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 29, 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 Filer |_| Accelerated Filer |X| Non-Accelerated 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 October 31, 2007, 15,526,113 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 29, 2007,
December 30, 2006 and September 30, 2006 3
Condensed Consolidated Statements of Income for the thirty-nine and
thirteen weeks ended September 29, 2007 and September 30, 2006 4
Condensed Consolidated Statements of Cash Flows for the thirty-nine
weeks ended September 29, 2007 and September 30, 2006 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6. Exhibits 18
SIGNATURES 19
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 29, December 30, September 30,
ASSETS 2007 2006 2006
--------------------- --------------------- --------------------
(Unaudited) (Unaudited)
Current assets:
Cash and equivalents $ 8,975,000 $ 19,363,000 $ 33,214,000
Marketable securities 40,245,000 42,094,000 20,315,000
Receivables, net 4,571,000 4,794,000 4,399,000
Inventories, net 36,329,000 34,829,000 37,074,000
Prepaid expenses and other current assets 5,439,000 7,217,000 5,572,000
--------------------- --------------------- --------------------
Total current assets 95,559,000 108,297,000 100,574,000
Equipment and leasehold improvements, net 49,768,000 50,450,000 50,788,000
Goodwill and intangible
assets 11,173,000 ---- ---
Other assets 664,000 439,000 440,000
--------------------- --------------------- --------------------
Total assets $ 157,164,000 $ 159,186,000 $ 151,802,000
===================== ===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,623,000 $ 11,702,000 $ 15,648,000
Note payable 1,695,000 --- ---
Accrued compensation 2,589,000 1,689,000 2,522,000
Accrued liabilities 10,489,000 11,515,000 12,132,000
--------------------- --------------------- --------------------
Total current liabilities 27,396,000 24,906,000 30,302,000
Note payable 4,640,000 --- ---
Other liabilities 15,983,000 15,749,000 15,161,000
Deferred income taxes, net 198,000 2,068,000 2,197,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized,
20,000,000 shares; issued 16,309,358,
16,275,708 and 15,791,003 163,000 163,000 158,000
Additional paid-in capital 45,800,000 44,646,000 36,525,000
Retained earnings 73,243,000 71,654,000 67,459,000
Treasury stock, 637,029 shares, at cost (10,259,000) --- ---
--------------------- --------------------- --------------------
Total stockholders' equity 108,947,000 116,463,000 104,142,000
--------------------- --------------------- --------------------
Total liabilities and
stockholders' equity $ 157,164,000 $ 159,186,000 $ 151,802,000
===================== ===================== ====================
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 THIRTY-NINE WEEKS ENDED
(UNAUDITED)
September 29, September 30,
2007 2006
--------------------- ------------------
Net sales $ 195,953,000 $ 195,438,000
Cost of sales, including buying and occupancy 105,361,000 102,693,000
--------------------- ------------------
Gross profit 90,592,000 92,745,000
--------------------- ------------------
Expenses
Store operating expenses 72,703,000 67,055,000
General and administrative expenses 17,399,000 15,340,000
Lillie Rubin exit costs (78,000) 5,518,000
--------------------- ------------------
Total expenses 90,024,000 87,913,000
--------------------- ------------------
Operating income 568,000 4,832,000
Other income:
Interest expense (78,000) ---
Interest income 2,007,000 1,850,000
--------------------- ------------------
Income before income taxes 2,497,000 6,682,000
Income tax provision 908,000 2,606,000
--------------------- ------------------
Net income $ 1,589,000 $ 4,076,000
===================== ==================
Basic earnings per share $0.10 $0.26
===================== ==================
Diluted earnings per share $0.10 $0.25
===================== ==================
Basic weighted average shares outstanding 16,189,000 15,784,000
===================== ==================
Diluted weighted average shares outstanding 16,454,000 16,160,000
===================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
-4-
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
(Unaudited)
September 29, September 30,
2007 2006
--------------------- ---------------------
Net sales $ 60,572,000 $ 59,935,000
Cost of sales, including buying and occupancy 32,905,000 31,669,000
--------------------- ---------------------
Gross profit 27,667,000 28,266,000
--------------------- ---------------------
Costs and expenses
Store operating expenses 23,072,000 22,330,000
General and administrative expenses 4,906,000 5,606,000
Lillie Rubin exit costs (78,000) (144,000)
--------------------- ---------------------
Total expenses 27,900,000 27,792,000
--------------------- ---------------------
Operating income (loss) (233,000) 474,000
Other income:
