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DLIA > SEC Filings for DLIA > Form 10-K on 23-Apr-2013All Recent SEC Filings

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Form 10-K for DELIAS, INC.


23-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Financial Data" and our financial statements and related notes appearing elsewhere in this annual report. Descriptions of all documents included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so referenced.

Executive Summary and Overview

dELiA*s, Inc. is a multi-channel retailer of apparel and accessories, comprised of two lifestyle brands-dELiA*s and Alloy. Our merchandise assortment (which includes many name brand products along with our own proprietary brand products), our e-commerce webpages, our catalogs, and our mall-based dELiA*s retail stores are designed to appeal directly to consumers. We reach our customers through our direct marketing segment, which consists of our e-commerce and catalog businesses, and our dELiA*s retail stores.

Our strategy is to improve upon our position as a direct marketing company; to increase productivity in our dELiA*s retail stores; and to carry out such strategy while controlling costs. In addition, our strategy includes strengthening the dELiA*s brand through alignment across all channels of our business while continuing extended offerings online and in our catalogs.

We expect that improved productivity in each segment of our business will be the key element of our overall growth strategy. Our focus is to improve productivity in our current retail store base, to invest in web-based marketing programs to drive additional traffic to our websites and improve the productivity of catalogs distributed. As productivity improves and market conditions allow, we plan to continue to expand the dELiA*s retail store base over the long term. In addition, as store performance and market conditions allow, we may plan on accelerating our growth in gross square footage. Should we accelerate our growth, we may need additional equity or debt financing.

Recent Developments

On March 28, 2013, we announced that we had retained Janney Montgomery Scott LLC ("Janney"), as strategic advisor to our Board of Directors with an initial focus on the potential disposition of the Company's Alloy brand. We believe this potential disposition will allow management to concentrate its efforts on the dELiA*s business. Our Board of Directors has not set a definitive timetable for any transaction, and there can be no assurance that Janney's will result in any specific action or transaction. We do not intend to disclose or comment on developments until such time as our Board of Directors takes action, if any, or otherwise considers disclosure appropriate or required.

On March 28, 2013, we also announced that Walter Killough, our chief executive officer, who we previously announced would leave the Company at or about April 1, 2013, has agreed to continue to serve as our chief executive officer on a month-to-month basis as our search for a permanent chief executive officer continues.

On March 28, 2013, we further announced that Dyan Jozwick, President, dELiA*s Brand, had resigned from the Company. The Company has retained a senior merchandise consultant with relevant experience to oversee our merchandising functions on an interim basis.


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Goals

We believe that focusing on our brands and implementing the following initiatives should lead to profitable growth and improved results from operations:

delivering low-to mid-single digit comparable store sales growth in our dELiA*s retail stores over the long term;

driving low-to mid-single digit top-line growth in direct marketing, through targeted circulation in productive mailing segments, and implementation of web, mobile and social media based initiatives;

improving gross profit margins each year by 50 basis points;

developing retail merchandising assortments that emphasize key categories more effectively;

improving our retail store metrics through increased focus on the selling culture, with emphasis on increased customer conversion, thereby improving productivity;

implementing profit-improving inventory planning and allocation strategies such as seasonal carry-in reduction, better store-planning, targeted replenishment by size, tactical fashion investment, and to create inventory turn improvement;

leveraging our current expense infrastructure and taking additional operating costs out of the business;

monitoring and opportunistically closing or working with landlords to reduce costs on underperforming stores; and

expanding the dELiA's retail store base over the long-term.

Key Performance Indicators

The following measurements are among the key business indicators that management reviews regularly to gauge the Company's results:

store metrics such as comparable store sales, sales per gross square foot, average retail price per unit sold, average transaction values, average units per transaction, traffic conversion rates and store contribution margin (defined as store gross profit less direct costs of running the store);

direct marketing metrics such as average order value and demand generated by book, with demand defined as the amount customers seek to purchase without regard to merchandise availability;

web metrics such as unique site visits, carts opened and carts converted, and site conversion;

fill rate, which is the percentage of any particular order we are able to ship for our direct marketing business, from available on-hand inventory or future inventory orders;

gross profit;

operating income;

inventory turnover and average inventory per store; and

cash flow and liquidity determined by the Company's cash provided by operations.

