Cache, Inc.
1440 Broadway
New York, New York 10018
May 22, 2008
Mr. Steve Lo
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549
RE: CACHE, INC. FORM 10-K FILING FOR FISCAL YEAR ENDED DECEMBER 29, 2007 FILED
ON MARCH 13, 2008 AND RESPONSE LETTER DATED MAY 1, 2008
SEC FILE NO. 000-10345
Dear Mr. Lo,
Cache, Inc. (the "Company") is responding to the letter dated May 9, 2008 (the
"Staff Comment Letter"), concerning the above-referenced Form 10-K filed by the
Company and our initial response to your April 17, 2008 Letter, dated May 1,
2008. We have reviewed the comments of the SEC staff (the "Staff") and
respectfully submit our responses below. For your convenience, the comments are
restated below in italics, with our responses following.
GENERAL
1. WE NOTE IN YOUR RESPONSES TO COMMENTS 1, 3-6, AND 8 OF OUR LETTER
DATED APRIL 17, 2008, THAT YOU REQUESTED TO COMPLY WITH THE COMMENTS
IN FUTURE FILINGS. PLEASE PROVIDE US WITH THE DISCLOSURE THAT YOU
INTEND TO INCLUDE IN FUTURE FILINGS TO AID US IN OUR CONSIDERATION OF
YOUR REQUESTS.
We have repeated below each of the Staff's prior comments referenced
above from your April 17, 2008 letter, together with the disclosure that we
intend to include in future filings.
1. WE NOTE THAT YOU ANTICIPATE PURCHASES FROM THIRD PARTY VENDORS TO
APPROXIMATE 25% OF YOUR TOTAL PURCHASES IN FISCAL 2008. PLEASE CLARIFY
FROM WHOM YOU ANTICIPATE PURCHASING THE OTHER 75%, AS IT APPEARS THAT
YOU WILL PURCHASE THE REMAINING AMOUNTS FROM RELATED-PARTY VENDORS. IN
ADDITION, DESCRIBE IN MORE DETAIL THE DIRECT-SOURCING OF MERCHANDISE
THAT YOU MENTION ON PAGE 5.
The following disclosure will be included as a clarification, updated as
applicable, in Part I Item 1, of the Company's Form 10-K for the year ending
December 27, 2008:
"We direct source a substantial portion of our goods from third party vendors.
Direct sourcing involves our company directly sourcing materials to be used in
the manufacture of finished goods and then arranging for the contract
manufacture of the goods. Direct sourcing is in contrast to purchasing finished
goods from a vendor. Direct sourcing enables us to purchase goods at lower cost
by eliminating the commissions charged by independent sourcing agents and the
mark up on materials when goods are purchased on a finished basis from a vendor.
During fiscal 2008, we direct sourced approximately XX% of our purchases. We
anticipate that, during fiscal 2009, we will direct source approximately XX% of
our purchases. Substantially all of these purchases will be sourced through
third party vendors that had a prior business relationship with Adrienne
Victoria Designs, or AVD, the business of which we acquired during fiscal 2007.
Prior to the acquisition, AVD was our largest supplier. We expect that the
remainder (approximately XX%) of our goods purchased in fiscal 2009 will be
purchased as finished goods."
3. PLEASE PROVIDE YOUR DISCUSSION AND ANALYSIS WITH RESPECT TO THE LILLIE
RUBIN EXIT COSTS IN FISCAL YEARS 2006 AND 2007. REFER TO SAB TOPIC
5:P.4. FOR ADDITIONAL GUIDANCE.
The following disclosure will be included in the Management's Discussion and
Analysis section in the Company's Form 10-Q for the quarter ending September 27,
2008 and the Form 10-K for the year ending December 27, 2008:
"During fiscal 2006, we recorded a pre-tax charge of $5.7 million for asset
impairment and store closing costs for the exit of the Lillie Rubin business.
Included in the exit costs were (1) write downs of leasehold improvements and
furniture and fixtures on 19 stores in the amount of $4.4 million, intangibles
of $455,000 and supplies of $275,000, (2) severance accruals of $400,000 and (3)
an accrual of $1.5 million for contractual termination costs negotiated prior to
year-end. These costs were partially offset by the reversal of $1.3 million of
deferred rent liabilities. We paid these costs in fiscal 2006 and 2007 and, in
fiscal 2007, reversed $78,000 of contractual termination costs due to our
conversion of one Lillie Rubin store into a Cache store."
