XNAS:DLIA dELiA*s, Inc. Quarterly Report 10-Q Filing - 4/28/2012

Effective Date 4/28/2012

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Table of Contents

 

 

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 April 28, 2012

 

¨ 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: 000-51648

 

 

dELiA*s, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-3397172

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

50 West 23rd Street, New York, NY 10010

(Address of Principal Executive Offices) (Zip Code)

(212) 590-6200

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report:

None

 

 

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 such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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 June 4, 2012 the registrant had 31,726,645 shares of common stock, $.001 par value per share, outstanding.

 

 

 


Table of Contents

dELiA*s, Inc.

TABLE OF CONTENTS

 

          Page No.  

PART I — FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
  

Condensed Consolidated Balance Sheets at April 28, 2012 (unaudited), January 28, 2012 and April 30, 2011 (unaudited)

     3   
  

Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended April 28, 2012 (unaudited) and April 30, 2011 (unaudited)

     4   
  

Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 28, 2012 (unaudited) and April 30, 2011 (unaudited)

     5   
   Notes to Condensed Consolidated Financial Statements (unaudited)      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      21   

Item 4.

   Controls and Procedures      21   

PART II — OTHER INFORMATION

  

Item 1.

   Legal Proceedings      22   

Item 1A.

   Risk Factors      22   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      22   

Item 3.

   Defaults upon Senior Securities      22   

Item 4.

   Mine Safety Disclosures      22   

Item 5.

   Other Information      22   

Item 6.

   Exhibits      23   
   EXHIBIT INDEX   
   SIGNATURES   


Table of Contents
Item 1. Financial Statements

dELiA*s, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

     April 28, 2012     January 28, 2012     April 30, 2011  
     (unaudited)           (unaudited)  

ASSETS

      

CURRENT ASSETS:

      

Cash and cash equivalents

   $ 16,634      $ 28,426      $ 11,503   

Inventories, net

     30,445        30,937        32,667   

Prepaid catalog costs

     1,704        2,111        1,666   

Restricted cash

     —          —          10,244   

Other current assets

     3,909        3,556        17,893   
  

 

 

   

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     52,692        65,030        73,973   

PROPERTY AND EQUIPMENT, NET

     41,471        42,588        48,643   

GOODWILL

     4,462        4,462        4,462   

INTANGIBLE ASSETS, NET

     2,419        2,419        2,419   

OTHER ASSETS

     822        837        242   
  

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 101,866      $ 115,336      $ 129,739   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

CURRENT LIABILITIES:

      

Accounts payable

   $ 18,124      $ 24,199      $ 18,534   

Accrued expenses and other current liabilities

     13,177        16,747        18,173   

Income taxes payable

     788        736        780   
  

 

 

   

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     32,089        41,682        37,487   

DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES

     11,155        11,545        12,516   
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES

     43,244        53,227        50,003   
  

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

      

STOCKHOLDERS’ EQUITY:

      

Preferred Stock; $.001 par value, 25,000,000 shares authorized, none issued

     —          —          —     

Common Stock; $.001 par value, 100,000,000 shares authorized; 31,726,645, 31,726,645 and 31,432,531 shares issued and outstanding, respectively

     32        32        31   

Additional paid-in capital

     99,431        99,244        98,671   

Accumulated deficit

     (40,841     (37,167     (18,966
  

 

 

   

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     58,622        62,109        79,736   
  

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 101,866      $ 115,336      $ 129,739   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

     For the Thirteen Weeks Ended  
     April 28,
2012
    April 30,
2011
 

NET REVENUES

   $ 52,451      $ 49,146   

Cost of goods sold

     35,015        32,663   
  

 

 

   

 

 

 

GROSS PROFIT

     17,436        16,483   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     21,546        21,900   

Other operating income

     (632     (38
  

 

 

   

 

 

 

TOTAL OPERATING EXPENSES

     20,914        21,862   
  

 

 

   

 

 

 

OPERATING LOSS

     (3,478     (5,379

Interest expense, net

     153        87   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (3,631     (5,466

Provision (benefit) for income taxes

     43        (997
  

 

 

   

 

 

 

NET LOSS

   $ (3,674   $ (4,469
  

 

 

   

 

 

 

BASIC AND DILUTED LOSS PER SHARE:

    

NET LOSS PER SHARE

   $ (0.12   $ (0.14
  

 

 

   

 

 

 

WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING

     31,320,254        31,209,737   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Thirteen Weeks
Ended
 
     April 28,
2012
    April 30,
2011
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (3,674   $ (4,469
  

 

 

   

 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     2,336        2,787   

Stock-based compensation

     187        161   

Changes in operating assets and liabilities:

    

Inventories

     492        (642

Prepaid catalog costs and other assets

     69        (5,334

Restricted cash

     —          (1,976

Income taxes payable

     52        38   

Accounts payable, accrued expenses and other liabilities

     (9,851     (6,187
  

 

 

   

 

 

 

Total adjustments

     (6,715     (11,153
  

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

     (10,389     (15,622
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (1,403     (949
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (1,403     (949
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (11,792     (16,571

CASH AND CASH EQUIVALENTS, beginning of period

     28,426        28,074   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 16,634      $ 11,503   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Cash paid during the period for interest

   $ 127      $ 48   
  

 

 

   

 

 

 

Cash paid during the period for taxes

   $ 68      $ 37   
  

 

 

   

 

 

 

Capital expenditures incurred not yet paid

   $ 744      $ 893   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In this Form 10-Q , when we refer to “Alloy, Inc.” we are referring to Alloy, Inc., our former parent corporation, and when we refer to “Alloy” we are referring to the Alloy-branded direct marketing and merchandising business that we operate. Similarly, when we refer to “dELiA*s” we are referring to the dELiA*s-branded direct marketing, merchandising and retail store business that we operate, when we refer to “dELiA*s, Inc.”, the “Company”, “we”, “us”, or “our”, we are referring to dELiA*s, Inc. and its subsidiaries. When we refer to the “Spinoff”, we are referring to the December 19, 2005 spinoff of the outstanding common shares of dELiA*s, Inc. to the Alloy, Inc. shareholders.