The discussion below includes references to "comparable stores." We consider a store comparable after it has been open for fifteen full months without closure for more than seven consecutive days and whose square footage has not been expanded or reduced by more than 25% within the past year. If a store is closed during a fiscal quarter, it is removed from the computation of comparable store sales for that fiscal quarter.

Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to January 31. The fiscal year ended February 2, 2013 was a 53-week fiscal year, while January 28, 2012, and January 29, 2011 were both 52-week fiscal years. We refer to the extra week in fiscal 2012 as the "53rd week".


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Consolidated Results of Operations

The following table sets forth our statements of operations data for the periods indicated, reflected as a percentage of revenues:

                                                                Fiscal Year
                                                     2012          2011          2010
 STATEMENTS OF OPERATIONS DATA:
 Total revenues                                       100.0 %       100.0 %       100.0 %
 Cost of goods sold                                    67.2 %        68.5 %        66.7 %

 Gross profit                                          32.8 %        31.5 %        33.3 %

 Operating expenses:
 Selling, general and administrative expenses          42.0 %        42.7 %        43.4 %
 Impairment of goodwill                                 2.0 %         0.0 %         3.4 %
 Impairment of long-lived assets                        0.1 %         0.2 %         0.0 %
 Other operating income                                (1.9 %)       (0.9 %)       (0.2 %)

 Total operating expenses                              42.2 %        42.0 %        46.6 %

 Operating loss                                        (9.4 %)      (10.5 %)      (13.3 %)
 Interest expense, net                                  0.3 %         0.3 %         0.2 %

 Loss before provision (benefit) for income taxes      (9.7 %)      (10.8 %)      (13.5 %)
 Provision (benefit) for income taxes                   0.0 %        (0.4 %)       (3.7 %)

 Net loss                                              (9.7 %)      (10.4 %)       (9.8 %)

Fiscal 2012 Compared with Fiscal 2011 (53 weeks vs. 52 weeks)

Revenues

Total Revenues

Total revenues increased 2.6% to $222.7 million in fiscal 2012 from $217.2 million in fiscal 2011. Revenue from the retail segment comprised 56.4% of total revenue for fiscal 2012 as compared to 56.7% in fiscal 2011, and revenue from the direct segment comprised 43.6% of total revenue for fiscal 2012 as compared to 43.3% for fiscal 2011. The 53rd week added incremental revenues of approximately $2.9 million.

Direct Marketing Revenues

Direct marketing revenues increased 3.4% to $97.1 million in fiscal 2012 from $93.9 million in fiscal 2011. The increase in revenue is attributable to an increase in full price selling and the 53rd week added incremental revenues of approximately $1.7 million.

Retail Store Revenues

Retail store revenues increased 1.9% to $125.6 million in fiscal 2012 from $123.2 million in fiscal 2011. The increase in revenue was driven by a comparable store sales increase of 5.2% (fiscal 2012 includes a fifty-third week and therefore the fiscal 2012 comparable sales are compared to the fifty-three week period ended February 4, 2012 for the prior year) partially offset by a reduction in store count.


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The following table sets forth select operating data in connection with the revenues of our Company:

                                                        For Fiscal Years Ended
                                                          2012            2011
  Channel Net Sales (in thousands):
  Retail                                              $    125,595      $ 123,223
  Direct:
  Phone                                                      3,836          6,872
  Internet                                                  93,268         87,057

                                                            97,104         93,929

                                                      $    222,699      $ 217,152

  Catalogs Mailed (in thousands)                            36,534         38,758

  Number of Stores:
  Beginning of Period                                          113            114
  Stores Opened *                                                1 *            4 **
  Stores Closed *                                               10 *            5 **

  End of Period                                                104            113

  Total Gross Sq. Ft @ End of Period (in thousands)          399.4          434.4

* Totals include one store that was closed and relocated to an alternative site in the same mall during the first quarter of fiscal 2012.

** Totals include two stores that were closed, remodeled and reopened during fiscal 2011, and one store that was closed and relocated to an alternative site in the same mall during fiscal 2011.

Gross Profit

Total Gross Profit

Gross profit for fiscal 2012 was $73.2 million or 32.8% of revenues, as compared to $68.3 million, or 31.5% of revenues in fiscal 2011. The increase in gross profit percentage was principally due to increased merchandise margins and the leveraging of reduced occupancy costs partially offset by higher shipping costs.

