UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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 that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "Accelerated
Filer" and "Large Accelerated Filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer
| | |X| | |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|
As of October 31 2006, 15,811,003 common shares were outstanding.
CACHE, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2006, December 31, 2005 and October 1, 2005 3
Condensed Consolidated Statements of Income for the thirty-
nine and thirteen weeks ended September 30, 2006 and
October 1, 2005 4
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended September 30, 2006 and
October 1, 2005 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1A. Risk Factors 20
Item 6. Exhibits 25
SIGNATURES 26
2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS September 30, December 31, October 1,
2006 2005 2005
---- ---- ----
Current assets:
Cash and cash equivalents $ 33,214,000 $ 16,753,000 $ 22,263,000
Marketable securities 20,315,000 36,520,000 25,023,000
Receivables, net 4,399,000 5,734,000 5,039,000
Inventories 37,074,000 32,785,000 35,604,000
Deferred income taxes, net 718,000 691,000 541,000
Prepaid expenses and other current assets 4,854,000 4,777,000 1,668,000
--------------------- --------------------- --------------------
Total current assets 100,574,000 97,260,000 90,138,000
Equipment and leasehold improvements, net 50,788,000 52,760,000 51,139,000
Other assets 440,000 864,000 863,000
--------------------- --------------------- --------------------
Total assets $ 151,802,000 $ 150,884,000 $ 142,140,000
===================== ===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,648,000 $ 18,404,000 $ 21,176,000
Accrued compensation 2,522,000 2,624,000 2,533,000
Accrued liabilities 12,132,000 12,446,000 10,219,000
--------------------- --------------------- --------------------
Total current liabilities 30,302,000 33,474,000 33,928,000
Other liabilities 15,161,000 16,309,000 15,415,000
Deferred income taxes, net 2,197,000 2,105,000 1,455,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized, 20,000,000 shares;
15,791,003, 15,770,553 and 15,726,553 shares issued
and outstanding 158,000 158,000 157,000
Additional paid-in capital 36,525,000 35,455,000 35,343,000
Retained earnings 67,459,000 63,383,000 55,842,000
--------------------- --------------------- --------------------
Total stockholders' equity
104,142,000 98,996,000 91,342,000
--------------------- --------------------- --------------------
Total liabilities and stockholders'
equity $ 151,802,000 $ 150,884,000 $ 142,140,000
===================== ===================== ====================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTY-NINE WEEKS ENDED
(UNAUDITED)
September 30, October 1,
2006 2005
--------------------- --------------------
Net sales $ 195,438,000 $ 187,025,000
Cost of sales, including occupancy and buying costs 102,693,000 103,413,000
--------------------- --------------------
Gross profit 92,745,000 83,612,000
--------------------- --------------------
Expenses
Store operating expenses 67,055,000 62,379,000
General and administrative expenses 15,340,000 12,224,000
Lillie Rubin exit costs 5,518,000 ---
--------------------- --------------------
Total expenses 87,913,000 74,603,000
--------------------- --------------------
Operating income 4,832,000 9,009,000
Interest income 1,850,000 677,000
Other income --- 2,000
--------------------- --------------------
Income before income taxes 6,682,000 9,688,000
Income taxes 2,606,000 3,824,000
--------------------- --------------------
Net income $ 4,076,000 $ 5,864,000
===================== ====================
Basic earnings per share $0.26 $0.37
================== ==================
Diluted earnings per share $0.25 $0.37
================== ==================
Basic weighted average shares outstanding 15,784,000 15,714,000
================== ==================
Diluted weighted average shares outstanding 16,160,000 16,017,000
================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
(UNAUDITED)
September 30, October 1,
2006 2005
--------------------- --------------------
Net sales $ 59,935,000 $ 57,262,000
Cost of sales, including occupancy and buying costs 31,669,000 31,149,000
--------------------- --------------------
Gross profit 28,266,000 26,113,000
--------------------- --------------------
Expenses
Store operating expenses 22,330,000 20,508,000
General and administrative expenses 5,606,000 4,064,000
Lillie Rubin exit costs (144,000) ---
--------------------- --------------------
Total expenses 27,792,000 24,572,000
--------------------- --------------------
Operating income 474,000 1,541,000
Interest income 657,000 277,000
Other income --- 2,000
--------------------- --------------------
Income before income taxes 1,131,000 1,820,000
Income taxes 441,000 713,000
--------------------- --------------------
Net income $ 690,000 $ 1,107,000
===================== ====================
Basic earnings per share $0.04 $0.07
================== ==================
Diluted earnings per share $0.04 $0.07
================== ==================
Basic weighted average shares outstanding 15,791,000 15,743,000
================== ==================
Diluted weighted average shares outstanding 16,165,000 16,085,000
================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
(UNAUDITED)
September 30, October 1,
2006 2005
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,076,000 $ 5,864,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,914,000 7,136,000
Increase (decrease) in deferred income taxes 65,000 (1,457,000)
Amortization of deferred rent (1,002,000) (892,000)
Gift card breakage (2,425,000) ---
Other, net (30,000) (31,000)
Stock-based compensation 849,000 ---
Lillie Rubin exit costs 3,827,000 ---
Change in assets and liabilities:
Decrease in receivables 1,335,000 1,506,000
Increase in inventories (4,564,000) (3,308,000)
Decrease (increase) in prepaid expenses and other current assets (77,000) 280,000
Increase (decrease) in accounts payable (2,756,000) 4,121,000
Excess tax benefits from stock options (29,000) ---
Increase in accrued liabilities
and accrued compensation 1,883,000 1,959,000
---------------------- ------------------------
Net cash provided by operating activities 9,066,000 15,178,000
---------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 60,736,000 24,582,000
Purchases of marketable securities (44,531,000) (23,731,000)
Payments for equipment and leasehold improvements (9,060,000) (11,167,000)
---------------------- ------------------------
Net cash provided by (used in) investing activities 7,145,000 (10,316,000)
---------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 221,000 553,000
EXCESS TAX BENEFITS FROM STOCK OPTIONS 29,000 ---
---------------------- ------------------------
Net cash provided by financing activities 250,000 553,000
---------------------- ------------------------
Net increase in cash and equivalents 16,461,000 5,415,000
Cash and equivalents, at beginning of period 16,753,000 16,848,000
---------------------- ------------------------
Cash and equivalents, at end of period $ 33,214,000 $ 22,263,000
====================== ========================
6
Supplemental disclosure of cash flow information:
Income taxes paid $ 5,175,000 $ 4,643,000
Accrued equipment and leasehold improvements $ 2,416,000 $ 918,000
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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 currently operate three chains of women's apparel
specialty stores of which 273 stores are operated under the trade name "Cache",
16 stores are operated under the trade name "Luxe" and 5 stores are operated
under the trade name "Lillie Rubin", as of September 30, 2006.
