UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from......to........
Commission File Number: 0-10345
CACHE, INC.
(Exact name of registrant as specified in its Charter)
Florida 59-1588181
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1440 Broadway, New York, New York 10018
---------------------------------------- ---------
(Address of principal executive offices) (zip code)
212-575-3200
------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------------
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $.01 15,752,553
-------------------------- -------------------------------
Class of Stock Outstanding Outstanding at November 9, 2005
<page>
CACHE, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Condensed Consolidated Balance Sheets as of
October 1, 2005, January 1, 2005 and
September 25, 2004 3
Condensed Consolidated Statements of Operations
for the thirty-nine and thirteen weeks ended
October 1, 2005 and September 25, 2004 4
Condensed Consolidated Statements of Cash Flows
for the thirty-nine weeks ended October 1, 2005
and September 25, 2004 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<page>
<table>
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<caption> September 25,
2004
October 1, January 1, As restated, see
ASSETS 2005 2005 Note 10
------------- ------------- -------------
<s> <c> <c> <c>
Current Assets:
Cash and equivalents $ 22,263,000 $ 16,848,000 $ 12,830,000
Marketable securities 25,023,000 25,874,000 24,094,000
Receivables, net 5,039,000 6,545,000 5,308,000
Inventories 35,604,000 32,296,000 31,067,000
Deferred income taxes, net 541,000 567,000 468,000
Prepaid expenses and other current assets 1,668,000 1,948,000 1,954,000
------------- ------------- -------------
Total current assets 90,138,000 84,078,000 75,721,000
Equipment and leasehold improvements, net 51,139,000 47,118,000 43,378,000
Other assets 863,000 832,000 830,000
------------- ------------- -------------
Total assets $ 142,140,000 $ 132,028,000 $ 119,929,000
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,176,000 $ 17,055,000 $ 17,333,000
Accrued compensation 2,533,000 1,927,000 1,192,000
Accrued liabilities 10,219,000 11,627,000 9,602,000
------------- ------------- -------------
Total current liabilities 33,928,000 30,609,000 28,127,000
------------- ------------- -------------
Other liabilities 15,415,000 13,556,000 12,142,000
Deferred income taxes, net 1,455,000 3,023,000 1,427,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized, 20,000,000 shares;
15,752,553, 15,653,000 and 15,634,178 shares issued and 157,000 157,000 156,000
outstanding
Additional paid-in capital 35,343,000 34,705,000 34,307,000
Retained earnings 55,842,000 49,978,000 43,770,000
------------- ------------- -------------
Total Stockholders' Equity 91,342,000 84,840,000 78,233,000
------------- ------------- -------------
Total Liabilities and Stockholders' Equity $ 142,140,000 $ 132,028,000 $ 119,929,000
============= ============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
</table>
3
<page>
<table>
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED
(Unaudited)
<caption>
October 1, September 25,
2005 2004
------------- -------------
<s> <c> <c>
Net sales $ 187,025,000 $ 168,711,000
Cost of sales, including occupancy and buying costs 103,413,000 94,278,000
------------- -------------
Gross profit 83,612,000 74,433,000
------------- -------------
Expenses
Store operating expenses 62,379,000 53,624,000
General and administrative expenses 12,224,000 9,517,000
------------- -------------
Total expenses 74,603,000 63,141,000
------------- -------------
Operating income 9,009,000 11,292,000
Other income :
Interest income (net) 677,000 309,000
Other income (net) 2,000 20,000
------------- -------------
Income before income taxes 9,688,000 11,621,000
Income tax provision 3,824,000 4,532,000
------------- -------------
Net income $ 5,864,000 $ 7,089,000
============= =============
Basic earnings per share $0.37 $0.46
============= =============
Diluted earnings per share $0.37 $0.44
============= =============
Basic weighted average shares outstanding 15,714,000 15,569,000
============= =============
Diluted weighted average shares outstanding 16,017,000 15,967,000
============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
</table>
4
<page>
<table>
CACHE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED
(Unaudited)
October 1, September 25,
2005 2004
------------- -------------
<s> <c> <c>
Net sales $ 57,262,000 $ 49,430,000
Cost of sales, including occupancy and buying costs 31,149,000 29,834,000
------------- -------------
Gross profit 26,113,000 19,596,000
------------- -------------
Expenses
Store operating expenses 20,508,000 18,287,000
General and administrative expenses 4,064,000 2,270,000
------------- -------------
Total expenses 24,572,000 20,557,000