Direct Marketing Gross Profit

Direct marketing gross profit for fiscal 2012 was $40.6 million or 41.9% of revenues, as compared to $41.2 million, or 43.9% of revenues in fiscal 2011. The decrease in gross profit percentage and in dollars was principally due to increased shipping costs.

Retail Store Gross Profit

Retail store gross profit for fiscal 2012 was $32.5 million or 25.9% of revenues, as compared to $27.1 million, or 22.0% of revenues in fiscal 2011. The increase in gross profit percentage and in dollars was primarily due to increased merchandise margins and the leveraging of reduced occupancy costs.

Operating Expenses

Total Selling, General and Administrative

As a percentage of total revenues, our selling, general and administrative ("SG&A") expenses decreased to 42.0% in fiscal 2012 from 42.7% in fiscal 2011. This decrease was primarily attributable to lower selling and depreciation expenses in the retail segment. In total dollars, SG&A expenses increased 0.7% to $93.4 million in fiscal 2012 from $92.7 million in fiscal 2011.


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Direct Marketing Selling, General and Administrative

As a percentage of revenues, SG&A expenses increased to 49.0% in fiscal 2012 from 47.9% in fiscal 2011. The increase in SG&A expenses as a percentage of revenues reflects the deleveraging of selling and overhead expenses. In dollars, direct marketing SG&A expenses increased 5.6% to $47.5 million in fiscal 2012 from $45.0 million in fiscal 2011. The increase reflects higher selling and overhead expenses.

Retail Store Selling, General and Administrative

As a percentage of revenues, SG&A expenses decreased to 36.5% in fiscal 2012 from 38.7% in fiscal 2011. In dollars, retail store SG&A expenses decreased 3.9% to $45.9 million in fiscal 2012 from $47.7 million in fiscal 2011. The decrease in SG&A expenses in dollars and as a percentage of revenues reflects lower selling and depreciation expenses partially offset by increased overhead costs.

Impairment of Goodwill

As a result of our annual goodwill impairment analysis, we recognized a goodwill impairment charge related to the direct marketing reporting unit of $4.5 million in fiscal 2012 primarily as a result of the current and projected future performance of the Alloy business.

Impairment of Long-Lived Assets

We recognized impairment of long-lived assets related to under-performing stores of $0.2 million and $0.5 million in fiscal 2012 and fiscal 2011, respectively.

Other Operating Income

Other operating income, which represents breakage income, was $4.2 million for fiscal 2012 compared to $2.0 million in fiscal 2011. The increase was due to reduced redemption rates for gift cards issued in fiscal 2010.

Loss from Operations

Total Loss from Operations

Our total loss from operations before interest expense and income taxes was $20.8 million in fiscal 2012 as compared to a loss of $22.9 million in fiscal 2011.

Loss from Direct Marketing Operations

Direct marketing loss from operations was $7.6 million in fiscal 2012 as compared to a loss of $2.2 million in fiscal 2011. The fiscal 2012 loss included the goodwill impairment charge of $4.5 million noted above. The remainder of the loss was attributable to increased shipping, selling and overhead costs partially offset by higher breakage income.

Loss from Retail Store Operations

Our loss from retail store operations was $13.1 million in fiscal 2012, as compared to $20.8 million in fiscal 2011. This decrease was primarily attributable to higher merchandise margins as well as decreased occupancy costs and depreciation expense.

Interest Expense, net

We recognized net interest expense of $0.7 million and $0.6 million in fiscal 2012 and fiscal 2011, respectively. Interest expense was related to costs from our credit facilities with GE Capital and Wells Fargo Retail Finance II, LLC ("Wells Fargo"). Interest income was earned from cash balances in banks.


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Income Tax Benefit

We recorded income tax expense of $0.1 million in fiscal 2012, compared with a benefit of $0.8 million in fiscal 2011. The fiscal 2011 benefit included adjustments related to the filing of our fiscal 2010 income tax return. The Company did not recognize any tax benefit in fiscal 2012 for federal taxes since the Company did not generate taxable income during the two-year carry-back period for the fiscal 2012 NOL. The effective tax rates for fiscal 2012 and 2011 were 0% and 4%, respectively.

Fiscal 2011 Compared with Fiscal 2010 (52 weeks vs. 52 weeks)

Revenues

Total Revenues

Total revenues decreased 1.6% to $217.2 million in fiscal 2011 from $220.7 million in fiscal 2010. Revenue from the retail segment comprised 56.7% of total revenue for fiscal 2011 as compared to 55.5% in fiscal 2010, and revenue from the direct segment comprised 43.3% of total revenue for fiscal 2011 as compared to 44.5% for fiscal 2010.

