**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 29, 2008**

 

**OR**

 

**o TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from                   to                   **

 

# ***Commission File Number:0-10345***

# *** ***

**CACHE,INC.**

(Exact name of registrant as specified in itsCharter)

 

| **Florida**                               | ** ** | **59-1588181**                    |
|-------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of           |       | (IRS Employer Identification No.) |
| incorporation or organization)            |       |                              |
|                                      |       |                              |
| **1440  Broadway, New York, New York**    |       | **10018**                         |   |
| (Address  of principal executive offices) |       | (zip code)                        |   |
|                                           |            |                                   |  |  |  |

 

**212-575-3200**

(Registrant’s telephone number, includingarea code)

 

 

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

 

**Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tofiling requirements for the past 90 days. Yes**x   No o

** **

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

** **

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

** **

As of April 30, 2008, 13,386,608 common shareswere outstanding.

 

## ** **

----

 

## CACHE, INC. AND SUBSIDIARIES

##  

INDEX

** **
| PART I. FINANCIAL  INFORMATION |                                                                                                                        |
|------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                        |
| Item 1.                             | Condensed Consolidated Financial Statements (unaudited)                                                                     |   |
|                                     | Condensed  Consolidated Balance Sheets as of  March 29, 2008, December 29, 2007 and March 31, 2007           | 3 |
|                                     | Condensed  Consolidated Statements of Operations for the thirteen weeks ended  March 29, 2008 and March 31, 2007  | 4 |
|                                     | Condensed  Consolidated Statements of Cash Flows  for the thirteen weeks ended March 29, 2008 and March 31,  2007 | 5 |
|                                     | Notes to the Condensed Consolidated Financial  Statements                                                                   | 6 |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 | 11 |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                 | 17 |
| Item 4.                             | Controls and  Procedures                                                                                                    | 17 |
|                                     |                                                                                                                        |   |
| PART II. OTHER  INFORMATION    |                                                                                                                        |
|                                     |                                                                                                                        |   |
| Item 6.                             | Exhibits                                                                                                                    | 18 |
|                                     |                                                                                                                        |   |
| SIGNATURES                               |                                                                                                                        | 19 |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

** **

**ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)**

** **

### **CACHE, INC. AND SUBSIDIARIES**

### **CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                      | ** ** | **March 29,** | ** **      | **December 29,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-----------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                      | ** ** | **2008**           | ** **      | **2007**              | ** ** | **2007**           | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)**    | ** **      | **(Audited)**         | ** ** | **(Unaudited)**    | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Current assets:**                                                                                                             | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Cash and equivalents**                                                                                                        | ** ** | **$**              | **3,250,000**   | ** **            | **$**      | **7,243,000**      | ** ** | **$** | **9,106,000** | ** ** |
| **Marketable securities**                                                                                                       | ** ** | **27,414,000**     | ** **      | **42,887,000**        | ** ** | **51,942,000**     | ** ** |
| **Receivables, net**                                                                                                            | ** ** | **6,204,000**      | ** **      | **4,788,000**         | ** ** | **4,418,000**      | ** ** |
| **Inventories, net**                                                                                                            | ** ** | **32,524,000**     | ** **      | **30,547,000**        | ** ** | **36,135,000**     | ** ** |
| **Prepaid expenses and other current assets**                                                                                   | ** ** | **4,924,000**      | ** **      | **2,465,000**         | ** ** | **8,063,000**      | ** ** |
| **Total current assets**                                                                                                        | ** ** | **74,316,000**     | ** **      | **87,930,000**        | ** ** | **109,664,000**    | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Equipment and leasehold improvements, net**                                                                                   | ** ** | **46,561,000**     | ** **      | **49,298,000**        | ** ** | **50,493,000**     | ** ** |
| **Goodwill**                                                                                                                    | ** ** | **10,089,000**     | ** **      | **10,089,000**        | ** ** | **—**         | ** ** |
| **Intangible assets, net**                                                                                                      | ** ** | **1,393,000**      | ** **      | **1,423,000**         | ** ** | **102,000**        | ** ** |
| **Other assets**                                                                                                                | ** ** | **383,000**        | ** **      | **385,000**           | ** ** | **342,000**        | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Total assets**                                                                                                                | ** ** | **$**              | **132,742,000** | ** **            | **$**      | **149,125,000**    | ** ** | **$** | **160,601,000** | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                   | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Current liabilities:**                                                                                                        | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Accounts payable**                                                                                                            | ** ** | **$**              | **11,751,000**  | ** **            | **$**      | **10,510,000**     | ** ** | **$** | **12,523,000** | ** ** |
| **Note payable**                                                                                                                | ** ** | **1,474,000**      | ** **      | **1,586,000**         | ** ** | **—**         | ** ** |
| **Accrued compensation**                                                                                                        | ** ** | **2,926,000**      | ** **      | **1,910,000**         | ** ** | **2,571,000**      | ** ** |
| **Accrued liabilities**                                                                                                         | ** ** | **10,875,000**     | ** **      | **14,252,000**        | ** ** | **10,441,000**     | ** ** |
| **Total current liabilities**                                                                                                   | ** ** | **27,026,000**     | ** **      | **28,258,000**        | ** ** | **25,535,000**     | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Note payable**                                                                                                                | ** ** | **4,052,000**      | ** **      | **4,348,000**         | ** ** | **—**         | ** ** |
| **Other liabilities**                                                                                                           | ** ** | **15,491,000**     | ** **      | **16,172,000**        | ** ** | **16,103,000**     | ** ** |
| **Deferred income taxes, net**                                                                                                  | ** ** | **50,000**         | ** **      | **83,000**            | ** ** | **1,882,000**      | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Commitments and contingencies**                                                                                               | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                                   | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Common  stock, par value $.01; authorized, 20,000,000 shares; issued and outstanding  16,386,608, 16,319,358 and 16,287,483** | ** ** | **164,000**        | ** **      | **163,000**           | ** ** | **163,000**        | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Additional paid-in capital**                                                                                                  | ** ** | **46,678,000**     | ** **      | **46,136,000**        | ** ** | **45,119,000**     | ** ** |
| **Retained earnings**                                                                                                           | ** ** | **76,122,000**     | ** **      | **78,175,000**        | ** ** | **71,799,000**     | ** ** |
| **Treasury  stock, 3,000,000, 1,695,032 and 0 shares, at cost**                                                                 | ** ** | **(36,841,000**    | **)**           | **(24,210,000**       | **)**      | **—**         | ** ** |
| **Total stockholders’ equity**                                                                                             | ** ** | **86,123,000**     | ** **      | **100,264,000**       | ** ** | **117,081,000**    | ** ** |
| ** **                                                                                                                      | ** ** | ** **         | ** **      | ** **            | ** ** | ** **         | ** ** |
| **Total liabilities and stockholders’ equity**                                                                             | ** ** | **$**              | **132,742,000** | ** **            | **$**      | **149,125,000**    | ** ** | **$** | **160,601,000** | ** ** |

** **

**The accompanying Notes to CondensedConsolidated Financial Statements are an integral part of these statements.**

 

