NEW YORK -- Furthering its focus on the plus-size market, Charming Shoppes Inc. will close 207 stores, taking a $37.5 million pretax charge in the fourth quarter.
Wall Street approved of the move as investors pushed up the firm's shares 41 cents, or 7.7 percent, to close Monday at $5.72 on the Nasdaq. Moody's Investors Service, however, placed the firm on review for possible downgrade, citing "higher uncertainty about future performance and integration of the Lane Bryant acquisition."
The Bensalem, Pa.-based firm will close 130 underperforming Fashion Bug doors in the fourth quarter of its next fiscal year, representing 1.1 million square feet, or 6 percent of the of Charming Shoppes's total retail space. An additional 44 locations will be converted to its Lane Bryant concept. The 174 units to be closed or converted represent a 14 percent reduction in Fashion Bug's 1,252-store retail presence.
During the first half of fiscal 2003, Charming Shoppes also will shutter its 77-door Added Dimensions chain, part of its Catherines Stores division, representing 2 percent of the firm's total square footage. About 15 of the closed Added Dimensions stores will be converted into the Catherine's Plus Size format and, due to their close proximity to existing Catherine's stores, will be marketed to attract customers to the stores' new nameplate.
The charge will comprise a $17.5 million noncash item to write down fixed assets, while the remaining $20 million will be in cash, primarily to terminate leases. After taxes, the total charge is expected to be $23 million, or 21 cents a share.
The restructuring should culminate in a pretax annualized earnings improvement of about $12 million, to be fully recognized in fiscal 2004. Increased productivity from the 44 stores converted to the Lane Bryant nameplate will account for $2 million of the improvement, with another $4 million coming from the closed Added Dimensions stores and $6 million from the Fashion Bug closures.
The company declined to reveal the toll to be levied on its 26,000-strong workforce, or to cite specific locations beyond noting they would be dispersed throughout the country. McDonald Investments equity analyst Jeffrey Stein said he expected the move: "It's good news. Basically, it should accelerate the company's transition to become the dominate player in the plus-size market and further reduce its exposure to the underperforming Fashion Bug business. We would have been happy to see Charming Shoppes go a bit further in downsizing Fashion Bug, but the size and scope of the business is just too important to the total company."On an ongoing basis, the firm's plus-size business accounts for 72 percent of its sales, or $1.8 billion in 2002, giving the firm about 9 percent of the total $20 billion market. Going forward, the category also is expected to grow by about 10 percent a year, compared with a 2 to 3 percent overall growth rate for women's apparel, according to The NPD Group.
The market also is underserved, with Charming Shoppes "far and away number one" in supplying the niche, Stein noted.
Competitors in the field include United Retail Group Inc., Cato Corp., Talbots Inc. and Chicos FAS Inc.
Chairman and chief executive officer Dorrit Bern, in a statement, noted: "By the end of fiscal 2003, we'll have already grown America's leading plus-size chain by approximately 10 percent since the acquisition. As we continue to reassess our real estate portfolio in the future, we will look for additional opportunities to maximize profitability."
Eric Specter, executive vice president and chief financial officer, told WWD in a telephone interview that the move will "really jump-start" the Lane Bryant division. In addition to the 44 Fashion Bug stores to be converted, 25 new Lane Bryant stores are set to open, on top of the current base of 653 doors. Most of these new stores will be in strip shopping centers rather than conventional malls. "Although we will continue to grow in malls, the majority of the growth going forward will be in additional strip shopping centers," said the cfo.
Over the next five years, he said that Lane Bryant could grow into a 1,000-store chain with about 100 more mall locations.
J.P. Morgan equity analyst Thomas Filandro said of the restructuring: "It's very positive." Not only will it allow Charming Shoppes to "right-size its fleet of underperforming Fashion Bug stores" but it will help drive the top line at stores in the same market as those set to close.
"It's a tremendous opportunity to leverage the company's presence in the environments and transfer the volume right back into the chain," he said, noting that "it's not as if they're closing regions or markets in total."Excluding the restructuring charge, Charming Shoppes is looking for fourth-quarter losses of 2 to 4 cents a diluted share. For the full-year, earnings should be in the range of 18 to 20 cents.
Stein noted that challenges facing the company going forward include the tough economy, a highly leveraged balance sheet from the acquisition of Lane Bryant and LB's ongoing integration. On a pro-forma basis, the firm's debt-to-capital ratio currently rests at about 38 percent, said Stein, above the low- to mid-teen percentage preferable for specialty stores.
All this is manageable, though, he noted. "They've already demonstrated through the successful integration of Catherine's that they know how to buy a business and get it assimilated into their operations," said Stein.
Filandro added that Charming Shoppes should produce about $50 million to $60 million in free cash flow a year, giving them some ability to start paying down debt. Also, of the remaining Fashion Bug stores, he noted: "I don't think there's a single store that's generating negative cash flow."
Specter projected EPS for fiscal 2003 of 34 to 36 cents and said that money would be used to pay down the company's debt. Debt stood at $358 million at the conclusion of the third quarter of 2002.
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