UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 31, 2006

OR

| | 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 0-12188

DEB SHOPS, INC.

(Exact name of registrant as specified in its charter)



| | Pennsylvania(State or other jurisdiction ofincorporation or organization) |  | 23-1913593(I.R.S. EmployerIdentification No.) | 
| | ------------------------------------------------------------------------- |  | --------------------------------------------- | 

| |  |  |  | 
| |  |  |  | 

| | 9401
      Blue Grass Road, Philadelphia, Pennsylvania(Address of principal executive offices) |  | 19114(Zip Code) | 
| | ---------------------------------------------------------------------------------------------- |  | --------------- | 

(215) 676-6000

(Registrants telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer

        Accelerated filer

        Non-accelerated filer


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

YesNo

Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of the latest practicable date.



| | Common Stock,
      Par Value $.01 |  | 14,327,808                              | 
| | ---------------------------------- |  | --------------------------------------- | 
| |                                    |  |                                         | 
| | (Class)                            |  | (Outstanding at
      December 5, 2006) | 






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DEB SHOPS, INC. AND SUBSIDIARIES

INDEX



PagePART I.


      


      


      

        Financial Information:Item 1.

        

        Financial StatementsConsolidated Balance SheetsOctober 31, 2006 (Unaudited) and January 31, 2006

        1Consolidated Statements of Operations (Unaudited)Three Months and Nine Months Ended October 31, 2006 and 2005

        2Consolidated Statements of Cash Flows (Unaudited)Nine Months Ended October 31, 2006 and 2005

        3Notes to Consolidated Financial StatementsOctober 31, 2006 (Unaudited)

        4-6Item 2.

        

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

        7-12Item 3.

        

        Quantitative and Qualitative Disclosures About Market Risk

        12Item 4.

        

        Controls and Procedures

        12PART II.

        

        

        

        Other Information:Item 1.

        

        Legal Proceedings

        13Item 1A.

        

        Risk Factors

        13Items 2 - 5.

        

        

        13Item 6.

        

        Exhibits

        13Signatures

        

        

        14Exhibit Index

        15




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PART I.

        Financial Information


Item 1.

        Financial Statements


DEB SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



OCTOBER
          31,2006(Unaudited)
      
      JANUARY
          31,2006ASSETSCurrent
          AssetsCash
          and cash equivalents
      
      $
      28,454,464
      
      $
      26,520,757Marketable
          securities
      
      
      91,900,000
      
      
      91,000,000Merchandise
          inventories
      
      
      26,236,671
      
      
      32,902,705Prepaid
          expenses and other
      
      
      5,671,991
      
      
      3,247,389Deferred
          income taxes
      
      
      1,180,154
      
      
      1,180,154Total
          current assets
      
      
      153,443,280
      
      
      154,851,005Property,
          Plant and Equipment - at costLand
      
      
      150,000
      
      
      150,000Buildings
      
      
      2,365,697
      
      
      2,365,697Leasehold
          improvements
      
      
      58,351,109
      
      
      55,615,772Furniture
          and equipment
      
      
      18,313,405
      
      
      16,794,54279,180,211
      
      
      74,926,011Less
          accumulated depreciation and amortization
      
      
      53,829,441
      
      
      51,600,719Net
          property, plant and equipment
      
      
      25,350,770
      
      
      23,325,292Other
          AssetsDeferred
          income taxes
      
      
      7,780,844
      
      
      7,780,844Other
      
      
      1,712,223
      
      
      1,712,223Total
          other assets
      
      
      9,493,067
      
      
      9,493,067Total
          assets
      
      $
      188,287,117
      
      $
      187,669,364LIABILITIES
          AND SHAREHOLDERS EQUITYCurrent
          LiabilitiesTrade
          accounts payable
      
      $
      26,039,183
      
      $
      26,917,480Accrued
          expenses and other
      
      
      12,318,888
      
      
      13,173,334Income
          taxes payable
      
      
      
      
      
      4,511,782Total
          current liabilities
      
      
      38,358,071
      
      
      44,602,596Deferred
          lease credits
      
      
      12,516,441
      
      
      11,511,430Total
          liabilities
      
      
      50,874,512
      
      
      56,114,026Shareholders
          EquitySeries
          A preferred stock, par value $1.00 per share:Authorized
          - 5,000,000 sharesIssued
          and outstanding  460 shares,liquidation
          value $460,000
      
      
      460
      
      
      460Common
          stock, par value $.01 per share:Authorized
          - 50,000,000 sharesIssued-
          15,688,290 shares
      
      
      156,883
      
      
      156,883Additional
          paid in capital
      
      
      14,425,753
      
      
      14,187,841


Retained
          earnings
      
      
      131,267,011
      
      
      125,684,867145,850,107
      
      
      140,030,051Less
          common treasury shares, at cost:October
          31, 2006: 1,360,482; January 31, 2006: 1,366,482
      
      
      8,437,502
      
      
      8,474,713Total
          shareholders equity
      
      
      137,412,605
      
      
      131,555,338Total
          liabilities and shareholders equity
      
      $
      188,287,117
      
      $
      187,669,364


See notes to consolidated financial statements.

