Form 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HRXV/TaQPv7Bc2AT4ylff6cmHAY85o8Cl0txaWjvn7Fy0+W43iaHQJOUyXBu7Dxu BxsuzPvLi2rn0qQgTMi4oA== 0001193125-08-128763.txt : 20080605 0001193125-08-128763.hdr.sgml : 20080605 20080605160258 ACCESSION NUMBER: 0001193125-08-128763 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080503 FILED AS OF DATE: 20080605 DATE AS OF CHANGE: 20080605 FILER: COMPANY DATA: COMPANY CONFORMED NAME: dELiAs, Inc. CENTRAL INDEX KEY: 0001337885 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 203397172 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-51648 FILM NUMBER: 08883201 BUSINESS ADDRESS: STREET 1: 435 HUDSON STREET CITY: NEW YORK CITY STATE: NY ZIP: 10014 BUSINESS PHONE: (212) 807-9060 MAIL ADDRESS: STREET 1: 435 HUDSON STREET CITY: NEW YORK CITY STATE: NY ZIP: 10014 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 3, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-51648

dELiA*s, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-3397172

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

50 West 23^rd Street, 10^th Floor, New York NY 10010

(Address of Principal Executive Offices) (Zip Code)

(212) 590-6200

(Registrant’s telephone number, including area code)

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

None

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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨ Accelerated Filer x Non-accelerated Filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 4, 2008 the registrant had 31,026,473 shares of common stock, $.001 par value per share, outstanding.

dELiA*s, Inc.

TABLE OF CONTENTS


		Page No.
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at May 3, 2008 (unaudited), February 2, 2008 and May 5, 2007 (unaudited)	3
	Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended May 3, 2008 and May 5, 2007 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 3, 2008 and May 5, 2007 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	20
	SIGNATURES
	EX-31.1
	EX-31.2
	EX-32.1
	EX-32.2

Item 1.

Financial Statements

dELiA*s, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	May 3, 2008			February 2, 2008		May 5, 2007
	(unaudited)					(unaudited)
ASSETS

Current Assets:
Cash and cash equivalents	$	8,343		$	11,399	$	19,227
Inventories, net		38,082			43,096		28,365
Prepaid catalog costs		3,676			4,417		3,234
Other current assets		7,278			6,641		8,443

Total current assets		57,379			65,553		59,269
Property and equipment, net		55,990			51,901		46,508
Goodwill		40,204			40,204		40,204
Intangible assets, net		2,478			2,517		2,587
Other assets		315			356		598

Total assets	$	156,366		$	160,531	$	149,166


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	19,368		$	22,611	$	$13,795
Bank loan payable		1,858			—		—
Current portion of mortgage note payable		213			203		149
Accrued expenses and other current liabilities		29,746			30,351		29,300

Total current liabilities		51,185			53,165		43,244
Deferred credits and other long-term liabilities		9,530			7,979		8,488
Long-term portion of mortgage note payable		2,155			2,212		2,372

Total liabilities		62,870			63,356		54,104

Commitment and contingencies
Stockholders’ Equity:
Preferred stock: $0.001 par value; 25,000,000 shares authorized, none issued		—			—		—
Common stock: $0.001 par value; 100,000,000 shares authorized; 31,026,473; 31,026,473; and 30,829,463 shares issued and outstanding, respectively		31			31		31
Additional paid-in capital		97,003			96,733		95,550
(Accumulated deficit) retained earnings		(3,538	)		411		(519	)

Total stockholders’ equity		93,496			97,175		95,062

Total liabilities and stockholders’ equity	$	156,366		$	160,531	$	149,166

See accompanying notes to condensed consolidated financial statements.

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)


	For the Thirteen Weeks Ended
	May 3, 2008			May 5, 2007
Net revenues	$	63,537		$	57,807
Cost of goods sold		41,642			36,947

Gross profit		21,895			20,860
Selling, general and administrative expenses		25,660			24,314

Operating loss		(3,765	)		(3,454	)
Interest (expense) income, net		(89	)		209

Loss before provision for income taxes		(3,854	)		(3,245	)
Provision for income taxes		95			20

Net loss	$	(3,949	)	$	(3,265	)

Basic and diluted net loss per share of common stock:
Basic and diluted net loss attributable to common stockholders per share	$	(0.13	)	$	(0.11	)

WEIGHTED AVERAGE BASIC AND DILUTED COMMON SHARES OUTSTANDING		30,878,134			30,778,033

See accompanying notes to condensed consolidated financial statements.

dELiA*s, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the Thirteen Weeks Ended
	May 3, 2008			May 5, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,949	)	$	(3,265	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,071			1,707
Stock-based compensation		270			198
Changes in operating assets and liabilities:
Inventories		5,014			3,315
Prepaid catalog costs and other current assets		105			(1,761	)
Other noncurrent assets		41			80
Accounts payable, accrued expenses and other liabilities		(3,784	)		(1,626	)

Net cash used in operating activities		(232	)		(1,352	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(4,635	)		(8,649	)

Net cash used in investing activities		(4,635	)		(8,649	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of mortgage note payable		(47	)		(24	)
Net borrowings under line of credit agreement		1,858			—
Proceeds from exercise of employee stock options		—			378

Net cash provided by financing activities		1,811			354


NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,056	)		(9,647	)
CASH AND CASH EQUIVALENTS, beginning of period		11,399			28,874

CASH AND CASH EQUIVALENTS, end of period		8,343			19,227


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest	$	99		$	93

Cash paid during the period for taxes	$	142		$	323

Capital expenditures incurred not yet paid	$	3,825		$	2,046

See accompanying notes to condensed consolidated financial statements.

dELiA*s, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the discussion and analysis below, when we refer to “Alloy, Inc.” we are referring to Alloy, Inc., our former parent corporation, and when we refer to “Alloy” we are referring to the Alloy-branded direct marketing and merchandising business that we operate. Similarly, when we refer to “dELiA*s”, we are referring to the dELiA*s-branded direct marketing, merchandising and retail store business that we operate, when we refer to “dELiA*s Corp.” we are referring to dELiA*s Corp., the company Alloy, Inc. acquired in 2003 and which has since been renamed dELiA*s Assets Corp., when we refer to “dELiA*s, Inc.,” the “Company”, “we,” “us,” or “our,” we are referring to dELiA*s, Inc., its subsidiaries and its predecessors, including Alloy Merchandising Group, LLC, the company that, together with its subsidiaries, historically operated our business and that converted to a corporation named dELiA*s, Inc. on August 5, 2005, and when we refer to “the Spinoff”, we are referring to the December 19, 2005 spinoff of the outstanding common shares of dELiA*s, Inc. to the Alloy, Inc. shareholders. The accompanying financial information for the periods ended May 3, 2008 and May 5, 2007 is unaudited. The accompanying condensed consolidated balance sheet information at February 2, 2008 was derived from the audited consolidated balance sheet at February 2, 2008.

