• Q3 loss of US$19.4m, up from $2m 
  • Revenue slump 28.9% to $33m from $46.4m 
  • Comparable store sales down 22.9%

Teen apparel retailer Delia's has said it remains confident in its outlook, despite reporting a wider loss during the third-quarter amid challenging trading conditions.

"While we expected the third quarter to be tough, our results were further pressured by a challenging retail environment," said CEO Tracy Gardner.

"We significantly reduced inventory levels by taking aggressive markdowns in order to work through underperforming legacy merchandise."

Revenue from Delia's retail segment slumped 30.9% to $24.3m during the three months to 2 November, while direct segment sales declined 22.6% to $8.7m.

The company's gross margin fell to 12.9% during the period, compared to 32.8% in the same period last year, primarily due to increased inventory reserves and lower merchandise margins in connection with clearing legacy product, as well as the deleveraging of occupancy costs.

"However, we were encouraged by the strong customer response to the newness we have been able to deliver thus far. We plan to continue to bring in new product that is more differentiated to the Delia's customer in December and more notably in the first quarter," Gardner added.

"Overall, our new merchandising and marketing teams are working diligently to develop a stronger brand image and merchandise assortment that resonates with our girl. We believe this turnaround will take time, but remain confident in the long term potential of the Delia's brand."

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DELIA*S, INC. ANNOUNCES THIRD QUARTER 2013 RESULTS

NEW YORK--(BUSINESS WIRE)--Nov. 21, 2013-- dELiA*s, Inc. (NASDAQ:DLIA), a multi-channel retail company primarily marketing to teenage girls, today announced the results for its third quarter of fiscal 2013.

dELiA*s, Inc. results for all periods presented reflect its former Alloy business as a discontinued operation. All financial results in this press release are for continuing operations only unless otherwise stated.

Third Quarter Fiscal 2013 Highlights:

  • Total revenue decreased 28.9% to $33.0 million from $46.4 million in the third quarter of fiscal 2012. Revenue from the retail segment decreased 30.9% to $24.3 million, including a comparable store sales decrease of 22.9%. Revenue from the direct segment decreased 22.6% to $8.7 million.
  • Consolidated gross margin was 12.9% compared to 32.8% in the prior year quarter, primarily due to increased inventory reserves and lower merchandise margins in connection with clearing legacy product, as well as the deleveraging of occupancy costs.
  • Stockholders ratified the issuance of $21.8 million of convertible notes and approved the issuance of 20.7 million shares of common stock upon conversion of the notes.
  • Loss from continuing operations was $19.3 million, including $3.3 million in non-cash store impairment charges and $2.9 million in non-cash charges related to the note conversion, compared to a loss from continuing operations for the third quarter of fiscal 2012 of $2.1 million.

Tracy Gardner, Chief Executive Officer, commented, "While we expected the third quarter to be tough, our results were further pressured by a challenging retail environment. We significantly reduced inventory levels by taking aggressive markdowns in order to work through underperforming legacy merchandise. However, we were encouraged by the strong customer response to the newness we have been able to deliver thus far. We plan to continue to bring in new product that is more differentiated to the dELiA*s customer in December and more notably in the first quarter. Overall, our new merchandising and marketing teams are working diligently to develop a stronger brand image and merchandise assortment that resonates with our girl. We believe this turnaround will take time, but remain confident in the long term potential of the dELiA*s brand.”

Results by Segment

Retail Segment Results

Total revenue for the retail segment for the third quarter of fiscal 2013 decreased 30.9% to $24.3 millionfrom $35.2 million in the third quarter of fiscal 2012. This decrease was primarily due to a comparable store sales decrease of 22.9%, as well as a 5% reduction in store count.

Gross margin for the retail segment, which includes distribution, occupancy and merchandising costs, was 10.0% for the third quarter of fiscal 2013 compared to 29.5% in the prior year period. The decrease in gross margin included a 500 basis point reduction related to increased markdown and other inventory reserves and a 600 basis point reduction in merchandise margins in connection with clearing underperforming legacy inventory, as well as an 800 basis point reduction due to the deleveraging of occupancy costs on lower revenues.

Selling, general and administrative (SG&A) expenses for the retail segment were $11.0 million, or 45.1% of sales, in the third quarter of fiscal 2013 compared to $12.2 million, or 34.8% of sales, in the prior year period. The reduction in SG&A expenses in dollars reflects reduced selling, overhead and depreciation expenses offset, in part, by an increase in stock-based compensation. The increase in SG&A expenses as a percent of revenues reflects the deleveraging of selling, overhead and depreciation expenses on lower revenues.

The operating loss for the third quarter of fiscal 2013 for the retail segment was $11.8 million compared to$1.7 million in the prior year period. The operating loss for the third quarter of fiscal 2013 included $3.3 million of non-cash impairment charges related to underperforming stores.

The Company closed one store location during the third quarter of fiscal 2013, ending the period with 102 stores.