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DEB SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



Three
          Months Ended October 31,
      
      Nine
          Months Ended October 31,2006
      
      
      2005
      
      
      2006
      
      
      2005Net
          sales
      
      $
      82,525,663
      
      $
      83,126,336
      
      $
      239,641,679
      
      $
      236,577,177Cost
          of sales, including buyingand occupancy costs
      
      
      59,808,991
      
      
      59,704,713
      
      
      165,545,074
      
      
      162,321,770Gross
          profit
      
      
      22,716,672
      
      
      23,421,623
      
      
      74,096,605
      
      
      74,255,407Operating
          expenses:Selling
          and administrative
      
      
      18,812,735
      
      
      17,908,951
      
      
      56,517,863
      
      
      53,530,261Depreciation
          and amortization
      
      
      1,384,477
      
      
      1,371,467
      
      
      3,959,066
      
      
      4,020,84820,197,212
      
      
      19,280,418
      
      
      60,476,929
      
      
      57,551,109Operating
          income
      
      
      2,519,460
      
      
      4,141,205
      
      
      13,619,676
      
      
      16,704,298Other
          income, principally interest
      
      
      1,158,769
      
      
      859,932
      
      
      3,258,795
      
      
      3,233,237Income
          before income taxes
      
      
      3,678,229
      
      
      5,001,137
      
      
      16,878,471
      
      
      19,937,535Income
          tax provision
      
      
      1,282,000
      
      
      1,911,000
      
      
      5,882,000
      
      
      7,497,000Net
          income
      
      $
      2,396,229
      
      $
      3,090,137
      
      $
      10,996,471
      
      $
      12,440,535Net
          income per common shareBasic
      
      $
      0.17
      
      $
      0.21
      
      $
      0.76
      
      $
      0.88Diluted
      
      $
      0.17
      
      $
      0.21
      
      $
      0.76
      
      $
      0.88Cash
          dividend declared per common share
      
      $
      0.125
      
      $
      0.125
      
      $
      0.375
      
      $
      6.375Weighted
          average number of common shares outstandingBasic
      
      
      14,327,808
      
      
      14,319,308
      
      
      14,326,336
      
      
      14,060,414Diluted
      
      
      14,334,842
      
      
      14,319,308
      
      
      14,343,567
      
      
      14,143,016


See notes to consolidated financial statements.

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DEB SHOPS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



Nine
          Months Ended October 31,2006
      
      2005Cash
          flows from operating activities:Net
          income
      
      $
      10,996,471
      
      $
      12,440,535Adjustments
          to reconcile net income tonet
          cash provided by operating activities:Depreciation
          and amortization
      
      
      3,959,066
      
      
      4,020,848Stock
          compensation expense
      
      
      120,823
      
      
      Loss
          on retirement of property, plant and equipment
      
      
      66,344
      
      
      57,648Changes
          in operating assets and liabilities:Decrease
          in merchandise inventories
      
      
      6,666,034
      
      
      4,649,373Increase
          in prepaid expenses and other
      
      
      (1,972,080
      )
      
      (17,437
      )Decrease
          in trade accounts payable
      
      
      (878,297
      )
      
      (2,001,263
      )Decrease
          in accrued expenses and other
      
      
      (855,196
      )
      
      (268,322
      )Decrease
          in income taxes payable
      
      
      (4,511,782
      )
      
      (4,618,905
      )Increase
          (decrease) in deferred lease credits
      
      
      592,511
      
      
      (399,199
      )Net
          cash provided by operating activities
      
      
      14,183,894
      
      
      13,863,278Cash
          flows from investing activities:Purchases
          of property, plant and equipment
      
      
      (6,090,909
      )
      
      (3,172,958
      )Purchases
          of investment securities
      
      
      (9,600,000
      )
      
      (88,550,000
      )Sales
          of investment securities
      
      
      8,700,000
      
      
      160,150,000Net
          cash (used in) provided by investing activities
      
      
      (6,990,909
      )
      
      68,427,042Cash
          flows from financing activities:Preferred
          stock cash dividends paid
      
      
      (41,400
      )
      
      (41,400
      )Common
          stock cash dividends paid
      
      
      (5,372,178
      )
      
      (91,157,984
      )Proceeds
          from exercise of stock options
      
      
      142,500
      
      
      9,753,484Tax
          benefit from stock based compensation
      
      
      11,800
      
      
      520,900Net
          cash used in financing activities
      
      
      (5,259,278
      )
      
      (80,925,000
      )Increase
          in cash and cash equivalents
      
      
      1,933,707
      
      
      1,365,320Cash
          and cash equivalents at beginning of period
      
      
      26,520,757
      
      
      30,298,970Cash
          and cash equivalents at end of period
      
      $
      28,454,464
      
      $
      31,664,290Supplemental
          disclosures of cash flow information:Cash
          paid during the period for:Income
          taxes, net
      
      $
      12,340,000
      
      $
      12,370,000


See notes to consolidated financial statements.