------------- -------------
Operating income (loss) 1,541,000 (961,000)
Other income:
Interest income 277,000 107,000
Other income (net) 2,000 0
------------- -------------
Income (loss) before income taxes 1,820,000 (854,000)
Income tax provision (benefit) 713,000 (333,000)
------------- -------------
Net income (loss) $ 1,107,000 $ (521,000)
============= =============
Basic earnings (loss) per share $0.07 ($0.03)
============= ==============
Diluted earnings (loss) per share $0.07 ($0.03)
============= =============
Basic weighted average shares outstanding 15,743,000 15,634,000
============= =============
Diluted weighted average shares outstanding 16,085,000 15,634,000
============= =============
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
</table>
5
<page>
<table>
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
(Unaudited)
<caption>
September 25,
2004
October 1, As restated, see
2005 Note 10
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
<s> <c> <c>
Net income $ 5,864,000 $ 7,089,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,136,000 5,737,000
Decrease (increase) in deferred income tax assets (1,457,000) 2,553,000
Deferred rent, net (892,000) (813,000)
Change in assets and liabilities:
- ---------------------------------
Decrease (increase) in receivables 1,506,000 (694,000)
Increase in inventories (3,308,000) (4,343,000)
Decrease (increase) in prepaid expenses and other current assets 280,000 (715,000)
Increase in accounts payable 4,121,000 2,971,000
Increase (decrease) in accrued liabilities and accrued compensation 1,959,000 (1,078,000)
------------- -------------
Net cash provided by operating activities 15,209,000 10,707,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Maturities of marketable securities 24,582,000 13,172,000
Purchase of marketable securities (23,731,000) (17,520,000)
Additions to equipment and leasehold improvements (11,167,000) (15,116,000)
------------- -------------
Net cash used in investing activities (10,316,000) (19,464,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from the issuance of common stock 553,000 4,657,000
Other, net (31,000) 43,000
------------- -------------
Net cash provided by financing activities 522,000 4,700,000
------------- -------------
Net increase (decrease) in cash and cash equivalents 5,415,000 (4,057,000)
Cash and equivalents, at beginning of period 16,848,000 16,887,000
------------- -------------
Cash and equivalents, at end of period $ 22,263,000 $ 12,830,000
============= =============
Supplemental disclosure of cash flow information:
Income taxes paid $ 4,643,000 $ 3,360,000
Income tax benefit from stock option exercises 85,000 1,345,000
Change in accrued equipment and leasehold improvements 10,000 ---
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
</table>
6
<page>
CACHE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
References to the "Company," "we," "us," or "our" means Cache, Inc., together
with its wholly-owned subsidiaries, except as expressly indicated or unless
the context otherwise requires. We operate two chains of women's apparel
specialty stores of which 262 stores are operated under the trade name "Cache"
and 39 stores are operated under the trade name "Lillie Rubin", as of October 1,
2005.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X and do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States. However, in the opinion of our management, all
known adjustments necessary for a fair presentation of the results of the
interim periods have been made. These adjustments consist primarily of normal
recurring accruals and estimates that impact the carrying value of assets and
liabilities. Actual results may materially differ from these estimates.
These condensed consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
January 1, 2005, which are included in the Company's Annual Report on Form 10-K
with respect to such period filed with the Securities and Exchange Commission.
All significant intercompany accounts and transactions have been eliminated.
The January 1, 2005 condensed consolidated balance sheet amounts are derived
from the Company's audited consolidated financial statements.
The Company's Fiscal Year ("Fiscal Year" or "Fiscal") refers to the 52 or 53
weeks, as applicable, ending the Saturday nearest to December 31. The year
ending December 31, 2005 ("Fiscal 2005") is a 52 week year as compared to the
years ended January 1, 2005 ("Fiscal 2004") and December 27, 2003 ("Fiscal
2003"), that are a 53 and 52 week years, respectively.
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements included in the Fiscal 2004 10-K.
2. COMMON STOCK SPLIT
On June 18, 2004, we completed a three-for-two stock split for holders of record
on May 21, 2004. All share and per share amounts have been retroactively
restated to reflect the stock split.