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
December 31, 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 December 31, 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 years
ended December 30, 2006 ("Fiscal 2006") and December 31, 2005 ("Fiscal 2005")
are each 52-week years as compared to the year ended January 1, 2005 ("Fiscal
2004"), that was a 53-week year.
Gift Cards, Gift Certificates and Merchandise Credits. The Company sells gift
cards and gift certificates and issues credits to its customers when merchandise
is returned (collectively, "Gift Cards"). The Company recognizes sales from Gift
Cards when they are redeemed by the customer.
During the third quarter of 2006, the Company formed a new subsidiary to handle
all Gift Card sales and maintain the liability related to Gift Cards. As a
result of transferring all existing obligations to the newly formed subsidiary,
the Company recognized $2.4 million of breakage income, within net sales, in the
third quarter related to Gift Cards sold/issued since the inception of the Gift
Card program. There was no breakage income recognized for the same period in the
prior year.
As of the third quarter, the Company will recognize income when the likelihood
of the Gift Card being redeemed by the customer is remote (Gift Card breakage)
and the Company determines that it does not have a legal obligation to remit the
value of unredeemed Gift Cards to the relevant jurisdiction as abandoned
property.
The Company determines Gift Card breakage income based upon historical
redemption patterns. Breakage income represents the balance of Gift Cards for
which the Company believes the likelihood of redemption by the customer is
remote. At that time, the Company will recognize breakage income over the
performance period for those Gift Cards.
7
2. STOCK BASED COMPENSATION
Effective January 1, 2006, the Company began recording compensation expense
associated with stock options in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as interpreted by
SEC Staff Accounting Bulletin No. 107. Prior to January 1, 2006, we had
accounted for stock options according to the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. We adopted the modified
prospective transition method provided for under SFAS No. 123R, and,
consequently, have not retroactively adjusted results from prior periods. Under
this transition method, compensation cost associated with stock options
recognized in Fiscal 2006 includes: 1) quarterly amortization related to the
remaining unvested portion of all stock option awards granted prior to January
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123; and 2) quarterly amortization related to
all stock option awards granted subsequent to January 1, 2006, when granted,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123R.
The Company's 2000 Stock Option Plan provides for the granting of either
incentive stock options ("ISO's") or non-qualified options to purchase up to
825,000 shares of common stock. As of September 30, 2006, there were 67,032
shares under the 2000 plan available for future grant. The Company's 2003 Stock
Option Plan provides for the granting of either ISO's or non-qualified options
to purchase up to 1,350,000 shares of common stock. As of September 30, 2006,
there were 152,500 shares under the 2003 plan available for future grant. All of
the Company's prior stock option plans have expired as to the ability to grant
new options.
Stock awards outstanding under the Company's current plans have generally been
granted at prices which are equal to the market value of our stock on the date
of grant, generally vest over four years and expire no later than ten years
after the grant date. Effective January 1, 2006, we recognize compensation
expense ratably over the vesting period, net of estimated forfeitures. As of
September 30, 2006, there was $1.2 million of total unrecognized compensation
cost related to non-vested options, which is expected to be recognized over a
remaining weighted-average vesting period of 1.37 years. The total intrinsic
value of options exercised during the 39 and 13-week periods ended September 30,
2006 was approximately $146,000 and $0.
A summary of the changes in stock options outstanding during the 39-week period
ended September 30, 2006 is presented below:
TOTAL OUTSTANDING CURRENTLY EXERCISABLE
-------------------------------------- --------------------------------------
NUMBER AGGREGATE NUMBER AGGREGATE
OF AVERAGE AVERAGE INTRINSIC OF AVERAGE AVERAGE INTRINSIC
OPTIONS PRICE(1) LIFE(2) VALUE (3) OPTIONS PRICE(1) LIFE(2) VALUE (3)
-------------------------------------- --------------------------------------
December 31, 2005 1,481,500 $10.85 7.45 $9,579,495 742,250 $8.80 6.92 $6,324,778
Granted -- -- -- --
Vested 239,375
Canceled/forfeited (9,000) 12.65 -- --
Exercised (20,450) 10.72 (20,450) 10.72
-------- ----- -------- -----
September 30, 2006 1,452,050 $10.84 6.70 $10,230,182 961,175 $9.76 6.36 $7,818,015
========= ====== ===== =========== ========= ====== ===== ===========
(1) - Weighted-average exercise price.
(2) - Weighted-average contractual life remaining in years.
(3) - The aggregate intrinsic values in the table above are based on the Company's closing stock price as of
the last business day of the periods ended December 31, 2005 and September 30, 2006, which was $17.32 and $17.89,
respectively.
8
A summary of the activity for the non-vested share awards during the 39-week
period ended September 30, 2006 is presented below:
COMMON FAIR VALUE
STOCK AT GRANT
OPTIONS DATE
---------- ----------
Non-vested--December 31, 2005 739,250 $12.92
Granted --- ---
Vested (239,375) $12.65
Cancelled/forfeited (9,000) $12.65
---------- ----------
Non-vested--September 30, 2006 490,875 $12.98
========= ==========
Prior to the adoption of SFAS No. 123R, we presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Condensed
Consolidated Statement of Cash Flows. SFAS No. 123R requires that cash flows
resulting from tax deductions in excess of the cumulative compensation cost
recognized for options exercised ("excess tax benefits") be classified as
financing cash flows. For the 39 and 13-week periods ended September 30, 2006,
there was $29,000 of excess tax benefits realized from the exercise of stock
options.
During the 39 and 13-week periods ended September 30, 2006, the Company
recognized approximately $849,000 ($681,000 after tax or $0.04 per diluted
share) and $247,000 ($131,000 after tax or $0.01 per diluted share) in
share-based compensation expense. The grant date fair value is calculated using
the Black Scholes option valuation model. No compensation cost was recognized
prior to January 1, 2006. Had compensation cost for our share-based compensation
plans been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts
(in thousands, except per share data):
39 Weeks Ended 13 Weeks Ended
October 1, October 1,
2005 2005
---- ----
Net earnings as reported: $5,864,000 $1,107,000
Add share-based employee compensation expense included in reported --- ---
net income, net of taxes
Deduct employee compensation expense determined under a fair value (531,000) (177,000)
based method, net of related tax effects
Pro forma net earnings $5,333,000 $930,000
Basic earnings per share:
As reported $0.37 $0.07
Pro forma $0.34 $0.06
Diluted earnings per share:
As reported $0.37 $0.07
Pro forma $0.33 $0.06
There were no options granted during the 39 and 13-week periods ended September 30, 2006. There were 140,000 and 35,000 options
granted during the 39 and 13-week periods ended October 1, 2005, respectively.
