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Cpi Corp (CPICQ) SEC Filing 10-K Annual report for the fiscal year ending Saturday, February 5, 2011

Cpi Corp

CIK: 25354 Ticker: CPICQ
EXHIBIT 99.1
 


CPI Corp.
news for immediate release                                                                FOR RELEASE  April 19, 2011



FOR FURTHER INFORMATION CONTACT:

NAME
Jane Nelson
 
FROM
 
CPI Corp.
ADDRESS
1706 Washington Avenue
 
CITY
 
St. Louis
STATE, ZIP
Missouri, 63103
 
TELEPHONE
 
(314) 231-1575


 

CPI CORP. ANNOUNCES 2010 FOURTH-QUARTER RESULTS

ST. LOUIS, April 19, 2011 – CPI Corp. (NYSE: CPY) today reported results for the fiscal fourth quarter and year ended February 5, 2011.

Fiscal 2010 fourth-quarter sales declined 8% to $128.9 million from $140.2 million in the prior-year fourth quarter.
o  
Fourth-quarter PictureMe Portrait Studio® brand comparable store sales, as described herein, decreased 11% versus the same period last year.
o  
Fourth-quarter Sears Portrait Studio brand comparable store sales, as described herein, decreased 17% versus the same period last year.
o  
Sales from newly opened Kiddie Kandids studios contributed $8.6 million, excluding net revenue recognition change, during the 2010 fourth quarter.

 
Fiscal 2010 fourth-quarter Adjusted EBITDA and diluted EPS were $28.0 million and $2.06 per share, respectively, versus $37.6 million and $3.07, respectively, in the prior-year fourth quarter.  Excluding other charges and impairments in both periods and a $2.0 million tax adjustment in the prior year quarter related to foreign tax credits recorded for a previous year, fourth-quarter diluted EPS declined to $2.24 versus $2.74 in the prior-year fourth quarter.

Full-year Adjusted EBITDA and diluted EPS were $41.6 million and $1.64 per share, respectively, versus $53.3 million and $1.97 in the respective prior-year period.  Excluding other charges and impairments in both periods and a $2.0 million tax adjustment in the prior year related to foreign tax credits recorded for a previous year, full year diluted EPS increased to $2.07 versus $1.97 in the prior fiscal year.

Net debt declined to $43.5 million as of the 2010 fiscal year end from $58.6 million as of the 2009 fiscal year end.

Newly acquired Bella Pictures®, a leading provider of wedding photography and videography through an extensive network of contract photographers and videographers, substantially expands the Company’s mobile (on location) photography capabilities and offers substantial sales and fulfillment synergies with CPI’s core studio operations as well as a strong growth platform.

Commenting on the fourth quarter, Renato Cataldo, CPI’s President and Chief Executive Officer said, “Although we are disappointed with our fiscal 2010 fourth quarter results which reflected very difficult industry and broader economic conditions in the period, we are pleased with the underlying fundamentals of our business.  Amid a difficult operating environment in 2010, we improved service levels, loyalty plan enrollment and sales productivity, reduced operating costs, strengthened our balance sheet, solidified our host relationships, re-launched the Kiddie Kandids brand in 171 locations including 21 mall-based locations and 20 expansion stores, and substantially expanded our event and on-location photography capabilities with the acquisition of Bella Pictures, a potential game-changer as we seek to transform our relationships with customers.”

 
 
 
 
Continuing, Mr. Cataldo said, “Looking ahead to 2011, we expect continued top-line challenges, especially in view of the higher food and energy prices and job insecurity that are weighing especially heavily on our core customer.  We are, nevertheless, encouraged about our prospects to sustain solid profitability and cash generation over the next year based on already identified cost reductions and operating income improvement expected from the Kiddie Kandids operations.”

Fourth-quarter 2010 Results
Net sales for the fourth quarter of fiscal 2010 decreased 8% to $128.9 million from the $140.2 million reported in the fiscal 2009 fourth quarter.  Excluding the positive impacts of net store openings ($7.6 million), foreign currency translation ($1.0 million), E-commerce ($0.6 million) and other items totaling $0.4 million, and negative impacts of net revenue recognition change ($1.7 million) and revenue deferral related to the Company’s loyalty programs ($0.7 million), comparable same-store sales decreased approximately 14%.

Net income for the fourth quarter in fiscal 2010 was $14.9 million, or $2.06 per diluted share, compared with $21.7 million, or $3.07 per diluted share, reported for the fourth quarter of fiscal 2009.  Earnings in the period were significantly affected by comparable store sales declines, an adverse commission adjustment related to greater than expected sales declines and increased employee insurance, pension and amortization expense.  These negative earnings impacts were partially offset by lower production, labor and advertising costs as well as lower interest expense and depreciation.  Foreign currency translation effects did not have a material impact on the Company’s net earnings in the fourth quarter of 2010.  The Kiddie Kandids studio operations contributed approximately $1.8 million of operating income during the 2010 fourth quarter.

Net sales from the Company’s PictureMe Portrait Studio® (PMPS) brand, on a comparable same-store basis, excluding impacts of net revenue recognition change, store closures, foreign currency translation and other items totaling ($0.6 million), decreased 11% in the fourth quarter of fiscal 2010 to $59.1 million from $66.4 million in the fourth quarter of fiscal 2009.  The decrease in PMPS sales for the fourth quarter was the result of a 16% decrease in the number of sittings, offset in part by a 6% increase in average sale per customer sitting.

Net sales from the Company’s Sears Portrait Studio (SPS) brand, on a comparable same-store basis, excluding impacts of net revenue recognition change, store closures, loyalty program revenue deferral and other items totaling ($1.7 million), decreased 17% in the fourth quarter of fiscal 2010 to $52.3 million from $63.1 million in the fourth quarter of fiscal 2009.  The decrease in SPS sales for the fourth quarter of fiscal 2010 was the result of a 14% decline in the number of sittings and a 4% decline in average sale per customer sitting.

Net sales from the Company’s Kiddie Kandids studio operations, excluding the impact of net revenue recognition change totaling ($0.3 million), contributed $8.6 million in net sales in the fourth quarter of fiscal 2010.  The Company has opened 171 Kiddie Kandids locations as of April 18, 2011.  The Company plans to open an additional 25 locations during fiscal 2011.

Cost of sales, excluding depreciation and amortization expense, declined to $8.4 million in the fourth quarter of fiscal 2010, from $9.0 million in the fourth quarter of fiscal 2009 due to lower overall production levels, as well as continuing productivity improvements.

Selling, general and administrative (SG&A) expense decreased to $92.6 million in the fourth quarter of fiscal 2010 from $93.7 million in the prior-year quarter, primarily due to reductions in SPS and PMPS studio employment costs from improved scheduling, selected operating hour reductions and studio closures, a decline in host commission expense due to lower sales levels, a reduction in corporate bonuses for fiscal 2010 and reduced advertising costs.  These decreases were offset significantly by costs associated with the newly opened Kiddie Kandids studios, an adverse commission adjustment ($0.4 million) arising from greater than expected sales declines, higher employee insurance and pension costs due to unfavorable claim activity and changes in discount rates, respectively, and increased expenses amortized as the result of a higher level of stock-based compensation performance awards made for the 2009 fiscal year.

Depreciation and amortization expense was $3.9 million in the fourth quarter of fiscal 2010, compared with $4.8 million in the fourth quarter of fiscal 2009.  Depreciation expense decreased as a result of the full depreciation of certain assets acquired in connection with the 2007 acquisition of PCA and the closure of certain PMPS locations during the past two fiscal years.

In the fourth quarter of fiscal 2010, the Company recognized a $2.2 million charge in other charges and impairments, compared with a credit of $0.5 million in the fourth quarter of fiscal 2009.  The current-quarter charge primarily includes certain litigation costs, costs incurred in connection with the acquisition of assets of Bella Pictures, Inc. and severance costs.  The prior-year credit primarily related to the gain on sale of the production facility based in Connecticut.
 
 
 
 
 
 
Interest expense declined $0.7 million in the fourth quarter of fiscal 2010 to $0.6 million from $1.3 million in the fourth quarter of fiscal 2009.  The decrease is primarily a result of lower average borrowings and favorable interest rates as a result of the new credit facility.

Fiscal 2010 Full-Year Results
For the fiscal year ended February 5, 2011, the Company reported that net sales decreased 4% to $407.0 million from the $422.4 million reported in the fiscal year 2009.  Excluding the positive impacts of net store openings ($15.3 million), foreign currency translation ($4.9 million), E-commerce ($1.5 million) and other items totaling $0.2 million, comparable same-store sales decreased approximately 9%.

The Company also reported net income of $11.9 million, or $1.64 per diluted share, for fiscal 2010 compared with $13.8 million, or $1.97 per diluted share, for fiscal 2009.  Earnings in the period were significantly affected by comparable store sales declines, an adverse commission adjustment related to greater than expected sales declines and increased employee insurance, pension and amortization expense.  These decreases were offset in part by lower production, labor and advertising costs as well as lower interest expense and depreciation.  Foreign currency translation effects did not have a material impact on the Company’s net earnings in fiscal 2010.  The Kiddie Kandids studio operations contributed approximately $0.9 million in operating income in fiscal 2010.

Net sales from the Company’s PictureMe Portrait Studio® (PMPS) brand, on a comparable same-store basis, excluding impacts of store closures, foreign currency translation, E-commerce, net revenue recognition change and other items totaling $2.7 million, decreased 5% in fiscal 2010 to $208.0 million from $219.1 million in fiscal 2009.  The decrease in PMPS sales in fiscal 2010 was the result of a 10% decline in the number of sittings, offset in part by a 6% increase in average sale per customer sitting.

Net sales from the Company’s Sears Portrait Studio (SPS) brand, on a comparable same-store basis, excluding impacts of store closures, foreign currency translation, net revenue recognition change and other items totaling ($0.7 million), decreased 13% in fiscal 2010 to $171.2 million from $197.3 million in fiscal 2009.  The decrease in SPS sales in fiscal 2010 was the result of an 11% decline in the number of sittings and a 3% decline in average sale per customer sitting.

Net sales from the Company’s Kiddie Kandids studio operations, excluding the impact of net revenue recognition change and other items totaling ($0.9 million), contributed $20.8 million in net sales in fiscal 2010.

Cost of sales, excluding depreciation and amortization expense, declined to $28.3 million in fiscal 2010, from $30.6 million in fiscal 2009 due to lower overall production levels, as well as continuing productivity improvements.  These declines were offset in part by a change in product mix and an increase in carrier rates.

Selling, general and administrative (SG&A) expense decreased to $337.5 million in fiscal 2010 from $339.1 million in the prior year, primarily due to reductions in SPS and PMPS studio employment costs from improved scheduling, selected operating hour reductions and studio closures, reduced advertising costs, a decline in host commission expense due to lower sales levels and a reduction in corporate bonuses for fiscal 2010.  These decreases were offset significantly by costs associated with the newly opened Kiddie Kandids studios, increased expenses amortized as the result of a higher level of stock-based compensation performance awards made for the 2009 fiscal year, an adverse commission adjustment ($1.5 million) arising from greater than expected sales declines and higher pension, employee insurance and worker’s compensation costs due to changes in discount rates, unfavorable claim activity and loss experience adjustments, respectively.

Depreciation and amortization expense was $18.0 million in fiscal 2010, compared with $22.7 million in fiscal 2009.  Depreciation expense decreased as a result of the full depreciation of certain assets acquired in connection with the 2005 digital conversion of SPS and 2007 acquisition of PCA and the closure of certain PMPS locations during the past two fiscal years.

