In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions set forth under the caption entitled “Cautionary Statement Regarding Forward-Looking Statements,” which can be found in Item 1A, Risk Factors.  Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the Item 1A, Risk Factors and elsewhere in this report.

 

Change in Fiscal Year

In order to conform to the predominant fiscal calendar used within the retail industry, on February 25, 2010 our Board of Directors approved a change in our fiscal year from a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to May 31 to a fiscal year comprised of the twelve consecutive fiscal months ending on the Saturday closest to January 31.  This Form 10-K/T is a transition report for the 35 week transition period beginning on May 31, 2009, the day following the end of our 2009 fiscal year, and ended on January 30, 2010 (the Transition Period).  Fiscal 2009 ended on May 30, 2009 and was a 52 week year.  Fiscal 2008 ended on May 31, 2008 and was a 52 week year.  Fiscal 2007 ended on June 2, 2007 and was a 52 week year.

Statements that we make about fiscal year 2010 refer to our first full fiscal year after the Transition Period, which will be the 52 week period commencing on January 31, 2010 and ending January 29, 2011 (Fiscal 2010).

General

 

We are a nationally recognized retailer of high-quality, branded apparel at everyday low prices. We opened our first store in Burlington, New Jersey in 1972, selling primarily coats and outerwear. Since then, we have expanded our store base to 442 stores in 44 states and Puerto Rico, and diversified our product categories by offering an extensive selection of in-season, fashion-focused merchandise, including: ladies sportswear, menswear, coats, family footwear, baby furniture and accessories, as well as home decor and gifts. We employ a hybrid business model which enables us to offer the low prices of off-price retailers and the branded merchandise and product diversity of department stores. We acquire desirable, first-quality, current-brand, labeled merchandise directly from nationally-recognized manufacturers.

 

As of January 30, 2010, we operated 442 stores under the names “Burlington Coat Factory Warehouse” (424 stores), “MJM Designer Shoes” (15 stores), “Cohoes Fashions” (two stores), and “Super Baby Depot” (one store) in 44 states and Puerto Rico.  For the Transition Period, we generated total revenues of approximately $2,479.3 million.

 

Executive Summary  

 

Overview of 35 Week Transition Period Ended January 30, 2010 Operating Results

 

We experienced a decrease in net sales for the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  Consolidated net sales decreased $19.0 million, or 0.8%, to $2,457.6 million  for the 35 weeks ended January 30, 2010 from $2,476.6 million  for the 35 weeks ended January 31, 2009.  This decrease was attributable to:

·	a comparative store sales decrease of $114.2 million, or 4.8%, to $2,263.2 million,

·	a decrease in barter sales of $10.8 million, and

·	a decrease in net sales of $2.5 million from stores closed since the comparable period in Fiscal 2009, partially offset by;

·	an increase in net sales of $63.2 million for stores previously opened that are not included in our comparative store sales,

·	an increase in net sales of $34.1 million related to nine new stores opened during the Transition Period, and

·	an increase in layaway and other sales of $10.8 million.

We believe the comparative store sales decrease was primarily due to weather conditions.  November of 2009 was the warmest November in the last eight years.  Also contributing to our decrease in comparative store sales was weakened consumer demand as a result of the contraction of credit available to consumers and the overall challenging retail conditions.

Gross margin as a percentage of net sales increased from 39.0% during the 35 weeks ended January 31, 2009 to 39.3% during the Transition Period.  The improvement in gross margin as a percentage of net sales is due to fewer markdowns during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.  This improvement in gross margin as a percentage of net sales is almost entirely offset by increased shrink during the 35 weeks ended January 30, 2010 compared with the 35 weeks ended January 31, 2009.

Selling and administrative expenses as a percentage of net sales increased from 30.7% during the 35 weeks ended January 31, 2009 to 30.9% during the Transition Period.  Total selling and administrative expenses decreased $1.3 million from $761.1 million during the 35 weeks ended January 31, 2009 to $759.8 million, which includes the opening of nine new stores during the Transition Period.  The decrease in selling and administrative expenses during the Transition Period was due to various initiatives that reduced store payroll, maximized supply chain efficiencies and reduced our overall headcount by approximately 2,300 positions, or slightly less than 10% of the total workforce.  The increase in selling and administrative expenses as a percentage of net sales during the Transition Period compared with the 35 weeks ended January 31, 2009 is due to the decrease in comparative store net sales.