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DEB SHOPS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

OCTOBER 31, 2006

- A - Organization / Basis Of Presentation

Deb Shops, Inc. operates 337 womens and mens specialty apparel retail stores in regional malls and strip shopping centers principally located in the East and Midwest regions of the United States. We operate 329 stores under the name DEB which offer moderately priced, fashionable, coordinated womens tops, bottoms, dresses, coats, lingerie, accessories, shoes and novelty items for junior and plus-sizes. DEB merchandise consists of clothing and accessories appealing primarily to fashion-conscious junior and plus-sized female consumers between the ages of 13 and 25. One hundred seventy eight of our DEB stores contain plus-size departments. In addition, we operate two outlet stores under the name CSO.  The outlet stores offer the same merchandise as DEB at reduced prices and serve as clearance stores for slow-moving inventory. We also operate
six apparel retail stores under the name Tops N Bottoms.  The Tops N Bottoms stores sell moderately priced mens and womens apparel. Thirteen of the DEB stores contain Tops N Bottoms departments.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the first and third quarters, cost of goods sold and inventories are estimated based on the use of the gross profit method. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended October 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2007. For further information, refer to the consolidated financial statements
and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2006.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain amounts appearing in the prior period financial statements have been reclassified to conform to current presentation.

- B - Net Income Per Share

The table below sets forth the reconciliation of the numerators and denominators of the basic and diluted net income per common share computations.



Three
          Months Ended October 31,
      
      Nine
          Months Ended October 31,2006
      
      2005
      
      2006
      
      2005Net
          income
      
      $
      2,396,229
      
      $
      3,090,137
      
      $
      10,996,471
      
      $
      12,440,535Dividends
          on preferred stock
      
      
      (13,800
      )
      
      (13,800
      )
      
      (41,400
      )
      
      (41,400
      )Income
          available to common shareholders
      
      $
      2,382,429
      
      $
      3,076,337
      
      $
      10,955,071
      
      $
      12,399,135Basic
          weighted average number of common shares outstanding
      
      
      14,327,808
      
      
      14,319,308
      
      
      14,326,336
      
      
      14,060,414Effect
          of dilutive stock options
      
      
      7,034
      
      
      
      
      
      17,231
      
      
      82,602Diluted
          weighted average number of common shares outstanding
      
      
      14,334,842
      
      
      14,319,308
      
      
      14,343,567
      
      
      14,143,016


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- B - Net Income Per Share (continued)

For the periods indicated, we issued the following number of common shares as a result of stock option exercises.



Three Months Ended October 31,


      

        Nine Months Ended October 31,2006


      


      2005


      


      2006


      


      2005Common shares issued


      


      


      


      


      


      6,000


      


      557,297


For each of the periods indicated, the effect of these exercises is included in the basic and diluted weighted average number of common shares outstanding.

Options to purchase 142,000 shares of common stock, at a weighted average exercise price of $23.91 per share, were outstanding at October 31, 2006. At October 31, 2005, options to purchase 135,500 shares of common stock, at a weighted average exercise price of $23.75 were outstanding. To the extent applicable, the effect of these options on the diluted weighted average number of common shares outstanding at October 31, 2006 and 2005 is reflected in the above table that reconciles numerators and denominators of the basic and diluted net income per common share computations.

- C - Income Taxes

Our effective tax rate differs from the federal statutory rate due primarily to state income taxes, offset by tax-exempt interest earnings. The 34.85% rate for the three and nine-month periods ended October 31, 2006 represents our estimate of the rate we expect for the fiscal year ending January 31, 2007.

In July 2006, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprises tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN 48. FIN 48 is effective
after the beginning of an entitys first fiscal year that begins after December 15, 2006. We will adopt FIN 48 as of February 1, 2007, and are currently evaluating the impact, if any, to our consolidated financial statements.

- D - Stock Related Compensation

We have a stock option plan whereby options may be granted to employees or non-employee directors on the basis of contributions to our operations. Details concerning the plan are described in Note G to the financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2006.