Direct Marketing Revenues

Direct marketing revenues decreased 4.4% to $93.9 million in fiscal 2011 from $98.3 million in fiscal 2010. In the direct segment, there were decreases in both the Alloy and dELiA*s brands. The decrease in revenue is attributable to a decrease in clearance and full price selling in both brands.

Retail Store Revenues

Retail store revenues increased 0.6% to $123.2 million in fiscal 2011 from $122.4 million in fiscal 2010. The increase in revenue was driven by the full year impact of the seven stores (net of relocations and remodels) opened in fiscal 2010, and a comparable store sales increase of 0.1%.

Gross Profit

Total Gross Profit

Gross profit for fiscal 2011 was $68.3 million or 31.5% of revenues, as compared to $73.5 million, or 33.3% of revenues in fiscal 2010. The decline in gross profit percentage was principally due to reduced merchandise margins related to markdowns and the deleveraging of occupancy costs on lower overall sales volume.

Direct Marketing Gross Profit

Direct marketing gross profit for fiscal 2011 was $41.2 million or 43.9% of revenues, as compared to $44.0 million, or 44.8% of revenues in fiscal 2010. The decrease in gross profit percentage and in dollars was principally due to reduced merchandise margins and increased shipping costs.

Retail Store Gross Profit

Retail store gross profit for fiscal 2011 was $27.1 million or 22.0% of revenues, as compared to $29.4 million, or 24.0% of revenues in fiscal 2010. The decrease in gross profit percentage and in dollars was primarily due to reduced merchandise margins related to markdowns.


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Operating Expenses

Total Selling, General and Administrative

As a percentage of total revenues, our selling, general and administrative ("SG&A") expenses decreased to 42.7% in fiscal 2011 from 43.4% in fiscal 2010. This decrease was primarily attributable to the leveraging of reduced overhead expenses. In total dollars, SG&A expenses decreased 3.1% to $92.7 million in fiscal 2011 from $95.7 million in fiscal 2010.

Direct Marketing Selling, General and Administrative

As a percentage of revenues, SG&A expenses increased to 47.9% in fiscal 2011 from 47.4% in fiscal 2010. The increase in SG&A expenses as a percentage of revenues reflects the deleveraging of selling expenses on lower sales, partially offset by lower overhead and depreciation expenses. In dollars, direct marketing SG&A expenses decreased 3.3% to $45.0 million in fiscal 2011 from $46.6 million in fiscal 2010. The decrease reflects lower selling, overhead and depreciation expenses.

Retail Store Selling, General and Administrative

As a percentage of revenues, SG&A expenses decreased to 38.7% in fiscal 2011 from 40.2% in fiscal 2010. In dollars, retail store SG&A expenses decreased 3.0% to $47.7 million in fiscal 2011 from $49.2 million in fiscal 2010. The decrease in SG&A expenses in dollars and as a percentage of revenues reflects lower selling and overhead costs.

Impairment of Long-Lived Assets and Goodwill

Impairment of long-lived assets and goodwill was $0.5 million in fiscal 2011 compared to $7.6 million in fiscal 2010. In fiscal 2011, we recognized an impairment of long-lived assets related to under-performing stores of $0.5 million, and in fiscal 2010, we recognized a goodwill impairment charge related to the direct marketing segment of $7.6 million.

Other Operating Income

Other operating income, which represents breakage income, was $2.0 million for fiscal 2011 compared to $0.5 million in fiscal 2010.

Loss from Operations

Total Loss from Operations

Our total loss from operations before interest expense and income taxes was $22.9 million in fiscal 2011 as compared to a loss of $29.4 million in fiscal 2010.

Loss from Direct Marketing Operations

Direct marketing loss from operations was $2.2 million in fiscal 2011 as compared to a loss of $9.9 million in fiscal 2010. The fiscal 2010 loss included the goodwill impairment charge of $7.6 million noted above.

Loss from Retail Store Operations

Our loss from retail store operations was $20.8 million in fiscal 2011, as compared to $19.5 million in fiscal 2010. This increase was primarily attributable to lower merchandise margins, increased occupancy costs, and the impairment of long-lived assets related to under-performing stores noted above.


