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 March 31, 2007
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 Accelerated Non-Accelerated
Filer |_| Filer |X| Filer |_|
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 April 30, 2007, 16,296,733 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
March 31, 2007, December 30, 2006 and April 1, 2006 3
Condensed Consolidated Statements of Income for
the thirteen weeks ended March 31, 2007 and
April 1, 2006 4
Condensed Consolidated Statements of Cash Flows
for the thirteen weeks ended March 31, 2007 and
April 1, 2006 5
Notes to the Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits 15
SIGNATURES 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 30, April 1,
ASSETS 2007 2006 2006
------------- --------------- ---------------
(Unaudited) (Unaudited)
Current assets:
Cash and equivalents $ 9,106,000 $ 19,363,000 $ 22,185,000
Marketable Securities 51,942,000 42,094,000 34,552,000
Receivables, net 4,418,000 4,794,000 3,697,000
Inventories 36,135,000 34,829,000 34,427,000
Prepaid expenses and other current assets 8,063,000 7,217,000 1,737,000
------------- --------------- ---------------
Total current assets 109,664,000 108,297,000 96,598,000
Equipment and leasehold improvements, net 50,493,000 50,450,000 54,059,000
Other assets 444,000 439,000 886,000
------------- --------------- --------------
Total assets $160,601,000 $ 159,186,000 $ 151,543,000
============= =============== ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,523,000 $ 11,702,000 $ 16,027,000
Income taxes payable --- --- 872,000
Accrued compensation 2,571,000 1,689,000 2,560,000
Accrued liabilities 10,441,000 11,515,000 12,624,000
------------- --------------- --------------
Total current liabilities 25,535,000 24,906,000 32,083,000
Other liabilities 16,103,000 15,749,000 16,171,000
Deferred income taxes, net 1,882,000 2,068,000 2,042,000
Commitments and
contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized,
20,000,000 shares; issued and outstanding
16,287,483, 16,275,708 and 15,785,553 163,000 163,000 158,000
Additional paid-in capital 45,119,000 44,646,000 35,978,000
Retained earnings 71,799,000 71,654,000 65,111,000
------------- --------------- ---------------
Total stockholders' equity 117,081,000 116,463,000 101,247,000
------------- --------------- ---------------
Total liabilities and
stockholders' equity $160,601,000 $159,186,000 $151,543,000
============= =============== ===============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
(Unaudited)
March 31, April 1,
2007 2006
----------- -----------
Net sales $64,355,000 $63,821,000
Cost of sales, including 35,364,000 34,639,000
buying and occupancy ----------- ------------
Gross profit 28,991,000 29,182,000
----------- ------------
Expenses
Store operating expenses 24,018,000 22,054,000
General and administrative expenses 5,462,000 4,824,000
----------- ------------
Total expenses 29,480,000 26,878,000
----------- ------------
Operating income (loss) (489,000) 2,304,000
Other income:
Interest income 726,000 529,000
----------- -----------
Income before income taxes 237,000 2,833,000
Income tax provision 92,000 1,105,000
----------- -----------
Net income $ 145,000 $1,728,000
=========== ===========
Basic earnings per share $0.01 $0.11
========== ===========
Diluted earnings per share $0.01 $0.11
========== ===========
Basic weighted average 16,283,000 15,776,000
shares outstanding
========== ===========
Diluted weighted average 16,766,000 16,236,000
shares outstanding ========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
(Unaudited)
March 31, April 1,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 145,000 $ 1,728,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,719,000 2,749,000
Non-cash compensation expense 310,000 330,000
Decrease in deferred income tax liabilities (186,000) (77,000)
Amortization of deferred rent (297,000) (389,000)
Gift card breakage (98,000) ---
Other, net (5,000) (22,000)
Change in assets and liabilities:
Decrease in receivables 376,000 2,037,000
Increase in inventories (1,306,000) (1,642,000)
Decrease (increase) in prepaid expenses and other
current assets (846,000) 3,745,000
Increase (decrease) in accounts payable 821,000 (2,377,000)
Increase in income taxes payable --- 872,000
Increase (decrease) in accrued liabilities and
accrued compensation 1,966,000 (651,000)
----------- -----------
Net cash provided by operating activities 3,599,000 6,303,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchase of marketable securities (22,916,000) (23,666,000)
Maturities of marketable securities 13,068,000 25,634,000
Payments for equipment and leasehold improvements (4,171,000) (3,032,000)
----------- -----------
Net cash used in investing activities (14,019,000) (1,064,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from the issuance of common stock 163,000 193,000
----------- -----------
Net cash provided by financing activities 163,000 193,000
----------- -----------
Net increase (decrease) in cash and equivalents (10,257,000) 5,432,000
Cash and equivalents, at beginning of period 19,363,000 16,753,000
----------- -----------
Cash and equivalents, at end of period $9,106,000 $22,185,000
=========== ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 5,000 $ 60,000
Accrued equipment and leasehold improvements $ 590,000 $ 2,191,000
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
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 two chains of women's apparel
specialty stores, of which 281 stores are operated under the trade name "Cache"
and 16 stores are operated under the trade name "Cache Luxe".