9
3. 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:
13-Weeks Ended 39-Weeks Ended
---------------------------------- ----------------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net income $690,000 $1,107,000 $4,076,000 $5,864,000
Basic weighted number of average
shares outstanding 15,791,000 15,743,000 15,784,000 15,714,000
Incremental shares from assumed issuances
of stock options 374,000 342,000 376,000 303,000
Diluted weighted average number of
shares outstanding 16,165,000 16,085,000 16,160,000 16,017,000
Net income per share - Basic $0.04 $0.07 $0.26 $0.37
- Diluted $0.04 $0.07 $0.25 $0.37
Options to purchase 10,000 common shares with an exercise price of $18.30 per share were excluded from the computation of diluted
earnings per share, for the 13 and 39-week periods in fiscal 2005 and 2006, because the exercise price was greater than the market
price.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3". This
statement changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition through a cumulative adjustment within net
income in the period of the change. This statement requires retrospective
application to prior periods' financial statements unless it is impracticable to
determine the period-specific effects or the cumulative effect of the change and
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. We do not expect that the adoption of
SFAS No. 154 will have a material impact on our consolidated financial
statements.
On October 6, 2005, the FASB issued FASB Staff Position ("FSP") No. FAS 13-1
"Accounting for Rental Costs Incurred during a Construction Period." The FASB
has concluded that rental costs incurred during and after a construction period
are for the right to control the use of a leased asset and must be recognized as
rental expense. Such costs were previously capitalized as construction costs, if
the company had a policy to do so. The FSP is effective for reporting periods
beginning after December 15, 2005. The Company expects that the implementation
of FSP No. FAS 13-1 will decrease net income by approximately $175,000 for the
fiscal year ending December 30, 2006. During the 39-week and 13-week periods
ended September 30, 2006, the Company incurred $85,000 and ($36,000) of such
costs. The reversal in the current 13-week period is primarily due to the
over-accrual of construction rents, related to the April Cornell leases acquired
in the second quarter.
10
On November 3, 2005, FASB issued FSP Nos. FAS 115-1 and FAS 124-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments."
This FSP addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the timing and
measurement of an impairment loss. The FSP is required to be applied to
reporting periods beginning after December 15, 2005 and was adopted by the
Company in the first quarter of fiscal 2006. The impact of the adoption of this
FSP did not have a material impact on its consolidated financial statements.
On July 13, 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB No.
109, ACCOUNTING FOR INCOME TAXES. FIN 48 provides guidance on the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact of this standard on
our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR
MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL
STATEMENTS, which provides interpretive guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal
years ending after November 15, 2006. Early application is encouraged, but not
required. We are required to adopt SAB No. 108 for our fiscal year ending
December 30, 2006. We are currently assessing the impact, if any, the adoption
of SAB No. 108 will have on our operating income or net earnings. The cumulative
effect, if any, of applying the provisions of SAB No. 108 will be reported as an
adjustment to beginning-of-year retained earnings.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
September 30, December 31, October 1,
2006 2005 2005
------------------ ------------------ ------------------
Leasehold improvements $ 50,558,000 $ 51,827,000 $ 50,689,000
Furniture, fixtures and equipment 54,302,000 51,715,000 50,175,000
------------------ ------------------ ------------------
104,860,000 103,542,000 100,864,000
Less: accumulated depreciation
and amortization (54,072,000) (50,782,000) (49,725,000)
------------------ ------------------ ------------------
$ 50,788,000 $ 52,760,000 $ 51,139,000
================== ================== ==================
6. ACCRUED LIABILITIES
September 30, December 31, October 1,
2006 2005 2005
------------------ ------------------ ------------------
Operating expenses $ 4,379,000 $ 2,894,000 $ 2,839,000
Other taxes 2,125,000 2,540,000 1,483,000
Group insurance 711,000 598,000 693,000
Sales return reserve 657,000 803,000 675,000
Leasehold additions 2,416,000 859,000 918,000
Other customer deposits and credits 1,844,000 4,752,000 3,611,000
------------------ ------------------ ------------------
$ 12,132,000 $ 12,446,000 $ 10,219,000
================== ================== ==================
11
7. BANK DEBT
During November 2005, the Company reached an agreement with its bank to extend
the maturity of the Amended Revolving Credit Facility until November 30, 2008.
Pursuant to the newly Amended Revolving Credit Facility, $17,500,000 is
available until expiration at November 30, 2008. The amounts outstanding under
the credit facility bear interest at a maximum per annum rate equal to the
bank's prime rate, currently 8.25% at September 30, 2006, less 0.25%. 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 2006 and
fiscal 2005. There were outstanding letters of credit of $2.7 million, $1.0
million and $3.0 million, pursuant to the Amended Revolving Credit Facility, at
September 30, 2006, December 31, 2005 and October 1, 2005, respectively.
8. LILLIE RUBIN EXIT COSTS
During the quarter ended July 1, 2006, the Company recorded a pre-tax charge of
$5.7 million for asset impairment and store closing costs for the exit of the
Lillie Rubin business. Included in the exit costs was a write down of leasehold
improvements, furniture and fixtures on 19 stores in the amount of $4.1 million,
write down of intangibles of $455,000, write down of supplies of $275,000,
severance accrual of $384,000, as well as an accrual of $1.6 million for
contractual termination costs negotiated prior to July 1, 2006. These costs were
partially offset by the reversal of $1.2 million of deferred rent accruals.
During the quarter ended September 30, 2006, the Company reversed $144,000 of
the store closing costs based upon updated information. The Company closed 15 of
the stores as of September 30, 2006 and anticipates the closing of the remaining
5 stores by the end of the first fiscal quarter of 2007. The Company does not
expect to incur significant additional exit costs upon the closing of these
properties during the fourth quarter.
