Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                    |
| **For the  quarterly period ended April 3, 2010** |
| ** **                                             | ** **                                                                                    |
| **OR**                                                 |
| ** **                                             | ** **                                                                                    |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom            to            **

 

**Commission File Number: 0-10345**

 

**CACHE, INC.**

(Exact name ofregistrant as specified in its Charter)

 

| **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’stelephone number, including area code)

 

 

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

 

**Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to filing requirements for thepast 90 days.  Yes **x No o

** **

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateweb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o No o

** **

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (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 May1, 2010,12,771,174 common shares were outstanding.

 

 

 

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CACHE, INC. AND SUBSIDIARIES

 

INDEX

** **
| PART I. FINANCIAL  INFORMATION | 3                                                                                                                                     |
|------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                  |   |
| Item 1.                             | Condensed Consolidated Financial Statements (unaudited)                                                                               | 3 |
|                                     | Condensed Consolidated Balance Sheets as of April 3, 2010, January 2,  2010 and March 28, 2009                         | 3 |
|                                     | Condensed Consolidated Statements of Operations for  the thirteen week periods ended April 3, 2010 and March 28,  2009 | 4 |
|                                     | Condensed Consolidated Statements of Cash Flows for the thirteen week periods ended  April 3, 2010 and March 28, 2009       | 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                                                                           | 18 |
| Item 4.                             | Controls  and Procedures                                                                                                              | 18 |
|                                     |                                                                                                                                  |   |
| PART II. OTHER  INFORMATION    | 19                                                                                                                                    |
|                                     |                                                                                                                                  |   |
| Item 6.                             | Exhibits                                                                                                                              | 19 |
|                                     |                                                                                                                                  |   |
| SIGNATURES                               | 20                                                                                                                                    |

 

2

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**PART I - FINANCIAL INFORMATION**

 