4. WE NOTE THAT THE DECREASE IN NET SALES WAS PRIMARILY DUE TO THE
DECREASE IN COMPARABLE STORE SALES AND SUCH DECREASE WAS OFFSET BY
ADDITIONAL NET SALES FROM NON-COMPARABLE STORES AND WHOLESALE SALES
RECORDED BY THE AVD DIVISION. PLEASE EXPAND YOUR DISCUSSION AND
ANALYSIS TO DESCRIBE THE PRIMARY BUSINESS REASONS UNDERLYING THESE
FLUCTUATIONS.
The following disclosure will be included in our Form 10-K for the year ending
December 27, 2008 in the Results of Operations section of our Management's
Discussion and Analysis where we discuss 2007 net sales in comparison to 2006
net sales:
"The decrease in comparable store sales was primarily due to lower foot traffic
in the fourth quarter that resulted from the overall softer economic
environment, coupled with management's decision to reduce the frequency and
volume of product catalogue mailings to our customers. During fiscal 2006, we
mailed approximately 4.0 million catalogues during the fourth quarter,
while, in fiscal 2007, we mailed approximately 1.7 million catalogues, a 58%
reduction from the prior year. The decrease in net sales in fiscal 2007 also was
due to exclusion of Lillie Rubin business that had been included in fiscal 2006
and closed during that fiscal year and the inclusion of wholesale sales of the
AVD business, which we acquired during the third quarter of fiscal 2007."
We provided the following disclosure on page 12, in the Results of Operations
section of our Management's Discussion and Analysis in our Form 10-Q for the
quarter ended March 29, 2008 (our first quarter of fiscal 2008). Comparable
disclosure, modified as applicable for the period being discussed, will also be
included in future periodic reports.
"Net sales increased to $67.7 million from $64.4 million, an increase of $3.3
million, or 5.2%, over the same 13-week period last year. This reflects $1.8
million of additional net sales, as a result of a 3% increase in comparable
store sales. Comparable store sales increased due to strong customer response to
the sportswear assortment, which was driven by a well designed collection and
strong response to the Company's aggressive pricing strategy. Non-comparable
sales decreased $316,000 during the current period, due to fewer total stores
during the current fiscal quarter of 2008, as compared to the same period last
year. The decrease in non-comparable stores was offset by sales amounting to
$1.8 million in our newly acquired wholesale division - Mary L. Due to the
acquisition of the Mary L. division in the third quarter of fiscal 2007, no
sales for Mary L. were recorded during the first quarter of fiscal 2007. The
increase in net sales in fiscal 2008 at Cache stores reflected a 6.8% increase
in sales transactions, which was partially offset by a 3.3% decrease in average
dollars per transactions, primarily due to the increase in markdowns."
5. PLEASE DISCLOSE YOUR ACCOUNTING POLICY RELATED TO THE ALLOWANCE FOR
DOUBTFUL ACCOUNTS.
We provided the following disclosure on page 15, in the Summary of Significant
Accounting Policies of Management's Discussion and Analysis in our Form 10-Q for
the quarter ended March 29, 2008 (our first quarter of fiscal 2008). Comparable
disclosure, modified as applicable for the period being discussed, will be
included in future periodic reports.
"The allowance for doubtful accounts is the Company's best estimate of the
amount of probable credit losses in existing accounts receivable. The allowance
is determined based on historical write-off experience and the current retailer
environment. We regularly review the allowance for doubtful accounts. Balances
over 90 days past due and over a specified amount are reviewed individually for
collectability; other balances are considered on an aggregate basis considering
the aging of balances. Account balances are written off against the allowance
when it is probable the receivable will not be recovered. There is no
off-balance sheet credit exposure related to our customers. Management believes
that the risk associated with trade accounts receivable is adequately provided
for in the allowance for doubtful accounts. We recorded a reserve of $515,000
and $234,000 for the 13-weeks period ended March 29, 2008 and the 52-weeks
period ended December 29, 2007. The estimated provision for sales allowances and
doubtful accounts recorded in the first fiscal quarter of 2008 resulted in an
aggregate reserve amount of $750,000, as of March 29, 2008."
6. PLEASE DISCLOSE THE FAIR VALUE OF YOUR MARKETABLE SECURITIES. REFER TO
PARAGRAPH 20 OF SFAS 115 FOR ADDITIONAL GUIDANCE.
We provided the following disclosure on page 8, in the footnotes to the
condensed consolidated financial statements in our Form 10-Q for the quarter
ended March 29, 2008 (our first quarter of fiscal 2008). Comparable disclosure,
modified as applicable for the period being discussed, will be included in
future periodic reports.
