UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-Q |X|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED APRIL 30,            2005  OR |_|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  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 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 and [2] has been subject to
such filing requirements for the past 90 days. |X| Yes   |_|  No Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |X| Yes   |_|  No As of June 6, 2005, the Registrant had
7,850,297 common shares outstanding.     CPI CORP.INDEX TO
QUARTERLY REPORT ON FORM 10-Q12 Weeks Ended April 30, 2005


PagePART
      1. FINANCIAL INFORMATIONItem
      1. Financial StatementsInterim
      Condensed Consolidated Balance SheetsApril
      30, 2005 (Unaudited) and February 5, 2005
    1Interim
      Condensed Consolidated Statements of Operations (Unaudited)12
      Weeks Ended April 30, 2005 and May 1, 2004
    3Interim
      Condensed Consolidated Statement of Changes in Stockholders Equity(Unaudited)
      12 Weeks Ended April 30, 2005
    4Interim
      Condensed Consolidated Statements of Cash Flows (Unaudited)12
      Weeks Ended April 30, 2005 and May 1, 2004
    5Notes
      to Interim Condensed Consolidated Financial Statements (Unaudited)
    7Item
      2. Managements Discussions and Analysis of Financial Condition and
      Results of Operations
    14Item
      3. Quantitative and Qualitative Disclosures about Market Risk
    23Item
      4. Controls and Procedures
    23PART II.
      OTHER INFORMATIONItem
      6. Exhibits
    24Signatures
    25Exhibit
      Index
    26
CPI CORP.Interim
Condensed Consolidated Balance Sheets  Assets


PART I.
FINANCIAL INFORMATION


Item 1     Financial
Statements

thousands
    April
      30, 2005
      (Unaudited)
    
    February
      5, 2005ASSETSCurrent
      assets:Cash
      and cash equivalents
    $
    25,021
    
    $
    33,883Restricted
      cash-collateral for outstanding letters of credit
    
    5,904
    
    
    6,154Accounts
      receivable:Due
      from licensor stores
    
    8,989
    
    
    7,365Other
    
    143
    
    
    326Inventories
    
    11,087
    
    
    10,521Prepaid
      expenses and other current assets
    
    7,041
    
    
    6,905Deferred
      tax assets
    
    10,834
    
    
    8,795Total
      current assets
    
    69,019
    
    
    73,949Property
      and equipment:Land
    
    2,765
    
    
    2,765Building
      improvements
    
    26,405
    
    
    26,684Leasehold
      improvements
    
    5,954
    
    
    6,005Photographic,
      sales and manufacturing equipment
    
    179,645
    
    
    183,979Total
    
    214,769
    
    
    219,433Less
      accumulated depreciation and amortization
    
    171,419
    
    
    177,775Property
      and equipment, net
    
    43,350
    
    
    41,658Assets
      of business transferred under contractual arrangements:Preferred
      Security
    
    7,000
    
    
    7,000Accrued
      dividends on preferred security
    
    834
    
    
    689Impairment
      reserve related to preferred security interest
    
    (7,834
    )
    
    (7,689
    )Other investments
      - supplemental retirement plan
    
    6,190
    
    
    6,141Deferred
      tax assets
    
    10,679
    
    
    11,734Other assets,
      net of amortization of $1,359 at both April 30, 2005and
      February 5, 2005
    
    1,537
    
    
    1,618TOTAL
      ASSETS
    $
    130,775
    
    $
    135,100See accompanying notes.


1
CPI CORP.Interim
Condensed Consolidated Balance Sheets  Liabilities and Stockholders Equity



thousands,
      except share and per share data
    April
      30, 2005
      (Unaudited)
    
    February
      5, 2005LIABILITIESCurrent
      liabilities:Current
      maturities of long-term debt
    $
    8,580
    
    $
    8,580Accounts
      payable
    
    11,555
    
    
    13,011Accrued
      employment costs
    
    11,682
    
    
    12,463Customer
      deposit liability
    
    23,606
    
    
    21,828Accrued
      severance
    
    4,080
    
    
    4,205Income
      taxes payable
    
    2,641
    
    
    2,872Sales
      taxes payable
    
    1,094
    
    
    1,886Accrued
      advertising expenses
    
    1,297
    
    
    1,568Accrued
      expenses and other liabilities
    
    5,789
    
    
    5,348Total
      current liabilities
    
    70,324
    
    
    71,761Long-term
      debt, less current maturities
    
    17,058
    
    
    17,050Accrued
      pension obligations
    
    14,349
    
    
    13,993Supplemental
      retirement plan obligations
    
    4,550
    
    
    4,512Customer
      deposit liability
    
    3,971
    
    
    4,334Other liabilities
    
    163
    
    
    564Total
      liabilities
    
    110,415
    
    
    112,214STOCKHOLDERS
      EQUITYPreferred
      stock, no par value, 1,000,000 shares authorized; no shares outstanding
    
    
    
    
    Preferred
      stock, Series A, no par value, 200,000 shares authorized;no
      shares outstanding
    
    
    
    
    Common
      stock, $0.40 par value. 50,000,000 shares authorized; 18,476,718 and18,432,779
      shares outstanding at April 30, 2005 and February 5, 2005, respectively
    
    7,391
    
    
    7,373Additional
      paid-in capital
    
    53,947
    
    
    53,301Retained
      earnings
    
    203,513
    
    
    206,812Accumulated
      other comprehensive loss
    
    (10,567
    )
    
    (10,505
    )254,284
    
    
    256,981Treasury
      stock - at cost, 10,639,543 and 10,672,236 at April 30, 2005 andFebruary
      5, 2005, respectively
    
    (233,541
    )
    
    (234,031
    )Unamortized
      deferred compensation- restricted stock
    
    (383
    )
    
    (64
    )Total
      stockholders equity
    
    20,360
    
    
    22,886TOTAL
      LIABILITIES AND STOCKHOLDERS EQUITY
    $
    130,775
    
    $
    135,100See accompanying notes.