On February 1, 2006 we adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), Share-Based Payment (FAS 123(R)), requiring that the fair value of stock-based compensation be expensed in our financial statements. FAS 123(R) revised FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123) and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). FAS 123(R) is supplemented by Securities Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 107. SAB No. 107 expresses the SEC staffs views regarding the interaction between FAS 123(R) and certain SEC rules and regulations, including the valuation of share-based payment arrangements.

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- D - Stock Related Compensation (continued)

We recognize the cost of all employee stock options on a straight-line attribution basis over the respective vesting periods, net of estimated forfeitures. We have selected the modified prospective method of transition; accordingly, prior periods have not been restated. Prior to adopting FAS 123(R), we applied APB 25 and related interpretations in accounting for our stock-based compensation plans. All stock options were granted at the grant date market price. Accordingly, no compensation cost was recognized for stock option grants. Under the modified prospective method, compensation expense will be recorded for the unvested portion of previously issued awards that were outstanding at February 1, 2006 using the same estimate of the grant date fair value and the same attribution method used to determine the pro forma disclosure under FAS 123.

We recognized share-based compensation expense of approximately $30,000 and $121,000 for the quarter and nine-months ended October 31, 2006, respectively. These amounts are included as a component of selling and administrative expenses. The effect on net income was less than $0.01 per diluted share in both the quarter and nine-month periods.

Prior to February 1, 2006, we accounted for stock-based awards using the intrinsic value method in accordance with APB 25. The following table illustrates the effect on net income and earnings per share for the quarter and nine-month periods ended October 31, 2005 if we had applied the fair value recognition provisions of FAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure:



Three MonthsEndedOctober 31,


      

        Nine MonthsEndedOctober 31,2005


      

        2005Net income as reported


      


      $


      3,090,137


      


      $


      12,440,535Stock-based employee compensation cost

        

        

        (34,680

        )

        

        (172,750

        )Pro-forma net income

        

        

        3,055,457

        

        

        12,267,785Dividends on preferred stock

        

        

        (13,800

        )

        

        (41,400

        )Pro forma net income available to common shareholders

        

        $

        3,041,657

        

        $

        12,226,385Basic net income per common share, as reported

        

        $

        0.21

        

        $

        0.88Pro forma basic net income per common share

        

        $

        0.21

        

        $

        0.87Diluted net income per common share, as reported

        

        $

        0.21

        

        $

        0.88Pro forma diluted net income per common share

        

        $

        0.21

        

        $

        0.86


As of October 31, 2006, there was $86,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our stock option plan. Of this amount, $21,000 is expected to be recognized over the remainder of the fiscal year ending January 31, 2007.

- E - Revenue Recognition

We recognize revenue at the time of sale of merchandise to our customers. Sales relating to lay-a-way transactions are recognized at the time the customer remits final payment and takes possession of the merchandise. The value of promotional coupons and other discounts that result in a reduction of the price paid by the customer are recorded as a reduction of sales. Sales returns, which are reserved for based on historical experience, are provided for in the period that the related sales are recorded. Proceeds from the sale of gift cards are recorded as a gift card liability. Revenue is recognized when the gift card is redeemed by the holder.

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Item 2.

Managements Discussion and Analysis of Financial Condition and Results Of Operations

Forward-Looking Statements

We have made in this report, and from time to time may otherwise make, forward-looking statements (as that term is defined under federal securities laws) concerning our future operations, performance, profitability, revenues, expenses, earnings and financial condition. This report includes, in particular, forward-looking statements regarding expectations of future performance, store openings and closings and other matters. Such forward-looking statements are subject to various risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors. Such factors may include, but are not limited to, our ability to improve or maintain sales and margins, respond to changes in fashion, find suitable retail locations and our ability to attract and retain key management personnel. Such factors may also include
other risks and uncertainties detailed in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended January 31, 2006 (the 2006 10-K). We assume no obligation to update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Investors should also be aware that while we do communicate with securities analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against confirming financial forecasts or projections issued by others. Therefore, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Critical Accounting Policies

Our critical accounting policies are discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations and notes accompanying the consolidated financial statements that appear in the 2006 10-K. There were no material changes subsequent to the filing of the 2006 10-K in our critical accounting policies or in the assumptions or estimates used to prepare the financial information appearing in this report.

Overview

This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and accompanying notes appearing elsewhere in this report. As used in this report, the terms fiscal 2007 and fiscal 2008 refer to our fiscal years that will end on January 31, 2007 and January 31, 2008, respectively. The term fiscal 2006 refers to our fiscal year that ended on January 31, 2006.

