Edgar Filing: CHARMING SHOPPES INC

form10q080407.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 4, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File No. 000-07258

CHARMING SHOPPES, INC.

(Exact name of registrant as specified in its charter)

	PENNSYLVANIA		23-1721355
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	450 WINKS LANE, BENSALEM, PA 19020		(215) 245-9100
	(Address of principal executive offices) (Zip Code)		(Registrant’s telephone number, including Area Code)

NOT APPLICABLE

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

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large Accelerated Filer x

Accelerated Filer o

Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No x

The number of shares outstanding of the issuer’s Common Stock (par value $.10 per share) as of September 4, 2007 was 122,552,663 shares.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	2

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Balance Sheets
	August 4, 2007 and February 3, 2007	2

	Condensed Consolidated Statements of Operations and Comprehensive Income
	Thirteen weeks ended August 4, 2007 and July 29, 2006	3
	Twenty-six weeks ended August 4, 2007 and July 29, 2006	4

	Condensed Consolidated Statements of Cash Flows
	Twenty-six weeks ended August 4, 2007 and July 29, 2006	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Forward-looking Statements	18

	Critical Accounting Policies	20

	Recent Developments	21

	Results of Operations	22

	Liquidity and Capital Resources	29

	Financing	33

	Market Risk	34

	Impact of Recent Accounting Pronouncements	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION	36

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 4.	Submission of Matters to a Vote of Security Holders	38

Item 6.	Exhibits	38

	SIGNATURES	40

	Exhibit Index	41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	August 4,			February 3,
*(In thousands, except share amounts)*	2007			2007
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	233,274		$	143,838
Available-for-sale securities		26,648			1,997
Accounts receivable, net of allowances of $1,575 and $5,083		3,109			33,366
Investment in asset-backed securities		64,846			60,643
Merchandise inventories		405,633			429,433
Deferred advertising		16,441			21,707
Deferred taxes		5,573			4,469
Prepayments and other		131,914			145,385
Total current assets		887,438			840,838

Property, equipment, and leasehold improvements – at cost		1,064,424			996,430
Less accumulated depreciation and amortization		612,824			573,984
Net property, equipment, and leasehold improvements		451,600			422,446

Trademarks and other intangible assets		247,990			249,490
Goodwill		153,370			153,370
Other assets		101,021			44,798
Total assets	$	1,841,419		$	1,710,942

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	165,299		$	178,629
Accrued expenses		191,722			190,702
Current portion – long-term debt		10,035			10,887
Total current liabilities		367,056			380,218

Deferred taxes		57,693			57,340
Other non-current liabilities		151,233			144,722
Long-term debt		306,227			181,124

Stockholders’ equity
Common Stock $.10 par value:
Authorized – 300,000,000 shares
Issued – 151,281,918 shares and 135,762,531 shares		15,128			13,576
Additional paid-in capital		405,114			285,159
Treasury stock at cost – 24,247,572 shares and 12,265,993 shares		(233,552	)		(84,136	)
Accumulated other comprehensive income		3			1
Retained earnings		772,517			732,938
Total stockholders’ equity		959,210			947,538
Total liabilities and stockholders’ equity	$	1,841,419		$	1,710,942

Certain prior-year amounts have been reclassified to conform to the current-year presentation.

*See Notes to Condensed Consolidated Financial Statements*

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Thirteen Weeks Ended
	August 4,			July 29,
*(In thousands, except per share amounts)*	2007			2006

Net sales	$	770,925		$	763,353

Cost of goods sold, buying, catalog, and occupancy expenses		551,332			534,600
Selling, general, and administrative expenses		191,269			176,586
Total operating expenses		742,601			711,186

Income from operations		28,324			52,167

Other income		3,771			2,867
Interest expense		(2,818	)		(3,811	)

Income before income taxes		29,277			51,223
Income tax provision		10,998			18,660

Net income		18,279			32,563

Other comprehensive income, net of tax
Unrealized gains on available-for-sale securities,
net of income tax provision of $4 in 2007 and $1 in 2006		5			1

Comprehensive income	$	18,284		$	32,564

Basic net income per share	$	.15		$	.27

Diluted net income per share	$	.14		$	.24

Certain prior-year amounts have been reclassified to conform to the current-year presentation.

*See Notes to Condensed Consolidated Financial Statements*

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

	Twenty-six Weeks Ended
	August 4,			July 29,
*(In thousands, except per share amounts)*	2007			2006

Net sales	$	1,555,637		$	1,498,275

Cost of goods sold, buying, catalog, and occupancy expenses		1,097,529			1,035,672
Selling, general, and administrative expenses		386,889			358,033
Total operating expenses		1,484,418			1,393,705

Income from operations		71,219			104,570

Other income		5,101			4,414
Interest expense		(6,081	)		(7,935	)

Income before income taxes		70,239			101,049
Income tax provision		25,662			36,425

Net income		44,577			64,624

Other comprehensive income, net of tax
Unrealized gains on available-for-sale securities,
net of income tax provision of $3 in 2007 and $3 in 2006		2			4

Comprehensive income	$	44,579		$	64,628

Basic net income per share	$	.36		$	.53

Diluted net income per share	$	.34		$	.48

Certain prior-year amounts have been reclassified to conform to the current-year presentation.

*See Notes to Condensed Consolidated Financial Statements*

CHARMING SHOPPES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Twenty-six Weeks Ended
	August 4,			July 29,
*(In thousands)*	2007			2006

Operating activities
Net income	$	44,577		$	64,624
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		46,256			45,129
Deferred income taxes		350			1,290
Stock-based compensation		7,760			5,015
Excess tax benefits related to stock-based compensation		(780	)		(2,516	)
Net loss from disposition of capital assets		1,191			139
Net gain from securitization activities		(1,006	)		(451	)
Changes in operating assets and liabilities
Accounts receivable, net		30,257			35,458
Merchandise inventories		23,800			(5,124	)
Accounts payable		(13,330	)		40,423
Deferred advertising		5,266			4,511
Prepayments and other		12,501			(10,888	)
Income taxes payable		0			9,301
Accrued expenses and other		6,690			(11,273	)
Net cash provided by operating activities		163,532			175,638

Investing activities
Investment in capital assets		(74,016	)		(54,971	)
Gross purchases of securities		(30,422	)		(17,127	)
Proceeds from sales of securities		2,579			17,828
Increase in other assets		(9,285	)		(7,719	)
Net cash used by investing activities		(111,144	)		(61,989	)

Financing activities
Proceeds from short-term borrowings		7,395			131,410
Repayments of short-term borrowings		(7,395	)		(161,410	)
Proceeds from issuance of senior convertible notes		275,000			0
Proceeds from long-term borrowings		790			0
Repayments of long-term borrowings		(5,968	)		(7,600	)
Payments of deferred financing costs		(7,541	)		0
Excess tax benefits related to stock-based compensation		780			2,516
Purchase of hedge on senior convertible notes		(90,475	)		0
Sale of Common Stock warrants		53,955			0
Purchases of treasury stock		(149,416	)		0
Funds deposited with third-party for purchases of treasury stock		(40,000	)		0
Net proceeds/(payments) from shares issued under employee stock plans		(77	)		3,122
Net cash provided/(used) by financing activities		37,048			(31,962	)