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

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                      | ** ** | **April 3,********2010** | ** **      | **January 2,********2010** | ** ** | **March 28,********2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|-----------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **(Unaudited)**               | ** **      | **(Audited)**                   | ** ** | **(Unaudited)**                | ** ** |
| **ASSETS**                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Current assets:**                                                                                                                             | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Cash and equivalents**                                                                                                                        | ** ** | **$**                         | **357,000**     | ** **                      | **$**      | **5,516,000**                  | ** ** | **$** | **1,146,000** | ** ** |
| **Marketable securities**                                                                                                                       | ** ** | **25,727,000**                | ** **      | **29,999,000**                  | ** ** | **29,379,000**                 | ** ** |
| **Certificates of deposit —  restricted**                                                                                                  | ** ** | **1,500,000**                 | ** **      | **1,500,000**                   | ** ** | **—**                     | ** ** |
| **Receivables, net**                                                                                                                            | ** ** | **3,451,000**                 | ** **      | **3,411,000**                   | ** ** | **3,784,000**                  | ** ** |
| **Income tax receivable, net**                                                                                                                  | ** ** | **3,459,000**                 | ** **      | **3,438,000**                   | ** ** | **3,709,000**                  | ** ** |
| **Inventories, net**                                                                                                                            | ** ** | **19,306,000**                | ** **      | **16,599,000**                  | ** ** | **26,036,000**                 | ** ** |
| **Prepaid expenses and other  current assets**                                                                                                  | ** ** | **8,054,000**                 | ** **      | **4,943,000**                   | ** ** | **3,116,000**                  | ** ** |
| **Total current assets**                                                                                                                        | ** ** | **61,854,000**                | ** **      | **65,406,000**                  | ** ** | **67,170,000**                 | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Equipment and leasehold  improvements, net**                                                                                                  | ** ** | **30,005,000**                | ** **      | **31,713,000**                  | ** ** | **41,180,000**                 | ** ** |
| **Goodwill**                                                                                                                                    | ** ** | **9,092,000**                 | ** **      | **9,092,000**                   | ** ** | **9,092,000**                  | ** ** |
| **Intangible assets, net**                                                                                                                      | ** ** | **102,000**                   | ** **      | **102,000**                     | ** ** | **1,275,000**                  | ** ** |
| **Other assets**                                                                                                                                | ** ** | **4,424,000**                 | ** **      | **4,684,000**                   | ** ** | **2,113,000**                  | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Total assets**                                                                                                                                | ** ** | **$**                         | **105,477,000** | ** **                      | **$**      | **110,997,000**                | ** ** | **$** | **120,830,000** | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                  | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Current liabilities:**                                                                                                                        | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Accounts payable**                                                                                                                            | ** ** | **$**                         | **10,459,000**  | ** **                      | **$**      | **7,624,000**                  | ** ** | **$** | **10,659,000** | ** ** |
| **Note payable**                                                                                                                                | ** ** | **1,838,000**                 | ** **      | **1,408,000**                   | ** ** | **1,271,000**                  | ** ** |
| **Accrued compensation**                                                                                                                        | ** ** | **1,421,000**                 | ** **      | **2,668,000**                   | ** ** | **2,330,000**                  | ** ** |
| **Accrued liabilities**                                                                                                                         | ** ** | **9,203,000**                 | ** **      | **11,783,000**                  | ** ** | **9,897,000**                  | ** ** |
| **Total current liabilities**                                                                                                                   | ** ** | **22,921,000**                | ** **      | **23,483,000**                  | ** ** | **24,157,000**                 | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Note payable**                                                                                                                                | ** ** | **1,030,000**                 | ** **      | **1,425,000**                   | ** ** | **2,832,000**                  | ** ** |
| **Other liabilities**                                                                                                                           | ** ** | **15,157,000**                | ** **      | **15,806,000**                  | ** ** | **16,801,000**                 | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Commitments and contingencies**                                                                                                               | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                                                   | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Common stock, par value $.01;  authorized, 40,000,000, 40,000,000 and 20,000,000 shares;  issued 16,453,373, 16,433,373 and 16,410,036** | ** ** | **164,000**                   | ** **      | **164,000**                     | ** ** | **164,000**                    | ** ** |
| **Additional paid-in capital**                                                                                                                  | ** ** | **47,722,000**                | ** **      | **47,555,000**                  | ** ** | **47,213,000**                 | ** ** |
| **Retained earnings**                                                                                                                           | ** ** | **58,278,000**                | ** **      | **62,359,000**                  | ** ** | **69,458,000**                 | ** ** |
| **Treasury stock 3,682,199, shares, at cost**                                                                                                   | ** ** | **(39,795,000**               | **)**           | **(39,795,000**                 | **)**      | **(39,795,000**                | **)**      |
| **Total stockholders’ equity**                                                                                                             | ** ** | **66,369,000**                | ** **      | **70,283,000**                  | ** ** | **77,040,000**                 | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                    | ** **      | ** **                      | ** ** | ** **                     | ** ** |
| **Total liabilities and  stockholders’ equity**                                                                                            | ** ** | **$**                         | **105,477,000** | ** **                      | **$**      | **110,997,000**                | ** ** | **$** | **120,830,000** | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **April 3,  2010** | ** **     | **March 28,  2009** | ** ** |
|----------------------------------------------------|------------|-------------------------|----------------|--------------------------|------------|
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net sales**                                      | ** ** | **$**                   | **48,550,000** | ** **               | **$**      | **53,006,000** | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **31,835,000**          | ** **     | **31,211,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Gross profit**                                   | ** ** | **16,715,000**          | ** **     | **21,795,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Expenses**                                       | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Store operating expenses**                       | ** ** | **18,659,000**          | ** **     | **19,588,000**           | ** ** |
| **General and administrative  expenses**           | ** ** | **4,674,000**           | ** **     | **4,736,000**            | ** ** |
| **Total expenses**                                 | ** ** | **23,333,000**          | ** **     | **24,324,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Operating loss**                                 | ** ** | **(6,618,000**          | **)**          | **(2,529,000**           | **)**      |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Other income (expense):**                        | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Interest expense**                               | ** ** | **(35,000**             | **)**          | **(51,000**              | **)**      |
| **Interest income**                                | ** ** | **44,000**              | ** **     | **67,000**               | ** ** |
| **Total other income, net**                        | ** ** | **9,000**               | ** **     | **16,000**               | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Loss before income taxes**                       | ** ** | **(6,609,000**          | **)**          | **(2,513,000**           | **)**      |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Income tax benefit**                             | ** ** | **(2,528,000**          | **)**          | **(918,000**             | **)**      |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net loss**                                       | ** ** | **$**                   | **(4,081,000** | **)**                    | **$**      | **(1,595,000** | **)** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Basic loss per share**                           | ** ** | **$**                   | **(0.32**      | **)**                    | **$**      | **(0.12** | **)** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Diluted loss per share**                         | ** ** | **$**                   | **(0.32**      | **)**                    | **$**      | **(0.12** | **)** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,771,000**          | ** **     | **12,954,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,771,000**          | ** **     | **12,954,000**           | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **April 3,  2010** | ** **     | **March 28,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|--------------------------|------------|
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net loss**                                                                                           | ** ** | **$**                   | **(4,081,000** | **)**                    | **$**      | **(1,595,000** | **)** |
| **Adjustments to reconcile net  loss to net cash********provided  by (used in) operating activities:** | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Depreciation and amortization**                                                                      | ** ** | **2,437,000**           | ** **     | **2,743,000**            | ** ** |
| **Provision for sales allowance  and doubtful accounts, net**                                          | ** ** | **(33,000**             | **)**          | **73,000**               | ** ** |
| **Stock-based compensation**                                                                           | ** ** | **98,000**              | ** **     | **58,000**               | ** ** |
| **Non-cash interest expense on  note payable**                                                         | ** ** | **35,000**              | ** **     | **51,000**               | ** ** |
| **Deferred income taxes**                                                                              | ** ** | **(2,515,000**          | **)**          | **(918,000**             | **)**      |
| **Gift card breakage**                                                                                 | ** ** | **(50,000**             | **)**          | **(63,000**              | **)**      |
| **Amortization of deferred income  for co-branded credit card**                                        | ** ** | **(148,000**            | **)**          | **(90,000**              | **)**      |
| **Amortization of deferred rent**                                                                      | ** ** | **(787,000**            | **)**          | **(512,000**             | **)**      |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Change in assets and  liabilities:**                                                                 | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Decrease (increase) in  receivables and income tax receivables**                                     | ** ** | **(28,000**             | **)**          | **2,215,000**            | ** ** |
| **Increase in inventories**                                                                            | ** ** | **(2,707,000**          | **)**          | **(3,715,000**           | **)**      |
| **Increase in prepaid expenses  and other current assets**                                             | ** ** | **(267,000**            | **)**          | **(592,000**             | **)**      |
| **Increase in accounts payable**                                                                       | ** ** | **2,835,000**           | ** **     | **4,284,000**            | ** ** |
| **Increase (decrease) in accrued  liabilities, accrued compensation and other liabilities**            | ** ** | **(3,288,000**          | **)**          | **217,000**              | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net cash provided by (used in)  operating activities**                                               | ** ** | **(8,499,000**          | **)**          | **2,156,000**            | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Purchase of marketable  securities**                                                                 | ** ** | **(4,359,000**          | **)**          | **(12,030,000**          | **)**      |
| **Maturities of marketable  securities**                                                               | ** ** | **8,631,000**           | ** **     | **7,804,000**            | ** ** |
| **Purchase of equipment and  leasehold improvements**                                                  | ** ** | **(932,000**            | **)**          | **(683,000**             | **)**      |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net cash provided by (used in)  investing activities**                                               | ** ** | **3,340,000**           | ** **     | **(4,909,000**           | **)**      |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Repayment of note payable**                                                                          | ** ** | **—**              | ** **     | **(350,000**             | **)**      |
| **Repurchase of common stock**                                                                         | ** ** | **—**              | ** **     | **(586,000**             | **)**      |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net cash used in financing  activities**                                                             | ** ** | **—**              | ** **     | **(936,000**             | **)**      |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Net decrease in cash and  equivalents**                                                              | ** ** | **(5,159,000**          | **)**          | **(3,689,000**           | **)**      |
| **Cash and equivalents, at  beginning of period**                                                      | ** ** | **5,516,000**           | ** **     | **4,835,000**            | ** ** |
| **Cash and equivalents, at end of  period**                                                            | ** ** | **$**                   | **357,000**    | ** **               | **$**      | **1,146,000** | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Supplemental disclosure of cash  flow information:**                                                 | ** ** | ** **              | ** **     | ** **               | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** **     | ** **               | ** ** |
| **Interest paid**                                                                                      | ** ** | **$**                   | **—**     | ** **               | **$**      | **54,000** | ** ** |
| **Income taxes paid**                                                                                  | ** ** | **$**                   | **24,000**     | ** **               | **$**      | **35,000** | ** ** |
| **Accrued equipment and leasehold  improvements**                                                      | ** ** | **$**                   | **31,000**     | ** **               | **$**      | **107,000** | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

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**CACHE, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.     BASISOF PRESENTATION**

 

References to the “Company,”“we,” “us,” or “our” means Cache, Inc., together with its wholly-ownedsubsidiaries, except as expressly indicated or unless the context otherwiserequires. Under the trade name “Cache”, we operated 285 women’s apparelspecialty stores, as of April 3, 2010.

 

The accompanyingunaudited condensed consolidated financial statements include all knownadjustments necessary for a fair presentation of the results of the interimperiods as required by accounting principles generally accepted in the UnitedStates. These adjustments consist primarily of normal recurring accruals andestimates that impact the carrying value of assets and liabilities. Actualresults may materially differ from these estimates.

 

These condensedconsolidated financial statements should be read in conjunction with theCompany’s audited consolidated financial statements for the year ended January 2,2010, which are included in the Company’s Annual Report on Form 10-K withrespect to such period filed with the Securities and Exchange Commission. Allsignificant intercompany accounts and transactions have been eliminated. The January 2,2010 condensed 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 applicable 52 or 53 weekperiod. The year ended January 2, 2010 (“fiscal 2009”) was a 53-week yearand the year ending January 1, 2011 (“fiscal 2010”) is a 52-week year.

