weeks ended October 27, 2012 compared with 344 in the comparable period last year. Perfumania's comparable store sales decreased by 2.0% during the thirteen weeks ended October 27, 2012 from the same period in 2011. Comparable store sales measure sales from stores that have been open for one year or more. We exclude stores that are closed for renovation from comparable store sales from the month during which renovation commences until the first full month after reopening. The average retail price per unit sold during the thirteen weeks ended October 27, 2012 increased by 2.2% from the prior year's comparable period while the total number of units sold decreased by 2.4%. The reduction in demand is attributed to lower mall traffic.
SOW's consignment sales increased from $13.3 million in the thirteen weeks ended October 29, 2011 to $14.1 million in the thirteen weeks ended October 27, 2012. The increase in SOW's net sales is due generally to sales increases for multiple consignment accounts offset by the termination of several consignment relationships.
Excluding the results of Parlux, the decrease in wholesale sales of $7.5 million is the result of less product availability for the wholesale division due to a tightening of supplier inventory, and lower customer demand during the thirteen weeks ended October 27, 2012 compared to the thirteen weeks ended October 29, 2011.

Gross Profit
                                                                                                                                   Percent
                                              Thirteen Weeks                                                                       Change
                          Thirteen Weeks          Ended                           Dollar Change due        Dollar Change          Excluding
                              Ended            October 29,                            to Parlux           Excluding Parlux         Parlux
                         October 27, 2012          2011         Dollar Change        Acquisition            Acquisition          Acquisition
                                 ($ in thousands)
Retail                 $           32,910     $     33,350     $        (440 )   $               -     $          (440 )            (1.3 )%
Wholesale                          25,285            9,721            15,564                13,989               1,575              16.2  %
  Total gross profit   $           58,195     $     43,071     $      15,124     $          13,989     $         1,135               2.6  %

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Gross Profit Percentages
                                   Thirteen Weeks     Thirteen Weeks
                                       Ended              Ended
                                  October 27, 2012   October 29, 2011
Retail                                 44.8%              45.8%
Wholesale                              38.3%              20.6%
  Total gross profit percentage        41.7%              35.9%

Gross profit increased 35.1% from $43.1 million in the thirteen weeks ended October 29, 2011 to $58.2 million in the thirteen weeks ended October 27, 2012. The increase in gross profit was due to the acquisition of Parlux on April 18, 2012. Excluding the results of Parlux, gross profit increased by $1.1 million or 2.6%.
Perfumania's retail gross profit dollars for the thirteen weeks ended October 27, 2012 decreased by 0.1% to $27.2 million compared with the comparable period in 2011. For these same periods, Perfumania's retail gross margins were 45.8%. Wholesale gross profit percentage increased from 20.6% during the thirteen weeks ended October 29, 2011 to 38.3% during the thirteen weeks ended October 27, 2012. Excluding the results of Parlux, gross profit percentage during the thirteen weeks ended October 27, 2012 was 28.4%. During the thirteen weeks ended October 27, 2012, Parlux's gross profit was reduced by approximately $1.3 million to expense a portion of the purchase accounting adjustment to record Parlux's acquired inventory at fair market value at the acquisition date. This will impact future quarters until the remaining fair market value purchase accounting adjustment of approximately $13.5 million is expensed.