2
CPI CORP.Interim
Condensed Consolidated Statements of Operations(Unaudited)


12
      Weeks Endedthousands,
      except share and per share data
    April
      30, 2005
    
    May
      1, 2004Net
      sales
    $
    55,804
    
    $
    54,925Cost
      and expenses:Cost
      of sales (exclusive of depreciation and amortization shown below)
    
    7,465
    
    
    7,691Selling,
      general and administrative expenses
    
    47,130
    
    
    45,678Depreciation
      and amortization
    
    4,273
    
    
    3,861Other
      charges and impairments
    
    109
    
    
    9,56358,977
    
    
    66,793Loss
      from continuing operations
    
    (3,173
    )
    
    (11,868
    )Interest
      expense
    
    451
    
    
    599Interest
      income
    
    175
    
    
    281Other
      income, net
    
    171
    
    
    45Loss
      from continuing operations before income tax benefit
    
    (3,278
    )
    
    (12,141
    )Income
      tax benefit
    
    1,220
    
    
    4,492Net
      loss from continuing operations
    
    (2,058
    )
    
    (7,649
    )Net
      loss from discontinued operations, net of income tax benefit
    
    
    
    
    (1,149
    )NET
      LOSS
    $
    (2,058
    )
    $
    (8,798
    )NET
      LOSS PER COMMON SHARENet
      loss per share from continuing operations - diluted
    $
    (0.26
    )
    $
    (0.95
    )Net
      loss per share from discontinued operations - diluted
    
    
    
    
    (0.14
    )Net
      loss per share - diluted
    $
    (0.26
    )
    $
    (1.09
    )Net
      loss per share from continuing operations - basic
    $
    (0.26
    )
    $
    (0.95
    )Net
      loss per share from discontinued operations - basic
    
    
    
    
    (0.14
    )Net
      loss per share - basic
    $
    (0.26
    )
    $
    (1.09
    )Dividends
      per share
    $
    0.16
    
    $
    0.16Weighted
      average number of common and commonequivalent
      shares outstanding-diluted
    
    7,809,608
    
    
    8,100,572Weighted
      average number of common and commonequivalent
      shares outstanding-basic
    
    7,809,608
    
    
    8,100,572See accompanying notes.


3
CPI CORP.Interim
Condensed Consolidated Statement of Changes in Stockholders Equity(Unaudited)


Twelve weeks ended April
30, 2005


thousands,
      except share and
      per share data
    Common
      stock
    
    Additional
      paid-in 
      capital
    
    Retained
      earnings
    
    Accumulated 
      other 
      comprehensive
      loss
    
    Treasury
      stock, 
      at cost
    
    Deferred 
      compensation -
      restricted 
      stock
    
    TotalBalance
      at February 5, 2005
    $
    7,373
    
    $
    53,301
    
    $
    206,812
    
    
    ($10,505
    )
    
    ($234,031
    )
    
    ($64
    )
    $
    22,886Net loss
    
    
    
    
    
    
    
    (2,058
    )
    
    
    
    
    
    
    
    
    
    
    (2,058
    )Total other
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    (62
    )Total
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,120
    )Issuance
      of common stock toemployee
      benefit plans andrestricted
      stock awards (76,632shares)
    
    18
    
    
    646
    
    
    
    
    
    
    
    
    490
    
    
    (664
    )
    
    490Dividends
      ($.16 per common share)
    
    
    
    
    
    
    
    (1,241
    )
    
    
    
    
    
    
    
    
    
    
    (1,241
    )Amortization
      of deferredcompensation
      - restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345
    
    
    345Balance
      at April 30, 2005
    $
    7,391
    
    $
    53,947
    
    $
    203,513
    
    
    ($10,567
    )
    
    ($233,541
    )
    
    ($383
    )
    $
    20,360See accompanying notes.


4
CPI CORP.Interim
Condensed Consolidated Statements of Cash Flows(Unaudited)


12
      Weeks Endedthousands
    April
      30, 2005
    
    May
      1, 2004Reconciliation
      of net loss from continuing operations to cash flows(used
      in) provided by operating activities:Net loss
      from continuing operations
    $
    (2,058
    )
    $
    (7,649
    )Adjustments
      for items not requiring cash:Depreciation
      and amortization
    
    4,442
    
    
    3,864Loss
      on disposition of property, plant and equipment
    
    218
    
    
    69Deferred
      income taxes
    
    (984
    )
    
    (958
    )Deferred
      revenues and related costs
    
    1,205
    
    
    93Accrued
      interest on preferred security
    
    
    
    
    (145
    )Accelerated
      vesting of supplemental retirement plan benefits
    
    
    
    
    3,338Other
      impairment charges
    
    
    
    
    2,895Other
    
    11
    
    
    (764
    )(Increase)
      decrease in current assets:Receivables
      and inventories
    
    (2,006
    )
    
    (65
    )Refundable
      income taxes
    
    (231
    )
    
    (3,359
    )Prepaid
      expenses and other current assets
    
    126
    
    
    679Increase
      (decrease) in current liabilities:Accounts
      payable
    
    (1,456
    )
    
    4,890Accrued
      expenses and other liabilities
    
    (1,528
    )
    
    49Cash flows
      (used in) provided by continuing operations
    
    (2,261
    )
    
    2,937Cash flows
      used in discontinued operations
    
    
    
    
    (1,617
    )Cash flows
      (used in) provided by operating activities
    $
    (2,261
    )
    $
    1,320See accompanying notes.


5
CPI CORP.Interim
Condensed Consolidated Statements of Cash Flows (continued)(Unaudited)


12
      Weeks Endedthousands
    April
      30, 2005
    
    May
      1, 2004Cash
      flows (used in) provided by operating activities
    $
    (2,261
    )
    $
    1,320Cash flows
      (used in) provided by financing activities:Reduction
      in restricted cash-collateral for outstanding letters of credit
    
    250
    
    
    Proceeds
      from borrowings against cash surrender value of life insurance
    
    
    
    
    184Issuance
      of common stock to employee stock plansand
      restricted stock awards
    
    664
    
    
    410Cash
      dividends
    
    (1,241
    )
    
    (1,291
    )Cash
      flows used in financing activities:
    
    (327
    )
    
    (697
    )Cash flows
      (used in) provided by investing activities:Additions
      to property and equipment
    
    (6,200
    )
    
    (4,905
    )Proceeds
      from sales of property and equipment
    
    1
    
    
    Proceeds
      from sale of assets held for sale
    
    20
    
    
    Changes
      in loan receivable:Borrowings
    
    
    
    
    (11,868
    )Repayments
    
    
    
    
    10,520Increase
      in assets held in Rabbi Trust
    
    (117
    )
    
    (300
    )Supplemental
      retirement payments funded by assets held in Rabbi Trust
    
    68
    
    
    309Cash
      flows used in investing activities
    
    (6,228
    )
    
    (6,244
    )Effect
      of exchange rate changes on cash and cash equivalents
    
    (46
    )
    
    (308
    )Net decrease
      in cash and cash equivalents
    
    (8,862
    )
    
    (5,929
    )Cash
      and cash equivalents at beginning of period
    
    33,883
    
    
    51,011Cash
      and cash equivalents at end of period
    $
    25,021
    
    $
    45,082Supplemental
      cash flow information:Income
      taxes refunded (paid)
    $
    22
    
    $
    (100
    )Supplemental
      non-cash financing activities:Issuance
      of treasury stock under the employee profit sharing plan
    $
    490
    
    $
    554See accompanying notes.