The following is a summary of the activity in the reserve for exit costs:
- ---------------------------------------- --------------------- ---------------- ----------------------- -----------------------
BALANCE BEGINNING CHARGES CASH PAYMENTS BALANCE END OF PERIOD
OF PERIOD
- ---------------------------------------- --------------------- ---------------- ----------------------- -----------------------
Contractual termination costs $ --- $1,437,000 $1,153,000 $284,000
- ---------------------------------------- --------------------- ---------------- ----------------------- -----------------------
Severance --- 253,000 208,000 45,000
- ---------------------------------------- --------------------- ---------------- ----------------------- -----------------------
Impairment of long lived assets and ---
supplies 5,089,000
- ---------------------------------------- --------------------- ---------------- ----------------------- -----------------------
Reversal of deferred rent liability --- (1,261,000)
- ---------------------------------------- --------------------- ---------------- ----------------------- -----------------------
9. CONTINGENCIES
The Company is exposed to a number of asserted and unasserted potential claims.
Management does not believe it is reasonably possible that resolution of these
matters will result in a material loss. We have not provided any third party
financial guarantees as of and for the 39 and 13-week periods ended September
30, 2006.
12
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 could cause actual results
to differ materially.
RECENT DEVELOPMENTS
In May 2006, we announced plans to introduce a new concept, Cache Luxe, and exit
our Lillie Rubin business. During the third fiscal quarter of 2006, we converted
16 Lillie Rubin locations to Cache Luxe stores. In addition, we expanded three
Cache stores by combining them into three adjacent Lillie Rubin stores and added
Cache Luxe merchandise to Cache stores. Our five remaining Lillie Rubin store
locations are expected to be closed by the end of the first fiscal quarter of
2007.
The Cache Luxe concept primarily focuses on our daytime and evening merchandise.
This concept is expected to broaden our customer base, enable us to offer a
larger selection of evening apparel and accessories at highter price points and
allow us to leverage our marketing under a single Cache brand. In addition,
Cache stores located in malls containing a Cache Luxe store have increased
capacity to offer an expanded casual assortment. Almost all of our current Cache
Luxe stores are in malls that also contain a Cache store.
RESULTS OF OPERATIONS
The following tables set forth our results of operations for the 13 and 39-week
periods ended September 30, 2006 and October 1, 2005, expressed as a percentage
of net sales. Amounts in both tables include the combined results of our Cache,
Cache Luxe and Lillie Rubin stores.
13-Weeks Ended 39-Weeks Ended
---------------------------------------- -------------------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------------ ----------------- ---------------- ----------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 52.8 54.4 52.5 55.3
Gross profit 47.2 45.6 47.5 44.7
Store operating expenses 37.3 35.8 34.3 33.4
General and administrative expenses 9.4 7.1 7.8 6.5
Lillie Rubin exit costs (0.2) 0.0 2.8 0.0
Operating income 0.8 2.7 2.5 4.8
Interest income 1.1 0.5 0.9 0.4
Income before income taxes 1.9 3.2 3.4 5.2
Income taxes 0.7 1.2 1.3 2.0
Net income 1.2 1.9 2.1 3.1
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:
13-Weeks Ended 39-Weeks Ended
---------------------------------------- -------------------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------------ ----------------- ---------------- ----------------
Total store count at end of period 294 301 294 301
Net sales growth 4.7% 16.0% 4.5% 10.8%
Comparable store sales growth 1.0% 8.0% 3.0% 5.0%
Average sales per transaction growth 4.0% 8.0% 4.0% 6.0%
Average number of transactions growth (3.0%) -- (1.0%) (1.0%)
Net sales per average square foot $99 $96 $319 $318
Total square footage (in thousands) 589 609 589 609
13
NET SALES
Net sales increased to $195.4 million from $187.0 million, an increase of $8.4
million or 4.5%, over the prior year 39-week period. The increase included
breakage income of $2.4 million, as a result of the formation of a new
subsidiary to handle all Gift Card sales and maintain the liability related to
Gift Cards. Comparable store sales at Cache stores (sales for stores open at
least one year or more) increased $7.0 million or 4%, during the 39-week period.
Comparable store sales at Lillie Rubin stores decreased $2.4 million or 18%,
during the 39-week period. Net sales from non-comparable stores increased $1.5
million, which reflects the net impact of store openings and closings during the
current 39-week period. The increase in net sales in Fiscal 2006 at Cache stores
reflected a 4% increase in average dollars per transaction, as well as a 1%
decrease in sales transactions. Higher levels of dress sales also helped to
increase sales above Fiscal 2005 levels.
Net sales increased to $59.9 million from $57.3 million, an increase of $2.6
million, or 4.7%, over the same 13-week period last year. The increase included
breakage income of $2.4 million, as a result of the formation of a new
subsidiary to handle all Gift Card sales and maintain the liability related to
Gift Cards. This reflects $496,000 of additional net sales as a result of 1%
increase in comparable store sales at Cache stores. Net sales at Lillie Rubin
stores decreased $208,000 or 9.1%, during the 13-week period. Net sales
decreased $39,000, as a result of sales at non-comparable stores, during the
current 13-week period. The increase in net sales in Fiscal 2006 at Cache stores
reflected a 4% increase in average dollars per transaction, as well as a 3%
decrease in sales transactions.
GROSS PROFIT
Gross profit increased to $92.7 million from $83.6 million, an increase of $9.1
million or 10.9%, over the prior year 39-week period. This increase was
primarily due to higher net sales and recognition of breakage income, as
mentioned above. As a percentage of net sales, gross profit increased to 47.5%
from 44.7%. The increase in gross profit as a percentage of net sales was
primarily due to the recognition of breakage income and lower promotional
activity, as well as higher initial markup, offset by higher markdowns due to
the exit of our Lillie Rubin business. The Company expects gross margins to
improve during the remainder of Fiscal 2006 and in Fiscal 2007, primarily due to
the establishment of an internal production and sourcing department.
Gross profit increased to $28.3 million from $26.1 million, an increase of $2.2
million, or 8.4%, over the same 13-week period last year. This increase was
primarily due to higher net sales and recognition of breakage income, as
mentioned above. As a percentage of net sales, gross profit increased to 47.2%
from 45.6%. The increase in gross profit, as a percentage of net sales, was
primarily due to the same factors as for the 39-week period. The Company
incurred higher markdowns during the quarter, as we liquidated the Lillie Rubin
inventories related to our decision to exit the Lillie Rubin business.
STORE OPERATING EXPENSES
Store operating expenses increased to $67.1 million from $62.4 million, an
increase of $4.7 million or 7.5%, over the prior year 39-week period. As a
percentage of net sales, store operating expenses increased to 34.3% from 33.4%
for the 39-week period. This increase reflects the impact of newer stores, which
have not achieved a mature sales volume level as compared to the existing store
base. The increase in store operating expenses was principally due to higher
payroll expense ($1.2 million), higher depreciation expense ($758,000), higher
property taxes ($379,000) and advertising expenses ($1.0 million) in Fiscal 2006
as compared to Fiscal 2005, primarily due to the increase in stores open for
most of the period.