Expenses
Selling, general and administrative expenses include payroll and related benefits for our distribution center, sales, store operations, field management, purchasing and other corporate office and administrative personnel; rent, common area maintenance, real estate taxes and utilities for our stores, distribution centers and corporate office; advertising, consignment fees, sales promotion, insurance, supplies, freight out, and other administrative expenses. Selling, general and administrative expenses were $57.5 million in the thirteen weeks ended October 27, 2012, compared to $39.9 million in the thirteen weeks ended October 29, 2011. Excluding the results of Parlux, selling, general and administrative expenses increased by $0.7 million. Included in selling, general and administrative expenses are expenses in connection with the Services Agreement with Quality King, which was less than $0.1 million during the thirteen weeks ended October 27, 2012 and $0.1 million for the thirteen weeks ended October 29, 2011.
Depreciation and amortization was approximately $3.7 million and $2.1 million in the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively. Approximately $1.7 million of amortization expense during the thirteen weeks ended October 27, 2012 relates to amortization on identifiable intangibles acquired as a result of the acquisition of Parlux.
Merger related expenses of approximately $0.1 million during the thirteen weeks ended October 27, 2012 represents costs incurred by the Company for the acquisition of Parlux.
Interest expense was approximately $2.5 million for the thirteen weeks ended October 27, 2012 compared with approximately $1.9 million for the thirteen weeks ended October 29, 2011. The increase in interest expense is due primarily to a higher average outstanding balance on the Company's revolving credit facility, as well as a higher outstanding balance on the Company's outstanding notes payable to affiliates during the thirteen weeks ended October 27, 2012 compared with the thirteen weeks ended October 29, 2011.
The Company continues to record a full valuation allowance against all deferred tax assets, thus no income tax benefit was recorded on operating losses during the thirteen weeks ended October 27, 2012 and October 29, 2011. As a result of the foregoing, we realized a net loss of approximately $5.4 million in the thirteen weeks ended October 27, 2012 compared to a net loss of $0.8 million in the thirteen weeks ended October 29, 2011. Excluding the results of Parlux, our net loss would have been $0.9 million for the thirteen weeks ended October 27, 2012.

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Comparison of the Thirty-nine Weeks Ended October 27, 2012 with the Thirty-nine
Weeks Ended October 29, 2011.

Net Sales

                                                                                                                                                            Percent Change
                  Thirty-nine Weeks     Percentage     Thirty-nine Weeks     Percentage                        Dollar Change due        Dollar Change         Excluding
                        Ended               of               Ended               of                                to Parlux          Excluding Parlux          Parlux
                  October 27, 2012      Net Sales      October 29, 2011      Net Sales      Dollar Change         Acquisition            Acquisition         Acquisition
                                           ($ in thousands)
Retail          $           225,920       63.8%      $           224,121       68.0%      $         1,799     $               -     $         1,799               0.8  %
Wholesale                   128,123       36.2%                  105,380       32.0%               22,743                35,874             (13,131 )           (12.5 )%
Total net sales $           354,043       100.0%     $           329,501       100.0%     $        24,542     $          35,874     $       (11,332 )            (3.4 )%

Net sales increased 7.4% from $329.5 million in the thirty-nine weeks ended October 29, 2011 to $354.0 million in the thirty-nine weeks ended October 27, 2012. The increase in sales included an increase in retail sales of $1.8 million and an increase in wholesale sales of $22.7 million. Excluding the results of Parlux, net sales decreased by $11.3 million.
Retail sales increased by 0.8% from $224.1 million in the thirty-nine weeks ended October 29, 2011 to $225.9 million in the thirty-nine weeks ended October 27, 2012. The increase included an increase in Perfumania's retail sales of $0.7 million and an increase in SOW's consignment sales of $1.1 million.
Perfumania's retail sales increased from $180.2 million in the thirty-nine weeks ended October 29, 2011 to $180.9 million in the thirty-nine weeks ended October 27, 2012. Perfumania's comparable store sales decreased by 0.4% during the thirty-nine weeks ended October 27, 2012. The average retail price per unit sold during the thirty-nine weeks ended October 27, 2012 decreased 4.2% from the prior year's comparable period while the total number of units sold increased by 0.3%. We attribute the decrease in the average retail price per unit sold to various store level pricing promotions. The average number of stores operated was 342 in the thirty-nine weeks ended October 27, 2012, versus 349 in the prior year's comparable period.
SOW's consignment sales increased from $43.9 million in the thirty-nine weeks ended October 29, 2011 to $45.0 million in the thirty-nine weeks ended October 27, 2012. The increase in SOW's net sales is due to an increase in sales to multiple existing accounts offset by the termination of several consignment relationships.
Excluding the results of Parlux, the decrease in wholesale sales of $13.1 million or 12.5% is the result of less product availability for the wholesale division and less customer demand during the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011.