We operate 337 womens and mens specialty apparel retail stores in regional malls and strip shopping centers principally located in the East and Midwest regions of the United States. We operate 329 stores under the name DEB which offer moderately priced, fashionable, coordinated womens tops, bottoms, dresses, coats, lingerie, accessories, shoes and novelty items for junior and plus-sizes. DEB merchandise consists of clothing and accessories appealing primarily to fashion-conscious junior and plus-sized female consumers between the ages of 13 and 25. One hundred seventy eight of the DEB stores contain plus-size departments. In addition, we operate two outlet stores under the name CSO. The outlet stores offer the same merchandise as DEB at reduced prices and serve as clearance stores for slow-moving inventory. We also operate
six apparel retail stores under the name Tops N Bottoms. The Tops N Bottoms stores sell moderately priced mens and womens apparel. Thirteen of the DEB stores contain Tops N Bottoms departments.

Operating results for the quarter ended October 31, 2006 (the Current Quarter) included a 4.0% decrease in comparable store sales. The comparable store sales decrease was almost fully offset by the sales from new stores. We operated an average of 336 stores during the Current Quarter versus 326 stores during the quarter ended October 31, 2005 (the Comparable Quarter). The decrease in our sales and earnings during the Current Quarter versus the Comparable Quarter was principally due to lower than expected sales throughout our store base during the months of August and October, offset by positive comparable store sales during September. We believe sales in September benefited from a shift in back to school purchases to later in the season in certain markets, most notably for us in Michigan.

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During the quarter, our dress business continued to perform well and we also saw some strength in our top business, particularly in tunics and hooded tee shirts. In addition, sales were strong in tights, leggings and hooded coats and jackets. However, continued weakness in our bottoms and accessory business more than offset these positives. We believe the decrease in our sales and earnings was in part attributable to a continuation of a challenging macro economic environment for our value-driven customer. We also recognize that certain aspects of our merchandise assortment have not been fully accepted by our core customer.

The following table sets forth certain store information.



Store Data (1)Three Months EndedOctober 31,


      

        Nine Months EndedOctober 31,2006


      

        2005


      

        2006


      

        2005Stores open at end of the period


      


      


      337


      


      


      328


      


      


      337


      


      


      328Average number in operation during the period

        

        

        336

        

        

        326

        

        

        333

        

        

        324Average net sales per store (in thousands)

        

        $

        246

        

        $

        255

        

        $

        721

        

        $

        730Average operating income per store (in thousands)

        

        $

        7

        

        $

        13

        

        $

        41

        

        $

        52Comparable store sales (2)- percent change

        

        

        (4.0

        )%

        

        9.8

        %

        

        (1.9

        )%

        

        7.1

        %


The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of net sales:



Three
          Months EndedOctober 31,
      
      Nine
          Months EndedOctober 31,2006
      
      2005
      
      2006
      
      2005Net
          sales
      
      100.0
      %
      100.0
      %
      100.0
      %
      100.0
      %Gross
          profit
      
      27.5
      
      28.2
      
      30.9
      
      31.4Operating
          income
      
      3.1
      
      5.0
      
      5.7
      
      7.1Income
          before income taxes
      
      4.5
      
      6.0
      
      7.0
      
      8.4Income
          tax provision
      
      1.6
      
      2.3
      
      2.5
      
      3.2Net
          income
      
      2.9
      %
      3.7
      %
      4.6
      %
      5.3
      %


Results of Operations

Three Months Ended October 31, 2006 Compared to Three Months Ended October 31, 2005

Net sales

Net sales decreased 0.7% during the three months ended October 31, 2006 (the Current Quarter) to $82,526,000 from $83,126,000 in the quarter ended October 31, 2005 (the Comparable Quarter). The $600,000 decrease was the result of a 4.0% or $3,237,000 comparable store sales decrease, offset by the effect of operating an average of 336 stores during the Current Quarter versus 326 stores in the Comparable Quarter. We believe the decrease in our sales and earnings was in part attributable to a continuation of a challenging macro economic environment for our value-driven customer. We also recognize that certain aspects of our merchandise assortment have not been fully accepted by our core customer. The number of transactions during the Current Quarter decreased approximately 2.8% versus the Comparable Quarter.

---

(1)

        Includes Tops N Bottoms stores.


(2)

        Comparable stores sales include stores open for both periods. A store is added to the comparable store base in its 13th month of operation.


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Cost of sales, including buying and occupancy costs

Cost of sales, including buying and occupancy costs, increased $104,000 or 0.2% during the Current Quarter to $59,809,000 from $59,705,000 in the Comparable Quarter. As a percentage of sales, these costs increased to 72.5% from 71.8% in the Comparable Quarter. The dollar increase between periods was due to an increase in buying and occupancy costs as a result of operating an average of 10 additional stores during the Current Quarter versus the Comparable Quarter, offset by the reduction in the cost of merchandise sold due to the decline in overall sales.