6
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)


  NOTE 1 
    DESCRIPTION OF BUSINESS AND INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The Company operates 1,021
professional portrait studios as of April 30, 2005 throughout the United States, Canada
and Puerto Rico principally under license agreements with Sears, Roebuck and Co.
(Sears). The Company also operates searsphotos.com, an on-line photofinishing
service as well as a vehicle for the Companys customers to archive, share portraits
via email and order additional portraits and products.


The Interim Condensed Consolidated
Balance Sheet as of April 30, 2005, the related Interim Condensed Consolidated Statements
of Operations for the 12 weeks ended April 30, 2005 and May 1, 2004, the Interim Condensed
Consolidated Statement of Changes in Stockholders Equity for the 12 weeks ended
April 30, 2005 and the Interim Condensed Consolidated Statements of Cash Flows for the 12
weeks ended April 30, 2005 and May 1, 2004, are unaudited. The interim condensed
consolidated financial statements reflect all adjustments (consisting only of normal
recurring accruals), which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. The interim condensed
consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the CPI Corp. 2004 Annual Report on
Form 10-K for its fiscal year ended February 5, 2005. The results of operations for the
interim periods should not be considered indicative of results to be expected for the full
year.


The preparation of financial
statement in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported
amounts of 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 reclassifications have been
made to the 2004 financial statements to conform with the current year presentation.


NOTE 2 
BORROWINGS


On April 15, 2005, the Company
entered into a new $30.0 million (reducing to $25 million in February 2006 and $20 million
in February 2007) unsecured bank revolving credit facility (the Revolving
Facility), which will expire on April 13, 2007 and carries a variable interest rate
charged at either LIBOR or prime rate funds, with an applicable margin added.


Concurrent with the closing of the
Revolving Facility, the Company amended its existing Senior Note agreement to allow it to
incur additional indebtedness without violating the debt to equity ratio covenant included
in the original agreement. The covenants of the amended Senior Note Agreement now
principally mirror those included in the Revolving Facility.


At April 30, 2005, the Company had
$25.6 million outstanding under its existing Senior Note Agreement and no borrowings
against its $30.0 million Revolving Facility. The Company was in compliance with all the
covenants under its Senior Note Agreement and its Revolving Facility as of April 30, 2005.


7
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)



NOTE 3  OTHER
CHARGES AND IMPAIRMENTS



Other charges and impairments for
the periods ended April 30, 2005 and May 1, 2004 included the following:


12
      Weeks Endedthousands
    April
      30, 2005
    
    May
      1, 2004Accruals
      related to accelerated vesting of supplemental
    $
    
    
    $
    3,414retirement
      plan benefits and guaranteed bonuses for 2004Impairment
      charges
    
    
    
    
    3,067Reserves
      for severance and related costs
    
    134
    
    
    2,036Consent
      solicitation costs
    
    
    
    
    846Contract
      terminations and settlements
    
    (25
    )
    
    200Total Other
      Charges and Impairments
    $
    109
    
    $
    9,563Accelerated  Vesting of
 Supplemental  Retirement  Plan Benefits and Guaranteed  Bonuses for 2004


In the first quarter of 2004,
 change of control provisions in executive  employment  contracts  were triggered as a
result of the change in the  composition of the Companys  Board of Directors
resulting from the completion of the consent  solicitation.  As a result, the Company
accrued $3.3 million related to the accelerated  vesting of executives  benefits
 covered by the  Companys  supplemental  retirement  plan and  guaranteed  bonuses
of $76,000  provided for in  employment contracts for those covered executives whose
employment continues with the Company.


Impairment  Charges


During  the first  quarter of 2004,
 the  Companys  new Board  along with its new  management  leadership  in the
 technology function,  made a decision to materially alter the Companys previously
planned and recently in-process  technology platform that was to serve as the  foundation
 for the  eventual  conversion  to full  digital  technology  in the  portrait  studios.
 As a result of this  decision,  certain previously  capitalized  software  development
 costs related to the  development  of the previous  platform no longer have future
utility to the Company and, accordingly, have been written off.


Reserves for  Severance
and Related  Costs


During the first  quarter of 2004,
 the Company  established a reserve for severance and related costs consisting
 principally of potential  benefits related to severance pay and  supplemental
 retirement plan costs associated with the dismissal of certain  executives.  During the
first quarter of 2005, the Company  accrued an additional  $134,000 in costs related to
the dismissal of certain of those executives.


Consent  Solicitation
 Costs


In the first quarter of 2004, the
Company  incurred  $846,000 of  professional  services costs related to the consent
solicitation  that was completed in March 2004.  These costs  included  $154,000 of
 consent-related  costs incurred by the  Knightspoint  Group, which the Company has
reimbursed.


8
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)



Contract Terminations
and Settlements


During the first quarter of 2005, a
favorable  settlement of a professional  services billing was negotiated resulting in the
reversal of $25,000 of a previous accrual.


In early March 2004,  prior to the
change of control,  the Company  received a lending  commitment  related to the  proposed
 refinancing  of its then-existing debt structure.  In exchange for that commitment,  the
Company paid a $200,000  non-refundable  loan commitment fee.  Subsequent to the receipt
of the commitment and prior to its funding,  the consent  solicitation was completed
resulting in the installation of a new Board and the lending commitment expired,
necessitating the write-off of the previously capitalized non-refundable fee.