In fiscal 2010, the Company recognized $5.1 million in other charges and impairments, compared with $3.3 million in fiscal 2009.  The current-year charge includes a $1.9 million downward adjustment to the carrying value of a large facility previously classified as “held for sale”, the write-off of $1.1 million of debt fees related to the Company’s former credit facility as a result of its new revolving credit facility, certain litigation costs, costs incurred in connection with the Kiddie Kandids asset acquisition and acquisition of assets of Bella Pictures, Inc. and severance costs.  These charges were offset in part by a gain on sale of the production facility based in Brampton, Ontario and an early termination fee received from Walmart in relation to certain early PMPS store closures.  The prior-year charge primarily related to certain PMPS integration charges, including severance and lab closure costs and impairment, proxy contest costs and litigation costs; offset in part by a gain on sale of the production facility based in Connecticut.
 
 
 
 
 
 
Interest expense declined $3.1 million in fiscal 2010 to $3.9 million from $7.0 million in fiscal 2009.  The decrease is primarily a result of lower average borrowings and favorable interest rates as a result of the new credit facility, as well as a change in the interest rate swap value, which expired in the third quarter of fiscal 2010.

Income tax expense was $3.4 million and $5.8 million in fiscal 2010 and 2009, respectively.  The resulting effective tax rates were 22% and 30% in 2010 and 2009, respectively.  The overall decrease in the effective tax rate in fiscal 2010 was primarily due to certain tax benefits recognized related to a previous uncertain tax position and miscellaneous tax return adjustments.

Acquisition of Assets of Bella Pictures, Inc.
As previously announced, on January 26, 2011, the Company’s subsidiary, Bella Pictures Holdings, LLC acquired substantially all of the assets of Bella Pictures, Inc. (the “Seller”), a leading provider of branded wedding photography services.  In consideration for the assets purchased, the subsidiary issued to the Seller shares representing a 5% ownership in the subsidiary and also assumed certain liabilities (net of cash of $1.5 million), consisting primarily of specified customer fulfillment obligations for both booked and completed weddings.

The acquisition significantly expands the Company’s mobile (on location) photography capabilities and offers customers high-quality wedding photography and videography services and products in most major U.S. markets through a network of certified photographers and videographers.  The Company’s strong digital capabilities and infrastructure combined with the outstanding customer service skills of Bella Pictures® will allow the Company to provide exceptional value to both wedding and non-wedding customers across a wide spectrum of offerings and price points.

Capital Structure
As of February 5, 2011, the Company has reduced net debt to $43.5 million from $58.6 million as of February 6, 2010.

As previously announced, the Company has a share repurchase program in place to purchase up to 1.0 million shares through August of 2011.  During the fourth quarter of fiscal 2010, the Company repurchased 324,716 shares of common stock under this program for a total purchase price of $7.2 million.  As of April 18, 2011, the Company has repurchased 377,653 shares of common stock under this program for a total purchase price of $8.3 million.

Preliminary First-Quarter Net Sales
The Company’s preliminary net sales on a point-of-sale (POS) basis for the first 10 weeks of the first quarter of fiscal 2011 declined 11% to $73.7 million from $83.2 million in the same period last year due significantly to the shift in the Easter holiday (Easter 2011 is three weeks later than in 2010).  On a comparable same-store POS basis, excluding the impacts of the Kiddie Kandids operations and foreign currency translation, preliminary net sales for the first 10 weeks declined approximately 17% compared with the corresponding period in the prior year.  PMPS and SPS net sales for the first 10 weeks of the first quarter declined 14% and 20%, respectively.  The Company expects the negative trend to moderate moving through the Easter 2011 holiday but still expects to report negative comparisons for the first quarter.

Conference Call/Webcast Information
The Company will host a conference call and audio webcast on Tuesday, April 19, 2011, at 10:00 a.m. Central time to discuss the financial results and provide a Company update.  To participate on the call, please dial 800-561-2601 or 617-614-3518 and reference passcode 58468611 at least five minutes before start time.

The webcast can be accessed on the Company’s own site at http://www.cpicorp.com as well as http://www.earnings.com.  To listen to a live broadcast, please go to these websites at least 15 minutes prior to the scheduled start time in order to register, download, and install any necessary audio software.  A replay will be available on the above websites as well as by dialing 888-286-8010 or 617-801-6888 and providing passcode 23183001.  The replay will be available through May 3, 2011, by phone and for 30 days on the Internet.

CPI Corp. uses the Investor Relations page of its website at http://www.cpicorp.com to make information available to its investors and the public.  You can sign up to receive e-mail alerts whenever the Company posts new information to the website.

 
 
 
 
About CPI Corp.
For more than 60 years, CPI Corp. (NYSE: CPY) has been dedicated to helping customers conveniently create cherished photography portrait keepsakes that capture a lifetime of memories.  Headquartered in St. Louis, Missouri, CPI Corp. provides portrait photography services at approximately 3,000 locations in the United States, Canada, Mexico and Puerto Rico and offers on location wedding photography and videography services through an extensive network of contract photographers and videographers.  CPI’s conversion to a fully digital format allows its studios and on location business to offer unique posing options, creative photography selections, a wide variety of sizes and an unparalleled assortment of enhancements to customize each portrait – all for an affordable price.

 Forward-Looking Statements
The statements contained in this press release that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties.  The Company identifies forward-looking statements by using words such as “preliminary,” “plan,” “expect,” “looking ahead,” “anticipate,” “estimate,” “believe,” “should,” “intend” and other similar expressions.  Management wishes to caution the reader that these forward-looking statements, such as the Company’s outlook with respect to the integration of the acquisition of the operating assets and certain liabilities of the Bella Pictures business, portrait studios, net income, future cash requirements, cost savings, compliance with debt covenants, valuation allowances, reserves for charges and impairments, capital expenditures and other similar statements, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company.  Such risks include, but are not limited to: the Company's dependence on Walmart, Sears and Toys “R” Us, the approval of the Company’s business practices and operations by Walmart, Sears and Toys “R” Us, the termination, breach, limitation or increase of the Company's expenses by Walmart under the lease and license agreements and Sears and Toys “R” Us under the license agreements, the integration of the Bella Pictures operations into the Company and the continued development and operation of the Bella Pictures business, customer demand for the Company's products and services, the development and operation of the Kiddie Kandids business, the economic recession and resulting decrease in consumer spending, manufacturing interruptions, dependence on certain suppliers, competition, dependence on key personnel, fluctuations in operating results, a significant increase in piracy of the Company's photographs, widespread equipment failure, compliance with debt covenants, high level of indebtedness, implementation of marketing and operating strategies, outcome of litigation and other claims, impact of declines in global equity markets to pension plan and impact of foreign currency translation.  The risks described above do not include events that the Company does not currently anticipate or that it currently deems immaterial, which may also affect its results of operations and financial condition.  The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Financial tables to follow.
###
 
 
 
 
 
 
 
 
CPI CORP.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
 
 
   
12 Weeks
 
Vs
 
12 Weeks
   
52 Weeks
 
Vs
 
52 Weeks
 
   
February 5, 2011
     
February 6, 2010
   
February 5, 2011
     
February 6, 2010
 
                             
Net sales
  $ 128,949       $ 140,241     $ 407,035       $ 422,371  
                                     
Cost and expenses:
                                   
  Cost of sales (exclusive of depreciation and
                                   
    amortization shown below)
    8,381         8,983       28,263         30,626  
  Selling, general and administrative expenses
    92,570         93,658       337,490         339,138  
  Depreciation and amortization
    3,874         4,827       17,962         22,740  
  Other charges and impairments
    2,203         (458 )     5,092         3,294  
      107,028         107,010       388,807         395,798  
                                     
Income from operations
    21,921         33,231       18,228         26,573  
                                     
Interest expense
    635         1,345       3,860         7,030  
                                     
Interest income
    1         -       17         94  
                                     
Other income (expense), net
    100         (297 )     929         (44 )
                                     
Income from operations before income tax expense
    21,387         31,589       15,314         19,593  
                                     
Income tax expense
    6,496         9,890       3,413         5,796  
                                     
Net income
    14,891         21,699       11,901         13,797  
Net loss attributable to noncontrolling interest
    (7 )       -       (7 )       -  
                                     
Net income attributable to CPI Corp.
  $ 14,898       $ 21,699     $ 11,908       $ 13,797  
                                     
                                     
Net income per common share attributable to CPI Corp. - diluted
  $ 2.06       $ 3.07     $ 1.64       $ 1.97  
                                     
Net income per common share attributable to CPI Corp. - basic
  $ 2.07       $ 3.10     $ 1.64       $ 1.97  
                                     
Weighted average number of common and
                                   
 common equivalent shares outstanding:
                                   
   Diluted
    7,245         7,068       7,272         7,020  
                                     
   Basic
    7,208         7,008       7,257         6,993  
                                     
 
MORE...

 
 
 
 
 
CPI CORP.
ADDITIONAL CONSOLIDATED OPERATING INFORMATION
(In thousands)
 
   
12 Weeks
 
Vs.
 
12 Weeks
   
52 Weeks
 
Vs.
 
52 Weeks
 
   
February 5, 2011
     
February 6, 2010
   
February 5, 2011
     
February 6, 2010
 
                             
Capital expenditures
  $ 1,362       $ 726     $ 13,490       $ 5,234  
                                     
EBITDA is calculated as follows:
                                   
Net income attributable to CPI Corp.
    14,898         21,699       11,908         13,797  
Income tax expense
    6,496         9,890       3,413         5,796  
Interest expense
    635         1,345       3,860         7,030  
Depreciation and amortization
    3,874         4,827       17,962         22,740  
Other non-cash charges
    (3 )       (41 )     3,128         1,165  
                                     
EBITDA (1) & (5)
  $ 25,900       $ 37,720     $ 40,271       $ 50,528  
                                     
Adjusted EBITDA (2)
  $ 28,016       $ 37,592     $ 41,558       $ 53,270  
                                     
EBITDA margin (3)
    20.09 %       26.90 %     9.89 %       11.96 %
                                     
Adjusted EBITDA margin (4)
    21.73 %       26.81 %     10.21 %       12.61 %
 
(1)    EBITDA represents net earnings from continuing operations before interest expense, income taxes, depreciation and amortization and other non-cash charges. EBITDA is included because it is one liquidity measure used by certain investors to determine a company's ability to service its indebtedness.  EBITDA is unaffected by the debt and equity structure of the company. EBITDA does not represent cash flow from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. EBITDA is not necessarily comparable with similarly-titled measures for other companies.
 
(2)   Adjusted EBITDA is calculated as follows:
 
EBITDA
  $ 25,900     $ 37,720     $ 40,271     $ 50,528  
   EBITDA adjustments:
                               
Litigation costs
    1,461       24       1,461       557  
Kiddie Kandids integration costs
    72       -       1,250       -  
Reserves for severance and related costs
    235       6       538       970  
Bella Pictures Acquisition costs
    472       -       472       -  
Other transition related costs - PCA Acquisition
    45       (554 )     393       123  
            Gain on sale of Brampton facility     -       -       (1,473     -  
Translation gain
    (77 )     344       (803 )     61  
Proxy contest fees
    -       (33 )     -       871  
Other
    (92 )     85       (551 )     160  
                                 
Adjusted EBITDA
  $ 28,016     $ 37,592     $ 41,558     $ 53,270  
                                 
 
(3)   EBITDA margin represents EBITDA, as defined in (1), stated as a percentage of sales.
 
(4)   Adjusted EBITDA  margin represents Adjusted EBITDA, as defined in (2), stated as a percentage of sales.
 