3. STOCK BASED COMPENSATION
The Company periodically grants stock options to its employees, and accounts
for these stock options in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). The Company also adopted the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"). If the
options are granted to employees with exercise prices below fair market value,
compensation expense is recognized over the vesting period. If the Company would
have elected to recognize compensation expense based on the fair value of
options at grant date, as prescribed by SFAS No. 123, net income (loss) and
earnings per share would have been reduced to the pro forma amounts indicated
in the following table:
7
<page>
<table>
13 Weeks Ended 39 Weeks Ended
------------------------- -------------------------
Oct. 1, Sept. 25, Oct. 1, Sept. 25,
2005 2004 2005 2004
---------- ---------- ---------- ----------
<s> <c> <c> <c> <c>
Net income (loss):
As reported $1,107,000 ($521,000) $5,864,000 $7,089,000
Deduct: Total stock based employee
compensation expense determined under fair
value based method, net of taxes (177,000) (110,000) (531,000) (330,000)
---------- --------- ---------- ----------
Pro forma net income (loss) $930,000 ($631,000) $5,333,000 $6,759,000
========== ========= ========== ==========
Basic earnings (loss) per share:
As reported $0.07 ($0.03) $0.37 $0.46
Pro forma $0.06 ($0.04) $0.34 $0.43
Diluted earnings (loss) per share:
As reported $0.07 ($0.03) $0.37 $0.44
Pro forma $0.06 ($0.04) $0.33 $0.42
</table>
There were 140,000 option grants, at their fair market value, in the 39 week
period ended October 1, 2005. For the 39 week period ended September 25, 2004,
stock options totaling 105,000, at their fair market value, were granted.
The weighted average fair value of the Company's stock options was calculated
using the Black-Scholes Option Pricing Model with the following weighted average
assumptions used for grants in their respective periods. For the third quarter
of 2005: no dividend yield; expected volatility of 54%; risk free interest rate
of 4.00%; and expected life of 5.0 years. For the third quarter of 2004: no
dividend yield; expected volatility of 71%; risk free interest rate of 3.64%;
and expected life of 5.0 years.
4. BASIC AND DILUTED EARNINGS
In accordance with SFAS No. 128, "Earnings Per Share", basic earnings per share
has been computed based upon the weighted average of common shares outstanding.
Diluted earnings per share gives effect to outstanding stock options.
Earnings per common share has been computed as follows:
<table>
13 Weeks Ended 39 Weeks Ended
------------------------ -------------------------
Oct. 1, Sept. 25, Oct. 1, Sept. 25,
2005 2004 2005 2004
---------- ---------- ---------- ----------
<s> <c> <c> <c> <c>
Net income (loss) $1,107,000 ($521,000) $5,864,000 $7,089,000
Basic weighted number of average
shares outstanding 15,743,000 15,634,000 15,714,000 15,569,000
Incremental shares from assumed issuances
of stock options 342,000 -0- 303,000 398,000
Diluted weighted average number of shares
Outstanding 16,085,000 15,634,000 16,017,000 15,967,000
Net income (loss) per share - Basic $0.07 ($0.03) $0.37 $0.46
- Diluted $0.07 ($0.03) $0.37 $0.44
</table>
8
<page>
Options to purchase 1,499,500 common shares with exercise prices ranging from
$1.73 to $18.30 per share were outstanding at October 1, 2005, and options to
purchase 1,765,000 common shares with exercise prices ranging from $1.73 to
$15.17 per share were outstanding at September 25, 2004.
10,000 options to purchase common shares at a price of $18.30 per share during
the thirteen and thirty-nine week periods ended October 1, 2005 and 1,765,000
options to purchase common shares at prices ranging from $1.73 to $15.17 per
share during the thirteen week period ended September 25, 2004 were outstanding
but were not included in the computation of dilutive earnings per share because
to do so would have been anti-dilutive for the periods presented.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB published SFAS No. 123R, pursuant to which all forms
of share-based payments to employees, including employee stock options, would
be treated as compensation and recognized in the income statement. SFAS No.
123R is effective beginning the first quarter of Fiscal 2006. The Company
currently accounts for stock options under APB No. 25. The Company is continuing
to evaluate the full impact of SFAS No. 123R for its adoption in the first
quarter of Fiscal 2006.
In December 2004, the FASB published Statement of Financial Accounting Standards
No. 151, "Inventory Costs" ("SFAS No. 151"), an amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4, which clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
Company has determined that SFAS No. 151 will not have a material impact on
its condensed consolidated results of operations, financial position or cash
flows.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections-A Replacement of APB Opinion No.