Increase in cash and cash equivalents		89,436			81,687
Cash and cash equivalents, beginning of period		143,838			130,132
Cash and cash equivalents, end of period	$	233,274		$	211,819

Non-cash financing and investing activities
Common Stock issued on redemption of convertible notes	$	149,564		$	0
Assets acquired through capital leases	$	4,137		$	0

*See Notes to Condensed Consolidated Financial Statements*

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements

We have prepared our condensed consolidated balance sheet as of August 4, 2007, our condensed consolidated statements of operations and comprehensive income for the thirteen weeks and twenty-six weeks ended August 4, 2007 and July 29, 2006, and our condensed consolidated statements of cash flows for the twenty-six weeks ended August 4, 2007 and July 29, 2006 without audit. In our opinion, we have made all adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and comprehensive income, and cash flows. Certain prior-year amounts in the condensed consolidated balance sheets and condensed consolidated statements of operations and comprehensive income have been reclassified to conform to the current-year presentation. We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles. These financial statements and related notes should be read in conjunction with our financial statements and related notes included in our February 3, 2007 Annual Report on Form 10-K. The results of operations for the thirteen weeks and twenty-six weeks ended August 4, 2007 and July 29, 2006 are not necessarily indicative of operating results for the full fiscal year.

As used in these notes, “Fiscal 2008” refers to our fiscal year ending February 2, 2008 and “Fiscal 2007”refers to our fiscal year ended February 3, 2007. “Fiscal 2009” refers to our fiscal year ending January 31, 2009. “Fiscal 2008 Second Quarter” refers to our fiscal quarter ended August 4, 2007 and “Fiscal 2007 Second Quarter” refers to our fiscal quarter ended July 29, 2006. “Fiscal 2008 First Quarter” refers to our fiscal quarter ended May 5, 2007 and “Fiscal 2008 Third Quarter” refers to our fiscal quarter ending November 3, 2007. The terms “Charming Shoppes, Inc.,” “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.

Segment Reporting

We operate and report in two segments: Retail Stores and Direct-to-Consumer. We determine our operating segments based on the way our chief operating decision-makers review our results of operations. We also consider the similarity of economic characteristics, production processes, and operations in aggregating our operating segments. Accordingly, we have aggregated our retail stores and store-related E-commerce operations into a single reporting segment (the “Retail Stores” segment). Our catalog and catalog-related E-commerce operations are reported under the Direct-to-Consumer segment. The Retail Stores segment derives its revenues from sales through retail stores and store-related E-commerce sales under our LANE BRYANT^®(including LANE BRYANT OUTLET™), FASHION BUG^®, CATHERINES PLUS SIZES^®, and PETITE SOPHISTICATE^® (including PETITE SOPHISTICATE OUTLET™) brands. The Direct-to-Consumer segment derives its revenues from catalog sales and catalog-related E-commerce sales under our Crosstown Traders catalogs. See “Note 10. Segment Reporting” below for further information regarding our segment reporting.

Stock-based Compensation

We have various stock-based compensation plans under which we are currently granting awards, which are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 11. Stock-Based Compensation Plans” in our February 3, 2007 Annual Report on Form 10-K.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Shares available for future grants under our stock-based compensation plans as of August 4, 2007:

2004 Stock Award and Incentive Plan			3,983,062
2003 Non-Employee Directors Compensation Plan			122,968
1994 Employee Stock Purchase Plan			1,107,413
1988 Key Employee Stock Option Plan			103,521

Stock option activity for the twenty-six weeks ended August 4, 2007:

				Average							Aggregate
	Option			Option		Option Prices					Intrinsic Value⁽¹⁾
	Shares			Price		Per Share						(000’s)

Outstanding at February 3, 2007		2,217,790		$	5.82	$	1.00	–	$	13.84	$	16,473
Granted – option price less than market price		18,000			1.00		1.00	–		1.00
Canceled/forfeited		(7,268	)		6.19		1.00	–		11.28
Exercised		(98,148	)		5.58		1.00	–		8.46		664	⁽²⁾
Outstanding at August 4, 2007		2,130,374		$	5.79	$	1.00	–	$	13.84	$	7,262
Exercisable at August 4, 2007		2,064,612		$	5.94	$	1.00	–	$	13.84	$	6,722
____________________
(1) Aggregate market value less aggregate exercise price.
(2) As of date of exercise.

Stock-based compensation expense for the thirteen weeks and twenty-six weeks ended August 4, 2007 and July 29, 2006 includes (i) compensation cost for all partially-vested stock-based awards granted prior to the beginning of Fiscal 2007, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and (ii) compensation cost for all stock-based awards granted subsequent to the beginning of Fiscal 2007, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), a revision of SFAS No. 123. Current grants of stock-based compensation consist primarily of restricted stock and restricted stock unit awards.

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 4,		July 29,		August 4,		July 29,
*(In thousands)*	2007		2006		2007		2006

Total stock-based compensation expense	$	4,836	$	2,464	$	7,760	$	5,015

We use the Black-Scholes valuation model to estimate the fair value of stock options, and amortize stock-based compensation on a straight-line basis over the estimated life of a stock option or the vesting period of an award. Stock-based compensation for performance-based awards is initially determined using an estimate of performance levels expected to be achieved and is periodically reviewed and adjusted as required. Estimates or assumptions we used under the Black-Scholes model are more fully described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies; Stock-based Compensation” in our February 3, 2007 Annual Report on Form 10-K.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1. Condensed Consolidated Financial Statements (Continued)

Total stock-based compensation not yet recognized, related to the non-vested portion of stock options and awards outstanding, was $21,780,000 as of August 4, 2007. The weighted-average period over which we expect to recognize this compensation is approximately 3 years.

Crosstown Traders Integration Plan

Concurrent with our acquisition of Crosstown Traders (see “Item 8. Financial Statements and Supplementary Data; Note 2. Acquisition of Crosstown Traders, Inc.” in our February 3, 2007 Annual Report on Form 10-K), we prepared a formal integration plan for Crosstown Traders’ operations that included exiting and consolidating certain activities of Crosstown Traders, lease terminations, severance, and certain other exit costs. As of January 28, 2006, we finalized the plan and recorded a liability for the costs of the plan, which we recorded as a component of the purchase price of the acquisition in accordance with FASB Emerging Issues Task Force (“EITF”) Issue 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”

Liabilities recorded in connection with the integration plan outstanding as of February 3, 2007, payments or settlements of these liabilities for the twenty-six weeks ended August 4, 2007, and the remaining accrual as of August 4, 2007 were as follows:

	Balance at		Twenty-six Weeks Ended			Balance at
	February 3,		August 4, 2007			August 4,
*(In thousands)*	2007		Payments/Settlements			2007

Lease termination and related costs	$	1,820	$	(403	)	$	1,417
Other costs		239		(82	)		157
Total	$	2,059	$	(485	)	$	1,574

Subsequent to the Fiscal 2008 Second Quarter, we reached an agreement with the landlord to terminate the lease on Crosstown Traders’ manufacturing facility for approximately $600,000. Accordingly, the lease termination liability, goodwill, and deferred taxes will be adjusted in the Fiscal 2008 Third Quarter to reflect the settlement and termination of the lease.