1. Basis of Presentation

We are a multi-channel retail company comprised of two lifestyle brands primarily targeting teenage girls and young women. Our two lifestyle brands—dELiA*s and Alloy—generate revenue by selling to consumers through the integration of direct mail catalogs, e-commerce websites and, for dELiA*s, mall-based retail stores. Through our e-commerce web pages and catalogs, we sell many name brand products, along with our own proprietary brand products, directly to consumers, including apparel, accessories and footwear. Our mall-based retail stores derive revenue primarily from the sale of apparel and accessories to teenage girls.

The accompanying unaudited condensed consolidated financial statements (the “financial statements”) of dELiA*s, Inc. at April 28, 2012 and April 30, 2011 and for the thirteen week periods ended April 28, 2012 and April 30, 2011 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain notes and other information have been condensed or omitted from the financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the most recent dELiA*s, Inc. Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet at January 28, 2012 and related information presented in the footnotes have been derived from audited consolidated statements at that date.

The Company’s fiscal year ends on the Saturday closest to January 31st. References to “fiscal 2011” represent the 52-week period ended January 28, 2012 and references to “fiscal 2012” represent the 53-week period ending February 2, 2013.

The financial statements include the accounts of dELiA*s, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

2. Recent Accounting Pronouncements

Recently Issued Standard

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption will have a material impact on its condensed consolidated financial statements.

 

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Table of Contents

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

3. Fair Value of Financial Instruments

We follow the guidance in ASC 820 as it relates to financial and nonfinancial assets and liabilities. Our non-financial assets, which include property and equipment, goodwill and indefinite-lived intangibles, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and we are required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at fair value. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2—inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3—unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts of our financial instruments, including cash and cash equivalents, receivables, payables, and obligations under capital leases approximated fair value due to the short maturity of these financial instruments.

There were no impairment charges in the thirteen week periods ended April 28, 2012 and April 30, 2011.

4. Cash and Cash Equivalents

Cash and cash equivalents consist of cash, credit card receivables and highly liquid investments with original maturities of three months or less. Credit card receivable balances included in cash and cash equivalents as of April 28, 2012, January 28, 2012 and April 30, 2011 were approximately $1.5 million, $1.6 million and $1.7 million, respectively.

5. Inventories

Inventories, which consist of finished goods, including certain capitalized expenses, are stated at the lower of cost (first-in, first-out method) or market value. Inventories may include items that have been written down to our best estimate of their net realizable value. Our decisions to write-down and establish valuation allowances against our merchandise inventories are based on our current rate of sale, the age of the inventory and other factors. Actual final sales prices to customers may be higher or lower than our estimated sales prices and could result in a fluctuation in gross profit in subsequent periods.

6. Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding during the period. When the effects are not anti-dilutive, diluted earnings per share is computed by dividing the Company’s net earnings by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options and restricted stock. The dilutive impact of stock options and restricted stock is determined by applying the “treasury stock” method.

The total weighted average number of potential shares of common stock with an anti-dilutive impact excluded from the calculation of diluted net income (loss) per share is detailed in the following table for the thirteen week periods ended April 28, 2012 and April 30, 2011:

 

     For Thirteen Weeks Ended  
     April 28,
2012
     April 30,
2011
 

Options, warrants and restricted shares

     4,062,519         6,581,923   
  

 

 

    

 

 

 

7. Other Current Assets

Other current assets consisted of the following (in thousands):

 

     April 28,
2012
     January 28,
2012
     April 30,
2011
 

Income taxes receivable

   $ 243       $ 256       $ 10,983   

Other current assets

     3,666         3,300         6,910   
  

 

 

    

 

 

    

 

 

 
   $ 3,909       $ 3,556       $ 17,893   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

8. Property and Equipment, net

Property and equipment, net, consisted of the following (in thousands):

 

     April 28,
2012
    January 28,
2012
    April 30,
2011
 

Construction in progress

   $ 1,629      $ 1,236      $ 1,368   

Computer equipment

     11,787        11,730        11,277   

Machinery and equipment

     125        125        125   

Office furniture

     20,264        20,204        19,637   

Leasehold improvements

     56,080        55,371        53,161   

Building

     7,559        7,559        7,559   

Land

     500        500        500   
  

 

 

   

 

 

   

 

 

 
     97,944        96,725        93,627   

Less: accumulated depreciation and amortization

     (56,473     (54,137     (44,984
  

 

 

   

 

 

   

 

 

 
   $ 41,471      $ 42,588      $ 48,643   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense related to property and equipment was approximately $2.3 million and $2.8 million for the thirteen week periods ended April 28, 2012 and April 30, 2011, respectively.

9. Credit Facility

On May 26, 2011, the Company and certain of its wholly-owned subsidiaries entered into a new credit agreement (the “Credit Agreement”) with General Electric Capital Corporation (“GE Capital”), as a lender and as agent for the financial institutions from time to time party to the Credit Agreement (together with GE Capital in its capacity as a lender, the “Lenders”), which replaced the Company’s previous letter of credit agreement, as amended, with Wells Fargo Retail Finance II, LLC (“Wells Fargo”) (the “Wells Fargo Agreement”). The Credit Agreement provides for a total aggregate commitment of the Lenders of $25,000,000, including a $15,000,000 sublimit for the issuance of letters of credit and a swingline loan facility of $5,000,000. Under the Credit Agreement, the Company has the right to request, subject to the agreement of the Lenders, that the Lenders increase their revolving commitments up to an additional $25,000,000. The Credit Agreement has a term of five years and matures on May 26, 2016. The obligations of the borrowers under the Credit Agreement are secured by substantially all property and assets of the Company and certain of its subsidiaries.

As of April 28, 2012, there were approximately $11.6 million of outstanding letters of credit under the Credit Agreement, and unused availability of approximately $6.0 million.

The Credit Agreement calls for the payment by the Company of a fee of 0.375% per annum on the average unused portion of the Credit Agreement, a letter of credit fee calculated using a per annum rate equal to the Applicable Margin with respect to letters of credit (as defined in the Credit Agreement) multiplied by the average outstanding face amount of letters of credit issued under the Credit Agreement, as well as other customary fees and expenses. Interest accrues on the outstanding principal amount of the revolving credit loans at an annual rate equal to LIBOR (as defined in the Credit Agreement) or the Base Rate (as defined in the Credit Agreement), plus an applicable margin which is subject to periodic adjustment based on average excess availability under the Credit Agreement. Interest on each swingline loan is calculated using the Base Rate. The Credit Agreement does not contain any financial covenants with which the Company or any of its subsidiaries or affiliates has to comply during the term of the Credit Agreement.