 

**2.     STOCKBASED COMPENSATION**

 

Stock-basedcompensation expensefor all stock-based awards program, including grants of stock options, isrecorded in accordance with “*Compensation-StockCompensation*”, Topic 718 of the Financial Accounting Standards BoardAccounting Standards Codification (“FASB ASC”). During the 13-week periods ended April 3, 2010 and March 28,2009, the Company recognized approximately $98,000 and $58,000, respectively,in stock-based compensation expense. The grant date fair value for stockoptions is calculated using the Black-Scholes option valuation model. TheCompany granted 40,000 options during the 13-week period ended April 3,2010, as compared to no options being granted during the 13-week period ended March 28,2009. No excess tax benefits were recognized from the exercise of stock optionsduring the first quarter of fiscal 2010 and 2009. During the first quarter offiscal 2010, 20,000 shares of the Company’s common stock were issued forservices to its board members. The total fair value of the issued common stockwas approximately $92,000 of which, approximately $23,000 is included instock-based compensation expense for the 13-week period ended April 3,2010 and the remaining cost is expected to be recognized during fiscal 2010.

 

The weighted-averagegrant date fair value of options granted during the 13-week period ended April 3,2010 was $1.79. The grant date fair value is calculated using the Black-Scholesoption valuation model. The following assumptions were used during fiscal 2010:

 
| Expected dividend rate  |   | $             | 0.00   |   |
|-------------------------|--------|---------------|--------|--------|
| Expected volatility     |   | 59.53 - 59.61 | %      |
| Risk free interest rate |   | 1.48 - 1.50   | %      |
| Expected lives (years)  |   | 3.00          |   |

 

**3.     BASICAND DILUTED EARNINGS PER SHARE**

 

Basicloss per share has been computed based upon the weighted average of commonshares outstanding. Diluted loss per share also includes the dilutive effect ofpotential common shares (dilutive stock options and unvested restricted commonshares) outstanding during the period. Lossper common share has been computed as follows:

 

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| ** **                                             | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **April 3,**       | ** ** | **March 28,** | ** ** |
| ** **                                             | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Net loss                                               |       | $                       | (4,081,000 | ) | $ | (1,595,000 | ) |
| Basic weighted number of  average shares outstanding   |       | 12,771,000              |       | 12,954,000 |   |
| Diluted weighted average  number of shares outstanding |       | 12,771,000              |       | 12,954,000 |   |
|                                                   |       |                    |       |   |   |
| Net loss per share - Basic                             |       | $                       | (0.32      | ) | $ | (0.12 | ) |
| - Diluted                                              |       | $                       | (0.32      | ) | $ | (0.12 | ) |

 

Options and unvestedrestricted common shares of 913,003 and 732,675 were excluded from thecomputation of diluted loss per share for the first quarter of fiscal 2010 and2009, respectively, because of the net loss incurred by the Company.

 

**4.     RECENT ACCOUNTING PRONOUNCEMENTS**

 

In April 2010,Financial Accounting Standards Board (“FASB”) issued Accounting StandardsUpdate (“ASU”) 2010-18, *Receivables (Topic 310)Effect of a Loan Modification When the Loan is Part of a Pool That IsAccounted for as a Single Asset,*which provides that modification ofloans that are accounted for within a pool will not result in the removal ofthose loans from the pool even if the modification of those loans would beconsidered a troubled debt restructuring. An entity will be required toconsider whether the pool of assets in which the loan is included is impaired,if expected cash flows for the pool change. ASU 2010-18 is effectiveprospectively in the first interim or annual period ending on or after July 15,2010, early adoption is permitted. The Company does not expect the adoption ofASU 2010-18 to have a material impact on its consolidated financial statements.

 

In April 2010, FASBissued ASU 2010-17, *Revenue Recognition —Milestone Method (Topic 605) Milestone Method of Revenue Recognition,*providesguidance on defining a milestone and determining when it may be appropriate toapply the milestone method of revenue recognition for research or developmenttransactions. ASU 2010-17 is effective prospectively beginning on or after June 15,2010, early adoption is permitted. The respective ASU can also be appliedretrospectively for all prior periods. The Company does not expect the adoptionof ASU 2010-18 to have a material impact on its consolidated financialstatements.

 

In April 2010, FASBissued ASU 2010-13, *Compensation — StockCompensation(Topic 718) Effect of Denominating the Exercise Price of aShare-Based Payment Award in the Currency of the Market in Which the UnderlyingEquity Security Trades,*which clarifies that an employee share-basedpayment award with an exercise price denominated in the currency of a market inwhich a substantial portion of the entity’s equity shares trades should not beconsidered to contain a condition that is not a market, performance or servicecondition. ASU 2010-13 is effective for fiscal years beginning on or after December 15,2010, early adoption is permitted. The Company does not expect the adoption ofASU 2010-18 to have a material impact on its consolidated financial statements.

 

In January 2010, FASB issued ASU 2010-06, *Improving Disclosures about Fair Measurements*,which provides amendments to subtopic 820-10 that require separate disclosureof significant transfers in and out of Level 1 and Level 2 fair valuemeasurements and the presentation of separate information regarding purchases,sales, issuances and settlements for Level 3 fair value measurements.Additionally, ASU 2010-06 provides amendments to subtopic 820-10 that clarifyexisting disclosures about the level of disaggregation and inputs and valuationtechniques. ASU 2010-06 is effective for financial statements issued for interimand annual periods ending after December 15, 2009, except for thedisclosures about purchases, sales, issuances and settlements in therollforward of activity in Level 3 fair value measurements, which areeffective for interim and annual periods ending after December 15, 2010.The Company does not expect the adoption of ASU 2010-06 to have a materialimpact on its consolidated financial statements.

 

In October 2009, FASB issued ASU 2009-13, *Revenue Recognition (Topic 605)—Multiple-DeliverableRevenue Arrangements*. This guidance addresses accounting formultiple-deliverable arrangements to enable vendors to account for products orservices (deliverables) separately rather than as a combined unit. It alsoaddresses how to separate deliverables and how to measure and allocatearrangement consideration to one or more units of accounting. ASU 2009-13 willbe effective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. Earlyadoption is permitted. The Company does not expect the adoption of ASU 2009-13to have a material impact on its consolidated financial statements.

 

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**5.     FAIR VALUE MEASUREMENT**

 

“*Fair Value Measurements and Disclosures*”, Topic 820 of theFASB ASC, defines fair value as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date (exit price). Topic 820 of the FASB ASCestablishes a fair value hierarchy, which prioritizes the inputs used inmeasuring fair value into three broad levels as follows:

 

·      Level 1 —Unadjusted quoted market prices in active markets for identical assets orliabilities that the Company has the ability to access at the measurement date.

 

·      Level 2 —Quoted prices for similar assets or liabilities in active markets, quoted pricesfor identical or similar assets or liabilities in markets that are not active,inputs other than quoted prices that are observable for the asset or liability(i.e., interest rates, yield curves, etc.) and inputs that are derivedprincipally from or corroborated by observable market data by correlation orother means.

 

·      Level 3 —Unobservable inputs that reflect assumptions about what market participantswould use in pricing assets or liabilities based on the best informationavailable.