(5)   As requried by the SEC's Regulation G, a reconciliation of EBITDA, a non-GAAP liquidity measure,with the most directly comparable GAAP liquidity measure, cash flow from continuing operations follows:
 
   
12 Weeks
 
Vs.
 
12 Weeks
   
52 Weeks
 
Vs.
 
52 Weeks
 
   
February 5, 2011
     
February 6, 2010
   
February 5, 2011
     
February 6, 2010
 
                             
EBITDA
  $ 25,900       $ 37,720     $ 40,271       $ 50,528  
Income tax expense
    (6,496 )       (9,890 )     (3,413 )       (5,796 )
Interest expense
    (635 )       (1,345 )     (3,860 )       (7,030 )
Adjustments for items not requiring cash:
                                   
   Deferred income taxes
    5,166         10,646       748         6,195  
   Deferred revenues and related costs
    (5,474 )       (7,154 )     (441 )       (1,076 )
   Other, net
    950         (967 )     1,497         319  
Decrease (increase) in current assets
    8,636         13,560       2,203         1,724  
Increase (decrease) in current liabilities
    (5,886 )       (10,529 )     540         (12,583 )
Increase (decrease) in current income taxes
    958         (894 )     1,522         (992 )
                                     
Cash flows from continuing operations
  $ 23,119       $ 31,147     $ 39,067       $ 31,289  
                                     

MORE...
 
 
 
 
 
 
CPI CORP.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 5, 2011 AND FEBRUARY 6, 2010
 
 
 
   
February 5, 2011
   
February 6, 2010
 
Assets
           
             
  Current assets:
           
   Cash and cash equivalents
  $ 5,363     $ 18,913  
   Other current assets
    24,726       34,642  
  Net property and equipment
    35,998       34,169  
  Intangible assets
    60,736       60,380  
  Other assets
    16,977       18,487  
                 
   Total assets
  $ 143,800     $ 166,591  
                 
                 
Liabilities and stockholders' equity
               
                 
  Current liabilities
  $ 49,203     $ 62,432  
  Long-term debt obligations
    48,900       57,855  
  Other liabilities
    31,427       36,116  
  Stockholders' equity
    14,270       10,188  
                 
   Total liabilities and stockholders' equity
  $ 143,800     $ 166,591  
                 
 
###
 

The following information was filed by Cpi Corp (CPICQ) on Tuesday, April 19, 2011 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

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

For the fiscal year ended February 5, 2011                                                                                or

o     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 1-10204

CPI Corp.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
 
1706 Washington Ave., St. Louis, Missouri
(Address of principal executive offices)
43-1256674
(I.R.S. Employer Identification No.)
 
63103
(Zip Code)

Registrant’s telephone number, including area code: 314/231-1575

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, par value $0.40 per share
Name of each exchange on which registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.          oYes    x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  oYes    x No

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. x Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     o Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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 the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o   Non-accelerated filer o   Accelerated filer x   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     oYes     xNo

As of July 24, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $147,828,000 based on the closing sales price of the common stock as reported on the New York Stock Exchange.

As of April 15, 2011, 7,004,079 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:
 
Part III of this Annual Report incorporates by reference certain information from the registrant’s definitive proxy statement for the 2011 annual meeting of the shareholders, which the registrant intends to file with the Securities and Exchange Commission no later than 120 days after the close of the registrant’s fiscal year ended February 5, 2011.




 
 
 
 
 
 

TABLE OF CONTENTS
PART I
       
         
Item 1.
 
Business
 
3
Item 1A.
 
Risk Factors
 
8
Item 1B.
 
Unresolved Staff Comments
 
11
Item 2.
 
Properties
 
12
Item 3.
 
Legal Proceedings
 
12
         
PART II
       
         
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder
   
     
Matters and Issuer Purchases of Equity Securities
 
13
Item 6.
 
Selected Consolidated Financial Data
 
16
Item 7.
 
Management's Discussion and Analysis of
   
     
Financial Condition and Results of Operations
 
18
Item 7A.
 
Quantitative and Qualitative Disclosures About
   
     
Market Risk
 
29
Item 8.
 
Financial Statements and Supplementary Data
 
30
Item 9.
 
Changes in and Disagreements with Accountants
   
     
on Accounting and Financial Disclosures
 
67
Item 9A.
 
Controls and Procedures
 
67
         
PART III
       
         
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
69
Item 11.
 
Executive Compensation
 
69
Item 12.
 
Security Ownership of Certain Beneficial Owners
   
     
and Management and Related Stockholder Matters
 
69
Item 13.
 
Certain Relationships and Related Transactions, and Director
   
     
Independence
 
69
Item 14.
 
Principal Accounting Fees and Services
 
70
         
PART IV
       
         
Item 15.
 
Exhibits and Financial Statement Schedules
 
70
     
76






 
2
 
 
 
Forward-Looking Statements

The statements contained in this report, and in particular in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties.  The Company identifies forward-looking statements by using words such as "preliminary," "plan," "expect," "looking ahead," "anticipate," "estimate," "believe," "should," "intend," and other similar expressions.  Management wishes to caution the reader that these forward-looking statements, such as the Company’s outlook for portrait studios, net income, future cash requirements, cost savings, compliance with debt covenants, valuation allowances, reserves for charges and impairments, capital expenditures and other similar statements, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company.  A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” beginning on page 8 of this report.  The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I
Item 1.              Business

An Overview of the Company

CPI Corp. (“CPI”, the “Company” or “we”), a Delaware corporation formed in 1982, is a long-standing leader, based on sittings, number of locations and related revenues, in the professional portrait photography of young children, individuals and families.  From a single studio opened by our predecessor company in 1942, we have grown to 3,084 studios, as of February 5, 2011, throughout the U.S., Canada, Mexico and Puerto Rico, principally under lease and license agreements with Walmart Stores, Inc. (“Walmart”) and license agreements with Sears, Roebuck and Co. (“Sears”) and Toys “R” Us – Delaware, Inc. (“TRU”).

Since 2007, the Company has provided professional portrait photography for Walmart customers and has been the sole operator of portrait studios in Walmart stores and supercenters in all fifty states in the U.S., Canada, Mexico and Puerto Rico.  For purposes of this report, the Walmart studio operations are operating within CPI Corp. under the trade names PictureMe Portrait Studio® in the U.S., Walmart Portrait Studios in Canada and Estudios Fotografia de Walmart in Mexico, collectively “PMPS” or the “PMPS brand”.  The Company has also provided professional portrait photography for Sears’ customers since 1959 and has been the only Sears portrait studio operator since 1986.

Effective as of April 20, 2010, the Company entered into a license agreement with Toys “R” Us – Delaware, Inc. (“Toys “R” Us” or “TRU”) which grants the Company an exclusive license to operate photo studios in certain Babies “R” Us stores under the Kiddie Kandids name.  The term of the agreement expires on January 31, 2016.  The agreement allows CPI significant operating flexibility and collaborative marketing opportunities and provides for the opening of additional locations through October of 2011.  The agreement contains certain termination rights for both the Company and TRU.  The fees paid to TRU under the agreement are based upon the Gross Sales of the Studios operated under the agreement.  Separately, in the first quarter of 2010, the Company also acquired certain assets of Kiddie Kandids, LLC in an auction approved by the United States Bankruptcy Court for the District of Utah (the “Kiddie Kandids, LLC asset acquisition”).

On January 26, 2011, the Company acquired substantially all of the assets and certain liabilities of Bella Pictures, Inc., a leading provider of branded wedding photography services (the “Bella Pictures® Acquisition”).  The operations acquired through the Bella Pictures® Acquisition are conducted through the Company’s newly formed subsidiary, Bella Pictures Holdings, LLC (“Bella Pictures®”).  The Bella Pictures® Acquisition significantly expands the Company’s mobile photography operations and offers customers high-quality wedding photography and videography services and products in most major U.S. markets through a network of certified photographers and videographers.  The Company’s strong digital capabilities and infrastructure, combined with outstanding customer service skills, will allow it to provide exceptional value to couples across a wide spectrum of offerings and price points, while greatly expanding its sales beyond the traditional holiday season.

As of February 5, 2011, PMPS operates 1,904 studios worldwide, including 1,536 in the U.S. and Puerto Rico, 260 in Canada and 108 in Mexico, Sears Portrait Studios (“SPS” or the “SPS brand”) operates 992 studios worldwide, including 882 in the U.S. and Puerto Rico and 110 in Canada, and Kiddie Kandids Portrait Studios (“KKPS” or the “KKPS brand”) operates 171 studios in the U.S. Approximately $96.9 million, $14.5 million and $2.3 million of long-lived assets are used in our domestic, Canadian and Mexican operations, respectively, as of February 5, 2011.  The Company generated fiscal year 2010 net sales of $340.7 million, $57.6 million and $8.7 million related to its domestic, Canadian and Mexican operations, respectively, which accounted for 84%, 14% and 2% of total revenues in fiscal year 2010, respectively.

 
3
 
 

We operate websites which support and complement our Walmart, Sears and Toys “R” Us studio operations.  These websites serve as vehicles to archive, share portraits via email (after a portrait session) and order additional portraits and products.  In 2010, revenues from on-line sales and services related to these websites were approximately $3.7 million.  In connection with the Bella Pictures® Acquisition, we also operate a website for Bella Pictures® which serves as a vehicle to reserve/book weddings, select specialized, unique product offerings and view/edit photographs and videos from the wedding day.

The Company’s Products and Services

Each of the Company’s portrait studio brands offers customers a wide range of differentiated portrait products, portrait choices, ordering options and service offerings with digital capabilities.  CPI’s full digital process offers significant advantages compared to other portrait providers, including being the only company that employs trained digital technicians who optimize portrait quality during the manufacturing process.  For definition purposes, a package sitting consists of a fixed number of portraits, all of the same pose, for a relatively low price.  Package customers may buy additional portrait sheets for a fee.  A custom sitting consists of portraits purchased by the sheet and allows for a variety of sizes, poses and backgrounds.  A collection sitting consists of a predetermined number of portraits bundled together at significant savings.

Our PMPS brand focuses on the sales of packages and portrait collections.  Our trial packages are offered in all studios and consist of low-priced advertised “introductory” offers that provide a high volume of portraits with less customization and more limited selections.  Our associates offer customers the opportunity to upgrade to portrait collections in which customers receive a greater variety in terms of poses, sizes and customization.  There are no session fees in our PMPS studios.  Our SPS brand focuses on customized, more traditional portrait solutions that provide a wide variety of selection, customization and an enhanced studio experience.  Our KKPS brand focuses on a variety of contemporary and traditional baby, young children and family photographic styles while offering unique and customizable portrait collections, supplemented by specialty product portrait offerings.  Due to the wide variety and customization allowed within our Sears and Kiddie Kandids studios, the customer is charged a session fee.

Each brand offers customers the opportunity to join a portrait savings club.  Each club requires a one-time membership fee for a certain enrollment period, which is currently one year.  PMPS Portrait Smiles Club, Sears’ Super Saver Program and Kiddie Kandids Portrait Club members receive exclusive and additional savings on products and services and a free portrait sheet on each returning visit.  Additionally, Sears’ Super Saver Program and Kiddie Kandids Portrait Club members pay no session fees for the enrollment period.  Both of these plans were designed to promote customer loyalty while encouraging frequent return visits to the studio.

In SPS and KKPS studios, high-resolution images are transmitted electronically to one of our processing centers for fulfillment and/or customer orders can be printed immediately in the studio.  On-site printing is available for only limited PMPS studios.  All studios offer same-day portraits with full copyright on a portrait CD.  Our processing centers complete the customer’s orders to their specifications and return them to the studio for pick-up.  Orders placed in studios are generally available for pick-up within 5-10 days from the time of order.

