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 June 27, 2009**                                                                                                                                 |
| ** **                                                                                                                                                                             | ** **                                                                                               |
| **OR**                                                                                                                                                                                 |
| ** **                                                                                                                                                                             | ** **                                                                                               |
| **o**                                                                                                                                                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                             | ** **                                                                                               |
| **For the  transition period  from            to            ** |
| ** **                                                                                                                                                                             | ** **                                                                                               |
| **Commission File Number: 0-10345**                                                                                                                                                    |

 

**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 mark whether the registrant has submittedelectronically and posted on its corporate web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes **o No o

** **

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

 

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

 

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

 

As of July 31 2009,12,727,837 common shares were outstanding.

 

 

 

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Table ofContents

 

CACHE, INC. AND SUBSIDIARIES

 

INDEX

** **
| PART I. FINANCIAL  INFORMATION | 3                                                                                                                                              |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                           |   |
| Item 1.                             | Condensed Consolidated Financial Statements (unaudited)                                                                                        | 3 |
|                                     | Condensed  Consolidated Balance Sheets as of  June 27, 2009, December 27, 2008 and June 28, 2008                                | 3 |
|                                     | Condensed  Consolidated Statements of Operations for the twenty-six and thirteen week  periods ended June 27, 2009 and June 28, 2008 | 4 |
|                                     | Condensed  Consolidated Statements of Cash Flows  for the twenty-six week periods ended June 27, 2009 and  June 28, 2008             | 6 |
|                                     | Notes  to the Condensed Consolidated Financial Statements                                                                                      | 7 |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                    | 12 |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                                    | 19 |
| Item 4.                             | Controls  and Procedures                                                                                                                       | 20 |
|                                     |                                                                                                                                           |   |
| PART II. OTHER  INFORMATION    | 20                                                                                                                                             |
|                                     |                                                                                                                                           |   |
| Item 1A.                                 | Risk Factors                                                                                                                                   | 20 |
| Item 6.                             | Exhibits                                                                                                                                       | 20 |
|                                     |                                                                                                                                           |   |
| SIGNATURES                               | 21                                                                                                                                             |

 

2

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

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

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                     | ** ** | **June 27,********2009** | ** **      | **December 27,********2008** | ** ** | **June 28,********2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|-----------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                     | ** ** | **(Unaudited)**               | ** **      | **(Audited)**                     | ** ** | **(Unaudited)**               | ** ** |
| **ASSETS**                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Current assets:**                                                                                            | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Cash and equivalents**                                                                                       | ** ** | **$**                         | **2,815,000**   | ** **                        | **$**      | **4,835,000**                 | ** ** | **$** | **1,045,000** | ** ** |
| **Marketable securities**                                                                                      | ** ** | **30,513,000**                | ** **      | **25,153,000**                    | ** ** | **26,319,000**                | ** ** |
| **Certificates of deposit —  restricted**                                                                 | ** ** | **1,500,000**                 | ** **      | **—**                        | ** ** | **—**                    | ** ** |
| **Receivables, net**                                                                                           | ** ** | **2,653,000**                 | ** **      | **3,898,000**                     | ** ** | **4,565,000**                 | ** ** |
| **Income tax receivables**                                                                                     | ** ** | **534,000**                   | ** **      | **5,883,000**                     | ** ** | **—**                    | ** ** |
| **Inventories, net**                                                                                           | ** ** | **22,420,000**                | ** **      | **22,321,000**                    | ** ** | **35,042,000**                | ** ** |
| **Prepaid expenses and other  current assets**                                                                 | ** ** | **2,109,000**                 | ** **      | **1,795,000**                     | ** ** | **4,465,000**                 | ** ** |
| **Total current assets**                                                                                       | ** ** | **62,544,000**                | ** **      | **63,885,000**                    | ** ** | **71,436,000**                | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Equipment and leasehold  improvements, net**                                                                 | ** ** | **38,415,000**                | ** **      | **43,320,000**                    | ** ** | **46,764,000**                | ** ** |
| **Goodwill**                                                                                                   | ** ** | **9,092,000**                 | ** **      | **9,092,000**                     | ** ** | **10,089,000**                | ** ** |
| **Intangible assets, net**                                                                                     | ** ** | **1,245,000**                 | ** **      | **1,304,000**                     | ** ** | **1,364,000**                 | ** ** |
| **Other assets**                                                                                               | ** ** | **2,399,000**                 | ** **      | **1,924,000**                     | ** ** | **382,000**                   | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Total assets**                                                                                               | ** ** | **$**                         | **113,695,000** | ** **                        | **$**      | **119,525,000**               | ** ** | **$** | **130,035,000** | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                 | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Current liabilities:**                                                                                       | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Accounts payable**                                                                                           | ** ** | **$**                         | **5,559,000**   | ** **                        | **$**      | **6,375,000**                 | ** ** | **$** | **10,567,000** | ** ** |
| **Note payable**                                                                                               | ** ** | **1,282,000**                 | ** **      | **1,259,000**                     | ** ** | **1,362,000**                 | ** ** |
| **Accrued compensation**                                                                                       | ** ** | **1,316,000**                 | ** **      | **1,713,000**                     | ** ** | **1,949,000**                 | ** ** |
| **Accrued liabilities**                                                                                        | ** ** | **8,647,000**                 | ** **      | **11,077,000**                    | ** ** | **9,663,000**                 | ** ** |
| **Total current liabilities**                                                                                  | ** ** | **16,804,000**                | ** **      | **20,424,000**                    | ** ** | **23,541,000**                | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Note payable**                                                                                               | ** ** | **2,518,000**                 | ** **      | **3,143,000**                     | ** ** | **3,753,000**                 | ** ** |
| **Other liabilities**                                                                                          | ** ** | **16,430,000**                | ** **      | **16,795,000**                    | ** ** | **16,373,000**                | ** ** |
| **Deferred income taxes, net**                                                                                 | ** ** | **—**                    | ** **      | **—**                        | ** ** | **99,000**                    | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Commitments and contingencies**                                                                              | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                  | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Common stock, par value $.01;  authorized, 20,000,000 shares; issued 16,410,036, 16,410,036 and 16,392,936** | ** ** | **164,000**                   | ** **      | **164,000**                       | ** ** | **164,000**                   | ** ** |
| **Additional paid-in capital**                                                                                 | ** ** | **47,272,000**                | ** **      | **47,155,000**                    | ** ** | **46,784,000**                | ** ** |
| **Retained earnings**                                                                                          | ** ** | **70,302,000**                | ** **      | **71,053,000**                    | ** ** | **78,227,000**                | ** ** |
| **Treasury stock, 3,682,199, 3,372,000 and 3,167,000 shares, at cost**                                         | ** ** | **(39,795,000**               | **)**           | **(39,209,000**                   | **)**      | **(38,906,000**               | **)**      |
| **Total stockholders’ equity**                                                                            | ** ** | **77,943,000**                | ** **      | **79,163,000**                    | ** ** | **86,269,000**                | ** ** |
| ** **                                                                                                     | ** ** | ** **                    | ** **      | ** **                        | ** ** | ** **                    | ** ** |
| **Total liabilities and  stockholders’ equity**                                                           | ** ** | **$**                         | **113,695,000** | ** **                        | **$**      | **119,525,000**               | ** ** | **$** | **130,035,000** | ** ** |