20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct
effects of the change. Indirect effects of a change in accounting principle,
such as a change in non-discretionary profit-sharing payments resulting from
an accounting change, should be recognized in the period of the accounting
change. SFAS 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived non-financial assets be accounted for as a
change in accounting estimate affected by a change in accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years beginning
after the date this Statement is issued. The Statement is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not believe that the adoption of SFAS
154 will have a significant effect on its financial statements.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations ("FIN 47"), was issued in March 2005. This interpretation will be
effective for the Company in the fourth quarter of 2005 and clarifies that an
entity is required to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if the liability's fair value can be
reasonably estimated. The Company does not believe that the adoption of FIN 47
will have a significant effect on its financial statements.
9
<page>
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<table>
October 1, January 1, September 25,
2005 2005 2004
------------ ------------ ------------
<s> <c> <c> <c>
Leasehold improvements $ 50,689,000 $ 45,349,000 $ 42,823,000
Furniture, fixtures and equipment 50,175,000 45,049,000 43,520,000
------------ ------------ ------------
100,864,000 90,398,000 86,343,000
Less: accumulated depreciation
and amortization 49,725,000 43,280,000 42,965,000
------------ ------------ ------------
$ 51,139,000 $ 47,118,000 $ 43,378,000
============ ============ ============
</table>
7. ACCRUED LIABILITIES
<table>
October 2, January 1, September 25,
2005 2005 2004
------------ ------------ ------------
<s> <c> <c> <c>
Operating expenses $ 2,839,000 $ 3,315,000 $ 2,747,000
Taxes, other than income taxes 1,483,000 2,185,000 1,436,000
Group insurance 693,000 509,000 477,000
Sales return reserve 675,000 832,000 642,000
Leasehold additions 918,000 928,000 1,329,000
Other customer deposits 3,611,000 3,858,000 2,971,000
------------ ------------ ------------
$ 10,219,000 $ 11,627,000 $ 9,602,000
============ ============ ============
</table>
8. BANK DEBT
During November 2002, the Company reached an agreement with its bank to extend
the maturity of the Amended Revolving Credit Facility until November 30, 2005.
Pursuant to the Amended Revolving Credit Facility, $17,500,000 is available
until expiration at November 30, 2005 and we are currently in negotiations to
extend the existing line of credit under similar terms to the existing
agreement. The amounts outstanding thereunder bear interest at a maximum per
annum rate equal to the bank's prime rate. The agreement contains selected
financial and other covenants. Effective upon the occurrence of an Event of
Default under the Amended Revolving Credit Facility, the Company grants to the
bank a security interest in the Company's inventory and certain receivables.
The Company has, at all times, been in compliance with all loan covenants.
There have been no borrowings against the line of credit during fiscal 2005
and fiscal 2004. There were outstanding letters of credit of $3.0 million,
$3.1 million and $2.2 million, pursuant to the Revolving Credit Facility, at
October 1, 2005, January 1, 2005 and September 25, 2004, respectively.
9. CONTINGENCIES
From time to time, the Company may become a party to legal proceeding which
arise in the normal course of business. At October 1, 2005, there were no
material, pending legal proceedings to which the Company was a party. In the
opinion of management, disposition of all legal proceedings is not expected
to materially affect the Company's financial position, cash flows or results
of operation. We have not provided any third party financial guarantees as of
and for the thirty-nine week period ended October 1, 2005.
10
<page>
10. RESTATEMENT OF BALANCE SHEET AND STATEMENT OF CASH FLOWS
Subsequent to the issuance of the condensed consolidated financial statements
for the period ended September 25, 2004, we determined that our lease incentives
should have been classified within other liabilities rather than equipment and
leaseholds on the condensed consolidated balance sheet. Further, historically,
the Company's consolidated statements of cash flows have reflected lease
incentives as a reduction of capital expenditures within investing activities
rather than as an increase in deferred lease credits within operating
activities. The impact of the revised accounting is to increase both net cash
provided by operating activities and net cash used for investing activities by
equal amounts.