The Credit Agreement contains customary representations and warranties, as well as customary covenants that, among other things, restricts the ability of the Company and its subsidiaries to incur liens, consolidate or merge with other entities, incur certain additional indebtedness and guaranty obligations, pay dividends or make certain other restricted payments. The Credit Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties and covenants, cross defaults to other material indebtedness, and bankruptcy and insolvency matters.

 

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Table of Contents

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The Wells Fargo Agreement, which was terminated on May 26, 2011, provided for a maximum aggregate face amount of letters of credit that may be issued, to be the lesser of (a) $10,000,000 or (b) an amount equal to a specified percentage of cash collateral held by Wells Fargo. The cash collateral was required in an amount equal to 105% of the face amount of outstanding letters of credit issued. None of the other assets or properties of the Company, or any of its subsidiaries or affiliates, were pledged as collateral for these obligations. At April 30, 2011, the cash collateral required to secure the Company’s obligations under the Wells Fargo Agreement was approximately $10.2 million. The cash collateral, which is shown as restricted cash on the accompanying condensed consolidated balance sheet, was included in current assets as of April 30, 2011 since the restriction related to the Wells Fargo Agreement was to expire within one year.

10. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

     April 28,
2012
     January 28,
2012
     April 30,
2011
 

Accrued sales tax

   $ 540       $ 1,426       $ 525   

Accrued payroll, bonus, taxes and withholdings

     677         1,504         606   

Accrued professional services

     585         478         335   

Credits due to customers

     6,939         7,866         10,031   

Allowance for sales returns

     1,002         962         983   

Accrued capital expenditures

     315         424         703   

Other accrued expenses

     3,119         4,087         4,990   
  

 

 

    

 

 

    

 

 

 
   $ 13,177       $ 16,747       $ 18,173   
  

 

 

    

 

 

    

 

 

 

11. Deferred Credits and Other Long-Term Liabilities

Deferred credits and other long-term liabilities consist primarily of long-term portions of deferred rent and tenant allowances. We occupy our retail stores, home office and call center facility under operating leases generally with terms of seven to ten years. Some of these retail store leases have early cancellation clauses, which permit the lease to be terminated if certain sales levels are not met in specific periods. Most of the store leases require payment of a specified minimum rent, plus a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold. Most of the lease agreements have defined escalating rent provisions, which are reported as a deferred rent liability and expensed on a straight-line basis over the term of the related lease, commencing with date of possession. This includes any lease renewals deemed to be probable. In addition, we receive cash allowances from our landlords on certain properties and have reported these amounts as tenant allowances which are amortized to rent expense over the term of the lease, also commencing with date of possession. Included in deferred credits at April 28, 2012, January 28, 2012 and April 30, 2011 was approximately $5.9 million, $6.0 million, and $5.8 million, respectively, of deferred rent liability, and approximately $4.3 million, $4.6 million, and $5.8 million, respectively, of tenant allowances.

12. Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718 Compensation-Stock Compensation, which requires share-based compensation related to stock options to be measured based on estimated fair values at the date of grant using an option-pricing model.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of stock option grants and expected future stock price volatility over the expected term.

 

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dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Included in selling, general and administrative expenses in the financial statements was stock-based compensation expense of approximately $187,000 and $161,000 for the thirteen week periods ended April 28, 2012 and April 30, 2011, respectively, related to employee stock options and restricted stock.

The per share weighted average fair value of stock options granted during the thirteen weeks ended April 28, 2012 was $0.82. The fair value of each option grant is estimated on the date of grant with the following weighted average assumptions:

 

     Thirteen Weeks Ended
April 28, 2012
 

Dividend yield

     —     

Risk-free interest rate

     1.5

Expected life (in years)

     6.25   

Historical volatility

     60

A summary of the Company’s stock option activity and weighted average exercise prices is as follows:

 

     Options     Weighted Average
Exercise Price
 

Options outstanding at January 28, 2012

     3,096,288      $ 4.71   

Options granted

     477,750        1.44   

Options exercised

     —          —     

Options cancelled

     (133,253     7.40   
  

 

 

   

 

 

 

Options outstanding at April 28, 2012

     3,440,785      $ 4.15   
  

 

 

   

 

 

 

Options exercisable at April 28, 2012

     2,203,723      $ 5.57   
  

 

 

   

 

 

 

As of April 28, 2012, there was approximately $669,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 1.6 years.

13. Stockholders’ equity

Rights Offering

On December 30, 2005, we filed a prospectus under which we distributed to persons who were holders of our common stock on December 28, 2005 transferable rights to purchase up to an aggregate of 2,691,790 shares of our common stock at a cash subscription price of $7.43 per share. The rights offering was made to fund the costs and expenses of our retail store expansion plan and to provide funds for general corporate purposes following the Spinoff. MLF Investments, LLC (“MLF”), which was controlled by Matthew L. Feshbach, our former Chairman of the Board, agreed to backstop the rights offering, meaning MLF agreed to purchase all shares of our common stock that remained unsold upon completion of the rights offering at the same $7.43 subscription price per share. The rights offering was completed in February 2006 with $20 million of gross proceeds. The stockholders exercised subscription rights to purchase 2,040,570 shares of dELiA*s, Inc. common stock, of the 2,691,790 shares offered in the rights offering, raising a total of $15,161,435. On February 24, 2006, MLF purchased the remaining 651,220 shares for a total of $4,838,565. MLF received as compensation for its backstop commitment a nonrefundable fee of $50,000 and ten-year warrants to purchase 215,343 shares of our common stock at an exercise price of $7.43 per share. The warrants had a grant date fair value of approximately $900,000 and were recorded as a cost of raising capital. The MLF warrants were subsequently split so that MLF Offshore Portfolio Company, LP owned warrants to purchase 206,548 shares of our common stock and MLF Partners 100, LP owned warrants to purchase 8,795 shares of our common stock. Such warrants were distributed on a pro-rata basis to investors as part of the winding up of operations of MLF and its affiliated funds.