As a percentage of sales, these costs increased due to the de-leveraging of buying and occupancy costs as a result of our 4.0% comparable store sales decrease. Buying and occupancy costs were 16.5% and 15.8% of net sales for the Current Quarter and Comparable Quarter, respectively.

Selling and administrative expenses

Selling and administrative expenses increased $904,000 or 5.0% during the Current Quarter to $18,813,000 from $17,909,000 in the Comparable Quarter. As a percentage of net sales, these costs increased to 22.8% from 21.5% in the Comparable Quarter. The dollar increase between periods was due to a combination of increases in store, store supervisory and corporate office payroll expenses, buyer and store supervisory related travel expenses, and insurance costs.

Depreciation and amortization

Depreciation expense increased $13,000 or 1.0% to $1,384,000 in the Current Quarter from $1,371,000 in the Comparable Quarter. As a percentage of net sales, these expenses remained consistent at 1.7%.

Other income, principally interest

Other income, principally interest, increased $299,000 or 34.8% to $1,159,000 in the Current Quarter from $860,000 in the Comparable Quarter. The increase was the result of an increase in average interest rates during the Current Quarter versus the Comparable Quarter, offset by a $1,700,000 decrease in the average amount invested. The decrease in the amount invested was the result of the $6 per share special dividend paid on August 16, 2005, partially offset by cash generated from our operations.

Income tax provision

The income tax provision for the Current Quarter was $1,282,000, resulting in a 34.85% effective tax rate, as compared to $1,911,000 and a 38.2% effective tax rate for the Comparable Quarter. The rate for the Current Quarter represents the rate we expect for the full fiscal year. The rate for the Comparable Quarter reflected the rate that was expected for the fiscal year ended January 31, 2006. The actual rate for the prior year was 36.6%. The difference between the rate expected for the current year and the actual prior year rate is due to the forecasted decrease in year over year earnings and the fact that our tax-exempt interest income is expected to represent a greater percentage of our income than was the case last year.

Nine Months Ended October 31, 2006 Compared to Nine Months Ended October 31, 2005

Net sales

Net sales increased 1.3% during the nine months ended October 31, 2006 (the Current Year-to-Date Period) to $239,642,000 from $236,577,000 in the nine months ended October 31, 2005 (the Comparable Year-to-Date Period). The $3,065,000 increase was the result of operating an average of 333 stores during the Current Year-to-Date Period versus 324 stores in the Comparable Year-to-Date Period, offset by a 1.9%, or $4,431,000 decrease in comparable store sales. The decrease in comparable store sales began in late May and with the exception of September, which benefited from a later back to school selling season and an additional Saturday versus the prior year, continued through October. We believe the decrease in our sales and earnings was in part attributable to a continuation of a challenging macro economic environment for our value-driven
customer. We also recognize that certain aspects of our merchandise assortment have not been fully accepted by our core customer. The number of transactions during the Current Year-to-Date Period decreased approximately 2.7% versus the Comparable Year-to-Date Period.

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Cost of sales, including buying and occupancy costs

Cost of sales, including buying and occupancy costs, increased $3,223,000 or 2.0% during the Current Year-to-Date Period to $165,545,000 from $162,322,000 in the Comparable Year-to-Date Period. As a percentage of sales, these costs increased to 69.1% from 68.6% in the Comparable Year-to-Date Period. The dollar increase was due to the aforementioned $3,065,000 increase in sales resulting from the fact that we operated an average of 333 stores during the Current Year-to-Date Period versus 324 stores in the Comparable Year-to-Date Period. The additional stores result in higher overall occupancy costs. The increase as a percentage of sales was due to the de-leveraging of buying and occupancy costs as a result of our 1.9% comparable store sales decrease. Buying and occupancy costs were 16.6% and 16.1% of net sales for the Current Year-to-Date Period and Comparable Year-to-Date
Period, respectively.

Selling and administrative expenses

Selling and administrative expenses increased $2,988,000 or 5.6% during the Current Year-to-Date Period to $56,518,000 from $53,530,000 in the Comparable Year-to-Date Period. As a percentage of net sales, these costs increased to 23.6% from 22.6% in the Comparable Year-to-Date Period. The increase was due to a $2,154,000 increase in store, store supervisory and corporate office payroll expenses, a $368,000 increase in buyer and store supervisory related travel expenses, a $128,000 increase in store supply costs, $121,000 in stock compensation expense arising from the adoption of FAS 123(R), and a $118,000 increase in merchant fees related to credit card charges arising from an increase in the percentage of our sales paid for by credit cards.