 

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

 

3

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE TWENTY-SIX WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **June 27,  2009** | ** **      | **June 28,  2008** | ** ** |
|----------------------------------------------------|------------|-------------------------|-----------------|-------------------------|------------|
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Net sales**                                      | ** ** | **$**                   | **109,872,000** | ** **              | **$**      | **141,681,000** | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **62,848,000**          | ** **      | **79,074,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Gross profit**                                   | ** ** | **47,024,000**          | ** **      | **62,607,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Expenses**                                       | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Store operating expenses**                       | ** ** | **39,251,000**          | ** **      | **48,701,000**          | ** ** |
| **General and administrative  expenses**           | ** ** | **8,985,000**           | ** **      | **11,871,000**          | ** ** |
| **Store exit costs**                               | ** ** | **—**              | ** **      | **2,308,000**           | ** ** |
| **Total expenses**                                 | ** ** | **48,236,000**          | ** **      | **62,880,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Operating loss**                                 | ** ** | **(1,212,000**          | **)**           | **(273,000**            | **)**      |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Other income (expense):**                        | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Interest expense**                               | ** ** | **(98,000**             | **)**           | **(131,000**            | **)**      |
| **Interest income**                                | ** ** | **127,000**             | ** **      | **487,000**             | ** ** |
| **Total other income, net**                        | ** ** | **29,000**              | ** **      | **356,000**             | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Income (loss) before income  taxes**             | ** ** | **(1,183,000**          | **)**           | **83,000**              | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Income tax provision (benefit)**                 | ** ** | **(432,000**            | **)**           | **31,000**              | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Net income (loss)**                              | ** ** | **$**                   | **(751,000**    | **)**                   | **$**      | **52,000** | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Basic earnings (loss) per share**                | ** ** | **$**                   | **(0.06**       | **)**                   | **$**      | **0.00** | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Diluted earnings (loss) per  share**             | ** ** | **$**                   | **(0.06**       | **)**                   | **$**      | **0.00** | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,841,000**          | ** **      | **13,443,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **      | ** **              | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,841,000**          | ** **      | **13,462,000**          | ** ** |

 

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

 

4

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **June 27,  2009** | ** **     | **June 28,  2008** | ** ** |
|----------------------------------------------------|------------|-------------------------|----------------|-------------------------|------------|
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Net sales**                                      | ** ** | **$**                   | **56,866,000** | ** **              | **$**      | **73,973,000** | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **31,636,000**          | ** **     | **39,781,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Gross profit**                                   | ** ** | **25,230,000**          | ** **     | **34,192,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Expenses**                                       | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Store operating expenses**                       | ** ** | **19,663,000**          | ** **     | **24,783,000**          | ** ** |
| **General and administrative  expenses**           | ** ** | **4,249,000**           | ** **     | **6,202,000**           | ** ** |
| **Total expenses**                                 | ** ** | **23,912,000**          | ** **     | **30,985,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Operating income**                               | ** ** | **1,318,000**           | ** **     | **3,207,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Other income (expense):**                        | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Interest expense**                               | ** ** | **(47,000**             | **)**          | **(63,000**             | **)**      |
| **Interest income**                                | ** ** | **60,000**              | ** **     | **197,000**             | ** ** |
| **Total other income, net**                        | ** ** | **13,000**              | ** **     | **134,000**             | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Income before income taxes**                     | ** ** | **1,331,000**           | ** **     | **3,341,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Income tax provision**                           | ** ** | **486,000**             | ** **     | **1,236,000**           | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Net income**                                     | ** ** | **$**                   | **845,000**    | ** **              | **$**      | **2,105,000** | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Basic earnings per share**                       | ** ** | **$**                   | **0.07**       | ** **              | **$**      | **0.16** | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Diluted earnings per share**                     | ** ** | **$**                   | **0.07**       | ** **              | **$**      | **0.16** | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,728,000**          | ** **     | **13,320,000**          | ** ** |
| ** **                                         | ** ** | ** **              | ** **     | ** **              | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,728,000**          | ** **     | **13,357,000**          | ** ** |

 

**The accompanyingNotes to Condensed Consolidated Financial Statements are an integral part ofthese statements.**

 