 

We recorded net income of $18.7 million for the 35 weeks ended January 30, 2010 compared with a net loss of $155.6 million for the 35 weeks ended January 31, 2009.  The loss recorded during the 35 weeks ended January 31, 2009 was primarily the result of impairment charges recorded during the period.  The results of the Transition Period do not purport to be indicative of the results in the future or for the 52 weeks ending May 31, 2010 had the Company not changed its fiscal year.

 

Store Openings, Closings, and Relocations.

  During the Transition Period, we opened nine new Burlington Coat Factory Warehouse stores (BCF stores).  Two of those new store openings were in locations within the same trading markets as two existing stores.  The existing stores remained open through January 30, 2010 in order to liquidate merchandise and cease operations.  Those stores are expected to close during the first six months of Fiscal 2010.  As of January 30, 2010, we operated 442 stores under the names "Burlington Coat Factory Warehouse" (424 stores), "Cohoes Fashions" (two stores), "MJM Designer Shoes" (15 stores) and "Super Baby Depot" (one store).  

We continue to pursue our growth plans and invest in capital projects that meet our required financial hurdles. During Fiscal 2010, we plan to open between 15 and 23 new stores (exclusive of two relocations).

 

Ongoing Initiatives for Fiscal 2010

 We continue to focus on a number of ongoing initiatives aimed at increasing our overall profitability by improving our comparative store sales trends and reducing expenses.  These initiatives include, but are not limited to:

 

·	Improving comparative store sales:

·

Enhancing our merchandise content.   We are focused on our core female customer who shops for herself and her family. We are working toward building assortments that better address her needs – trend right, desirable brands at great everyday low prices. We plan on delivering exceptional values that fit within a good, better, and best pricing strategy. By maximizing our in-season buys, we believe that we are able to take advantage of known trends and in-season buying opportunities.

·

Refining our store experience through the eyes of the customer.   We have empowered our store teams to provide an outstanding customer experience for every customer in every store, every day. We have, and will continue to strive, to streamline processes to create opportunities for fast and effective customer interactions. Our stores must reflect clean, organized merchandise presentations that highlight the brands, value and diversity of our selection within our assortments. Through proper staffing flexibility we provide sales floor coverage during peak shopping hours to better serve the customer on the sales floor and at the check-out.

We plan to execute these initiatives during Fiscal 2010 by:

·	Continuing to allocate incremental payroll to stores for such things as additional early morning recovery and overnight stocking crews to ensure goods are moved quickly from the store docks to the selling floor.

·	Continuing the implementation of a chain wide store housekeeping initiative to ensure our stores reflect clean organized merchandise presentation and are easier and more comfortable to shop.

·

Continuing the implementation of a store refresh program with respect to stores that we have identified as having certain needs such as new carpet, painting, fitting room improvements and various other improvements.  We expect to complete the refresh program with respect to the original 25 stores selected by the end of May 2010.  We are in the process of identifying additional stores to refresh through the end of Fiscal 2010.

 

·

Continuing the implementation of upgraded lighting retrofits in our stores which will make the stores more energy efficient while improving the lighting within the stores, making it easier for customers to navigate the stores.  With respect to the original 70 stores initially identified for lighting retrofits, 60 of those lighting retrofits have been completed with the remaining lighting retrofits expected to be completed by the end of May 2010.  We are in the process of identifying additional stores to upgrade the lighting retrofits through the end of Fiscal 2010.

·

Continuing the implementation of a new signing program in all our stores that will make them easier to navigate and shop.  This program is still in the early stages of development.  To date, the new signage has been installed, and is being tested, at three stores and we are planning to install the new signage at all additional new stores planned to be opened during Fiscal 2010.

·

Keeping inventory fresh through improved receipt management. This initiative is targeted to ensure that we have the right goods, in the right store, at the right time. We are working to better develop and tailor assortments regionally to address seasonal and lifestyle differences.  We are continuing to refine our processes supporting consistent merchandise flow by continuing to better align receipts with sales. In addition, we believe we can improve receipt management by incorporating flow, inventory turnover, and exit strategies for fashion and seasonal product into the day-to-day business process.