As a result, the condensed consolidated balance sheet and the condensed
consolidated statement of cash flows as of and for the thirty-nine week period
ended September 25, 2004 have been restated to reflect the lease incentives
within other liabilities, rather than within equipment and leaseholds on the
condensed consolidated balance sheet and from cash flows used in investing
activities to cash flows provided by operating activities in the condensed
consolidated statement of cash flows. A summary of the effect of the
restatement on the condensed consolidated balance sheet and condensed
consolidated cash flow provided by (used in) operating and investing activities
is as follows:
<table>
As Previously
Reported As Restated
----------- -----------
<s> <c> <c>
For the thirty-nine weeks ended September 25, 2004:
Cash flow provided by operating activities
($3,772,000 lease restatement impact) $6,935,000 $10,707,000
Cash flow used in investing activities
($3,772,000 lease restatement impact) (15,692,000) (19,464,000)
As of September 25, 2004:
Equipment and leasehold improvements 32,466,000 43,378,000
Total Assets 109,017,000 119,929,000
Other liabilities 1,230,000 12,142,000
Total Liabilities and Stockholders' Equity 109,017,000 119,929,000
</table>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Except for the historical information and current statements contained in this
Form 10-Q, certain matters discussed herein, including, without limitation,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward looking statements that involve risks and uncertainties,
including, without limitation, the effect of economic and market conditions and
competition, the ability to open new stores and expand into new markets, and
risks relating to foreign importing operations, which would cause actual results
to differ materially.
11
<page>
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth our results of operations for the 13 and 39 week
periods ended October 1, 2005 and September 25, 2004, expressed as a percentage
of net sales.
<table>
13 Weeks Ended 39 Weeks Ended
---------------- -----------------
Oct. 1, Sept. 25, Oct. 1, Sept. 25,
2005 2004 2005 2004
------ ------ ------ ------
<s> <c> <c> <c> <c>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 54.4 60.4 55.3 55.9
Gross profit 45.6 39.6 44.7 44.1
Store operating expenses 35.8 37.0 33.4 31.8
General and administrative expenses 7.1 4.6 6.5 5.6
Operating income (loss) 2.7 (1.9) 4.8 6.7
Other income (loss) 0.5 0.2 0.4 0.2
Income (loss) before income taxes 3.2 (1.7) 5.2 6.9
Income tax provision (benefit) 1.2 0.7 2.0 2.7
Net income (loss) 1.9 (1.1) 3.1 4.2
</table>
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:
<table>
13 Weeks Ended 39 Weeks Ended
----------------- -----------------
Oct. 1, Sept. 25, Oct. 1, Sept. 25,
2005 2004 2005 2004
------ ------ ------ ------
<s> <c> <c> <c> <c>
Total store count at end of period 301 276 301 276
Net sales growth 16.0% 4.4% 10.8% 11.3%
Comparable store sales growth 8.0% (2.0%) 5.0% 4.0%
Net sales per average square foot $96 $91 $318 $321
Total square footage (in thousands) 609 572 609 572
</table>
Net sales
- ---------
Net sales increased to $187.0 million from $168.7 million, an increase of
$18.3 million or 10.8%, over the prior year 39 week period. Comparable store
sales (sales for stores open at least one year or more) increased $7.4
million or 5%, during the 39 week period. Net sales from new stores and
non-comparable stores were $10.9 million during the current 39 week period.
Net sales increased to $57.3 million from $49.4 million, an increase of $7.9
million, or 15.8%, over the same 13 week period last year. This reflects $3.9
million of additional net sales as a result of 8% increase in comparable store
sales. Net sales increased $4.0 million as a result of additional sales from
non-comparable stores, during the current 13 week period.
12
<page>
Gross profit
- ------------
Gross profit increased to $83.6 million from $74.4 million, an increase of
$9.2 million or 12.3%, over the prior year 39 week period. This increase was
primarily due to higher net sales. As a percentage of net sales, gross profit
increased to 44.7% from 44.1%. The increase in gross profit as a percentage of
net sales was primarily due to lesser promotional activity and higher initial
markup and was partially offset by increased occupancy costs related to our
store expansion program.
Gross profit increased to $26.1 million from $19.6 million, an increase of $6.5
million, or 33.3%, over the same 13 week period last year. This increase was
primarily due to higher net sales. As a percentage of net sales, gross profit
increased to 45.6% from 39.6%. The increase in gross profit as a percentage of
net sales was primarily due to the same factors as for the 39 week period.
Store operating expenses
- ------------------------
Store operating expenses increased to $62.4 million from $53.6 million, an
increase of $8.8 million or 16.3%, over the prior year 39 week period. This
increase is primarily attributable to the increase in the number of stores open.