Depreciation and amortization

Depreciation expense decreased $62,000 or 1.5% to $3,959,000 in the Current Year-to-Date Period from $4,021,000 in the Comparable Year-to-Date Period. As a percentage of net sales, these expenses remained consistent at 1.7%. The dollar decrease was due to the fact that in the Comparable Year-to-Date Period, we recorded an additional depreciation expense charge relating to a store that was closing prior to its scheduled lease termination. Partially offsetting this decrease is depreciation expense related to assets placed in service for new and remodeled stores during the past 12 months. During the period November 1, 2005 through October 31, 2006, we opened 17 new stores and remodeled seven locations.

Other income, principally interest

Other income, principally interest, increased $26,000 or 0.8% to $3,259,000 in the Current Year-to-Date Period from $3,233,000 in the Comparable Year-to-Date Period. The increase was the result of an increase in average interest rates during the Current Year-to-Date Period versus the Comparable Year-to-Date Period, offset by a $38,700,000 decrease in the average amount invested. The decrease in the amount invested was the result of the $6 per share special dividend paid on August 16, 2005, partially offset by cash generated from our operations.

Income tax provision

The income tax provision for the Current Year-to-Date Period was $5,882,000, resulting in a 34.85% effective tax rate, as compared to $7,497,000 and a 37.6% effective tax rate for the Comparable Year-to-Date Period. The effective tax rate for the Current Year-to-Date Period is the rate anticipated for fiscal 2007. The actual effective tax rate for fiscal 2006 was 36.6%. The effective tax rate for the Current Year-to-Date Period is lower than the actual rate for fiscal 2006 because our tax-exempt interest income is expected to represent a greater percentage of our income in fiscal 2007 than in fiscal 2006.

Liquidity and Capital Resources

As of October 31, 2006, we had cash and cash equivalents of $28,454,000 and marketable securities of $91,900,000 compared to cash and cash equivalents of $31,664,000 and marketable securities of $74,500,000 as of October 31, 2005. The increase in our total cash and cash equivalents and marketable securities compared to last year is primarily the result of the cash generated from operations, offset by capital acquisitions related to new and remodeled stores and dividend payments.

The cash and cash equivalents are invested principally in money market mutual funds while the marketable securities are invested principally in auction market securities, which trade on a par-in, par-out basis and provide interest-rate reset options on a revolving 35-day basis. Because we regularly liquidate our investments in these securities for reasons including, among others, changes in market interest rates and changes in the availability of and the yield on alternative investments, we have classified these securities as available for sale. We do not invest for trading purposes and therefore do not believe we have significant exposure to market risk with respect to our investments.

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During the Current Year-to-Date and Comparable Year-to-Date Periods, we funded all of our operating needs internally, including capital expenditures for the opening of new stores and the remodeling of existing stores. For the Current Year-to-Date Period, cash provided by operations was $14,184,000, resulting primarily from net income, increased by a reduction in merchandise inventories and the non-cash charge for depreciation and amortization. Offsetting the cash generated from earnings were payments made for income taxes and a reduction in accounts payable, accrued and other expenses.

For the Comparable Year-to-Date period, cash provided by operations was $13,863,000, resulting primarily from net income, a reduction in merchandise inventories and the non-cash charge for depreciation and amortization, offset by income tax and accounts payable payments.

Using cost of sales (excluding buying and occupancy expenses) divided by average inventory at cost for the applicable periods, the inventory turnover rates were approximately 4.1 times for the Current Year-to-Date Period and 4.2 times for the Comparable Year-to-Date Period.

During the Current Year-to-Date Period, net cash used in investing activities was $6,991,000. We used $6,091,000, primarily for capital acquisitions related to opening of 18 new stores, three of which opened after October 31, 2006 and for the remodeling of five existing locations, two of which opened after October 31, 2006. We also purchased $9,600,000 in marketable securities, offset by sales of $8,700,000 of similar investments.

During the Comparable Year-to-Date Period, net cash provided by investing activities was $68,427,000. These funds were generated from the net sales of marketable securities, primarily to fund the special $6.00 per common share dividend we paid on August 16, 2005. We also used $3,173,000 for capital additions relating to the opening of six new stores and the remodeling of 11 existing stores.

During the Current Year-to-Date Period, net cash used in financing activities was $5,259,000. These funds were used for the payment of dividends on common and preferred stock, partially offset by proceeds from employee stock option exercises.

During the Comparable Year-to-Date Period, net cash used in financing activities was $80,925,000. These funds were used for the payment of dividends on our common and preferred stock, primarily the special $6.00 per common share dividend we paid on August 16, 2005. These dividend payments were partly offset by proceeds from the exercise of employee stock options and the related tax benefit.