·	The continued reduction of our cost structure:

o

Reduce store payroll costs. We introduced a new store management model during the beginning of the 2009 calendar year. This new model was designed to provide more consistent management coverage by sales volume.  Also during the beginning of the 2009 calendar year, we began to allocate payroll to our stores based primarily on an expected sales per labor hour metric.  Finally, we began to closely monitor new hire wage rates to ensure that new hires commenced employment at rates commensurate with their experience. These actions have allowed us to operate our business more efficiently without sacrificing our ability to serve our customers.  We intend to continue to refine our processes regarding payroll management during Fiscal 2010.

o

Supply chain efficiencies .  We continue to work on several logistics initiatives which we expect will result in reduced logistics cost and improved service levels.  We are in the process of consolidating our Burlington, New Jersey distribution center into our Edgewater Park, NJ distribution center and implementing a new warehouse management system within the Edgewater Park, NJ and San Bernardino, CA distribution centers which will allow for further improvements in productivity by providing functionality not currently available and will allow flexibility in processing any goods received at either of the two facilities.  In turn, as both facilities will be able to process all receipts in an efficient manner, we expect to be able to reduce the amount of transportation miles required to service our stores.  Lastly, we have implemented a performance management program designed to drive productivity improvements within the four walls of our distribution centers.  We intend to re-invest a portion of these logistics savings in policies and procedures intended to improve efficiencies at the store level.

 

·	Deliver Consistent Gross Margin.   We continue to focus on having stable gross margin as a percentage of net sales.

 

       W e plan to execute this initiative during Fiscal 2010 by:

 

o	Continuing to manage our receipt to reduction ratio.  By matching receipt dollars to sales and markdown dollars we will continue to be able to take advantage of in season buying opportunities and to capitalize on those businesses that are trending well.

 

o	Continuing to ensure adequate open to buy and buying more opportunistically in season.  By staying liquid, we put ourselves in a position to be able to take advantage of opportunistic in-season buys that will maximize our sales.

 

o	Continuing to improve the amount of current inventory as a percentage of our total inventory.  By having more current inventory in our merchandise mix, we will take fewer markdowns, and have more pricing flexibility to provide great value to our customers without reducing our overall margins.

 

o

Reducing our shrink as a percentage of net sales.  We are adding additional resources to help improve existing controls and processes to reduce our shrink as a percentage of net sales without impacting the store experience.  We expect results to occur over time with most of these shrink reductions becoming apparent in the fiscal year ended January 28, 2012.

 

 

Uncertainties and Challenges

 

 As management strives to increase profitability through achieving positive comparative store sales and leveraging productivity initiatives focused on improving the in-store experience, more efficient movement of products from the vendors to the selling floors, and modifying our marketing plans to increase our core customer base and increase our share of our current customer’s spending, there are uncertainties and challenges that we face as a value department store of apparel and accessories for men, women and children and home furnishings that could have a material impact on our revenues or income.

General Economic Conditions.   Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing economic conditions, inflation, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy costs, income tax rates and policies, consumer confidence and consumer perception of economic conditions.  In addition, consumer purchasing patterns may be influenced by consumers’ disposable income, credit availability and debt levels. A continued or incremental slowdown in the U.S. economy, an uncertain economic outlook or an expanded credit crisis could continue to adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis.  During Fiscal 2009 and continuing into the Transition Period, there was significant deterioration in the global financial markets and economic environment, which we believe continues to negatively impact consumer spending at many retailers, including us. In response to the ongoing economic crisis, we continue to take steps to increase opportunities to profitably drive sales and to curtail operating expenses where prudent.  Where appropriate, we have reinvested some of these savings back into our business and store experience.

We closely monitor our net sales, gross margin, expenses and working capital.  We have performed scenario planning such that if our net sales decline, we have identified variable costs that could be reduced to partially mitigate the impact of these declines.  If adverse economic trends continue to deteriorate, or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods.  For further discussion of the risks to us regarding general economic conditions, please refer to the section below entitled “Liquidity and Capital Resources” and Item 1A, Risk Factors.

Competition and Margin Pressure.   We believe that in order to remain competitive with off-price retailers and discount stores, we must continue to offer brand-name merchandise at a discount from traditional department stores as well as an assortment of merchandise that is appealing to our customers.