As a percentage of net sales, store operating expenses increased to 33.4% from
31.8% for the 39 week period, primarily due to higher payroll and depreciation
expense.
Store operating expenses increased to $20.5 million from $18.3 million, an
increase of $2.2 million or 12.2% over the same 13 week period last year. This
increase is primarily due to an increase in the number of stores open. As a
percentage of sales, store operating expenses decreased to 35.8% from 37.0%,
primarily due to higher sales volume during the 13 week period.
General and administrative expenses
- -----------------------------------
General and administrative expenses increased to $12.2 million from $9.5
million, an increase of $2.7 million or 28.4%, over the same 39 week period
last year. As a percentage of net sales, general and administrative expenses
increased to 6.5% from 5.6%, primarily due higher payroll, professional fees
and incentive bonus accruals, as compared to last year.
General and administrative expenses increased to $4.1 million from $2.3 million,
an increase of $1.8 million or 79.0%, above the same 13 week period last year.
As a percentage of net sales, general and administrative expenses increased to
7.1% from 4.6% for the 13 week period, primarily due to the same factors as for
the 39 week period.
Interest Income
- ---------------
Interest income increased to $677,000 from $309,000, an increase of $368,000
over the prior period, primarily due to higher average cash balances, as well
as higher interest rates.
Interest income increased to $277,000 from $107,000 in the same 13 week period
last year, for the same reasons as the 39 week period.
Income taxes
- ------------
Income taxes decreased to $3.8 million from $4.5 million, as compared to the
39 week period last year. The decrease was primarily attributable to lower
taxable income in fiscal 2005. The estimated effective tax rate for fiscal
2005 and fiscal 2004 were 39.5% and 39.0%, respectively, including state and
local income taxes.
Income taxes increased to $713,000 from a $333,000 benefit for the same 13
week period last year. The effective rate increased from 39.0% to 39.5% for
the current quarter.
13
<page>
Net income
- ----------
As a result of the factors discussed above, net income decreased to $5.9
million from $7.1 million for the prior year 39 week period.
Net income increased to $1.1 million from a $521,000 net loss for the same 13
week period last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As discussed in Note 10 to the Company's condensed consolidated financial
statements, the condensed consolidated balance sheet as of September 25, 2004
and the condensed consolidated statements of cash flow for the thirty-nine
week period ended September 25, 2004 have been restated. This discussion and
analysis gives effect to these statements. Our cash requirements are primarily
for working capital, the construction of new stores, the remodeling of existing
stores, and to improve and enhance our information technology systems. Due to
the seasonality of our business, we have historically realized a significant
portion of our cash flows from operating activities during the second half of
the fiscal year. Most recently, our cash requirements have been met primarily
through cash and cash equivalents on hand during the first half of the year,
and through cash flows from operating activities during the second half of the
year. We expect to continue to meet our cash requirements primarily through
cash flows from operating activities, existing cash and cash equivalents, and
short-term investments. In addition, we have available a $17.5 million
revolving credit facility (the "credit facility") with Bank of America Retail
Finance, although we have not had outstanding borrowings under the credit
facility for several years. The current credit facility expires in November
2005 and we are currently in negotiations to extend the credit facility under
similar terms to the existing agreement. At October 1, 2005, we had working
capital of $56.2 million, cash and cash equivalents of $22.3 million, short-term
investments of $25.0 million, and no third party debt outstanding.
The following table sets forth our cash flows for the period indicated:
<table>
---------------------------
Thirty-nine weeks ended
---------------------------
Oct. 1, Sept. 25,
2005 2004
----------- -----------
<s> <c> <c>
Net cash from operating activities............................... $15,209,000 $10,707,000
Net cash from investing activities............................... (10,316,000) (19,464,000)
Net cash from financing activities............................... 522,000 4,700,000
----------- -----------
Net increase (decrease) in cash and cash equivalents............. $5,415,000 ($4,057,000)
=========== ===========
</table>
During the thirty-nine weeks ended October 1, 2005, we increased our cash and
cash equivalents by $5.4 million, primarily due to net income of $5.9 million,
depreciation of $7.1 million and decreases in receivables of $1.5 million,
accounts payable increased $4.1 million and accrued expenses increased $2.0
million, which were partially offset by inventory purchases of $3.3 million
and expenditures for our new store expansion and remodeling program totaled
$11.2 million.
