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CACH > SEC Filings for CACH > Form 10-K on 12-Mar-2013All Recent SEC Filings

Show all filings for CACHE INC

Form 10-K for CACHE INC


12-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a nationwide, mall- and web-based specialty retailer of lifestyle sportswear and dresses targeting style-conscious women. Our merchandise offerings extend from elegant eveningwear to sophisticated casual and daytime sportswear, which encompasses a variety of tops, bottoms, dresses and accessories, all of which are sold under our Cache brand, although during fiscal 2013 we intend to explore the possibility of also offering products under labels other than Cache. We believe the appeal of our merchandise is enhanced through the intimate boutique-like environment we offer to our customers. This environment is achieved through a high level of customer service combined with our smaller store format, which averages approximately 2,000 square feet. As of December 29, 2012, we operated 260 stores, primarily situated in central locations in high traffic, upscale malls, in 42 states, Puerto Rico and the U.S. Virgin Islands.

We target women between the ages of 25 and 45 through our differentiated merchandising mix. Our brand appeals to a woman who has a youthful attitude, is self-confident and fashion-conscious. Our sportswear embodies a mix of lifestyle separates for both day and evening. Our stores carry a range of diverse merchandise, which includes dresses for daytime and evening. We believe that we are an important dress resource and destination for our target customers. Our accessories complement the seasonal themes and palettes of our sportswear and dresses.

For the fiscal year ended December 29, 2012, sportswear accounted for 53%, dresses for 40% and accessories for 7% of our net sales. Our price points generally range from $24 to $328 for sportswear, $118 to $698 for dresses and $12 to $98 for accessories.


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Overview

Hiring of Mr. Margolis; Backstop and Investment Agreement and Related Transactions

We continued to face a challenging retail environment in fiscal 2012, particularly in women's apparel which remained very promotional as our markdowns and discounts remained high. In fiscal 2013, we hired Mr. Margolis as the Company's new Chairman and CEO, which is expected to have a significant impact on our product offerings and merchandising strategies. Mr. Margolis is a highly accomplished executive with over 30 years of retail, merchandising and product development experience in the specialty retail industry. He is a seasoned merchandising executive with a proven track record in revamping product lines and leading successful business turnarounds.

In connection with hiring Mr. Margolis, the Company and the Investors entered into the Backstop and Investment Agreement, pursuant to which the Company agreed to commence an $8.0 million rights offering of its common stock. Pursuant to the Backstop and Investment Agreement, in a transaction separate from the rights offering, (a) each of MFP Partners and Mill Road has severally and not jointly agreed to purchase from us the number of shares of common stock equal to its full pro rata share (as of the record date) of the number of shares of common stock to be offered pursuant to the rights offering, (b) each of MFP Partners, Mill Road and Mr. Margolis has agreed, severally and not jointly, to purchase from us a specified number of shares such that the gross proceeds to us from the rights offering, the issuance of shares to MFP Partners and Mill Road as described in clause (a) above and the backstop commitment described in this clause (b) will be $8.0 million, and (c) each of Mill Road and Mr. Margolis has agreed to purchase from us additional shares of common stock in such amount, if any, sufficient to enable them to acquire an aggregate of $3.5 million and $1.0 million of common stock, respectively, to the extent they are not able to otherwise acquire such amounts pursuant to the transactions described in clauses (a) and (b) of this sentence. These transactions will raise between approximately $8.0 million and $13.8 million and are intended to raise capital to provide us with the financial resources to return to profitability and growth under the leadership of Mr. Margolis. There can be no assurance that we will consummate the rights offering and the other transactions contemplated by the Backstop and Investment Agreement.

E-Commerce Initiatives

We successfully re-launched our website, www.cache.com, on our new e-commerce platform with a supporting fulfillment center in August 2011. The re-launched website provided us with the ability to showcase our products in a more enticing, desirable manner as well as to offer enhanced online promotions. Since the re-launch, we have seen significant sales growth and positive customer feedback as a result of the improved online shopping experience. E-commerce sales were $25.9 million, $12.9 million and $8.9 million in fiscal 2012, 2011 and 2010, respectively.