 

As of April 3, 2010,the Company’s marketable securities primarily consist of short-term UnitedStates Treasury bills. The Company classifies its short-term investments asheld-to-maturity. Held-to-maturity securities are those securities in which theCompany has the ability and intent to hold the securities until maturity.Because the Company’s held-to-maturity securities mature within one year of thepurchase date, the securities are classified as short-term marketablesecurities. Held-to-maturity debt securities are recorded at amortized cost,adjusted for the amortization or accretion of premiums or discounts and suchcarrying values approximate fair value. A decline in the market value of anyheld-to-maturity security below cost that is deemed to be other than temporaryresults in a reduction in carrying amount to fair value. The impairment ischarged to earnings and a new cost basis for the security is established.

 

“*Financial Instruments*”, Topic 825 of the FASB ASC, providesentities the option to measure many financial instruments and certain otheritems at fair value. Entities that choose the fair value option will recognizeunrealized gains and losses on items for which the fair value option waselected in earnings at each subsequent reporting date. The Company hascurrently chosen not to elect the fair value option for any items that are notalready required to be measured at fair value in accordance with Topic 825 ofthe FASB ASC.

 

The fair value of ourmarketable securities, which was determined based upon Level 1 inputs, totaled$25.7 million, $30.0 million and $29.4 million as of April 3, 2010, January 2,2010 and March 28, 2009, respectively. For the fiscal periods ended April 3,2010, January 2, 2010 and March 28, 2009, the aggregate amount ofmarketable securities (maturing greater than 90 days and less than one year)totaled approximately $25.7 million, $30.0 million and $29.4 million,respectively. The Company noted small variances between the book value and fairvalue due to the remaining unamortized premiums. As a result, no impairment hasoccurred for the fiscal periods presented herein. Premiums and discounts areamortized or accreted over the life of the related held-to-maturityinvestments. Interest income is recognized when earned.

 

**Fair Value of Financial Instruments**

 

The carrying amounts of certificates of deposit, accountsreceivable, accounts payable and accrued liabilities approximate theirestimated fair values due to their short-term nature. The Company’s notepayable includes imputed interest at 5% as the fair market value of this noteis not readily determinable because comparable instruments do not exist. The 5%imputed interest represented the Company’s average return on its investmentportfolio, at the inception of the note.

 

**6.    ****RECEIVABLES**

 
| ** **               | ** ** | **April 3,** | ** ** | **January 2,** | ** ** | **March 28,** | ** ** |
|--------------------------|------------|-------------------|------------|---------------------|------------|--------------------|------------|
| ** **               | ** ** | **2010**          | ** ** | **2010**            | ** ** | **2009**           | ** ** |
| Construction allowances  |       | $                 | 441,000    |                | $          | 507,000            |       | $ | 505,000 |   |
| Third party credit cards |       | 2,344,000         |       | 2,142,000           |       | 2,109,000          |       |
| Accounts receivable, net |       | 36,000            |       | 62,000              |       | 341,000            |       |
| Other                    |       | 630,000           |       | 700,000             |       | 829,000            |       |
|                     |       | $                 | 3,451,000  |                | $          | 3,411,000          |       | $ | 3,784,000 |   |

 

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**7.    ****INVENTORIES**

 
| ** **      | ** ** | **April 3,** | ** ** | **January 2,** | ** ** | **March 28,** | ** ** |
|-----------------|------------|-------------------|------------|---------------------|------------|--------------------|------------|
| ** **      | ** ** | **2010**          | ** ** | **2010**            | ** ** | **2009**           | ** ** |
| Raw materials   |       | $                 | 1,623,000  |                | $          | 1,253,000          |       | $ | 1,526,000 |   |
| Work in process |       | 1,062,000         |       | 1,160,000           |       | 1,498,000          |       |
| Finished goods  |       | 16,621,000        |       | 14,186,000          |       | 23,012,000         |       |
|            |       | $                 | 19,306,000 |                | $          | 16,599,000         |       | $ | 26,036,000 |   |

 

**8.     EQUIPMENT****AND LEASEHOLD IMPROVEMENTS**

 
| ** **                                       | ** ** | **April 3,** | ** ** | **January 2,** | ** ** | **March 28,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                       | ** ** | **2010**          | ** ** | **2010**            | ** ** | **2009**           | ** ** |
|                                             |       |              |       |                |       |               |       |
| Leasehold improvements                           |       | $                 | 51,856,000 |                | $          | 51,861,000         |       | $ | 53,817,000 |   |
| Furniture, fixtures and  equipment               |       | 34,204,000        |       | 33,913,000          |       | 52,022,000         |       |
|                                             |       | 86,060,000        |       | 85,774,000          |       | 105,839,000        |       |
| Less: accumulated  depreciation and amortization |       | (56,055,000       | )          | (54,061,000         | )          | (64,659,000        | )          |
|                                             |       | $                 | 30,005,000 |                | $          | 31,713,000         |       | $ | 41,180,000 |   |

 

**9.     GOODWILL****AND****INTANGIBLE ASSETS**

 

In accordance with “*Intangibles -Goodwill andOther”*, Topic 350 of the FASB ASC, the Company’s goodwill andits indefinite-lived intangible assets are reviewed annually for impairment ormore frequently, if impairment indicators arise. The annual valuation processis performed during the fourth quarter of each year. The carrying value ofgoodwill as of April 3, 2010, January 2, 2010 and March 28, 2009was $9.1 million.

 

The carrying amounts of netintangible assets as of April 3, 2010, January 2, 2010 and March 28,2009 are as follows:

 
| ** **                           | ** ** | **April 3,** | ** ** | **January 2,** | ** ** | **March 28,** | ** ** |
|--------------------------------------|------------|-------------------|------------|---------------------|------------|--------------------|------------|
| ** **                           | ** ** | **2010**          | ** ** | **2010**            | ** ** | **2009**           | ** ** |
| Indefinite-lived  intangible assets: |       |              |       |                |       |               |       |
| Trademarks-Cache                     |       | $                 | 102,000    |                | $          | 102,000            |       | $ | 102,000 |   |
| Trademarks-Mary L                    |       | —            |       | —              |       | 620,000            |       |
|                                 |       | 102,000           |       | 102,000             |       | 722,000            |       |
|                                 |       |              |       |                |       |               |       |
| Definite-lived intangible  assets:   |       |              |       |                |       |               |       |
| Customer relationships               |       | —            |       | —              |       | 300,000            |       |
| Non-compete agreements               |       | —            |       | —              |       | 300,000            |       |
| Favorable market lease               |       | —            |       | —              |       | 160,000            |       |
|                                 |       | —            |       | —              |       | 760,000            |       |
| Less: accumulated  amortization      |       | —            |       | —              |       | (207,000           | )          |
|                                 |       | —            |       | —              |       | 553,000            |       |
|                                 |       |              |       |                |       |               |       |
| Total intangible assets,  net        |       | $                 | 102,000    |                | $          | 102,000            |       | $ | 1,275,000 |   |

 

During fiscal 2009 an impairment charge of $891,000 was recordedagainst the carrying value of intangible assets associated with the Company’swholesale division—Mary L. In addition, the Company also recorded a charge of$204,000 for the remaining net book value of its definite-lived intangibleasset—Non-Compete agreements. This charge resulted from an employee separationagreement that the Company entered into with two of its former executiveofficers.

 

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**10.  ACCRUED LIABILITIES**

 
| ** **                                                                    | ** ** | **April 3,** | ** ** | **January 2,** | ** ** | **March 28,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **2010**          | ** ** | **2010**            | ** ** | **2009**           | ** ** |
| Gift cards, merchandise  credit cards and other customer deposits and credits |       | $                 | 3,619,000  |                | $          | 3,817,000          |       | $ | 3,365,000 |   |
| Taxes, including income  taxes                                                |       | 2,372,000         |       | 2,807,000           |       | 2,232,000          |       |
| Operating expenses                                                            |       | 1,497,000         |       | 2,007,000           |       | 2,088,000          |       |
| Employee separation  settlement                                               |       | —            |       | 1,375,000           |       | —             |       |
| Deferred income                                                               |       | 610,000           |       | 568,000             |       | 378,000            |       |
| Sales return reserve                                                          |       | 554,000           |       | 470,000             |       | 735,000            |       |
| Group insurance                                                               |       | 521,000           |       | 481,000             |       | 655,000            |       |
| Leasehold additions                                                           |       | 30,000            |       | 234,000             |       | 107,000            |       |
| Exit costs                                                                    |       | —            |       | 24,000              |       | 337,000            |       |
|                                                                          |       | $                 | 9,203,000  |                | $          | 11,783,000         |       | $ | 9,897,000 |   |

 

Leasehold additions generally represent a liabilityto general contractors for a final 10% payable on construction contracts forstore construction or renovations.

 

**11.  BANKDEBT**

 

On May 27, 2009, theCompany entered into a one year credit facility with Bank of America (the “Bank”).Under this facility, the Company may direct the Bank to issue letters of creditup to a total of $1,425,000. Any outstanding letters of credit under thisfacility are collateralized by granting to the Bank a security interest invarious certificates of deposit held by the Company and its subsidiaries withthe Bank, amounting to a total of $1,500,000. This one year credit facilityexpired on May 1, 2010.

 

Anycertificates of deposit collateralized against this line of credit are reportedas restricted funds. Based on the expiry dates of the letters of creditsissued, the restricted cash has been reported as either Current or Non-Current.When the expiry date is within one year of the reporting period end date thenthe certificates of deposit are reported as Current, and when the expiry dateis beyond one year the certificates of deposit are reported as Non-Current.

 

Therewere outstanding letters of credit of $628,000 under this facility at April 3,2010.

 

Priorto the expiration of the preceding credit facility on May 1, 2010, theCompany entered into a new one year credit facility with the Bank on April 22,2010. Under this facility, the Company may direct the Bank to issue letters ofcredit up to a total of $2,500,000. Any outstanding letters of credit underthis facility are collateralized by granting to the bank a security interest invarious certificates of deposit held by the Company and its subsidiaries withthe Bank amounting to a total of $2,750,000. This one year credit facility willexpire on May 1, 2011.

 

**12. ****INCOME TAXES**

 

The Company accounts for income taxes in accordancewith “Income Taxes”, Topic 740 of the FASB ASC. This guidance requires theCompany to recognize deferred tax liabilities and assets for the expectedfuture tax consequences of events that have been recognized in the Company’sfinancial statements or tax returns. Under this method, deferred taxliabilities and assets are determined based on the difference between thefinancial statement carrying amounts and tax bases of assets and liabilities,using applicable tax rates for the years in which the differences are expectedto reverse. At January 2, 2010, the Company maintained $4.5million of net deferred tax assets, of which, approximately $919,000 related tostate tax net operating loss carry-forwards. In addition, during the 13-weekperiod ended April 3, 2010, the Company recorded an income tax benefit of$2.5 million, primarily related to the net loss incurred. The Current portionof deferred tax assets and liabilities is included in prepaid expenses andother current assets, while the Non-current portion of deferred tax assets andliabilities is included in other assets on the Company’s accompanying condensedconsolidated balance sheets.

 

**13.  EXIT COSTS**

 

The following table identifies the activity duringthe first quarter of fiscal 2010 related to exit costs previously recorded forunderperforming stores and the discontinuation of the Company’s wholesaledivision — Mary L.:

 

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| ** **              | ** ** | **Liability  Balance  Beginning of Year** | ** ** | **Utilization** | ** ** | **Liability  Balance  End of Period** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|-----------------|------------|-------------------------------------------------|------------|
| Severance               |       | $                                                   | 40,000     |            | $          | 5,000                                           |       | $ | 35,000 |   |
| Lease termination costs |       | 24,000                                              |       | 24,000          |       | —                                          |       |
|                    |       | $                                                   | 64,000     |            | $          | 29,000                                          |       | $ | 35,000 |   |

 

As of April 3, 2010,the Company had one remaining underperforming store open, which was closedsubsequent to that date.

 

**14.  COMMITMENTS AND CONTINGENCIES**

 

On September 23,2009, the Company entered into a separation agreement with its then executives(former executives of Adrienne Victoria Designs, Inc.). Pursuant toone of these separation agreements, the former executive may receive paymentsof up to $500,000 in the aggregate, based on the achievement by the Companyover the next 4 years of certain net income targets set forth in the agreement.  As of April 3, 2010, no accrual wasrecorded for this earn-out provision.

 

TheCompany is exposed to a number of asserted and unasserted potentialclaims.  Management does not believe thatthe resolution of any of these matters will result in a material loss.  The Company had no guarantees, subleases orassigned lease obligations as of April 3, 2010, January 2, 2010 or March 28,2009.

 

**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Exceptfor the historical information contained in this Form 10-Q, the mattersaddressed herein are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. Forward-looking statements represent the Company’s expectation or beliefconcerning future events.  Withoutlimiting the foregoing, the words “believes,” “thinks,” “anticipates,” “estimates,”“plans,” “expects” and similar expressions are intended to identifyforward-looking statements.  The Companycautions that forward-looking statements are subject to risks, uncertainties,assumptions and other important factors that could cause actual results todiffer materially, or otherwise, from those expressed or implied in theforward-looking statements, including, without limitation, macroeconomicfactors that have affected the retail sector, including changes in national,regional and local economic conditions, employment levels and consumer spendingpatterns, and the other risks detailed from time to time in the Company’s mostrecent Form 10-K, Forms 10-Q and other reports filed with the Securitiesand Exchange Commission. Continued weakness in or a further worsening of theeconomy generally or in a number of our markets could adversely affect our financialposition and results of operations, cause us to reduce the number and frequencyof new store openings, slow our re-modeling of existing locations or cause usto increase store closings. Other unknown or unpredictable factors also couldharm the Company’s business, financial condition and results.  Consequently, there can be no assurance thatactual results or developments anticipated by the Company will be realized or,even if substantially realized, that they will have the expected consequencesto, or effects on, the Company.  TheCompany undertakes no obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise,except to the extent required by applicable securities laws.

 

**RESULTS OFOPERATIONS**

 

The following table setsforth our results of operations for the 13-week periods ended April 3,2010 and March 28, 2009, respectively, expressed as a percentage of netsales.

 

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| ** **                           | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **April 3,**       | ** ** | **March 28,** | ** ** |
| ** **                           | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Sales                                |       | 100.0                   | %          | 100.0 | % |
| Cost of sales                        |       | 65.6                    |       | 58.9 |   |
| Gross profit                         |       | 34.4                    |       | 41.1 |   |
| Store operating expenses             |       | 38.4                    |       | 37.0 |   |
| General and administrative  expenses |       | 9.6                     |       | 8.8 |   |
| Operating loss                       |       | (13.6                   | )          | (4.7 | ) |
| Interest expense                     |       | (0.1                    | )          | (0.1 | ) |
| Interest income                      |       | 0.1                     |       | 0.1 |   |
| Loss before income taxes             |       | (13.6                   | )          | (4.7 | ) |
| Income tax benefit                   |       | (5.2                    | )          | (1.7 | ) |
| Net loss                             |       | (8.4                    | )%         | (3.0 | )% |

 

We use a number of key indicators of financialcondition and operating performance to evaluate the performance of ourbusiness, some of which are set forth in the following table:

 
| ** **                                             | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **April 3,**       | ** ** | **March 28,** | ** ** |
| ** **                                             | ** ** | **2010**                | ** ** | **2009** | ** ** |
| Total store count, at end  of period                   |       | 285                     |       | 294 |   |
| Net sales decrease                                     |       | (8.4                    | )%         | (21.7 | )% |
| Comparable store sales  decrease                       |       | (6.8                    | )%         | (20.7 | )% |
| Average sales per  transaction decrease                |       | (16.0                   | )%         | (13.7 | )% |
| Average number of  transactions increase (decrease)    |       | 11.0                    | %          | (8.1 | )% |
| Net sales per average  square foot                     |       | $                       | 81         |   | $ | 86 |   |
| Total square footage, at  end of period (in thousands) |       | 573                     |       | 596 |   |
|                                                        |            |                         |            |  |  |  |  |

 

Net sales

 

Duringthe 13-week period ended April 3, 2010, net sales decreased to $48.6million from $53.0 million, a decrease of $4.4 million, or 8.4%, as compared tothe same 13-week period last year.  Thisreflects $3.5 million of reduced net sales, as a result of a 6.8% decrease incomparable store sales, a decrease of $522,000 of net sales from our Mary L.division, which the Company discontinued during the first quarter of fiscal2010; and a decrease of $547,000 from our non-comparable store sales, which wasoffset by a small increase in income recognized from our co-branded creditcard. The decrease in net sales during the first quarter of fiscal 2010 was primarilydue to ongoing macroeconomic events, which resulted in a dramatic reduction inmall traffic where Cache stores are located, coupled with a shift in consumerspending pattern that favored lower priced or discounted merchandise. Thedecrease in net sales in the quarter at Cache stores reflected an 11.0%increase in sales transactions and a 16.0% decrease in average dollars pertransaction.

 

Gross profit

 

During the 13-week periodended April 3, 2010, gross profit decreased to $16.7 million from $21.8million, a decrease of $5.1 million, or 23.3%, as compared to the same 13-weekperiod last year.  This decrease wasprimarily due to lower net sales, as described

 

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above for the 13-week periodfor net sales. In addition, an increase in markdowns during the first quarterof fiscal 2010 coupled with an increase in operational costs related to our design, productionand sourcing departments, contributed to the decrease in gross profit. As apercentage of net sales, gross profit decreased to 34.4% from 41.1% for thecurrent 13-week period, as compared to the prior year period.

 

Store operating expenses

 

During the 13-week periodended April 3, 2010, store operating expenses decreased to $18.7 millionfrom $19.6 million, a decrease of $929,000, or 4.7%, as compared to the same13-week period last year. Store operating expenses decreased primarily due to areduction in payroll and payroll tax expense of $727,000, as a result of adecrease in the total number of employees, as compared to the same 13-weekperiod last year. A decrease in depreciation expense of $327,000 alsoattributed to the decrease in store operating expense. Reduction indepreciation expense was due to certain assets being fully depreciated as offiscal 2009, coupled with the impairment of 23 underperforming stores duringthe fourth quarter of fiscal 2009. As a percentage of net sales, storeoperating expenses increased to 38.4% from 37.0% for the fiscal 2010 13-weekperiod, as compared to the prior year period, due to the reduction in net salesin fiscal 2010.

 

General and administrativeexpenses

 

During the 13-week periodended April 3, 2010, general and administrative expenses did not changesignificantly, as compared to the same 13-week period last year. General andadministrative expenses had a small decrease primarily due to a reduction of$76,000 in shipping and commission costs in connection with the Company’swholesale division — Mary L., which the Company discontinued during the firstquarter of fiscal 2010. As a percentage of net sales, general andadministrative expenses increased to 9.6% from 8.9% in fiscal 2010, due to thereduction in net sales in fiscal 2010.

 

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Other income/expense

 

During the 13-week period ended April 3, 2010,other income (expense) decreased to $9,000 from $16,000, a decrease of $7,000or 43.8%, as compared to the same 13-week period last year. This decrease wasdue to a reduction in interest income of $23,000, primarily caused by lower averagecash balances during fiscal 2010.

 

Income taxes

 

During the 13-week period ended April 3, 2010,income tax benefit increased to $2.5 million from $918,000, an increase of $1.6million or 175.3%, as compared to the same 13-week period last year. The incometax benefits recorded in fiscal year 2010 and 2009 were attributable to the operatinglosses incurred by the Company in both years, as discussed above. The estimatedeffective tax rate for fiscal 2010 is projected to be 38.3%, as compared to thefiscal 2009 estimate of 36.5%.

 

Net loss

 

As a result of the factors discussed above, net lossesof $4.1 million and $1.6 million were recorded during the 13-week periods endedApril 3, 2010 and March 28, 2009, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cashrequirements are primarily for working capital, inventory for new stores,construction of new stores, remodeling of existing stores and to improve andenhance our information technology systems. We have historically satisfied ourcash requirements principally through cash flow from operations. During the 13-weekperiod ended April 3, 2010, we used $8.5 million of cash flow fromoperations, as compared to $2.2 million generated during the same period infiscal 2009. We expect to continue to meet our operating cash requirementsprimarily through cash flows from operating activities, existing cash and equivalents,and short-term investments. At April 3, 2010, we had working capital of $38.9million, cash and marketable securities of $27.6 million and $2.9 million inthird party debt outstanding related to the purchase of Adrienne VictoriaDesigns, Inc. (“AVD”). The cash and marketable securities at April 3, 2010included certificates of deposit of $1.5 million that have been placed by theCompany as collateral against a one year credit facility.

 

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

 
| ** **                                           | ** ** | **13-Weeks Ended**            | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **April 3,********2010** | ** ** | **March 28,********2009** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                             | (8,499,000 | ) | $ | 2,156,000 |   |
| Net cash provided by (used in) investing  activities |       | 3,340,000                     |       | (4,909,000 | ) |
| Net cash used in financing activities                |       | —                        |       | (936,000 | ) |
| Net decrease in cash and equivalents                 |       | $                             | (5,159,000 | ) | $ | (3,689,000 | ) |

 

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During the 13-week period ended April 3,2010, cash and equivalents decreased by $5.2 million, primarily as a result of theoperating loss incurred during the first quarter of fiscal 2010. Decrease inaccrued liabilities, accrued compensation and other liabilities ($3.3 million)is partially due to payment on the remaining $1.4 million owed to one of itsformer executive as part of the employee separation agreement entered into infiscal 2009. Seasonal increase in inventories ($2.7 million) coupled with thepurchase of equipment and leasehold improvements ($932,000), also contributedto the decrease in cash and equivalents. These decreases in cash were offset bynet maturities of marketable securities ($4.3 million) combined with anincrease in accounts payable ($2.8 million).

 

On April 22, 2010, the Company entered into a one year credit facilitywith Bank of America (the “Bank”). Under this facility, the Company may directthe Bank to issue letters of credit up to a total of $2,500,000. Anyoutstanding letters of credit under this facility are collateralized bygranting to the bank a security interest in various certificates of depositheld by the Company and its subsidiaries with the Bank amounting to a total of$2,750,000. This one year credit facility will expire on May 1, 2011.

 

The Company had outstanding letters of credit of $628,000,$660,000 and $643,000 at April 3, 2010, January 2, 2010 and March, 282009, respectively.

 

#### **Inflation / Recession**

#### ** **

The Company does not believethat its 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 inflationin the future.

 

Ongoing macroeconomicconditions continue to affect the sales volume and profitability levels of ourcompany.  Furthermore, we believe thatcontinuing limitations on the availability of consumer credit, especially ofcredit cards, continue to adversely affect customer demand for our products,which adversely affect our business, financial condition and results ofoperations.

 

Many of our suppliers relyon working capital financing to fund their operations.  As a result of current economic conditions,lenders continue to maintain stringent credit standards and terms. To theextent that any of our suppliers are unable to obtain adequate credit or theirborrowing costs increase, the supplier may cease operations, we may experiencedelays in obtaining products, the suppliers may increase their wholesale pricesto us or they may modify payment terms in a manner that is unfavorable tous.  Any of the foregoing could adverselyaffect our net sales or gross margins, which could adversely affect ourbusiness, financial condition and results of operations.

 

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

#### ** **

The Companydoes not have any off-balance sheet arrangements or transactions withunconsolidated, limited purpose entities. In the normal course of our business,we enter into operating leases for store locations and utilize letters ofcredit principally for the importation of merchandise. Other than operatinglease commitments and letters of credit we are not a party to anymaterial off-balance sheet financing arrangements.

 

# **Critical Accounting Policies andEstimates**

# ** **

TheCompany’s accounting policies are more fully described in Note 1 of Notes toConsolidated Financial Statements in our fiscal 2009 Form 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”), which requires management to make estimates andassumptions about future events that affect the amounts reported in theconsolidated financial statements and accompanying notes. Since future eventsand their effects cannot be determined with absolute certainty, actual resultswill differ from those estimates. Weevaluate our estimates and judgments on an ongoing basis and predicate thoseestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances.  Actual results will differ from theseunder different assumptions or conditions.

 

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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.*Our finished goods inventories at our retailstores are valued at the lower of cost or market using the retail inventorymethod. Under the retail inventory method (“RIM”), the valuation of inventoriesat cost and the resulting gross margins are calculated by applying a calculatedcost to retail ratio to the retail value of inventories. RIM is an averagingmethod that is widely used in the retail industry due to its practicality.Additionally, it is recognized that the use of RIM will result in valuinginventories at the lower of cost or market if markdowns are currently taken asa reduction of the retail value of inventories. Inherent in the RIM calculationare certain significant management judgments including, among others,merchandise markon, markups, and markdowns, which significantly impact theending inventory valuation at cost as well as the resulting gross margins. Wetake markdowns due to changes in fashion and style, based on the followingfactors: (i) supply on hand, (ii) historical experience and(iii) our expectations as to future sales. We do not anticipate anysignificant change in our markdown strategy that would cause a significantchange in our earnings. We believe that our RIM provides an inventory valuation,which results in a carrying value at the lower of cost or market. Inventoriesother than finished goods at retail stores, called production inventory,primarily consists of piece goods, trim and work-in-process. It is theCompany’s policy to value the production inventory, which makes upapproximately 14% of Company’s total inventory, at lower of cost or marketvalue using first-in-first-out valuation method. The Company reviews theinventory for factors such as age, obsolescence, potential use, or otherfactors that may indicate a decline in its value. The Company records a reserveagainst the cost of the production inventory to account for any decline in itsvalue.

 

*Finite long-lived assets.  *The Company’s judgment regarding theexistence of impairment indicators is based on market and operationalperformance. We assess the impairment of long-lived assets, primarily fixedassets, whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable and exceeds the fair market value. Factors weconsider important which could trigger an impairment review include thefollowing:

 

·      significant changes in the manner of ouruse of assets or the strategy for our overall business;

 

·      significant negative industry or economic trends;

 

·      store closings; or

 

·      underperforming business trends.

 

**TheCompany evaluates finite long-lived assets in accordance with “Impairment orDisposal of Long-Lived Assets” under Topic 360 “Property, Plant and Equipment”of the Financial Accounting Standards Board Accounting Standards Codification(“FASB ASC”). Finite-lived assets are evaluated for recoverability inaccordance with Topic 360 of the FASB ASC whenever events or changes incircumstances indicate that an asset may have been impaired. In evaluating anasset for recoverability, the Company estimates the future cash flows expectedto result from the use and eventual disposition of the asset. If the sum of theexpected future cash flows (undiscounted and without interest charges) is lessthan the carrying amount of the asset, an impairment loss, equal to the excessof the carrying amount over the fair market value of the asset is recognized.Various factors including future sales growth and profit margins are includedin this analysis. To the extent these future projections or strategies change,the conclusion regarding impairment may differ from the current estimates. Noimpairment charges were recorded during the 13-week period ended April 3,2010 and March 28, 2009. The Company recorded an impairment charge of $1.9million for 23 underperforming stores during the fourth quarter of fiscal 2009**.

** **

*Goodwill and Intangible Assets*. The Company evaluates its Goodwill andIntangible assets in accordance with “*Intangibles -Goodwill andOther”,*Topic 350 of the FASB ASC. This guidance requires ratable amortization of goodwill be replaced withperiodic tests of

 

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the goodwill’simpairment. The Company performs impairment testing, which considers theCompany’s fair value to determine whether an impairment charge related to thecarrying value of the Company’s recorded goodwill and other intangible assets,associated with its AVD reporting unit, is necessary. This is reevaluatedannually during the fourth quarter, or more frequently if necessary. TheCompany considers many factors in evaluating whether the carrying value of therecorded goodwill will be recoverable. Factors used to determine this primarilyinclude declines in stock price and the market capitalization in relation tothe book value of the Company, discounted projected cash flows of the reportingunit and valuation of companies comparable to the reporting unit. Noimpairment charges were recorded during the 13-week periods ended April 3,2010 and March 28, 2009. An impairment charge of $891,000 wasrecorded against the carrying value of intangible assets associated with itswholesale division—Mary L., during the fourth quarter of fiscal 2009, relatedto the discontinuance of Mary L. Pursuant to the employee separationagreements entered into with two of the Company’s then officers, the Companyrecorded a pre-tax charge of $204,000 during the third fiscal quarter of 2009for the remaining net book value of the non-compete agreements contained intheir employment agreements.

 

*Self Insurance.* The Company isself-insured for losses and liabilities related primarily to employee healthand welfare claims up to certain thresholds. Losses are accrued based upon ourestimates of the aggregate liability for claims incurred using certainactuarial assumptions followed in the insurance industry and based on Companyexperience. Adjustments to earnings resulting from changes in historical losstrends have been insignificant for fiscal 2010 and 2009. Further, we do notanticipate any significant change in loss trends, settlements or other coststhat would cause a significant change in our earnings. We maintain stop-lossinsurance coverage, which covers us for benefits paid in excess of limits asdefined in the plan.

 

*Gift Cards, Gift Certificates and Credits**.***The Company sells gift cards and giftcertificates (“Gift Cards”) and issues credits to its customers whenmerchandise is returned (“Merchandise Credit”), which do not expire. TheCompany recognizes sales from Gift Cards when they are redeemed by the customerand income when the likelihood of the Gift Card and Merchandise Credit beingredeemed by the customer is remote (“Gift Card breakage”), since the Companyhas determined that it does not have a legal obligation to remit the unredeemedvalue to the relevant jurisdiction as abandoned property. The Companydetermines Gift Card breakage income based upon historical redemption patternsand the remaining unredeemed percentage at the end of our historical data of3.5 years. Historical redemptions of Gift Cards ranged from 64% in the firstquarter to 0.03% in the fourteenth quarter subsequent to the issue date,resulting in an average of approximately 95% redeemed or 5% unredeemed GiftCards over the historical data of 3.5 years. We have determined that redemptionwould be remote based on the fact that, by the fourteenth quarter since issuedate, the redemption rate approximated 0%, indicating that the probability ofsuch cards being redeemed is remote. As such, we have recorded breakage incomebased upon this 5%, which is reviewed on a quarterly basis for propriety.Breakage income represents the balance of Gift Cards and Merchandise Credit,for which the Company believes the likelihood of redemption by the customer isremote. At that time, the Company will recognize breakage income for those GiftCards and Merchandise Credit. The Company recorded $50,000 and $63,000 ofbreakage income during the 13-week periods ended April 3, 2010 and March 28,2009, respectively.

 

*Revenue Recognition.*  Sales are recognized at the “point of sale,”which occurs when merchandise is sold in an “over-the-counter” transaction orupon receipt by a customer. Sales of merchandise via our website are recognizedat the expected time of delivery to the customer. Our customers have the rightto return merchandise. Sales are reported net of actual and estimated returns.We maintain a reserve for potential product returns and record, as a reductionto sales, a provision for estimated product returns, which is determined basedon historical experience. Charges/(credits) resulting from revisions toestimates on our sales return provision were approximately $84,000 and $185,000for the 13-week periods ended April 3, 2010 and March 28, 2009,respectively. Amounts billed to customers for shipping and handling fees areincluded in net sales at the time of shipment. Costs incurred at our stores forshipping and handling are included in cost of sales. The Company recordsrevenues net of applicable sales tax.

 

The Company’sco-branded customer credit card program, which was introduced during fiscal2007, entitles the Company to receive from the issuing bank a non-refundablecredit card activation fee for each new account that is opened and activated.These fees are initially deferred and recognized in consolidated net sales asrevenue over the life of the contract. During the 13-week periods ended April3, 2010 and March 28, 2009, the Company received $178,000 and $240,000,respectively, in connection with activated credit cards. The amount of feeincome recorded in connection with activated credit cards was $148,000 and$90,000 for the 13-week periods ended April 3, 2010 and March 28, 2009,respectively.

 

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

 

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net sales. Thefees that are incurred by the Company are cardholder incentives, which arefunded from the fees paid by the issuing bank and Visa U.S.A Inc. The amount ofsales royalty income recorded was $78,000 and $64,000 for the 13-week periodsended April 3, 2010 and March 28, 2009, respectively.

 

The Companyalso offers its card holders a program whereby points can be earned on netpurchases made with the co-branded credit card. Five reward points are awardedfor each dollar spent at Cache and one reward point is awarded for each dollarspent at non-Cache businesses.  Acardholder whose credit card account is not delinquent, in default or closed willbe automatically eligible to receive a $25 Cache gift card upon accrual of2,500 reward points. The issuing bank bears the cost of the reward program andis responsible for the administration and management of the program.

 

*Income Taxes.*****The Company accounts for income taxes in accordance with “*Income Taxes*”, Topic 740 of the FASB ASC.This guidance requires the Company to recognize deferred tax liabilities andassets for the expected future tax consequences of events that have beenrecognized in the Company’s financial statements or tax returns. Under thismethod, deferred tax liabilities and assets are determined based on thedifference between the financial statement carrying amounts and tax bases ofassets and liabilities, using applicable tax rates for the years in which thedifferences are expected to reverse. At January 2, 2010, the Companymaintained $4.5 million of net deferred tax assets, of which, approximately$919,000 related to state tax net operating loss carry-forwards. In addition,during the 13-week period ended April 3, 2010, the Company recorded an incometax benefit of $2.5 million, primarily related to the net loss incurred. When tax contingencies become probable, aliability for the contingent amount is estimated based upon the Company’s bestestimation of the potential exposures associated with the timing and amount ofdeductions, as well as various tax filing positions. As of April 3, 2010, theCompany has recorded a $435,000 reserve, net of federal benefit for potentialtax contingencies. As of March 28, 2009, the Company reported a reserve balanceof $331,000.

 

*Seasonality.* The Company experiences seasonal andquarterly fluctuations in net sales and operating income. Quarterly results ofoperations may fluctuate significantly as a result of a variety of factors,including the timing of new store openings, fashion trends, shifts in timing ofcertain holidays, economic conditions and competition.  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 QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our market risk relatesprimarily to changes in interest rates. The interest rate risk involves theshort-term investment of excess cash in short-term, investment-gradeinterest-bearing securities. These investments are included in cash andequivalents, marketable securities, and certificates of deposit — restricted on our balance sheet. If there are changes ininterest rates, those changes would affect the investment income we earn onthese investments and, therefore, impact our cash flows and results ofoperations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

The Company is committed to maintaining disclosurecontrols and procedures designed to ensure that information required to bedisclosed in our periodic reports filed under the Securities Exchange Act of1934, as amended (the “Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including our chief executive officer and chief financial officer, asappropriate, to allow for timely decisions regarding required disclosure.

 

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of our disclosure controls andprocedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, as of the end of the period covered by this Report.  There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, includingthe possibility of human error and the circumvention or overriding of thecontrols and procedures.  Accordingly,even effective disclosure controls and procedures can only provide reasonableassurance 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 controlover financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) ofthe Exchange Act) during the 13-weeks ended April 3, 2010 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**ITEM6.  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. |

 

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* Filed herewith

 

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**Signatures**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|     | Dated: May 13, 2010 |
|----------|--------------------------|
|     | 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) |

 

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