NOTE 4  STOCKHOLDERS EQUITY


The following table shows the
computation of comprehensive income (loss):

12
      Weeks Endedthousands
    April
      30, 2005
    
    May
      1, 2004Net
      loss
    $
    (2,058
    )
    $
    (8,798
    )Other comprehensive
      loss:Foreign
      currency translation adjustments
    
    (62
    )
    
    (575
    )Total accumulated
      other comprehensive loss
    
    (62
    )
    
    (575
    )Total
      comprehensive loss
    $
    (2,120
    )
    $
    (9,373
    )The following table displays the
components of accumulated other comprehensive loss as of April 30, 2005 and February 5,
2005.


thousands
    April
      30, 2005
    
    February 5, 2000Foreign
      currency translation adjustments
    $
    1,647
    
    $
    1,585Minimum pension
      liability, net of taxes
    
    8,920
    
    
    8,920Accumulated
      other comprehensive loss
    $
    10,567
    
    $
    10,5059
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)



NOTE 5 
STOCK-BASED COMPENSATION PLANS


At April 30, 2005, the Company had
various stock-based employee compensation plans, which are described more fully in Note 8
of the Notes to Consolidated Financial Statements in the Companys 2004 Annual Report
on Form 10-K. The Company accounts for those plans in accordance with APB No. 25,
Accounting For Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost was reflected in net income, as no options granted
under those plans had an exercise price less than the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on net loss
and loss per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation.


12
      Weeks Endedthousands,
      except per share data
    April
      30, 2005
    
    May
      1, 2004Net
      loss - as reported
    $
    (2,058
    )
    $
    (8,798
    )Less: Total
      stock-based employee compensationexpense
      determined under fair value basedmethod
      for all awards, net of related taxes (1)
    
    
    
    
    (33
    )Net
      loss - pro forma
    $
    (2,058
    )
    $
    (8,831
    )Loss per
      common share - basicAs
      reported
    $
    (0.26
    )
    $
    (1.09
    )Pro
      forma (1)
    $
    
    
    $
    (1.09
    )Loss
      per common share - dilutedAs
      reported
    $
    (0.26
    )
    $
    (1.09
    )Pro
      forma (1)
    $
    
    
    $
    (1.09
    )(1)
All
outstanding stock option grants became fully vested during the first quarter         of
2004 as a result of the change of control of the Companys Board of Directors.
        No new stock options were granted during the first quarter of 2005.On April 14, 2005, the Board of
Directors approved a grant of 34,562 shares of restricted stock to its Chairman of the
Board who has been acting in an executive officer capacity since October 6, 2004, when the
Company formed its Office of the Chief Executive. The compensation award included the
grant, without restrictions, of 17,281 shares of the Companys common stock and
17,281 shares of restricted stock that vests ratably from April 2005 through September
2005. The total fair value of the award at the date of the grant was $519,121. The fair
value of the 17,281 shares awarded, without restrictions, amounted to $259,561, $175,000
of which represented compensation for fiscal 2004 and was recorded as such in the
Companys Consolidated Financial Statements included in its Annual Report on Form
10-K for the year ended February 5, 2005. During the first quarter of 2005, $126,000 of
compensation expense was recorded related to the remainder of the expense pertaining to
the unrestricted shares as well as the amortization related to the restricted shares that
vested through April 30, 2005.


10
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)



On April 14, 2005, the Board of
Directors approved the CPI Corp. Non-Employee Directors Restricted Stock Policy allowing
members of the Board of Directors to become participants in the Restricted Stock plan. On
May 5, 2005, the Board of Directors approved a grant of 13,122 shares of restricted stock
to its members of the Board of Directors in lieu of board retainer fees and certain
committee chair fees they receive as directors of the Company.


On April 21, 2005, the Board of
Directors approved a grant of 9,377 shares of restricted stock to certain employees in
conjunction with 2004 performance awards.


NOTE 6  EMPLOYEE
 BENEFIT  PLANS


The Company maintains a qualified,
noncontributory pension plan that covers all full-time United States employees meeting
certain age and service requirements. The plan provides pension benefits based on an
employees length of service and the average compensation earned from the later of
the hire date or January 1, 1998 to the retirement date. The Companys funding policy
is to contribute annually at least the minimum amount required by government funding
standards, but not more than is tax deductible. Plan assets consist primarily of
marketable equity securities funds, guaranteed interest contracts, cash equivalents,
immediate participation guarantee contracts and government bonds.


The Company also maintains a
noncontributory defined benefit plan providing supplemental retirement benefits for
certain current and former executives. The cost of providing these benefits is accrued
over the remaining expected service lives of the active plan participants. The
supplemental retirement plan is unfunded and as such does not have a specific investment
policy or long-term rate of return assumptions. However, certain assets will be used to
finance these future obligations and consist of investments in a Rabbi Trust.


The following table sets forth the
components of net periodic benefit cost for the defined benefit plans:


12
      Weeks Ended
    
    12
      Weeks EndedPension
      Plan
    
    Supplemental
      Retirement Planthousands
    April
      30, 2005
    
    May
      1, 2004
    
    April
      30, 2005
    
    May
      1, 2004Components
      of net periodic benefit cost:Service
      cost
    $
    117
    
    $
    353
    
    $
    26
    
    $
    36Interest
      cost
    
    651
    
    
    624
    
    
    57
    
    
    85Expected
      return on plan assets
    
    (644
    )
    
    (677
    )
    
    
    
    
    Amortization
      of prior service cost
    
    10
    
    
    10
    
    
    7
    
    
    Amortization
      of net (gain) loss
    
    222
    
    
    319
    
    
    (4
    )
    
    Accelerated
      vesting
    
    
    
    
    
    
    
    
    
    
    3,338Settlement
      expense
    
    
    
    
    
    
    
    
    
    
    86Curtailment
      expense
    
    
    
    
    
    
    
    
    
    
    230Net
      periodic benefit cost
    $
    356
    
    $
    629
    
    $
    86
    
    $
    3,77511
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)



NOTE 7 
CONTINGENCIES


Standby
Letters of Credit


As of April 30, 2005, the Company had
outstanding standby letters of credit in the principal amount of $5.9 million used in
conjunction with the Companys self insurance programs, which were collateralized by
cash on deposit at the issuing bank in the amount of $5.9 million.


On May 17, 2005, the Company replaced
all of the outstanding collateralized standby letters of credit with new letters of credit
issued under the Companys new revolving credit facility. Accordingly, the restricted
cash which had been deposited as cash collateral has been returned to the Company for
general corporate purposes.


Litigation


The Company is a defendant in various
lawsuits arising in the ordinary course of business. It is the opinion of management that
the ultimate liability, if any, resulting from such lawsuits will not materially affect
the consolidated financial position or results of operations of the Company.