1. Business and Basis of Financial Statement Presentation

Business

We are a direct marketing and retail company comprised of three lifestyle brands primarily targeting consumers that are between the ages of 12 and 19. Our three lifestyle brands—dELiA*s, Alloy, and CCS—generate revenue by selling predominantly to teenage consumers through the integration of direct mail catalogs, e-commerce websites and, for dELiA*s, mall-based specialty retail stores. Through our catalogs and the e-commerce webpages, we sell many name brand products, along with our own proprietary brand products in key teenage spending categories, directly to consumers in the teen market, including apparel, action sports equipment and accessories. Our mall-based specialty retail stores derive revenue primarily from the sale of apparel and accessories to teenage girls.

Basis of Financial Statement Presentation

The accompanying Consolidated Financial Statements of dELiA*s, Inc. at May 3, 2008 and May 5, 2007 and for the thirteen week periods ended May 3, 2008 and May 5, 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the most recent dELiA*s, Inc. Annual Report on Form 10-K. Our consolidated financial information for the quarters ended May 3, 2008 and May 5, 2007 is unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at February 2, 2008 and related information presented in the footnotes have been derived from audited consolidated statements at that date.

2. Summary of Significant Accounting Policies

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to January 31, typically resulting in a fifty-two week year, but occasionally giving rise to an additional week, resulting in a fifty-three week year. We refer to the 52-week fiscal year ended February 2, 2008 as “fiscal 2007.” In addition, all references herein to “fiscal 2008” represent the 52-week fiscal year that will end on January 31, 2009.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

In preparing the financial statements, management makes routine estimates and judgments in determining the net realizable value of inventory, prepaid expenses, fixed assets, stock-based compensation, intangible assets and goodwill. Some of the more significant estimates include the allowance for sales returns, the reserve for inventory valuation, the expected future revenue stream of catalog mailings, risk-free interest rates, expected lives, expected volatility assumptions used for calculating stock-based compensation expense, the expected useful lives of fixed assets and the valuation of intangible assets and goodwill. Actual results may differ from these estimates under different assumptions and conditions.

We evaluate our estimates on an ongoing basis and make revisions as new information and experience warrants.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of dELiA*s, Inc. and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, credit card receivables and highly liquid investments with original maturities of three months or less. Credit card receivable balances included in cash and cash equivalents as of May 3, 2008, February 2, 2008 and May 5, 2007 were approximately $1.8 million, $1.3 million and $1.7 million, respectively.

Interest (Expense) Income, Net

Interest income and interest expense are presented as a net amount in the consolidated statements of operations. Interest income is derived from cash in bank accounts and money market accounts. Interest income for the thirteen week periods ended May 3, 2008 and May 5, 2007 was $ 41,000 and $244,000, respectively.

Interest expense for the thirteen week periods ended May 3, 2008 and May 5, 2007 was $130,000 and $35,000, respectively. We capitalized $31,000 and $49,000 of interest expense in the thirteen week periods ended May 3, 2008 and May 5, 2007, respectively.

Net Income (Loss) Per Share

Net income (loss) per share is computed in accordance with SFAS No. 128 “Earnings Per Share.” Basic net income (loss) per share is computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding during the period. When the effects are not anti-dilutive, diluted earnings per share is computed by dividing the Company’s net earnings by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options, restricted shares and convertible debentures. The dilutive impact of stock options is determined by applying the “treasury stock” method.

The total number of potential common shares with an anti-dilutive impact excluded from the calculation of diluted net loss per share are detailed in the following table for the thirteen week periods ended May 3, 2008 and May 5, 2007:


	For Thirteen Weeks Ended
	May 3, 2008	May 5, 2007
Options, warrants and restricted shares	6,515,319	6,943,117
Conversion of 5.375% Convertible Debentures	83,381	83,381

Total	6,598,700	7,026,498

Share-Based Compensation

The Company accounts for share-based compensation under the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires share-based compensation related to stock options to be measured based on estimated fair values at the date of grant using an option-pricing model.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of stock option grants and expected future stock price volatility over the expected term.

Included in selling, general and administrative expense in the Consolidated Statements of Operations for the thirteen week periods ended May 3, 2008 and May 5, 2007 was stock-based compensation expense of approximately $270,000 and $198,000, respectively, related to employee stock options and restricted stock.

The per share weighted average fair value of stock options granted during the quarter ended May 3, 2008 was $0.86. The fair value of each option grant is estimated on the date of grant with the following weighted average assumptions:


	Thirteen Weeks Ended May 3, 2008
Dividend yield	—
Risk-free interest rate	2.92	%
Expected life (in years)	5.5
Historical volitility	55	%

A summary of the Company’s stock option activity and weighted average exercise prices is as follows:


	Options		Weighted Average Exercise Price
Options outstanding at February 2, 2008	5,944,657		$	9.18
Options granted	372,000			1.65
Options exercised	—			—
Options cancelled	(179,675	)		7.79

Options outstanding at May 3, 2008	6,136,982		$	8.49

Options exercisable at May 3, 2008	3,800,865		$	9.99

As of May 3, 2008, there was $784,878 of total unrecognized compensation cost related to nonvested employee share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of approximately 1.2 years.

Rights Offering

On December 30, 2005, we filed a prospectus under which we distributed to persons who were holders of our common stock on December 28, 2005 transferable rights to purchase up to an aggregate of 2,691,790 shares of our common stock at a cash subscription price of $7.43 per share. The rights offering was made to fund the costs and expenses of our retail store expansion plan and to provide funds for general corporate purposes following the Spinoff. MLF Investments, LLC (“MLF”), which is controlled by Matthew L. Feshbach, our Chairman of the Board, agreed to backstop the rights offering, meaning MLF agreed to purchase all shares of our common stock that remained unsold upon completion of the rights offering at the same $7.43 subscription price per share. The rights offering was completed in February 2006 with $20 million of gross proceeds. The stockholders exercised subscription rights to purchase 2,040,570 shares of dELiA*s common stock, of the 2,691,790 shares offered in the rights offering, raising a total of $15,161,435. On February 24, 2006, MLF purchased the remaining 651,220 shares for a total of $4,838,565. Excluding MLF, 90% of the rights were exercised. MLF received as compensation for its backstop commitment a nonrefundable fee of $50,000 and ten-year warrants to purchase 215,343 shares of our common stock at an exercise price of $7.43 per share. The warrants had a grant date fair value of approximately $900,000 and were recorded as a cost of raising capital.