Gross Profit

                                                                                                                                         Percent Change
                         Thirty-nine Weeks       Thirty-nine Weeks                        Dollar Change due                                Excluding
                               Ended                   Ended                                  to Parlux        Dollar Change Excluding       Parlux
                         October 27, 2012        October 29, 2011       Dollar Change        Acquisition         Parlux Acquisition       Acquisition
                                     ($ in thousands)
Retail                 $            99,326     $           101,484     $      (2,158 )   $               -     $         (2,158 )             (2.1 )%
Wholesale                           44,242                  24,265            19,977                18,932                1,045                4.3  %
  Total gross profit   $           143,568     $           125,749     $      17,819     $          18,932     $         (1,113 )             (0.9 )%

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Gross Profit Percentages

                              Thirty-nine Weeks   Thirty-nine Weeks
                                    Ended               Ended
                              October 27, 2012    October 29, 2011
Retail                              44.0%               45.3%
Wholesale                           34.5%               23.0%
Total gross profit percentage       40.6%               38.2%

Gross profit increased 14.2% from $125.7 million in the thirty-nine weeks ended October 29, 2011 to $143.6 million in the thirty-nine weeks ended October 27, 2012. Excluding the results of Parlux, gross profit decreased by $1.1 million or 0.9%.
Perfumania's retail gross profit for the thirty-nine weeks ended October 27, 2012 decreased by 2.7% to $82.5 million compared with the comparable period in 2011. For these same periods, Perfumania's retail gross margins were 45.6% and 47.0%, respectively.
Wholesale gross profit percentage increased from 23.0% during the thirty-nine weeks ended October 29, 2011 to 34.5% during the thirty-nine weeks ended October 27, 2012. Excluding the results of Parlux, gross profit percentage during the thirty-nine weeks ended October 27, 2012 was 27.4%. During the thirty-nine weeks ended October 27, 2012, Parlux's gross profit was reduced by approximately $3.0 million to expense a portion of the purchase accounting adjustment to record Parlux's acquired inventory at fair market value at the acquisition date. This will impact future quarters until the remaining fair market value purchase accounting adjustment of approximately $13.5 million is expensed. Expenses
Selling, general and administrative expenses were $154.8 million in the thirty-nine weeks ended October 27, 2012, compared to $118.1 million in the thirty-nine weeks ended October 29, 2011. Excluding the results of Parlux, selling, general and administrative expenses increased by $1.6 million. Also included in selling, general and administrative expenses are expenses in connection with the Services Agreement with Quality King, which were $0.5 million and $0.4 million for the thirty-nine weeks ended October 27, 2012 and October 29, 2011, respectively.
Depreciation and amortization was approximately $10.3 million in the thirty-nine weeks ended October 27, 2012, compared to $5.8 million for the thirty-nine weeks ended October 29, 2011. Approximately $4.4 million of amortization expense during the thirty-nine weeks ended October 27, 2012 relates to amortization on identifiable intangibles acquired as a result of the acquisition of Parlux. Share-based compensation expense of approximately $4.3 million during the thirty-nine weeks ended October 27, 2012 represents the expense incurred on stock options granted during the current period.
Merger related expenses of approximately $4.6 million during the thirty-nine weeks ended October 29, 2012 represents costs incurred by the Company for the acquisition of Parlux.
Interest expense was approximately $6.6 million for the thirty-nine weeks ended October 27, 2012 compared with approximately $5.9 million for the thirty-nine weeks ended October 29, 2011. The increase in interest expense is due primarily to a higher average outstanding balance on the Company's revolving credit facility, as well as a higher overall average outstanding balance on the Company's outstanding notes payable to affiliates during the thirty-nine weeks ended October 27, 2012 compared with the thirty-nine weeks ended October 29, 2011.
Since the Company continues to record a full valuation allowance against all deferred tax assets, no income tax benefit was recorded during either of the thirty-nine week periods ended October 27, 2012 and October 29, 2011. As a result of the foregoing, we realized a net loss of approximately $37.0 million in the thirty-nine weeks ended October 27, 2012, compared to a net loss of $4.1 million in the thirty-nine weeks ended October 29, 2011. Excluding the results of Parlux, our net loss was $16.4 million for the thirty-nine weeks ended October 27, 2012.

LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the thirty-nine weeks ended October 27, 2012 was approximately $50.1 million, compared with approximately $3.3 million provided by operating activities during the thirty-nine weeks ended October 29, 2011. The $53.4 million decrease in cash flows from operating activities during the thirty-nine weeks ended October 27, 2012 compared with the prior year's comparable period resulted primarily from an increase in our net loss and an increase in our inventory levels. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

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Net cash used in investing activities was approximately $50.5 million in the thirty-nine weeks ended October 27, 2012 compared to $2.7 million in the thirty-nine weeks ended October 29, 2011. The current period's investing activities primarily related to the payment of $62.1 million to acquire Parlux, net of Parlux's $17.1 million cash on hand. During the thirty-nine weeks ended October 27, 2012, Perfumania opened 15 new stores and closed 11 stores, including 1 seasonal location. We plan to open a minimum of 5 stores and close 1 store for the remainder of fiscal 2012. We continuously evaluate the appropriate new store growth rate in light of economic conditions and may adjust the growth rate as conditions change. Furthermore, we continue to evaluate the need to close, remodel or relocate existing stores.
Net cash provided by financing activities during the thirty-nine weeks ended October 27, 2012 was approximately $100.5 million, primarily because of the $32.1 million borrowed under our Senior Credit Facility, net of cash and cash equivalents acquired from Parlux, the $30 million borrowed from affiliates to fund the cash paid for Parlux and the $35.7 million net loss, compared with approximately $0.6 million used in financing activities for the thirty-nine weeks ended October 29, 2011. See further discussion at Note 2 of the condensed consolidated financial statements.
The Company has a $225 million revolving credit facility with a syndicate of banks (the "Senior Credit Facility"), which is used for the Company's general corporate purposes and those of its subsidiaries, including working capital. The Company and certain of its subsidiaries are co-borrowers under the Senior Credit Facility, and the Company's other subsidiaries have guaranteed all of their obligations thereunder. The Company was in compliance with all financial and operating covenants under the Senior Credit facility as of October 27, 2012. As of October 27, 2012, the Company had $39.0 million available to borrow under the Senior Credit Facility based on the borrowing base at that date. Further information about the Senior Credit Facility is included in Note 6 of our condensed consolidated financial statements included in this Form 10-Q. The Company has various unsecured notes payable outstanding to affiliates which in aggregate total $125.4 million of principal. No payments of principal may be made on any of these notes payable to affiliates before the maturity of the Senior Credit Facility although interest payments are permitted under certain conditions. See further discussion of our notes payable to affiliates and our Senior Credit Facility in Note 6 of our condensed consolidated financial statements included in this Form 10-Q.
Our liquidity is impacted by a number of factors, including our sales levels, the amount of credit that our vendors extend to us and our borrowing capacity under our Senior Credit Facility. Our principal funding requirements are for inventory purchases, financing extended terms on accounts receivable, paying down accounts payable and debt, and to a lesser extent, information system enhancements, opening new stores and renovation of existing stores. These capital requirements generally have been satisfied through borrowings under the Senior Credit Facility, notes payable to affiliates and funds from operations. Based on current internal sales and cash flow projections, current vendor payable support and our projected available borrowing capacity under our Senior Credit Facility, as well as other initiatives to maximize cash flow, we believe that these resources will be adequate to meet our requirements in both the short and long-term.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed consolidated financial statements have been prepared in accordance with US GAAP. Preparation of these statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates, including those related to bad debts, inventories, asset impairments, sales returns and allowances, and other contingent assets and liabilities. As such, some accounting policies have a significant impact on amounts reported in these financial statements. The judgments and estimates made can significantly affect results. Materially different amounts might be reported under different conditions or by using different assumptions. We consider an accounting policy to be critical if it is both important to the portrayal of our financial condition and results of operations, and requires significant judgment and estimates by management in its application. We have identified certain critical accounting policies that affect the significant estimates and judgments used in the preparation of its financial statements. There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the year ended January 28, 2012.