PMPS, SPS and KKPS studios have the ability to upload images from any portrait session to our safe and secure websites.  With a code and individualized passwords, our customers can view their images from home, share them via email with family and friends, post them on Facebook and other social media sites and place orders online for portraits or gifts such as personalized t-shirts, mugs, mouse pads and more.

In connection with the Bella Pictures® Acquisition in fiscal year 2010, the Company has significantly expanded its mobile photography operations and offers customers high-quality wedding photography and videography services and products in most major U.S. markets through a national network of certified photographers and videographers.  The Company’s strong digital capabilities and infrastructure, combined with outstanding customer service skills, position us to provide exceptional value to couples across a wide spectrum of offerings and price points, while expanding our sales beyond the traditional holiday season.

Bella Pictures® offers services and products for wedding packages which consist of wedding photographer services to photograph the wedding and the production of digital negative compact discs, prints and various combinations of albums.  Bella Pictures® also offers pre-wedding engagement photography and wedding video services.  Bella Pictures® uses a photojournalistic approach to photographing weddings with the goal of telling the story of the customer’s wedding day.

Bella Pictures®’ customers also have the ability to book/order their wedding services and products through a website the Company maintains.  Through this website, customers can reserve/book weddings, select specialized, unique product offerings and view/edit photographs and videos from the wedding day.


 
4
 
 

Financial and Other Business Information

See Item 8 – Financial Statements and Supplementary Data for information on our financial condition, including revenues and net earnings for each of the last three fiscal years.  For geographic related information, see Note 1 to the Notes to Consolidated Financial Statements – Summary of Significant Accounting Policies.

The Company’s results of operations for the fiscal year 2010 were adversely impacted as a result of the challenging economic environment, which has continued to affect discretionary purchases such as portraiture.  As part of the Company’s continuing response to the market challenges, it has executed a number of cost reductions, which include delay or cancellation of certain expenditures.  See Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information related to market challenges.

The Company’s Host Relationships

Walmart

On June 8, 2007, the Company acquired substantially all of the assets of Portrait Corporation of America (“PCA”) and certain of its affiliates and assumed certain liabilities of PCA (the “PCA Acquisition”) and became the sole operator of portrait studios in Walmart Stores and Supercenters in the U.S., Canada, Mexico and Puerto Rico.  The Company operates under the trade names PictureMe Portrait Studio® in the U.S., Walmart Portrait Studios in Canada and Estudios Fotografia de Walmart in Mexico.  As of February 5, 2011, the Company operated 1,904 studios in Walmart locations worldwide and approximately 52% of our fiscal 2010 revenue was derived from sales within Walmart.  In fiscal year 2010, the Company closed 31 Walmart studios due to underperformance.  As of April 18, 2011, the Company has closed 2 such locations in fiscal year 2011.  We are not aware of any specific intentions Walmart has to close a significant number of existing stores that contain our portrait studios.  There can be no assurance that some such closures may not occur in the future thus resulting in the concurrent closure of some of our existing portrait studios.  The closure of a significant number of Walmart stores that result in the closing of related portrait studios, to the extent such closures are not offset by openings of portrait studios in new Walmart stores, could have an adverse impact on the Company’s operations. As part of the PCA Acquisition, we assumed certain preexisting lease and license agreements between PCA and Walmart.  These agreements are summarized below.

Effective June 8, 2007, the Company entered into the U.S. Master Lease Agreement (the “Agreement”), negotiated by PCA and Walmart during PCA’s bankruptcy proceedings, which requires us to pay a rental fee to Walmart based upon a percentage of sales of our studios operating in Walmart’s U.S. stores.  On September 8, 2010, the Company entered into an amendment (the “Amendment”) with Walmart to this Agreement which extended the lease term from January 31, 2013 to January 31, 2016, with one three-year option to extend by mutual agreement of the parties.  As of February 5, 2011, we operated 1,536 U.S. studios under this Agreement.

Our relationship with Walmart Canada Corp. is governed by an amended and restated license agreement effective January 1, 2006.  We are required to pay Walmart Canada a license fee based on a percentage of the sales of our portrait studios operated in Walmart’s Canadian stores.  The agreement has a five-year term, and Walmart Canada has an option to renew for two renewal periods of two years each.  Studios that were in operation on the effective date of this agreement are subject to a license schedule, which specifies expiration dates for those specific studios.  Based on this license schedule, our Canadian studios’ licenses expire as follows: 121 in 2011, 111 in 2012, 20 in 2013, 4 in 2014 and 2 in 2015.  Although we anticipate that these agreements will renew, there is no assurance of such.  As of February 5, 2011, we operated 260 studios under the agreement with Walmart Canada.

Within Mexico, our relationship with Nueva Walmart De Mexico, S de R.L. de C.V. ("Nueva Walmart De Mexico") is governed by an agreement dated as of June 1, 2002, for the first 44 studios. New agreements, with the same terms, are entered into as additional studios are added in Mexico. The agreements run for an undefined period of time. Neither party may terminate an agreement for a studio during the studio's first year of operation; thereafter, either party may terminate the agreement with respect to a studio by giving the other party written notice 30 days prior to the termination date.  Under these agreements, Nueva Walmart De Mexico is compensated based upon a percentage of our total sales in all Walmart studios in Mexico.  As of February 5, 2011, we operated in 108 Nueva Walmart De Mexico studios.

Sears

We have enjoyed a strong relationship with Sears for over 50 years under a series of license agreements, the most recent of which was entered into on December 22, 2008, pursuant to which the Company operates professional portrait studios at Sears locations in the U.S.

Pursuant to the terms and subject to the conditions of the License Agreement, we operate professional portrait studios under the name “Sears Portrait Studios.” The term of the License Agreement commenced on January 1, 2009, and ends on December 31, 2014.  The Company has the right to extend the License Agreement for up to four additional years if (i) it makes over a certain amount of capital expenditures with respect to Sears U.S. studios that are approved by Sears within a 12 month period, (ii) the net sales under the contract satisfy certain sales growth targets in 2013 or (iii) the Company pays Sears the amount that we would have owed Sears if the sales growth targets were met (taking into account amounts already paid to Sears).  Under the License Agreement, the Company pays Sears a percentage commission on the net sales of the Sears U.S. studios and shares with Sears a portion of actual savings from operating productivity improvements implemented through the cooperation of the parties.   Under the terms of our existing License Agreement with Sears in the United States, Sears is under no contractual obligation to invite us to open portrait studios in their new stores.  Once we do establish a portrait studio in a new Sears store, that studio is then governed by the terms of our existing License Agreement.

 
5
 
 
The License Agreement contains certain termination rights for both the Company and Sears.  These termination events include: (i) a breach of the License Agreement that is not cured (if curable) within thirty (30) days of written notice of such breach, (ii) the occurrence of a change of control of the Company without Sears’ consent, (iii) the Company’s conviction or pleading no contest to a felony or the Company engages in any conduct that is likely to materially adversely affect the Company, its Sears U.S. studios or Sears, and (iv) the Company’s failure to maintain appropriate insurance coverage or its failure to pay amounts owed to Sears under the License Agreement when due.  In addition, Sears may terminate the License Agreement solely with respect to any affected Sears U.S. studio due to the closing of a Sears store.

Upon expiration of the term of the License Agreement or upon certain termination events, Sears shall have the right to purchase certain furniture, fixtures and equipment located at the Sears U.S. studios at fair market value, as determined by three independent ASA certified equipment appraisals.

As of February 5, 2011, the Company operated 969 studios located in Sears stores and 23 freestanding studios under the Sears name in the U.S. and approximately 43% of our fiscal 2010 revenue was derived from sales within Sears.  We provide all studio furniture, equipment, fixtures, leasehold improvements and advertising and are also responsible for hiring, training and compensating our employees.  As a Sears licensee in studios located in Sears stores, we enjoy the benefits of using the Sears name, access to prime retail locations, Sears’ daily cashiering and bookkeeping systems, store security services and Sears’ assumption of certain credit card fees and credit and check authorization risks.  Our customers also have the convenience of using their Sears credit cards to purchase our products and services.  As a Sears licensee in freestanding studios under the Sears name in the U.S., we pay rent and utilities at each of these locations and benefit from the use of the Sears name.

The Company operates professional portrait studios in 110 Sears locations in Canada pursuant to a six-year license agreement with Sears Canada, Inc., a subsidiary of Sears (“Sears Canada, Inc.”), effective August 19, 2009.  The Company pays Sears a license fee in Canadian dollars based on total annual net sales.  The Company provides all studio furniture, equipment, fixtures and advertising and is responsible for hiring, training and compensating its employees.

Throughout the period of our relationship with Sears, Sears has never terminated the operation of any of our studios, except in connection with Sears store closings.  In fiscal year 2010, the Company closed 15 related Sears studios.  While Sears has closed 5 such stores as of April 18, 2011, in fiscal year 2011, we are not aware of any specific intentions to close a significant number of existing full-line, mall-based stores that contain our portrait studios.  There can be no assurance that some such closures may not occur in the future thus resulting in the concurrent closure of some of our existing portrait studios.  The closure of a significant number of Sears full-line, mall-based stores that result in the closing of related portrait studios, to the extent such closures are not offset by openings of portrait studios in new Sears stores or other formats or venues, could have an adverse impact on the Company’s operations.  The Company also closed 9 of its freestanding SPS locations due to underperformance as of April 18, 2011, in fiscal year 2011.

Toys “R” Us

Effective as of April 20, 2010, the Company entered into a license agreement with Toys “R” Us (“TRU”) which grants the Company an exclusive license to operate photo studios in certain Babies “R” Us stores under the Kiddie Kandids name.  The term of the agreement expires on January 31, 2016.  The agreement allows CPI significant operating flexibility and collaborative marketing opportunities and provides for the opening of additional locations through October of 2011.  The agreement contains certain termination rights for both the Company and TRU.  The fees paid to TRU under the agreement are based upon the Gross Sales of the Studios operated under the agreement.  As of February 5, 2011, the Company operated 150 studios located in Babies “R” Us stores and 21 Kiddie Kandids mall locations.  Approximately 5% of our fiscal year 2010 revenue was derived from KKPS sales.

The Company provides all studio furniture, equipment, fixtures, leasehold improvements and advertising and is also responsible for hiring, training and compensating its employees.  As a licensee in studios located in Babies “R” Us stores, we enjoy the benefits of access to prime retail locations and store security services.  As a licensee in freestanding mall locations under the Kiddie Kandids name in the U.S., we pay rent and utilities at each of these locations.

 
6
 
 

Industry Background and Competition

We compete in a highly fragmented domestic professional portrait photography industry, estimated to be over $6.5 billion. The primary customer categories within the industry are babies, preschoolers, school-age children (including youth sports and graduation portraits), adults, families/groups, weddings, passports and churches.  Other categories include: cruise ships, conventions/events, glamour and business portraits.  Our competitors include large studio chains operating in national retailers, other national free-standing portrait studio companies, national school and church photographers and a large number of independent portrait photography and videography providers.  The majority of the industry is comprised of small, independent photography companies and individual photographers.

Like CPI’s studio operations, other portrait photography companies provide services in retail hosts. These companies and their retail hosts include LifeTouch (JC Penney and Target) and Olan Mills (K-Mart, Belk’s, Meijer’s and Macy’s). We believe that we are the largest of these competitors based on revenues generated in the respective retail hosts.  A number of other companies in the professional portrait photography industry operate free-standing studios on a national, regional or local basis.  Among the more sizeable of these companies are Picture People and Portrait Innovations, which operate independent mall-based or strip mall locations.