Warrants and Convertible Debentures

Prior to the Spinoff, Alloy, Inc. had warrants outstanding for the purchase of 1,326,309 shares in the aggregate of Alloy, Inc. common stock that had been issued to certain purchasers of (i) Alloy, Inc. common stock in a private placement transaction completed on January 25, 2002, and (ii) Alloy, Inc.’s Series A Convertible Preferred Stock (collectively the “Warrants”). Upon consummation of the Spinoff, the Warrants became exercisable into both the number of shares of Alloy, Inc. common stock into which such Warrants otherwise were exercisable and one-half that number of shares, or 663,155 shares, of our common stock. We have agreed with Alloy, Inc. that we will issue shares of our common stock, without compensation, on behalf of Alloy, Inc. to holders of the Warrants as and when required in connection with any exercise of the Warrants. All other outstanding Alloy, Inc. warrants were unaffected by the Spinoff.

At the time of the Spinoff, Alloy, Inc. had outstanding $69.3 million of 5.375% convertible senior debentures due 2023 (the “Debentures”). The outstanding Debentures were convertible into 8,274,628 shares of Alloy, Inc. common stock. As a result of the Spinoff, the Debentures were convertible into 8,274,628 shares of Alloy, Inc. common stock (before consideration of a subsequent reverse stock split by Alloy, Inc.) and 4,137,314 shares of our common stock if and when the conditions to conversion are satisfied. We have agreed with Alloy, Inc. that we would issue shares of our common stock on behalf of Alloy, Inc. to holders of the Debentures as and when required in connection with any conversion of the Debentures. As a result of current market conditions, the combined share values of our common stock and Alloy, Inc.’s common stock have exceeded the conversion price of the Debentures. As of May 3, 2008, 4,053,933 shares of dELiA*s, Inc. common stock were issued in connection with conversions of the Debentures. When the remaining conversions occur, they will be recorded as a component of stockholders’ equity and would not have an impact on the statement of operations.

Restricted Stock

In fiscal 2007, the Company issued restricted stock, which is subject to vesting requirements, to five board members and one employee valued at approximately $505,000 at the dates of grant. These shares are charged to stock-based compensation expense ratably over the vesting periods, which do not exceed four years.

Income taxes

As of May 3, 2008, the Company had a liability for unrecognized tax benefits of $213,000, which includes interest and penalties of $49,000. There were no changes to the Company’s unrecognized tax benefits during the three months ended May 3, 2008. The Company does not expect any significant changes to its unrecognized tax positions during the next twelve months.

The Company recognizes interest accrued for increases in the net liability for unrecognized income tax benefits in interest expense and any related penalties in tax expense. There were $17,000 and $4,000 of interest and penalties, respectively, recognized during the three months ended May 3, 2008.

The Company’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the fiscal years 2003 onward. The Company is not currently under examination by the Internal Revenue Service. State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective returns. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is periodically subject to state income tax examination, and is currently under New York state income tax examination for the 2000 through 2002 tax years.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles and expand disclosures about fair value measurements. SFAS 157 requires quantitative disclosures using a tabular format in all periods (interim and annual) and qualitative disclosures about the valuation techniques used to measure fair value in all annual periods. On February 3, 2008, the Company adopted SFAS 157 except with respect to its non-financial assets and liabilities for which the effective date is February 1, 2009. The adoption of SFAS 157 for the Company’s financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating the potential impact on the consolidated financial statements of adopting SFAS 157 for its non-financial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company adopted SFAS 159 on February 3, 2008, however the Company did not elect the fair value option for any of its eligible financial instruments on the effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective for the Company on February 1, 2009. The Company is currently evaluating the impact SFAS 160 will have on its consolidated financial statements.

In December 2007, the FASB issued No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141R expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations. SFAS 141R is effective for the Company on February 1, 2009. The impact of adopting SFAS 141R will be dependent on the business combinations that the Company may pursue after its effective date.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires expanded qualitative, quantitative and credit-risk disclosures of derivative instruments and hedging activities. These disclosures include more detailed information about gains and losses, location of derivative instruments in financial statements, and credit-risk-related contingent features in derivative instruments. SFAS 161 also clarifies that derivative instruments are subject to concentration of credit risk disclosures under SFAS 107, Disclosure About Fair Value of Financial Instruments, SFAS 161, which applies only to disclosures, is effective for the Company on February 1, 2009. The Company is currently evaluating the impact of SFAS 161 will have on its consolidated financial statements.

3. Property and Equipment, net

Property and equipment, net, consisted of the following (in thousands):


	May 3, 2008			February 2, 2008			May 5, 2007
	(unaudited)						(unaudited)
Construction in progress	$	2,258		$	2,475		$	5,550
Computer equipment		10,370			10,370			9,156
Machinery and equipment		11,050			11,050			6,445
Office furniture		7,552			7,552			7,916
Leasehold improvements		35,584			29,246			21,186
Building		7,559			7,559			7,559
Land		500			500			500

		74,873			68,752			58,312
Less: accumulated depreciation and amortization		(18,883	)		(16,851	)		(11,804	)

	$	55,990		$	51,901		$	46,508

Depreciation and amortization expense related to property and equipment was approximately $2.0 million and $1.7 million for the thirteen week periods ended May 3, 2008 and May 5, 2007, respectively. In April 2007, approximately $6.7 million of fully depreciated assets were retired in conjunction with the dELiA*s, Inc. headquarters relocation.

4. Intangible Assets

Our acquired intangible assets were as follows (in thousands):


	May 3, 2008				February 2, 2008				May 5, 2007
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(unaudited)								(unaudited)
Amortizable intangible assets:
Mailing lists	$	78	$	72	$	78	$	71	$	78	$	68
Noncompetition agreements		390		371		390		356		390		312
Websites		689		689		689		689		689		689
Leaseholds		190		156		190		133		190		110

	$	1,347	$	1,288	$	1,347	$	1,249	$	1,347	$	1,179

Nonamortizable intangible assets:
Trademarks	$	2,419	$	—	$	2,419	$	—	$	2,419	$	—

Amortization expense was approximately $39,000 and $23,000 for the thirteen week periods ended May 3, 2008 and May 5, 2007, respectively. As of May 3, 2008, the estimated amortization expense for the remainder of fiscal 2008 and fiscal 2009 is approximately $29,000 and $30,000, respectively.

5. Credit Facility

On May 17, 2006, dELiA*s, Inc. and certain of its wholly-owned subsidiaries entered into a Second Amended and Restated Loan and Security Agreement with Wells Fargo Retail Finance II, LLC (the “Restated Credit Facility”). The Restated Credit Facility is a secured revolving credit facility that the Company may draw upon for working capital and capital expenditure requirements and had an initial credit limit of $25 million. The Restated Credit Facility may also be used for letters of credit up to an aggregate amount of $10 million.