Contingent
Lease Obligations


In July 2001, the Company announced
the completion of the sale of its Wall Décor segment which included the ongoing
guarantee of certain operating real estate leases of Prints Plus. As of April 30, 2005,
the maximum future obligation to the Company under its guarantee of these leases is $4.5
million. To recognize the risk associated with these leases and based upon the
Companys past experience with renegotiating lease obligations, a $1.0 million
reserve was established in 2001 at time of the sale. As a result of the significant
deterioration in the financial performance of Prints Plus in the third quarter of 2004,
including its subsequent bankruptcy filing, all of which is more fully described in Note
12 to the Companys Consolidated Financial Statements included in its Annual Report
on Form 10-K for the year ended February 5, 2005, the Company recorded an additional $2.1
million of lease obligation reserves bringing the total reserve at April 30, 2005 to $3.1
million. Based on the progress of the bankruptcy case to-date, including Prints Plus
receipt of debtor-in-possession financing on May 18, 2005, and the continued operations of
selected locations of Prints Plus, the Company believes that the $3.1 million reserve is
adequate to cover the potential losses to be realized under the Companys operating
lease guarantees.


12
CPI CORP.Notes to
Interim Condensed Consolidated Financial Statements(Unaudited)



To assist Print Plus in obtaining the
above-mentioned debtor-in-possession financing facility, the Company guaranteed $300,000
of the facility by posting a letter of credit with the lender.


NOTE 8 
CHANGE OF CONTROL


On March 24, 2004,  Knightspoint
 Partners I, L.P. and other entities  participating with them  (Knightspoint  Group)
completed a solicitation of the Companys stockholders. The effect of the consent
solicitation was to, among other things, remove seven of the nine members of the Companys
Board of Directors, decrease the size of the Board to eight directors and elect six
Knightspoint Group nominees to the Board.


The material change in the
composition of the Board resulting from the Knightspoint Groups successful consent
solicitation triggered change of control provisions in various employment and stock option
agreements between the Company and certain of its executives and employees. As described
in Note 3 of the Notes to Interim Condensed Consolidated Financial Statements included
herein, in the first quarter of 2004 the Company accrued $3.3 million related to the
accelerated vesting of executives benefits covered by the Companys
supplemental retirement plan and guaranteed bonuses of $76,000 provided for in employment
contracts for those covered executives whose employment continues with the Company.


13
Item 2. 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. It is useful to read Managements
Discussion and Analysis in conjunction with the interim condensed consolidated financial
statements and related notes thereto contained elsewhere in this document.


EXECUTIVE OVERVIEW


The
Companys Operations


CPI  Corp.  is a long-standing
leader, based on sittings and related revenues, in the professional portrait photography
of young children and families. From a single studio opened by our predecessor company in
1942, we have grown to 1,021 studios throughout the United States, Canada and Puerto Rico
principally, under license agreements with Sears. We have provided professional portrait
photography for Sears customers since 1959 and have been the exclusive Sears
portrait studio operator since 1986.


As of the end of the first quarter in
fiscal 2005 and 2004 the Companys studio counts were:



April
      30, 2005
    
    May
      1, 2004United
      States and Puerto Rico:Within
      full-line Sears stores
    
    865
    
    
    863Locations
      not within Sears stores
    
    40
    
    
    39Canada
    
    116
    
    
    118Total
    
    1,021
    
    
    1,020During the first quarter of 2005,
 the Company  continued  its plan to transition a substantial  number of studios to full
digital technology by converting an additional 143 U.S.  studios to full digital format,
 bringing the total number  converted to 271 U.S.  studios as of April 30, 2005.


Based on ongoing discussions with Sears, the Company believes that Sears
Portrait Studios will be in approximately 40 new Sears Essentials stores in
2005. As of April 30, 2005, the Company has opened a new portrait studio in one
Sears Essentials store.


14
RESULTS OF OPERATIONS


A summary of consolidated results of
operations and key statistics were as follows:


12
      Weeks Endedthousands,
      except per share data
    April
      30, 2005
    
    May
      1, 2004Net
      sales
    $
    55,804
    
    $
    54,925Cost
      and expenses:Cost
      of sales
    
    7,465
    
    
    7,691(exclusive
      of depreciation and amortization shown below)Cost
      of sales as a percentage of net sales
    
    13.4
    %
    
    14.0
    %Gross
      margin as a percentage of net sales
    
    86.6
    %
    
    86.0
    %Selling,
      general and administrative expenses
    
    47,130
    
    
    45,678Selling,
      general and administrative expenses as apercentage
      of net sales
    
    84.5
    %
    
    83.2
    %Depreciation
      and amortization
    
    4,273
    
    
    3,861Other
      charges and impairments
    
    109
    
    
    9,56358,977
    
    
    66,793Loss from
      continuing operations
    
    (3,173
    )
    
    (11,868
    )Interest
      expense
    
    451
    
    
    599Interest
      income
    
    175
    
    
    281Other income,
      net
    
    171
    
    
    45Loss from
      continuing operations before income tax benefit
    
    (3,278
    )
    
    (12,141
    )Income
      tax benefit
    
    1,220
    
    
    4,492Net loss
      from continuing operations
    
    (2,058
    )
    
    (7,649
    )Net loss
      from discontinued operations, net of income tax benefit
    
    
    
    
    (1,149
    )NET
      LOSS
    $
    (2,058
    )
    $
    (8,798
    )Net loss
      per share from continuing operations - diluted
    $
    (0.26
    )
    $
    (0.95
    )Net loss
      per share from discontinued operations - diluted
    
    
    
    
    (0.14
    )Net
      loss per share - diluted
    $
    (0.26
    )
    $
    (1.09
    )12 weeks ended April
30, 2005 compared to 12 weeks ended May 1, 2004


The Company reported a net loss for
the 12-week first quarter ended April 30, 2005 of $2.1 million or $0.26 per diluted share
compared to a net loss of $8.8 million or $1.09 per diluted share for the comparable
quarter of fiscal 2004. The first quarter of fiscal 2004 was significantly impacted by the
recording of other charges and impairments totaling $6.0 million on an after-tax basis and
$1.1 million of after-tax charges recorded as net losses from discontinued operations. The
other charges and impairments consist principally of costs incurred by the Company in the
first quarter of 2004 related to the consent solicitation contest completed in March 2004,
accruals triggered by various change of control provisions included in certain executive
employment contracts and charges resulting from personnel and strategic decisions made by
the Companys then-recently seated Board of Directors. The discontinued operations
presentation resulted from the Companys decision to exit its Mexican and mobile
photography operations in the second quarter of 2004.