Our studio competitors generally compete on the basis of the following: price, service, quality, location, product mix and convenience, including the immediate fulfillment of finished portraits at the time of the portrait session.  Many competitors focus heavily on price and commonly feature large portrait packages at aggressively low prices in mass marketing promotions.  Some of these same competitors have eliminated all sitting or session fees.

Our PMPS brand focuses on the sales of packages and portrait collections.  While our products and services are some of the lowest priced in the industry, we do not feel that we are offering lesser value.  In fact, it is our lower price that enables the PMPS customer to attain some of the same products, services and professionalism that higher priced studios offer.  It is an added benefit to the PMPS customer that session fees do not apply.  The SPS brand focuses on customized, more traditional portrait solutions that provide a wide variety of selection, customization and an enhanced studio experience.  Our KKPS brand focuses on a variety of contemporary and traditional baby, young children and family photographic styles while offering unique and customizable portrait collections, supplemented by specialty product portrait offerings.  Except for promotions during the year, the SPS and KKPS brands have not followed the “no session fee ever” practice because we believe a session fee is justified by the professionalism of our photographers, the quality of our equipment, our commitment to service and overall studio experience.  Furthermore, while our products and services are competitively priced, they are not generally the lowest priced in the industry as we focus on offering a better value proposition.  Other competitors, notably Picture People, have emphasized convenience and experience over low price and also the immediate fulfillment of orders in the studio as opposed to longer lead times of central lab fulfillment.

The industry remains in constant transformation brought about by significant advances in digital photographic technology. These technologies have made it possible to capture, manipulate, store and print high-resolution digital images in a decentralized environment. It is this digital evolution that has required industry incumbents to review and adjust their business models while fostering a number of new digital start-ups.  The digital evolution has generated photographic experimentation with the consumer and a “do-it-yourself” mentality that did not exist in years past.  This has impacted overall portrait studio activity and frequency.

Our Bella Pictures® business generally competes on the basis of price, value, service, quality, location and product mix.  Bella Pictures® caters to couples who want the convenience of technology-enabled services with the personal touch of consulting sessions.  It is the only national brand offering customers high-quality wedding photography and videography services and products in most major U.S. markets through a network of certified photographers and videographers.  Bella Pictures’® main competitors are local, independent wedding photography and videography providers.

Seasonality and Inflation

Our business is highly seasonal, with the largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas.  For fiscal years 2010 and 2009, fourth quarter net sales accounted for 32% and 33% of total net sales for the respective years. Historically, most, if not all, of the net earnings for the year are generated in the fourth fiscal quarter.  The timing of Easter, another seasonally important time for portraiture sales, can have a significant impact on the timing of recognition of sales revenues between the Company’s first and second fiscal quarters.  Historically, earlier Easters translate into lower sales due to the closer proximity of the earlier Easter date to the preceding Christmas holiday season during which customers are most portrait-active.  Most of the Company’s Easter-related sales in fiscal years 2010 and 2009, years with an early Easter, were recognized as revenues, in accordance with the Company’s revenue recognition policies reflected in Note 1 in the accompanying Notes to Consolidated Financial Statements, in the respective first fiscal quarters.  The moderate rate of inflation over the past three years has not had a significant effect on the Company’s revenues and profitability.

 
7
 
 

Suppliers

We purchase photographic paper and processing chemistry from four major manufacturers.  Eastman Kodak provides photographic paper for all central lab fulfillment pursuant to an agreement in effect through July 31, 2011.  Dye sublimation paper used for proof sheets, portrait collages and portrait orders delivered at the end of a sitting in digital studios is provided primarily by Sony (Dai Nippon Printing Co., Ltd. as of April 1, 2011) and Kanematsu.  Fujifilm North America Corp. provides photographic chemistry for central lab fulfillment.  We purchase digital camera and lens components, monitors, computers, printers and other equipment and materials from a number of leading suppliers.

Typically, we do not encounter difficulty in obtaining equipment and materials in the quantity and quality we require and we do not anticipate any problems in obtaining our requirements in the future.

CPI operates most of its U.S. studios in full digital platform utilizing the software of two vendors for its studio photography digital systems.  Our contracts with our software vendors allow CPI to scale the use of the software as necessary to support all of our current and prospective studios.  The Company also has internally developed software that is fully functional in a small number of its U.S. studios.

Intellectual Property

We own certain registered service marks and trademarks, including Portrait Creations®, Smile Savers Plan®, PictureMe Portrait Studio®, BigShots®, The Portrait Gallery®, Bella®, Bella Pictures® and Studio Blue®, which have been registered with the United States Patent and Trademark Office.  Our rights to these trademarks will continue as long as we comply with the usage, filing and other legal requirements relating to the renewal of trademarks.

The Company’s Employees

As of February 5, 2011, the Company employed approximately 12,500 employees, including approximately 7,600 part-time and temporary employees.

The Company Website and Periodic Reports

The Company’s website address is www.cpicorp.com.  We make available on the Investor Relations page of the website, free of charge, press releases, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

Environmental Regulation

Our operations are subject to commonly applicable environmental protection statutes and regulations. We do not expect that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect on our capital expenditures, earnings or competitive position.  At present, we have not been identified as a potentially responsible party under the Comprehensive Environmental Responses, Compensation and Liability Act and have not established any reserves or liabilities relating to environmental matters under this Act.

Item 1A.             Risk Factors

We wish to caution readers that in addition to the important factors described elsewhere in this Annual Report on Form 10-K, the following important factors, among others, sometimes have affected, or in the future could affect, our actual results and could cause our actual consolidated results during fiscal 2011, and beyond, to differ materially from those expressed in any forward-looking statements made by us or on our behalf.  The risks and uncertainties described below are not the only ones facing us and do not include other events that we do not currently anticipate or that we currently deem immaterial that may also affect our results of operations and financial condition.

We are materially dependent upon Walmart, Sears and Toys “R” Us.

Substantially all of our sales are derived from sales in Walmart, Sears and Toys “R” Us stores.  Therefore, we are materially dependent upon our relationship with Walmart, Sears and Toys “R” Us, the continued goodwill of Walmart, Sears and Toys “R” Us and the integrity of their brand names in the retail marketplace.  Any deterioration in our host relationships could have a material adverse effect on us.

 
8
 
 
Because we represent only a small fraction of Walmart, Sears and Toys “R” Us revenues, any deterioration of any host relationship would have a far greater effect on us than on our hosts.

In addition, our competitive posture could be weakened by negative changes in Walmart, Sears or Toys “R” Us.

Our portrait studios in Walmart and Toys “R” Us are substantially dependent on customer traffic generated by our host retail stores, and if the customer traffic through these host stores decreases due to the economy or for any other reason, our sales could be materially and adversely affected.

Our business practices and operations need to be acceptable to our hosts.

Our business practices and procedures must at all times be acceptable to Walmart, Sears and Toys “R” Us.  In addition, under our agreements there are substantial contractual rights, the most significant of which are described more fully in “Item 1. Business,” which the host can exercise in a manner that can have a material adverse effect on us.  Consequently, in the future, we may be required to make changes to our business practices and procedures, including with regard to advertising and promotions, product offerings, studio facilities and technology in response to host requests that would not be in our best interests and could materially and adversely affect our sales, costs, margins, business development or other aspects of our business.

Our hosts may terminate, breach, otherwise limit or increase our expenses under our agreements.

Our Walmart, Sears and Toys “R” Us studios in the U.S., Canada and Mexico are operated pursuant to certain license and lease agreements.  Our agreements have the following expiration dates: for our U.S. and Puerto Rico Walmart studios, January 2016; for our Canada Walmart Studios, 121 in 2011, 111 in 2012, 20 in 2013, 4 in 2014 and 2 in 2015; for our Mexico Walmart studios, with 30-day notice after one year of operation; for our U.S. Sears studios, December 2014; for our Canada Sears studios, August 2015; for our Puerto Rico Sears studios, December 2014; and for our U.S. Toys “R” Us studios, January 2016.  These agreements are more fully described in “Item 1. The Company’s Host Relationships.”

Walmart and Sears are under no obligation to renew these agreements.  The agreement with Toys “R” Us provides the Company and Toys “R” Us terms to renew the agreement under certain conditions.  Our hosts may also seek to increase the fees we pay under our agreements upon renewal of the agreements.  We do not have the contractual right to close any poorly performing locations without Walmart’s or Sears’ consent.  Under our agreement with Toys “R” Us, the Company and Toys “R” Us may close certain underperforming locations under specified conditions.  In addition, our agreements do not prohibit Walmart, Sears or Toys “R” Us from selling many of the tangible goods we sell, or from processing digital photos in other departments within their stores.  Furthermore, there is always the risk that Walmart, Sears or Toys “R” Us might breach our agreements. The loss or breach of the agreements could have a material adverse effect on us.  An adverse change in any other aspects of our business relationship with Walmart, Sears or Toys “R” Us, including the reduction of the number of studios operated pursuant to such arrangements or a decision by Walmart, Sears or Toys “R” Us to license or lease studios to other persons, could have a material adverse effect on us.

We may not be able to realize the anticipated benefits from the Bella Pictures® Acquisition.

Achieving the anticipated benefits of the Bella Pictures® Acquisition depends on the timely, efficient and successful execution of a number of events, including integrating the Bella Pictures® business into the Company.  Factors that could affect the Company’s ability to achieve these benefits include:

o  
Difficulty in integrating and managing personnel, financial reporting and other systems used by the Bella Pictures® business into the Company;
o  
The failure of the Bella Pictures® business to perform in accordance with the Company’s expectations; and
o  
Failure to achieve anticipated synergies between the Company’s business and the Bella Pictures® business.

If the Bella Pictures® business does not operate as anticipated, it could materially harm the Company’s business, financial condition and results of operations.  The integration of Bella Pictures® will place significant demands on administrative, operational and financial resources, and there is no assurance that the Company will be able to successfully integrate the Bella Pictures® business.  Failure to successfully integrate the Bella Pictures® business with CPI, and to successfully manage the challenges presented by the integration process, may prevent the Company from achieving anticipated benefits of the acquisition and could have a material adverse effect on the business.

 
9
 
 

The economic recession has materially impacted consumer spending and may adversely affect our financial position.
 
Consumer discretionary spending has been materially and adversely impacted by the current recession, job losses, volatile energy and food costs, greater levels of unemployment, higher levels of consumer debt, declines in home values and in the value of consumers' investments and savings, restrictions on the availability of credit and other negative economic conditions which have affected consumer confidence and disposable income.  If consumer discretionary spending further declines, demand for our products could decrease and we may be forced to discount our merchandise, which in turn could reduce our revenues, gross margins, operating cash flows and earnings.  In addition, higher transportation costs, higher costs of labor, insurance and healthcare, and other negative economic factors may increase our cost of sales and operating expenses.  Additionally, our business is highly seasonal, with the largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas. The fourth quarters in fiscal 2010 and 2009 accounted for approximately 32% and 33% of total net sales for the respective years.  As a result, any adverse impact on our fourth quarter operating results would significantly impact annual operating results.  Our fourth quarter operating results may fluctuate significantly based on many factors, including holiday spending patterns, prevailing economic conditions and weather conditions.

The agreements governing our debt impose restrictions on our business.