The Company is allowed under the Restated Credit Facility, under certain circumstances and if certain conditions are met, to permanently increase the credit limit in $5 million increments, up to a maximum credit limit of $40 million. Each permanent increase in the credit limit requires the Company to pay an origination fee of 0.20% of the amount of the increase. During March 2008, we permanently increased the credit limit under the Restated Credit Facility by $5 million, from $25 million to $30 million. The Company may also obtain temporary credit limit increases for up to 90 consecutive days during the period beginning July 15th and ending on December 15th each year. Temporary credit limit increases do not require the payment of an origination fee. The Restated Credit Facility has a maturity date of May 17, 2009.

Funds are available under the Restated Credit Facility up to the then existing credit limit or, if lower, the “Borrowing Base” of the Company determined in accordance with a formula set forth in the Restated Credit Facility based upon eligible inventory and accounts receivable, in each case less the sum of (i) outstanding revolving credit loans, (ii) outstanding letters of credit, (iii) certain “Availability Reserves” as determined in accordance with the terms of the Restated Credit Facility, and (iv) the “Availability Block” (which is equal to the greater of 6.5% of the then existing credit limit and $1.5 million). Loans under the Restated Credit Facility bear interest, at the Company’s option, either at the prime rate or the London Interbank Offered Rate plus a variable margin ranging from 1.25% to 1.75% depending on excess availability and cash on hand. A monthly fee of 0.25% per annum is payable based on the unused balance of the Restated Credit Facility.

The Restated Credit Facility is secured by substantially all of the assets of the Company and contains various affirmative and negative covenants, representations, warranties and events of default to which we are subject, including restrictions such as limitations on additional indebtedness, other liens, dividends, distributions, stock repurchases, the annual amount of capital expenditures we may make and the number of new stores the Company may open each year. The Company is currently in compliance with all of its covenants under the Restated Credit Facility.

At May 3, 2008, the unused available amount under the Restated Credit Facility was $8.3 million and approximately $7.6 million of letters of credit were outstanding.

As of May 3, 2008, February 2, 2008 and May 5, 2007, there was $1.9 million, $-0- and $-0- outstanding, respectively, under the Restated Credit Facility. The weighted average interest rate for funds borrowed under the Restated Credit Facility during the quarter ended May 3, 2008 was approximately 5.3%.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	May 3, 2008		February 2, 2008		May 5, 2007
	(unaudited)				(unaudited)
Sales and use taxes payable	$	990	$	839	$	2,163
Accrued payroll, bonus, taxes and withholdings		724		1,621		546
Accrued professional services		852		939		1,184
Credits due to customers		14,203		14,275		12,707
Allowance for sales returns		1,060		1,204		1,062
Accrued construction in progress		2,904		1,802		3,952
Other accrued expenses		9,013		9,671		7,686

	$	29,746	$	30,351	$	29,300

7. Mortgage Note Payable

We currently are a party to a mortgage loan agreement related to the purchase of our distribution facility in Hanover, Pennsylvania. The mortgage note amortizes on a fifteen-year schedule and was to mature with a balloon payment of $2.3 million in September 2008. During March 2008, we extended the maturity date on the mortgage note from September 2008 to September 2009, and the mortgage note has been, accordingly, classified as long-term on the accompanying balance sheet. The loan bears interest at LIBOR plus 225 basis points and is subject to quarterly financial covenants.

We were in compliance with the financial covenants for the quarter ended May 3, 2008. As of May 3, 2008, the current and long-term mortgage note payable balance was $213,000 and $2.2 million, respectively. The mortgage loan is secured by the distribution facility and related property. Our intention is to refinance the mortgage note prior to maturity.

8. Related Party Transactions

Services and Revenues

We recognize other revenues that consist primarily of advertising provided for third parties in our catalogs, on our e-commerce webpages, in our outbound packages, and in our retail stores pursuant to specific pricing arrangements with Alloy, Inc. Alloy, Inc. arranges these advertising services on our behalf, through a media services agreement entered into in connection with the Spinoff, and this arrangement is deemed a related party transaction. We believe that the terms and conditions of this relationship are similar to those that we could obtain in the marketplace. Revenue under these arrangements is recognized, net of commissions and agency fees, when the underlying advertisement is published or otherwise delivered pursuant to the terms of each arrangement. We recorded revenues of $224,000 and $327,000 for the thirteen weeks ended May 3, 2008 and May 5, 2007, respectively, in our financial statements in accordance with the terms of the media services agreement.

Prior to the Spinoff, we and Alloy, Inc. entered into the following agreements that were to define our ongoing relationships after the Spinoff: a distribution agreement, tax separation agreement, trademark agreement, information technology and intellectual property agreement, media services agreement, and an On Campus Marketing call center agreement. We have compensated Alloy, Inc. approximately $84,000 and $222,000 for the thirteen week periods ended May 3, 2008 and May 5, 2007, respectively, in relation to the services provided under these agreements.

9. Litigation

The Company is involved in litigation matters arising in the ordinary course of business and, from time to time, the Company may make provisions for potential litigation losses. The Company follows SFAS 5, “Accounting for Contingencies” when assessing pending or potential litigation. The Company believes that there is no claim or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results.

10. Segment Reporting

The Company’s executive management, being its chief operating decision makers, works together to allocate resources and assess the performance of the Company’s business. The Company’s executive management manages the Company as two distinct operating segments—direct marketing and retail stores. Although offering customers substantially similar merchandise, the Company’s direct and retail operating segments have distinct management, marketing and operating strategies and processes.

The Company’s executive management assesses the performance of each operating segment based on operating income (loss), which is defined as net sales less the cost of goods sold and selling, general and administrative expenses both directly identifiable and allocable. For the direct segment, these operating costs, in addition to the cost of merchandise sold, primarily consist of catalog development, production, and circulation costs, order processing costs, direct personnel costs and allocated overhead expenses. For the retail segment, these operating costs, in addition to the cost of merchandise sold, primarily consist of store selling expenses, direct labor costs and allocated overhead expenses. Allocated overhead expenses are costs associated with general corporate expenses and shared departmental services (e.g., executive, facilities, accounting, data processing, legal and human resources).