Interest expense (78,000) ---
Interest income 523,000 657,000
--------------------- ---------------------
Income before income taxes 212,000 1,131,000
Income tax provision 51,000 441,000
--------------------- ---------------------
Net income $ 161,000 $ 690,000
===================== =====================
Basic earnings per share $0.01 $0.04
=================== ==================
Diluted earnings per share $0.01 $0.04
=================== ==================
Basic weighted average shares outstanding 15,988,000 15,791,000
=================== ==================
Diluted weighted average shares outstanding 16,187,000 16,165,000
=================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
-5-
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED
(Unaudited)
September 29, September 30,
2007 2006
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
Net income $ 1,589,000 $ 4,076,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,719,000 7,914,000
Non-cash compensation expense 718,000 849,000
Non-cash interest expense on note payable 78,000 ---
Increase (decrease) in deferred income tax liabilities (1,870,000) 65,000
Gift card breakage (222,000) (2,425,000)
Amortization of deferred rent (1,160,000) (1,002,000)
Non-cash Lillie Rubin exit costs (78,000) 3,827,000
Excess tax benefit from stock based compensation --- (29,000)
Other, net (18,000) (30,000)
Change in assets and liabilities, net of assets purchased from Adrienne Victoria
Designs:
Decrease in receivables 223,000 1,335,000
Increase in inventories (487,000) (4,564,000)
Decrease (increase) in prepaid expenses and other current assets 1,778,000 (77,000)
Increase (decrease) in accounts payable 419,000 (2,756,000)
Increase in accrued liabilities and accrued compensation 2,872,000 1,883,000
-------------------- ---------------------
Net cash provided by operating activities 12,561,000 9,066,000
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
Purchase of marketable securities (69,257,000) (44,531,000)
Maturities of marketable securities, net 71,106,000 60,736,000
Purchase of assets from Adrienne Victoria Designs (5,701,000) ---
Purchase of equipment and leasehold improvements (9,274,000) (9,060,000)
-------------------- ---------------------
Net cash provided by (used in) investing activities (13,126,000) 7,145,000
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Repurchase of common stock (10,259,000) ---
Proceeds from the issuance of common stock 436,000 221,000
Excess tax benefit from stock-based compensation --- 29,000
-------------------- ---------------------
Net cash provided by (used in) financing activities (9,823,000) 250,000
-------------------- ---------------------
Net increase (decrease) in cash and equivalents (10,388,000) 16,461,000
Cash and equivalents, at beginning of period 19,363,000 16,753,000
===================== =====================
Cash and equivalents, at end of period $ 8,975,000 $ 33,214,000
===================== =====================
Supplemental disclosure of cash flow information:
Income taxes paid $ 1,880,000 $ 5,175,000
Accrued equipment and leasehold improvements $ 696,000 $ 2,416,000
Issuance of note payable in connection with acquisition of assets of Adrienne
Victoria Designs $ 6,257,000 $ ---
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
-6-
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 15 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 39-week and 13-week periods
ended September 29, 2007, the Company recognized share-based compensation
expense of approximately $718,000 ($456,000 after tax or $0.03 per diluted
share) and $117,000 ($89,000 after tax or $0.01 per diluted share),
respectively. During the 39-week and 13-week periods ended September 30, 2006,
the Company recognized $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) share-based
compensation expense. There were 155,000 options and 100,000 options granted
during the 39-week and 13-week periods ended September 29, 2007, and no options
granted during the 13-week and 39-week periods ended September 30, 2006. For the
39-week and 13-week periods ended September 29, 2007, there were no excess tax
benefits realized, from the exercise of stock options. For the 39-week and
13-week periods ended September 30, 2006, there was $29,000 of excess tax
benefits realized from the exercise of stock options.
The weighted-average fair value of options granted during the 39-week and
13-week periods ended September 29, 2007 was $5.71 and $5.62, respectively. The
grant date fair value is calculated using the Black-Scholes option valuation
model. The following assumptions were used during fiscal 2007:
Expected dividend rate $0.00
Expected volatility 41.5-45.0%
Risk free interest rate 4.7-5.0%
Expected lives (years) 4.00
-7-
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 number of common shares
outstanding. Diluted earnings per share gives effect to outstanding stock
options.