On August 30, 2010, the Company entered into the Credit Agreement (the “Credit Agreement”) which makes available to the Company a revolving credit facility, which includes letters of credit, and replaces the Company’s former facility.  The Credit Agreement provides the Company greater flexibility to pursue financial and strategic opportunities to enhance shareholder value.  Our Credit Agreement contains covenants and requires financial ratios and tests, which impose restrictions on our business.  Our ability to comply with these restrictions may be affected by events beyond our control, including, but not limited to, prevailing economic, financial and industry conditions. The breach of any of these covenants or restrictions, as well as any failure to make a payment of interest or the principal when due, could result in a default under the Credit Agreement.  If our lenders were unwilling to enter into an amendment or provide a waiver, such defaults would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest, and the ability to borrow under this Credit Agreement could be terminated.  If we are unable to repay debt to our lenders, these lenders could proceed against the collateral securing that debt.

A substantial or prolonged material adverse impact on our results of operations and financial condition could affect our ability to satisfy the financial covenants in our Credit Agreement, which could result in our having to seek amendments or waivers from our lenders to avoid the termination of commitments and/or the acceleration of the maturity of amounts that are outstanding under our Credit Agreement.

Our inability to remain competitive could have a detrimental impact on our results of operations.
 
The professional portrait photography industry is highly competitive. Evolving technology and business relationships may make it easier and cheaper for our competitors and potential competitors to develop products or services similar to ours or to sell competing products or services in our markets.  Likewise, the proliferation of amateur digital photography is making customers more discerning and demanding and has adversely affected overall portrait activity/frequency.

The companies in our industry compete on the basis of price, service, quality, location, product mix and convenience of retail distribution channel.  If the Company cannot continue to provide perceived value for our customers, this could have a material adverse impact on sales and profitability.  To compete successfully, we must continue to remain competitive in areas of price, service, quality, location, product mix and convenience of distribution.

If our key suppliers become unable to continue to provide us supplies under our current contracts, we will need to obtain an alternative source of supplies. If we enter into an agreement to obtain such supplies at less desirable terms, our financial condition and results of operations could be materially adversely affected.

As described in “Item 1. Suppliers,” the Company purchases photographic paper, dye sublimation paper and processing chemistry from several suppliers.  The Company operates most of its U.S. studios in full digital platform utilizing the software of two vendors for its studio photography digital systems.  If these companies become unable to continue to provide us supplies or services under our current arrangements or if prices are increased dramatically, we will need to obtain alternative sources of supplies or services.

Although management believes that the available alternative sources of supplies are adequate, there can be no assurance we would be able to obtain such supplies at the same or similar terms to those we currently have in place. If we enter into an agreement to obtain such supplies at less desirable terms, our financial condition and results of operations could be materially adversely affected.

Should the Company be forced to replace its digital software vendors, related costs could increase and production could be disrupted for a period of time, which could have a material adverse impact on the results of operations.

 
10
 
 
If we lose our key personnel, our business may be adversely affected.

Our continued success depends upon, to a large extent, the efforts and abilities of our key employees, particularly our executive management team.  We cannot assure you of the continued employment of any members of management. Competition for qualified management personnel is strong.  The loss of the services of our key employees or the failure to retain qualified employees when needed could materially adversely affect us.

A significant increase in piracy of our photographs could materially adversely affect our business, financial condition or results of operations.

We rely on copyright laws to protect our proprietary rights in our photographs. However, our ability to prevent piracy and enforce our proprietary rights in our photographs is limited. We are aware that unauthorized copying of photographs occurs within our industry. A significant increase in the frequency of unauthorized copying of our photographs could materially adversely affect our business, financial condition and results of operations by reducing revenues from photograph sales.

Any disruption in our manufacturing process could have a material adverse impact on our business.

The Company currently operates most of its U.S. studios in full digital platform utilizing the software of two vendors for its studio photography digital systems.  Any material delay in the vendors’ networking environment, coupled with a failure to identify and implement alternative solutions, could have an adverse effect upon the operations of the business.  Although the Company has internally developed software utilized in certain of its U.S. studios, should our software vendors no longer operate, the Company may be forced to roll out its software to all studios, which could be costly and could delay digital production for a period of time.  Although on-site printing is an available alternative to central printing in the Sears’ digital environment, it currently would be difficult and costly for on-site printing to replace central fulfillment during the holiday busy season.  On-site printing is available for only limited PMPS studios.  Any disruption of our processing systems for any reason could adversely impact our business, financial condition and results of operations.

We are subject to litigation and other claims that could have an adverse effect on our business.

We are a defendant in two pending legal proceedings related to allegations that the Company failed to pay certain employees for “off the clock” work and provide meal and rest breaks as required by law.  Additionally, the Company is a defendant in a lawsuit regarding alleged improper use of confidential information.  While we believe the claims are without merit and continue our vigorous defense, the outcomes of these proceedings are difficult to assess and quantify and therefore we cannot determine whether the financial impact, if any, will be material to our financial position or results of operations.  The defense of these actions may be both time consuming and expensive.  If these legal proceedings were to result in unfavorable outcomes, they could have material adverse effects on our business, financial position and results of operations.

The impact of declines in global equity markets on asset values and interest rates used to value the liabilities in our pension plan and changes in rules and regulations may result in higher pension costs and the need to fund the pension plan in future years in material amounts.

The impact of declines in the global equity and bond markets on asset values may result in higher pension costs and may increase and accelerate the need to fund the pension in future years.  The determination of pension expense and pension funding are based on a variety of rules and regulations.  Changes in these rules and regulations could impact the calculation of pension plan liabilities and the valuation of pension plan assets.  They may also result in higher pension costs and accelerate and increase the need to fully fund the pension plan.

We are subject to currency fluctuations from our operations within non-U.S. markets.

For our operations conducted in Canada and Mexico, transactions are typically denominated in local currencies.  Accordingly, certain costs of our operations in these foreign locations are also denominated in those local currencies.  Because our financial statements are stated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies, have had, and will continue to have, an impact on our reported financial results.

Item 1B.             Unresolved Staff Comments

None.

 
11
 
 

Item 2.              Properties

The following table sets forth certain information concerning the Company’s principal facilities as of February 5, 2011:
 

   
APPROXIMATE
         
   
AREA IN
     
OWNERSHIP
 
LOCATION
 
SQUARE FEET
 
PRIMARY USES
 
OR LEASE
 
Matthews, North Carolina
 
                 860,000
 
Unoccupied Administration and Portrait processing facility (includes 696,000 square feet in land)
 
Owned
(1)
Charlotte, North Carolina
 
                 372,000
 
Administration, Warehousing and Portrait processing (includes 315,000 square feet in land)
 
Owned
 
Charlotte, North Carolina
 
                 348,000
 
Undeveloped, industrial land
 
Owned
(1)
St. Louis, Missouri
 
                 341,000
 
Headquarters, Administration and Portrait processing (includes 31,000 square feet in land)
 
Owned
 
St. Louis, Missouri
 
                 159,000
 
Parking Lots
 
Owned
 
St. Louis, Missouri
 
                   53,000
 
Warehousing
 
Leased
(2)
Charlotte, North Carolina
 
                   51,000
 
Parking Lots
 
Owned
 
Sandy City, Utah
 
                   41,000
 
Unoccupied Administration (includes 24,000 square feet in land)
 
Owned
(3)
Brampton, Ontario
 
                     5,000
 
Administration
 
Leased
(4)

(1)
 
Properties are not in use.  See Note 7 to the Notes to Consolidated Financial Statements for further discussion.
(2)
 
Lease term expires on July 31, 2018.
(3)
 
Property is held for sale.  See Note 7 to the Notes to Consolidated Financial Statements for further discussion.
(4)
 
Lease term expires on June 30, 2015.

Studio license/lease agreements

As of February 5, 2011, the Company operates portrait studios in host stores under license and lease agreements as shown below:

NUMBER
       
OF STUDIOS
 
COUNTRY
 
LICENSOR/LESSOR
                1,536
 
United States and Puerto Rico
 
Walmart
                   859
 
United States and Puerto Rico
 
Sears
                            150
 
United States
 
Toys "R" Us
                   260
 
Canada
 
Walmart Canada Corp.
                   110
 
Canada
 
Sears Canada, Inc.
                   108
 
Mexico
 
Nueva Walmart de Mexico, S, de R.L. de C.V.
                     61
 
United States studios not
 
Third parties - generally leased for at least 3 years
     
in Walmart, Sears or Toys "R" Us
   
with some having renewal options
 
The Company pays Walmart, Sears and Toys “R” Us a fee based on annual sales within the respective host stores.  This fee covers the Company’s use of space in the host stores, the use of the Walmart name in Canada and Mexico and the use of the Sears and Kiddie Kandids names.  The Company also pays Sears a fee related to certain cost savings for reduced operating hours.  No separate amounts are paid to hosts expressly for the use of space.

The Company believes that the facilities used in its operations are adequate for its present and anticipated future operations.

Item 3.              Legal Proceedings

The Company and two of its subsidiaries are defendants in a lawsuit entitled Shannon Paige, et al. v. Consumer Programs, Inc., filed March 8, 2007, in the Superior Court of the State of California for the County of Los Angeles, Case No. BC367546.  The case was subsequently removed to the United States District Court for the Central District of California, Case No. CV 07-2498-FMC (RCx).  The Plaintiff alleges that the Company failed to pay him and other hourly associates for “off the clock” work and that the Company failed to provide meal and rest breaks as required by law.  The Plaintiff is seeking damages and injunctive relief for himself and others similarly situated.  On October 6, 2008, the Court denied the Plaintiffs’ motion for class certification but allowed Plaintiffs to attempt to certify a smaller class, thus reducing the size of the potential class to approximately 200.  Plaintiffs filed a motion seeking certification of the smaller class on November 14, 2008.  The Company filed its opposition on December 8, 2008.  In January 2009, the Court denied Plaintiffs' motion for class certification as to their claims that they worked "off the clock".  The Court also deferred ruling on Plaintiff's motion for class certification as to their missed break claims and stayed the action until the California Supreme Court rules on a pending case on the issue of whether an employer must merely provide an opportunity for employees to take a lunch break or whether an employer must actively ensure that its employees take the break.  The Company believes the claims are without merit and continues its vigorous defense on behalf of itself and its subsidiaries against these claims, however, an adverse ruling in this case could require the Company to pay damages, penalties, interest and fines.
 

 
12
 
 
 
The Company and two of its subsidiaries are defendants in a lawsuit entitled Chrissy Larkin, et al. v. CPI Corporation, Consumer Programs, Inc., d/b/a Sears Portrait Studios and CPI Images, LLC, d/b/a Sears Portrait Studios, filed August 12, 2010, in the United States District Court for the Western District of Wisconsin, Civil No. 3:10-cv-00411-wmc.  The Plaintiffs filed a second Amended Complaint on March 15, 2011.  The Plaintiffs allege that the defendants failed to pay them for all compensable time worked to provide rest and meal periods under applicable laws and to reimburse them for business related expenses.  The Plaintiffs’ actions are based on alleged violations of the laws of a number of states and the Fair Labor Standards Act.  The Plaintiffs are seeking damages, declaratory and injunctive relief and statutory penalties for themselves and others similarly situated.  The Company and its subsidiaries filed an answer on September 27, 2010, and an answer to the Second Amended Complaint on April 7, 2011.  The parties are in discovery.  The Company will contest collective action and class certification.  Because of the very early stage of the litigation, the Company is unable to predict or otherwise assess the outcome of these proceedings.
 