Operating segment assets are those directly used in or clearly allocable to an operating segment’s operations. For the retail segment, these assets primarily include inventory, fixtures and leasehold improvements. For the direct segment, these assets primarily include inventory and prepaid catalog costs. Corporate and other assets include corporate headquarters, distribution and contact center facilities, shared technology infrastructure as well as corporate cash and cash equivalents and prepaid expenses. Operating segment depreciation and amortization and capital expenditures are recorded directly to each operating segment. Corporate and other depreciation and amortization and capital expenditures are allocated to each operating segment. The accounting policies of the segments are the same as those described in Note 2. Reportable data for our operating segments were as follows:


	Direct Marketing Segment		Retail Store Segment		Total
	(In thousands)
Total Assets
May 3, 2008 (unaudited)	$	90,269	$	66,097	$	156,366
February 2, 2008	$	97,720	$	62,811	$	160,531
May 5, 2007 (unaudited)	$	90,801	$	58,365	$	149,166
Capital Expenditures
May 3, 2008 (unaudited)	$	160	$	5,961	$	6,121
May 5, 2007 (unaudited)	$	1,254	$	7,395	$	8,649
Depreciation and Amortization
May 3, 2008 (unaudited)	$	407	$	1,663	$	2,070
May 5, 2007 (unaudited)	$	409	$	1,298	$	1,707
Goodwill
May 3, 2008 (unaudited)	$	40,204	$	—	$	40,204
February 2, 2008	$	40,204	$	—	$	40,204
May 5, 2007 (unaudited)	$	40,204	$	—	$	40,204


	Thirteen Weeks Ended
	May 3, 2008			May 5, 2007
	(In thousands) (unaudited)
Net revenues:
Direct marketing	$	40,607		$	38,129
Retail store		22,930			19,678

Total net revenue	$	63,537		$	57,807

Operating income (loss):
Direct marketing	$	1,581		$	1,197
Retail store		(5,346	)		(4,651	)

Operating loss	$	(3,765	)	$	(3,454	)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this report on Form 10-Q. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so incorporated or included. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth under “Forward Looking Statements”, risk factors and elsewhere in this report.

Results of Operations and Financial Condition

Executive Summary

dELiA*s, Inc. is a multi-channel, specialty retailer of apparel, action sports equipment and accessories, comprised of three lifestyle brands—dELiA*s, Alloy and CCS. Our merchandise assortment (which includes many name brand products along with our own proprietary brand products), our catalogs, our e-commerce webpages, and our mall-based dELiA*s specialty retail stores are designed to appeal directly to consumers in the teen market. We reach our customers through our direct marketing segment, which consists of our catalog and e-commerce businesses, and our growing base of retail stores.

On May 31, 2005, Alloy, Inc. announced that its board of directors had approved a plan to pursue a spinoff to its shareholders of all of the outstanding common stock of dELiA*s, Inc. (the “Spinoff”). The Spinoff was completed as of December 19, 2005. In connection with the Spinoff, Alloy, Inc. contributed and transferred to us substantially all of the assets and liabilities related to its direct marketing and retail store segments.

Our strategy is to improve upon our strong competitive position as a direct marketing company targeting teenagers; to expand and develop our dELiA*s specialty retail stores; to capitalize on the strengths of our brands by testing other branded direct marketing and potentially exploring retail store concepts; and to carry out such strategy while controlling costs.

We expect that growth in our retail stores business, which represented 36.1% of our total net sales in the first fiscal quarter of 2008, will be the key element of our overall growth strategy. Our current expectation is to grow our retail store net square footage by approximately 12-14% in fiscal 2008 and approximately 15% annually thereafter. As market conditions allow, we plan to continue to expand the dELiA*s retail store base over the long term, perhaps to as many as 350-400 stores, in part by utilizing our databases to identify new store sites. In addition, as store performance and market conditions allow, we may plan on accelerating our growth in gross square footage. Should we accelerate our growth, we may need additional equity or debt financing, which may not be available on acceptable terms or at all.

dELiA*s, Inc. formerly was an indirect, wholly-owned subsidiary of Alloy, Inc. By virtue of the completion of the Spinoff, Alloy, Inc. does not own any of our outstanding shares of common stock. In addition, we entered into various agreements with Alloy, Inc. prior to or in connection with the Spinoff. These agreements, as subsequently amended, govern various interim and ongoing relationships between Alloy, Inc. and us following the Spinoff.

Goals

We believe that focusing on our brands and implementing the following initiatives should lead to profitable growth and improved results from operations:

•

Delivering low—to mid-single digit comparable store sales growth in our dELiA*s retail stores over the long term;

•

Driving low—to mid-single digit top-line growth in direct marketing, through targeted circulation in productive mailing segments;

•

Monitoring and opportunistically closing underperforming stores;

•

Improving gross profit margins each year by 50 basis points;

•

Developing retail merchandising assortments that emphasize key sportswear categories more heavily;

•

Improving our retail store metrics through increased focus on the selling culture, with emphasis on key item selling, and thereby improving productivity;

•

Implementing profit-improving inventory planning and allocation strategies such as seasonal carry-in reduction, better store-planning, targeted replenishment by size, tactical fashion investment, and vendor consolidation, to create inventory turn improvement;

•

Leveraging our current expense infrastructure and taking additional operating costs out of the business; and

•

Increasing square footage by approximately 12-14% in fiscal 2008 and by approximately 15% annually thereafter.

Key Performance Indicators

The following measurements are among the key business indicators that management reviews regularly to gauge the Company’s results:

•

store metrics such as comparable store sales, sales per gross square foot, average retail price per unit sold, average transaction values, store contribution margin (defined as store gross profit less direct costs of running the store), and average units per transaction;

•

direct marketing metrics such as demand generated by book, with demand defined as the amount customers seek to purchase without regard to merchandise availability;

•

fill rate, which is the percentage of any particular order we are able to ship for our direct marketing business, from available on-hand inventory or future inventory orders;

•

gross profit;

•

operating income;

•

inventory turnover and cost of goods available per average square foot (COGAS); and

•

cash flow and liquidity determined by the Company’s cash provided by operations.

The discussion below includes references to “comparable stores.” We consider a store comparable after it has been open for fifteen full months without closure for more than seven consecutive days and whose square footage has not been expanded or reduced by more than 25% within the past year. If a store is closed during a fiscal period, it is removed from the computation of comparable store sales for that fiscal quarter and year-to-date period.

Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to January 31. The fiscal year ended February 2, 2008 was a 52-week fiscal year, and the fiscal year ending January 31, 2009 will also be a 52-week fiscal year.