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Interest Expense, net

We recognized net interest expense of $0.6 million and $0.4 million in fiscal 2011 and fiscal 2010, respectively. Interest expense was related to costs from our credit facilities with GE Capital and Wells Fargo. Interest income was earned from cash balances in money market accounts.

Income Tax Benefit

We recorded an income tax benefit of $0.8 million in fiscal 2011, compared with a benefit of $8.1 million in fiscal 2010. The fiscal 2011 benefit included adjustments related to the filing of our fiscal 2010 income tax return. The Company did not recognize any additional tax benefit in fiscal 2011 for federal taxes since the Company did not generate taxable income during the two-year carry-back period for the fiscal 2011 NOL. The effective tax rates for fiscal 2011 and 2010 were 4% and 27%, respectively.

Liquidity and Capital Resources

Our capital requirements include maintenance and remodeling expenditures for existing stores, information technology, distribution and other infrastructure related investments, and construction, fixture and inventory costs related to the opening of any new retail stores. Future capital requirements will depend on many factors, including, but not limited to, additional investments in infrastructure and technology, the pace of new store openings, the availability of suitable locations for new stores, the size of the specific stores we open and the nature of arrangements negotiated with landlords. In that regard, our net investment to open new stores is likely to vary significantly in the future.

On May 26, 2011, the Company and certain of its wholly-owned subsidiaries entered into a new credit agreement (the "Credit Agreement") with General Electric Capital Corporation ("GE Capital"), as a lender and as agent for the financial institutions from time to time party to the Credit Agreement (together with GE Capital in its capacity as a lender, the "Lenders"), which replaced the Company's previous letter of credit agreement, as amended, with Wells Fargo Retail Finance II, LLC ("Wells Fargo") (the "Wells Fargo Agreement"). The Credit Agreement provides for a total aggregate commitment of the Lenders of $25 million, including a $15 million sublimit for the issuance of letters of credit and a swingline loan facility of $5 million. Under the Credit Agreement, the Company has the right to request, subject to the agreement of the Lenders, that the Lenders increase their revolving commitments up to an additional $25 million. The Credit Agreement has a term of five years and matures on May 26, 2016. The obligations of the borrowers under the Credit Agreement are secured by substantially all property and assets of the Company and certain of its subsidiaries.

As of February 2, 2013, availability under the Credit Facility was $5.1 million, net of outstanding letters of credit of $11.9 million.

The Credit Agreement calls for the payment by the Company of a fee of 0.375% per annum on the average unused portion of the Credit Agreement, a letter of credit fee calculated using a per annum rate equal to the Applicable Margin with respect to letters of credit (as defined in the Credit Agreement) multiplied by the average outstanding face amount of letters of credit issued under the Credit Agreement, as well as other customary fees and expenses. Interest accrues on the outstanding principal amount of the revolving credit loans at an annual rate equal to LIBOR (as defined in the Credit Agreement) or the Base Rate (as defined in the Credit Agreement), plus an applicable margin which is subject to periodic adjustment based on average excess availability under the Credit Agreement. Interest on each swingline loan is calculated using the Base Rate. The Credit Agreement does not contain any financial covenants with which the Company or any of its subsidiaries or affiliates has to comply during the term of the Credit Agreement.

The Credit Agreement contains customary representations and warranties, as well as customary covenants that, among other things, restricts the ability of the Company and its subsidiaries to incur liens, consolidate or merge with other entities, incur certain additional indebtedness and guaranty obligations, pay dividends or make


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certain other restricted payments. The Credit Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties and covenants, cross defaults to other material indebtedness, and bankruptcy and insolvency matters.

The Wells Fargo Agreement, which was terminated on May 26, 2011, provided for a maximum aggregate face amount of letters of credit that may be issued, to be the lesser of (a) $10 million or (b) an amount equal to a specified percentage of cash collateral held by Wells Fargo. The cash collateral was required in an amount equal to 105% of the face amount of outstanding letters of credit issued. None of the other assets or properties of the Company, or any of its subsidiaries or affiliates, were pledged as collateral for these obligations.

A significant portion of our vendor base is factored, which means our vendors have sold their accounts receivable to specialty lenders known as factors. Approximately 70% of our merchandise payments are made to factors. The credit extended by these factors is enhanced by standby letters of credit that we provide as collateral for our obligations to our vendors, which directly reduce the amount available to us under our Credit Agreement.

We expect our current cash balance, cash flow from operations and availability . . .

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