The Company is a defendant in a lawsuit entitled TPP Acquisition, Inc. v. CPI Corp., filed April 1, 2011, as amended on April 18, 2011, in the Supreme Court of the State of New York, County of New York, Index No. 650883/2011.  Plaintiff acquired the assets of The Picture People, Inc. on or about March 1, 2011.  The Company was a competing bidder for the assets.  Plaintiff alleges that the Company has improperly used information obtained under a confidentiality agreement to interfere with Plaintiff’s business relations with landlords of Picture People studios and to engage in unfair competition.  Plaintiff seeks injunctive relief and damages of not less than $40 million.  The Company believes that the lawsuit is without merit and anticipates pursuing multiple counterclaims.
 
The Company is also a defendant in other routine litigation, but does not believe these lawsuits, individually or in combination with the cases described above, will have a material adverse effect on its financial condition.  The Company cannot, however, give assurances that these legal proceedings will not have a material adverse effect on its business or financial condition.
 
PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock and Cash Dividends

Since April 17, 1989, the Company's common stock has been traded on the New York Stock Exchange under the symbol CPY.
 
The following tables set forth the high and low closing prices of the common stock reported by the New York Stock Exchange and the dividends declared for each full quarterly period during the Company's last two fiscal years.
 
FISCAL YEAR 2010
                 
(ending February 5, 2011)
 
HIGH
   
LOW
   
DIVIDEND
 
First Quarter
  $ 28.63     $ 12.57     $ 0.16  
Second Quarter
    31.91       21.31       0.25  
Third Quarter
    28.03       18.73       0.25  
Fourth Quarter
    30.80       19.43       0.25  
 
FISCAL YEAR 2009
                 
(ending February 6, 2010)
 
HIGH
   
LOW
   
DIVIDEND
 
First Quarter
  $ 10.86     $ 6.00     $ 0.16  
Second Quarter
    18.80       9.90       0.16  
Third Quarter
    18.78       9.99       0.16  
Fourth Quarter
    15.00       11.60       0.16  
 

 
13
 
 

Performance Graph

The following graph compares the five-year cumulative returns of $100 invested in (a) the Company (“CPY”), (b) the Standard & Poor’s 500 Index (“S&P 500”), and (c) the Russell 2000 Index (“Russell 2000”), assuming the reinvestment of all dividends.  The Russell 2000 index was selected because it encompasses similarly sized companies to the Company.  The measurement dates for the purposes of determining the stock price of the Company correspond to the fiscal year end (i.e., the first Saturday in February of each year reflected).  The corresponding measurement dates for the S&P 500 and the Russell 2000 are January 31st of each of the years reflected.
 
                                                                        
                    
 
2006
2007
2008
2009
2010
2011
CPY
             100.00
              296.16
                115.14
                  43.91
                 84.56
             131.32
S&P 500
             100.00
              114.32
                111.80
                  69.24
                 91.90
             112.03
Russell 2000
             100.00
              110.40
                  99.73
                  63.36
                 87.13
             114.28
 
Shareholders of Record

As of April 15, 2011, the closing sales price of the Company’s common stock was $21.59 per share with 7,004,079 shares outstanding and 1,225 holders of record.

Dividends

The Company intends, from time to time, to pay cash dividends on its common stock, as its Board of Directors deems appropriate, after consideration of the Company's operating results, financial condition, cash requirements, restrictions imposed by Delaware law and credit agreements, including maximum limits of cash to be used to pay for dividends, general business conditions and such other factors as the Board of Directors deems relevant.

 
14
 
 

Issuer Repurchases of Equity Securities

On August 25, 2010, the Company’s Board of Directors approved a stock repurchase program.  During the fourth quarter of fiscal year 2010, the Company repurchased 324,716 shares of its common stock at an average price of $22.19 per share under this program, as detailed in the table below.  The Company did not repurchase any of its equity securities during the fourth quarter of fiscal year 2009.

               
Total Number of
   
Maximum Number
 
               
Shares Purchased
   
of Shares that May
 
   
Total Number of
   
Average Price
   
as Part of Publicly Announced Plans
   
Yet Be Purchased
Under the Plans
 
Period
 
Shares Purchased (1)
   
Paid per Share
   
Programs (1)
   
or Programs (2)
 
November 14, 2010 - December 13, 2010
    -     $ -       -       1,000,000  
 
                               
December 14, 2010 - January 13, 2011
    289,049       22.33       289,049       710,951  
 
                               
January 14, 2011 - February 5, 2011
    35,667       20.77       35,667       675,284  
                                 
Total
    324,716     $ 22.19       324,716          
                                 
 
(1)  
On August 25, 2010, the Company's Board of Directors authorized a 1.0 million share open market repurchase program.  The expiration date of the program is August 25, 2011.

(2)  
Subsequent to the 2010 fiscal year end, the Company repurchased an additional 52,937 shares of its common stock at an average price of $20.54 per share.  The remaining maximum number of shares that may yet be purchased under the program as of April 20, 2011, is 622,347 shares.

 
15
 
 

Item 6.               Selected Consolidated Financial Data

The summary historical consolidated financial data as of and for each of the fiscal years in the five-year period ended February 5, 2011, set forth below have been derived from the Company’s audited consolidated financial statements. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included herein.  Fiscal year 2008 includes 53 weeks compared to 52 weeks for all other fiscal years presented below.  The 2007 PCA Acquisition affected the operating result trends as depicted in the table below.  Certain of this data has been reclassified to conform with the current year presentation.
 
 
in thousands except share and per share data
 
2010
   
2009
   
2008
   
2007
   
2006
 
                               
STATEMENT OF OPERATIONS (1)
                             
Net sales
  $ 407,035     $ 422,371     $ 462,548     $ 423,429     $ 292,973  
Cost of sales (exclusive of depreciation and amortization shown below)
    28,263       30,626       43,280       47,135       30,211  
Selling, general and administrative expenses
    337,490       339,138       377,310       326,568       218,282  
Depreciation and amortization
    17,962       22,740       29,432       27,291       16,861  
Other charges and impairments (2)
    5,092       3,294       13,557       7,695       1,241  
                                         
Income (loss) from continuing operations
    18,228       26,573       (1,031 )     14,740       26,378  
Interest expense, net (3)
    3,843       6,936       8,527       8,818       1,815  
Other income (expense), net (4)
    929       (44 )     190       175       1,031  
Income tax expense (benefit)
    3,413       5,796       (2,644 )     2,080       9,164  
                                         
Net income (loss) from continuing operations
    11,901       13,797       (6,724 )     4,017       16,430  
Net loss from discontinued operations, net of tax (1)
    -       -       (961 )     (441 )     (103 )
                                         
Net income (loss)
    11,901       13,797       (7,685 )     3,576       16,327  
Net loss attributable to noncontrolling interest
    (7 )     -       -       -       -  
Net income (loss) attributable to CPI Corp.
  $ 11,908     $ 13,797     $ (7,685 )   $ 3,576     $ 16,327  
                                         
SHARE AND PER SHARE DATA (1)
                                       
Net income (loss) from continuing operations - diluted (5)
  $ 1.64     $ 1.97     $ (1.03 )   $ 0.63     $ 2.58  
Net income (loss) from continuing operations - basic (5)
  $ 1.64     $ 1.97     $ (1.03 )   $ 0.63     $ 2.59  
Net income (loss) attibutable to CPI Corp. - diluted (5)
  $ 1.64     $ 1.97     $ (1.18 )   $ 0.56     $ 2.56  
Net income (loss) attibutable to CPI Corp. - basic (5)
  $ 1.64     $ 1.97     $ (1.18 )   $ 0.56     $ 2.57  
                                         
Dividends
  $ 0.91     $ 0.64     $ 0.64     $ 0.64     $ 0.64  
Average shares outstanding - diluted (5)
    7,272       7,020       6,510       6,416       6,376  
Average shares outstanding - basic (5)
    7,257       6,993       6,510       6,391       6,353  
                                         
CASH FLOW DATA (continuing operations only)
                                       
Net cash provided by operating activities
  $ 39,067     $ 31,289     $ 12,663     $ 39,872     $ 37,993  
Net cash (used in) provided by financing activities
  $ 43,735     $ (33,494 )   $ (13,419 )   $ 90,788     $ (43,567 )
Net cash used in investing activities
  $ (8,821 )   $ (2,876 )   $ (33,488 )   $ (97,653 )   $ (2,358 )
                                         
Capital expenditures
  $ 13,490     $ 5,234     $ 36,074     $ 14,884     $ 2,760  
 

 
16
 
 

Item 6.               Selected Consolidated Financial Data (continued)
 
in thousands
 
2010
   
2009
   
2008
   
2007
   
2006
 
                               
BALANCE SHEET
                             
     Cash and cash equivalents
  $ 5,363     $ 18,913     $ 23,665     $ 59,177     $ 26,294  
     Current assets
    30,089       53,555       61,480       92,835       55,164  
     Net fixed assets
    35,998       34,169       50,887       56,280       26,693  
     Goodwill and intangible assets (6)
    60,736       60,380       61,665       62,956       512  
     Other assets
    16,977       18,487       18,823       27,152       11,379  
     Total assets
    143,800       166,591       192,855       239,223       93,748  
     Current liabilities
    49,203       62,432       55,010       83,051       49,407  
     Long-term debt, less current maturities
    48,900       57,855       104,578       105,728       8,333  
     Other liabilities
    31,427       36,116       32,432       33,470       23,209  
     Stockholders' equity (5)
    14,270       10,188       835       16,974       12,799  
 
(1)  
The following business areas were classified as discontinued operations in the years indicated.  The financial statements for the periods prior to the classification were reclassified to reflect these changes:

-  
In 2008, Portrait Gallery and E-Church operations.
-  
In 2007, the UK Operations which were acquired in connection with the PCA Acquisition.

(2)  
Other charges and impairments:
 
in thousands
 
2010
   
2009
   
2008
   
2007
   
2006
 
                               
Impairment charges (a)
  $ 1,871     $ 300     $ 739     $ -     $ -  
Kiddie Kandids integration costs (b)
    1,335       -       -       -       -  
Severance and related costs (c)
    538       970       2,046       2,035       878  
Bella Pictures® Acquisition costs (d)
    472       -       -       -       -  
Other transition related costs - PCA Acquisition (e)
    388       527       1,255       2,817       -  
Gain on sale of Brampton facility (f)
    (1,473 )     -       -       -       -  
Sears fees related to the settlement of the previous license
   agreement (g)
    -       -       7,527       2,500       -  
Proxy contest fees (h)
    -       871       -       -       -  
Other  (i)
    1,961       626       1,990       343       363  
                                         
Total Other Charges and Impairments
  $ 5,092     $ 3,294     $ 13,557     $ 7,695     $ 1,241  
                                         
 
 (a)   Consists primarily of 2010, 2009 and 2008 impairment charges related to the Matthews, North Carolina facility.
 (b)   Relates to certain integration costs incurred in connection with the Kiddie Kandids, LLC asset acquisition.
 (c)  
Consists principally of expenses and related costs for employee severance, retirements and repositioning.  Specifically, in 2008 and 2007, the cost primarily related to the PCA Acquisition.
 (d)   Relates to certain costs incurred in connection with the Bella Pictures® Acquisition, primarily related to legal and consulting fees.
 (e)   Consists of integration-related costs relative to the PCA Acquisition.
 (f)   Represents the gain on sale of the Brampton, Ontario facility in 2010.
 (g)   Consists of certain fees and charges related to the settlement of the previous Sears license agreement.
 (h)   Relates to certain fees incurred in connection with the proxy contest in 2009.
 (i)   Costs in 2010 primarily related to legal expense incurred in connection with the Chrissy Larkin vs. CPI Corp. case and the write-off of debt fees related to the Company’s former credit facility as a result of its new revolving credit facility; offset in part by an early termination fee received from Walmart in relation to certain early PMPS studio closures.  Costs in 2009 primarily related to net legal expense incurred in connection with the settlement of the Picture Me Press LLC vs. Portrait Corporation of America case.  Costs in 2008 primarily related to legal expense incurred for the settlement of the Portraits International of the Southwest vs. CPI Corp. case and in connection with the Picture Me Press LLC vs. Portrait Corporation of America case.  Costs in 2007 primarily related to the write-off of software that is no longer used in the business.  Costs in 2006 represent professional service expense in connection with a strategic alternative review and the write-off of certain legacy equipment that is no longer used in the business.
 