Note 2. Accounts Receivable

Accounts receivable consist of trade receivables from sales through our FIGI’S^® catalog. Details of our accounts receivable are as follows:

	August 4,			February 3,
*(In thousands)*	2007			2007

Due from customers	$	4,684		$	38,449
Allowance for doubtful accounts		(1,575	)		(5,083	)
Net accounts receivable	$	3,109		$	33,366

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3. Trademarks and Other Intangible Assets

	August 4,		February 3,
*(In thousands)*	2007		2007

Trademarks, tradenames, and internet domain names	$	241,988	$	241,850
Customer lists, customer relationships, and covenant not to compete		16,400		16,400
Total at cost		258,388		258,250
Less accumulated amortization of customer lists, customer
relationships, and covenant not to compete		10,398		8,760
Net trademarks and other intangible assets	$	247,990	$	249,490

Note 4. Long-term Debt

	August 4,		February 3,
*(In thousands)*	2007		2007

1.125% Senior Convertible Notes, due May 2014	$	275,000	$	0
4.75% Senior Convertible Notes, due June 2012⁽¹⁾		0		149,999
Capital lease obligations		13,524		12,853
6.07% mortgage note, due October 2014		11,390		11,696
6.53% mortgage note, due November 2012		7,350		8,050
7.77% mortgage note, due December 2011		8,202		8,496
Other long-term debt		796		917
Total long-term debt		316,262		192,011
Less current portion		10,035		10,887
Long-term debt	$	306,227	$	181,124
____________________
(1) On April 30, 2007, we called these notes for redemption on June 4, 2007 (see below).

On April 30, 2007, we issued $250,000,000 in aggregate principal amount of 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125% Notes”) in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On May 11, 2007, the initial purchasers of the 1.125% Notes exercised their over-allotment option and purchased an additional $25,000,000 in aggregate principal amount of the notes. The 1.125% Notes were issued at par plus accrued interest, if any, from April 30, 2007, and interest is payable semiannually in arrears on May 1 and November 1, beginning November 1, 2007. The 1.125% Notes will mature on May 1, 2014, unless earlier repurchased by us or converted.

We received combined proceeds of approximately $268,125,000 from the issuance, net of underwriting fees of approximately $6,875,000. The underwriting fees, as well as additional transaction costs of $666,000 incurred in connection with the issuance of the 1.125% Notes, are included in “Other assets” on our condensed consolidated balance sheets, and amortized to interest expense on an effective interest rate basis over the life of the notes (seven years).

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

Holders of the 1.125% Notes may convert their notes based on a conversion rate of 65.0233 shares of our Common Stock per $1,000 principal amount of notes (the equivalent of $15.379 per share), subject to adjustment upon certain events, only under the following circumstances as described in the Indenture for the 1.125% Notes (the “Indenture”): (1) during specified periods, if the price of our Common Stock reaches specified thresholds; (2) if the trading price of the 1.125% Notes is below a specified threshold; (3) at any time after November 15, 2013; or (4) upon the occurrence of certain corporate transactions.

Upon conversion, we intend to deliver an amount in cash equal to the lesser of the aggregate principal amount of notes to be converted and our total conversion obligation. If our conversion obligation exceeds the aggregate principal amount of the 1.125% Notes, we will deliver shares of our Common Stock in respect of the excess. However, we have the option, subject to the approval of our Board of Directors, to elect to satisfy our conversion obligation entirely in shares of our Common Stock. In connection with a “Fundamental Change” as defined in the Indenture, we also will deliver upon conversion of the notes additional shares of Common Stock as described in the Indenture. In addition, if we undergo a Fundamental Change before maturity of the 1.125% Notes, we may be required to repurchase for cash all or a portion of the 1.125% Notes at a repurchase price of 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, including additional amounts, if any, up to but excluding the date of purchase. As of August 4, 2007, none of the conditions allowing holders of the 1.125% Notes to convert had been met.

We are required to file a shelf registration statement with the Securities and Exchange Commission (“SEC”) covering resales of the 1.125% Notes and the shares of our Common Stock issuable on conversion of the notes. If we are not eligible to use an automatic shelf registration statement, we are required to use our reasonable efforts to cause the shelf registration statement to become effective no later than 210 days after the first date of original issuance of the notes. If we fail to meet these terms, we will be required to pay additional interest on the 1.125% Notes in an amount of up to 0.50% per annum. On August 24, 2007 (subsequent to the end of the Fiscal 2008 Second Quarter), we filed with the SEC an automatic shelf registration statement covering resales of the 1.125% Notes and the shares issuable on conversion of the notes.

We accounted for the issuance of the 1.125% Notes in accordance with the guidance in EITF Issue 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion” and EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Accordingly, we have recorded the 1.125% Notes as long-term debt in our condensed consolidated balance sheet as of August 4, 2007.

Concurrently with the issuance of the 1.125% Notes, we entered into privately negotiated Common Stock call options with affiliates of the initial purchasers. The call options allow us to purchase up to approximately 17,881,000 shares of our Common Stock at an initial strike price of $15.379 per share. The call options expire on May 1, 2014 and must be net-share settled. The cost of the call options was approximately $90,475,000.

In addition, we sold warrants to affiliates of certain of the initial purchasers whereby they have the option to purchase up to approximately 18,775,000 shares of our Common Stock at an initial strike price of $21.607 per share. The warrants expire on various dates from July 30, 2014 through December 18, 2014 and must be net-share settled. We received approximately $53,955,000 in cash proceeds from the sale of these warrants.

The call options are intended to reduce the potential dilution to our Common Stock upon conversion of the 1.125% Notes by effectively increasing the initial conversion price of the notes to $21.607 per share, representing a 73.0% conversion premium over the closing price of $12.49 per share for our Common Stock on April 30, 2007.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

Paragraph 11(a) of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” provides that contracts issued or held by an entity that are both (1) indexed to the entity’s own common stock and (2) classified in stockholders’ equity in its statement of financial position are not considered to be derivative instruments under SFAS No. 133 if the provisions of EITF Issue 00-19 are met.

We accounted for the call options and warrants in accordance with the guidance in EITF Issue 00-19. The call options and warrants meet the requirements of EITF Issue 00-19 to be accounted for as equity instruments. Accordingly, the cost of the call options and the proceeds from the sale of the warrants are included in additional paid-in capital in our accompanying condensed consolidated balance sheet as of August 4, 2007. We used a portion of the net proceeds from the 1.125% Notes to pay the $36,520,000 net cost of the call options and warrants.

During the Fiscal 2008 First Quarter, we repurchased 10,315,000 shares of our Common Stock with $131,102,000 of the proceeds from our issuance of the 1.125% Notes. In May 2007, we announced that we intend to use an additional $80 to $100 million of the proceeds to repurchase additional shares of Common Stock through the remainder of Fiscal 2008. During the Fiscal 2008 Second Quarter, we repurchased 1,667,000 shares of Common Stock in the open market for $18,314,000.

During the Fiscal 2008 Second Quarter, we also deposited $40,000,000 with a third-party financial institution under an agreement that provides the third party with discretionary authority to purchase shares of our Common Stock on our behalf. As of the end of the Fiscal 2008 Second Quarter, the $40,000,000 deposit with the third-party financial institution was recorded as a component of “Other assets” on our condensed consolidated balance sheet and as cash used by financing activities in our condensed consolidated statement of cash flows. Subsequent to the end of the Fiscal 2008 Second Quarter, the third-party financial institution completed the purchase of approximately 4 million shares of our Common Stock in accordance with the agreement. During the remainder of Fiscal 2008, as market conditions allow, we intend to repurchase additional shares of our Common Stock with an aggregate market value of approximately $40,000,000 in the open market or in privately negotiated transactions.