We further improved the visitor's online experience in 2012 with the addition of several new site enhancements, including product ratings and reviews, automated product recommendations, enhanced on-site search and live chat. We also expanded our social media presence through the creation of branded experiences on Twitter, Pinterest, and Instagram, in addition to Facebook and YouTube, and made it easier for site visitors to share products with other individuals in their social networks. Furthermore, we established paid search, display advertising and affiliate marketing programs that helped expand our brand presence online and acquire new customers. In 2013, we intend to continue to focus on improving the site experience for visitors and introducing additional initiatives to acquire new customers, such as new payment options (PayPal, Bill Me Later), improved on-site merchandising (top rated and best-selling items), personalization, optimized checkout, and omnichannel functionality (online visibility to store availability and order in store/ship to home). In November 2012, we launched an international version of our e-commerce site that allows customers in 110 countries to place orders. To date since the launch, we have shipped to 35 countries.


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Store Opening and Closings

During fiscal 2012, we opened two new stores and closed 21 stores. To date, during fiscal 2013, we have closed nine stores and expect to close approximately five additional stores. These closed stores, and the additional stores that we expect to close, had negative profitability in fiscal 2012, so their closures are expected to have a positive impact on fiscal 2013 earnings. In fiscal 2012, the Company recorded accelerated depreciation of fixed assets of $166,000 and a net gain of $268,000 from the reversal of deferred rent partially offset by lease termination costs, which were substantially negotiated and paid in December 2012 for the stores closed in fiscal 2013. We do not currently anticipate opening any new stores in fiscal 2013. We plan to remodel approximately five stores and partially remodel nine stores in fiscal 2013.

During the fourth quarter of fiscal 2012, we recorded a pre-tax impairment charge of approximately $1.1 million for 26 underperforming stores. See Impairment Charges in Results of Operations for the 52 weeks ended December 29, 2012.

Key Financial and Operating Performance Indicators

    The key indicators of financial condition and operating performance set
forth in the following table are some of the indicators we use to evaluate the
performance of our business. Some of the items that are included in our revenues
and expenses are discussed in the following table:

                                         52 Weeks          52 Weeks         52 Weeks
                                           Ended             Ended           Ended
                                       December 29,      December 31,      January 1,
                                           2012              2011             2011
Total store count, at end of period               260               279            282
Net sales increase (decrease)                     0.1 %             8.4 %         (6.0 )%
Comparable store sales increase
(decrease)                                        2.7 %             8.1 %         (2.3 )%
Net sales per square foot                 $       364       $       367     $      340
Total square footage (in thousands)               526               565            571

Net sales. Net sales consist of sales from comparable stores and non-comparable stores, as well as credit card activation fees and sales royalties. A store is not included in comparable store sales until the first day of the fiscal month following the twelfth full month of sales. Non-comparable store sales include sales generated at new stores prior to the period when they are considered comparable stores and sales generated from stores that we have since closed. Comparable stores sales percentages shown in the chart above are calculated based upon the number of weeks in the respective fiscal year. Internet sales are included in comparable store sales.

Also included in net sales is the Company's co-branded customer credit card program which 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.

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. The Company 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 the issuing bank and Visa U.S.A Inc.

Shipping and handling. Amounts billed to customers for shipping and handling fees are included in net sales. Costs incurred for shipping and handling are included in cost of sales.


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Cost of sales. Cost of sales includes the cost of merchandise, costs incurred for shipping and handling, payroll for our buying, merchandising, design, production and sourcing personnel and store occupancy costs.

Store operating expenses. Store operating expenses include payroll for store employees, payroll taxes, health benefits, insurance, credit card processing fees, depreciation, licenses and taxes, marketing and advertising expenses, as well as other store level expenses.

General and administrative expenses. General and administrative expenses include district and regional manager payroll, other corporate personnel payroll and employee benefits, employment taxes, insurance, legal and other professional fees, as well as other corporate level expenses. Corporate level expenses are primarily attributable to our corporate headquarters in New York.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

Our accounting policies are more fully described in Note 1 to the consolidated financial statements, located elsewhere in this document. We have identified certain critical accounting policies and estimates which are described below.

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 consists of piece goods, trim and work-in-process. The Company values production inventory at the 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-lived assets in accordance with "Impairment or Disposal of Long-Lived Assets" under Topic 360 "Property, Plant and Equipment" of the Financial Accounting Standards Board Accounting Standards Codification ("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. The Company evaluated its finite-lived assets during fiscal 2012, 2011 and 2010 and, as a result, recorded an impairment charge of $1.1 million for 26 underperforming stores, $719,000 for 14 underperforming stores and $974,000 for 15 underperforming stores, respectively.