5

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE TWENTY-SIX WEEKS ENDED**

**(Unaudited)**

** **
| ** **                                                                                                     | ** ** | **June 27,  2009** | ** **    | **June 28,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-------------------------|------------|
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Net income (loss)**                                                                                          | ** ** | **$**                   | **(751,000**  | **)**                   | **$**      | **52,000** | ** ** |
| **Adjustments to reconcile net  income (loss) to net cash********provided by (used in) operating activities:** | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Depreciation and amortization**                                                                              | ** ** | **5,691,000**           | ** **    | **6,260,000**           | ** ** |
| **Write down of equipment and  leasehold improvements, net of deferred rent**                                  | ** ** | **—**              | ** **    | **1,445,000**           | ** ** |
| **Provision for sales allowance  and doubtful accounts, net**                                                  | ** ** | **(37,000**             | **)**         | **117,000**             | ** ** |
| **Stock-based compensation**                                                                                   | ** ** | **117,000**             | ** **    | **150,000**             | ** ** |
| **Non-cash interest expense on  note payable**                                                                 | ** ** | **47,000**              | ** **    | **63,000**              | ** ** |
| **Deferred income taxes**                                                                                      | ** ** | **(468,000**            | **)**         | **16,000**              | ** ** |
| **Gift card breakage**                                                                                         | ** ** | **(123,000**            | **)**         | **(159,000**            | **)**      |
| **Amortization of deferred income  for co-branded credit card**                                                | ** ** | **(197,000**            | **)**         | **—**              | ** ** |
| **Amortization of deferred rent**                                                                              | ** ** | **(961,000**            | **)**         | **(1,030,000**          | **)**      |
| **Excess tax benefit from  stock-based compensation**                                                          | ** ** | **—**              | ** **    | **(155,000**            | **)**      |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Change in assets and  liabilities:**                                                                         | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Decrease in receivables and  income tax receivables**                                                        | ** ** | **6,631,000**           | ** **    | **106,000**             | ** ** |
| **Increase in inventories**                                                                                    | ** ** | **(99,000**             | **)**         | **(4,495,000**          | **)**      |
| **Increase in prepaid expenses  and other current assets**                                                     | ** ** | **(321,000**            | **)**         | **(1,842,000**          | **)**      |
| **Increase (decrease) in accounts  payable**                                                                   | ** ** | **(816,000**            | **)**         | **57,000**              | ** ** |
| **Decrease in accrued  liabilities, accrued compensation and other liabilities**                               | ** ** | **(1,719,000**          | **)**         | **(2,243,000**          | **)**      |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Net cash provided by (used in)  operating activities**                                                       | ** ** | **6,994,000**           | ** **    | **(1,658,000**          | **)**      |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Purchase of marketable  securities**                                                                         | ** ** | **(19,063,000**         | **)**         | **(26,908,000**         | **)**      |
| **Maturities of marketable  securities**                                                                       | ** ** | **13,703,000**          | ** **    | **43,476,000**          | ** ** |
| **Certificates of deposit —  restricted**                                                                 | ** ** | **(1,500,000**          | **)**         | **—**              | ** ** |
| **Purchase of equipment and  leasehold improvements**                                                          | ** ** | **(919,000**            | **)**         | **(6,029,000**          | **)**      |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Net cash provided by (used in)  investing activities**                                                       | ** ** | **(7,779,000**          | **)**         | **10,539,000**          | ** ** |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Proceeds from the issuance of  common stock**                                                                | ** ** | **—**              | ** **    | **344,000**             | ** ** |
| **Excess tax benefit from  stock-based compensation**                                                          | ** ** | **—**              | ** **    | **155,000**             | ** ** |
| **Repayment of note payable**                                                                                  | ** ** | **(649,000**            | **)**         | **(882,000**            | **)**      |
| **Repurchase of common stock**                                                                                 | ** ** | **(586,000**            | **)**         | **(14,696,000**         | **)**      |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Net cash used in financing  activities**                                                                     | ** ** | **(1,235,000**          | **)**         | **(15,079,000**         | **)**      |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Net decrease in cash and  equivalents**                                                                      | ** ** | **(2,020,000**          | **)**         | **(6,198,000**          | **)**      |
| **Cash and equivalents, at  beginning of period**                                                              | ** ** | **4,835,000**           | ** **    | **7,243,000**           | ** ** |
| **Cash and equivalents, at end of  period**                                                                    | ** ** | **$**                   | **2,815,000** | ** **              | **$**      | **1,045,000** | ** ** |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Supplemental disclosure of cash  flow information:**                                                         | ** ** | ** **              | ** **    | ** **              | ** ** |
| ** **                                                                                                     | ** ** | ** **              | ** **    | ** **              | ** ** |
| **Interest paid**                                                                                              | ** ** | **$**                   | **105,000**   | ** **              | **$**      | **141,000** | ** ** |
| **Income taxes paid**                                                                                          | ** ** | **$**                   | **118,000**   | ** **              | **$**      | **1,853,000** | ** ** |
| **Accrued equipment and leasehold  improvements**                                                              | ** ** | **$**                   | **24,000**    | ** **              | **$**      | **461,000** | ** ** |

 

**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.****             ****BASIS OF PRESENTATION**

 

Referencesto the “Company,” “we,” “us,” or “our” means Cache, Inc., together withits wholly-owned subsidiaries, except as expressly indicated or unless thecontext otherwise requires. We own and operate women’s apparel specialty storesunder the trade name “Cache” and “Cache Luxe”. As of June 27, 2009, weoperated 286 Cache and five Cache Luxe stores.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with Rule 10-01 of Regulation S-X and do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States. However, in the opinion of ourmanagement, all known adjustments necessary for a fair presentation of theresults of the interim periods have been made. These adjustments consistprimarily of normal recurring accruals and estimates that impact the carryingvalue of assets and liabilities. Actual results may materially differ fromthese estimates.

 

Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements for the year ended December 27,2008, 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 December 27,2008 condensed consolidated balance sheet amounts are derived from the Company’saudited consolidated financial statements.

 

TheCompany’s fiscal year (“fiscal year” or “fiscal”) refers to the applicable52 or 53 week period. The year ended December 27, 2008 (“fiscal2008”) was a 52-week year and the year ending January 2, 2010 (“fiscal2009”) is a 53-week year.

 

**2.****             ****STOCK BASED COMPENSATION**

 

TheCompany records compensation expense associated with stock options in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 123R, “*Share-BasedPayment*”, as interpreted by SEC Staff Accounting Bulletin No. 107.During the 26 and 13-week periods ended June 27, 2009, the Companyrecognized approximately $117,000 and $59,000, respectively, in stock-basedcompensation expense and, for the same periods ended June 28, 2008, theCompany recognized approximately $150,000 and $76,000, respectively.  The grant date fair value is calculated usingthe Black-Scholes option valuation model. The Company did not grant any optionsduring the 26 and 13-week periods ended June 27, 2009 and no excess taxbenefits were recognized from the exercise of stock options during the sameperiod. During the 26-week period ended June 28, 2008, the Company granted15,000 options and recognized $155,000 in excess tax benefits from the exerciseof stock options. No options were granted and no excess tax benefits from theexercise of stock options was recognized during the 13-week period ended June 28,2008.

 

Theweighted-average fair value of options granted during the 26 and 13-weekperiods ended June 28, 2008 was $3.14. The grant date fair value iscalculated using the Black-Scholes option valuation model. The followingassumptions were used during fiscal 2008:

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

 

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**3.****             ****BASIC AND DILUTED EARNINGS PERSHARE**

 

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

 
| ** **                                                  | ** ** | **26-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | **June 27,**       | ** ** | **June 28,**       | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                                                  | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income (loss)                                           |       | $                       | (751,000   | )                       | $          | 52,000 |   | $ | 845,000 |   | $ | 2,105,000 |   |
| Basic weighted number of  average shares outstanding        |       | 12,841,000              |       | 13,443,000              |       | 12,728,000 |   | 13,320,000 |   |
| Incremental shares from  assumed issuances of stock options |       | —                  |       | 19,000                  |       | — |   | 37,000 |   |
|                                                        |       |                    |       |                    |       |   |   |   |   |
| Diluted weighted average  number of shares outstanding      |       | 12,841,000              |       | 13,462,000              |       | 12,728,000 |   | 13,357,000 |   |
|                                                        |       |                    |       |                    |       |   |   |   |   |
| Net income (loss) per  share - Basic                        |       | $                       | (0.06      | )                       | $          | 0.00 |   | $ | 0.07 |   | $ | 0.16 |   |
| - Diluted                                                   |       | $                       | (0.06      | )                       | $          | 0.00 |   | $ | 0.07 |   | $ | 0.16 |   |

 

Optionsto purchase 732,675 and 721,675 common shares were excluded from thecomputation of diluted earnings per share for the 26 and 13-week periods ended June 27,2009, respectively, due to the net loss and also due to the anti-dilutiveeffect caused by the exercise price exceeding the average market price, respectively.

 

Optionsto purchase 644,000 common shares were excluded from the computation of dilutedearnings per share for the 26 and 13-week periods ended June 28, 2008, dueto the anti-dilutive effect caused by the exercise price exceeding the average marketprice.