In accordance with SFAS No. 128, “Earnings Per Share,” the 1.125% Notes will have no impact on our diluted net income per share until the price of our Common Stock exceeds the conversion price of $15.379 per share because the principal amount of the 1.125% Notes will be settled in cash upon conversion. Prior to conversion, we will include the effect of the additional shares that may be issued if our Common Stock price exceeds $15.379 per share using the treasury stock method. For the first $1.00 by which the price of our Common Stock exceeds $15.379 per share, there would be dilution of approximately 1,093,000 shares. Further increases in the share price would result in additional dilution at a declining rate, such that a price of $21.607 per share would result in cumulative dilution of approximately 5,156,000 shares. Should the stock price exceed $21.607 per share, we would also include the dilutive effect of the additional potential shares that may be issued related to the warrants, using the treasury stock method. The 1.125% Notes and warrants would have a combined dilutive effect such that, for the first $1.00 by which the stock price exceeds $21.607 per share, there would be cumulative dilution of approximately 6,552,000 shares prior to conversion. Further increases in the share price would result in additional dilution at a declining rate.

The call options are not included in the calculation of diluted net income per share because their effect would be anti-dilutive. Upon conversion of the 1.125% Notes, the call options will serve to neutralize the dilutive effect of the notes up to a stock price of $21.607 per share. For the first $1.00 by which the stock price exceeds $21.607 per share, the call options would reduce the cumulative dilution of approximately 6,552,000 shares in the example above to approximately 833,000 shares.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Long-term Debt (Continued)

The preceding calculations assume that the average price of our Common Stock exceeds the respective conversion prices during the period for which diluted net income per share is calculated, and exclude any potential adjustments to the conversion ratio provided under the terms of the 1.125% Notes.

On April 30, 2007, we called for the redemption on June 4, 2007 of our $149,999,000 outstanding aggregate principal amount of 4.75% Senior Convertible Notes, due June 2012 (the “4.75% Notes”). The holders of the 4.75% Notes had the option to convert their notes into shares of our Common Stock at a conversion price of $9.88 per share until the close of business on June 1, 2007. As of June 4, 2007, the holders of $149,956,000 principal amount of the 4.75% Notes had exercised their right to convert their notes into an aggregate of 15,145,556 shares of our Common Stock and the remaining notes were redeemed for $43,000. In addition, we paid $392,000 in lieu of fractional shares.

Note 5. Stockholders’ Equity

	Twenty-six
	Weeks Ended
	August 4,
*(Dollars in thousands)*	2007

Total stockholders’ equity, beginning of period	$	947,538
Cumulative effect of adoption of FIN No. 48⁽¹⁾		(4,998	)
Net income		44,577
Net proceeds/(payments) from shares issued under employee stock plans (373,831 shares)		(77	)
Purchase of treasury shares (11,981,579 shares)⁽²⁾		(149,416	)
Common Stock issued (15,145,556 shares) on redemption of convertible notes		149,564
Sale of Common Stock warrants⁽²⁾		53,955
Purchase of Common Stock call options⁽²⁾		(90,475	)
Stock-based compensation expense		7,760
Excess tax benefits related to stock-based compensation		780
Unrealized gains on available-for-sale securities, net of tax		2
Total stockholders’ equity, end of period	$	959,210
____________________
(1) See *“Note 8. Income Taxes”* below.
(2) See *“Note 4. Long-term Debt”* above.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6. Customer Loyalty Card Programs

We offer our customers various loyalty card programs. Customers that join these programs are entitled to various benefits, including discounts and rebates on purchases during the membership period. Customers generally join these programs by paying an annual membership fee. We recognize revenue from these loyalty programs as sales over the life of the membership period based on when the customer earns the benefits and when the fee is no longer refundable. We recognize costs in connection with administering these programs as cost of goods sold when incurred. During the thirteen weeks ended August 4, 2007 we recognized revenues of $5,309,000 and during the thirteen weeks ended July 29, 2006 we recognized revenues of $5,101,000 in connection with our loyalty card programs. During the twenty-six weeks ended August 4, 2007 we recognized revenues of $11,011,000 and during the twenty-six weeks ended July 29, 2006 we recognized revenues of $9,171,000 in connection with our loyalty card programs.

Note 7. Net Income per Share

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	August 4,			July 29,		August 4,			July 29,
*(In thousands, except per share amounts)*	2007			2006		2007			2006

Basic weighted average common shares outstanding		123,865			122,125		123,434			121,969
Dilutive effect of assumed conversion of
4.75% Senior Convertible Notes		4,838	⁽¹⁾		15,182		10,010	⁽¹⁾		15,182
Dilutive effect of stock options and awards		1,533			2,047		1,643			2,240
Diluted weighted average common shares
and equivalents outstanding		130,236			139,354		135,087			139,391

Net income	$	18,279		$	32,563	$	44,577		$	64,624
Decrease in interest expense from assumed
conversion of 4.75% Senior Convertible
Notes, net of income taxes		347	⁽¹⁾		1,128		1,476	⁽¹⁾		2,257
Net income used to determine diluted
net income per share	$	18,626		$	33,691	$	46,053		$	66,881

Options with weighted average exercise price
greater than market price, excluded from
computation of net income per share:
Number of shares		5			4		4			1
Weighted average exercise price per share	$	12.17		$	12.87	$	12.87		$	13.84
____________________
(1) The notes were converted or redeemed on June 4, 2007 (see “Note 4. Long-term Debt”* above).*

Our 1.125% Notes have no impact on our diluted net income per share until the price of our Common Stock exceeds the conversion price of $15.379 per share because we expect to settle the principal amount of the 1.125% Notes in cash upon conversion. The call options are not included in the calculation of diluted net income per share because their effect would be anti-dilutive. Should the price of our Common Stock exceed $21.607 per share, we would also include the dilutive effect of the additional potential shares that may be issued related to the warrants, using the treasury stock method. See “Note 4. Long-term Debt” above for further information regarding the 1.125% Notes, related call options and warrants, and the conversion of our 4.75% Notes.

See “Note 4. Long-term Debt” above for further information regarding repurchases of our Common Stock.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Income Taxes

The effective income tax rate was 36.5% for the twenty-six weeks ended August 4, 2007, as compared to 36.0% for the twenty-six weeks ended July 29, 2006.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, expanded disclosures regarding tax uncertainties, and transition.

FIN No. 48 applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income Taxes.” Under FIN No. 48, recognition of a tax benefit occurs when a tax position is more-likely-than-not to be sustained upon examination, based solely on its technical merits. The recognized benefit is measured as the largest amount of benefit which is more-likely-than-not to be realized on ultimate settlement, based on a cumulative probability basis. A tax position failing to qualify for initial recognition is recognized in the first interim period in which it meets the FIN No. 48 recognition standard, or is resolved through negotiation, litigation, or upon expiration of the statute of limitations. De-recognition of a previously recognized tax position would occur if it is subsequently determined that the tax position no longer meets the more-likely-than-not threshold of being sustained. Differences between amounts recognized in balance sheets prior to the adoption of FIN No. 48 and amounts reported after adoption (except for items not recognized in earnings) are accounted for as a cumulative-effect adjustment to retained earnings as of the date of adoption of FIN No. 48, if material.