We plan to open approximately 20 new stores during fiscal 2005. Five new stores
were opened in the first quarter, four new stores opened in second quarter and
five new stores opened in the third quarter. We anticipate opening the remaining
new stores before Thanksgiving. We renovated three existing stores in the first
quarter and seven existing stores in the second quarter and six stores in the
third quarter. We closed four stores during fiscal 2005. Three stores in New
Orleans were temporarily closed due to Hurricane Katrina. Two stores reopened
on October 29, 2005 and are performing well. We anticipate no material losses
from these temporary store closures. We spent $11.2 million
14
<page>
through October 1, 2005 and expect to spend an additional $5 million to $6
million in 2005, for both new store and existing store construction and
remodeling.
Cash provided by financing activities for the thirty-nine weeks ended October
1, 2005 totaled $522,000 compared to cash provided by $4.7 million for the
thirty-nine weeks ended September 25, 2004, primarily from the exercise of stock
options.
Inflation
- ---------
We do not believe that our sales revenue or operating results have been
materially impacted by inflation during the past three fiscal years. There can
be no assurance, however, that our sales revenue or operating results will not
be impacted by inflation in the future.
Off-Balance Sheet Arrangements
- ------------------------------
We do not have any off-balance sheet arrangements or transactions with
unconsolidated, limited purpose entities. In the normal course of its business,
we enter into operating leases for store locations and utilize letters of
credit principally for the importation of merchandise. We do not have any
undisclosed material transactions or commitments involving related persons or
entities.
Critical Accounting Policies and Estimates
- ------------------------------------------
Our accounting policies are more fully described in Note 1 of Notes to
Consolidated Financial Statements in our fiscal 2004 10-K. As disclosed in
Note 1 of 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
will 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 will differ from these under different
assumptions or conditions.
Our 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 inventories are valued at 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 has been 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. Management believes that our RIM provides an inventory
valuation, which results in a carrying value at the lower of cost or market.
Finite-lived assets. We evaluate the fair value and future benefits of
finite-lived assets whenever events and changes in circumstances suggest. We
perform an analysis of the anticipated undiscounted future net cash flows of the
related finite-lived assets. If the carrying value of the related asset exceeds
the undiscounted cash flows, the carrying value is reduced to its fair value.
Various factors including future sales growth and profit margins are included
in this analysis. To the extent these future projections or our strategies
change, the conclusion regarding impairment may differ from the current
estimates.
15
<page>
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 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.
Amounts billed to customers for shipping and handling fees are included in net
sales at the time of shipment. Costs incurred for shipping and handling are
included in cost of sales.
Income Taxes. Temporary differences arising from differing treatment of income
and expense items for tax and financial reporting purposes result in deferred
tax assets and liabilities that are recorded on the balance sheet. These
balances, as well as income tax expense, are determined through management's
estimations, interpretation of tax law for multiple jurisdictions and tax
planning. If our actual results differ from estimated results due to changes
in tax laws, new store locations or tax planning, our effective tax rate and tax
balances could be affected. As such these estimates may require adjustment
in the future, as additional facts become known or as circumstances change.
Seasonality. We experience seasonal and quarterly fluctuations in net sales
and operating income. Quarterly results of operations may fluctuate
significantly as a result of a variety of factors, including the timing of new
store openings, fashion trends and shifts in timing of certain holidays. Our
business is subject to seasonal influences, characterized by highest sales
during the fourth quarter (October, November and December) and lowest sales
during the third quarter (July, August and September).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the following types of market risk-fluctuations in the
purchase price of merchandise, as well as other goods and services: the value
of foreign currencies in relation to the U.S. dollar; and changes in interest
rates. Due to our inventory turn rate and its historical ability to pass
through the impact of any generalized changes in its cost of goods sold to its
customers through pricing adjustments, commodity and other product risks are not
expected to be material. We purchase substantially all merchandise in U.S.
dollars.
Our exposure to market risk for changes in interest rates relates to cash, cash
equivalents and marketable securities. As of October 1, 2005, our cash, cash
equivalents and marketable securities consisted primarily of funds invested in
money market accounts, which bear interest at a variable rate, U.S. treasury
instruments and tax exempt municipal bonds rated AA or better, which bear
interest at a fixed rate. Due to the average maturity and the conservative
nature of our investment portfolio, we believe a sudden change in interest rates
would not have a material effect on the value of our investment portfolio. As
the interest rates on a material portion of our cash, cash equivalents and
marketable securities are variable, a change in interest rates earned on our
investment portfolio would impact interest income along with cash flows, but
would not materially impact the fair market value of the related underlying
instruments.
