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CPI Corp. Announces 2012 Third-Quarter Results
By: PR Newswire
Dec. 31, 2012 05:58 PM
ST. LOUIS, Dec. 31, 2012 /PRNewswire/ -- CPI Corp. (OTCQX: CPIC) today reported the results for the fiscal 2012 third quarter ended November 10, 2012.
As of November 10, 2012, the Company was not in compliance with certain provisions of its Credit Agreement, as amended, including the Minimum Period Cumulative EBITDAR covenant and certain studio closure and lease abandonment provisions. Since that time, the Company has also fallen out of compliance with several additional covenants and such noncompliance exists as of today.
The Credit Agreement and amounts owed thereunder are currently due and the Company does not have sufficient resources to repay these amounts. The Company is currently negotiating a forbearance agreement under which it is expected that the lenders will forbear from exercising their rights and remedies under the Credit Agreement until mid-January, subject to the Company's compliance with certain conditions. There can be no assurances that the lenders will grant such waivers or amendments on commercially reasonable terms, if at all. If the Company is unable to secure these additional amendments to the Credit Agreement, the Company may be forced into an orderly liquidation or bankruptcy. The outcome of restructuring and sale initiatives required by the Credit Agreement, as amended, is uncertain and involves matters that are outside of the Company's control.
The Company's interim financial information has been prepared assuming that it will continue as a going concern; however, the conditions noted above raise substantial doubt about the Company's ability to do so. The interim financial information does not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.
Third-Quarter 2012 Results
Net sales for the third quarter of fiscal 2012 decreased ($25.1) million, or (26.50)%, to $69.5 million from the $94.6 million reported in the fiscal 2011 third quarter. Net sales for the 2012 third quarter were negatively impacted by net studio closings ($10.5 million), net revenue recognition change ($2.4 million), Bella Pictures® operations ($1.9 million) and other items ($256,000). Excluding the above impacts, comparable same-store sales in the quarter decreased approximately 13%.
Net sales from the Company's PictureMe Portrait Studio® (PMPS) brand, on a comparable same-store basis, excluding impacts of net revenue recognition change, studio closures and other items totaling $4.3 million, decreased 15% in the third quarter of 2012 to $36.8 million from $43.2 million in the third quarter of 2011. The decrease in PMPS sales for the third quarter was the result of a 14% decline in the average sale per customer sitting and a 1% decline in the number of sittings.
Net sales from the Company's Sears Portrait Studio (SPS) brand, on a comparable same-store basis, excluding impacts of net revenue recognition change, studio closures and other items totaling $0.6 million, decreased 21% in the third quarter of 2012 to $29.1 million from $36.9 million in the third quarter of 2011. The decrease in SPS sales for the third quarter was the result of a 14% decline in the average sale per customer sitting and a 8% decline in the number of sittings.
Net sales from the Company's Kiddie Kandids® (KK) studio operations, on a comparable same-store basis, excluding impacts of net revenue recognition change, studio closures and other items totaling $3.4 million, decreased 13% in the third quarter of 2012 to $2.6 million from $2.9 million in the third quarter of 2011. The decrease in KK sales for the third quarter was the result of a 12% decline in the average sale per customer sitting and a 2% decline in the number of sittings.
The Bella Pictures® operations contributed approximately $1.7 million in net sales in the third quarter of 2012, down 54% from net sales of $3.6 million in the third quarter of 2011. Effective in the second quarter of fiscal year 2012, the Company no longer pursued the business model and on December 17, 2012, the Company sold the Bella Pictures® tradename, certain assets and all remaining customer contracts. The sale will result in a net cash payout of approximately $195,000, primarily related to customer deposits received on open contracts. Also in the second quarter of 2012, the Company discontinued its Portrait Gallery from Bella Pictures operations.
Excluding the effects of impairments and other charges in both periods, costs and expenses were $76.2 million in the third quarter of 2012, a 28% decline from $106.1 million reported in the comparable prior-year period.