We adopted the provisions of FIN No. 48 effective as of February 4, 2007. In accordance with FIN No. 48, we recognized a cumulative-effect adjustment of $4,998,000, increasing our liability for unrecognized tax benefits, interest, and penalties and reducing the February 4, 2007 balance of retained earnings.

As of February 4, 2007, we had $44,203,000 of gross unrecognized tax benefits. If recognized, the portion of the liabilities for gross unrecognized tax benefits that would decrease our provision for income taxes and increase our net income is $15,106,000. We record interest and penalties related to unrecognized tax benefits in income tax expense. As of the date of adoption of FIN No. 48, we had accrued interest and penalties of $7,412,000. During the twenty-six weeks ended August 4, 2007, there was no material change in either the unrecognized tax benefits or accrued interest and penalties. We expect that the amount of unrecognized tax benefits will change within the next 12 months. Although we cannot determine the amount of the change at this time, based on currently available information we do not expect the change to have a material impact on our financial position or results of operations.

Our U.S. Federal income tax returns for Fiscal 2004 and beyond remain subject to examination by the U.S. Internal Revenue Service (“IRS”). The IRS is not currently examining any of our tax returns. We file returns in numerous state jurisdictions, with varying statutes of limitations. Our state tax returns for Fiscal 2003 and beyond, depending upon the jurisdiction, remain subject to examination. The statute of limitations on a limited number of returns for years prior to Fiscal 2003 has been extended by agreement between us and the particular state jurisdiction. The earliest year still subject to examination by state tax authorities is Fiscal 1999.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9. Asset Securitization

Our FASHION BUG, CATHERINES, and PETITE SOPHISTICATE proprietary credit card receivables are originated by Spirit of America National Bank (the “Bank”), our wholly-owned credit card bank, which transfers its interest in the receivables to the Charming Shoppes Master Trust (the “Trust”) through a separate and distinct special-purpose entity. The Trust is an unconsolidated qualified special-purpose entity (“QSPE”). Through Fiscal 2007, our Crosstown Traders apparel-related catalog proprietary credit card receivables, which we securitized subsequent to our acquisition of Crosstown Traders, were originated in a non-bank program by Crosstown Traders. Crosstown Traders transferred its interest in the receivables to Catalog Receivables LLC, a separate and distinct unconsolidated QSPE, through a separate and distinct special-purpose entity. On February 5, 2007, the Bank acquired the account relationships of the Crosstown Traders catalog proprietary credit cards and all subsequent new receivables are originations of the Bank. This acquisition did not cause a change in the securitization entities used by the Crosstown Traders proprietary credit card program.

The QSPEs can sell interests in these receivables on a revolving basis for a specified term. At the end of the revolving period, an amortization period begins during which the QSPEs make principal payments to the parties that have entered into the securitization agreement with the QSPEs. All assets of the QSPEs (including the receivables) are isolated and support the securities issued by those entities. Our asset securitization program is more fully described in “Item 8. Financial Statements and Supplementary Data; Note 16. Asset Securitization” in our February 3, 2007 Annual Report on Form 10-K.

Note 10. Segment Reporting

We operate and report in two segments: Retail Stores and Direct-to-Consumer (see “Note 1. Condensed Consolidated Financial Statements; Segment Reporting” above). The accounting policies of the segments are generally the same as those described in “Item 8. Financial Statements and Supplementary Data; Note 1. Summary of Significant Accounting Policies” in our February 3, 2007 Annual Report on Form 10-K. Our chief operating decision-makers evaluate the performance of our operating segments based on a measure of their contribution to operations, which consists of net sales less the cost of merchandise sold and certain directly identifiable and allocable operating costs. We do not allocate certain corporate costs, such as shared service costs, information systems support costs, and insurance costs to our Retail Stores or Direct-to-Consumer segments. For our Retail Stores segment, operating costs consist primarily of store selling, buying, and occupancy costs; and warehousing costs. For our Direct-to-Consumer segment, operating costs consist primarily of catalog development, production, and circulation costs; E-commerce advertising costs; warehousing costs; and order processing costs.

“Corporate and Other” includes unallocated general and administrative costs; shared service center costs; insurance costs; information systems support costs; corporate depreciation and amortization; corporate occupancy costs; the results of our proprietary credit card operations; and other non-routine charges. Operating contribution for the Retail Stores and Direct-to-Consumer segments less Corporate and Other net expenses equals income before interest and taxes.

Operating segment assets are those directly used in, or allocable to, that segment’s operations. For the Retail Stores segment, operating assets consist primarily of inventories; the net book value of store facilities; and goodwill and intangible assets. For the Direct-to-Consumer segment, operating assets consist primarily of trade receivables; inventories; deferred advertising costs; the net book value of catalog operating facilities; and goodwill and intangible assets. Corporate and Other assets include corporate cash and cash equivalents; the net book value of corporate facilities; deferred income taxes; and other corporate long-lived assets.

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Segment Reporting (Continued)

Selected financial information for our operations by reportable segment and a reconciliation of the information by segment to our consolidated totals is as follows:

	Retail		Direct-to-			Corporate
*(In thousands)*	Stores		Consumer			and Other			Consolidated

Thirteen weeks ended August 4, 2007
Net sales	$	686,455	$	81,693		$	2,777		$	770,925
Depreciation and amortization		14,420		366			8,726			23,512
Income before interest and taxes		70,814		(4,401	)		(34,318	)		32,095
Interest expense							(2,818	)		(2,818	)
Income tax provision							(10,998	)		(10,998	)
Net income		70,814		(4,401	)		(48,134	)		18,279
Capital expenditures		25,758		683			10,064			36,505

Twenty-six weeks ended August 4, 2007
Net sales	$	1,371,977	$	180,065		$	3,595		$	1,555,637
Depreciation and amortization		26,781		724			18,751			46,256
Income before interest and taxes		144,844		(2,911	)		(65,613	)		76,320
Interest expense							(6,081	)		(6,081	)
Income tax provision							(25,662	)		(25,662	)
Net income		144,844		(2,911	)		(97,356	)		44,577
Capital expenditures		55,592		810			17,614			74,016

Thirteen weeks ended July 29, 2006
Net sales	$	669,808	$	92,348		$	1,197		$	763,353
Depreciation and amortization		15,383		299			9,289			24,971
Income before interest and taxes		72,455		5,064			(22,485	)		55,034
Interest expense							(3,811	)		(3,811	)
Income tax provision							(18,660	)		(18,660	)
Net income		72,455		5,064			(44,956	)		32,563
Capital expenditures		22,698		1,160			7,259			31,117

Twenty-six weeks ended July 29, 2006
Net sales	$	1,297,212	$	199,753		$	1,310		$	1,498,275
Depreciation and amortization		26,477		567			18,085			45,129
Income before interest and taxes		147,668		10,174			(48,858	)		108,984
Interest expense							(7,935	)		(7,935	)
Income tax provision							(36,425	)		(36,425	)
Net income		147,668		10,174			(93,218	)		64,624
Capital expenditures		38,111		1,188			15,672			54,971

CHARMING SHOPPES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Impact of Recent Accounting Pronouncements

In September 2006, the FASB ratified the consensus of EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Agreements.” EITF Issue No. 06-4 addresses accounting for separate agreements that split life insurance policy benefits between an employer and an employee. EITF Issue No. 06-4 requires employers to recognize a liability for future benefits payable to the employee under such agreements. The effect of applying the provisions of Issue No. 06-4 should be recognized either through a change in accounting principle by a cumulative-effect adjustment to equity or through the retrospective application to all prior periods. The provisions of EITF Issue No. 06-4 will be effective as of the beginning of Fiscal 2009, with earlier application permitted. We have not yet determined the impact of adoption on our consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides a single definition of fair value, along with a framework for measuring it, and requires additional disclosure about using fair value to measure assets and liabilities. SFAS No. 157 emphasizes that fair value measurement is market-based, not entity-specific, and establishes a fair value hierarchy which places the highest priority on the use of quoted prices in active markets to determine fair value. It also requires, among other things, that entities are to include their own credit standing when measuring their liabilities at fair value.

