Wednesday, May 24, 2006

Charming Shoppes: Salad Days Ahead for This Plus-Size Apparel Retailer?

Despite earning $32.1 million, or 24 cents a share, on sales of $734.9 million in the fiscal first quarter ended April 29, shares of Charming Shoppes, Inc. (CHRS-$11.50) sold off 20 percent in the last four trading sessions, after the plus-size women’s apparel retailer warned of slowing traffic.

In the same period a year earlier, the Company earned $30 million, or 23 cents a share, on revenue of $603.3 million.

On its 1Q:06 conference call, Charming Shoppes guided 2Q:06 earnings lower, warning of slowing traffic at its FASHION BUG stores. In addition to plus-sizes, the 1,025 FASHION BUG stores also sell a wide variety of misses and junior apparel, accessories, intimate apparel, and footwear.

Management is looking for share-net of 24 cents –to-25 cents, while consensus estimates had called for 29 cents per share.

For the fiscal year ending February 3, 2007, the Company did reaffirm its projection for earnings per share in the range of $0.81 - $0.83, in line with analysts’ estimates.

Of concern, management’s guidance for 2H:06 estimates of 33 cents or 34 cents per share, assumes (i) comparable store sales increases of low single digits for the Company's retail stores segment and (ii) 75 – to – 80 new Lane Bryant outlet stores will open on schedule in July and August (and be profitable, too).

In contrast to the pain recently suffered by Common Stock shareholders, Ms. Dorrit J. Bern, Chairman of the Board, President & CEO, continues to lead a ‘charmed life.’

In August 1995, Ms Bern was hired as CEO. It took her ten years to accumulate 1.22 million shares, or approximately one percent, of the Common Stock outstanding, worth $14.03 million.

In January 2005, Ms. Bern signed a new Employment Agreement. Irrespective of future Company performance the agreement provides for an increase in her annual base salary from $1,000,000 to $1,250,000 per year in FY 2006. In the last 12-months, she has also received an aggregate 873,231 shares/units still to be vested (valued at $11.01 million).

Ms. Bern earned cash bonuses of $2.5 million in each of the last two Fiscal years. The 10Q Detective does not contest these payouts. Ms. Bern was at the helm, and thus can take credit for a corporate turnaround. Looking at performance metrics for the prior four year period (from the year-ended February 1, 2003 to January 28, 2006): stockholder equity increased $268 million to $814.3 million; ROE increased from (1.1)% to 13.2%; ROA increased 740 basis points to 6.9 percent; net income increased from $(0.05) per share to share-net of $0.83; and, the stock price increased 281.2 percent in value.

Looking ahead, if the Company does not deliver on its promised growth, the share price of Charming Shoppes will retest its 52-week low of $8.75 per share (set on May 24, 2005). The business plan of the Company is largely dependent upon continued growth in the plus-size women’s apparel market (75% of sales). As corporate, in our opinion, is too dependent on stores not yet open to drive top-line growth, we doubt that this growth will occur. Look for an announcement of comp-store sales decreases to be the catalyst for the next break in the stock price.

June 22, 2006, is the day of the annual shareholder meeting. Deteriorating fundamentals and a slipping stock price does not make it a good day to be the CEO.

The 10Q Detective noted that Ms. Bern’s annual compensation package also includes payment for the rent-free use of an apartment in Philadelphia. The amount for FY 2006 with respect to Bern included $68,671 attributable for use of this apartment. Also included for FY 2006 is the payment of $44,191, representing “gross-up” payments covering taxes payable on the apartment, air travel commuting expenses and medical and financial plan expense reimbursements. The amounts for fiscal 2005 and fiscal 2004 for Ms. Bern’s apartment use were $62,400 and $62,400, respectively.

…. And Caesar, lying in his own pool of blood after being stabbed on the Capitol steps, sees his friend Brutus among the conspirators, and utters his famous words, "Et tu, Brute?"

Knowing history in the corporate boardroom, we doubt, however, that Ms. Bern will ever need to utter those same words: “And you, Brutus?”

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