 

**4.****              RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In April 2009, the FASBissued Staff Position No. FAS 107-1, “*InterimDisclosures About Fair Value of Financial Instruments*” (“FSP 107-1”).FSP 107-1 amends FASB Statement No.107, Disclosures about Fair Value ofFinancial Instruments, to require disclosures about fair value of financialinstruments for interim periods of publicly traded companies as well as inannual financial statements. This FSP also amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarizedfinancials information at interim reporting periods. SFAS No. 107-1becomes effective for interim and annual periods ending after June 15,2009 with early application permitted for period ending after March 15, 2009.Effective June 27, 2009, the Company adopted SFAS No. 107-1, which requiredadditional disclosure on its consolidated financial statements.

 

In April 2009, the FASBissued Staff Position No. FAS 115-2, “*Recognitionand Presentation of Other-Than-Temporary Impairments*” (“FSP 115-2”).FSP 115-2 provides new guidance on the recognition of anOther-Than-Temporary-Impairments (OTTI) and provides some new disclosurerequirements. SFAS No. 115-2 becomes effective for interim and annualperiods ending after June 15, 2009 with early application permitted forperiod ending after March 15, 2009. Effective June 27, 2009, theCompany adopted SFAS No. 115-2, which did not have an impact on itsconsolidated financial statements.

 

In April 2009, the FASBissued Staff Position No. FAS 157-4, “*DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*”(“FSP 157-4”). FSP 157-4 amends FASB Statement No.157, Fair ValueMeasurements to provide additional guidance on estimating fair value when thevolume and level of activity for an asset or liability significantly decreasedin relation to market activity for the asset or liability. The FSP alsoprovides additional guidance on circumstances that may indicate that atransaction is not orderly. SFAS No. 157-4 becomes effective for interimand annual periods ending after June 15, 2009 with early applicationpermitted for period ending after March 15, 2009. Effective June 27,2009, the Company adopted SFAS No. 157-4, which did not have an impact onits consolidated financial statements.

 

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In June 2009, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, *Accounting for Transfers of Financial Assets, anamendment of FASB Statement No. 140*(“SFAS 166”). Thisstatement improves the information that a reporting entity provides in itsfinancial reports about a transfer of financial assets; the effects of atransfer on its financial position, financial performance and cash flows; and acontinuing interest in transferred financial assets. In addition, SFAS 166amends various concepts addressed by FASB Statement No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125*,including removing the concept of qualified special purpose entities. SFAS 166must be applied to transfers occurring on or after the effective date. SFAS 166becomes effective for interim and annual periods beginning after November 15,2009. The Company does not expect to have a material impact on its consolidatedfinancial statements upon adoption.

 

In June 2009, theFASB issued SFAS No. 167, *Amendments toFASB Interpretation No. 46(R) *(“SFAS 167”). This statementamends certain requirements of FASB Interpretation No. 46 (revised December 2003),*Consolidation of Variable Interest Entities*.Among other accounting and disclosure requirements, SFAS 167 replaces thequantitative-based risks and rewards calculation for determining whichenterprise has a controlling financial interest in a variable interest entitywith an approach focused on identifying which enterprise has the power todirect the activities of a variable interest entity and the obligation toabsorb losses of the entity or the right to receive benefits from the entity.SFAS 167 becomes effective for interim and annual periods beginning after November 15,2009. The Company does not expect to have a material impact on its consolidatedfinancial statements upon adoption.

 

Effective July 1,2009, the FASB issued SFAS No. 168, *TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162*(“ASC”), which became the single official source of authoritative,nongovernmental GAAP. The historical GAAP hierarchy was eliminated and the ASCbecame the only level of authoritative GAAP, other than guidance issued by theSEC. All other literature became non-authoritative. ASC is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The Company does not expect to have a material impact on its consolidatedfinancial statements upon adoption.

 

**5.****              FAIR VALUEMEASUREMENT**

 

Effective December 30,2007, the Company adopted SFAS 157, which defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date (exitprice). SFAS 157 establishes a fair value hierarchy, which prioritizes theinputs used in measuring fair value into three broad levels as follows:

 

·                  Level 1 — Unadjusted quotedmarket prices in active markets for identical assets or liabilities that theCompany has the ability to access at the measurement date.

 

·                  Level 2 — Quoted prices forsimilar assets or liabilities in active markets, quoted prices for identical orsimilar assets or liabilities in markets that are not active, inputs other thanquoted prices that are observable for the asset or liability (i.e., interestrates, yield curves, etc.) and inputs that are derived principally from orcorroborated by observable market data by correlation or other means.

 

·                  Level 3 — Unobservableinputs that reflect assumptions about what market participants would use inpricing assets or liabilities based on the best information available.

 

As of June 27, 2009,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.

 

Effective December 30,2007, the Company adopted SFAS 159, which provides entities the option tomeasure many financial instruments and certain other items at fair value. Entitiesthat choose the fair value option will recognize unrealized gains and losses onitems for which the fair value option was elected in earnings at eachsubsequent reporting date. The Company has currently chosen not to elect thefair value option for any items that are not already required to be measured atfair value in accordance with accounting principles generally accepted in theUnited States of America.

 

The fair value of ourmarketable securities, which was determined based upon Level 1 inputs, totaled$30.6 million, $25.2 million and $26.3 million as of June 27, 2009, December 27,2008 and June 28, 2008, respectively. For the fiscal periods ended June 27,2009, December 27, 2008 and June 28, 2008, the aggregate amount ofmarketable securities (maturing greater than 90 days and less than one year)totaled approximately $30.5 million, $25.2 million and $26.3 million,respectively. The Company noted small variances between the book value and fairvalue due to the remaining unamortized

 

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premiums. As a result, noimpairment has occurred for the fiscal periods presented herein. Premiums anddiscounts are amortized or accreted over the life of the relatedheld-to-maturity investments. Interest income is recognized when earned.

 

**FairValue of Financial Instruments**

** **

The carryingamounts of certificates of deposit, accounts receivable, accounts payable andaccrued liabilities approximate their estimated fair values due to theirshort-term nature. The Company's note payable due to a related party (previousowners from AVD acquisition and now employees of the Company) includes imputedinterest at 5% as the fair market value of this note is not readilydeterminable because comparable instruments do not exist. The 5% imputedinterest represented the Company's average return on its investment portfolio,at the inception of the note.

 

**6.****              RECEIVABLES**

 
| ** **               | ** ** | **June 27,** | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **               | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| Construction allowances  |       | $                 | 384,000    |                  | $          | 536,000           |       | $ | 988,000 |   |
| Third party credit card  |       | 1,386,000         |       | 2,382,000             |       | 1,997,000         |       |
| Accounts receivable, net |       | 115,000           |       | 184,000               |       | 686,000           |       |
| Other                    |       | 768,000           |       | 796,000               |       | 894,000           |       |
|                     |       | $                 | 2,653,000  |                  | $          | 3,898,000         |       | $ | 4,565,000 |   |

 

Accounts receivable, net includes sales from ourwholesale division - Mary L., which are recorded net of any returns,chargebacks, discounts and allowances. The Company recorded approximately$502,000 and utilized $547,000 of provisions for sales allowances and doubtfulaccounts during the 26-week period ended June 27, 2009, which resulted inan aggregate reserve amount of $66,000, as of June 27, 2009.