Earnings per common share has been computed as follows:
39 Weeks Ended 13 Weeks Ended
---------------------------------- ----------------------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net income $1,589,000 $4,076,000 $161,000 $690,000
Basic weighted number of average
shares outstanding 16,189,000 15,784,000 15,988,000 15,791,000
Incremental shares from
assumed issuances of stock options 265,000 376,000 199,000 374,000
Diluted weighted average number of shares
outstanding 16,454,000 16,160,000 16,187,000 16,165,000
Net income per share - Basic $0.10 $0.26 $0.01 $0.04
- Diluted $0.10 $0.25 $0.01 $0.04
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 and 39-week periods ended September 30, 2006, because the exercise price
was greater than the market price.
4. RECENT DEVELOPMENTS
ADRIENNE VICTORIA
- -----------------
On July 3, 2007, the Company, through a wholly-owned subsidiary which was
created in connection with the acquisition, acquired certain assets of Adrienne
Victoria Designs, Inc. ("AVD"), our largest supplier. Under the terms of the
agreement, the Company made cash payments totaling $5.7 million, including
transaction costs. The agreement also calls for the payment of $7.0 million in
guaranteed installment payments to be paid over 5 years, as well as contingent
payments, not to exceed $5.5 million, based upon earn-out provisions to be paid
also over 5 years, if certain conditions are met. The Company acquired certain
assets of AVD, a design, sourcing and manufacturing company, to increase
operating efficiencies and increase shareholder value. The acquisition was
accounted for in the third quarter of fiscal 2007, using the purchase method in
accordance with SFAS No. 141, "BUSINESS COMBINATIONS". Accordingly, the assets
acquired were recorded at their estimated fair values and operating results were
included in our financial statements from the date of acquisition. The purchase
price was allocated on a preliminary basis, using information currently
available.
The acquisition consideration and allocation of that consideration are as
follows (in thousands):
ACQUISITION CONSIDERATION:
- --------------------------
Cash consideration paid $ 4,821,000
Note issued 6,257,000
Transaction related fees 880,000
------------------
$ 11,958,000
==================
-8-
ALLOCATION OF ACQUISITION CONSIDERATION:
- ----------------------------------------
Inventory $ 1,013,000
Equipment and leasehold improvements 67,000
Other assets 207,000
Goodwill and intangible assets 11,173,000
Accounts Payable (502,000)
------------------
$ 11,958,000
==================
The Company has made a preliminary valuation of assets and has estimated the
value of goodwill and intangible assets to be approximately $11.2 million. The
Company will complete its valuation of these assets in the fourth quarter of
fiscal 2007. The Company determined that this is not a significant subsidiary in
accordance with Regulation S-X and as such, pro-forma financial information is
not required. The Company also has entered into employment agreements with
Adrienne Kantor and Robert Kantor, the principal officers of AVD. These
agreements will cover a period of 5 years, providing compensation and employee
benefits.
During the period ended September 29, 2007, the Company recorded a note payable
to Robert Kantor and Adrienne Kantor, related to the acquisition of Adrienne
Victoria Designs. The $6.3 million note, which will be paid over five years, has
an imputed five percent interest rate. At September 29, 2007, $1.7 million of
the note is recorded in current liabilities and $4.6 million is included in
long-term liabilities.
REPURCHASE PROGRAM
- ------------------
On July 30, 2007, the Company's Board of Directors authorized a share repurchase
program pursuant to which the Company may repurchase up to 1,000,000 shares of
Company common stock, either through the open market or in privately negotiated
transactions in accordance with SEC requirements, in either case, at the
prevailing market rate. The program began in August 2007. There is no
expiration date governing the period over which the Company can repurchase
shares. During the 13-week period ended September 29, 2007, the Company
repurchased, in the open market, 637,029 shares at a cost of $10.3 million or
$16.10 per share.
As of October 31, 2007, the Company repurchased, in the open market, an
additional 146,216 shares at a cost of $2.4 million or $16.46 per share.
CO-BRANDED CREDIT CARD PROGRAM
- ------------------------------
During the second quarter of fiscal 2007, Cache introduced a co-branded customer
credit card program. Under this program, the Company will receive from the
issuing bank a non-refundable credit card activation fee for each new account
that is opened and activated. These fees are initially deferred and recognized
in consolidated net sales as revenue over the life of the contract. For the
39-week and 13-week periods ended September 29, 2007, the Company received
approximately $220,000 and $177,000, respectively in connection with activated
cards. The amount of fee income recorded in connection with activated credit
cards was insignificant in fiscal 2007.
The Company also offers its credit card holders a program whereby points can be
earned on net purchases made with the co-branded credit card. Five reward points
are awarded for each dollar spent at Cache and one reward point is awarded for
each dollar spent at non-Cache businesses. Cardholders whose credit card account
is not delinquent, in default or closed will be automatically eligible to
receive a $25 Cache gift card upon accrual of 2,500 reward points. The issuing
bank bears the cost of the reward program and will be responsible for the
administration and management of the program.