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 30, 2006, 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 30, 2006 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 29, 2007 ("Fiscal 2007"), December 30, 2006 ("Fiscal 2006") and
December 31, 2005 ("Fiscal 2005") are each 52-week years.
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. During the 13-week periods ended March
31, 2007 and April 1, 2006, the Company recognized approximately $310,000
($189,000 after tax or $0.01 per diluted share) and $330,000 ($201,000 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. There
were no options granted during the 13-week period ended March 31, 2007 and April
1, 2006. For the 13-week periods ended March 31, 2007 and April 1, 2006, there
were no excess tax benefits realized from the exercise of stock options.
3. BASIC AND DILUTED EARNINGS PER SHARE
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.
6
Earnings per common share has been computed as follows:
13-Weeks Ended
-----------------------
March 31, April 1,
2007 2006
--------- --------
Net income $145,000 $1,728,000
Basic weighted number of average
shares outstanding 16,283,000 15,776,000
Incremental shares from assumed
issuances of stock options 483,000 460,000
Diluted weighted average number of
of shares outstanding 16,766,000 16,236,000
Net income per share - Basic $0.01 $0.11
- Diluted $0.01 $0.11
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-week period in fiscal 2006, because the exercise price was greater than the
market price.
4. RECENT DEVELOPMENTS.
On May 9, 2007, we announced that we entered into an agreement in principle,
through the signing of a letter of intent, to acquire certain assets of Adrienne
Victoria Designs, Inc. ("AV"), our largest supplier. We expect this acquisition,
which is expected to close on or around June 30, 2007, to be accretive to fiscal
2007 earnings. Based in New York, Adrienne Victoria Designs is a design,
sourcing and manufacturing company. Adrienne and Robert Kantor, the Company's
founders will join Cache, with Adrienne assuming responsibility for all aspects
of merchandising and design and Robert assuming responsibilities in
manufacturing.
5. RECENT ACCOUNTING PRONOUNCEMENTS
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. The Company adopted the provisions of FIN 48,
effective December 31, 2006. The adoption of FIN 48 did not have a material
impact on the consolidated financial statements. The Company classifies any
interest and penalty payments or accruals within operating expenses on our
financial statements. There were no accruals of interest and penalties, nor were
there any unrecognized tax benefits at the date of adoption of FIN 48. The
Internal Revenue Service has reviewed the Company's income tax returns through
the period ended January 1, 2005 and proposed no changes to the tax returns
filed by the Company.
In February, 2006, FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES," ("SFAS No. 159"), which amends the
accounting for assets and liabilities in financial statements in accordance with
SFAS No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES". SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. This statement does not affect any
existing accounting literature that requires certain assets and liabilities to
be carried at fair value. SFAS No. 159 is effective for fiscal years beginning
7
after December 15, 2007. The Company does not expect this statement to have a
material impact on the consolidated financial statements.
Effective December 31, 2006, the Company adopted EITF No. 06-03 "How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement." The Company records revenues net of
applicable sales tax in our consolidated statements of income.
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
March 31, December 30, April 1,
2007 2006 2006
------------ ------------ ------------
Leasehold improvements $ 52,945,000 $ 51,320,000 $ 52,860,000
Furniture, fixtures and equipment 46,202,000 45,687,000 53,136,000
------------ ------------ ------------
99,147,000 97,007,000 105,996,000
Less: accumulated depreciation
and amortization (48,654,000) (46,557,000) (51,937,000)
------------ ------------ ------------
$ 50,493,000 $ 50,450,000 $ 54,059,000
============ ============ ============
7. ACCRUED LIABILITIES
March 31, December 30, April 1,
2007 2006 2006
------------ ------------ ------------
Operating expenses $ 3,825,000 $ 2,978,000 $ 2,507,000
Other taxes 1,765,000 2,190,000 1,933,000
Group insurance 744,000 737,000 624,000
Sales return reserve 1,018,000 845,000 902,000
Leasehold additions 590,000 2,000,000 2,191,000
Other customer deposits and credits 2,499,000 2,765,000 4,467,000
------------ ------------ ------------
$ 10,441,000 $ 11,515,000 $ 12,624,000
============ ============ ============
Leasehold additions generally represent a liability to general contractors for a
final 10% payable on construction contracts for store construction or
renovations.