We will be required to adopt the provisions of SFAS No. 157 prospectively, effective as of the beginning of Fiscal 2009. We are evaluating the impact that adoption of SFAS No. 157 would have on our financial condition or results of operations.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” which clarifies when a tax position is considered to be “settled” under FIN No. 48. Under FSP FIN 48-1, a tax position can be “effectively settled” upon completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, we would recognize the full amount of the tax benefit, even if (1) the tax position is not considered more-likely-than-not to be sustained solely on the basis of its technical merits, and (2) the statute of limitations remains open. In applying the provisions of the FSP, we are required to document our analyses and conclusions. The provisions of FSP FIN 48-1 are effective upon adoption of FIN No. 48. The adoption of FSP FIN 48-1 did not have a material effect on our financial condition or results of operations.

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

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included in Item 1 of this report. It should also be read in conjunction with the management’s discussion and analysis of financial condition and results of operations, financial statements, and accompanying notes appearing in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007. As used in this management’s discussion and analysis, “Fiscal 2008” refers to our fiscal year ending February 2, 2008 and “Fiscal 2007” refers to our fiscal year ended February 3, 2007. “Fiscal 2008 Second Quarter” refers to our thirteen week fiscal period ended August 4, 2007 and “Fiscal 2007 Second Quarter” refers to our thirteen week fiscal period ended July 29, 2006. “Fiscal 2008 First Quarter” refers to our thirteen week fiscal period ended May 5, 2007. “Fiscal 2008 Third Quarter” refers to our thirteen-week fiscal period ending November 3, 2007 and “Fiscal 2008 Fourth Quarter” refers to our thirteen-week fiscal period ending February 2, 2008. “Fiscal 2008 First Half” refers to our twenty-six week fiscal period ended August 4, 2007 and “Fiscal 2007 First Half” refers to our twenty-six week fiscal period ended July 29, 2006. The terms “Charming Shoppes, Inc.,” “the Company,” “we,” “us,” and “our” refer to Charming Shoppes, Inc. and its consolidated subsidiaries, except where the context otherwise requires or as otherwise indicated.

FORWARD-LOOKING STATEMENTS

With the exception of historical information, the matters contained in the following analysis and elsewhere in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of revenues, income or loss, cost reductions, capital expenditures, liquidity, financing needs or plans, and plans for future operations, as well as assumptions relating to the foregoing. The words “expect,” “could,” “should,” “project,” “estimate,” “predict,” “anticipate,” “plan,” “intend,” “believes,” and similar expressions are also intended to identify forward-looking statements.

We operate in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors that may affect us. Forward-looking statements are inherently subject to risks and uncertainties, some of which we cannot predict or quantify. Future events and actual results, performance and achievements could differ materially from those set forth in, contemplated by or underlying the forward-looking statements, which speak only as of the date on which they were made. We assume no obligation to update or revise any forward-looking statement to reflect actual results or changes in, or additions to, the factors affecting such forward-looking statements. Given those risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Factors that could cause our actual results of operations or financial condition to differ from those described in this report include, but are not necessarily limited to, the following:

·	Our business is dependent upon our ability to accurately predict rapidly changing fashion trends, customer preferences, and other fashion-related factors, which we may not be able to successfully accomplish in the future.

·	A slowdown in the United States economy, an uncertain economic outlook, and escalating energy costs could lead to reduced consumer demand for our products in the future.

·	The women’s specialty retail apparel and direct-to-consumer markets are highly competitive and we may be unable to compete successfully against existing or future competitors.

·	We cannot assure the successful implementation of our business plan for Crosstown Traders, including the successful launch of our LANE BRYANT catalog.

·	We cannot assure the successful implementation of our business plans for entry into the outlet store distribution channel and expansion of our CACIQUE^®product line through new store formats.

·	We cannot assure the successful implementation of our business plan for increased profitability and growth in our Retail Stores or Direct-to-Consumer segments. Recent changes in management may fail to achieve improvement in our operating results.

·	Our business plan is largely dependent upon continued growth in the plus-size women’s apparel market, which may not occur.

·	We depend on key personnel, particularly our Chief Executive Officer, Dorrit J. Bern, and we may not be able to retain or replace these employees or recruit additional qualified personnel.

We depend on our distribution and fulfillment centers and third-party freight consolidators and service providers, and could incur significantly higher costs and longer lead times associated with distributing our products to our stores and shipping our products to our E-commerce and catalog customers if operations at any of these locations were to be disrupted for any reason.

We depend on the availability of credit for our working capital needs, including credit we receive from our suppliers and their agents, and on our credit card securitization facilities. As a result of investor concerns regarding current disruptions in the securitization market, we cannot assure you that we will be able to enter into financing arrangements on terms and conditions that are favorable to us. An inability to enter into a favorable securitization series or satisfactory alternative financing arrangements could adversely affect our financial condition.

·	Natural disasters, as well as war, acts of terrorism, or other armed conflict, or the threat of either may negatively impact availability of merchandise and customer traffic to our stores, or otherwise adversely affect our business.

We rely significantly on foreign sources of production and face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad. Such risks include (but are not necessarily limited to) political instability; imposition of, or changes in, duties or quotas; trade restrictions; increased security requirements applicable to imports; delays in shipping; increased costs of transportation; and issues relating to compliance with domestic or international labor standards.

Our Retail Stores and Direct-to-Consumer segments experience seasonal fluctuations in net sales and operating income. Any decrease in sales or margins during our peak sales periods, or in the availability of working capital during the months preceding such periods, could have a material adverse effect on our business. In addition, extreme or unseasonable weather conditions may have a negative impact on our sales.

·	We may be unable to obtain adequate insurance for our operations at a reasonable cost.

·	We may be unable to protect our trademarks and other intellectual property rights, which are important to our success and our competitive position.

We may be unable to hire and retain a sufficient number of suitable sales associates at our stores. In addition, we are subject to the Fair Labor Standards Act and various state and Federal laws and regulations governing such matters as minimum wages, exempt status classification, overtime, and employee benefits. Changes in Federal or state laws or regulations regarding minimum wages or other employee benefits could cause us to incur additional wage and benefit costs, which could adversely affect our results of operations.