The Company also receives from the issuing bank and Visa U.S.A Inc. a sales
royalty, which is based on a percentage of net purchases made by the cardholder
at Cache or other businesses. Cache has determined that since it has not
incurred any significant or recurring costs in relation to the co-branded credit
card program the sales royalties earned in connection to the agreement will be
recorded under net sales. The fees that are incurred by the Company are
cardholder incentives, which are funded from the fees paid by the issuing bank
and Visa U.S.A Inc.
-9-
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.
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.
In February, 2007, 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 the first fiscal year
beginning after November 15, 2007. The Company does not expect this statement to
have a material impact on the consolidated financial statements.
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
September 29, December 30, September 30,
2007 2006 2006
------------------ ------------------ ------------------
Leasehold improvements $ 55,112,000 $ 51,320,000 $ 50,558,000
Furniture, fixtures and equipment 48,805,000 45,687,000 54,302,000
------------------ ------------------ ------------------
103,917,000 97,007,000 104,860,000
Less: accumulated depreciation
and amortization (54,149,000) (46,557,000) (54,072,000)
------------------ ------------------ ------------------
$ 49,768,000 $ 50,450,000 $ 50,788,000
------------------ ------------------ ------------------
7. ACCRUED LIABILITIES
September 29, December 30, September 30,
2007 2006 2006
------------------ ------------------ ------------------
Operating expenses $ 4,363,000 $ 2,978,000 $ 4,379,000
Accrued income and other taxes 1,687,000 2,190,000 2,125,000
Group insurance 683,000 737,000 711,000
Sales return reserve 659,000 845,000 657,000
Leasehold additions 696,000 2,000,000 2,416,000
Other customer deposits and credits 2,401,000 2,765,000 1,844,000
------------------ ------------------ ------------------
$ 10,489,000 $ 11,515,000 $ 12,132,000
------------------ ------------------ ------------------
-10-
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
7.75% at September 29, 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.
There have been no borrowings against the line of credit during fiscal 2007 and
fiscal 2006. There were outstanding letters of credit of $0.6 million, $1.1
million and $2.7 million, pursuant to the Amended Revolving Credit Facility, at
September 29, 2007, December 30, 2006 and September 30, 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 for
fiscal 2007:
BALANCE
BEGINNING OF CASH BALANCE END
YEAR PAYMENTS REVERSALS OF PERIOD
----------- -------- --------- -----------
Contractual termination costs $385,000 $307,000 $78,000 $0
Severance $43,000 $43,000 $0 $0
The reversal in fiscal 2007 was due to the Company converting the Lillie Rubin
store into a Cache store.
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 39 and 13-week periods ended September 29, 2007 and September 30,
2006.
-11-
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 39-week and
13-week periods ended September 29, 2007 and September 30, 2006, expressed as a
percentage of net sales. Amounts include the combined results of our Cache and
Cache Luxe stores.
13 Weeks Ended 39 Weeks Ended
---------------------------------------- -------------------------------------
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
------------------ ----------------- ---------------- ----------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 54.3 52.8 53.8 52.5
Gross profit 45.7 47.2 46.2 47.5
Store operating expenses 38.1 37.3 37.1 34.3
General and administrative expenses 8.1 9.4 8.9 7.8
Lillie Rubin exit costs (0.1) (0.2) (0.0) 2.8
Operating income (loss) (0.4) 0.8 0.3 2.5
Interest income, net 0.8 1.1 1.0 0.9
Income before income taxes 0.3 1.9 1.3 3.4
Income taxes 0.1 0.7 0.5 1.3
Net income 0.3% 1.2% 0.8% 2.1%
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
---------------------------------------- -------------------------------------
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
------------------ ----------------- ---------------- ----------------
Total store count at end of period 296 294 296 294
Net sales growth 1% 5% 0% 5%
Comparable store sales growth 4% 1% 2% 3%
Average sales per transaction growth
(decrease) (7%) 4% (8%) 4%
Average number of transactions growth
(decrease) 11% (3%) 10% (1%)
Net sales per average square foot $ 98 $ 99 $319 $319
Total square footage (in thousands) 604 589 604 589
-12-
NET SALES
Net sales remained substantially unchanged, as compared to the same 39-week
period last year, increasing to $196.0 million from $195.4 million. Comparable
store sales at Cache stores (sales for stores open at least one year or more)
increased $3.9 million or 2% during the 39-week period. Non-comparable sales
decreased $3.4 million during the current period, as a result of the reduction
of $12.5 million in net sales for Lillie Rubin stores open in the 39-week period
of fiscal 2006, which was partially offset by sales at new store locations of
approximately $9.1 million, during the current 39-week period. Net sales in the
fiscal 2007 period at Cache stores reflected an 10% increase in sales
transactions, which was partially offset by a 8% decrease in average dollars per
transaction, primarily due to the increase in markdown sales.