Direct Segment Results

Total revenue for the direct segment for the third quarter of fiscal 2013 decreased 22.6% to $8.7 millionfrom $11.2 million in the third quarter of fiscal 2012. Catalog circulation for the third quarter of fiscal 2013 decreased 16.3% compared to the prior year quarter predominantly due to a reduction in unprofitable circulation.

Gross margin for the direct segment was 21.2% for the third quarter of fiscal 2013 compared to 43.0% in the third quarter of fiscal 2012. The decrease in gross margin included a 400 basis point reduction related to increased markdown and other inventory reserves and a 1,500 basis point reduction in merchandise margins in connection with clearing underperforming legacy inventory, as well as a 200 basis point reduction due to increased shipping and handling costs as a percent of revenues.

SG&A expenses for the direct segment were $6.2 million, or 71.5% of sales, in the third quarter of fiscal 2013 compared to $6.2 million, or 55.1% of sales, in the prior year period. SG&A expenses in dollars for fiscal 2013 included reduced selling, overhead and depreciation expenses compared to the prior year period, offset by increased stock-based compensation expense. The increase in SG&A expenses as a percent of revenues reflects the deleveraging of selling, overhead and depreciation expenses on lower revenues.

Operating loss for the third quarter of fiscal 2013 for the direct segment was $4.2 million, compared to $0.2 million in the prior year period, which included an incremental gift card breakage benefit of $1.0 million.

Conversion of Private Placement Notes

During the third quarter of fiscal 2013, the Company obtained stockholder ratification of the issuance of$21.8 million in principal amount of its secured 7.25% convertible notes and approval for the conversion of those convertible notes into equity. As a result of the market price of the stock on the date of conversion being in excess of the issue price, the Company recorded $2.9 million in non-cash charges. A $0.5 millioncharge related to the participation of certain insiders in the convertible note offering was included in stock-based compensation expense, while the remaining $2.4 million was included in interest expense. The Company used the net proceeds it received from the note offering for the repayment of outstanding amounts under its revolving credit facility with Salus Capital.

Balance Sheet Highlights

At the end of the third quarter of fiscal 2013, cash and cash equivalents were $1.9 million compared with$5.9 million at the end of the third quarter of fiscal 2012. At the end of the third quarter of fiscal 2013, the Company had restricted cash of $10.8 million to support outstanding letters of credit. Availability under the Company's credit facility with Salus Capital was $20.1 million as of the end of the third quarter of fiscal 2013, net of borrowings of $1.2 million.

Total net inventories at the end of the third quarter of fiscal 2013 were $25.9 million compared with $32.3 million at the end of the third quarter of fiscal 2012. Inventory per average retail store was down 16.1% compared to the prior year period, and inventory for the direct segment was down 19.3% compared to the prior year, primarily due to clearance of legacy inventory.

First Nine Month Results

For the nine-month period ended November 2, 2013, total revenue decreased 20.5% to $101.3 million from$127.4 million for the prior year period. Total gross margin was 19.3% compared to 32.0% for the prior year period. SG&A expenses were $51.9 million, or 51.2% of sales, for the first nine months of fiscal 2013, compared to $54.3 million, or 42.6% of sales, for the prior year period.

The operating loss for the first nine months of fiscal 2013 increased to $35.1 million, compared to $11.7 million for the first nine months of fiscal 2012. The operating loss for the first nine months of fiscal 2013 included $3.3 million of non-cash impairment charges related to underperforming stores.

Loss from continuing operations for the first nine months of fiscal 2013 increased to $39.6 million, compared to $11.8 million for the first nine months of fiscal 2012. Included in the first nine months of fiscal 2013 is a gift card breakage benefit of $0.5 million compared to $1.7 million in the first nine months of fiscal 2012. The loss from continuing operations for the first nine months of fiscal 2013 included $3.3 million of non-cash impairment charges related to underperforming stores, and $2.9 million in non-cash charges related to the conversion of the notes payable to equity.

Interest expense for the first nine months of fiscal 2013 was $4.4 million, including $2.4 million in non-cash charges related to the conversion of the notes payable to equity, compared to $0.5 million for the first nine months of fiscal 2012.

The provision for income taxes for the first nine months of fiscal 2013 was $0.1 million, compared to an income tax benefit of $0.4 million for fiscal 2012.

Conference Call and Webcast Information

A conference call to discuss third quarter 2013 results is scheduled for Thursday, November 21, 2013 at4:30 P.M. Eastern Time. The conference call will be webcast live at www.deliasinc.com. A replay of the call will be available through December 21, 2013 and can be accessed by dialing (877) 870-5176 and providing the pass code number 6207507.

During the conference call, the Company may discuss and answer questions concerning business and financial developments and trends. The Company’s responses to questions, as well as other matters discussed during the conference call, may contain or constitute information that has not been disclosed previously.

About dELiA*s, Inc.

dELiA*s, Inc. is a multi-channel retail company primarily marketing to teenage girls. It generates revenue by selling apparel, accessories and footwear to consumers through its website, direct mail catalogs and mall-based retail stores.

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