 
 
17
 
 

(3)
 
In 2010, 2009, 2008 and 2007, includes (income) expense of ($2.0 million), ($1.5 million), $617,000 and $2.9 million, respectively, in connection with marking the interest rate swap agreement to its market value.  The interest rate swap agreement expired on September 17, 2010.
     
(4)
 
In 2010, the Company recorded an $803,000 translation gain related to intercompany balances that are payable in the foreseeable future.
 
In 2004, the Company recorded accrued lease liability obligations relating to its lease guarantees on certain of Prints Plus’ retail stores.  As the total guarantee related to these leases had decreased with the passage of time, the payment of rents by Prints Plus and the settlement by the Company of certain leases rejected in bankruptcy, the related liability was reduced by $887,000 in 2006 to reflect management’s revised estimate of remaining potential loss.
     
(5)
 
The Company recorded the repurchase of 1,658,607 shares of common stock for $32.4 million in 2006.
     
(6)
 
In connection with the Bella Pictures® Acquisition in 2010, the Company acquired a tradename and additional goodwill. At the time of the PCA Acquisition in 2007, the Company acquired a host agreement and customer list with Walmart and additional goodwill.  See Note 8 to the Notes to Consolidated Financial Statements for further discussion.

Item 7.               Management's Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on the Company’s results of operations, financial position and liquidity, significant accounting policies and critical estimates, and the future impact of accounting standards that have been issued but are not yet effective.   Management’s Discussion and Analysis is presented in the following sections: Executive Overview; Results of Operations; Liquidity and Capital Resources; and Accounting Pronouncements and Policies.  The reader should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this document.

All references to earnings per share relate to diluted earnings per common share.

EXECUTIVE OVERVIEW

The Company’s Operations

CPI Corp. is a long-standing leader, based on sittings, number of locations and related revenues, in the professional portrait photography of young children, individuals and families.  From a single studio opened by our predecessor company in 1942, we have grown to 3,084 studios throughout the U.S., Canada, Mexico and Puerto Rico, principally under lease and license agreements with Walmart and license agreements with Sears and Toys “R” Us.  CPI is the sole operator of portrait studios in Walmart stores and supercenters in all 50 states in the U.S., Canada, Mexico and Puerto Rico, as well as Babies “R” Us stores in the U.S.  The Company has provided professional portrait photography for Sears’ customers since 1959 and has been the only Sears portrait studio operator since 1986.

CPI entered into a license agreement, effective as of April 20, 2010, with Toys “R” Us (“TRU”) which grants CPI an exclusive license to operate photo studios in certain Babies “R” Us stores under the Kiddie Kandids name.  The term of the agreement expires on January 31, 2016.  The agreement allows CPI significant operating flexibility and collaborative marketing opportunities and provides for the opening of additional locations through October of 2011.  The agreement contains certain termination rights for both the Company and TRU.  The fees paid to TRU under the agreement are based upon the Gross Sales of the Studios operated under the agreement.  Separately, in the first quarter of 2010, the Company also acquired certain assets of Kiddie Kandids, LLC in an auction approved by the United States Bankruptcy Court for the District of Utah (the “Kiddie Kandids, LLC asset acquisition”).  The Company evaluated the asset purchase under the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” (“ASC Topic 805”) and determined the purchase was an asset acquisition rather than a business combination.  Accordingly, the purchase of such assets has been classified as an asset acquisition in the accompanying consolidated financial statements.

On January 26, 2011, the Company acquired substantially all of the assets and certain liabilities of Bella Pictures, Inc., a leading provider of branded wedding photography services (the “Bella Pictures® Acquisition”).  The operations acquired through the Bella Pictures® Acquisition are conducted through the Company’s subsidiary, Bella Pictures Holdings, LLC (“Bella Pictures®”).  The Bella Pictures® Acquisition significantly expands the Company’s mobile photography operations and offers customers high-quality wedding photography and videography services and products in most major U.S. markets through a network of certified photographers and videographers.  The Company’s strong digital capabilities and infrastructure, combined with outstanding customer service skills, will allow it to provide exceptional value to couples across a wide spectrum of offerings and price points, while greatly expanding its sales beyond the traditional holiday season.  The Company evaluated the Bella Pictures® Acquisition under the guidance in ASC Topic 805 and determined it was a business combination.  Accordingly, the results have been included in the accompanying consolidated financial statements from the date of acquisition.

 
18
 
 
Management has determined the Company operates as a single reporting segment offering similar products and services in all locations.

As of the end of the last three fiscal years, the Company’s studio counts were:
 
   
2010
 
2009
 
2008
 
               
Within Walmart stores:
             
United States and Puerto Rico
    1,536     1,549     1,642  
Canada
    260     260     259  
Mexico
    108     114     118  
                     
Within Sears stores:
                   
United States and Puerto Rico
    859     871     887  
Canada
    110     110     110  
                     
Within Babies "R" Us stores in the United States
    150     -     -  
                     
Locations not within above host stores
    61     31     30  
                     
Total
    3,084     2,935     3,046  
                     
 
Certain under-performing PMPS studios have been closed since 2008 in order to improve overall financial results.  Locations not within Walmart, Sears or Babies “R” Us stores include 23 free-standing SPS studio locations, 21 Kiddie Kandids mall locations and 17 Shooting Star locations (located within Buy Buy Baby stores).

The Company continues to seek opportunities from its digital platform to create diversified revenue streams, drive productivity and profitability gains, leverage its manufacturing capacity and efficiency and implement aggressive, targeted marketing campaigns.  Such opportunities may be restrained if the economy worsens in the foreseeable future.
 

 
19
 
 

RESULTS OF OPERATIONS

A summary of consolidated results of operations and key statistics follows:
 
in thousands, except per share data
 
2010
   
2009
   
2008
 
                   
Net sales
  $ 407,035     $ 422,371     $ 462,548  
                         
Cost and expenses:
                       
Cost of sales (exclusive of depreciation and amortization shown below)
    28,263       30,626       43,280  
Selling, general and administrative expenses
    337,490       339,138       377,310  
Depreciation and amortization
    17,962       22,740       29,432  
Other charges and impairments
    5,092       3,294       13,557  
      388,807       395,798       463,579  
                         
Income (loss) from continuing operations
    18,228       26,573       (1,031 )
                         
Interest expense
    3,860       7,030       8,529  
Interest income
    17       94       2  
Other income (expense), net
    929       (44 )     190  
Income (loss) from continuing operations before income tax expense (benefit)
    15,314       19,593       (9,368 )
                         
Income tax expense (benefit)
    3,413       5,796       (2,644 )
                         
Net income (loss) from continuing operations
    11,901       13,797       (6,724 )
                         
Net loss from discontinued operations, net of income tax benefit
    -       -       (961 )
 
                       
Net income (loss)
    11,901       13,797       (7,685 )
Net loss attributable to noncontrolling interest
    (7 )     -       -  
NET INCOME (LOSS) ATTRIBUTABLE TO CPI CORP.
  $ 11,908     $ 13,797     $ (7,685 )
                         
NET INCOME (LOSS) PER COMMON SHARE
                       
                         
Net income (loss) per share from continuing operations - diluted
  $ 1.64     $ 1.97     $ (1.03 )
Net loss per share from discontinued operations - diluted
    -       -       (0.15 )
Net income (loss) per share attibutable to CPI Corp. - diluted
  $ 1.64     $ 1.97     $ (1.18 )
                         
Weighted average number of common and common equivalent shares outstanding - diluted
    7,272       7,020       6,510  

2010 versus 2009 and 2009 versus 2008
 
Unless otherwise noted, the fiscal year 2010 results include the 52-weeks ended February 5, 2011, compared to 52-weeks in fiscal year 2009, which ended February 6, 2010, and 53-weeks in fiscal year 2008, which ended February 7, 2009.

Net sales totaled $407.0 million, $422.4 million and $462.5 million in 2010, 2009 and 2008, respectively.

·  
Net sales for 2010 decreased $15.4 million, or 4%, to $407.0 million from the $422.4 million reported in 2009.  Excluding the positive impacts of net store openings ($15.3 million), foreign currency translation ($4.9 million), E-commerce ($1.5 million) and other items totaling $200,000, comparable same-store sales decreased approximately 9% from the prior year.  The Bella Pictures® Acquisition on January 26, 2011, did not materially affect the Company’s 2010 net sales.

Net sales from the Company’s PMPS brand, on a comparable same-store basis, excluding impacts of store closures, foreign currency translation, E-commerce, net revenue recognition change and other items, totaling $2.7 million, decreased 5% in fiscal 2010 to $208.0 million from $219.1 million in fiscal 2009.  The decrease in PMPS sales performance in 2010 was the result of a 10% decline in the number of sittings, offset in part by a 6% increase in average sale per customer sitting.

Net sales from the Company’s SPS brand, on a comparable same-store basis, excluding impacts of store closures, foreign currency translation, net revenue recognition change and other items, totaling ($700,000), decreased 13% in fiscal 2010 to $171.2 million from $197.3 million in fiscal 2009.  The decrease in SPS sales in 2010 was the result of an 11% decline in the number of sittings and a 3% decline in average sale per customer sitting.

Net sales from the Company’s Kiddie Kandids studio operations, excluding the impact of net revenue recognition change and other items totaling ($900,000), contributed $20.8 million in net sales in 2010.

 
20
 
 
Net sales for 2009 decreased $40.1 million, or 9%, to $422.4 million from the $462.5 million reported in 2008.  Excluding the negative impacts of store closures ($8.9 million), the 53rd week in the prior year ($7.0 million), net revenue recognition change ($4.1 million), revenue deferral related to positive response to the Company’s loyalty programs ($4.0 million), foreign currency translation ($1.9 million) and other net impacts ($1.1 million), comparable same-store sales decreased approximately 3%.

Net sales from the Company’s PMPS brand, on a comparable same-store basis, excluding impacts of store closures, net revenue recognition change, the 53rd week in the prior year, foreign currency translation and other items, totaling ($19.1 million), increased 9% in fiscal 2009 to $222.8 million from $204.1 million in fiscal 2008.  The improved PMPS sales performance for fiscal 2009 was the result of an approximate 24% increase in average sale per customer sitting, reflecting customers’ positive response to the offerings made possible by the digital conversion as well as new sales and performance management processes, offset in part by an approximate 12% decline in the number of sittings.

During fiscal 2009, net sales from the Company’s SPS brand, on a comparable same-store basis, excluding impacts of the 53rd week in the prior year, loyalty program revenue deferral, store closures and other items, totaling ($7.9 million), were $198.8 million, a decrease of 14% from $231.2 million in fiscal 2008.  SPS sales performance for fiscal 2009 was the result of a decline of approximately 15% in the number of sittings, offset slightly by an increase of 2% in average sale per customer sitting.

Costs and expenses were $388.8 million in 2010, compared with $395.8 million in 2009 and $463.6 million in 2008.

·  
Cost of sales, excluding depreciation and amortization expense, was $28.3 million, $30.6 million, and $43.3 million in 2010, 2009 and 2008, respectively.