During fiscal 2008, we expect to begin the roll-out of new point-of-sale hardware and software. We anticipate the cost of this implementation will not exceed $4,000,000 and expect completion during fiscal 2008. We have an unsecured line of credit in the amount of $20,000,000 as of October 31, 2006. Of this amount, $3,952,000 was outstanding as letters of credit for the purchase of inventory. We believe that our existing cash and marketable securities and internally generated funds will be sufficient to meet our anticipated capital expenditures and current operating needs. Initial lease terms for our retail apparel stores, warehouse and office building range from 10 to 20 years. Following is a summary of our contractual obligations for minimum rental payments on our non-cancelable operating leases and minimum payments on other commitments as of October 31, 2006.



Payments
          Due by PeriodContractual
          obligations
      
      Total
      
      Less
          than 1year
      
      1
          - 3years
      
      3
          - 5years
      
      More
          than 5yearsOperating
          leases
      
      $
      158,400,000
      
      $
      25,997,000
      
      $
      46,503,000
      
      $
      35,292,000
      
      $
      50,608,000Letters
          of credit
      
      
      3,952,000
      
      
      3,952,000
      
      
      
      
      
      
      
      
      Total
      
      $
      162,352,000
      
      $
      29,949,000
      
      $
      46,503,000
      
      $
      35,292,000
      
      $
      50,608,000


The above table excludes $1,805,000 in common and preferred stock dividends, which were accrued at October 31, 2006 and were paid in November 2006.

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Other Matters

Seasonality and Quarterly Results

Our operating results are subject to seasonal fluctuations. Highest sales levels have historically occurred during the five-month period from August 1 to December 31 of each year (the back-to-school and holiday periods). Sales generated during these periods have traditionally had a significant impact on our results of operations. Any decreases in sales for these periods or in the availability of working capital needed in the months preceding these periods could have a material adverse effect on our results of operations. Results of operations in any one fiscal quarter are not necessarily indicative of the results of operations that can be expected for any other fiscal quarter or for the full fiscal year.

Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of expenses incurred in connection with, and sales contributed by, new stores, store remodels and the integration of new stores into our operations.

Item
  3.

Quantitative and Qualitative Disclosures About Market Risk

As of October 31, 2006, we had cash and cash equivalents of $28,454,000 and marketable securities of $91,900,000 compared to cash and cash equivalents of $31,664,000 and marketable securities of $74,500,000 as of October 31, 2005. The increase in our total cash and cash equivalents and marketable securities compared to last year is primarily the result of the cash generated from operations, offset by capital acquisitions related to new and remodeled stores and dividend payments.

The cash and cash equivalents are invested principally in money market mutual funds while the marketable securities are invested principally in auction market securities, which trade on a par-in, par-out basis and provide interest-rate reset options on a revolving 35-day basis. Because we regularly liquidate our investments in these securities for reasons including, among others, changes in market interest rates and changes in the availability of and the yield on alternative investments, we have classified these securities as available for sale. We do not invest for trading purposes and therefore do not believe we have significant exposure to market risk with respect to our investments.

Item
  4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, with the participation of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report (the Evaluation Date) and, based on that evaluation, concluded that, as of the Evaluation Date, the disclosure controls and procedures were effective for recording, processing, summarizing and reporting information that is required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SECs rules and forms.

(b) Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting during the quarter ended October 31, 2006 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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PART II.


      


      Other InformationItem
          1.

        

        Legal ProceedingsNot Applicable.Item
          1A.

        

        Risk Factors


In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2006 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and / or operating results.



Items
          2 - 5.Not Applicable




Item
          6.
      
      ExhibitsExhibit
          31.1
      
      Section
          302 Certification by President andChief Executive Officer, pursuant to Rule
          13a-14(a) under the Securities Exchange Act of 1934Exhibit
          31.2
      
      Section
          302 Certification by Chief Financial Officer, pursuant to Rule 13a-14(a)
          under the Securities Exchange Act of 1934Exhibit
          32.1
      
      Certification
          of Periodic Report by President and Chief Executive Officer, pursuant
          to 18 U.S.C. Section 1350Exhibit
          32.2
      
      Certification
          of Periodic Report by Chief Financial Officer, pursuant to 18 U.S.C.
          Section 1350




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SIGNATURES

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



DEB
          SHOPS, INC.DATE: December 8, 2006
      
      By:
      /s/ Marvin RounickMarvin
          RounickPresident and Chief Executive OfficerDATE: December 8, 2006

        

        By:

        /s/ Barry J. Susson, CPABarry J. Susson, CPAChief Financial Officer and Assistant Secretary




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Exhibit
          IndexExhibit 31.1

        Section 302 Certification by President and Chief Executive OfficerExhibit 31.2

        Section 302 Certification by Chief Financial OfficerExhibit 32.1

        Certification of Periodic Report by President and Chief Executive OfficerExhibit 32.2

        Certification of Periodic Report by Chief Financial Officer


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