·	Our manufacturers may be unable to manufacture and deliver merchandise to us in a timely manner or to meet our quality standards.

·	Our Retail Stores segment sales are dependent upon a high volume of traffic in the strip centers and malls in which our stores are located, and our future retail store growth is dependent upon the availability of suitable locations for new stores.

Inadequate systems capacity, a disruption or slowdown in telecommunications services, changes in technology, changes in government regulations, systems issues, security breaches, a failure to integrate order management systems, or customer privacy issues could result in reduced sales or increases in operating expenses as a result of our efforts or our inability to remedy such issues.

·	Successful operation of our E-commerce websites and our catalog business is dependent on our ability to maintain efficient and uninterrupted customer service and fulfillment operations.

·	We may be unable to manage significant increases in certain costs vital to catalog operations, including postage, paper, and acquisition of prospects, which could adversely affect our results of operations.

·	Response rates to our catalogs and access to new customers could decline, which would adversely affect our net sales and results of operations.

·	We may be unable to successfully implement our plan to improve merchandise assortments in our Retail Stores or Direct-to-Consumer segments.

We make certain significant assumptions, estimates, and projections related to the useful lives of our property, plant, and equipment and the valuation of intangible assets related to acquisitions. The carrying amount and/or useful life of these assets are subject to periodic valuation tests for impairment. Impairment results when the carrying value of an asset exceeds the undiscounted (or for goodwill and indefinite-lived intangible assets the discounted) future cash flows associated with the asset. If actual experience were to differ materially from the assumptions, estimates, and projections used to determine useful lives or the valuation of property, plant, equipment, or intangible assets, a write-down for impairment of the carrying value of the assets, or acceleration of depreciation or amortization of the assets, could result. Such a write-down or acceleration of depreciation or amortization would have an adverse impact on our reported results of operations.

·	Changes to existing accounting rules or the adoption of new rules could have an adverse impact on our reported results of operations.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include our assessment of the effectiveness of our internal control over financial reporting in our annual reports. Our independent registered public accounting firm is also required to report on whether or not they believe that we maintained, in all material respects, effective internal control over financial reporting. If we are unable to maintain effective internal control over financial reporting we could be subject to regulatory sanctions and a possible loss of public confidence in the reliability of our financial reporting. Such a failure could result in our inability to provide timely and/or reliable financial information and could adversely affect our business.

The holders of our 1.125% Senior Convertible Notes due May 1, 2014 (the “1.125% Notes”) could require us to repurchase the principal amount of the notes for cash before maturity of the notes upon the occurrence of a “Fundamental Change,” as defined in the indenture relating to the 1.125% Notes. Such a repurchase would require significant amounts of cash and could adversely affect our financial condition.

The Financial Accounting Standards Board (“FASB”) has issued a proposed Staff Position (“FSP”) that, if adopted, would apply to any convertible debt instrument that may be settled in whole or in part with cash upon conversion, which would include our 1.125% Notes. We would be required to adopt the proposal as of February 3, 2008 (the beginning of Fiscal 2009), with retrospective application to financial statements for periods prior to the date of adoption. As compared to our current accounting for the 1.125% Notes, adoption of the proposal would reduce long-term debt, increase stockholders’ equity, and reduce net income and earnings per share. Adoption of the proposal would not affect our cash flows.

CRITICAL ACCOUNTING POLICIES

We have prepared the financial statements and accompanying notes included in Item 1 of this report in conformity with United States generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates and assumptions are based on historical experience, analysis of current trends, and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions.

We periodically reevaluate our accounting policies, assumptions, and estimates and make adjustments when facts and circumstances warrant. Historically, actual results have not differed materially from those determined using required estimates. Our critical accounting policies are discussed in the management’s discussion and analysis of financial condition and results of operations and notes accompanying the consolidated financial statements that appear in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007. Except as disclosed below and in the financial statements and accompanying notes included in Item 1 of this report, there were no material changes in, or additions to, our critical accounting policies or in the assumptions or estimates we used to prepare the financial information appearing in this report.

Senior Convertible Notes

On April 30, 2007, we issued $250.0 million in aggregate principal amount of our 1.125% Notes in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On May 11, 2007, the initial purchasers of the 1.125% Notes exercised their over-allotment option and purchased an additional $25.0 million in aggregate principal amount of the notes. See “Notes to Condensed Consolidated Financial Statements; Note 4. Long-term Debt” above for further details of the transaction.

We will be required to monitor the 1.125% Notes, call options, and warrants for compliance with the provisions of EITF Issue 00-19 and paragraph 11(a) of SFAS No. 133 on a quarterly basis. Should the issuance of the 1.125% Notes, the purchase of the call options, or the sale of the warrants fail to qualify under the provisions of EITF Issue 00-19 or paragraph 11(a) of SFAS No. 133, we would be required to recognize derivative instruments in connection with the transaction, include the effects of the transaction in assets or liabilities instead of equity, and recognize changes in the fair values of the assets or liabilities in consolidated net income as they occur until the provisions of EITF Issue 00-19 and paragraph 11(a) of SFAS No. 133 are met.

Income Taxes

We adopted the provisions of FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” effective as of February 4, 2007 (see “Notes to Condensed Consolidated Financial Statements; Note 8. Income Taxes” above).

RECENT DEVELOPMENTS

During the Fiscal 2008 Second Quarter, we deposited $40.0 million with a third-party financial institution under an agreement that provides the third party with discretionary authority to purchase shares of our Common Stock on our behalf. Subsequent to the end of the Fiscal 2008 Second Quarter, the third-party financial institution completed the purchase of approximately 4.0 million shares of our Common Stock in accordance with the agreement. During the remainder of Fiscal 2008, as market conditions allow, we intend to repurchase additional shares of our Common Stock with an aggregate market value of approximately $40.0 million in the open market or in privately negotiated transactions.

See “Notes to Condensed Consolidated Financial Statements; Note 4. Long-term Debt” above and “FINANCING; Long-term Debt” below for further details of the transactions.

RESULTS OF OPERATIONS

Overview

Throughout the Fiscal 2008 Second Quarter, we experienced downward trending store traffic levels at our Retail Store segment, with accelerating weakness in July. As a result, we experienced a lower sell-through of our spring and summer merchandise. Therefore, we were more aggressive in clearing seasonal Retail Stores inventory, leading to deeper-than-planned markdowns and pressure on our merchandise margins. At our Direct-to-Consumer segment, we continued to experience declining response rates to our apparel catalogs. In response to our performance during the Fiscal 2008 Second-Quarter, we are reducing selling, general, and administrative expenses and managing to lower inventory levels for the second half of Fiscal 2008. Additionally, we have reassessed our capital spending plans, and have decreased our capital budget by approximately $12 – $15 million through the reduction of certain store development and non-critical infrastructure projects during the remainder of the year.

