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Jason Mercer

CHRS AT A GLANCE

P/E ► -3.84   EV/EBITDA ► -12.6   ROA ► -13.3% AVG ROE ► -33.6% AVG Debt to Equity ► 1.31 AVG Current Ratio ► 2.35 AVG Interest Coverage Ratio ► -11.7 LOW

 

 

 

 

 

 

Charming Shoppes (NASDAQ: CHRS) is the parent company of the Lane Bryant, Lane Bryant Outlet, Fashion Bug and Catherine's Plus Sizes clothing companies, as well Crosstown Traders, a company that markets women's clothing and accessories. All of Charming Shoppes' businesses cater to plus-size women, which means it is in a good position to take advantage of the large American plus-size market - fully 62% of all American women are overweight.^[1] Recessionary fears, however, have led to decreased store traffic and consumer purchases, which caused net earnings of -$83,413,000 in Fiscal 2008.^[2] The company is attempting to cope with the decrease in consumer spending by cutting costs, partly by eliminating 150 management positions and closing one of its divisions, the Petite Sophisticate Outlet.^[3] Charming Shoppes is also one of many retailers that extends a line of credit to its consumers, which would ordinarily be a disadvantage considering the state of the American economy, in which credit card debt is increasing due to inability to secure home equity loans. The average debt of the Charming Shoppes' consumer, however, is low enough that repayment is more viable than with peer companies; the fact that Charming Shoppes credit cards are restricted to its own stores, as opposed to other retailers who have their own unrestricted lines of credit for its customers, helps keep the average debt of each consumer low.

Business and Financials

Charming Shoppes, Inc. is divided into a number of segments:

• Lane Bryant(41% of Fiscal 2008 sales, including Lane Bryant Outlet sales.) is a plus-size retailer offering sizes 14-28 under the brand names Lane Bryant, Cacique, and Venezia. Its demographic consists of middle-class women age 35 to 55. In Fiscal Year 2006 Lane Bryant introduced an intimate apparel store, which was placed adjacent to the Lane Bryant clothing store. As of February 2, 2008, 108 stores are operated in this side-by-side format. Lane Bryant sells its apparel through its 795 stores (located in 46 U.S. states) as well as its website, which averaged over 2.4 million unique users per month in fiscal year 2008.^[4]
• Lane Bryant Outlet is the only national outlet chain that sells plus-size apparel exclusively. As of February 2, 2008, Lane Bryant Outlet operated 101 stores in 35 U.S. states.^[5]
• Fashion Bug(33% of Fiscal 2008 sales) offers plus-size and junior's apparel for customers between 20 and 49 years old with low to medium income. Fashion Bug operates 989 stores in 44 states, and its website averaged 900,000 unique visitors per month during Fiscal 2008.^[6]
• Catherines Plus Sizes(12% of Fiscal 2008 sales) offers an extended range of sizes (over size 28) and caters to consumers between 40 and 65 years of age with moderate income. Catherines sells its merchandise through 468 stores located in 44 states, as well as its website, which averaged over 463,000 unique visitors per month in Fiscal 2008.^[7]
• Petite Sophisticate Outlet(<1% of Fiscal 2008 sales) is the only national outlet store chain that exclusively sells petite apparel. This store sells clothing to women between 35 and 55 years of age, between 4'11" and 5'4" who wear petite sizes 0-14. Petite Sophisticate Outlet operates 52 stores in 23 states, most of which operate side-by-side with a Lane Bryant store. Petite Sophisticate does not sell clothing on its website; it is instead used for marketing and informational purposes. Charming Shoppes plans to end the Petite Sophisticate chain.^[8]
• Crosstown Traders(14% of Fiscal 2008 sales) markets women's apparel, accessories, footwear, and specialty gifts. Crosstown markets its products through a number of brands such as Old Pueblo Traders®, Bedford Fair Lifestyles®, Willow Ridge®, Lew Magram®, Brownstone Studio®, Intimate Appeal®, Monterey Bay Clothing Company®, Coward®, Shoe, Shoetrader™ and Figi's®. Crosstown also produces the Lane Bryant Woman catalog and operates the corresponding website, which offers intimate apparel, clothing, and footwear in a greater range of sizes than the Lane Bryant store. During Fiscal 2008 Crosstown Traders' websites averaged 777,000 unique visitors per month.^[9]

^[10]

^[11]

Charming Shoppes' performance has been poor during Fiscal 2008, reporting a net loss of $87 million. This decrease in net income is due in large part to lower numbers of people actually entering its stores and overall lower demand for its products.^[12] In response to its poor performance during the past fiscal year, Charming Shoppes has focused on decreasing costs wherever it can. For example, it has taken steps to have the headquarters of Catherines moved from Memphis, TN to Bensalem, PA. The company plans to share facilities with Fashion Bug, resulting in savings of $8 million. In addition, Charming Shoppes plans to close 150 underperforming stores, which combined lose $5 million annually. Also, by January 31, 2008 the company had eliminated 150 corporate and field management positions, which it believes will save $14 million in annual expenses. Charming Shoppes has also ended the Petite Sophisticate Outlet chain in order to focus on its more established chains, i.e. Lane Bryant, Lane Bryant Outlet, Fashion Bug and Catherines Plus Sizes.^[13]

• Includes Petite Sophisticate Outlet stores.