Consolidated Results of Operations

The following table sets forth our statements of operations data for the periods indicated, reflected as a percentage of revenues:


	Thirteen Weeks Ended
	May 3, 2008		May 5, 2007
STATEMENTS OF OPERATIONS DATA:
Total revenues	100.0	%	100.0	%
Cost of goods sold	65.5	%	63.9	%
Gross profit	34.5	%	36.1	%
Operating expenses:
Selling, general and administrative expenses	40.4	%	42.1	%
Total operating expenses	40.4	%	42.1	%
Operating loss	(5.9	)%	(6.0	)%
Interest (expense) income, net	(0.1	)%	0.4	%
Loss before provision income taxes	(6.1	)%	(5.6	)%
Provision for income taxes	(0.1	)%	0.0	%
Net loss	(6.2	)%	(5.6	)%

Quarter Ended May 3, 2008 Compared with the Quarter Ended May 5, 2007

Revenues

Total Revenues. Total revenues increased 10% to $63.5 million in the quarter ended May 3, 2008 from $57.8 million in the quarter ended May 5, 2007. Revenue increases in the retail segment were driven primarily by new store sales, in addition to a 2% comparable store sales increase over the prior comparable period. Direct revenue increased primarily on the strength of the dELiA*s and CCS businesses.

Direct Marketing Revenues. Direct marketing revenues increased 6.5% to $40.6 million in the quarter ended May 3, 2008 from $38.1 million in the quarter ended May 5, 2007. The direct business showed productivity increases offsetting the impact of the planned circulation cuts. Our dELiA*s and CCS brands were up double digits in comparison to the first quarter of fiscal 2007 offsetting modest decreases in our Alloy brand.

Retail Store Revenues. Retail store revenues increased 16.5% to $22.9 million for the quarter ended May 3, 2008 from $19.7 million for the quarter ended May 5, 2007. The revenue increase was driven by new store openings which included seventeen net new store openings since the end of the first quarter of fiscal 2007. Our comparable store sales were up 2% over the prior year. During the quarter, we opened six new stores and relocated one store. Accordingly, we ended the quarter ended May 3, 2008 with 92 stores in operation as compared to the 75 locations open as of May 5, 2007.

The following table sets forth select operating data in connection with the revenues of our Company:


	Thirteen Weeks Ended
	May 3, 2008			May 5, 2007
Channel net revenues:
Retail	$	22,930		$	19,678
Direct:
Catalog		7,732			9,492
Internet		32,875			28,637

Total direct		40,607			38,129

	$	63,537		$	57,807

Internet % of total direct revenues		81	%		75	%

Catalogs Mailed		13,069			15,123

Number of Stores:
Beginning of period		86			74
Stores opened		7	*		7	**
Stores closed		1	*		6	**

End of Period		92			75

Total Gross Sq. Ft. End of Period		349.5			283.0

*	Totals include one store that was closed and relocated to another site in the same mall during the first quarter of fiscal 2008.

**	Totals include one store that was closed and relocated to another site in the same mall during the first quarter of fiscal 2007; and one store that was closed in the first quarter of fiscal 2007 that was remodeled and reopened during the second of quarter of 2007.

Gross Profit

Total Gross Profit. Total gross profit for the quarter ended May 3, 2008 was $21.9 million or 34.5% of revenues as compared to $20.9 million or 36.1% of revenues in the quarter ended May 5, 2007.

Direct Marketing Gross Profit. Direct marketing gross profit for the quarter ended May 3, 2008 was $16.9 million or 41.7% of revenues as compared to $16.9 million or 44.4% of revenues for the quarter ended May 5, 2007. The 270 basis point decline was primarily attributable to reduced net shipping and handling income as a result of an increased proportion of orders with free shipping and a significant increase in costs due to higher rates and fuel surcharges. In addition, a higher proportion of clearance versus full-price merchandise sales reduced merchandise margins.

Retail Store Gross Profit. Retail store gross profit for the quarter ended May 3, 2008 was $5.0 million or 21.7% of revenues as compared to $3.9 million or 19.9% of revenues for the quarter ended May 5, 2007. The 180 basis point increase in gross profit percentage in the current quarter was the result of improved merchandise margins which were offset, in part, by the deleveraging of occupancy costs.

Operating Expenses

Total Selling, General and Administrative. As a percentage of revenues, total selling, general and administrative expenses decreased to 40.4% for the quarter ended May 3, 2008 from 42.1% for the quarter ended May 5, 2007. In total, selling, general and administrative expenses increased $1.4 million, from $24.3 million in the quarter ended May 5, 2007 to $25.7 million in the quarter ended May 3, 2008. The $1.4 million increase was primarily due to the higher depreciation and other store costs associated with the number of new stores opened, which was offset by savings in catalog costs.

Direct Marketing Selling, General and Administrative. Direct marketing selling, general and administrative expenses decreased $402,000 from $15.7 million in the quarter ended May 5, 2007 to $15.3 million in the quarter ended May 3, 2008. As a percentage of related revenues, direct marketing selling, general and administrative expenses decreased from 41.3% in the quarter ended May 5, 2007 to 37.8% in the quarter ended May 3, 2008. This reduction was driven by a decrease in catalog costs attributable to planned circulation cuts and book design economies, offset by the effect of postage, paper and freight rate increases.

Retail Store Selling, General and Administrative. Retail selling, general and administrative expenses increased $1.7 million from $8.6 million in the quarter ended May 5, 2007 to $10.3 million in the quarter ended May 3, 2008. As a percentage of related revenues, retail selling, general and administrative expenses increased from 43.6% for the quarter ended May 5, 2007 to 45.0% in the quarter ended May 3, 2008. The increase was primarily due to the higher depreciation and other costs associated with the number of new stores opened as well as additional preopening costs based upon the timing of new store openings this year versus last year.

Operating Income (Loss)

Total Operating Loss. Our total operating loss was $3.8 million in the first quarter of fiscal 2008 as compared to a loss of $3.5 million in the first quarter of fiscal 2007.

Direct Marketing Operating Income. Direct marketing operating income was $1.6 million for the quarter ended May 3, 2008 versus income of $1.2 million for the quarter ended May 5, 2007.

Retail Store Operating Loss. Operating loss from retail stores was $5.3 million for the quarter ended May 3, 2008 versus a loss of $4.7 million for the quarter ended May 5, 2007.

Interest (expense) income, net

We recorded net interest expense of $89,000 in the quarter ended May 3, 2008 and net interest income of $209,000 in the quarter ended May 5, 2007. Interest expense is related to the mortgage note for our Hanover, Pennsylvania facility and the increase in borrowings under the Restated Credit Facility. Reduced interest income resulted from the lower quarterly cash balances in the first quarter of fiscal 2008.

Provision for income taxes

Our income tax expense reflects our anticipated annual effective tax rate. We recorded an income tax expense of $95,000 in the quarter ended May 3, 2008 and income tax expense of $20,000 for the quarter ended May 5, 2007 primarily related to state tax expense.