15
Net sales totaled $55.8 million and
$54.9 million in the first quarter of fiscal 2005 and 2004, respectively.



Net
sales for the first quarter of 2005  increased  $879,000 or 2% to $55.8  million from the
$54.9  million  reported in the first       quarter of 2004. This increase  resulted from
an 11% increase in average sales per customer  sitting  partially  offset by a 9%
decrease       in customer sittings.The
Company believes that its increased first quarter sales are attributable to the impacts
of the following initiatives undertaken throughout 2004 and continuing to date:
The
 implementation  of a  significant  computer  hardware  and  printer  upgrade in all of
our U.S.  studios  which  improved  the                      performance of our legacy
systems while laying the foundation for a transition to digital.
The
successful  conversion of 271 of our studios to full digital format as of the end of the
first quarter.  The converted  studios                      significantly outperformed
the analog film studios in the first quarter and continue to do so to date.
The
restoration of coverage and training hours to our studios that had been significantly
 reduced in the fiscal 2004 first quarter                      in response to
then-declining sales trends.
The
effectuation of offer changes and targeted price increases as well as the increased
 utilization of more efficient  advertising                      vehicles.The
Company, furthermore, believes that its first quarter sales growth was moderated somewhat
by a lower level of marketing intensity in the early part of the quarter as well as the
possible negative effects of an early Easter, a seasonally-important time for portraiture
sales. Historically, the Company has generally recognized lower Easter-related sales in
those years when Easter falls earlier on the calendar.Costs and expenses were
$59.0 million in the first quarter of 2005, compared with $66.8 million in the
comparable prior year period.



Cost
of sales,  excluding  depreciation and amortization  expense, was $7.5 million in the
first quarter of 2005 compared with $7.7       million  in the  comparable  prior  year
 period.  Cost of sales as a  percentage  of net sales was 13.4% in the first  quarter of
2005,       compared to 14.0% in the comparable  quarter in 2004.  Correspondingly,
 gross margin rates were 86.6% and 86.0% in the first quarter of       2005 and 2004,
 respectively.  The decrease in cost of sales resulted from reduced levels of sittings
and declines in film purchases and       shipping  costs  attributable  to the  converted
 digital  studios.  These  reductions  were  partially  offset  by  start-up  costs and
      inefficiencies  (both  in-studio  and central  lab) in  connection  with the new
digital  studios,  higher  effective  print media costs       associated  with
 onsite-fulfilled  product in the new  digital  studios and  inefficiencies  related to
the  operations  of new digital       printers in the Companys remaining analog
studios.
Selling,
 general and  administrative  (SG&A)  expenses  were $47.1 million and
$45.7 million for first quarter of 2005 and 2004,       respectively.  As a percentage of
sales, these expenses were 84.5% in 2005 and 83.2% in 2004.SG&A
costs increased primarily as a result of increases in studio employment partially offset
by planned net reductions in advertising costs and lower corporate employment costs. The
increase in studio employment costs resulted principally from the Companys ongoing
initiative to restore coverage hours to its studios that had been reduced in the first
quarter of 2004 in response to then-declining sales trends. Studio labor also reflects
increased labor and training investments in connection with the start-up operations of
the Companys digital studios. The Company anticipates that with respect to the
trend of increased coverage hours, comparisons to the prior year will improve beginning
in the second half of the year while the labor and training investments related to the
conversion of its studios to digital will continue for a substantial portion of the
remainder of 2005. Furthermore, various initiatives launched late in the first quarter of
2005 to improve labor scheduling and overall productivity are expected to drive
improvements beginning in the second quarter.16

Depreciation
and amortization was $4.3 million in the first quarter of 2005,  compared to $3.9 million
in the comparable quarter of       2004.The
increase in depreciation and amortization is principally attributable to additional
depreciation charges related to the 2004 studio-wide hardware and printer upgrade as well
as the ongoing digital conversion.
Other
charges and  impairments  reflect  costs  incurred from  strategic  actions  implemented
 by the Company to  restructure  its       operations,  costs that are unpredictable and
atypical of the Companys  operations and additional charges due to asset
impairments.  In       the first quarter of 2005 and 2004, the Company  recognized
 $109,000 and $9.6 million,  respectively,  in other charges and impairments
      consisting of the following:12
      Weeks Endedthousands
    April
      30, 2005
    
    May
      1, 2004Accruals
      related to accelerated vesting of supplemental
    $
    
    
    $
    3,414retirement
      plan benefits and guaranteed bonuses for 2004Impairment
      charges
    
    
    
    
    3,067Reserves
      for severance and related costs
    
    134
    
    
    2,036Consent solicitation
      costs
    
    
    
    
    846Contract
      terminations and settlements
    
    (25
    )
    
    200Total Other
      Charges and Impairments
    $
    109
    
    $
    9,563
Accelerated
 Vesting of  Supplemental  and Retirement  Plan Benefits and  Guaranteed  Bonuses for 2004In
the first quarter of 2004,            change of control provisions in executive
 employment  contracts were triggered as a result of the change in the composition of the
           Companys  Board of Directors  resulting from the completion of the
consent  solicitation.  As a result,  the Company  accrued $3.3            million
 related to the  accelerated  vesting of executives  benefits  covered by the
Companys  supplemental  retirement plan and            guaranteed  bonuses of
$76,000 provided for in employment  contracts for those covered  executives whose
employment  continues with            the Company.
Impairment
ChargesDuring
the first quarter of 2004,  the Companys new Board along with its new  management
 leadership in the  technology  function,            made a decision to materially alter
the Companys previously planned and recently in-process  technology platform that
was to serve            as the foundation for the eventual  conversion to full digital
 technology in the portrait  studios.  As a result of this decision,            certain
 previously  capitalized  software  development  costs related to the  development of the
previous  platform no longer have            future utility to the Company and,
accordingly, have been written off.
Reserves
for Severance and Related CostsDuring
the first quarter of 2004,  the Company  established a reserve for severance  and related
costs  consisting  principally  of            potential  benefits  related to severance
 pay and  supplemental  retirement  plan costs  associated  with the dismissal of certain
           executives.  During the first  quarter of 2005,  the Company  accrued an
 additional  $134,000 in costs related to the dismissal of            certain of those
executives.17

