End of a nasty battle for Charming Shoppes

Dissident investors, advisers and their lawyers tapped on Blackberries and barked into cell phones from the parking lot.

A few feet away inside corporate suites, the top dogs at Charming Shoppes Inc. were on the other end of last-ditch proxy negotiations.

The scene at the retailer's Bensalem headquarters last week during a wholly unexpected shareholder battle was the culmination of months of recriminations and nasty infighting over one of Philadelphia's highest-profile homegrown companies.

And all because, some say, women stopped shopping.

"The economy took a very dramatic and sudden turn that affected not only us but the entire industry," said Steve Wishner, the company's senior vice president of finance.

The settlement, which gives activists two board seats, ended a roller-coaster year that had started out rosy for the $3 billion company that runs Fashion Bug, Lane Bryant and other stores nationwide catering mostly to plus-size women.

Back then, executives were boasting solid growth and more to come. But one day last summer, company officials say, the game changed. Drastically.

Expensive gas and the subprime crash fueled an economic downturn that extended into a dismal holiday season. Plummeting profits lured activist investors to Charming Shoppes shares like bargain hunters at a fire sale.

The proxy fight that ensued was like a child-custody battle in a divorce that few saw coming.

"We all got caught in what became a very significant downturn that occurred very quickly that came right on the heels of the credit crisis that began last summer," said executive vice president and chief financial officer Eric M. Specter, who has been CFO since 1997 and with the company since 1983.

Two months ago, on an earnings call with Wall Street analysts as the proxy fight was gearing up, chief executive Dorrit J. Bern looked back at how things had changed so abruptly.

"This time last year," she said, "it seems like a lifetime ago, but this time last year we had come off a record 2006.

"We were very happy, we were very pleased with the business, all the brands were working, the catalog business was sound, the e-commerce business was generating double-digit sales increases," Bern said.

Then came the summer of 2007, and the company's prized consumer - women sized 14 to 28 and beyond - cut back, big time.

"It's like, June 4 at 4 p.m., every woman in the United States picked up the phone and said, 'We're going to stop shopping,' " Bern said. "We began to see a very serious deterioration of traffic."

Certainly, the company's woes cannot be reduced to a single event. In caustic slide presentations sent to investors during the proxy fight, the dissident group argued that management and its board overseers had no one but themselves to blame.

They were ill-prepared for the downturn, said the investors, a partnership of New York firms Crescendo Partners and Myca Partners. They said the company had overspent on unwise acquisitions and strayed too far from its core business: selling merchandise to plus-size women.

Myca began scooping up shares in March 2007, when they were trading below $12 apiece. In June, share values began a steady descent.

Retailers across the country began to experience a sales slowdown as the subprime lending crisis emerged, gas got expensive and consumers turned frugal. Back-to-school sales offered little relief, worsening by Christmas.

Charming Shoppes also said loose-fitting "peasant-cut" fashions were dominating mainstream stores and cutting into its plus-size market.

As things started to come undone in the summer, Myca Partners began expressing its concerns to management, said a person familiar with the proxy fight, speaking last week on condition of anonymity.

In November, the company announced cost-saving measures. A month later, it renegotiated Bern's employment contract, stripping her of a number of executive perks - including a free Rittenhouse Square apartment - and tying compensation more closely to the company's financial performance.

That same month, with shares trading at about $5, Crescendo began buying them. In mid-January, Crescendo and Myca announced they would nominate three people to fill the seats expiring on the Charming Shoppes board. One of those seats belonged to Bern.

The proxy fight had begun. Dissidents held an 8 percent stake. Charming Shoppes sued to block them from getting on the board.

In February, the company told investors it planned to close 150 stores, slow new store openings and eliminate 200 jobs to save money.

In March, the company sized up the damage: Net sales for the year had dropped about $600 million. It had lost $87.7 million the year that ended Feb. 2.

Dissidents pounded away, criticizing high executive pay and suggesting the board of directors was cozy with management. The activists said the company should sell non-core businesses to generate cash.

The company counter-charged that the dissidents were opportunists looking for a quick stock-price boost at the expense of long-term profitability.

The settlement reached last week gives two board seats to dissident nominees Michael Appel and Arnaud Ajdler. It protects Bern's seat but ends her reign as joint CEO and chairman. The post of chairman will now be held by someone else, if shareholders approve the compromise next month. The settlement came about after Charming Shoppes reached out to dissidents Wednesday night. Shareholders had said they wanted to avoid a proxy showdown, Specter said.

What comes next remains to be seen, though asset sales may very well be on the table. Officials say the task for now is to heal battle scars.

"This is now a cohesive board," Specter said.