 

AtJune 27, 2009, the income tax receivable was $534,000, which represents thefederal and state income tax refunds the Company expects to receive from itsfiscal 2008 tax returns. During the 26-week period ended June 27, 2009,the Company received payments of $5.3 million against the $5.9 millionreceivable, which was recorded for fiscal 2008. During fiscal 2008, the Companyrecorded income tax receivables of $5.9 million, which resulted fromestimated tax payments of $2.5 million made during fiscal 2008 and 2007combined with a refund of $3.4 million, generated as a result of the carryback on the net loss incurred for fiscal 2008.

 

**7.****              INVENTORIES**

 
| ** **      | ** ** | **June 27,** | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **      | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| Raw materials   |       | $                 | 2,075,000  |                  | $          | 2,136,000         |       | $ | 4,568,000 |   |
| Work in process |       | 1,241,000         |       | 1,614,000             |       | 2,942,000         |       |
| Finished goods  |       | 19,104,000        |       | 18,571,000            |       | 27,532,000        |       |
|            |       | $                 | 22,420,000 |                  | $          | 22,321,000        |       | $ | 35,042,000 |   |

 

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

 
| ** **                                      | ** ** | **June 27,** | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008**          | ** ** |
|                                            |       |              |       |                  |       |              |       |
| Leasehold improvements                          |       | $                 | 53,475,000 |                  | $          | 53,480,000        |       | $ | 53,692,000 |   |
| Furniture, fixtures and equipment               |       | 51,704,000        |       | 51,789,000            |       | 51,026,000        |       |
|                                            |       | 105,179,000       |       | 105,269,000           |       | 104,718,000       |       |
| Less: accumulated depreciation and amortization |       | (66,764,000       | )          | (61,949,000           | )          | (57,954,000       | )          |
|                                            |       | $                 | 38,415,000 |                  | $          | 43,320,000        |       | $ | 46,764,000 |   |

 

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

 

In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, “*Goodwill and OtherIntangible Assets”*, the Company’s goodwill andits indefinite-lived intangible assets are reviewed annually for impairment or morefrequently, if impairment indicators arise. The annual valuation process isperformed during the fourth quarter of each year. The carrying values ofgoodwill as of June 27, 2009, December 27, 2008 and June 28,2008 were $9.1 million, $9.1 million and $10.1 million, respectively.

 

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The Company recorded agoodwill impairment charge of $997,000 during the fourth quarter of fiscal2008. The carrying amounts of intangible assets as of June 27, 2009, December 27,2008 and June 28, 2008 are as follows:

 
| ** **                          | ** ** | **June 27,** | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| Indefinite-lived intangible assets: |       |              |       |                  |       |              |       |
| Trademarks-Cache                    |       | $                 | 102,000    |                  | $          | 102,000           |       | $ | 102,000 |   |
| Trademarks-Mary L                   |       | 620,000           |       | 620,000               |       | 620,000           |       |
|                                |       | 722,000           |       | 722,000               |       | 722,000           |       |
|                                |       |              |       |                  |       |              |       |
| Definite-lived intangible assets:   |       |              |       |                  |       |              |       |
| Customer relationships              |       | 300,000           |       | 300,000               |       | 300,000           |       |
| Non-compete agreements              |       | 300,000           |       | 300,000               |       | 300,000           |       |
| Favorable market lease              |       | 160,000           |       | 160,000               |       | 160,000           |       |
|                                |       | 760,000           |       | 760,000               |       | 760,000           |       |
| Less: accumulated amortization      |       | (237,000          | )          | (178,000              | )          | (118,000          | )          |
|                                |       | 523,000           |       | 582,000               |       | 642,000           |       |
|                                |       |              |       |                  |       |              |       |
| Total intangible assets, net        |       | $                 | 1,245,000  |                  | $          | 1,304,000         |       | $ | 1,364,000 |   |

 

**10.****       ACCRUED LIABILITIES**

 
| ** **                                                                    | ** ** | **June 27,** | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                    | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| Operating expenses                                                            |       | $                 | 1,592,000  |                  | $          | 2,469,000         |       | $ | 2,176,000 |   |
| Taxes, including income taxes                                                 |       | 1,998,000         |       | 2,593,000             |       | 1,722,000         |       |
| Group insurance                                                               |       | 556,000           |       | 656,000               |       | 554,000           |       |
| Sales return reserve                                                          |       | 340,000           |       | 550,000               |       | 579,000           |       |
| Leasehold additions                                                           |       | 24,000            |       | 216,000               |       | 461,000           |       |
| Gift cards, merchandise credit cards and other  customer deposits and credits |       | 3,387,000         |       | 3,644,000             |       | 3,357,000         |       |
| Store exit costs (Note 12)                                                    |       | 301,000           |       | 616,000               |       | 597,000           |       |
| Deferred income                                                               |       | 449,000           |       | 333,000               |       | 217,000           |       |
|                                                                          |       | $                 | 8,647,000  |                  | $          | 11,077,000        |       | $ | 9,663,000 |   |

 

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

 

**11.****      ****BANK DEBT**

 

OnMay 27, 2009, the Company entered into a one year credit facility withBank of America (the “Bank”). Under this facility, the Company may direct theBank to issue letters of credit up to a total of $1,425,000. Any outstandingletters of credit under this facility are collateralized by granting to thebank a security interest in various Certificates of Deposit held by the Companyand its subsidiaries with the Bank amounting to a total of $1,500,000. This oneyear credit facility will expire 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 $1,135,000 under this facility at June 27,2009.

 

**12.****       STORE EXIT COSTS**

 

During fiscal 2008, the Company recorded a pre-taxcharge of $2.8 million, net of deferred rent, for asset write down and storeclosing costs for 16 underperforming stores, of which $2.3 million was recordedfor 14 stores during the first quarter of fiscal 2008. As of December 27,2008, there was a total liability of $695,000 remaining for lease terminationand severance costs. The following table identifies the activity during thefirst half of fiscal 2009.

 
| ** **              | ** ** | **Liability  Balance  Beginning of Year** | ** ** | **Utilization** | ** ** | **Liability  Balance  End of Period** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|-----------------|------------|-------------------------------------------------|------------|
| Severance               |       | $                                                   | 79,000     |            | $          | 52,000                                          |       | $ | 27,000 |   |
| Lease termination costs |       | 616,000                                             |       | 315,000         |       | 301,000                                         |       |
|                    |       | $                                                   | 695,000    |            | $          | 367,000                                         |       | $ | 328,000 |   |

 

The Company does not expect to incursignificant additional exit costs upon the closing of these stores.  The Company has closed 11 underperformingstores as of June 27, 2009 and expects to close the remaining stores overthe balance of fiscal 2009.