Net sales increased to $60.6 million from $59.9 million, an increase of
$637,000, or 1.1%, as compared to the same 13-week period last year. This
reflects $2.1 million of additional net sales as a result of a 4% increase in
comparable store sales at Cache stores. Non-comparable sales decreased $1.5
million during the current period, as a result of the reduction of $2.9 million
in net sales for Lillie Rubin stores open in the 13-week period of fiscal 2006,
as well as $2.4 million of breakage income recorded last year, as a result of
the formation of a new subsidiary to handle all Gift Card sales, which was
partially offset by sales at new store locations of approximately $3.8 million,
during the current 13-week period. Net sales in the fiscal 2007 period at Cache
stores reflected a 11% increase in sales transactions, which was partially
offset by an 7% decrease in average dollars per transaction, primarily due to
the increase in markdown sales.
GROSS PROFIT
Gross profit decreased to $90.6 million from $92.7 million, a decrease of $2.1
million, or 2.3%, as compared to the same 39-week period last year. This
decrease was primarily due to greater markdowns taken, due to reduced sales 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 increased as a
percent of sales in the current period, partially due to the acquisition of the
Adrienne Victoria Designs, our manufacturing and sourcing division, in the third
quarter of fiscal 2007. As a percentage of net sales, gross profit decreased to
46.2% from 47.5%, last year.
Gross profit decreased to $27.7 million from $28.3 million, a decrease of
$599,000, or 2.1%, as compared to the same 13-week period last year. This
decrease was primarily due to greater markdowns taken, due to reduced sales 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 increased as a
percent of sales in the current period, primarily due to the reasons mentioned
above. As a percentage of net sales, gross profit decreased to 45.7% from 47.2%
last year.
STORE OPERATING EXPENSES
Store operating expenses increased to $72.7 million from $67.1 million, an
increase of $5.6 million, or 8.4%, over the prior year 39-week period. As a
percentage of net sales, store operating expenses increased to 37.1% from 34.3%,
for the 39-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 ($4.0 million), depreciation expense
($758,000), outside services ($354,000) and payroll expense ($536,000), which
were partially offset by lower charges in other expense categories.
Store operating expenses increased to $23.1 million from $22.3 million, an
increase of $742,000, or 3.3%, over the prior year 13-week period. As a
percentage of net sales, store operating expenses increased to 38.1% from 37.3%
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
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principally due to higher depreciation expense ($637,000), payroll expense
($220,000) and outside services ($121,000), which were partially offset by lower
charges in other expense categories.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $17.4 million from $15.3
million, an increase of $2.1 million, or 13.4%, over the same 39-week period
last year. As a percentage of net sales, general and administrative expenses
increased to 8.9% from 7.8%, principally due to higher professional fees ($1.0
million) and a legal settlement related to exempt employees in California ($1.0
million), as compared to last year.
General and administrative expenses decreased to $4.9 million from $5.6 million,
a decrease of $700,000, or 12.5%, as compared to the same 13-week period last
year. As a percentage of net sales, general and administrative expenses
decreased to 8.1% from 9.4%, principally due to lower professional fees
($436,000), as well as reductions in several other expense categories, as
compared to last year.
LILLIE RUBIN EXIT COSTS
During the 39-week period ended September 29, 2007 the Company reversed a
pre-tax charge of $78,000 for the exit of the Lillie Rubin business as compared
to the pre-tax charge of $5.5 million in fiscal 2006. The reversal was due to
the Company converting the Lillie Rubin store into a Cache store. The charge for
$5.5 million in fiscal 2006 was comprised of leasehold improvements, furniture
and fixtures write down ($4.4 million), a write-down of intangibles ($455,000),
a 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 of $1.3 million
of deferred rent accruals. As a percent of sales, Lillie Rubin exit costs were
(0.2%) and 2.8%, for the 13-week and 39-week periods in fiscal 2006.