 

The U.S. retail apparel and home furnishings markets are highly fragmented and competitive. We compete for business with department stores, off-price retailers, specialty stores, discount stores, wholesale clubs, and outlet stores. We anticipate that competition will increase in the future. Therefore, we will continue to look for ways to differentiate our stores from those of our competitors.

 

The U.S retail industry continues to face increased pressure on margins as the overall challenging retail conditions have led consumers to be more value conscious.  The weak retail environment helped to offset this pressure with a plentiful supply of goods in the market which created downward pricing pressure for wholesale purchases.

 

Changes to import and export laws could have a direct impact on our operating expenses and an indirect impact on consumer prices and we cannot predict any future changes in such laws.

 

Seasonality of Sales and Weather Conditions . Our sales, like most other retailers, are subject to seasonal influences, with the majority of our sales and net income derived during the months of September through January, which includes the back-to-school and holiday seasons.

 

Additionally, our sales continue to be significantly affected by weather. Generally, our sales are higher if the weather is cold during the Fall and warm during the early Spring.  Sales of cold weather clothing are increased by early cold weather during the Fall, while sales of warm weather clothing are improved by early warm weather conditions in the Spring. Although we have diversified our product offerings, we believe traffic to our stores is still heavily driven by weather patterns.

 

 

 

Key Performance Measures

 

We consider numerous factors in assessing our performance. Key performance measures used by management include comparative store sales, gross margin and inventory levels, receipt-to-reduction ratio, liquidity and comparative store payroll.  

Comparative Store Sales.   Comparative store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year.  The method of calculating comparative store sales varies across the retail industry.  As a result, our definition of comparative store sales may differ from other retailers.  

 

During the two months ended January 30, 2010, we changed our definition of comparative store sales.  We now define comparative store sales as sales of those stores commencing on the first day of the fiscal month one year after the end of their grand opening activities, which normally conclude within the first two months of operations.  Previously, we defined comparative store sales as sales of those stores (net of sales discounts) following their four hundred and twenty-fifth day of operation (approximately one year and two months).  This change aligns our external reporting of comparative store sales with how the metric is reviewed internally by senior management.  The table below depicts our comparative store sales under both the current and previous definitions for the Transition Period, Fiscal 2009, and Fiscal 2008.   

 
 

 

 

     Comparative store sales which were reported under the previous definition of comparative store sales for the three months ended August 29, 2009 and November 28, 2009 were not materially different than those that would have been reported under the current definition of comparative store sales.

 

Various factors affect comparative store sales, including, but not limited to, current economic conditions, weather conditions, the timing of our releases of new merchandise and promotional events, the general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, competition, and the success of marketing programs.  While any and all of these factors can impact comparative store sales, we believe that the decrease in comparative store sales during the Transition Period was driven by weather conditions and weakened customer demand.  The decrease in comparative store sales during Fiscal 2009 was primarily attributable to weakened consumer demand as a result of the overall challenging retail conditions.  The decrease in comparative store sales during Fiscal 2008 was due to a combination of unfavorable weather, weakened consumer demand, and temporarily low or out of stock issues in certain limited divisions.

  

Gross Margin. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is the difference between net sales and the cost of sales.  Our cost of sales and gross margin may not be comparable to those of other entities, since some entities include all of the costs related to their buying and distribution functions in cost of sales.  We include certain of these costs in the "Selling and Administrative Expenses" and "Depreciation and Amortization" line items in our Consolidated Statements of Operations and Comprehensive Income (Loss).  We include in our "Cost of Sales" line item all costs of merchandise (net of purchase discounts and certain vendor allowances), inbound freight, distribution center outbound freight and certain merchandise acquisition costs, primarily commissions and import fees.  Gross margin as a percentage of net sales increased from 39.0% during the 35 weeks ended January 31, 2009 to 39.3% during the Transition Period.

Inventory Levels.   Inventory at January 30, 2010 was $613.3 million compared with $641.8 million at May 30, 2009.  The decrease of $28.5 million was due to the seasonality of our business combined with our ongoing initiatives to enhance our supply chain efficiencies and our merchandise content.  These factors resulted in a decrease of average inventory at January 30, 2010 of approximately 6.4% to $1.4 million per store compared with the average store inventory of $1.5 million at May 30, 2009.