 

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**13.****      ****SUBSEQUENTEVENTS**

 

On July 21, 2009, theCompany held its annual meeting of the shareholders at its headquarters locatedin New York, New York. At this meeting, shareholders approved a stock optionand performance incentive plan and also authorized an additional 20,000,000shares, which brings the total authorized to 40,000,000 shares, of theCompany’s common stock. Pursuant to the stock option and performance incentiveplan, grants representing up to 800,000 shares in the aggregate may be made toemployees who hold various positions within the Company.

 

The Company has evaluatedsubsequent events through August 6, 2009, which is the date the financialstatements were issued, and has concluded that no such events or transactionstook place, which would require a disclosure herein, except for the approval ofthe stock awards program and the authorization of additional 20,000,000 sharesof the Company’s common stock, as mentioned above.

 

**14.****      ****COMMITMENTSAND CONTINGENCIES**

 

OnJuly 3, 2007, the Company, through a wholly-owned subsidiary which wascreated in connection with the acquisition, acquired certain assets of Adrienne Victoria Designs, Inc. (“AVD”), our largestvendor. Under the terms of the agreement, Cache is obligated to make contingentpayments, not to exceed $5.5 million, based upon earn-out provisions to bepaid over 5 years, if certain conditions are met. During fiscal 2009 and2008, the earn-out provision was not achieved; therefore, Cache was notobligated to make any cash payments.

 

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 June 27, 2009, December 27, 2008 or June 28,2008.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS 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 ourfinancial position and results of operations, cause us to reduce the number andfrequency of new store openings, slow our re-modeling of existing locations orcause us to increase store closings. Other unknown or unpredictable factorsalso could harm 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-looking statements,whether as a result of new information, future events or otherwise, except tothe extent required by applicable securities laws.

 

**RESULTS OF OPERATIONS**

 

The following table sets forth our results ofoperations for the 26-week periods ended June 27, 2009 and June 28,2008, respectively, expressed as a percentage of net sales.

 
| ** **                          | ** ** | **26-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **June 27,**       | ** ** | **June 28,**       | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                          | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                               |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 57.2                    |       | 55.8                    |       | 55.6 |   | 53.8 |   |
| Gross profit                        |       | 42.8                    |       | 44.2                    |       | 44.4 |   | 46.2 |   |
| Store operating expenses            |       | 35.7                    |       | 34.4                    |       | 34.6 |   | 33.5 |   |
| General and administrative expenses |       | 8.2                     |       | 8.4                     |       | 7.5 |   | 8.4 |   |
| Store exit costs                    |       | 0.0                     |       | 1.6                     |       | 0.0 |   | 0.0 |   |
| Operating income (loss)             |       | (1.1                    | )          | (0.2                    | )          | 2.3 |   | 4.3 |   |
| Interest expense                    |       | (0.1                    | )          | (0.1                    | )          | (0.1 | ) | (0.1 | ) |
| Interest income                     |       | 0.1                     |       | 0.3                     |       | 0.1 |   | 0.3 |   |
| Income (loss) before income taxes   |       | (1.1                    | )          | 0.0                     |       | 2.3 |   | 4.5 |   |
| Income tax provision (benefit)      |       | (0.4                    | )          | 0.0                     |       | 0.8 |   | 1.7 |   |
| Net income (loss)                   |       | (0.7                    | )%         | 0.0                     | %          | 1.5 | % | 2.8 | % |

 

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:

 
| ** **                                             | ** ** | **26-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **June 27,**       | ** ** | **June 28,**       | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                                             | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total store count, at end of period                    |       | 291                     |       | 297                     |       | 291 |   | 297 |   |
| Net sales increase (decrease)                          |       | (22.5                   | )%         | 4.7                     | %          | (23.1 | )% | 4.1 | % |
| Comparable store sales increase (decrease)             |       | (21.9                   | )%         | 3.0                     | %          | (23.0 | )% | 3.1 | % |
| Average sales per transaction decrease                 |       | (11.2                   | )%         | (1.7                    | )%         | (9.0 | )% | (0.5 | )% |
| Average number of transactions increase (decrease)     |       | (12.0                   | )%         | 5.0                     | %          | (15.5 | )% | 3.5 | % |
| Net sales per average square foot                      |       | $                       | 177        |                    | $          | 223 |   | $ | 91 |   | $ | 117 |   |
| Total square footage, at end of period (in  thousands) |       | 586                     |       | 601                     |       | 586 |   | 601 |   |
|                                                        |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

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Net sales

 

During the 26-week period ended June 27,2009, net sales decreased to $109.9 million from $141.7 million, a decrease of$31.8 million, or 22.5%, as compared to the same 26-week period last year.  This reflects $29.2 million of reduced netsales, as a result of a 21.9% decrease in comparable store sales, a decrease of$1.8 million of net sales from our Mary L. division, and a decrease of $919,000from our non-comparable store sales, which was offset by a small increase inincome recognized from our co-branded credit card. The decrease in net sales isdue primarily to the ongoing economic crisis, which resulted in a dramaticreduction in mall traffic where Cache stores are primarily located. Thedecrease in net sales in fiscal 2009 at Cache stores reflected a 12.0% decreasein sales transactions and an 11.2% decrease in average dollars pertransactions.

 

During the 13-week period ended June 27,2009, net sales decreased to $56.9 million from $74.0 million, a decrease of$17.1 million, or 23.1%, as compared to the same 13-week period last year.  This reflects $16.1 million of reduced netsales, as a result of a 23.0% decrease in comparable store sales, a decrease of$550,000 of net sales from our Mary L. division, and a decrease of $528,000from our non-comparable store sales, which was offset by a small increase inincome recognized from our co-branded credit card. The decrease in net salesfor the fiscal 2009 13-week period was due to the same reasons stated above.The decrease in net sales in the quarter at Cache stores reflected a 15.5%decrease in sales transactions and a 9.0% decrease in average dollars pertransactions.

 

Gross profit

 

During the 26-week period ended June 27,2009, gross profit decreased to $47.0 million from $62.6 million, a decrease of$15.6 million, or 24.9%, as compared to the same 26-week period last year.  This decrease was primarily due to lower netsales, as described above for the 26-week period for net sales. As a percentageof net sales, gross profit decreased to 42.8% from 44.2% for the fiscal 200926-week period, as compared to the prior year period. This decrease as apercentage of net sales was primarily driven by the deleveraging of storeoccupancy costs resulting from lower sales. The decrease in net sales was partially offset by a decrease inproduction costs and higher initial mark ups, primarily due to improvedsourcing and lower freight costs, as compared to the prior year.

 

During the 13-week period ended June 27,2009, gross profit decreased to $25.2 million from $34.2 million, a decrease of$9.0 million, or 26.2%, as compared to the same 13-week period last year.  This decrease was primarily due to lower netsales, as described above for the 26-week period for net sales. As a percentageof net sales, gross profit decreased to 44.4% from 46.2% for the fiscal 200913-week period as compared to the prior year period. This decrease as apercentage of net sales was primarily driven by the deleveraging of storeoccupancy costs resulting from lower sales. The decrease in net sales was partially offset by lower freight costsand higher initial mark ups, primarily due to improved sourcing, as compared tothe prior year.

 

Store operating expenses

 

During the 26-week period ended June 27,2009, store operating expenses decreased to $39.3 million from $48.7 million, adecrease of $9.4 million, or 19.4%, as compared to the same 26-week period lastyear. Store operating expenses decreased primarily due to the Company’sinitiatives to reduce costs and preserve cash. Due to these initiatives, theCompany achieved reductions primarily in payroll expenses ($4.3 million),advertising expense ($1.8 million), depreciation expense ($1.0 million) andgroup and liability insurance expense ($658,000). Payroll expenses were lowerprimarily due to a reduction in store hours allotted to employees. The declinein advertising expense was due to a reduction in spending for postcards, directmail and photography. Depreciation expense decreased as a result of certainassets being fully depreciated as of fiscal 2008, the closure of 16underperforming stores, as indicated below, under “Store exit costs” and due tothe Company’s decision to reduce capital expenditures on new stores, storerenovations and new equipment. Group and liability insurance expense decreaseddue to changes in the Company’s medical plan coupled with reduction in premiumsfor liability insurance resulting from renegotiated contracts. As a percentageof net sales, store operating expenses increased to 35.7% from 34.4% for thefiscal 2009 26-week period as compared to the prior year period.

 

During the 13-week period ended June 27,2009, store operating expenses decreased to $19.7 million from $24.8 million, adecrease of $5.1 million, or 20.7%, as compared to the same 13-week period lastyear. Store operating expenses decreased primarily due to the Company’sinitiatives to reduce costs and preserve cash. Due to these initiatives, theCompany achieved reductions primarily in payroll expenses ($2.3 million),advertising expense ($866,000), depreciation expense ($430,000) and group andliability insurance ($580,000). The decrease in payroll expense was primarilydue to a reduction in store hours allotted to employees and the decrease inadvertising expense was due to a reduction in spending for postcards, directmail and photography. Depreciation expense decreased as a result of certainassets being fully depreciated as of fiscal 2008. Group and liability insuranceexpense decreased due to changes in the Company’s medical plan coupled withreduction in premiums for liability insurance resulting from renegotiatedcontracts. As a 

 

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percentage of net sales, store operatingexpenses increased to 34.6% from 33.5% for the fiscal 2009 13-week period ascompared to the prior year period.

 

General and administrative expenses

 

During the 26-week periodended June 27, 2009, general and administrative expenses decreased to $9.0million from $11.9 million, a decrease of $2.9 million, or 24.3%, as comparedto the same 26-week period last year. The decrease in general andadministrative expenses was primarily due to the Company’s initiatives toreduce costs and preserve cash. In total, payroll expenses decreased by $1.1million, primarily due to the one time charges associated with managementchanges incurred during the first quarter of fiscal 2008 in the amount of$616,000, combined with a reduction of base salaries paid to several of theCompany’s officers and a reduction in headcount. In addition, shipping andcommission expenses paid in connection with our Mary L. division decreased by$519,000, due to a decrease in Mary L. sales and also due to a discontinuationof outsourced shipping services for Mary L. products, which are now beingshipped through the Company’s primary carrier. Travel expense decreased by$503,000 due to a reduction in travel by corporate and regional management. Asa percentage of net sales, general and administrative expenses decreased to8.2% from 8.4% in fiscal 2009.

 

During the 13-week periodended June 27, 2009, general and administrative expenses decreased to $4.2million from $6.2 million, a decrease of $2.0 million, or 31.5%, as compared tothe same 13-week period last year. The decrease in general and administrativeexpenses was primarily due to the Company’s initiatives to reduce costs andpreserve cash. In total, payroll expenses decreased by $469,000, primarily dueto a reduction of base salaries paid to several of the Company’s officerscombined with a reduction in headcount. In addition, shipping and commissionexpenses paid in connection with our Mary L. division decreased by $596,000,due to a decrease in Mary L. sales and also due to a discontinuation ofoutsourced shipping services for Mary L. products, which are now being shippedthrough the Company’s primary carrier. Additional decreases in expenses werenoted for travel expense of $249,000, due to a reduction in travel by corporateand regional management and also in professional fees of $414,000. As apercentage of net sales, general and administrative expenses decreased to 7.5%from 8.4% in fiscal 2009.

 

Store exit costs

 

There were no exit costs incurred during fiscal 2009.During the 26-week period ended June 28, 2008, the Company recorded apre-tax charge of $2.3 million ($1.5 million after tax or $0.11 per dilutedshare) for 14 underperforming stores, of which we closed six stores duringfiscal 2008 and an additional five stores during the 26-week period ended June 27,2009. The remaining stores will close over the balance of fiscal 2009. Includedin the exit costs is a write down of equipment and leasehold improvements andfurniture and fixtures in the amount of $2.1 million, severance accrual of$198,000 and lease termination costs for $665,000. These costs were offset bythe reversal of $626,000 of deferred rents.

 

Other income/expense

 

During the 26-week period ended June 27,2009, other income (expense) decreased to $29,000 from $356,000, a decrease of$327,000 or 91.9%, as compared to the same 26-week period last year. Thisdecrease was due to a reduction in interest

 

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income of $360,000, caused by lower interestrates and lower average cash and marketable securities balances. The reductionin average cash balances was primarily due to repurchases of the Company’scommon stock.

 

During the 13-week period ended June 27,2009, other income (expense) decreased to $13,000 from $134,000, a decrease of$121,000 or 90.3%, as compared to the same 13-week period last year. Thisdecrease was due to a reduction in interest income of $137,000, primarilycaused by lower interest rates.

 

Income taxes

 

During the 26-week period ended June 27,2009, an income tax benefit of $432,000 was recorded as compared to an incometax provision of $31,000 recorded in the same 26-week period last year. Duringthe 13-week period ended June 27, 2009, the income tax provision decreasedto $486,000 from $1.2 million, a decrease of $750,000 or 60.7%, as compared tothe same 13-week period last year. The estimated effective tax rate for fiscal2009 is projected to be 36.5%, as compared to the fiscal 2008 estimate of37.0%.