Store operating expenses increased to $22.3 million from $20.5 million, an
increase of $1.8 million or 8.8% over the same 13-week period last year. As a
percentage of sales, store operating expenses increased to 37.3% from 35.8%. The
increase in store operating expenses was principally due to higher payroll
expense ($543,000), which includes training time for employees for the upgraded
POS system; as well as higher group insurance expense ($294,000) and advertising
expenses ($735,000) in the third quarter as compared to Fiscal 2005.
14
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $15.3 million from $12.2
million, an increase of $3.1 million or 25.4%, over the same 39-week period last
year. As a percentage of net sales, general and administrative expenses
increased to 7.8% from 6.5%, primarily due to higher travel ($362,000),
telephone expense ($194,000) and professional fees ($860,000), as compared to
last year, as well as due to higher payroll expense ($1.5 million), which
included compensation from stock options ($849,000) related to the adoption of
FAS No. 123R.
General and administrative expenses increased to $5.6 million from $4.1 million,
an increase of $1.5 million or 36.6%, above the same 13-week period last year.
As a percentage of net sales, general and administrative expenses increased to
9.4% from 7.1% for the 13-week period, primarily due to higher travel
($125,000), telephone expense ($165,000) and professional fees ($739,000), as
compared to last year, as well as due to higher payroll expense of ($331,000),
which included compensation from stock options ($247,000). The Company spent an
additional $200,000 in administrative support for the POS upgrade during the
current period.
LILLIE RUBIN EXIT COSTS
During the 39-week period ended, the Company recorded a pre-tax charge of $5.5
million for the exit of the Lillie Rubin business. The charge is comprised of
leasehold improvement, furniture and fixtures write-down ($4.4 million),
write-down of intangibles ($455,000), write-down of supplies ($275,000),
severance charges ($253,000), as well as an accrual ($1.4 million) for
contractual termination costs negotiated prior to July 1, 2006. These costs were
partially offset by the reversal ($1.3 million) of deferred rent accruals.
INTEREST INCOME
Interest income increased to $1.9 million from $677,000, an increase of $1.2
million over the prior year period, primarily due to higher average cash
balances, as well as higher interest rates.
Interest income increased to $657,000 from $277,000 in the same 13-week period
last year.
INCOME TAXES
Income taxes decreased to $2.6 million from $3.8 million, as compared to the
39-week period last year. The decrease was primarily attributable to lower
taxable income in fiscal 2006. The estimated effective tax rate for the 39-week
periods in fiscal 2006 and fiscal 2005 was 39.0% and 39.5%, respectively.
Income taxes decreased to $441,000 from $713,000, as compared to the same
13-week period last year. The estimated effective tax rate for the 13-week
periods in fiscal 2006 and fiscal 2005 was 39.0% and 39.5%, respectively.
NET INCOME
As a result of the factors discussed above, net income decreased to $4.1 million
from $5.9 million for the prior year 39-week period.
Net income decreased to $690,000 from $1.1 million for the same 13-week period
last year.
15
LIQUIDITY AND CAPITAL RESOURCES
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. During the 39-week period ended September 30,
2006, we generated $9.1 million of cash flow from operations as compared to
$15.2 million generated in the same period in Fiscal 2005. We expect to continue
to meet our operating 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, under
which we have not had outstanding borrowings for several years. At September 30,
2006, we had working capital of $70.3 million, cash and marketable securities of
$53.5 million and no third party debt outstanding.
The following table sets forth our cash flows for the period indicated:
------------------------------
39-Weeks ended
------------------------------
September October 1,
30,
2006 2005
------------- -------------
Net cash from operating activities............................................... $9,066,000 15,178,000
Net cash from investing activities............................................... 7,145,000 (10,316,000)
Net cash from financing activities............................................... 250,000 553,000
------------- -------------
Net increase in cash and cash equivalents........................................ $16,461,000 $5,415,000
============= =============
During the 39-week period ended September 30, 2006, we increased our cash and
cash equivalents by $16.5 million, primarily due to net matured investments
($16.2 million), net income ($4.1 million), which includes depreciation expense
($7.9 million), a reduction in receivables ($1.3 million) and an increase in
accrued liabilities ($1.9 million), which was partially offset by an increase in
inventories ($4.6 million), a reduction in accounts payable ($2.8 million) and
expenditures for our new store expansion and remodeling program totaling $9.1
million. The Company recorded a charge of $5.5 million for the exit of the
Lillie Rubin business, which is comprised of $3.8 million of non-cash charges
and $1.7 million of cash charges. Cash charges totaling $1.4 million were paid
out in the third quarter. The exit of Lillie Rubin should be finalized by the
end of the first fiscal quarter of 2007.
We plan to open approximately 20 new stores during Fiscal 2006. The Company
opened one new Cache store in the third quarter, 10 new stores in the second
quarter and one new store in the first quarter of Fiscal 2006. We anticipate
opening an additional 7 new stores during the fourth quarter. We renovated 12
existing stores in Fiscal 2006. We spent $9.1 million through September 30, 2006
and expect to spend an additional $4-5 million in the fourth quarter, for both
new store and existing store construction and remodeling, as well as for an
upgrade of the existing POS computer system.
There have been no borrowings against the line of credit during fiscal 2006 and
fiscal 2005. There were outstanding letters of credit of $2.7 million, $1.0
million and $3.0 million, pursuant to the credit facility, at September 30,
2006, December 31, 2005 and October 1, 2005, respectively.
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.
16
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 1 of Notes to
Consolidated Financial Statements in our Fiscal 2005 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 mark-on, mark-ups, 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, and (ii) our expectations as
to future sales. We do not anticipate any significant change in our markdown
strategy that would cause a 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.
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. Factors we consider important which could trigger an impairment
review include the following:
o significant changes in the manner of our use of assets or the strategy
for our overall business;
o significant negative industry or economic trends;
o store closings;
o underperforming stores; or
o underperforming business trends.
In the evaluation of the fair value and future benefits of finite
long-lived assets, we perform an analysis by store of the anticipated
undiscounted future net cash flows of the related finite long-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 strategies change, the conclusion regarding
impairment may differ from the current estimates. During the 39-week period
ended September 30, 2006, the Company recorded a charge of $5.5 million related
to the exit of the Lillie Rubin store chain. $3.8 million of this charge relates
to the impairment of fixed assets. No impairment charges were incurred in Fiscal
2003, 2004 and 2005, respectively.