"The fair value of our marketable securities totaled $34.0 million, $50.8
million and $65.1 million as of March 29, 2008, December 29, 2007 and March 31,
2007, respectively. For the periods ended March 29, 2008, December 29, 2007 and
March 31, 2007, the aggregate amount of investments recorded in cash and
equivalents (maturing less than 90 days) and marketable securities (maturing
greater than 90 days and less than one year) totaled approximately $33.9
million, $50.8 million and $65.1 million, respectively. The difference between
the amounts reported on the balance sheet and the fair value of the Company's
investments primarily relates to outstanding checks associated with normal
business operations. The Company noted small variances between the book value
and fair value due to the remaining unamortized premiums. As a result, no
impairment has occurred for the fiscal periods presented herein. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity investments. Interest income is recognized when earned."
In addition, effective December 30, 2007, the Company adopted the provisions of
SFAS Nos. 157 and 159 and provided the relevant disclosures for each.
8. PLEASE ADDRESS THE FOLLOWING RELATED TO YOUR ACCOUNTING FOR GIFT
CARDS:
a. WE NOTE THAT YOU RECOGNIZED $2.4 MILLION OF BREAKAGE INCOME AS A
RESULT OF TRANSFERRING ALL EXISTING OBLIGATIONS RELATED TO GIFT
CARDS TO A SUBSIDIARY. TELL US WHY THE TRANSFER OF THE
OBLIGATIONS RESULTED IN THE RECOGNITION OF BREAKAGE INCOME AND
HOW YOU DERIVED THE AMOUNT OF BREAKAGE INCOME TO BE $2.4 MILLION.
b. WE NOTE IN THE FOURTH PARAGRAPH ON PAGE 9 THAT YOU BEGAN SELLING
GIFT CARDS IN THE SECOND HALF OF 2006. EXPLAIN TO US WHY YOU
BELIEVE YOU HAD SUFFICIENT COMPANY-SPECIFIC HISTORICAL EXPERIENCE
TO DETERMINE BREAKAGE PATTERNS TO RECOGNIZE BREAKAGE INCOME IN
THE THIRD QUARTER OF 2006 WHEN YOU BEGAN SELLING GIFT CARDS IN
THE SAME PERIOD.
c. DISCLOSE WHETHER YOUR GIFT CARDS EXPIRE, AND IF SO, DESCRIBE WHEN
THEY EXPIRE.
d. WE NOTE THAT YOU DETERMINE GIFT CARD BREAKAGE INCOME BASED UPON
HISTORICAL REDEMPTION PATTERNS. DISCLOSE A DESCRIPTION OF THE
REDEMPTION PATTERNS, AND DESCRIBE WHEN YOU DETERMINE THAT
REDEMPTION IS REMOTE BASED ON THOSE PATTERNS.
We provided the following disclosure on page 15-16, in the Summary of
Significant Accounting Policies of Management's Discussion and Analysis in our
Form 10-Q for the quarter ended March 29, 2008 (our first quarter of fiscal
2008). Comparable disclosure, modified as applicable for the period being
discussed, will be included in future periodic reports.
"The Company sells gift cards and gift certificates ("Gift Cards") and issues
credits to its customers when merchandise is returned. These Gift Cards do not
have expiration dates. 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 and the remaining unredeemed percentage at the end of our historical
data of 3.5 years. Historical redemptions of gift cards ranged from 64% in the
first quarter to 0.03% in the fourteenth quarter subsequent to the issue date,
resulting in an average of approximately 95% redeemed or 5% unredeemed gift
cards over the historical data of 3.5 years. We have determined that redemption
would be remote based on the fact that, by the fourteenth quarter since issue
date, the redemption rate approximated 0%, indicating that the probability of
such cards to be redeemed is remote. As such, we have recorded breakage income
based upon this 5%, which is continually reviewed on a quarterly basis for
propriety. 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. The
Company recorded $81,000 and $98,000 of breakage income during the 13-week
periods ended March 29, 2008 and March 31, 2007, respectively."
ACQUISITION OF ADRIENNE VICTORIA DESIGNS, INC., PAGE F-17
2. WE NOTE YOUR RESPONSE TO COMMENT NUMBER 9 OF OUR LETTER DATED APRIL
17, 2008. PARAGRAPH 9 AND FOOTNOTE 4 OF SFAS 141 REFERS TO THE
GUIDANCE IN EITF 98-3 IN DETERMINING WHETHER AN ASSET GROUP
CONSTITUTES A BUSINESS. PLEASE PROVIDE US YOUR ANALYSIS AS TO WHETHER
NET ASSETS YOU ACQUIRED FROM AVD CONSTITUTE A BUSINESS UNDER THE
GUIDANCE PROVIDED BY EITF 98-3.
The Company reviewed EITF 98-3 to determine if the net assets acquired in
connection with the acquisition of Adrienne Victoria Design, Inc., or "AVD",
constitute a business. We reviewed the requirements of what constitutes a
business under the respective EITF paragraph 6, and noted the following:
"A BUSINESS CONSISTS OF (A) INPUTS, (B) PROCESSES APPLIED TO THOSE
INPUTS, AND (C) RESULTING OUTPUTS THAT ARE USED TO GENERATE REVENUES.