Inventory at January 30, 2010 decreased $81.7 million from $695.0 million at January 31, 2009.  This decrease was the result of our initiatives to enhance our supply chain efficiencies and our merchandise content.  Average store inventory at January 30, 2010 decreased approximately 14.8% to $1.4 million per store compared with average store inventory of $1.6 million at January 31, 2009.

In order to better serve our customers, and maximize sales, we continue to refine our merchandising mix and inventory levels within our stores.  Our efforts to date have resulted in a 14.8% reduction in average store inventory at January 30, 2010 compared with January 31, 2009.  By managing our inventories conservatively we believe we will be better able to deliver a continual flow of fresh merchandise to our customers.  We continue to move toward more productive inventories by increasing the amount of current inventory as a percent of total inventory.

 

 

 

Receipt-to-Reduction Ratio.    We are in the process of refining a more consistent merchandise flow based on a receipt-to-reduction ratio.  In other words, we are attempting to match forecasted levels of receipts to forecasted sales on a monthly basis.  We believe this will result in a more normalized receipt cadence to support sales and will ultimately lead to an improved inventory turnover ratio.

Inventory turnover is a measure that indicates how efficiently inventory is bought and sold.  It measures the length of time that we own our inventory.  This is significant because usually the longer the inventory is owned, the more likely markdowns may be required to sell the inventory.  Inventory turnover is calculated by dividing retail sales before sales discounts by the average retail value of the inventory for the period being measured.  Our annualized inventory turnover rate for the Transition Period has increased from 2.4 turns per year at May 30, 2009 to 2.7 turns per year at January 30, 2010.  The inventory turnover calculation is based on a rolling 13 month average of inventory and the last 12 months sales.  We expect inventory turnover to increase in Fiscal 2010.

 

Liquidity.   Liquidity measures our ability to generate cash.  Management measures liquidity through cash flow and working capital position.  Cash flow is the measure of cash generated from operating, financing, and investing activities.  We experienced a decrease in cash flow of $2.7 million during the Transition Period compared with the 35 weeks ended January 31, 2009 due to accelerated payments of $274.8 million as part of the Company’s working capital management strategy implemented at the end of the Transition Period.  The acceleration of payments decreased cash flow from operating activities related to the Company’s accounts payable from January 31, 2009 to January 30, 2010; which was almost entirely offset by decreased uses of cash in investing and financing activities.  The decrease in cash used in investing activities was primarily due to decreased capital expenditures as a result of fewer store openings during the Transition Period compared with the 35 weeks ended January 31, 2009.  The decrease in cash used in financing activities was primarily due to higher payments, net of borrowings, on our ABL Line of Credit.  During the Transition Period and the 35 weeks ended January 31, 2009, we made net repayments on our ABL Line of Credit of $29.1 million and $151.6 million, respectively.  Cash and cash equivalents decreased $1.1 million from May 30, 2009 to $24.8 million at January 30, 2010 (discussed in more detail under the caption below entitled “Liquidity and Capital Resources”).  

Changes in working capital also impact our cash flows. Working capital equals current assets (exclusive of restricted cash and cash equivalents) minus current liabilities. Working capital at January 30, 2010 was $349.7 million compared with $312.3 million at May 30, 2009 and $179.7 million at January 31, 2009.  The increase in working capital from both May 30, 2009 and January 31, 2009 is primarily attributable to decreased accounts payable at January 30, 2010, as a result of the timing of payments, which was partially offset by decreased inventory levels as a result of the decreases in our average store inventory of 6.4% from May 30, 2009 and 14.8% from January 30, 2009.

Comparative Store Payroll.   Comparative store payroll measures a store’s payroll during the current reporting period against the payroll of the same store in the corresponding period of the previous year.  We define comparative store payroll as the aggregate payroll of all stores which were opened for an entire week both in the previous fiscal year (or period, as applicable) and the current fiscal year (or period, as applicable).  Comparative store payroll decreased 11.8% during the Transition Period compared with the 35 weeks ended January 31, 2009 as a result of our ongoing initiative to reduce store payroll costs.  This was accomplished through a variety of initiatives.  First, we introduced a new store management model that was designed to provide consistent management coverage by sales volume.  We also began managing store payroll based primarily on an expected sales per labor hour metric.  Lastly, we began to closely monitor new hire wage rates to ensure new hires commenced employment at rates commensurate with their experience.  We believe that these actions will allow us to operate the business more efficiently without sacrificing our ability to serve our customers.