17
SELF INSURANCE. We are self-insured for losses and liabilities related primarily
to employee health and welfare claims. 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 have
been insignificant for fiscal 2003, 2004 and 2005. Further, we do not anticipate
any significant change in loss trends, settlements or other costs that would
cause a significant change in our earnings.
GIFT CARDS, GIFT CERTIFICATES AND CREDITS. The Company sells gift cards and gift
certificates and issues credits to its customers when merchandise is returned.
The Company recognizes sales from Gift Cards when they are redeemed by the
customer and income when the likelihood of the Gift Card being redeemed by the
customer is remote (Gift Card breakage) and the Company determines that it does
not have a legal obligation to remit the value of unredeemed Gift Cards to the
relevant jurisdiction as abandoned property. The Company determines Gift Card
breakage income based upon historical redemption patterns. Breakage income
represents the balance of Gift Cards, for which the Company believes the
likelihood of redemption by the customer is remote. At that time, the Company
will recognize breakage income for those Gift Cards.
During the third quarter of fiscal 2006, the Company formed a new subsidiary to
handle all sales and maintain the liability related to Gift Cards. As a result
of transferring all existing obligations to the newly formed subsidiary, the
Company recognized $2.4 million of breakage income, within net sales, in the
second quarter related to Gift Cards sold/issued since the inception of the Gift
Card program. There was no breakage income recognized for the same period in the
prior year.
REVENUE RECOGNITION. Sales are recognized at the "point of sale," which occurs
when merchandise is sold in an "over-the-counter" transaction or upon receipt by
a customer. Sales of merchandise via our website are recognized at the expected
time of delivery to the customer. Our customers have the right to return
merchandise. Sales are reported net of actual and estimated returns. We maintain
a reserve for potential product returns and record, as a reduction to sales, a
provision for estimated product returns, which is determined based on historical
experience. Charges or credits to earnings resulting from revisions to estimates
on our sales return provision were approximately $66,000, $20,000 and $(29,000)
for Fiscal 2003, 2004 and 2005, respectively. 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. The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." This statement 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. The
Company reserves for tax contingencies when it is probable that a liability has
been incurred and the contingent amount is reasonably estimable. These reserves
are 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. Due to the complexity of these examination issues, $301,000
has been accrued to date.
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).
18
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 September 30, 2006, our cash, cash
equivalents and marketable securities consisted primarily of funds invested in
money market accounts, which bear interest at a variable rate and U.S. treasury
instruments, 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
As of September 30, 2006, we carried out an evaluation, under the supervision
and with the participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to the Securities
and Exchange Act Rule 13(a)-15(b). Our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective as of September 30, 2006 due to the material weakness in our internal
control over financial reporting, as a result of the lack of resources
identified during the Company's assessment of internal control over financial
reporting as of January 1, 2006 and reported in our Fiscal 2005 Annual Report on
Form 10-K. We continue our efforts to remediate this material weakness through
ongoing process improvements and the implementation of enhanced policies and
hiring additional personnel, engaging third-party tax, financial and financial
systems consultants, improving quality control standards, and providing
additional training and education to our financial reporting and accounting
personnel. Accordingly, this material weakness is not yet fully remediated. No
material weaknesses will be considered remediated until the remedial procedures
have operated for an appropriate period, have been tested, and management has
concluded that they are operating effectively.
To compensate for this material weaknesses, the Company performed additional
analysis and other procedures in order to prepare the unaudited quarterly
consolidated financial statements in accordance with generally accepted
accounting principles in the United States of America. Accordingly, management
believes that the consolidated financial statements included in this Quarterly
Report on Form 10-Q fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.
There were no changes during the quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
19
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
OUR EXPANSION INTO NEW MARKETS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Some of our new stores will be opened in areas of the United States in
which we currently have few or no stores. The expansion into new markets may
present competitive, merchandising and administrative challenges that are
different from those currently encountered in our existing markets. Any of these
challenges could adversely affect our business, financial condition and results
of operations. To the extent our new store openings are in existing markets, we
may experience reduced net sales volumes in existing stores in those markets.
OUR NEW CACHE LUXE CONCEPT MAY NOT BE SUCCESSFUL, WHICH COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND DIVERT MANAGEMENT'S TIME
AND ATTENTION FROM OUR CORE CACHE STORE BUSINESS.
In the third fiscal quarter of 2006, we opened 16 Cache Luxe stores. Almost all
of our Cache Luxe stores are located in malls that also contain a Cache store.
As a new concept, Cache Luxe may not be successful. It may detract from our
existing Cache brand and/or result in reduced sales at Cache stores that are
located in the same mall as a Cache Luxe store. The continued implementation and
expansion of the Cache Luxe concept could divert our management's time and
resources from our core Cache store business. If the results of operations of
our Cache Luxe stores are not significantly better than the Lillie Rubin stores
they replaced, there could be a material adverse effect on our business,
financial condition and results of operations.
OUR MANUFACTURERS MAY BE UNABLE TO MANUFACTURE AND DELIVER PRODUCTS IN A TIMELY
MANNER OR MEET OUR QUALITY STANDARDS, WHICH COULD RESULT IN LOST SALES,
CANCELLATION CHARGES OR EXCESSIVE MARKDOWNS.
We purchase apparel and accessories from importers and directly from
third-party manufacturers. Similar to most other specialty retailers, we have
short selling seasons for much of our inventory. Factors outside of our control,
such as manufacturing or shipping delays or quality problems, could disrupt
merchandise deliveries and result in lost sales, cancellation charges or
excessive markdowns, all of which could have a material adverse effect on our
financial condition and results of operations.
SUBSTANTIALLY ALL OF OUR MERCHANDISE IS PRODUCED IN FOREIGN FACILITIES. THIS
SUBJECTS US TO THE RISKS OF INTERNATIONAL TRADE AND OTHER RISKS GENERALLY
ASSOCIATED WITH DOING BUSINESS IN FOREIGN MARKETS.
Substantially all of our vendors utilize overseas production facilities.
The failure of foreign manufacturers to ship products to us in a timely manner
could result in our stores lacking needed inventory. Any event causing a
disruption of imports, including financial or political instability, currency
fluctuations, terrorism or heightened security, trade restrictions in the form
of tariffs or quotas or both, political or military conflict involving the
United States, or the migration of manufacturers, could negatively affect our
business, financial condition or results of operations. These adverse impacts
may include an increased cost to us, reductions in the supply of merchandise or
delays in our manufacturing lead time.