 

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dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Warrants

Prior to the Spinoff, Alloy, Inc. had warrants outstanding for the purchase of 1,326,309 shares in the aggregate of Alloy, Inc. common stock that were issued to certain purchasers of (i) Alloy, Inc. common stock in a private placement transaction completed on January 25, 2002, and (ii) Alloy, Inc.’s Series A Convertible Preferred Stock (collectively the “Warrants”). Upon consummation of the Spinoff, the Warrants became exercisable into both the number of shares of Alloy, Inc. common stock into which such Warrants otherwise were exercisable and one-half that number of shares, or 663,155 shares, of our common stock, none of which had been issued. We had agreed with Alloy, Inc. that we would issue shares of our common stock, without compensation, on behalf of Alloy, Inc. to holders of the Warrants as and when required in connection with any exercise of the Warrants. All other outstanding Alloy, Inc. warrants were unaffected by the Spinoff. The warrants expired on January 25, 2012.

Restricted Stock

The Company issues shares of restricted stock, which are subject to vesting requirements, primarily to outside board members. These shares are charged to stock-based compensation expense ratably over the vesting period, which is generally three years. No restricted shares were issued during the thirteen weeks ended April 28, 2012 or April 30, 2011.

14. Interest Expense, Net

Interest expense and income are presented net in the condensed consolidated statements of operations. Interest income is derived from cash balances in money market accounts. Interest expense for the thirteen weeks ended April 28, 2012 relates to costs associated with our Credit Agreement. Interest expense for the thirteen weeks ended April 30, 2011 related to costs associated with our former Letter of Credit Agreement. Interest expense for the thirteen week periods ended April 28, 2012 and April 30, 2011 was $153,000 and $89,000, respectively. Interest income for the thirteen week periods ended April 28, 2012 and April 30, 2011 was $ -0- and $2,000, respectively.

15. Spinoff Related Transactions

Services and Revenues

We recognize other revenues that consist primarily of advertising provided for third parties in our catalogs, on our e-commerce web pages, in our outbound packages, and in our retail stores pursuant to specific pricing arrangements with Alloy, Inc. Alloy, Inc. originally arranged these advertising services on our behalf, through a Media Services Agreement (the “Original Agreement”) entered into in connection with the Spinoff. Revenue under these arrangements is recognized, net of commissions and agency fees, when the underlying advertisement is published or otherwise delivered pursuant to the terms of each arrangement.

On November 16, 2010, the Company entered into an Amended and Restated Media Services Agreement (the “A/R Media Services Agreement”) with Alloy, Inc. The A/R Media Services Agreement replaces the Original Agreement, which expired by its terms on December 19, 2010, and became effective on December 20, 2010, upon expiration of the Original Agreement. The A/R Media Services Agreement provides, among other things, that Alloy, Inc. will serve as our exclusive sales agent for the purpose of providing the following media and marketing related services to the Company and its subsidiaries: license of websites, internet advertising, direct segment upsell arrangements, catalog advertisements and insertions, sampling and in-store promotions, and database collection and marketing. The A/R Media Services Agreement expires on December 20, 2015. Effective May 6, 2011, the Company and Alloy, Inc. amended the A/R Media Services Agreement to remove the sampling and in-store promotion services therefrom.

We recorded revenues of approximately $135,000 for each of the thirteen week periods ended April 28, 2012 and April 30, 2011, respectively, in our consolidated financial statements in accordance with the terms of the media services agreements noted above.

Prior to the Spinoff, we and Alloy, Inc. entered into the following agreements that were to define our ongoing relationships after the Spinoff: a distribution agreement, tax separation agreement, trademark agreement, information technology and intellectual property agreement, and an On Campus Marketing call center agreement. In addition, as part of the transaction involving the sale of our former CCS business, we entered into a Media Placement Services Agreement with Alloy, Inc. pursuant to which we agreed to purchase specified media services over a three year period for $3.3 million. The Media Placement Services Agreement expired on February 1, 2012.

We recorded expenses of approximately $120,000 and $179,000 for the thirteen week periods ended April 28, 2012 and April 30, 2011, respectively, in our consolidated financial statements in accordance with the terms of these agreements noted above.

 

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dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

16. Income Taxes

The provision (benefit) for income taxes is based on the current estimate of the annual effective rate and is adjusted as necessary for quarterly events. The effective income tax rate for the thirteen weeks ended April 28, 2012 and April 30, 2011 was an expense of 1.2% and a benefit of 18.2%, respectively. Although the Company expects to generate a net operating loss (“NOL”) for fiscal 2012, the Company did not generate taxable income during the two-year carry-back period, and therefore cannot recognize a federal tax benefit related to the NOL. As a result, the effective income tax rate is lower than what would be expected if the federal statutory rate were applied to loss before income taxes. In the first quarter of fiscal 2012, the Company recognized tax expense related to certain state taxes. In the thirteen weeks ended April 30, 2011, the Company recognized a benefit for adjustments related to the filing of the Company’s 2010 federal income tax return.

The Company follows ASC 740-10 Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For this benefit to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes interest accrued for increases in the net liability for unrecognized income tax benefits in interest expense and any related penalties in income tax expense.

At April 28, 2012, the Company had a liability for unrecognized tax benefits of approximately $434,000 all of which would favorably affect the Company’s effective tax rate if recognized. Included within the $434,000 is an accrual of approximately $136,500 for the payment of related interest and penalties. There were no material changes to the Company’s unrecognized tax benefits during the thirteen weeks ended April 28, 2012. The Company does not believe there will be any material changes in the unrecognized tax positions over the next twelve months.

The Company’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the fiscal years 2008, 2009 and 2010. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective returns. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is periodically subject to state income tax examinations.

17. Litigation

The Company is involved from time to time in litigation incidental to the business and, from time to time, the Company may make provisions for potential litigation losses. The Company follows ASC 450 Contingencies when assessing pending or potential litigation. The Company believes that there is no claim or litigation pending, the outcome of which could have a material adverse effect on its financial condition or operating results.

18. Segment Reporting

The Company’s executive management, being its chief operating decision makers, works together to allocate resources and assess the performance of the Company’s business. The Company’s executive management manages the Company as two distinct operating segments—direct marketing and retail stores. Although offering customers substantially similar merchandise, the Company’s direct and retail operating segments have distinct management, marketing and operating strategies and processes.