Seasonality and Quarterly Fluctuation

Our historical revenues and operating results have varied significantly from quarter to quarter due to seasonal fluctuations in consumer purchasing patterns. Sales of apparel, accessories, footwear and action sports equipment through our e-commerce webpages, catalogs and retail stores have generally been higher in our third and fourth fiscal quarters, which contain the key back-to-school and holiday selling seasons, than in our first and second fiscal quarters. Starting in the second quarter and through the beginning of our fourth fiscal quarters, our working capital requirements increase and have typically been funded by our cash balances and borrowings under the Restated Credit Facility. Quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the relative proportion of our new stores to mature stores, fashion trends and changes in consumer preferences, calendar shifts of holiday or seasonal periods, changes in merchandise mix, timing of promotional events, fuel, postage and paper prices, general economic conditions, competition and weather conditions.

Liquidity and Capital Resources

Our primary capital requirements include construction and fixture costs related to the opening of new retail stores and for maintenance and selective remodeling expenditures for existing stores, as well as incremental inventory required for the new stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores, the size of the specific stores we open and the nature of arrangements negotiated with landlords. In that regard, our net investment to open new stores is likely to vary significantly in the future.

We expect our current cash balance, cash flow from operations and availability under our Restated Credit Facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures at least through the end of fiscal 2008. Beyond that time frame, if we decide to accelerate growth of our retail operations beyond the ranges in our stated retail strategy, or if cash flow from operations is not sufficient to meet our capital requirements, then we may be required to obtain additional equity or debt financing in the future. Such equity or debt financing may not be available to us when we need it or, if available, may not be on terms that will be satisfactory to us or may be dilutive to our stockholders. If financing is not available when required or is not available on acceptable terms, we may be unable to expand our retail store operations as currently planned or execute on other aspects of our growth strategy. In addition, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

Net cash used in operating activities was $232,000 in the thirteen weeks ended May 3, 2008, compared with $1.4 million in the thirteen weeks ended May 5, 2007. The cash used in operating activities in the first quarter of fiscal 2008 was due primarily to funding the net operating losses in the retail segment.

Cash used in investing activities was $4.6 million in the thirteen weeks ended May 3, 2008, compared with $8.6 million in the thirteen weeks ended May 5, 2007, which included the build out of our new corporate offices. The $4.6 million used in the first quarter of 2008 was primarily due to capital expenditures associated with the construction of our new retail stores. Six new stores were opened during the quarter and one store was relocated.

Cash provided by financing activities was $1.8 million in the thirteen weeks ended May 3, 2008, primarily related to borrowing under the Restated Credit Facility. Cash provided by financing activities in the thirteen weeks ended May 5, 2007 was $354,000.

At May 3, 2008, the unused available amount under the Restated Credit Facility was $8.3 million and approximately $7.6 million of letters of credit were outstanding.

As of May 3, 2008, February 2, 2008 and May 5, 2007, there were $1.9 million, $-0- and $-0- outstanding, respectively, under the Restated Credit Facility. The weighted average interest rate for funds borrowed under the Restated Credit Facility during the quarter ended May 3, 2008 was approximately 5.3%.

We currently are a party to a mortgage loan agreement related to the purchase of our distribution facility in Hanover, Pennsylvania. The mortgage note amortizes on a fifteen-year schedule and was to mature with a balloon payment of $2.3 million in September 2008. During March 2008, we extended the maturity date on the mortgage note from September 2008 to September 2009 and the mortgage note has been, accordingly, classified as long-term on the accompanying balance sheet. The loan bears interest at LIBOR plus 225 basis points and is subject to quarterly financial covenants.

We were in compliance with the financial covenants for the quarter ended May 3, 2008. As of May 3, 2008, the current and long-term mortgage note payable balances were $213,000 and $2.2 million, respectively. The mortgage loan is secured by the distribution facility and related property. Our intention is to refinance the mortgage note prior to maturity.

Contractual Obligations

The following table presents our significant contractual obligations as of May 3, 2008 (in thousands):


	Payments Due By Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations
Mortgage Loan Agreement Principal (1)	$	2,368	$	213	$	2,155	$	—	$	—
Interest on Mortgage Loan (1)		164		118		46		—		—
Operating Lease Obligations (2)		114,981		14,889		29,173		25,806		45,113
Purchase Obligations (3)		37,803		37,803		—		—		—
Future Severance-Related Payments (4)		3,384		3,384		—		—		—

Total	$	158,700	$	56,407	$	31,374	$	25,806	$	45,113

(1)	Our mortgage loan agreement is related to the purchase of our distribution facility in Hanover, Pennsylvania

(2)	Our operating lease obligations are primarily related to dELiA*s retail stores

(3)	Our purchase obligations are primarily related to inventory commitments and service agreements

(4)	Our future severance-related payments primarily consist of severance agreements with existing employees and a non-competition agreement with a former employee of dELiA*s Corp.

We have long-term noncancelable operating lease commitments for retail stores, office space, contact center facilities and equipment. We also have long-term, non-cancelable capital lease commitments for equipment.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses, among other things, our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to product returns, bad debts, inventories, investments, intangible assets and goodwill, income taxes, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following policies are most critical to the portrayal of the Company’s financial condition and results of operations.

Revenue Recognition

Direct marketing revenues are recognized at the time of shipment to customers. These revenues are net of any promotional price discounts and an allowance for sales returns. The allowance for sales returns is estimated based upon our direct marketing return policy, historical experience and evaluation of current sales and returns trends. Direct marketing revenues also include shipping and handling fees billed to customers.

Retail store revenues are recognized at the point of sale, net of any promotional price discounts and an allowance for sales returns. The allowance for sales returns is estimated based upon our retail return policy, historical experience and evaluation of current sales and returns trends.

We recognize other revenues that consist primarily of advertising provided for third parties in our catalogs, on our e-commerce webpages, in our outbound packages, and in our retail stores, pursuant to specific pricing arrangements with Alloy, Inc. Alloy, Inc. arranges these advertising services on our behalf through a media services agreement (see Note 8 to our financial statements) entered into in connection with the Spinoff. We believe that the terms and conditions of this relationship are similar to those that we could obtain in the marketplace. Revenue under these arrangements is recognized, net of commissions and agency fees, when the underlying advertisement is published or otherwise delivered pursuant to the terms of each arrangement. We also recognize revenue from the sale of offline magazine subscriptions to our telephone direct marketing customers at the time of purchase. The revenue from third-party advertising and offline magazine subscription sales was approximately $224,000 and $327,000 for the thirteen weeks ended May 3, 2008 and May 5, 2007, respectively.

Catalog Costs

Catalog costs consist of catalog production, including paper, and mailing costs. These costs are capitalized and expensed over the expected future revenue stream, which is customarily two to four months from the date the catalogs are mailed.