3

----

** **

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                        | ** ** | **March 29,** | ** **     | **March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------|----------------|--------------------|------------|
| ** **                                        | ** ** | **2008**           | ** **     | **2007**           | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net sales**                                     | ** ** | **$**              | **67,708,000** | ** **         | **$**      | **64,355,000** | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Cost of sales, including buying and occupancy** | ** ** | **39,293,000**     | ** **     | **35,364,000**     | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Gross profit**                                  | ** ** | **28,415,000**     | ** **     | **28,991,000**     | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Expenses**                                      | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Store operating expenses**                      | ** ** | **23,918,000**     | ** **     | **24,018,000**     | ** ** |
| **General and administrative expenses**           | ** ** | **5,669,000**      | ** **     | **5,462,000**      | ** ** |
| **Store exit costs**                              | ** ** | **2,308,000**      | ** **     | **—**         | ** ** |
| **Total expenses**                                | ** ** | **31,895,000**     | ** **     | **29,480,000**     | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Operating loss**                                | ** ** | **(3,480,000**     | **)**          | **(489,000**       | **)**      |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Other income (expense):**                       | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Interest expense**                              | ** ** | **(68,000**        | **)**          | **—**         | ** ** |
| **Interest income**                               | ** ** | **290,000**        | ** **     | **726,000**        | ** ** |
| **Total other income, net**                       | ** ** | **222,000**        | ** **     | **726,000**        | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Income (loss) before income taxes**             | ** ** | **(3,258,000**     | **)**          | **237,000**        | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Income tax provision (benefit)**                | ** ** | **(1,205,000**     | **)**          | **92,000**         | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net income (loss)**                             | ** ** | **$**              | **(2,053,000** | **)**              | **$**      | **145,000** | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Basic earnings (loss) per share**               | ** ** | **$**              | **(0.15**      | **)**              | **$**      | **0.01** | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Diluted earnings (loss) per share**             | ** ** | **$**              | **(0.15**      | **)**              | **$**      | **0.01** | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Basic weighted average shares outstanding**     | ** ** | **13,566,000**     | ** **     | **16,283,000**     | ** ** |
| ** **                                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Diluted weighted average shares outstanding**   | ** ** | **13,566,000**     | ** **     | **16,766,000**     | ** ** |

 

**The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesestatements.**

 

4

----

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

** **
| ** **                                                                    | ** ** | **March 29,** | ** **     | **March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|----------------|--------------------|------------|
| ** **                                                                    | ** ** | **2008**           | ** **     | **2007**           | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                     | ** ** | ** **         | ** **     | ** **         | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net income (loss)**                                                         | ** ** | **$**              | **(2,053,000** | **)**              | **$**      | **145,000** | ** ** |
| **Adjustments to reconcile net income (loss) to  net cash**                   | ** ** | ** **         | ** **     | ** **         | ** ** |
| **provided by (used in) operating activities:**                               | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Depreciation and amortization**                                             | ** ** | **3,191,000**      | ** **     | **2,719,000**      | ** ** |
| **Write down of equipment and leasehold  improvements, net of deferred rent** | ** ** | **1,445,000**      | ** **     | **—**         | ** ** |
| **Provision for sales allowance and doubtful  accounts**                      | ** ** | **515,000**        | ** **     | **—**         | ** ** |
| **Stock-based compensation**                                                  | ** ** | **74,000**         | ** **     | **310,000**        | ** ** |
| **Non-cash interest expense on note payable**                                 | ** ** | **68,000**         | ** **     | **—**         | ** ** |
| **Deferred income taxes**                                                     | ** ** | **(33,000**        | **)**          | **(186,000**       | **)**      |
| **Gift card breakage**                                                        | ** ** | **(81,000**        | **)**          | **(98,000**        | **)**      |
| **Amortization of deferred rent**                                             | ** ** | **(625,000**       | **)**          | **(297,000**       | **)**      |
| **Excess tax benefit from stock-based compensation**                          | ** ** | **(155,000**       | **)**          | **—**         | ** ** |
| **Other**                                                                     | ** ** | **—**         | ** **     | **(5,000**         | **)**      |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Change in assets and liabilities:**                                         | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Decrease (increase) in receivables**                                        | ** ** | **(1,931,000**     | **)**          | **376,000**        | ** ** |
| **Increase in inventories**                                                   | ** ** | **(1,977,000**     | **)**          | **(1,306,000**     | **)**      |
| **Increase in prepaid expenses and other current  assets**                    | ** ** | **(2,302,000**     | **)**          | **(846,000**       | **)**      |
| **Increase in accounts payable**                                              | ** ** | **1,241,000**      | ** **     | **821,000**        | ** ** |
| **Increase (decrease) in accrued liabilities and  accrued compensation**      | ** ** | **(1,488,000**     | **)**          | **1,966,000**      | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net cash provided by (used in) operating  activities**                      | ** ** | **(4,111,000**     | **)**          | **3,599,000**      | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                     | ** ** | ** **         | ** **     | ** **         | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Purchase of marketable securities**                                         | ** ** | **(13,455,000**    | **)**          | **(22,916,000**    | **)**      |
| **Maturities of marketable securities**                                       | ** ** | **28,927,000**     | ** **     | **13,068,000**     | ** ** |
| **Purchase of equipment and leasehold improvements**                          | ** ** | **(2,717,000**     | **)**          | **(4,171,000**     | **)**      |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net cash provided by (used in) investing  activities**                      | ** ** | **12,755,000**     | ** **     | **(14,019,000**    | **)**      |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                     | ** ** | ** **         | ** **     | ** **         | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Proceeds from the issuance of common stock**                                | ** ** | **314,000**        | ** **     | **163,000**        | ** ** |
| **Excess tax benefit from stock-based compensation**                          | ** ** | **155,000**        | ** **     | **—**         | ** ** |
| **Repayment of note payable**                                                 | ** ** | **(475,000**       | **)**          | **—**         | ** ** |
| **Repurchase of common stock**                                                | ** ** | **(12,631,000**    | **)**          | **—**         | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net cash provided by (used in) financing  activities**                      | ** ** | **(12,637,000**    | **)**          | **163,000**        | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Net decrease in cash and equivalents**                                      | ** ** | **(3,993,000**     | **)**          | **(10,257,000**    | **)**      |
| **Cash and equivalents, at beginning of period**                              | ** ** | **7,243,000**      | ** **     | **19,363,000**     | ** ** |
| **Cash and equivalents, at end of period**                                    | ** ** | **$**              | **3,250,000**  | ** **         | **$**      | **9,106,000** | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** |
| **Supplemental disclosure of cash flow  information:**                        | ** ** | ** **         | ** **     | ** **         | ** ** |
| ** **                                                                    | ** ** | ** **         | ** **     | ** **         | ** ** | ** ** | ** ** |
| **Interest paid**                                                             | ** ** | **$**              | **73,000**     | ** **         | **$**      | **—** | ** ** |
| **Income taxes paid**                                                         | ** ** | **$**              | **507,000**    | ** **         | **$**      | **5,000** | ** ** |
| **Accrued equipment and leasehold improvements**                              | ** ** | **$**              | **530,000**    | ** **         | **$**      | **590,000** | ** ** |

 

**The accompanying Notes to CondensedConsolidated Financial Statements are an integral part of these statements.**

 

5

----

 

**CACHE, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

1.               BASISOF PRESENTATION

 

**References to the “Company,” “we,” “us,” or “our” meansCache, Inc., together with its wholly-owned subsidiaries, except asexpressly indicated or unless the context otherwise requires. We currentlyoperate two chains of women’s apparel specialty stores, of which 281 stores areoperated under the trade name “Cache” and 13 stores are operated under thetrade name “Cache Luxe”.**

 

**The accompanying unaudited condensed consolidated financialstatements have been prepared in accordance with Rule 10-01 ofRegulation S-X and do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States.However, in the opinion of our management, all known adjustments necessary fora fair presentation of the results of the interim periods have been made. Theseadjustments consist primarily of normal recurring accruals and estimates thatimpact the carrying value of assets and liabilities. Actual results maymaterially differ from these estimates.**

 

**These condensed consolidated financial statements should beread in conjunction with the Company’s audited consolidated financialstatements for the year ended December 29, 2007, which are included in theCompany’s Annual Report on Form 10-K with respect to such period filedwith the Securities and Exchange Commission. All significant intercompanyaccounts and transactions have been eliminated. The December 29, 2007condensed consolidated balance sheet amounts are derived from the Company’saudited consolidated financial statements.**

 

**The Company’s fiscal year (“fiscal year” or “fiscal”)refers to the 52 or 53 weeks. The years ended December 29, 2007(“fiscal 2007”) and December 27, 2008 (“fiscal 2008”) are each 52-weekyears.**

 

A reclassification has beenmade to the 2007 Consolidated Balance Sheet to segregate intangible assets,net, as a separate line item to conform to the 2008 presentation. 

 

**2.**     STOCK BASED COMPENSATION

 

**The Company records compensation expenseassociated with stock options in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 123R, “*Share-Based Payment*”,as interpreted by SEC Staff Accounting Bulletin No. 107. During the13-week periods ended March 29, 2008 and March 31, 2007, the Companyrecognized approximately $74,000 and $310,000 in stock based compensationexpense.  The grant date fair value is calculated using the Black-Scholesoption valuation model. There were 15,000 options granted during the 13-weekperiod ended March 29, 2008 and no options were granted during the 13-weekperiod ended March 31, 2007. The Company recognized $155,000 in excess taxbenefits from the exercise of stock options for the 13-week period ended March 29,2008 and no excess tax benefits from the exercise of stock options wererecognized for the 13-week period ended March 31, 2007.**

 

**The weighted-average fair value of optionsgranted during the 13-week period ended March 29, 2008 was $3.14.  The grant date fair value is calculated usingthe Black-Scholes option valuation model. The following assumptions were used during fiscal 2008:**

 

6

----

 

| Expected dividend rate  |   | $     | 0.00   |   |
|-------------------------|--------|-------|--------|--------|
| Expected volatility     |   | 36.06 | %      |
| Risk free interest rate |   | 2.64  | %      |
| Expected lives (years)  |   | 4.00  |   |

 

**3.  BASIC AND DILUTED EARNINGS PER SHARE**

 

In accordance with SFAS No. 128, “*Earnings PerShare*”, basic earnings per share has been computed based upon theweighted average of common shares outstanding. Diluted earnings per share giveseffect to outstanding stock options.

 

**Earnings per common share has been computed as follows:**

 

| ** **                                                  | ** **          | **13 Weeks Ended** | ** ** |
|-------------------------------------------------------------|---------------------|------------------------------|------------|
| ** **                                                  | ** **          | **March 29,**           | ** ** | **March 31,** | ** ** |
| ** **                                                  | ** **          | **2008**                     | ** ** | **2007** | ** ** |
| Net income (loss)                                           |                | $                            | (2,053,000 | ) | $ | 145,000 |   |
| Basic weighted number of average shares outstanding         |                | 13,566,000                   |       | 16,283,000 |   |
| Incremental shares from assumed issuances  of stock options |                | —                       |       | 483,000 |   |
|                                                        |                |                         |       |   |   |
| Diluted weighted average number of shares  outstanding      |                | 13,566,000                   |       | 16,766,000 |   |
|                                                        |                |                         |       |   |   |
| Net income (loss) per share – Basic                    |                | $                            | (0.15      | ) | $ | 0.01 |   |
|                                                        | – Diluted |                         | $          | (0.15 | ) | $ | 0.01 |   |
|                                                             |                     |                              |            |  |  |  |  |  |

 

**Option to purchase 43,000 common shares wasexcluded from the computation of diluted earnings per share for the 13-weekperiod ended March 29, 2008, because their effect would be anti-diluted.**

 

**4.   RECENT DEVELOPMENTS**

 

On January 24, 2008, Mr. BrianWoolf, then Chairman and Chief Executive Officer, as well as the principal executiveofficer of Cache, Inc. resigned from the Company, effective immediately.On January 24, 2008, Mr. Thomas Reinckens, then Cache Inc.’sPresident, was appointed as the Company’s Chairman and Chief Executive Officerand will serve as the Company’s principal executive officer. He will continuein his position as the Company’s President, in addition to assuming these newroles. As a result of Mr.Woolf’s resignation, the Company recorded a severanceexpense of $604,000 during the 13-week period ended March 29, 2008.

 

On January 2, 2008, theBoard of Directors authorized the repurchase of an additional 1,000,000 share ofthe Company’s common stock, and on February 5, 2008, the Board ofDirectors authorized the repurchase of an additional 500,000 shares of theCompany’s common stock, bringing the total number of shares authorized torepurchase to 3,500,000 shares. As of March 29, 2008, the Company has repurchased 3,000,000 shares.

 

7

----

 

**5.   RECENT ACCOUNTING PRONOUNCEMENTS**

** **

During September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “*Fair Value Measurements”* (“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. The provisions of SFAS No. 157for financial assets and liabilities, as well as any other assets andliabilities that are carried at fair value on a recurring basis in financialstatements, are effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 (fiscal year 2008 for the Company). In February 2008,the FASB issued FASB Staff Positions (‘‘FSP’’) 157-1, which amended SFAS 157 toremove leasing transactions accounted for under SFAS 13, ‘‘*Accountingfor Leases*’’ and FSP 157-2, which deferred the effective date ofSFAS 157 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair valuein the financial statements on a nonrecurring basis to fiscal years beginningafter November 15, 2008 (fiscal year 2009 for the Company).   The implementation of SFAS No. 157 forfinancial assets and financial liabilities, effective December 30, 2007,did not have a material impact on the Company’s consolidated financialposition, results of operations or cash flows. The Company is currently evaluating the impact of SFAS No. 157 fornonfinancial assets and liabilities on its consolidated financial statements.

 

During February 2007,the FASB issued SFAS No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115”* (“SFAS No. 159”). SFAS No. 159allows companies the choice to measure many financial instruments and certainother items at fair value. The provisions of SFAS No. 159 are effectivefor financial statements issued for fiscal years beginning after November 15,2007. The implementation of SFAS No. 159 did not have a material impact onthe Company’s consolidated financial position, results of operations or cashflows.

 

During December 2007,the FASB issued SFAS No. 160, “*Noncontrolling interestsin Consolidated Financial Statements—an amendment of ARB No. 51”*(“SFAS No. 160”). SFAS No. 160 requires expanded disclosures in theconsolidated financial statements that clearly identify and distinguish betweenthe interests of the parent’s owners and the interests of noncontrolling ownersof a subsidiary. SFAS No. 160 is effective for fiscal years beginning onor after December 15, 2008. We are currently evaluating the standard, butdo not expect it to have a material impact on our consolidated financialstatements upon adoption.

 

During December 2007,the FASB issued SFAS No. 141R, “*Business Combinations”*(“SFAS No. 141R”). Under Statement 141R, an acquiring entity will berequired to recognize all the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions. Inaddition, acquisition costs will generally be expensed as incurred. The revisedstatement also includes a substantial number of new disclosure requirements. SFAS141R is effective prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008.

 

6.  FAIR VALUE MEASUREMENT

 

EffectiveDecember 30, 2007, the Company adopted SFAS 157, which defines fair value asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date (exit price).  SFAS 157establishes a fair value hierarchy, which prioritizes the inputs used inmeasuring fair value into three broad levels as follows:

 

·      Level 1 – Unadjusted quoted market pricesin active markets for identical assets or liabilities that the Company has theability to access at the measurement date.

·      Level 2 – Quoted prices for similar assetsor liabilities in active markets, quoted prices for identical or similar assetsor liabilities in markets that are not active, inputs other than quoted pricesthat are observable for the asset or liability (i.e., interest rates, yieldcurves, etc.) and inputs that are derived principally from or corroborated byobservable market data by correlation or other means.

·      Level 3 – Unobservable inputs that reflectassumptions about what market participants would use in pricing assets orliabilities based on the best information available.

 

As of March29, 2008, the Company’s marketable securities primarily consist of short-termUnited States Treasury bills and tax-exempt municipal bonds. The Companyclassifies its short-term investments as held-to-maturity. Held-to-maturitysecurities are those securities in which the Company has the ability and intentto hold the securities until maturity. Because the Company's held-to-maturitysecurities mature within one year of the purchase date, the securities areclassified as short-term marketable securities. Held-to-maturity debtsecurities are recorded at amortized cost, adjusted for the amortization oraccretion of premiums or discounts and such carrying values approximate fairvalue. A decline in the market value of any held-to-maturity security belowcost that is deemed to be other than temporary results in a reduction incarrying amount to fair value. The impairment is charged to earnings and a newcost basis for the security is established. 

 

EffectiveDecember 30, 2007, the Company adopted SFAS 159, which provides entities theoption to measure many financial instruments and certain other items at fairvalue. Entities that choose the fair value option will recognize unrealizedgains and losses on items for which the fair value option was elected inearnings at each subsequent reporting date. The Company has currently chosennot to elect the fair value option for any items that are not already required tobe measured at fair value in accordance with accounting principles generallyaccepted in the United States of America.

 

The fair valueof our marketable securities, which was determined based upon Level 1 inputs,totaled $34.0 million, $50.8 million and $65.1 million as of March 29, 2008,December 29, 2007 and March 31, 2007, respectively.  For the periods ended March 29, 2008,December 29, 2007 and March 31, 2007, the aggregate amount of investmentsrecorded in cash and equivalents (maturing less than 90 days) and marketablesecurities (maturing greater than 90 days and less than one year) totaledapproximately $33.9 million, $50.8 million and $65.1 million,respectively.  The difference between theamounts reported on the balance sheet and the fair value of the Company’sinvestments primarily relates to outstanding checks associated with normalbusiness operations.  The Company notedsmall variances between the book value and fair value due to the remainingunamortized premiums.  As a result, noimpairment has occurred for the fiscal periods presented herein.  Premiums and discounts are amortized oraccreted over the life of the related held-to-maturity investments. Interestincome is recognized when earned.  

 

 

8

----

 

7.  RECEIVABLES

 
| ** **                | ** ** | **March 29,** | ** ** | **December 29,** | ** ** | **March 31,** | ** ** |
|---------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                | ** ** | **2008**           | ** ** | **2007**              | ** ** | **2007**           | ** ** |
| Construction allowances   |       | $                  | 826,000    |                  | $          | 683,000            |       | $ | 804,000 |   |
| Third party credit card   |       | 3,207,000          |       | 2,522,000             |       | 3,357,000          |       |
| Accounts receivables, net |       | 1,327,000          |       | 596,000               |       | —             |       |
| Other                     |       | 844,000            |       | 987,000               |       | 257,000            |       |
|                      |       | $                  | 6,204,000  |                  | $          | 4,788,000          |       | $ | 4,418,000 |   |

 

Accounts receivable, netincludes sales from Mary L., which are recorded net of any returns,chargebacks, discounts and allowances. The Company recorded $515,000 of provisions for sales allowances anddoubtful accounts during the first fiscal quarter of 2008, which resulted in anaggregate reserve amount of $750,000, as of March 29, 2008.

 

8.  INVENTORIES

 
| ** **      | ** ** | **March 29,** | ** ** | **December 29,** | ** ** | **March 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|---------------|------------|
| ** **      | ** ** | **2008**           | ** ** | **2007**              | ** ** | **2007**      | ** ** |
| Raw materials   |       | $                  | 4,023,000  |                  | $          | 1,242,000     |       | $ | — |   |
| Work in process |       | 207,000            |       | 832,000               |       | —        |       |
| Finished goods  |       | 28,294,000         |       | 28,473,000            |       | 36,135,000    |       |
|            |       | $                  | 32,524,000 |                  | $          | 30,547,000    |       | $ | 36,135,000 |   |

 

**9. EQUIPMENT AND LEASEHOLD IMPROVEMENTS**

 
| ** **                                       | ** ** | **March 29,** | ** ** | **December 29,** | ** ** | **March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                       | ** ** | **2008**           | ** ** | **2007**              | ** ** | **2007**           | ** ** |
|                                             |       |               |       |                  |       |               |       |
| Leasehold improvements                           |       | $                  | 53,938,000 |                  | $          | 55,088,000         |       | $ | 52,945,000 |   |
| Furniture, fixtures and equipment                |       | 50,496,000         |       | 49,772,000            |       | 46,202,000         |       |
|                                             |       | 104,434,000        |       | 104,860,000           |       | 99,147,000         |       |
| Less: accumulated depreciation and  amortization |       | (57,873,000        | )          | (55,562,000           | )          | (48,654,000        | )          |
|                                             |       |               |       |                  |       |               |       |
|                                             |       | $                  | 46,561,000 |                  | $          | 49,298,000         |       | $ | 50,493,000 |   |

 

10. GOODWILL AND INTANGIBLE ASSETS

 

The Company’sgoodwill and its indefinite-lived intangible assets are reviewed annually forimpairment or more frequently, if impairment indicators arise. The annualvaluation is performed during the fourth quarter of each year. The carryingamounts of intangible assets as of March 29, 2008, December 29, 2007and March 31, 2007 are as follows:

 
| ** **                          | ** ** | **March 29,** | ** ** | **December 29,** | ** ** | **March 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2008**           | ** ** | **2007**              | ** ** | **2007**           | ** ** |
| Indefinite-lived intangible assets: |       |               |       |                  |       |               |       |
| Trademarks-Cache                    |       | $                  | 102,000    |                  | $          | 102,000            |       | $ | 102,000 |   |
| Trademarks-Mary L.                  |       | 620,000            |       | 620,000               |       | —             |       |
|                                |       | 722,000            |       | 722,000               |       | 102,000            |       |
|                                |       |               |       |                  |       |               |       |
| Definite-lived intangible assets:   |       |               |       |                  |       |               |       |
| Customer relationships              |       | 300,000            |       | 300,000               |       | —             |       |
| Non-Compete agreements              |       | 300,000            |       | 300,000               |       | —             |       |
| Favorable market lease              |       | 160,000            |       | 160,000               |       | —             |       |
|                                |       | 760,000            |       | 760,000               |       | —             |       |
| Less: accumulated amortization      |       | (89,000            | )          | (59,000               | )          | —             |       |
|                                |       | 671,000            |       | 701,000               |       | —             |       |
| Total intangible assets, net        |       | $                  | 1,393,000  |                  | $          | 1,423,000          |       | $ | 102,000 |   |

 

9

----

 

11. ACCRUED LIABILITIES

 
| ** **                                                                    | ** ** | **March 29,** | ** ** | **December 29,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **2008**           | ** ** | **2007**              | ** ** | **2007**           | ** ** |
| Operating expenses                                                            |       | $                  | 2,669,000  |                  | $          | 3,954,000          |       | $ | 3,825,000 |   |
| Taxes, including income taxes                                                 |       | 2,027,000          |       | 2,364,000             |       | 1,765,000          |       |
| Share repurchase liability                                                    |       | —             |       | 2,033,000             |       | —             |       |
| Group insurance                                                               |       | 552,000            |       | 557,000               |       | 744,000            |       |
| Sales return reserve                                                          |       | 950,000            |       | 752,000               |       | 1,018,000          |       |
| Leasehold additions                                                           |       | 530,000            |       | 752,000               |       | 590,000            |       |
| Gift cards, merchandise credit cards and other  customer deposits and credits |       | 3,347,000          |       | 3,840,000             |       | 2,499,000          |       |
| Store exit costs                                                              |       | 665,000            |       | —                |       | —             |       |
| Deferred income                                                               |       | 135,000            |       | —                |       | —             |       |
|                                                                          |       |               |       |                  |       |               |       |
|                                                                          |       | $                  | 10,875,000 |                  | $          | 14,252,000         |       | $ | 10,441,000 |   |

 

Leasehold additions generally represent aliability to general contractors for a final 10% payable on constructioncontracts for store construction or renovations.

 

12. BANK DEBT

 

**During November 2005, the Companyreached an agreement with its bank to amend the amount available under theAmended Revolving Credit Facility. Pursuant to the Amended Revolving CreditFacility, $17,500,000 is available until expiration at November 30, 2008.The amounts outstanding under the credit facility bear interest at a maximumper annum rate equal to the bank’s prime rate, currently 5.25% at March 29,2008, less 0.25%. The agreement contains selected financial and othercovenants. Effective upon the occurrence of an Event of Default under theAmended Revolving Credit Facility, the Company grants to the bank a securityinterest in the Company’s inventory and certain receivables. The Company hasbeen in compliance with all financial loan covenants during the fiscal periodspresented.**

 

**There have been no borrowings against theline of credit during fiscal 2007 and the first quarter of fiscal 2008. Therewere outstanding letters of credit of $783,000, $774,000 and $627,000, pursuantto the Amended Revolving Credit Facility, at March 29, 2008, December 29,2007 and March 31, 2007, respectively.**

 

**13. STORE EXIT COSTS**

 

During the quarter ended March 29, 2008,the Company recorded a pre-tax charge of $2.3 million for asset write down andstore closing costs for 14 underperforming stores.  Included in the exit costs are the following:

 

10

----

 
| ** **                                          | ** ** | **Balance**                     | ** ** | ** **  | ** ** | ** **             | ** ** | **Balance**                 | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|-------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **Beginning of Year** | ** ** | **Charges** | ** ** | **Cash Payments** | ** ** | **End of Period** | ** ** |
| Write down  of equipment and leasehold improvements |       | $                               | —     |        | $          | 2,071,000              |       | $                           | —     |   | $ | 2,071,000 |   |
| Severance                                           |       | —                          |       | 198,000     |       | —                 |       | 198,000                     |       |
| Reversal of deferred rent liability                 |       | —                          |       | (626,000    | )          | —                 |       | (626,000                    | )          |
| Lease termination costs                             |       | —                          |       | 665,000     |       | —                 |       | 665,000                     |       |
|                                                |       | $                               | —     |        | $          | 2,308,000              |       | $                           | —     |   | $ | 2,308,000 |   |

 

The Company does not expect to incur significant additional exit costsupon the closing of these stores. The Company plans on closing these storesover the course of fiscal 2008.

 

14. CONTINGENCIES

 

The Company is exposed to a number ofasserted and unasserted potential claims. Management does not believe that the resolution of these matters willresult in a material loss.  We have notprovided any third party financial guarantees as of and for the 13-week periodsended March 29, 2008 and March 31, 2007 and for the 52-week period endedDecember 29, 2007.

 

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Except for the historical information andcurrent statements contained in this Form 10-Q, certain matters discussedherein, including, without limitation, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” are forward-looking statementsthat involve risks and uncertainties, including, without limitation, the effectof economic and market conditions and competition, the ability to open newstores and expand into new markets, and risks relating to foreign importingoperations, which could cause actual results to differ materially.**

 

**RESULTS OF OPERATIONS**

 

**The following table sets forth our results ofoperations for the 13-week periods ended March 29, 2008 and March 31,2007, expressed as a percentage of net sales. Amounts include the combined results of our Cache and Cache Luxe stores.**

 
| ** **                          | ** ** | **13 Weeks Ended** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **March 29,**           | ** ** | **March 31,** | ** ** |
| ** **                          | ** ** | **2008**                     | ** ** | **2007** | ** ** |
|                                |       |                         |       |   |   |
| Sales                               |       | 100.0                        | %          | 100.0 | % |
| Cost of sales                       |       | 58.0                         |       | 55.0 |   |
| Gross profit                        |       | 42.0                         |       | 45.0 |   |
| Store operating expenses            |       | 35.3                         |       | 37.3 |   |
| General and administrative expenses |       | 8.4                          |       | 8.5 |   |
| Store exit costs                    |       | 3.4                          |       | 0.0 |   |
| Operating loss                      |       | (5.1                         | )          | (0.8 | ) |
| Interest expense                    |       | (0.1                         | )          | 0.0 |   |
| Interest income                     |       | 0.4                          |       | 1.1 |   |
| Income (loss) before income taxes   |       | (4.8                         | )          | 0.4 |   |
| Income tax provision (benefit)      |       | (1.8                         | )          | 0.1 |   |
| Net income (loss)                   |       | (3.0                         | )%         | 0.2 | % |

 

We use a number of key indicators offinancial condition and operating performance to evaluate the performance 

 

11

----

 

of our business, some of which are set forthin the following table:

 
| ** **                                             | ** ** | **13 Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **March 29,**           | ** ** | **March 31,** | ** ** |
| ** **                                             | ** ** | **2008**                     | ** ** | **2007** | ** ** |
|                                                   |       |                         |       |   |   |
| Total store count, at end of period                    |       | 294                          |       | 297 |   |
| Net sales growth                                       |       | 5.2                          | %          | 0.8 | % |
| Comparable store sales growth                          |       | 3                            | %          | 3 | % |
| Average sales per transaction decrease                 |       | (3.3                         | )%         | (8.0 | )% |
| Average number of transactions growth                  |       | 6.8                          | %          | 11.0 | % |
| Net sales per average square foot                      |       | $                            | 106        |   | $ | 107 |   |
| Total square footage, at end of period (in  thousands) |       | 595                          |       | 600 |   |
|                                                        |            |                              |            |  |  |  |  |

 

**Net sales**

 

**Net sales increased to $67.7 million from$64.4 million, an increase of $3.3 million, or 5.2%, over the same 13-weekperiod last year.  This reflects $1.8million of additional net sales, as a result of a 3% increase in comparablestore sales. Comparable store sales increased due to strong customer responseto the sportswear assortment, which was driven by a well designed collectionand strong response to the Company’s aggressive pricing strategy.  Non-comparable sales decreased $316,000during the current period, due to fewer total stores during the current fiscalquarter of 2008, as compared to the same period last year.  The decrease in non-comparable stores was offsetby sales amounting to $1.8 million in our newly acquired wholesale division –Mary L. Due to the acquisition of the Mary L. division in the third quarter offiscal 2007, no sales for Mary L. were recorded during the first quarter offiscal 2007.  The increase in net salesin fiscal 2008 at Cache stores reflected a 6.8% increase in sales transactions,which was partially offset by a 3.3% decrease in average dollars pertransactions, primarily due to the increase in markdowns.**

 

**Gross profit**

 

**Gross profit decreased to $28.4 million from$29.0 million, a decrease of $576,000, or 2.0%, as compared to the same 13-weekperiod last year.  This decrease wasprimarily due to an increase in markdown sales, as compared to the same periodlast year, coupled with** the inclusion of costs related to our newly acquired  subsidiary – Adrienne Victoria Designs or “AVD”.Costs related to AVD werenot recorded in the same period last year, as it was acquired in the thirdquarter of fiscal 2007.  These costs werepartially offset by higher initial gross margins from increased direct sourcingof merchandise through AVD and a decrease in buying and occupancy expense, ascompared to the same period last year.  Asa percentage of net sales, gross profit decreased to 42.0% from 45.1%, lastyear.

 

**Store operating expenses**

 

**Store operating expenses decreased to $23.9million from $24.0 million, a decrease of $100,000, or 0.4%, as compared to thesame 13-week period last year. As a percentage of net sales, store operatingexpenses decreased to 35.3% from 37.3%, for the 13-week period last year. Thedecrease is partially due to fewer total stores open during the current fiscalquarter of 2008, as compared to the same period last year.  Store operating expenses also decreased,principally due to lower marketing expenses ($1.3 million), which were onlypartially offset by an increase in depreciation and amortization expense($483,000), payroll expense ($489,000) and several other expense categories.**

 

**General and administrative expenses**

 

**General and administrative expenses increasedto $5.7 million from $5.5 million, an increase of $207,000, or 3.8%, over thesame 13-week period last year. As a percentage of net sales, general andadministrative expenses decreased to 8.4% from 8.5%.  General and administrative expenses increased,primarily due to higher payroll related costs ($454,000), principally due tothe payout resulting from the recent change in management, and several otherexpense categories.  This increase is offsetby a decrease in professional fees ($286,000), partially due to a decrease inour audit fees.**

 

12

----

 

**Store exit costs**

 

**During the 13-week period ended March 29,2008, the Company recorded a pre-tax charge of $2.3 million ($1.5 million aftertax or $0.11 per diluted share) for 14 underperforming stores, which will closeover the course of fiscal 2008.  Includedin the exit costs is a write down of equipment and leasehold improvements andfurniture and fixtures in the amount of $2.1 million, severance accrual of$198,000 and lease termination costs for $665,000.  These costs were offset by the reversal of $626,000of deferred rent accruals.**

 

**Other income/expense**

 

**Other income (expense) decreased to $222,000from $726,000, a decrease of $504,000, or 69.4% as compared to the same 13-weekperiod last year.  This decrease was dueto a reduction in interest income of $436,000 caused by lower interest ratesand lower average cash balances, coupled with charges related to interestexpense for the note payable recorded in connection with the acquisition of AVD.**

 

**Income taxes**

 

**An income tax benefit was recorded in thecurrent year for $1.2 million as compared to a $92,000 provision recorded forthe 13-week period last year.  Theestimated effective tax rate for fiscal 2008 is projected to be 37.0%, ascompared to the fiscal 2007 estimate of 39.0%.**

 

**Net income (loss)**

 

**As a result of the factors discussed above, anet loss of $2.1 million was recorded in fiscal 2008, as compared to the netincome of $145,000 for the prior year 13-week period.**

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cashrequirements are primarily for working capital, the construction of new stores,the remodeling of existing stores and to improve and enhance our informationtechnology systems. During the 13-week period ended March 29, 2008, weused $4.1 million of cash flow from operations as compared to $3.6 milliongenerated in the same period in fiscal 2007. We expect to continue to meet ouroperating cash requirements primarily through cash flows from operatingactivities, existing cash and equivalents, and short-term investments.  In addition, we have available a $17.5million revolving credit facility (the “credit facility”) with Bank of AmericaRetail Finance, under which we have not had outstanding borrowings for severalyears.  At March 29, 2008, we hadworking capital of $47.3 million, cash and marketable securities of $30.7million and $5.5 million in third party debt outstanding related to thepurchase of Adrienne Victoria Designs (“AVD”).

 

The following table setsforth our cash flows for the period indicated:

 
| ** **                                           | ** ** | **13 Weeks ended** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **March 29,**      | ** ** | **March 31,** | ** ** |
| ** **                                           | ** ** | **2008**                | ** ** | **2007** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                       | (4,111,000 | ) | $ | 3,599,000 |   |
| Net cash provided by (used in) investing  activities |       | 12,755,000              |       | (14,019,000 | ) |
| Net cash provided by (used in) financing  activities |       | (12,637,000             | )          | 163,000 |   |
|                                                 |       |                    |       |   |   |
| Net decrease in cash and equivalents                 |       | $                       | (3,993,000 | ) | $ | (10,257,000 | ) |

 

During the 13-week period ended March 29,2008, cash and equivalents decreased by $4.0 million, primarily due torepurchase of common stock ($12.6 million), amortization of deferred rent($625,000), increase in 

 

13

----

 

receivables ($1.9 million) primarily due tothe newly acquired division – Mary L., a seasonal increase in inventories ($1.9million), a seasonal increase in prepaid expenses ($2.3 million) and anincrease in accrued expenses ($ 1.5 million), primarily due to a reserve forstore exit costs and an increase in reserve for estimated returns.  Decreases in cash flows for the currentperiod also resulted from capital expenditures for our new store expansion andremodeling program totaling $2.7 million. This decrease was offset by operating cash flows from net maturities ofmarketable securities ($15.4 million), depreciation and amortization expense($3.2 million) and write down of equipment and leasehold improvements, net ofdeferred rent ($1.4 million).

 

**The Company plans to open approximately 10-13new stores during fiscal 2008, of which we have opened three new stores in thefirst fiscal quarter of 2008.  We alsorenovated three existing stores in the first quarter of fiscal 2008.  We spent approximately $2.7 million through March 29,2008 and expect to spend an additional $6 million to $7 million during thebalance of fiscal 2008, for both new store and existing store construction andremodeling. We announced the closure of 14 underperforming stores throughoutfiscal 2008 which is not inclusive of stores closed in the normal course ofbusiness.**

 

**As of April 30, 2008, the Companyrepurchased, in the open market, an additional 1,304,968 shares at a cost of$12.6 million or $9.68 per share for a total repurchase of 3,000,000 shares, ata cost of $36.8 million or $12.28 per share.**

 

**There have been no borrowings against theline of credit during fiscal 2007 and the first quarter of fiscal 2008. Therewere outstanding letters of credit of $783,000 $774,000 and $627,000, pursuantto the Amended Revolving Credit Facility, at March 29, 2008, December 29,2007 and March 31, 2007, respectively.**

 

#### **Inflation**

 

The Company does not believethat our sales revenue or operating results have been materially impacted byinflation during the past two fiscal years. There can be no assurance, however,that our sales revenue or operating results will not be impacted by inflation inthe future.

 

#### **Off-Balance Sheet Arrangements**

 

**The Company** does not have any off-balance sheetarrangements or transactions with unconsolidated, limited purposeentities.  In the normal course of ourbusiness, we enter into operating leases for store locations and utilizeletters of credit principally for the importation of merchandise.  We do not have any undisclosed materialtransactions or commitments involving related persons or entities.

 

# ***Critical Accounting Policies and Estimates***

#  

TheCompany’s accounting policies are more fully described in Note 1 of Notes toConsolidated Financial Statements in our fiscal 2007 10-K.  As disclosed in Note 1 of Notes toConsolidated Financial Statements, the preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) requires management to make estimates and assumptions aboutfuture events that affect the amounts reported in the consolidated financialstatements and accompanying notes. Since future events and their effects cannotbe determined with absolute certainty, actual results will differ from thoseestimates. We evaluate our estimatesand judgments on an ongoing basis and predicate those estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances.   Actual results will differ from these underdifferent assumptions or conditions.

 

TheCompany’s management believes the following critical accounting policies, amongothers, affect its more significant judgments and estimates used in preparationof the Consolidated Financial Statements.

 

*Inventories**.* TheCompany’s finished goods inventories at our retail stores are valued at thelower of cost or market using the retail inventory method. Under the retailinventory method (“RIM”), the valuation of inventories at cost and theresulting gross margins are calculated by applying a calculated cost to retailratio to the retail value of inventories. RIM is an averaging method that iswidely used in the retail industry due to its practicality. Additionally, it isrecognized that the use of RIM will result in valuing inventories at the lowerof cost or market if markdowns are currently taken as a reduction of the retailvalue of inventories. Inherent in the RIM calculation are certain 

 

14

----

 

significant managementjudgments including, among others, merchandise markon, markups, and markdowns,which significantly impact the ending inventory valuation at cost as well asthe resulting gross margins. We take markdowns due to changes in fashion andstyle, based on the following factors: (i) supply on hand, (ii) historicalexperience and (iii) our expectations as to future sales. We do not anticipateany significant change in our markdown strategy that would cause a significantchange in our earnings. We believe that our RIM provides an inventoryvaluation, which results in a carrying value at the lower of cost or market.For our AVD division, which makes up approximately 19% of total inventory, theraw materials, work in process and finished goods inventories are valued at thelower of cost or market value, using the first-in-first-out valuation method.The Company ensures that the raw materials, work in process and finished goodsare properly valued by taking into account any obsolescence and recording areserve in accordance with our established policy.

** **

***Reserve forsales allowance and doubtful accounts***. The allowance for doubtful accounts is the Company’s best estimate ofthe amount of probable credit losses in existing accounts receivable. Theallowance is determined based on historical write-off experience and thecurrent retailer environment. We regularly review the allowance for doubtful accounts.Balances over 90 days past due and over a specified amount are reviewedindividually for collectability; other balances are considered on an aggregatebasis considering the aging of balances. Account balances are written off against the allowance when it isprobable the receivable will not be recovered. There is no off-balance sheetcredit exposure related to our customers. Management believes that the riskassociated with trade accounts receivable is adequately provided for in theallowance for doubtful accounts.  Werecorded a reserve of $515,000 and $234,000 for the 13-weeks period ended March29, 2008 and the 52-weeks period ended December 29, 2007.  The estimated provision for sales allowancesand doubtful accounts recorded in the first fiscal quarter of 2008 resulted inan aggregate reserve amount of $750,000, as of March 29, 2008.

** **

***Finite-long lived assets.***    The Company’s judgment regarding the existence ofimpairment indicators is based on market and operational performance. We assessthe impairment of long-lived assets, primarily fixed assets, whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Factors we consider important which could trigger an impairmentreview include the following:

** **

**·**       significant changes inthe manner of our use of assets or the strategy for our overall business;

** **

**·**       significant negativeindustry or economic trends;

** **

**·**       storeclosings; or

** **

**·**       underperformingbusiness trends.

** **

In theevaluation of the fair value and future benefits of finite long-lived assets,we perform an analysis by store of the anticipated undiscounted future net cashflows of the related finite long-lived assets. If the carrying value of therelated asset exceeds the undiscounted cash flows, the carrying value isreduced to its fair value. Various factors including future sales growth andprofit margins are included in this analysis. To the extent these futureprojections or strategies change, the conclusion regarding impairment maydiffer from the current estimates. In fiscal 2006, the Company recorded animpairment charge of $101,000, related to one store, that the Company closed inearly 2007.  No impairment charges, otherthan the store exit costs, were recorded during the 13-week period ended March 29,2008. No impairment charges were recorded in the same period last year.

 

*Goodwill and Intangible Assets*. The Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “*Goodwill**and Other IntangibleAssets*” (“SFAS No. 142”) on December 30, 2001. SFAS No. 142requires that ratable amortization of goodwill be replaced with periodic testsof the goodwill’s impairment. During fiscal 2007, in connection with theacquisition of AVD, the Company recorded goodwill of $10.1 million and otherintangible assets of $1.3 million. The Company performs annual impairmenttesting which considers the Company’s fair value to determine whether animpairment charge related to the carrying value of the Company’s recordedgoodwill and other intangible assets is necessary. As a result of this testing,the Company concluded that there was no such impairment loss necessary as ofMarch 29, 2008 and during fiscal 2007. This is reevaluated annually during thefourth quarter, or more frequently if necessary, using similar testing.

 

*Self Insurance.* The Company isself-insured for losses and liabilities related primarily to employee healthand welfare claims. Losses are accrued based upon our estimates of theaggregate liability for claims incurred using certain actuarial assumptionsfollowed in the insurance industry and based on Company experience. Adjustmentsto earnings resulting from changes in historical loss trends have beeninsignificant for fiscal 2007 and 2008. Further, we do not anticipate anysignificant change in loss trends, settlements or other costs that would causea significant change in our earnings. We maintain stop-loss insurance coverage,which covers us for benefits paid in excess of limits as defined in the plan.

 

*Gift Cards, Gift Certificates and Credits**.***The Companysells gift cards and gift certificates (“Gift Cards”) and issues credits to itscustomers when merchandise is returned. These Gift Cards do not have expirationdates. The Company recognizes sales from Gift Cards when they are redeemed bythe customer and income when the likelihood of the Gift Card being redeemed bythe customer is remote (Gift Card breakage) since the Company has determinedthat it does not have a legal obligation to remit the value of unredeemed GiftCards to the relevant jurisdiction as abandoned property. The 

 

15

----

 

Companydetermines Gift Card breakage income based upon historical redemption patterns andthe remaining unredeemed percentage at the end of our historical data of 3.5years.  Historical redemptions of giftcards ranged from 64% in the first quarter to 0.03% in the fourteenth quartersubsequent to the issue date, resulting in an average of approximately 95%redeemed or 5% unredeemed gift cards over the historical data of 3.5years.  We have determined thatredemption would be remote based on the fact that, by the fourteenth quartersince issue date, the redemption rate approximated 0%, indicating that theprobability of such cards to be redeemed is remote.  As such, we have recorded breakage incomebased upon this 5%, which is continually reviewed on a quarterly basis forpropriety. Breakage income represents the balance of Gift Cards, for which theCompany believes the likelihood of redemption by the customer is remote. Atthat time, the Company will recognize breakage income for those Gift Cards. TheCompany recorded $81,000 and $98,000 of breakage income during the 13-weekperiods ended March 29, 2008 and March 31, 2007, respectively.

 

*Revenue Recognition.*  Salesare recognized at the “point of sale,” which occurs when merchandise is sold inan “over-the-counter” transaction or upon receipt by a customer. Sales ofmerchandise via our website are recognized at the expected time of delivery tothe customer. Our customers have the right to return merchandise. Sales arereported net of actual and estimated returns. We maintain a reserve forpotential product returns and record, as a reduction to sales, a provision forestimated product returns, which is determined based on historical experience.Charges or credits to earnings resulting from revisions to estimates on oursales return provision for fiscal 2007 and 2008, have not been material.Amounts billed to customers for shipping and handling fees are included in net salesat the time of shipment. Costs incurred for shipping and handling are includedin cost of sales. The Company records revenues net of applicable sales tax.

 

In connectionwith the acquisition of AVD, the Company also acquired the rights to the “MaryL.” trademark. Mary L. products are sold in upper tier department stores and asa result, Mary L. sales are included under net sales when the merchandise isshipped to the department stores. Mary L. sales are recorded net of anyreturns, chargebacks, discounts and allowances. We also maintain a reserve as areduction to sales for potential returns, chargebacks, discounts andallowances. The Company recorded $515,000 of provisions for salesallowances and doubtful accounts during the first fiscal quarter of 2008, whichresulted in an aggregate reserve amount of $750,000, as of March 29, 2008.

 

During thesecond quarter of fiscal 2007, Cache introduced a co-branded customer creditcard program. Under this program, the Company receives from the issuing bank anon-refundable credit card activation fee for each new account that is openedand activated. These fees are initially deferred and recognized in consolidatednet sales as revenue over the life of the contract.  During the 13-week period ended March 29,2008, the Company received approximately $289,000 in connection with activatedcards. The amount of fee income recorded in connection with activated creditcards was insignificant in fiscal 2008.

 

The Companyalso offers its credit card holders a program whereby points can be earned onnet purchases made with the co-branded credit card. Five reward points areawarded for each dollar spent at Cache business and one reward point is awardedfor each dollar spent at non-Cache businesses. Cardholders whose credit cardaccount is not delinquent, in default or closed will be automatically eligibleto receive a $25 Cache gift card upon accrual of 2,500 reward points. Theissuing bank bears the cost of the reward program and is responsible for theadministration and management of the program.

 

The Companyalso receives from the issuing bank and Visa U.S.A Inc. a sales royalty, whichis based on a percentage of net purchases made by cardholders at Cache or otherbusinesses. Cache has determined that since it has not incurred any significantor recurring costs in relation to the co-branded credit card program the salesroyalties earned in connection to the agreement will be recorded under netsales. The fees that are incurred by the Company are cardholder incentives,which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. Theamount of sales royalty income recorded was insignificant in fiscal 2008.

 

***Income Taxes.***The Company accounts for income taxes in accordance with SFAS No. 109,“*Accounting for Income Taxes*.”  This statement requires the Company torecognize deferred tax liabilities and assets for the expected future taxconsequences of events that have been recognized in the Company’s financialstatements or tax returns. Under this method, deferred tax liabilities andassets are determined based on the difference between the financial statementcarrying amounts and tax bases of assets and liabilities, using applicable taxrates for the years in which the differences are expected to reverse. When taxcontingencies become probable, a liability for the contingent amount isestimated based upon the Company’s best estimation of the potential exposuresassociated with the timing and amount of deductions, as well as various taxfiling positions. As of March 29, 2008, the Company did not have any taxcontingencies. The Company adopted the provisions of FIN 48, effective December 31,2006. The impact of adoption did not have a material impact on the consolidatedfinancial statements.

 

16

----

 

***Seasonality.***The Company experiences seasonal and quarterly fluctuations in net sales andoperating income. Quarterly results of operations may fluctuate significantlyas a result of a variety of factors, including the timing of new storeopenings, fashion trends and shifts in timing of certain holidays.  Our business is subject to seasonalinfluences, characterized by highest sales during the fourth quarter (October, November andDecember) and lowest sales during the third quarter (July, August andSeptember).

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

**The Company is exposed to the following typesof market risk-fluctuations in the purchase price of merchandise, as well asother goods and services the value of foreign currencies in relation to theU.S. dollar; and changes in interest rates. Due to our inventory turn rate andour historical ability to pass through the impact of any generalized changes inour cost of goods sold to our customers through pricing adjustments, commodityand other product risks are not expected to be material.  We purchase substantially all merchandise inU.S. dollars.**

 

**Our exposure to market risk for changes ininterest rates relates to cash, cash equivalents and marketable securities. Asof March 29, 2008, our cash, equivalents and marketable securitiesconsisted primarily of funds invested in money market accounts, which bearinterest at a variable rate and U.S. treasury instruments, as well as municipalbonds which bear interest at a fixed rate. Due to the average maturity and theconservative nature of our investment portfolio, we believe a sudden change ininterest rates would not have a material effect on the value of our investmentportfolio. As the interest rates on a material portion of our cash, cashequivalents and marketable securities are variable, a change in interest ratesearned on our investment portfolio would impact interest income along with cashflows, but would not materially impact the fair market value of the relatedunderlying instruments.**

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**The Company is committed to maintaining disclosure controls andprocedures designed to ensure that information required to be disclosed in ourperiodic reports filed under the Exchange Act of 1934, as amended (the“Exchange Act”), is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow for timelydecisions regarding required disclosure.**

** **

**Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of our disclosure controls and procedures, as such termis defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act asof  the end of the period covered by thisreport.  There are inherent limitationsto the effectiveness of any system of disclosure controls and procedures,including the possibility of human error and the circumvention or overriding ofthe controls and procedures. Accordingly, even effective disclosure controls and procedures can onlyprovide reasonable assurance of achieving their control objectives.  Based on this evaluation, our principalexecutive officer and our principal financial officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this Report.**

** **

**There has been no change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)during the three months ended March 29, 2008 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.**

 

17

----

 

**PART II - OTHER INFORMATION**

 

**ITEM 6. EXHIBITS**

 
| ** ** | **31.1** | **Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.** |
|------------|----------|------------------------------------------------------------------------------------|
| ** ** | **31.2** | **Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.** |
| ** ** | **32.1** | **Certification Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.** |

 

18

----

 

Signatures

 

**Pursuant to the requirement of Section 13or 15 (d) of the Securities and Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.**

** **

** **
| ** ** | **Dated: May 8, 2008**      |
|------------|----------------------------------|
| ** ** | **CACHE, INC.**                  |
| ** ** | ** **                       |
| ** ** | ** **                       |
| ** ** | **BY:**                          | ** /s/ Thomas E. Reinckens** |
| ** ** | **Thomas E. Reinckens**          |
| ** ** | **Chairman and Chief**           |
| ** ** | **Executive Officer**            |
| ** ** | **(Principal Executive**         |
| ** ** | **Officer)**                     |
| ** ** | ** **                       |
| ** ** | ** **                       |
| ** ** | **BY:**                          | ** /s/ Margaret Feeney** |
| ** ** | **Margaret Feeney**              |
| ** ** | **Executive Vice President and** |
| ** ** | **Chief Financial Officer**      |
| ** ** | **(Principal Financial and**     |
| ** ** | **Accounting Officer)**          |

 

19

----