The Company’s executive management assesses the performance of each operating segment based on operating income (loss), which is defined as net sales less the cost of goods sold and selling, general and administrative expenses both directly identifiable and allocable. For the direct segment, these operating costs, in addition to the cost of merchandise sold, primarily consist of catalog development, production and circulation costs, order processing costs, direct personnel costs and allocated overhead expenses. For the retail segment, these operating costs, in addition to the cost of merchandise sold, primarily consist of store selling expenses, direct labor costs and allocated overhead expenses. Allocated overhead expenses are costs associated with general corporate expenses and shared departmental services (e.g., executive, facilities, accounting, information technology, legal and human resources).

 

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dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Operating segment assets are those directly used in or clearly allocable to an operating segment’s operations. For the retail segment, these assets primarily include inventory, fixtures and leasehold improvements. For the direct segment, these assets primarily include inventory and prepaid catalog costs, together with goodwill. Corporate and other assets include corporate headquarters, distribution and contact center facilities, shared technology infrastructure as well as corporate cash and cash equivalents and prepaid expenses. Operating segment depreciation and amortization and capital expenditures are recorded directly to each operating segment. Corporate and other depreciation and amortization and corporate and other capital expenditures are allocated to each operating segment. The accounting policies of the segments are the same as those described in our most recent Form 10-K. Reportable data for our operating segments were as follows:

 

     Direct Marketing
Segment
     Retail Store
Segment
     Total  
     (in thousands)  

Total Assets

        

April 28, 2012

   $ 43,983       $ 57,883       $ 101,866   

January 28, 2012

     57,177         58,159         115,336   

April 30, 2011

     53,959         75,780         129,739   

Capital Expenditures (accrual basis)

        

April 28, 2012—13 weeks ended

   $ 526       $ 693       $ 1,219   

April 30, 2011—13 weeks ended

     22         1,420         1,442   

Depreciation and Amortization

        

April 28, 2012—13 weeks ended

   $ 234       $ 2,102       $ 2,336   

April 30, 2011—13 weeks ended

     302         2,485         2,787   

Goodwill

        

April 28, 2012

   $ 4,462       $ —         $ 4,462   

January 28, 2012

     4,462         —           4,462   

April 30, 2011

     4,462         —           4,462   

 

     Thirteen Weeks Ended  
     April 28,
2012
    April 30,
2011
 
     (in thousands)  

Net revenues:

    

Retail store

   $ 28,862      $ 27,014   

Direct marketing

     23,589        22,132   
  

 

 

   

 

 

 

Total net revenue

   $ 52,451      $ 49,146   
  

 

 

   

 

 

 

Operating loss:

    

Retail store

   $ (2,804   $ (4,353

Direct marketing

     (674     (1,026
  

 

 

   

 

 

 

Operating loss

   $ (3,478   $ (5,379
  

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this report on Form 10-Q and in conjunction with our audited financial statements and related notes in our most recent Form 10-K. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so incorporated or included. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth below in this Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Forward Looking Statements”.

Results of Operations and Financial Condition

Executive Summary

dELiA*s, Inc. is a multi-channel retailer of apparel, accessories and footwear, comprised of two lifestyle brands—dELiA*s and Alloy. Our merchandise assortment (which includes many name brand products along with our own proprietary brand products), our catalogs, our e-commerce webpages, and our mall-based dELiA*s retail stores are designed to appeal directly to consumers. We reach our customers through our direct marketing segment, which consists of our catalog and e-commerce businesses, and our dELiA*s retail stores.

Our strategy is to increase productivity in our dELiA*s retail stores and improve upon our strong competitive position as a direct marketing company while controlling costs. In addition, our strategy includes strengthening the dELiA*s brand through alignment across all channels of our business while continuing extended offerings online and in our catalogs.

We expect that improved productivity in each segment of our business will be the key element of our overall growth strategy. Our focus is to improve productivity in our current retail store base, to invest in web-based marketing programs to drive additional traffic to our websites and improve the productivity of catalogs distributed. As productivity improves and market conditions allow, we plan to continue to expand the dELiA*s retail store base over the long term. In addition, as store performance and market conditions allow, we may plan on accelerating our growth in gross square footage. Should we accelerate our growth, we may need additional equity or debt financing.

Goals

We believe that focusing on our brands and implementing the following initiatives should lead to profitable growth and improved results from operations:

 

   

delivering low-to mid-single digit comparable store sales growth in our dELiA*s retail stores over the long term;

 

   

driving low-to mid-single digit top-line growth in our direct marketing segment, through targeted circulation in productive mailing segments, and implementation of web, mobile and social media based initiatives;

 

   

improving gross profit margins each year by 50 basis points;

 

   

developing retail merchandising assortments that emphasize key categories more effectively;

 

   

improving our retail store metrics through increased focus on the selling culture, with emphasis on increased customer conversion, thereby improving productivity;

 

   

implementing profit-improving inventory planning and allocation strategies such as seasonal carry-in reduction, better store-planning, targeted replenishment by size, tactical fashion investment, and creating inventory turn improvement;

 

   

leveraging our current expense infrastructure and taking additional operating costs out of the business;

 

   

monitoring and opportunistically closing or working with landlords to reduce costs on underperforming stores; and

 

   

expanding the dELiA’s retail store base over the long-term.

 

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Key Performance Indicators

The following measurements are among the key business indicators that management reviews regularly to gauge the Company’s results:

 

   

store metrics such as comparable store sales, sales per gross square foot, average retail price per unit sold, average transaction values, average units per transaction, traffic conversion rates and store contribution margin (defined as store gross profit less direct costs of running the store);

 

   

direct marketing metrics such as average order value and demand generated by book, with demand defined as the amount customers seek to purchase without regard to merchandise availability;

 

   

web metrics such as unique site visits, carts opened and carts converted, and site conversion;

 

   

fill rate, which is the percentage of any particular order we are able to ship for our direct marketing business, from available on-hand inventory or future inventory orders;

 

   

gross profit;

 

   

operating income;

 

   

inventory turnover and average inventory per store; and

 

   

cash flow and liquidity determined by the Company’s cash provided by operations.

The discussion below includes references to “comparable stores.” We consider a store comparable after it has been open for fifteen full months without closure for more than seven consecutive days and whose square footage has not been expanded or reduced by more than 25% within that period. If a store is closed during a fiscal period, it is removed from the computation of comparable store sales for that fiscal period.

Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to January 31st. The fiscal year ended January 28, 2012 was a 52-week fiscal year, and fiscal year ending February 2, 2013 will be a 53-week fiscal year.

Consolidated Results of Operations

The following table sets forth our statements of operations data for the periods indicated, reflected as a percentage of revenues:

 

     Thirteen Weeks Ended  
     April 28,     April 30,  
     2012     2011  

STATEMENTS OF OPERATIONS DATA:

    

Total revenues

     100.0     100.0

Cost of goods sold

     66.8     66.5
  

 

 

   

 

 

 

Gross profit

     33.2     33.5
  

 

 

   

 

 

 

Operating expenses:

    

Selling, general and administrative expenses

     41.1     44.6

Other operating income

     (1.2 %)      (0.1 %) 
  

 

 

   

 

 

 

Total operating expenses

     39.9     44.5
  

 

 

   

 

 

 

Operating loss

     (6.6 %)      (10.9 %) 

Interest expense, net

     0.3     0.2
  

 

 

   

 

 

 

Loss before income taxes

     (6.9 %)      (11.1 %) 

Provision (benefit) for income taxes

     0.1     (2.0 %) 
  

 

 

   

 

 

 

Net loss

     (7.0 %)      (9.1 %) 
  

 

 

   

 

 

 

 

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Thirteen Weeks Ended April 28, 2012 Compared to Thirteen Weeks Ended April 30, 2011

Revenues

Total Revenues. Total revenues increased 6.7% to $52.5 million in the quarter ended April 28, 2012 from $49.1 million in the quarter ended April 30, 2011.

Direct Marketing Revenues. Direct marketing revenues increased 6.6% to $23.6 million in the quarter ended April 28, 2012 from $22.1 million in the quarter ended April 30, 2011. The revenue increase was primarily due to an increase in the number of orders compared to the prior year, partially offset by lower average order values.

Retail Store Revenues. Retail store revenues increased 6.8% to $28.9 million in the quarter ended April 28, 2012 from $27.0 million in the quarter ended April 30, 2011. The revenue increase was primarily due to a comparable store sales increase of 7.3% over the prior year period. During the quarter ended April 28, 2012, we relocated one store and closed one store, ending the period with 112 stores in operation, as compared to 115 stores in operation as of April 30, 2011.

The following table sets forth select operating data in connection with the revenues of our Company:

 

     Thirteen Weeks Ended  
     April 28,
2012
    April 30,
2011
 

Channel net revenues (in thousands):

    

Retail

   $ 28,862      $ 27,014   

Direct

     23,589        22,132   
  

 

 

   

 

 

 

Total net revenues

   $ 52,451      $ 49,146   
  

 

 

   

 

 

 

Catalogs Mailed (in thousands)

     7,542        8,741   
  

 

 

   

 

 

 

Number of Stores:

    

Beginning of period

     113        114   

Stores opened

     1     1   

Stores closed

     2     —     
  

 

 

   

 

 

 

End of Period

     112        115   
  

 

 

   

 

 

 

Total Gross Sq. Ft. End of Period (in thousands)

     429.6        440.0   
  

 

 

   

 

 

 

 

* Totals include one store that was closed and relocated to an alternative site in the same mall during the first quarter of fiscal 2012.

Gross Profit

Total Gross Profit. Total gross profit for the quarter ended April 28, 2012 was $17.4 million or 33.2% of revenues as compared to $16.5 million or 33.5% of revenues in the quarter ended April 30, 2011.

Direct Marketing Gross Profit. Direct marketing gross profit for the quarter ended April 28, 2012 was $9.7 million or 41.3% of related revenues as compared to $9.9 million or 44.6% of related revenues for the quarter ended April 30, 2011. The decrease in gross profit, as a percentage of related revenues, primarily resulted from lower merchandise margins, related to increased markdowns on clearance goods and more aggressive promotional techniques to acquire new customers, and increased shipping and handling costs.

Retail Store Gross Profit. Retail store gross profit for the quarter ended April 28, 2012 was $7.7 million or 26.7% of related revenues as compared to $6.6 million or 24.5% of related revenues for the quarter ended April 30, 2011. The increase in gross profit, as a percentage of related revenues, resulted from higher merchandise margins, driven by increased full price selling and fewer markdowns, and the leveraging of occupancy costs.

Selling, General and Administrative

Total Selling, General and Administrative. As a percentage of revenues, total selling, general and administrative expenses (SG&A) decreased to 41.1% for the quarter ended April 28, 2012 from 44.6% for the quarter ended April 30, 2011. In total dollars, SG&A decreased to $21.5 million in the quarter ended April 28, 2012 from $21.9 million in the quarter ended April 30, 2011.

 

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Direct Marketing SG&A. Direct marketing SG&A remained flat at $10.9 million in the quarter ended April 28, 2012 and the quarter ended April 30, 2011. As a percentage of related revenues, the direct marketing SG&A decreased to 46.4% from 49.3% for the quarter ended April 30, 2011. The decrease in SG&A, as a percentage of related revenues, reflects the leveraging of selling and overhead expenses.

Retail Store SG&A. Retail SG&A decreased to $10.6 million in the quarter ended April 28, 2012 from $11.0 million in the quarter ended April 30, 2011. As a percentage of related revenues, retail SG&A decreased to 36.7% in the quarter ended April 28, 2012 from 40.7% for the quarter ended April 30, 2011. The decrease in SG&A, in dollars and as a percentage of related revenues, was driven by reduced selling and depreciation expenses.

Other Operating Income

Other operating income, which represents breakage income, was $632,000 for the first quarter of fiscal 2012 compared to $38,000 in first quarter of fiscal 2011.

Operating Loss

Total Operating Loss. Our total operating loss was $3.5 million for the quarter ended April 28, 2012 as compared to a loss of $5.4 million for the quarter ended April 30, 2011.

Direct Marketing Operating Loss. Direct marketing operating loss was $0.7 million for the quarter ended April 28, 2012 as compared to a loss of $1.0 million for the quarter ended April 30, 2011.

Retail Store Operating Loss. Operating loss from retail stores was $2.8 million for the quarter ended April 28, 2012 as compared to a loss of $4.4 million for the quarter ended April 30, 2011.