An estimate of the future sales dollars to be generated from each individual catalog mailing serves as the foundation for our catalog costs policy. The estimate of future sales is calculated for each mailing using historical trends for catalogs mailed in similar prior periods as well as the overall current sales trend for each individual direct marketing brand. This estimate is compared with the actual sales generated-to-date for the catalog mailing to determine the percentage of total catalog costs to be capitalized as prepaid expenses on our consolidated balance sheets.

Inventories

Inventories, which consist of finished goods, are stated at the lower of cost (first-in, first-out method) or market value. Inventories may include items that have been written down to our best estimate of their net realizable value. Our decisions to write-down and establish valuation allowances against our merchandise inventories are based on our current rate of sale, the age of the inventory and other factors. Actual final sales prices to customers may be higher or lower than our estimated sales prices and could result in a fluctuation in gross profit. The cost of inventories includes the cost of merchandise, freight in, duties, and certain buying, merchandising and warehousing costs. Store occupancy costs, including rent and common area maintenance, are treated as period costs.

Goodwill and Other Indefinite-Lived Intangible Assets

We follow the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill that previously was amortized to earnings is no longer amortized, but is periodically tested for impairment.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge.

We perform valuation analyses and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projected future cash flows (including timing), discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

Considerable management judgment is necessary to estimate the fair value of our reporting units, which may be impacted by future actions taken by us or our competitors and the economic environment in which we operate. These estimates affect the balance of goodwill, as well as intangible assets on our consolidated balance sheets and operating expenses on our consolidated statements of operations.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Recent Accounting Pronouncements

Off-Balance Sheet Arrangements

We enter into letters of credit issued under the Restated Credit Facility to facilitate the purchase of merchandise.

dELiA*s Brand, LLC, one of our subsidiaries, entered into a license agreement in 2003 with JLP Daisy that grants JLP Daisy exclusive rights (except for our rights) to use the dELiA*s trademarks to advertise, promote and market the licensed products, and to sublicense to permitted sub-licensees the right to use the trademarks in connection with the manufacture, sale and distribution of the licensed products to approved wholesale customers.

At the time of the Spinoff, Alloy, Inc. had outstanding $69.3 million of 5.375% convertible senior debentures due 2023 (the “Debentures”). The outstanding Debentures were convertible into 8,274,628 shares of Alloy, Inc. common stock. As a result of the Spinoff, the Debentures were convertible into 8,274,628 shares of Alloy, Inc. common stock (before consideration of a subsequent reverse stock split by Alloy, Inc.) and 4,137,314 shares of our common stock if and when the conditions to conversion are satisfied. We have agreed with Alloy, Inc. that we would issue shares of our common stock on behalf of Alloy, Inc. to holders of the Debentures as and when required in connection with any conversion of the Debentures. As a result of current market conditions, the combined share value of our common stock and Alloy, Inc.’s common stock have exceeded the conversion price of the Debentures. As of May 3, 2008, 4,053,933 shares of dELiA*s, Inc. common stock were issued in connection with the conversion of the Debentures.

We do not maintain any other off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Guarantees

We have no significant financial guarantees.

Inflation

In general, our costs are affected by inflation, and we may experience the effects of inflation in future periods. We have experienced recent increases in postage, paper, freight and energy costs that have had an adverse impact on our operating results.

Forward-Looking Statements

Statements in this document expressing our expectations and beliefs regarding our future results or performance are forward-looking statements that involve a number of substantial risks and uncertainties. When used in this document, the words “anticipate,” “may,” “could,” “plan,” “project,” “should,” “would,” “predict,” “believe,” “estimate,” “expect” and “intend” and similar expressions are intended to identify such forward-looking statements.

Such statements are based upon management’s current expectations and are subject to risks, assumptions and uncertainties that could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Actual results may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risks discussed in “Risk Factors” (See Part II, Item 1A hereof).

Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as may be required by law.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

As of May 3, 2008, we did not hold any marketable securities, nor do we own any derivative financial instruments in our portfolio. Accordingly, we do not believe there is any material market risk exposure with respect to derivatives or other financial instruments that would require disclosure under this item. Revolving loans under the Restated Credit Facility bear interest at rates that are tied to the LIBOR and Prime Rate, and, therefore, our consolidated financial statements could be exposed to changes in interest rates. The Company has not considered this exposure material.

Item 4.

Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, May 3, 2008, our Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended May 3, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We are involved from time to time in litigation incidental to our business and, from time to time, we may make provisions for potential litigation losses. We follow SFAS No. 5, “Accounting for Contingencies” when assessing pending or potential litigation.

The information set forth in Part I, Note 9 on page 14 under the caption “Litigation” is incorporated herein by reference.

Item 1A.

Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits


(A)		Exhibits
31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.*

31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.*

32.1		Certification under section 906 by the Chief Executive Officer.*

32.2		Certification under section 906 by the Chief Financial Officer.*

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	dELiA*s, Inc.

Date: June 5, 2008	By:	/s/ Robert E. Bernard
		Robert E. Bernard
		Chief Executive Officer

Date: June 5, 2008	By:	/s/ Stephen A. Feldman
		Stephen A. Feldman
		Chief Financial Officer

EX-31.1 2 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

CERTIFICATIONS UNDER SECTION 302

I, Robert E. Bernard, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of dELiA*s, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Robert E. Bernard

Robert E. Bernard

Chief Executive Officer

(Principal Executive Officer)

Date: June 5, 2008

EX-31.2 3 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

CERTIFICATIONS UNDER SECTION 302

I, Stephen A. Feldman, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of dELiA*s, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Stephen A. Feldman

Stephen A. Feldman

Chief Financial Officer

(Principal Financial Officer)

Date: June 5, 2008

EX-32.1 4 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

EXHIBIT 32.1

CERTIFICATION OF ROBERT E. BERNARD, CHIEF EXECUTIVE OFFICER

CERTIFICATION UNDER SECTION 906

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of dELiA*s, Inc., a Delaware corporation (the “Company”), does hereby certify that:

The Quarterly Report on Form 10-Q for the quarter ended May 3, 2008 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of the operations of the Company.

/s/ Robert E. Bernard

Robert E. Bernard

Chief Executive Officer

Date: June 5, 2008

EX-32.2 5 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

EXHIBIT 32.2

CERTIFICATION OF STEPHEN A. FELDMAN, CHIEF FINANCIAL OFFICER

CERTIFICATION UNDER SECTION 906

/s/ Stephen A. Feldman

Stephen A. Feldman

Chief Financial Officer

Date: June 5, 2008

-----END PRIVACY-ENHANCED MESSAGE-----

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents