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Perfumania Holdings Inc. Reports Operating Results (10-Q)

December 15, 2009 | About:
10qk

10qk

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Perfumania Holdings Inc. (PERF) filed Quarterly Report for the period ended 2009-10-31.

PERFUMANIA is a specialty retailer and wholesale distributor of a wide range of brand name and designer fragrances. Perfumania operates a chain of retail stores specializing in the sale of fragrances at discounted prices up to 75% below the manufacturers' suggested retail prices. Perfumania's wholesale division distributes fragrances and related products primarily to an affiliate. Perfumania.com offers a selection of the Company's more popular products for sale over the Internet and serves as an alternative shopping experience to Perfumania retail customers. Perfumania Holdings Inc. has a market cap of $53.3 million; its shares were traded at around $5.94 with and P/S ratio of 0.1.

Highlight of Business Operations:

Approximately $0.2 million of the $13.2 million decrease in wholesale sales are represented by affiliate sales to Perfumania in the period from August 3, 2008 through August 10, 2008. As a result of the Merger on August 11, 2008, wholesale sales to Perfumania became intercompany transactions, which are eliminated in consolidation. The remaining decrease in wholesale sales of $13.0 million is the result of the tightening of credit resources generally during the past year, which has decreased our customers ability to purchase, and lower consumer demand.

Approximately $15.4 million of the $37.4 million decrease in wholesale sales are represented by affiliate sales to Perfumania during the period February 3, 2008 through August 10, 2008. As a result of the Merger on August 11, 2008, wholesale sales to Perfumania became intercompany transactions, which are eliminated in consolidation. The remaining decrease in wholesale sales of $22.0 million is the result of the tightening of credit resources generally and weakened consumer demand.

Selling, general and administrative expenses increased by 76.4% from $66.6 million in the thirty-nine weeks ended November 1, 2008 to $117.5 million in the thirty-nine weeks ended October 31, 2009. Excluding the selling, general and administrative expenses of Perfumanias retail division, which are included for the thirty-nine weeks ended October 31, 2009 and the period August 11, 2008 through November 1, 2008, selling, general and administrative expenses decreased by $5.5 million or 13.2%. Included in selling, general and administrative expenses are expenses charged by Quality King for shared services, which were $2.3 million and $2.4 million for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. These amounts include the sublease payments to Quality King discussed in Note 10 of these condensed consolidated financial statements.

As a result of the foregoing, we realized a net loss of approximately $26.1 million in the thirty-nine weeks ended October 31, 2009, of which $23.4 million is attributable to Perfumania, compared to net income of $0.3 million in the thirty-nine weeks ended November 1, 2008. As discussed above, certain corporate expenses were not allocated to Perfumania in the thirty-nine weeks ended October 31, 2009.

Revolving loans under the Senior Credit Facility may be drawn, repaid and reborrowed up to the amount available under a borrowing base calculated with reference to a specified percentage of the borrowers eligible accounts and a specified percentage of the borrowers eligible inventory from time to time. GECC has the right to impose reserves in its reasonable credit judgment, whether or not there is an Event of Default, which would effectively reduce the borrowing base and thereby the amount that the borrowers may borrow under the Senior Credit Facility. Under an amendment to the Senior Credit Facility executed as of May 26, 2009 (Waiver and Amendment No. 1), reserves against borrowing availability increasing from $9 million to $15 million at August 4, 2009 and thereafter will automatically apply, in addition to any reserves that may be imposed from time to time in GECCs reasonable credit judgment. The Senior Credit Facility also includes a sub-limit of $25 million for letters of credit and a sub-limit of $12.5 million for swing line loans (that is, same-day loans from the lead or agent bank).

On December 9, 2004, E Com issued a Subordinated Convertible Note (the Convertible Note) to Glenn and Stephen Nussdorf in exchange for a $5 million subordinated secured demand loan made in March 2004. The Convertible Note was originally secured by E Coms assets, but, in connection with the August 11, 2008 financing transactions, Glenn and Stephen Nussdorf released and terminated their security interest. The Convertible Note was originally payable in January 2007; however it was modified in January 2006 to extend the due date to January 2009. The Convertible Note is subordinate to all bank related indebtedness and, pursuant to a May 26, 2009 amendment, no payments of principal or interest may be made before the maturity of the Senior Credit Facility on August 11, 2011. As a result, the Convertible Note is currently in default, resulting in an increase of 2% in the nominal interest rate, which is the prime rate plus 1%. The Convertible Note allows Glenn and Stephen Nussdorf to convert any or all of the principal and accrued interest due on the Convertible Note into shares of the Companys common stock. The conversion price was originally $11.25, which equaled the closing market price of E Coms common stock on December 9, 2004, and was reduced to $7.00 by the May 26, 2009 amendment.

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