16
<page>
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
- ----------------------------------
We maintain a set of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), designed to provide reasonable assurance that
information required to be disclosed in our filings under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules, regulations and forms. The
Company conducted an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and the Chief Operating Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) as of the end of the period covered by this report. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based on their evaluation, the Chief
Executive Officer and the Chief Operating Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report in providing reasonable
assurance of achieving the Company's control objectives.
Changes in Internal Control over Financial Reporting
- ----------------------------------------------------
We also maintain a system of internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). No changes in
our internal control over financial reporting occurred during the quarter ended
October 1, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
17
<page>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Calculation of Basic and Diluted Earnings per Common Share.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
18
<page>
Signatures
Pursuant to the requirement of section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Dated: November 9, 2005
CACHE, INC.
BY: /s/ Brian Woolf
---------------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
BY: /s/ Margaret Feeney
---------------------------
Margaret Feeney
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<page>
<table>
EXHIBIT 11.1
CALCULATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
<caption>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------- --------------------------------
October 1, September 25, October 1, September 25,
2005 2004 2005 2004
------------------------------- --------------------------------
EARNINGS (LOSS)
- ---------------
<s>
Net Income (Loss) Applicable to <c> <c> <c> <c>
Common Stockholders $ 1,107,000 $ (521,000) $ 5,864,000 $ 7,089,000
============================== =================================
BASIC EARNINGS (LOSS) PER SHARE
- -------------------------------
Weighted Average Number of
Common Shares Outstanding 15,743,000 15,634,000 15,714,000 15,569,000
============================== =================================
Basic Earnings (Loss) Per Share $0.07 ($0.03) $0.37 $0.46
============================== =================================
DILUTED EARNINGS (LOSS) PER SHARE
- ---------------------------------
Weighted Average Number of
Common Shares Outstanding 15,743,000 15,634,000 15,714,000 15,569,000
Assuming Conversion of
Outstanding Stock Options 1,515,000 0 1,564,000 1,765,000
Less Assumed Repurchase
of Common Stock Pursuant
to the Treasury Stock Method (1,173,000) 0 (1,261,000) (1,367,000)
------------------------------ ---------------------------------
Weighted Average Number of
Common Shares Outstanding
As Adjusted 16,085,000 15,634,000 16,017,000 (15,967,000)
============================== =================================
Diluted Earnings (Loss) Per Share $0.07 ($0.03) $0.37 $0.44
============================== =================================
</table>
20
<page>
EXHIBIT 31.1
CERTIFICATION
-------------
I, Brian Woolf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cache, Inc.
(Cache),
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of Cache as of, and for, the periods
presented in this quarterly report;
4. Cache's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to Cache, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period which this quarterly report
is being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of Cache's disclosure controls
and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered
by this quarterly report based on such evaluation; and
d) disclosed in this report any changes in Cache's internal
control over financial reporting that occurred during
Cache's third quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting;
5. Cache's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial
reporting, to Cache's auditors and the audit committee of Cache's
Board of Directors;
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
Cache's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in Cache's internal control over financial reporting.
November 9, 2005 By: /s/ Brian Woolf
----------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
21
<page>
EXHIBIT 31.2
CERTIFICATION
-------------
I, Margaret Feeney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cache, Inc.
(Cache),
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of Cache as of, and for, the periods
presented in this quarterly report;
4. Cache's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to Cache, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period which this quarterly report
is being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of Cache's disclosure controls
and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered
by this quarterly report based on such evaluation; and
d) disclosed in this report any changes in Cache's internal
control over financial reporting that occurred during
Cache's third quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting;
5. Cache's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial
reporting, to Cache's auditors and the audit committee of Cache's
Board of Directors;
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
Cache's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in Cache's internal control over financial reporting.
November 9, 2005 By:/s/ Margaret Feeney
-------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
<page>
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to and solely for the purposes of, 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in
the capacity and on the date indicated below that:
1. The Quarterly Report of Cache, Inc. on Form 10-Q for the period
ended October 1, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of Cache, Inc.
November 9, 2005 BY: /s/ Brian Woolf
----------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
November 9, 2005 By: /s/ Margaret Feeney
--------------------
Margaret Feeney
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<page>