8. BANK DEBT
During November 2005, the Company reached an agreement with its bank to amend
the amount available under the Amended Revolving Credit Facility. Pursuant to
the 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 March 31, 2007, 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.
8
There have been no borrowings against the line of credit during fiscal 2006 and
the first quarter of fiscal 2007. There were outstanding letters of credit of
$0.6 million, $1.1 million and $0.7 million, pursuant to the Amended Revolving
Credit Facility, at March 31, 2007, December 30, 2006 and April 1, 2006,
respectively.
9. LILLIE RUBIN EXIT COSTS
During fiscal 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. The Company closed the last three Lillie Rubin stores during the first
fiscal quarter of fiscal 2007. The Company did not incur significant additional
exit costs upon the closing of these remaining properties.
The following is a summary of the activity in the reserve for exit costs:
BALANCE
BEGINNING OF CASH BALANCE END
YEAR CHARGES PAYMENTS OF PERIOD
Contractual
termination costs $385,000 $--- $307,000 $78,000
Severance costs $43,000 --- $43,000 ---
10. CONTINGENCIES
The Company is exposed to a number of asserted and unasserted potential claims.
Management does not believe that the resolution of these matters will result in
a material loss. We have not provided any third party financial guarantees as of
and for the 13-week periods ended March 31, 2007 and April 1, 2006.
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.
RESULTS OF OPERATIONS
The following table sets forth our results of operations for the 13-week periods
ended March 31, 2007 and April 1, 2006, expressed as a percentage of net sales.
Amounts include the combined results of our Cache, Cache Luxe and Lillie Rubin
stores.
9
13-Weeks Ended
------------------------
March 31, April 1,
2007 2006
--------- --------
Sales 100.0% 100.0%
Cost of sales 55.0 54.3
Gross profit 45.0 45.7
Store operating expenses 37.3 34.6
General and administrative
expenses 8.5 7.6
Operating income (loss) (0.8) 3.6
Interest income 1.1 0.8
Income before income taxes 0.4 4.4
Income taxes 0.1 1.7
Net income 0.2 2.7
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
------------------------
March 31, April 1,
2007 2006
--------- --------
Total store count at end
of period 297 302
Net sales growth 0.8% 1.6%
Comparable store sales
growth 3.0% 1.0%
Average sales per
transaction growth (decrease) (8.0%) 9.0%
Average number of
transactions growth (decrease) 11.0% (5.0%)
Net sales per average
square foot $107 $107
Total square footage (in
thousands) 600 616
NET SALES
Net sales increased to $64.4 million from $63.8 million, an increase of
$534,000, or 0.8%, over the same 13-week period last year. This reflects $1.4
million of additional net sales as a result of a 3% increase in comparable store
sales at Cache stores. Non-comparable sales decreased $871,000 during the
current period, as a result of the reduction of $4.9 million in net sales for
Lillie Rubin stores open in the first quarter of fiscal 2006, which was
partially offset by sales at new store locations of approximately $4.0 million,
during the current 13-week period. The increase in net sales in Fiscal 2007 at
Cache stores reflected an 11% increase in sales transactions, which was
partially offset by an 8% decrease in average dollars per transaction, primarily
due to the increase in markdown sales.
GROSS PROFIT
Gross profit decreased to $29.0 million from $29.2 million, a decrease of
$191,000, or 0.7%, as compared to the same 13-week period last year. This
decrease was primarily due to greater markdowns taken in our sportswear
assortment in the current period, which was partially offset by higher initial
gross margins from increased direct sourcing of merchandise, as compared to last
year. In addition, buying and occupancy expenses rose as a percent of sales in
the current period, primarily due to the relatively small increase in sales,
during the current period. As a percentage of net sales, gross profit decreased
to 45.0% from 45.7%, last year.
10
STORE OPERATING EXPENSES
Store operating expenses increased to $24.0 million from $22.1 million, an
increase of $1.9 million, or 8.9%, over the prior year 13-week period. As a
percentage of net sales, store operating expenses increased to 37.3% from 34.6%
for the 13-week period last year. 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 marketing expenses ($1.8 million) and payroll expense ($281,000),
which were partially offset by lower charges in several expense categories.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $5.5 million from $4.8 million,
an increase of $638,000, or 13.2%, over the same 13-week period last year. As a
percentage of net sales, general and administrative expenses increased to 8.5%
from 7.6%, due to higher professional fees ($641,000), principally public
company costs, as compared to last year.
INTEREST INCOME
Interest income increased to $726,000 from $529,000 in the same 13-week period
last year, primarily due to higher average cash balances.