FOR A TRANSFERRED SET OF ACTIVITIES AND ASSETS TO BE A BUSINESS, IT
MUST CONTAIN ALL OF THE INPUTS AND PROCESSES NECESSARY FOR IT TO
CONTINUE TO CONDUCT NORMAL OPERATIONS AFTER THE TRANSFERRED SET IS
SEPARATED FROM THE TRANSFEROR, WHICH INCLUDES THE ABILITY TO SUSTAIN A
REVENUE STREAM BY PROVIDING ITS OUTPUTS TO CUSTOMERS."
"INPUTS:"
a. LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS, OR RIGHTS TO THE
USE OF LONG-LIVED ASSETS.
In connection with the acquisition of AVD in July 2007, the Company acquired the
following certain tangible assets from AVD, as disclosed in our fiscal 2007 Form
10-K on page F-18: (1) net fixed assets; (2) security deposit; and (3)
inventory. In addition, the Company acquired the
following intangible assets, as disclosed in our fiscal 2007 Form 10-K on page
F-19: (1) Trademarks - Mary L; (2) Customer relationships; (3) Non-Compete
agreements; and 4) Favorable market lease
b. INTELLECTUAL PROPERTY.
As a result of the acquisition, we acquired the "Mary L" and certain other
trademarks.
c. THE ABILITY TO OBTAIN ACCESS TO NECESSARY MATERIALS OR RIGHTS.
AVD is a designer and manufacturer of womens' apparel and has been in the
business for several years. As such, it has built a relationship with its
vendors, which allows AVD to easily obtain the necessary components to design
and manufacture womens' apparel. Prior to the acquisition, AVD did business with
over 50 fabric vendors, over 10 factories, several trim suppliers and many other
vendors that supplied products and services. Cache has access to all these
vendors and continues to use substantially all of AVD's vendors for materials,
supplies and services. Cache also acquired all of AVD's permits, business
licenses, accreditations, qualifications, product registrations, implied
guaranties, warranties and other similar rights in AVD's favor.
d. EMPLOYEES.
Cache obtained 35 employees of AVD as part of the acquisition, with an annual
payroll exceeding $2.2 million, and has retained substantially all of these
employees.
"PROCESSES:"
e. THE EXISTENCE OF SYSTEMS, STANDARDS, PROTOCOLS, CONVENTIONS, AND
RULES THAT ACT TO DEFINE THE PROCESSES NECESSARY FOR NORMAL,
SELF-SUSTAINING OPERATIONS, SUCH AS (I) STRATEGIC MANAGEMENT
PROCESSES, (II) OPERATIONAL PROCESSES, AND (III) RESOURCE
MANAGEMENT PROCESSES.
In connection with the Company's strategy to vertically integrate its operations
and increase operating efficiencies, the Company acquired AVD. AVD had
merchandise procurement processes, standards and systems in place which allowed
for the manufacture of products that the Company needed. The majority of these
processes, standards and systems were in place prior to the acquisition, which
allowed AVD to run its daily operations for Cache and other customers. Among
other things, Cache acquired all books and records (other than certain personal
tax records), data, files stationary, forms, labels, shipping materials, catalog
brochures, artwork, photo supplies, advertising materials and reports of AVD.
"OUTPUTS:"
f. THE ABILITY TO OBTAIN ACCESS TO THE CUSTOMERS THAT PURCHASE THE
OUTPUTS OF THE TRANSFERRED SET.
AVD sold Mary L. branded products to upper-tier department stores, including
Bloomingdales, Saks Fifth Avenue, Dillards, Neiman Marcus and others. Cache
continues to sell Mary L. branded products to these customers.
CONCLUSION:
We reviewed the criteria as set forth by EITF 98-3 and determined that a
business was acquired as a result of our acquisition of AVD.
* * *
We acknowledge that (i) we are responsible for the adequacy and
accuracy of the disclosure in the filings on Form 10-K; (ii) Staff comments or
changes to disclosure in response to staff comments do not foreclose the
Commission from taking any action with respect to the filings; (iii) we may not
assert staff comments as a defense in any proceeding initiated by the Commission
or any person under the federal securities laws of the United States, and (iv)
the Division of Enforcement has access to all information we provide to the
staff of the Division of Corporation Finance in its review of our filings or in
response to comments on filings.
If you have any questions or comments, or require further information
with respect to the foregoing, please do not hesitate to call me at (212)
575-3206.
Sincerely,
/s/ Margaret Feeney
--------------------------------
Margaret Feeney
Executive Vice President and Chief
Financial Officer