Consent
Solicitation CostsIn
the first quarter of 2004, the Company  incurred  $846,000 of  professional  services
costs related to the consent  solicitation            that was completed in March 2004.
 These costs  included  $154,000 of  consent-related  costs incurred by the  Knightspoint
 Group,            which the Company has reimbursed.
Contract
Terminations and SettlementsDuring
the first  quarter of 2005, a favorable  settlement  of a  professional  services
 billing was  negotiated  resulting in the            reversal of $25,000 of a previous
accrual.In
early March 2004, prior to the change of control,  the Company received a lending
commitment related to the proposed refinancing            of its then-existing debt
structure.  In exchange for that commitment,  the Company paid a $200,000  non-refundable
loan commitment            fee.  Subsequent to the receipt of the commitment and prior to
its funding,  the consent  solicitation  was completed  resulting in            the
 installation of a new Board and the lending  commitment  expired,  necessitating  the
write-off of the previously  capitalized            non-refundable fee.
Interest
 expense was $451,000 in the first quarter of 2005 compared to $599,000 in the
 comparable  period of the prior year.  The       reduction in interest  expense is
primarily a result of scheduled  annual  principal  payments  totaling  $8.6 million made
in June 2004       reducing the outstanding balance of the Senior Notes.
Interest
 income was $175,000 in the first quarter of 2005 compared to $281,000 in the first
quarter of 2004.  The first quarter of       2004 included $145,000 of accrued preferred
 security  dividends that were subsequently fully reserved in the third quarter of 2004
as a       result of the  deteriorating  financial  performance of Prints Plus, the
Companys  former Wall Decor segment.  Excluding  these accrued       dividends,
 interest  income  increased due to the impact of higher  interest rates earned on
average  invested cash balances  partially       offset by lower average balances.
Income
tax benefits on losses from continuing  operations were $1.2 million and $4.5 million in
the first quarter of 2005 and 2004,       respectively.  These benefits resulted in
effective tax rates of 37.2% in 2005 and 37.0% in 2004.18
LIQUIDITY AND CAPITAL
RESOURCES


The following table presents a
summary of our cash flows for first quarter of 2005 and 2004.


12
      Weeks Endedthousands
    April
      30, 2005
    
    May
      1, 2004Net
      cash (used in) provided by:Operating
      activities
    $
    (2,261
    )
    $
    1,320Investing
      activities
    
    (6,228
    )
    
    (6,244
    )Financing
      activities
    
    (327
    )
    
    (697
    )Effect
      of exchange rate changes on cash
    
    (46
    )
    
    (308
    )Net decrease
      in cash
    $
    (8,862
    )
    $
    (5,929
    )Net Cash Used
In Operating Activities


Net cash used in operating activities
was $2.3 million during the twelve weeks of 2005 compared to net cash provided by
operating activities of $1.3 million in the comparable period of 2004. The approximate
$3.6 million increase in cash used by operating activities between the first quarter of
2005 and 2004 resulted principally from decreases in accounts payable and accrued expenses
and increases in accounts receivable and inventory, partially offset by the absence in
2005 of any cash used in discontinued operations. The decrease in accounts payable and
accrued expenses resulted principally from the absence in 2005 of accruals recorded in
2004 related to the studio hardware upgrade purchase commitments and accruals necessitated
by the change of control of the Board of Directors, including those accruals related to
subsequent strategic and leadership changes made by the new Board. The increase in
accounts receivable and inventory relates principally to higher sales volume at the end of
the first quarter of 2005 and higher levels of print media in the studios related to the
digital conversion. Cash flows used in discontinued operations were $1.6 million in 2004
and none in 2005.


Net Cash Used
In Investing Activities


Net cash used in investing activities
was $6.2 million during both the first quarter of 2005 and 2004. A $1.3 million increase
in capital expenditures during the first quarter of 2005 was offset by a $1.3 million
decrease in the first quarter of 2005 in net borrowings by Prints Plus under the
then-existing revolving line of credit. The increase in capital expenditures is primarily
the result of the Companys ongoing implementation of its plan to convert its studios
to digital technology. The decrease in the Prints Plus borrowings resulted from the
termination of the revolving credit facility.


Net Cash Used
In Financing Activities


Net cash used in financing activities
was $327,000 in the first quarter of 2005 compared to $697,000 in the comparable prior
year period. The decrease in net cash used in 2005 was primarily related to an increase
the issuance of common stock for employee stock plans and restricted stock awards of
$254,000 and a reduction in restricted cash collateral for outstanding letters of credit
of $250,000. These amounts were partially offset by a $49,000 decrease in cash dividends
due to fewer shares outstanding in the first quarter of 2005 and a $184,000 decrease in
proceeds received in 2004 from borrowings against the cash surrender value of life
insurance policies.


19
Debt Covenants


On April 15, 2005, the Company
entered into a new $30.0 million (reducing to $25 million in February 2006 and $20 million
in February 2007) unsecured bank revolving credit facility (the Revolving
Facility), which will expire on April 13, 2007 and carries a variable interest rate
charged at either LIBOR or prime rate funds, with an applicable margin added.


Concurrent with the closing of the
Revolving Facility, the Company amended its existing Senior Note agreement to allow it to
incur additional indebtedness without violating the debt to equity ratio covenant included
in the original agreement. The covenants of the amended Senior Note Agreement now
principally mirror those included in the Revolving Facility.


At April 30, 2005, the Company had
$25.6 million outstanding under its existing Senior Note Agreement and no borrowings
against its $30.0 million Revolving Facility. The Company was in compliance with all the
covenants under its Senior Note Agreement and its Revolving Facility as of April 30, 2005.


Off-Balance
Sheet Arrangements


Other than stand-by letters of credit
to support various self-insurance programs and the ongoing guarantee of certain operating
real estate leases of Prints Plus, both of which are more fully discussed in the following
Contingencies section, the Company has no additional off-balance sheet arrangements.


Contingencies


The Company uses stand-by letters of
credit to support its various self-insurance programs. As of April 30, 2005, the Company
had standby letters of credit outstanding in the principal amount of $5.9 million, which
were collateralized by cash on deposit at the issuing bank in the amount of $5.9 million.


On May 17, 2005, the Company replaced
all of the outstanding collateralized standby letters of credit with new letters of credit
issued under the Companys new revolving credit facility. Accordingly, the restricted
cash which had been deposited as cash collateral has been returned to the Company for
general corporate purposes.