Interest expense, net

We recorded net interest expense of $153,000 in the quarter ended April 28, 2012 compared to $87,000 for the quarter ended April 30, 2011. Interest expense for the quarter ended April 28, 2012 related to costs associated with our Credit Agreement. Interest expense for the quarter ended April 30, 2011 related to our former Letter of Credit Agreement.

Provision (benefit) for income taxes

We recorded an income tax provision of $43,000 for the fiscal quarter ended April 28, 2012 and an income tax benefit of $1.0 million for the fiscal quarter ended April 30, 2011. The Company does not expect to recognize any tax benefit for federal taxes for fiscal 2012, since the Company did not generate taxable income during the two-year carry-back period for the fiscal 2012 net operating loss. The benefit for the first quarter of fiscal 2011 included adjustments related to the filing of our 2010 federal income tax return.

Seasonality and Quarterly Fluctuation

Our historical revenues and operating results have varied significantly from quarter to quarter due to seasonal fluctuations in consumer purchasing patterns. Sales of apparel, accessories and footwear through our e-commerce web pages, catalogs and retail stores have generally been higher in our third and fourth fiscal quarters, which contain the key back-to-school and holiday selling seasons, than in our first and second fiscal quarters. Starting in the third quarter and through the beginning of our fourth fiscal quarter, our working capital requirements increase and have typically been funded by our cash balances as well as utilization of our former Letter of Credit Agreement and the Credit Agreement. Quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the relative proportion of our new stores to mature stores, fashion trends and changes in consumer preferences, calendar shifts of holiday or seasonal periods, changes in merchandise mix, timing of promotional events, fuel, postage and paper prices, general economic conditions, competition and weather conditions.

Liquidity and Capital Resources

Our capital requirements include maintenance and remodeling expenditures for existing stores, information technology, distribution and other infrastructure related investments, and construction, fixture and inventory costs related to the opening of any new retail stores. Future capital requirements will depend on many factors, including, but not limited to, additional investments in infrastructure and technology, the pace of new store openings, the availability of suitable locations for new stores, the size of the specific stores we open and the nature of arrangements negotiated with landlords. In that regard, our net investment to open new stores is likely to vary significantly in the future.

 

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We expect our current cash balance, cash flow from operations and availability under our Credit Agreement will be sufficient to meet our cash requirements for operations and planned capital expenditures at least through the end of our current fiscal year. However, if cash balances, cash flow from operations and availability under our Credit Agreement are not sufficient to meet our capital requirements, then we may be required to obtain additional equity or debt financing in the future. Such equity or debt financing may not be available to us when we need it or, if available, may not be on terms that will be satisfactory to us or may be dilutive to our stockholders. If financing is not available when required or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

On May 26, 2011, the Company and certain of its wholly-owned subsidiaries entered into a new credit agreement (the “Credit Agreement”) with General Electric Capital Corporation (“GE Capital”), as a lender and as agent for the financial institutions from time to time party to the Credit Agreement (together with GE Capital in its capacity as a lender, the “Lenders”), which replaced the Company’s previous letter of credit agreement, as amended, with Wells Fargo Retail Finance II, LLC (“Wells Fargo”) (the “Wells Fargo Agreement”). The Credit Agreement provides for a total aggregate commitment of the Lenders of $25,000,000, including a $15,000,000 sublimit for the issuance of letters of credit and a swingline loan facility of $5,000,000. Under the Credit Agreement, the Company has the right to request, subject to the agreement of the Lenders, that the Lenders increase their revolving commitments up to an additional $25,000,000. The Credit Agreement has a term of five years and matures on May 26, 2016. The obligations of the borrowers under the Credit Agreement are secured by substantially all property and assets of the Company and certain of its subsidiaries.

As of April 28, 2012, there were approximately $11.6 million of outstanding letters of credit under the Credit Agreement, and unused availability of approximately $6.0 million.

The Credit Agreement calls for the payment by the Company of a fee of 0.375% per annum on the average unused portion of the Credit Agreement, a letter of credit fee calculated using a per annum rate equal to the Applicable Margin with respect to letters of credit (as defined in the Credit Agreement) multiplied by the average outstanding face amount of letters of credit issued under the Credit Agreement, as well as other customary fees and expenses. Interest accrues on the outstanding principal amount of the revolving credit loans at an annual rate equal to LIBOR (as defined in the Credit Agreement) or the Base Rate (as defined in the Credit Agreement), plus an applicable margin which is subject to periodic adjustment based on average excess availability under the Credit Agreement. Interest on each swingline loan is calculated using the Base Rate. The Credit Agreement does not contain any financial covenants with which the Company or any of its subsidiaries or affiliates has to comply during the term of the Credit Agreement.

The Credit Agreement contains customary representations and warranties, as well as customary covenants that, among other things, restricts the ability of the Company and its subsidiaries to incur liens, consolidate or merge with other entities, incur certain additional indebtedness and guaranty obligations, pay dividends or make certain other restricted payments. The Credit Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties and covenants, cross defaults to other material indebtedness, and bankruptcy and insolvency matters.

The Wells Fargo Agreement, which was terminated on May 26, 2011, provided for a maximum aggregate face amount of letters of credit that may be issued, to be the lesser of (a) $10,000,000 or (b) an amount equal to a specified percentage of cash collateral held by Wells Fargo. The cash collateral was required in an amount equal to 105% of the face amount of outstanding letters of credit issued. None of the other assets or properties of the Company, or any of its subsidiaries or affiliates, were pledged as collateral for these obligations. At April 30, 2011, the cash collateral required to secure the Company’s obligations under the Wells Fargo Agreement was approximately $10.2 million. The cash collateral, which is shown as restricted cash on the accompanying condensed consolidated balance sheet, was included in current assets as of April 30, 2011 since the restriction related to the Wells Fargo Agreement was to expire within one year.

 

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Table of Contents

Operating Activities

Net cash used in operating activities was $10.4 million in the thirteen weeks ended April 28, 2012, compared with $15.6 million in the thirteen weeks ended April 30, 2011. The cash used in operating activities for the thirteen week periods ended April 28, 2012 and April 30, 2011 was due primarily to funding the net operating losses and the timing of vendor payments.