Our consolidated net sales for the Fiscal 2008 Second Quarter were $770.9 million, as compared to net sales for the Fiscal 2007 Second Quarter of $763.3 million, an increase of 1.0%. Diluted net income per share for the Fiscal 2008 Second Quarter was $0.14, as compared to diluted net income per share for the Fiscal 2007 Second Quarter of $0.24, a decrease of 41.7%. Fiscal 2007 Second Quarter results included pre-opening operating expenses of approximately $5.6 million pre-tax, ($3.6 million after tax, or $0.03 per diluted share) relating to our opening of 76 LANE BRYANT OUTLET stores. For the Fiscal 2008 First Half, our consolidated net sales were $1,555.6 million, as compared to net sales for the Fiscal 2007 First Half of $1,498.3 million, an increase of 3.8%. Diluted net income per share for the Fiscal 2008 First Half was $0.35, as compared to diluted net income per share of $0.48 for the Fiscal 2007 First Half, a decrease of 27.1%. Fiscal 2007 First Half results included pre-opening operating expenses of approximately $7.8 million pre-tax, ($5.0 million after tax, or $0.04 per diluted share) relating to our opening of the LANE BRYANT OUTLET stores.

We are executing on a number of new product and marketing initiatives for our fall season to be better positioned to improve traffic and sales trends during the second half of Fiscal 2008. During the Fiscal 2008 Second Quarter, the President of our CATHERINES brand was promoted to President for the LANE BRYANT brand. In addition to the new leadership at LANE BRYANT, we are encouraged by our new "Right Fit by Lane Bryant™" campaign, which supports our launch of new core denim and career pant assortments using new fit technology. Also, our FASHION BUG brand has signed a licensing agreement for the exclusive use of the Gitano^® brand name. We expect the Gitano product, which will include fashionable casual merchandise offerings in Plus and Misses Sportswear and Footwear, to arrive at our stores during the Fiscal 2008 Third Quarter.

We continue to strengthen and support our Direct-to-Consumer segment’s management team and have improved visual creative and merchandise offerings for a number of our fall catalog titles. We expect these changes to lead to a moderation of our downward trending catalog sales results for the remainder of Fiscal 2008. Additionally, we are finalizing our preparations for the launch of our LANE BRYANT catalog, which is scheduled for distribution in November, 2007. We plan to invest approximately $10 million for the launch of the catalog during the Fiscal 2008 Fourth Quarter.

In view of uncertain credit market conditions, we remain cautious for the second half of Fiscal 2008, based on our perception of pressure on consumers’ disposable income and spending levels.

The following table shows our results of operations expressed as a percentage of net sales and on a comparative basis:

							Percentage									Percentage
	Thirteen Weeks Ended⁽¹⁾						Change			Twenty-six Weeks Ended⁽¹⁾						Change
	August 4,			July 29,			From Prior			August 4,			July 29,			From Prior
	2007			2006			Period			2007			2006			Period

Net sales		100.0	%		100.0	%		1.0	%		100.0	%		100.0	%		3.8	%
Cost of goods sold, buying,
catalog, and occupancy expenses		71.5			70.0			3.1			70.6			69.1			6.0
Selling, general, and
administrative expenses		24.8			23.1			8.3			24.9			23.9			8.1
Income from operations		3.7			6.8			(45.7	)		4.6			7.0			(31.9	)
Other income		0.5			0.4			31.6			0.3			0.3			15.6
Interest expense		0.4			0.5			(26.1	)		0.4			0.5			(23.4	)
Income tax provision		1.4			2.4			(41.1	)		1.6			2.4			(29.5	)
Net income		2.4			4.3			(43.9	)		2.9			4.3			(31.0	)
____________________
(1) Results may not add due to rounding.

The following table shows details of our consolidated total net sales:

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 4,		July 29,		August 4,		July 29,
*(In millions)*	2007		2006		2007		2006

FASHION BUG	$	282.4	$	292.7	$	540.2	$	548.5
LANE BRYANT⁽¹⁾		305.6		281.2		627.9		558.3
CATHERINES		93.5		95.9		194.1		190.4
Other retail stores⁽²⁾		5.0		0.0		9.8		0.0
Total Retail Stores segment sales		686.5		669.8		1,372.0		1,297.2
Total Direct-to-Consumer segment sales		81.7		92.3		180.1		199.8
Corporate and other⁽³⁾		2.7		1.3		3.5		1.3
Total net sales	$	770.9	$	763.4	$	1,555.6	$	1,498.3
____________________
(1) Includes LANE BRYANT OUTLET stores, which began operations in July 2006.
(2) PETITE SOPHISTICATE OUTLET stores.
(3) Primarily revenue related to loyalty card fees.

The following table shows information related to the change in our consolidated total net sales:

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 4,			July 29,			August 4,			July 29,
	2007			2006			2007			2006

Retail Stores segment
Increase (decrease) in comparable store sales⁽¹⁾:
Consolidated retail stores		(3	)%		2	%		(2	)%		1	%
FASHION BUG		(1	)		(1	)		(1	)		(1	)
LANE BRYANT		(5	)		4			(3	)		3
CATHERINES		(2	)		2			1			4

Sales from new stores as a percentage of total
consolidated prior-period sales⁽²⁾:
FASHION BUG		1			2			1			2
LANE BRYANT⁽³⁾		8			4			8			4
CATHERINES		1			1			1			1
Other retail stores⁽⁴⁾		1			—			1			—

Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
FASHION BUG		(2	)		(2	)		(2	)		(2	)
LANE BRYANT		(3	)		(2	)		(3	)		(3	)
CATHERINES		(1	)		(1	)		(1	)		(1	)

Increase in Retail Stores segment sales		2			5			6			4

Direct-to-Consumer segment
Decrease in Direct-to-Consumer segment sales		(12	)		—			(10	)		—

Increase in consolidated total net sales		1			11	⁽⁵⁾		4			16	⁽⁵⁾
____________________
(1) “Comparable store sales” is not a measure that has been defined under generally accepted accounting principles. The method of calculating comparable store sales varies across the retail industry and, therefore, our calculation of comparable store sales is not necessarily comparable to similarly-titled measures reported by other companies. We define comparable store sales as sales from stores operating in both the current and prior-year periods. New stores are added to the comparable store sales base 13 months after their open date. Sales from stores that are relocated within the same mall or strip-center, remodeled, or have a legal square footage change of less than 20% are included in the calculation of comparable store sales. Sales from stores that are relocated outside the existing mall or strip-center, or have a legal square footage change of 20% or more, are excluded from the calculation of comparable store sales until 13 months after the relocated store is opened. Stores that are temporarily closed for a period of 4 weeks or more are excluded from the calculation of comparable store sales for the applicable periods in the year of closure and the subsequent year. Non-store sales, such as catalog and internet sales, are excluded from the calculation of comparable store sales.
(2) Includes incremental Retail Stores segment E-commerce sales.
(3) Includes LANE BRYANT OUTLET stores.
(4) Includes PETITE SOPHISTICATE OUTLET stores.
(5) The increase in consolidated total net sales includes increases of 6% for the thirteen weeks ended July 29, 2006 and 12% for the twenty-six weeks ended July 29, 2006 as a result of the acquisition of Crosstown Traders, Inc. on June 2, 2005.

The following table sets forth information with respect to our year-to-date retail store activity for Fiscal 2008 and planned store activity for all of Fiscal 2008:

	FASHION			LANE
	BUG			BRYANT			CATHERINES			Other⁽¹⁾			Total

Fiscal 2008 Year-to-Date⁽²⁾:
Stores at February 3, 2007		1,009			859			465			45			2,378

Stores opened		7			43	⁽³⁾		4			1			55
Stores closed		(10	)		(9	)		(3	)		(0	)		(22	)
Net change in stores		(3	)		34			1			1			33