INCOME TAXES
Income taxes decreased to $ 92,000 from $1.1 million, as compared to the 13-week
period last year. The decrease was primarily attributable to lower taxable
income in fiscal 2007. The estimated effective tax rate for both 13-week periods
in fiscal 2007 and fiscal 2006 was 39.0%.
NET INCOME
As a result of the factors discussed above, net income decreased to $145,000
from $1.7 million for the prior year 13-week period.
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 13-week period ended March 31, 2007,
we generated $3.6 million of cash flow from operations as compared to $6.3
million generated in the same period in fiscal 2006. 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 March 31, 2007, we had working
capital of $84.1 million, cash and marketable securities of $61.0 million and no
third party debt outstanding.
11
The following table sets forth our cash flows for the period indicated:
-------------------------
13-Weeks ended
-------------------------
March 31, April 1,
2007 2006
------------ -----------
Net cash provided by operating activities............... $3,599,000 $6,303,000
Net cash used in investing activities................... (14,019,000) (1,064,000)
Net cash provided by financing activities............... 163,000 193,000
-------------- -----------
Net increase (decrease) in cash and equivalents......... ($10,257,000) $5,432,000
============== ===========
During the 13-week period ended March 31, 2007, cash and cash equivalents
decreased by $10.3 million, primarily due to net purchases of marketable
securities ($9.8 million). Increases in cash flows for the current period,
included depreciation expense ($2.7 million), a decrease in receivables
($376,000), a seasonal increase in accounts payable ($821,000), as well as a
seasonal increase in accrued liabilities ($2.0 million), which was partially
offset by a seasonal increase in inventories ($1.3 million), an increase in
prepaid expenses ($846,000) and capital expenditures for our new store expansion
and remodeling program totaling $4.2 million.
We plan to open approximately 10-15 new stores during fiscal 2007. The Company
opened four new Cache stores in the first quarter of fiscal 2007. We renovated 4
existing stores in the first quarter of fiscal 2007. We spent approximately $4.2
million through March 31, 2007 and expect to spend an additional $6-7 million
during the balance of fiscal 2007, for both new store and existing store
construction and remodeling, as well as the upgrade of the existing POS computer
system.
There have been no borrowings against the line of credit during fiscal 2006 and
the first quarter of fiscal 2007. There were outstanding letters of credit of
$0.6 million, $1.1 million and $0.7 million, pursuant to the credit facility, at
March 31, 2007, December 30, 2006 and April 1, 2006, respectively.
INFLATION
We do not believe that our sales revenue or operating results have been
materially impacted by inflation during the past two 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 our 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 2006 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.
12
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, (ii) historical experience
and (iii) our expectations as to future sales. We do not anticipate any
significant change in our markdown strategy that would cause a 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; 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. No impairment charges were incurred in fiscal 2004
and 2005, respectively. In fiscal 2006, the Company recorded an impairment
charge of $101,000, related to one store, that the Company closed in early
2007.
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 2004, 2005 and 2006. Further, we do not anticipate
any significant change in loss trends, settlements or other costs that would
cause a significant change in our earnings. We maintain stop-loss insurance
coverage, which covers us for benefits paid in excess of limits, as defined in
the plan.
GIFT CARDS, GIFT CERTIFICATES AND CREDITS. The Company sells gift cards and gift
certificates ("Gift Cards") and issues credits to its customers when merchandise
is returned. 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 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. The Company recognized $98,000 of
13
breakage income during the period ended March 31, 2007. 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 for fiscal 2004, 2005 and 2006, have not been
material. 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. When tax
contingencies become probable, a liability for the contingent amount is
estimated based upon the Company's best estimation of the potential exposures
associated with the timing and amount of deductions, as well as various tax
filing positions. As of March 31, 2007, the Company did not have any tax
contingencies. The Company adopted the provisions of FIN 48, effective December
31, 2006. The impact of adoption did not have a material impact on the
consolidated financial statements.
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 our historical ability to pass through
the impact of any generalized changes in our cost of goods sold to our 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 March 31, 2007, our 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, as well as municipal bonds 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.
14
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 March 31, 2007, 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
March 31, 2007 due to the material weakness in our internal control over
financial reporting, identified during the Company's assessment of internal
control over financial reporting as of December 30, 2006 and reported in our
fiscal 2006 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 weakness, 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.
PART II - OTHER INFORMATION
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.
15
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: May 10, 2007
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)
16
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 first
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.
May 10, 2007 By: /s/ Brian Woolf
------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
17
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 first
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.
May 10, 2007 By: /s/ Margaret Feeney
--------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
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
March 31, 2007 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.
May 10, 2007 BY: /s/ Brian Woolf
------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
May 10, 2007 By: /s/ Margaret Feeney
--------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19