20
WE RELY ON OUR MANUFACTURERS TO USE ACCEPTABLE ETHICAL BUSINESS PRACTICES, AND
IF THEY FAIL TO DO SO, THE CACHE BRAND NAME COULD SUFFER REPUTATIONAL HARM AND
OUR SALES COULD DECLINE OR OUR INVENTORY SUPPLY COULD BE INTERRUPTED.
We do not control our manufacturers or their labor and other business
practices. If one of our manufacturers violates labor or other laws or
implements labor or other business practices that are generally regarded as
unethical in the United States, the shipment of finished products to us could be
interrupted, orders could be canceled, relationships could be terminated and our
reputation could be damaged. Any of these events could have a material adverse
effect on our revenues and, consequently, our results of operations.
OUR PLANS TO INCREASE OUR DIRECT-SOURCING OF PRODUCTS SOLD IN OUR STORES FROM
INTERNATIONAL VENDORS MAY NOT BE SUCCESSFUL, WHICH COULD RESULT IN ADDITIONAL
COSTS AND MANUFACTURING DELAYS. TO THE EXTENT THAT WE INCREASE DIRECT-SOURCING,
INTERRUPTIONS IN OUR DIRECT-SOURCING OPERATIONS COULD RESULT IN LOST SALES AND
INCREASED COSTS.
We have limited experience with direct-sourcing from international vendors
that can supply us merchandise at lower costs. In fiscal 2005, we
directly-sourced approximately 8% of our merchandise. By the second half of
fiscal 2007, we expect to increase direct-sourcing to approximately 20 to 25% of
our merchandise, and we believe that we can increase the percentage of our
merchandise that is directly-sourced to approximately 40 to 50% in the
long-term. We cannot assure you that direct-sourcing will result in the cost
saving we anticipate. Furthermore, we may not be able to effectively cultivate
and manage these direct relationships with manufacturers, which could result in
additional costs and manufacturing delays.
To the extent that we are successful in significantly increasing
direct-sourcing, we will be further subject to risks associated with doing
business in foreign markets. Interruptions in our direct-sourcing operations
could disrupt manufacturing, shipment or receipt of our merchandise, which could
result in lost sales and increase our costs. Increasing our direct-sourcing
could adversely affect our relationship with our domestic vendors.
THE RAW MATERIALS USED TO MANUFACTURE OUR PRODUCTS AND OUR DISTRIBUTION AND
LABOR COSTS ARE SUBJECT TO AVAILABILITY CONSTRAINTS AND PRICE VOLATILITY, WHICH
COULD RESULT IN INCREASED COSTS.
The raw materials used to manufacture our products are subject to
availability constraints and price volatility caused by high demand for
petroleum-based synthetic fabrics, weather, supply conditions, regulations,
economic climate and other unpredictable factors. In addition, our
transportation and labor costs are subject to price volatility caused by the
price of oil, supply of labor, regulations, economic climate and other
unpredictable factors. Increases in demand for, or the price of, raw materials,
distribution services and labor could have a material adverse effect on our
business, financial condition and results of operations.
BECAUSE OUR CACHE BRAND IS ASSOCIATED WITH ALL OF OUR MERCHANDISE, OUR SUCCESS
DEPENDS HEAVILY ON THE VALUE ASSOCIATED WITH OUR BRAND. IF THE VALUE ASSOCIATED
WITH OUR BRAND WERE TO DIMINISH, OUR SALES COULD DECREASE, CAUSING LOSSES OR
LOWER PROFITS.
Our success depends on our Cache brand and its value. The Cache name is
integral to our business, as well as to the implementation of our new Cache Luxe
concept. The Cache brand could be adversely affected if our public image or
reputation were to be tarnished, which could result in a material adverse effect
on our business.
21
ANY MATERIAL DISRUPTION OF OUR INFORMATION SYSTEMS COULD DISRUPT OUR BUSINESS
AND REDUCE OUR SALES.
Our information systems integrate all major aspects of our business,
including sales, finance, distribution, purchasing, inventory control and
merchandise planning. We have substantially completed the rollout of a new
point-of-sale, POS, system to all of our stores and installation of a wide area
network that allows us to add functionality to our POS system, including the
ability to process debit card transactions at lower rates, centralize credit
authorizations, enhance labor scheduling, centralize our customer database,
introduce our customer loyalty program, speed up customer transaction time and
analyze real-time sales data. We are increasingly dependent on these information
systems for the efficient operation of our business, including our web site, and
to facilitate the enhancement of our marketing efforts.
We may experience operational problems with our information systems as a
result of system failures, viruses, computer "hackers" or other causes. Any
material disruption or slowdown of our systems, including a disruption or
slowdown caused by any failure on our part to successfully maintain or perform
additional upgrades to our systems, could cause information to be lost or delay
our ability to process and make use of that information in our business, which
may lead to declines in sales. In addition, if future changes in technology
cause our information systems to become obsolete, or if our current information
systems prove to be inadequate to support our growth, we could lose customers.
OUR MARKETING EFFORTS RELY UPON THE EFFECTIVE USE OF CUSTOMER INFORMATION.
RESTRICTIONS ON THE AVAILABILITY OR USE OF CUSTOMER INFORMATION COULD ADVERSELY
AFFECT OUR MARKETING PROGRAM, WHICH COULD RESULT IN LOST SALES AND A DECREASE IN
PROFITS.
We use our customer database to market to our customers. We intend to
expand use of our customer database when we implement our customer loyalty
program, which is expected to occur in the first half of fiscal 2007. Any
limitations imposed on the use of such consumer data, whether imposed by federal
or state governments or business partners, could have an adverse effect on our
future marketing activity. In addition, to the extent our security procedures
and protection of customer information prove to be insufficient or inadequate,
we may become subject to litigation, which could expose us to liability and
cause damage to our reputation or brand.
WE ARE SUBJECT TO NUMEROUS REGULATIONS THAT COULD AFFECT OUR OPERATIONS. CHANGES
IN SUCH REGULATIONS COULD IMPACT THE OPERATION OF OUR BUSINESS THROUGH DELAYED
SHIPMENTS OF OUR GOODS, FINES OR PENALTIES THAT COULD AFFECT OUR PROFITABILITY.