Cost of sales, excluding depreciation and amortization expense, decreased to $7.0 million in the third quarter of 2012 from $8.6 million in the third quarter of 2011 primarily due to lower overall production levels, offset in part by a higher-cost product mix and higher shipping charges resulting from certain promotional events.
Selling, general and administrative expense declined to $67.2 million in the third quarter of 2012 from $92.9 million in the third quarter of 2011, primarily due to net reductions in studio, field and corporate employment costs, lower host commission expense due to lower sales levels and reduced advertising expenses, partially offset by increased employee insurance costs.
Depreciation and amortization expense was $2.0 million in the third quarter of 2012, compared with $4.6 million in the third quarter of 2011. Expense decreased in 2012 primarily as a result of significant impairment charges recognized during the fourth quarter of fiscal year 2011 and throughout fiscal year 2012, which resulted in lowering or eliminating the depreciable base on many of the Company's long-lived assets. The Company also sold a number of properties during fiscal year 2012, which is contributing to the decrease in depreciation expense in the third quarter of 2012.
Impairment charges in the third quarter of 2012 were $4.0 million and consisted of $0.8 million and $3.2 million in charges related to the impairment of certain long-lived property and equipment and certain intangible long-lived assets, respectively.
In the third quarter of 2012, the Company recognized $3.1 million in other charges, compared with $699,000 in the third quarter of 2011. The current-quarter charges primarily relate to costs incurred in connection with the debt renegotiation and costs incurred as the Company winds down its Bella Pictures® operation. The prior-year charges primarily related to severance and certain litigation costs.
Net interest expense increased to $6.1 million in the third quarter of 2012 from $1.3 million in the third quarter of fiscal 2011, primarily as the result of higher average borrowings, the write-off of certain prepaid debt fees and higher interest charges and fees resulting from the Second Amendment to the Credit Agreement.
Income tax expense was $176,000 in the third quarter of 2012 compared to an income tax benefit of $7.4 million in the third quarter of 2011. The resulting effective tax rates were (1)% and 54% in 2012 and 2011, respectively. Beginning in the fourth quarter of fiscal 2011, the Company established valuation allowances against all of its deferred tax assets. Income tax expense in the third quarter of 2012 is the result of current income taxes payable in certain foreign taxing jurisdictions. In the third quarter of 2011, income taxes were impacted by a change in the annualized effective tax rate, as well as certain tax benefits recognized related to a previous uncertain tax position.
Preliminary Fourth-Quarter Net Sales
About CPI Corp.
Such risks include, but are not limited to: the Company's ability to operate as a going concern, the Company's ability to sell or refinance its indebtedness prior to the expiration of its Credit Agreement, the Company's need for additional liquidity, declining sales trends in the Company's business, the Company's dependence on Walmart, Sears and Toys "R" Us, the approval of the Company's business practices and operations by Walmart, Sears and Toys "R" Us, the termination, breach, limitation or increase of the Company's expenses by Walmart under the lease and license agreements and Sears and Toys "R" Us under the license agreements, the Company's ability to comply with its debt covenants under its Credit Agreement, as amended, restrictions on the Company's business imposed by agreements governing its debt, the Company's ability to generate sufficient cash flow or raise additional capital to cover its operating expenses, the inability of the Company to pay dividends, customer demand for the Company's products and services, the economic recession and resulting decrease in consumer spending, manufacturing interruptions, dependence on certain suppliers, competition, dependence on key personnel, fluctuations in operating results, a significant increase in piracy of the Company's photographs, widespread equipment failure, implementation of marketing and operating strategies, outcome of litigation and other claims, impact of declines in global equity markets to the pension plan, impact of foreign currency translation and the limited trading market of its stock.
The risks described above do not include events that the Company does not currently anticipate or that it currently deems immaterial, which may also affect its results of operations and financial condition. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
SOURCE CPI Corp.
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