Investing Activities

Cash used in investing activities was $1.4 million in the thirteen weeks ended April 28, 2012, compared with $0.9 million in the thirteen weeks ended April 30, 2011. The cash used in investing activities was primarily due to capital expenditures associated with the construction of our new retail stores and, for the first quarter of fiscal 2012, costs associated with our new websites and systems to support our e-commerce business.

Contractual Obligations

The following table presents our significant contractual obligations as of April 28, 2012 (in thousands):

 

     Payments Due By Period  
     Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 

Contractual Obligations

              

Operating Lease Obligations (1)

   $ 96,121       $ 16,669       $ 32,845       $ 27,530       $ 19,077   

Purchase Obligations (2)

     29,463         29,463         —           —           —     

Future Severance-Related Payments (3)

     2,152         2,152         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 127,736       $ 48,284       $ 32,845       $ 27,530       $ 19,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our operating lease obligations are primarily related to dELiA*s retail stores and our corporate headquarters.
(2) Our purchase obligations are primarily related to inventory commitments and service agreements.
(3) Our future severance-related payments consist of severance agreements with existing employees.

We have long-term, non-cancelable operating lease commitments for retail stores, office space, contact center facilities and equipment.

Critical Accounting Policies

Management has determined that our most critical accounting policies are those related to revenue recognition, catalog costs, inventory valuation, goodwill and other indefinite-lived intangible assets and long-lived asset impairment, and income taxes. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies as discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

 

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Recent Accounting Pronouncements

Recently Issued Standard

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption will have a material impact on its condensed consolidated financial statements.

Off-Balance Sheet Arrangements

We entered into letters of credit issued under the Letter of Credit Agreement and currently enter into letters of credit issued under the Credit Agreement in each instance to finance the acquisition of inventory from suppliers, to provide standby letters of credit to factors, landlords and other parties for business purposes, and for other general corporate purposes.

dELiA*s Brand, LLC, one of our subsidiaries, entered into a license agreement in 2003 with JLP Daisy, LLC that grants JLP Daisy, LLC exclusive rights (except for our rights) to use the dELiA*s trademarks to advertise, promote and market the licensed products, and to sublicense to permitted sublicensees the right to use the trademarks in connection with the manufacture, sale and distribution of the licensed products to approved wholesale customers.

We do not maintain any other off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Guarantees

We have no significant financial guarantees.

Inflation

In general, our costs, some of which include postage, paper, cotton, freight and energy costs, are affected by inflation and we may experience the effects of inflation in future periods. We believe, however, that such effects have not been material to us during the past.

Forward-Looking Statements

In order to keep stockholders and investors informed of our future plans, this Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains and, from time to time, other reports and oral or written statements issued by us may contain, statements expressing our expectations and beliefs regarding our future results, goals, performance and objectives that are or may be deemed to be “forward-looking statements” within the meaning of applicable securities laws. Our ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. When used in this document, the words “anticipate”, “may”, “could”, “plan”, “project”, “should”, “would”, “predict”, “believe”, “estimate”, “expect” and “intend” and similar expressions are intended to identify such forward-looking statements.

 

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Table of Contents

Our forward-looking statements are based upon management’s current expectations and beliefs. They are subject to a number of known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements as a result of various factors, including, but not limited to, the impact of general economic and business conditions; our inability to realize the full value of merchandise currently in inventory as a result of underperforming sales; unanticipated increases in mailing and printing costs; the cost of additional overhead that may be required to expand our brands; changing customer tastes and buying trends; the inherent difficulty in forecasting consumer buying patterns and trends, and the possibility that any improvements in our product margins, or in customer response to our merchandise, may not be sustained; uncertainties related to our multi-channel model, and, in particular, the effects of shifting patterns of e-commerce or retail purchases versus catalog purchases; any significant variations between actual amounts and the amounts estimated for those matters identified as our critical accounting estimates or our other accounting estimates made in the preparation of our financial statements; as well as the various other risk factors set forth in our periodic and other reports filed with the Securities and Exchange Commission. Accordingly, while we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. You are urged to consider all such factors. Except as required by law, we assume no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have significant amounts of cash and cash equivalents invested in deposit accounts at FDIC-insured banks. All of our deposit account balances are currently FDIC-insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As of April 28, 2012, we did not hold any marketable securities and do not own any derivative financial instruments in our portfolio, thus we do not believe there is any market risk exposure with respect to these items.

 

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, April 28, 2012, that our disclosure controls and procedures were effective to ensure both that (i) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Exchange Act, and (ii) information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended April 28, 2012 identified in connection with the evaluation thereof by our Chief Executive Officer and Chief Financial Officer that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

21


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are involved from time to time in litigation incidental to our business and, from time to time, we may make provisions for potential litigation losses. The Company is not a party to any material pending legal proceedings.

The information set forth in Part I, Note 17 to the Notes to Condensed Consolidated Financial Statements contained on page 13 under the caption “Litigation” is incorporated herein by reference.

 

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

Risk factors and the other information are set forth in our most recent Annual Report on Form 10-K and our other periodic reports filed with the Securities Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, and results of operations. Other than response to rules and regulations promulgated by the Securities and Exchange Commission, we assume no obligation (and specifically disclaim any such obligation) to update our risk factors or any other forward-looking statements to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 3. Defaults upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

Not applicable.

 

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Table of Contents
Item 6. Exhibits

 

(A)

  

Exhibits

  31.1    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*
  31.2    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*
  32.1    Certification under section 906 by the Chief Executive Officer.*
  32.2    Certification under section 906 by the Chief Financial Officer.*
101. INS    XBRL Instance Document**
101.SCH    XBRL Taxonomy Extension Schema Document**
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB    XBRL Taxonomy Extension Label Linkbase Document**
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document**

 

* Filed herewith.
** Furnished with this report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    dELiA*s, Inc.

Date: June 7, 2012

    By   /s/ Walter Killough
      Walter Killough
      Chief Executive Officer

Date: June 7, 2012

    By   /s/ David J. Dick
      David J. Dick
      Chief Financial Officer

 

24

XNAS:DLIA dELiA*s, Inc. Quarterly Report 10-Q Filling

dELiA*s, Inc. XNAS:DLIA Stock - Get Quarterly Report SEC Filing of dELiA*s, Inc. XNAS:DLIA stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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