We are subject to customs, truth-in-advertising, truth-in-lending and other
laws, including consumer protection regulations and zoning and occupancy
ordinances, that regulate retailers generally and/or govern the importation,
promotion and sale of merchandise, the use of proprietary credit cards and the
operation of retail stores and warehouse facilities. Although we undertake to
monitor changes in these laws, if these laws change without our knowledge, or
are violated by our employees, importers, buying agents, manufacturers or
distributors, we could experience delays in shipments and receipt of goods or be
subject to fines or other penalties under the controlling regulations, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
22
WE REPORTED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING
AND, IF WE ARE UNABLE TO IMPROVE OUR INTERNAL CONTROLS, OUR FINANCIAL RESULTS
MAY NOT BE ACCURATELY REPORTED.
In connection with the preparation of our Annual Report on Form 10-K for
fiscal 2005, management identified a material weakness, due to an insufficient
number of resources in the accounting and finance department, resulting in an
ineffective review, monitoring and analysis of schedules, reconciliations and
financial statement disclosures and several audit adjustments to the financial
statements for the quarter and year ended December 31, 2005. As a result of this
material weakness, we concluded that our disclosure controls and procedures were
not effective as of December 31, 2005. Due to the pervasive effect of the lack
of resources and the potential impact on the financial statements and
disclosures and the importance of the annual and interim financial closing and
reporting process, in the aggregate there is more than a remote likelihood that
a material misstatement of the annual financial statements would not have been
prevented or detected.
We continue our efforts to remediate this material weakness through ongoing
process improvements and the implementation of enhanced policies and hiring of
additional personnel, engaging third-party tax, financial and financial system
consultants, improving quality control standards and providing additional
training and education to our financial reporting and accounting personnel.
Accordingly, this material weakness is not yet fully remediated. No material
weaknesses will be considered remediated until the remediated procedures have
operated for an appropriate period, have been tested, and management has
concluded that they are operating effectively. We cannot be certain that these
measures will ensure that we implement and maintain adequate controls over our
financial reporting processes and that we will remediate the material weakness.
Any failure to implement required new or improved controls or to remediate the
material weakness, or difficulties encountered in their implementation, could
prevent us from accurately reporting our financial results, result in material
misstatements in our financial statements or cause us to fail to meet our
reporting obligations. In addition, we cannot assure you that we will not in the
future identify further material weaknesses in our internal control over
financial reporting that we have not discovered to date, which may impact the
reliability of our financial reporting and financial statements. Insufficient
internal controls could also cause investors to lose confidence in our reported
financial information.
RISKS RELATED TO OUR INDUSTRY
IF NEW LEGISLATION RESTRICTING THE IMPORTATION OR INCREASING THE COST OF
TEXTILES AND APPAREL PRODUCED ABROAD IS ENACTED, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.
Legislation that would restrict the importation or increase the cost of
textiles and apparel produced abroad has been periodically introduced in
Congress. The enactment of new legislation or international trade regulation, or
executive action affecting international textile or trade agreements, could
adversely affect our business. International trade agreements that can provide
for tariffs and/or quotas can increase the cost and limit the amount of product
that can be imported.
23
The quota system established by the World Trade Organization was eliminated
on December 31, 2004. We cannot be certain of the full impact that this
elimination will have on international trade in general and the apparel industry
in particular. We also cannot be certain of the impact of quota elimination on
our business, including increased competition that could result from the
importation of an increasing amount of lower priced apparel into the United
States. Notwithstanding quota elimination, China's accession agreement for
membership in the WTO provides that WTO member countries, including the United
States, may re-impose safeguard quotas on specific products. In May 2005, the
United States imposed unilateral quotas on several product categories, limiting
growth in imports of these categories to 7.5% a year. The safeguard quotas in
several categories have been extended by the United States government and will
likely continue through 2008. These limitations apply to a limited number of
products imported by us from China. We are unable to assess the potential for
additional action by the United States government with respect to these or other
product categories in the event that the quantity of imported apparel
significantly disrupts the apparel market in the United States. Additional
action by the United States in response to a disruption in its apparel markets
could limit our ability to import apparel and increase our costs.
RISKS RELATED TO OUR COMMON STOCK
OUR SHARE PRICE HAS FLUCTUATED SIGNIFICANTLY AND COULD CONTINUE TO FLUCTUATE
SIGNIFICANTLY.
Between January 1, 2004 and November 7, 2006, the market price of our
common stock has ranged from $10.90 to $23.63 per share. The stock market has,
from time to time, experienced extreme price and volume fluctuations. The market
price for our common stock may change significantly in response to various
factors, including:
o Periodic variations in the actual or anticipated financial results
of our business or other companies in the retail industry;
o A shortfall in net sales or net income from that expected in
securities analysts' estimates or from that expected by investors;
o The timing of new store openings and net sales contributed by new
stores;
o Material announcements by us or our competitors;
o Public sales of a substantial number of common shares following this
offering; and
o Adverse changes in general market conditions or economic trends.
24
In the past, companies that have experienced volatility in the market price of
their shares have been the subject of securities class action litigation. If we
become involved in a securities class action litigation in the future, it could
result in substantial costs and diversion of our management's attention and
resources, thus harming our business.
PROVISIONS OF OUR GOVERNING DOCUMENTS AND FLORIDA LAW COULD DISCOURAGE
ACQUISITION PROPOSALS OR DELAY A CHANGE IN OUR CONTROL, AND THIS MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK OR DENY OUR STOCKHOLDERS A CHANCE TO
REALIZE A PREMIUM ON THEIR SHARES.
Our articles of incorporation and by-laws contain anti-takeover provisions,
including those listed below, that could make it more difficult for a third
party to acquire control of us, even if that change in control would be
beneficial to our stockholders:
o our board of directors has the authority to issue common stock and
preferred stock and to determine the price, rights and preferences
of any new series of preferred stock without further stockholder
approval and
o there are limitations on who can call special meetings of
stockholders.
In addition, provisions of Florida law and our stock option plans may also
discourage, delay or prevent a change in control of our company or unsolicited
acquisition proposals.
ITEM 6. EXHIBITS
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.
25
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 7, 2006
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)
26
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 controls 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;
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; and
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 controls 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
controls over financial reporting.
November 7, 2006 By: /s/ Brian Woolf
------------------
Brian Woolf
Chairman and Chief Executive Officer
(Principal Executive Officer)
27
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 controls 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;
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; and
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 controls 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
controls over financial reporting.
November 7, 2006 By: /s/ Margaret Feeney
------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
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 ending
September 30, 2006 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 7, 2006 BY: /s/ Brian Woolf
------------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive Officer)
November 7, 2006 BY: /s/ Margaret Feeney
------------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
29