In July 2001, the Company announced
the completion of the sale of its Wall Décor segment which included the ongoing
guarantee of certain operating real estate leases of Prints Plus. As of April 30, 2005,
the maximum future obligation to the Company under its guarantee of these leases is $4.5
million. To recognize the risk associated with these leases and based upon the
Companys past experience with renegotiating lease obligations, a $1.0 million
reserve was established in 2001 at time of the sale. As a result of the significant
deterioration in the financial performance of Prints Plus in the third quarter of 2004,
including its subsequent bankruptcy filing, all of which is more fully described in Note
12 to the Companys Consolidated Financial Statements included in its Annual Report
on Form 10-K for the year ended February 5, 2005, the Company recorded an additional $2.1
million of lease obligation reserves bringing the total reserve at April 30, 2005 to $3.1
million. Based on the progress of the bankruptcy case to-date, including Prints Plus
receipt of debtor-in-possession financing on May 18, 2005, and the continued operations of
selected locations of Prints Plus, the Company believes that the $3.1 million reserve is
adequate to cover the potential losses to be realized under the Companys operating
lease guarantees.


20
To assist Print Plus in obtaining the
above-mentioned debtor-in-possession financing facility, the Company guaranteed $300,000
of the facility by posting a letter of credit with the lender.


Liquidity


Cash flows from operations, cash and
cash equivalents on hand and the borrowing capacity under the Companys new Revolving
Facility represent our expected sources of funds in 2005 to meet our obligations and
commitments, including debt service, annual dividends to shareholders, planned capital
expenditures which are estimated to be approximately $27 million in fiscal 2005 and normal
operating needs.


21
ACCOUNTING
PRONOUNCEMENTS AND POLICIES


Adoption of
New Accounting Standards


There were no accounting standards
issued during the first quarter of 2005, which will impact the Companys consolidated
financial statements.


Application of
Critical Accounting Policies


The Companys significant
accounting policies are discussed in the Notes to the Consolidated Financial Statements
that are included in the Companys 2004 Annual Report on Form 10-K that is filed with
the Securities and Exchange Commission. In most cases, the accounting policies utilized by
the Company are the only ones permissible under U.S. Generally Accepted Accounting
Principles for businesses in our industry. However, the application of certain of these
policies requires significant judgments or a complex estimation process that can affect
the results of operations and financial position of the Company, as well as the related
footnote disclosures. The Company bases its estimates on historical experience and other
assumptions that it believes are reasonable. If actual amounts are ultimately different
from previous estimates, the revisions are included in the Companys results of
operations for the period in which the actual amounts become known. The accounting
policies and estimates that can have a significant impact on the operating results,
financial position and footnote disclosures of the Company are described in the Management
Discussion and Analysis of Financial Condition and Results of Operations in the
Companys 2004 Annual Report on Form 10-K.


CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION


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 Act
of 1995, and involve risks and uncertainties. Management wishes to caution the reader that
these forward-looking statements, such as the Companys outlook for portrait studios,
future cash requirements, compliance with debt covenants, valuation allowances, reserves
for charges and impairments and capital expenditures, 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: customer demand for the
Companys products and services, the Companys ability to obtain financing when
needed under reasonable terms, the overall level of economic activity in the
Companys major markets, competitors actions, manufacturing interruptions,
dependence on certain suppliers, changes in the Companys relationship with Sears and
the impact of the Kmart/Sears merger, fluctuations in operating results, the ultimate
impact of the Prints Plus bankruptcy, the attraction and retention of qualified personnel,
unforeseen difficulties arising from installation and operation of new equipment in our
portrait studios and other risks as may be described in the Companys filings with
the Securities and Exchange Commission, including its From 10-K for the year ended
February 5, 2005.


22
Item 3. Quantitative
and Qualitative Disclosures About Market Risk


Market risks relating to the
Companys operations result primarily from changes in interest rates and changes in
foreign exchange rates. The Companys long-term debt obligations have fixed interest
rates, therefore, the Companys exposure to changes in interest rates is minimal. The
Companys exposure to changes in foreign exchange rates relates to its Canadian
operations and is also minimal, as these operations constitute 9.7% of the Companys
total assets at April 30, 2005 and 6.8% of the Companys total net sales for the 12
weeks then ended.




Item 4. Controls and
Procedures


An evaluation of the Companys
disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities
Exchange Act of 1934 (the Act) was carried out under the supervision and with
the participation of the Companys Chief Executive Officer, Chief Financial Officer
and several other members of the Companys senior management as of the end of the
period covered by this report. Based on this evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures as currently in effect are effective in ensuring that the
information required to be disclosed by the Company in the reports it files or submits
under the Act is (i) accumulated and communicated to the Companys management
(including the Chief Executive Officer and Chief Financial Officer) in a timely manner,
and (ii) recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms.


In the quarter ended April 30, 2005,
the Company did not make any changes to its internal controls over financial reporting
that has reasonably affected, or is reasonably likely to affect, the Companys
internal control over financial reporting. In addition, since the date of this evaluation
to the filing date of this Quarterly Report, there have been no significant changes in the
Companys internal controls or in other factors that could significantly affect
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.


23
Item 6. Exhibits


Exhibits:
 An Exhibit Index has been filed as part of this Report on Page E-1.24
CPI CORP.




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.

Dated: June 8, 2005
      Dated: June 8, 2005
    CPI Corp. 
      (Registrant) 
      By: /s/ Gary W. Douglass 
             
             Gary W. Douglass 
             Executive Vice President, Finance
      and Chief Financial Officer and
             Member of the Office of the Chief
      Executive 
             (Principal Financial Officer)
      
      By: /s/ Kimberly A. LaBelle 
             
             Kimberly A. LaBelle 
             Vice President, Corporate Controller
      
             (Principal Accounting Officer)25
CPI CORP.




E-1EXHIBIT INDEX



3.12
Amended
and Restated Bylaws of the Company11.1
Computation
of Per Share Earnings - Diluted - for the 12 weeks ended              April 30, 2005 and
May 1, 200411.2
Computation
of Per Share Earnings - Basic - for the 12 weeks ended              April 30, 2005 and
May 1, 200431.1
Certification
Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of 1934              by
the Chairman of the Board of Directors and Member of the Office of the              Chief
Executive31.2
Certification
Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of 1934              by
the President and Chief Operating Officer and Member of the Office of the Chief Executive31.3
Certification
Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of 1934              by
the Chief Financial Officer and Member of the Office of the Chief Executive32.0
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002 by Chairman of the Board of Directors, President
and Chief              Operating Officer and Chief Financial Officer, all Members of the
Office of the Chief Executive26