From the above chart it is evident that, through increasing the numbers of Lane Bryant and Catherines stores and decreasing the number of Fashion Bug stores, Charming Shoppes is attempting to focus more on its more established businesses and spend less energy on its less established divisions, especially in light of its hard times.

Trends and Forces

Plus-Size Market Means Good News for Charming Shoppes

^[15]

The above chart demonstrates the increasing rate of obesity in America. According to Obesity in America, approximately 62% of American women are considered overweight, meaning that they compose a large part of the plus-size market.^[16] Charming Shoppes, whose stores (with the exception of Petite Sophisticate) provide clothing to the plus-size demographic, is in a good position to take advantage of this market segment. In addition, obesity is most prevalent in low-income neighborhoods^[17], once again a demographic that Charming Shoppes serves. The trend of growing rates of obesity, especially within low income neighborhoods means that the market for Charming Shoppes' goods is expanding.

Decreasing Sales leads to Consolidation for Charming Shoppes

Charming Shoppes' sales have decreased substantially from Fiscal 2007 to Fiscal 2008, going from positive to negative net income. Charming Shoppes has attributed this decrease in sales to lower consumer traffic at its stores and fewer overall purchases-store sales decreased by 5% in the past year.^[18] Charming Shoppes is trying to cut costs in response to its decreasing net income. The company plans to close 150 underperforming stores, close all its Petite Sophisticate stores, move the headquarters of Catherines in order to share operations with Fashion Bug, eliminate 150 management positions, decrease spending and control inventory much more tightly. Charming Shoppes claims these actions will save an estimated $26 million. ^[19]

Charming Shoppes Insulated Against Credit Crisis

With home equity dried up, many consumers have started to rack up increasing amounts of credit card debt. As of 2007, the average credit card balance increased by 7%, as opposed to an average of 2% over the last six years.^[20] As credit card balances rise, so does the probability of consumers defaulting on them. For example, in the third quarter of 2007 delinquency rates-the amount of loans that are past due divided by the total amount of loans outstanding-at the country's 100 largest banks increased from 4.24% to 4.47%. From 2004 to 2006, when people were still able to refinance their homes or take out home equity loans to pay off mounting credit card debt, delinquency rates rarely surpassed 4%.^[21] The increased delinquency rate is bad news not only for credit card companies but for those retailers, such as Lane Bryant, that extend lines of credit to its consumers. Lane Bryant has $600 million in outstanding credit, which is an average of $260 or $270 per customer, and the minimum monthly repayments average $15 to $20 per month.^[22] Lane Bryant has an advantage over other retailers that extend lines of credit to its consumers due to the fact that Lane Bryant credit cards are usable only in Lane Bryant stores, whereas other retailers collaborate with Visa or MasterCard, making cards which can be used anywhere. The unrestricted use of these cards leads to larger balances, potentially reaching tens of thousands of dollars.^[23] The smaller size of average customer debt on the Lane Bryant credit makes it more likely that debt will be repaid.

Competition

Charming Shoppes' net sales are higher than Dress Barn but lower than Redcats and TJX Companies.

Dress Barn sells clothing and accessories to low-to-middle class women. Both the company’s divisions, Dress Barn and Maurices, also offer plus-size apparel.

Redcats is the number 3 home shopping company worldwide in fashion and home decoration. It has over 60 merchant websites, over 30 catalogues, and 600 stores internationally. 91.8% of its revenues come from catalog and internet orders. Redcats operates 37 brands, encompassing men's, women's, and children's apparel, furniture, home appliances, and discount retailers.^[30]

TJX Companies is the parent company of some of the largest discount retailers in the world, such as T.J. Maxx, Marshall's, and A.J. Wright.

References

1. ↑ Obesity in America-Obesity Demographics.
2. ↑ CHRS 2007 10-K
3. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
4. ↑ CHRS 2007 10-K. Item 1, Page 1.
5. ↑ CHRS 2007 10-K. Item 1, Page 1.
6. ↑ CHRS 2007 10-K. Item 1, Page 2.
7. ↑ CHRS 2007 10-K. Item 1, Page 2.
8. ↑ CHRS 2007 10-K. Item 1, Page 2.
9. ↑ CHRS 2007 10-K. Item 1, Page 2.
10. ↑ Charming Shoppes Products/Operations-Hoover's.
11. ↑ CHRS 2007 10-K. Item 6, Page 27.
12. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
13. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
14. ↑ CHRS 2007 10-K. Item 1, Page 3.
15. ↑ Obesity in America-Obesity Trends
16. ↑ Obesity in America-Obesity Demographics.
17. ↑ "Obesity disproportionately burdens low-income, ethnic minority populations." December 2, 2004. News-Medical.Net
18. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
19. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
20. ↑ "The Coming Credit-Card Crunch." January 4, 2008. Money Watch.
21. ↑ "The Coming Credit-Card Crunch." January 4, 2008. Money Watch.
22. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
23. ↑ Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript. Seeking Alpha.
24. ↑ DBRN 2007 10-K. Item 6, Page 14.
25. ↑ DBRN 2007 10-K. Item 1, Page 4.
26. ↑ Redcats Group-Key Figures.
27. ↑ Redcats Group-Key Figures.
28. ↑ TJX Companies, Key Numbers-Hoover's.
29. ↑ TJX Companies, Products/Operations-Hoover's.
30. ↑ Redcats-Brands.