Intangible Assets. Intangible assets consist of various trade names associated with the Cache name. The Company evaluates its intangible assets in accordance with "Intangibles-Goodwill and Other", Topic 350 of the FASB ASC. During fiscal 2010, the Company performed impairment testing, which considered the Company's fair value to determine whether an impairment charge related to the carrying value of the Company's recorded goodwill and other intangible assets associated with its Adrienne Victoria reporting unit was necessary. The Company considered many factors in evaluating whether the carrying value of the recorded goodwill was recoverable. Factors used to determine this primarily include declines in stock price and the market capitalization in relation to the book value of the Company, discounted projected cash flows of the reporting unit and valuation of companies comparable to the reporting unit. As a result of this testing, an impairment charge of $9.1 million was recorded against the remaining carrying value of goodwill during fiscal 2010.

Self Insurance. We are 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 were not significant for fiscal 2012 and 2010. The Company's earnings were impacted by an increase in employee health and welfare claims of $499,000 for fiscal 2011, as compared with fiscal 2010. We maintain stop loss insurance coverage which covers us for benefits paid in excess of limits as defined in the plan. Therefore we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in earnings.

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


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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. 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 $275,000, $642,000 and $196,000 during fiscal years ended 2012, 2011 and 2010, 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 and the related amounts billed to customers for shipping and handling fees 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. Charges/(credits) to earnings resulting from revisions to estimates on our sales return provision were approximately $34,000, $(96,000) and $77,000 for fiscal 2012, 2011 and 2010, respectively. Costs incurred for shipping and handling is included in cost of sales. The Company records revenues net of applicable sales tax.

The Company's co-branded customer credit card program 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 fiscal 2012, 2011 and 2010, the Company received $363,000, $745,000 and $780,000, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards in fiscal 2012, 2011 and 2010 was $1.2 million, $904,000 and $678,000, respectively.

The Company also offers its credit 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. Cardholders, whose credit card accounts are 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.

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. The Company 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 the issuing bank and Visa U.S.A Inc. The amount of sales royalty income recorded was $452,000, $425,000 and $373,000 in fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

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 29, 2012, the Company maintained $10.2 million of net deferred tax assets, of which approximately $11.2 million related to federal tax operating loss carry-forwards and $2.3 million


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related to state tax NOL carry-forwards. In addition, during the year ended December 29, 2012, the Company recorded an income tax benefit of $1.3 million, primarily related to the net loss incurred. The Company established a federal valuation allowance of $8.3 million and $4.6 million as of December 29, 2012, and December 31, 2011, respectively. For state income tax purposes, the Company established a valuation allowance in the amount of $675,000 and $538,000 as of December 29, 2012 and December 31, 2011, respectively. The valuation allowances are primarily to reserve for the possible non-utilization of NOL carry-forwards, which may not be realized in future periods before the NOLs expire.

At December 29, 2012 and December 31, 2011, the current portion of net deferred tax assets and liabilities of $352,000 and $354,000, respectively, were included in prepaid expenses and other current assets, while the non-current portion of net deferred tax assets and liabilities of $9.9 million and $8.5 million, respectively, were included in other assets, on the Company's accompanying 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 December 29, 2012 and December 31, 2011, the Company had no reserve recorded for tax contingencies.

Stock-based compensation. Stock-based compensation expense for all stock-based awards programs, including grants of stock options, is recorded in accordance with "Compensation-Stock Compensation", Topic 718 of the FASB ASC. The grant date fair value for stock options is calculated using the Black-Scholes option valuation model. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. All employee stock options were granted at or above the grant date market price. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. In accordance with the stated guidance, if actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted. The Company recognized $322,000, $381,000 and $461,000 in share-based compensation expense during fiscal 2012, 2011 and 2010, respectively.


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Results of Operations

The following table sets forth our operating results, expressed as a percentage of net sales:

                                          52 Weeks          52 Weeks       52 Weeks
                                           Ended             Ended           Ended
                                        December 29,      December 31,    January 1,
                                            2012              2011           2011
 Operating Results
 Net sales                                      100.0 %           100.0 %       100.0 %
 Cost of sales                                   62.6              56.9          61.8

 Gross profit                                    37.4              43.1          38.2
 Store operating expenses                        34.6              34.0          36.8
 General and administrative expenses              8.3               7.8           9.7
 Impairment charges                               0.5               0.3           4.9

 Operating income (loss)                         (6.0 )             1.0         (13.2 )
 Other income (net)                               0.0               0.0           0.0

 Loss before income taxes                        (6.0 )             1.0         (13.2 )
 Income tax provision (benefit)                  (0.6 )             0.1          (2.2 )

 Net income (loss)                               (5.4 )%            0.9 %       (11.0 )%

52 Weeks Ended December 29, 2012 (Fiscal 2012) Compared to 52 Weeks Ended December 31, 2011 (Fiscal 2011)

. . .

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