OTHER INCOME
Interest income increased to $2.0 million from $1.9 million, as compared to the
same 39-week period last year, primarily due to higher average cash and
marketable securities balances earlier in the year. Interest income decreased to
$523,000 from $657,000 in the same 13-week period last year, primarily due to
lower average cash and marketable securities balances and a reduction in
interest rates, as compared to last year. Interest expense of $78,000 in the
current 13-week period was accrued, related to the note payable issued for the
Adrienne Victoria acquisition.
INCOME TAXES
Income taxes decreased to $908,000 from $2.6 million, as compared to the 39-week
period last year. The decrease was primarily attributable to lower taxable
income in fiscal 2007. Income taxes decreased to $51,000 from $441,000, 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 the 39-week and 13-week periods in fiscal 2007 were 36.5% and 24.1%,
respectively. The estimated effective tax rate for both 39-week and 13-week
periods in fiscal 2006 were 39.0%, respectively.
NET INCOME
As a result of the factors discussed above, net income decreased to $1.6 million
from $4.1 million as compared to the same 39-week period last year. As a result
of the factors discussed above, net income decreased to $161,000 from $690,000,
as compared to the same 13-week period last year.
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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 29,
2007, we generated $12.6 million of cash flow from operations as compared to
$9.1 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 September 29,
2007, we had working capital of $68.2 million, cash and marketable securities of
$49.2 million and no third party debt outstanding.
The following table sets forth our cash flows for the period indicated:
------------------------------------
39 Weeks ended
------------------------------------
Sept 29, Sept 30,
2007 2006
----------------- ---------------
Net cash provided by operating activities............................ $12,561,000 $9,066,000
Net cash provided by (used in) investing activities.................. (13,126,000) 7,145,000
Net cash provided by (used in) financing activities.................. (9,823,000) 250,000
----------------- ---------------
Net increase (decrease) in cash and equivalents...................... $(10,388,000) $16,461,000
================= ===============
During the 39-week period ended September 29, 2007, cash and cash equivalents
decreased by $10.4 million, primarily due to repurchase of common stock ($10.3
million), purchase of assets from Adrienne Victoria Designs ($5.7 million),
decrease in deferred tax liabilities ($1.9 million), partially offset by
operating cash flows from depreciation expense ($8.7 million), net maturities of
marketable securities ($1.8 million), a seasonal decrease in prepaid expenses
($1.8 million) and a seasonal increase in accrued liabilities ($2.9 million).
Decreases in cash flows for the current period, also included capital
expenditures for our new store expansion and remodeling program totaling $9.3
million. Non-cash items included $1.2 million of deferred rent amortization.
We plan to open approximately 10 new stores during fiscal 2007, of which the
Company has opened 8 new stores to date. We renovated 14 existing stores to
date. We spent approximately $9.3 million through September 29, 2007 and expect
to spend an additional $1-2 million during the balance of fiscal 2007, for both
new store and existing store construction and remodeling.
On July 30, 2007, the Company's Board of Directors authorized a share repurchase
program pursuant to which the Company may repurchase up to 1,000,000 shares of
Company common stock, either through the open market or in privately negotiated
transactions in accordance with SEC requirements, in either case, at the
prevailing market rate. The program began in August 2007. There is no expiration
date governing the period over which the Company can repurchase shares. During
the 13-week period ended September 29, 2007, the Company repurchased, in the
open market, 637,029 shares at a cost of $10.3 million or $16.10 per share.
As of October 31, 2007, the Company repurchased, in the open market, an
additional 146,216 shares at a cost of $2.4 million or $16.46 per share.
There have been no borrowings against the line of credit during fiscal 2007 and
fiscal 2006. There were outstanding letters of credit of $0.6 million, $1.1
million and $2.7 million, pursuant to the credit facility, at September 29,
2007, December 30, 2006 and September 30, 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.
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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.
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 2007, the Company recorded an impairment
charge of $73,000 as compared to $101,000 in fiscal 2006. The impairment charge
in the current year was for one store that the Company planned on closing at the
end of fiscal 2007 and the impairment charge in fiscal 2006, related to one
store, which the Company closed in early 2007.
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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) since the Company has determined
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 of
fiscal 2006 related to Gift Cards sold/issued since the inception of the Gift
Card program. The Company recognized $222,000 of breakage income during the
39-week period ended September 29, 2007.
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 September 29, 2007, the Company did not have any tax
contingencies. The Company adopted the provisions of FIN 48, effective December
31, 2006. The 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
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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 September 29, 2007, 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, 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.
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 29, 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 September 29, 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, 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.
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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 8, 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)
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