 

Net income (loss)

 

As a result of the factors discussed above,net loss of $751,000 and net income of $845,000 was recorded during the 26 and13-week periods ended June 27, 2009, respectively. In fiscal 2008, netincome of $52,000 and $2.1 million was recorded during the 26 and 13-weekperiods ended June 28, 2008, respectively.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’s cash requirements are primarily forworking capital, inventory for new stores, construction of new stores,remodeling of existing stores and to improve and enhance our informationtechnology systems. We have historically satisfied our cash requirementsprincipally through cash flow from operations. During the 26-week period ended June 27,2009, we generated $7.0 million of cash flow from operations, as compared to$1.7 million used for the same period in fiscal 2008. We expect to continue tomeet our operating cash requirements primarily through cash flows fromoperating activities, existing cash and equivalents, and short-terminvestments. At June 27, 2009, we had working capital of $45.7 million,cash and marketable securities of $34.8 million and $3.8 million in third partydebt outstanding related to the purchase of AVD. The cash and marketablesecurities at June 27, 2009 included certificates of deposit of $1.5million that have been placed by the Company as collateral against a one yearcredit facility.

 

The following table sets forth our cash flows for theperiods indicated:

 
| ** **                                           | ** ** | **26-Weeks Ended**       | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **June 27,********2009** | ** ** | **June 28,********2008** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                             | 6,994,000  |   | $ | (1,658,000 | ) |
| Net cash provided by (used in) investing  activities |       | (7,779,000                    | )          | 10,539,000 |   |
| Net cash used in financing activities                |       | (1,235,000                    | )          | (15,079,000 | ) |
| Net decrease in cash and equivalents                 |       | $                             | (2,020,000 | ) | $ | (6,198,000 | ) |

 

During the 26 -week period ended June 27, 2009,cash and equivalents decreased by $2.0 million, primarily due to net purchasesof marketable securities ($5.4 million), certificates of deposit — restricted($1.5 million) used as collateral for outstanding letters of credit andpurchases of equipment and leasehold improvements ($919,000) for our new andremodeled stores. The decreases in the various areas mentioned above was offsetby a decrease in receivables and income tax receivables ($6.6 million),primarily due to collection of an income tax receivable recorded during fiscal2008. Decreases were also due to the repurchases of common stock ($586,000) andrepayment of a note payable ($649,000) in connection with the acquisition ofAVD.

 

During the 26-week period ended June 27,2009, the Company opened two new stores and is scheduled to open an additionalstore during the fourth quarter of fiscal 2009. No new stores were openedduring the 13-week period ended June 27, 2009.  We spent approximately $919,000 through June 27,2009, and expect to spend an additional $1.0 million to $1.5 million during thebalance of fiscal 2009, for new store openings and existing remodelings. Weannounced the closure of 16 underperforming stores throughout fiscal 2008, ofwhich we have closed 11 stores as of June 27, 2009 and expect to close theremaining stores over the balance of fiscal 2009. The Company accrued for thecost of closing these stores during fiscal 2008, as noted under note 12 of ourcondensed consolidated financial statements included herein. We have closedthree additional stores in the normal course of business during the 26-weekperiod ended June 27, 2009.

 

During the first half of fiscal 2009, theCompany had repurchased in the open market a total of 310,199 shares at a costof $586,000, or an average of $1.89 per share. This brings the totalrepurchase, since inception of the buyback program in 2007, to 3,682,000shares, at a cost of $39.8 million or an average of $10.81 per share.

 

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OnMay 27, 2009, the Company entered into a one year credit facility withBank of America (the “Bank”). Under this facility, the Company may direct theBank to issue letters of credit up to a total of $1,425,000. Any outstandingletters of credit under this facility are collateralized by granting to thebank a security interest in various Certificates of Deposit held by the Companyand its subsidiaries with the Bank amounting to a total of $1,500,000. This oneyear credit facility will expire on May 1, 2010.

 

The Company had outstanding letters of creditof $1.1 million, $585,000 and $569,000 at June 27, 2009, December 27,2008 and June 28, 2008, respectively.

 

#### **Inflation / Recession**

#### ** **

The Company does not believe that its sales revenue oroperating results have been materially impacted by inflation during the pasttwo fiscal years. There can be no assurance, however, that our sales revenue oroperating results will not be impacted by inflation in the future.

 

Recent economic events have affected, and continuedeconomic weakness in the United States is likely to continue to affect, thesales volume and profitability levels of our company.  Furthermore, a further reduction in theavailability of consumer credit, especially of credit cards, is likely toadversely affect customer demand for our products, which could result in adecrease in our net sales, which could adversely affect our business, financialcondition and results of operations.

 

Many of our suppliers rely on working capitalfinancing to fund their operations.  As aresult of current economic conditions, lenders have over the last severalmonths generally tightened credit standards and terms. Recently, there havebeen several news articles in the financial media about the possibility of CITfiling for bankruptcy protection. CIT provides financing and collectionservices to several of the Company’s suppliers. A CIT bankruptcy may createfinancing or other challenges to our suppliers. To the extent that any of oursuppliers are unable to obtain adequate credit or their borrowing costsincrease, we may experience delays in obtaining products, the suppliers mayincrease their wholesale prices to us or they may modify payment terms in amanner that is unfavorable to us.  Any ofthe foregoing could adversely affect our net sales or gross margins, whichcould adversely affect our business, financial condition and results ofoperations.

 

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

#### ** **

On July 3, 2007, the Company acquired certainassets of Adrienne Victoria Designs, Inc. (“AVD”), our largest vendor.Under the terms of the agreement, the Company is obligated to make contingentpayments, not to exceed $5.5 million, based upon an earn-out to be paid over 5years, if certain conditions are met. During the first and second quarters offiscal 2009 and 2008, the earn-out threshold was not achieved; therefore, theCompany was not obligated to make any cash payments. Other than operating leasecommitments and potential payment obligations pursuant to the AVD earn-out, we are not a party toany material off-balance sheet financing arrangements.

 

# **Critical Accounting Policies andEstimates**

# ** **

The Company’s accountingpolicies are more fully described in Note 1 of Notes to Consolidated FinancialStatements in our fiscal 2008 Form 10-K. As disclosed in Note 1 of Notes to Consolidated Financial Statements,the preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions about future events that affectthe amounts reported in the consolidated financial statements and accompanyingnotes. Since future events and their effects cannot be determined with absolutecertainty, actual results will differ from those estimates. We evaluate our estimates and judgments on anongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances.  Actualresults will differ from these under different assumptions or conditions.

 

The Company’s managementbelieves the following critical accounting policies, among others, affect itsmore significant judgments and estimates used in preparation of theConsolidated Financial Statements.

 

*Certificates of deposit — restricted.*****From time to time, the Company directsBank of America (the “Bank”) to issue letters of credit under its one yearcredit facility with the bank. These letters of credit are secured againstCertificates of Deposit held by the Company at the Bank.  Any Certificates of Deposit used to securethe Letters of Credit are reported as Restricted Funds. As of June 27,2009, the Company had $1.5 million of Certificates of deposit securing alloutstanding letters of credit. These Certificates of Deposit are reported asCurrent when the underlying Letters of Credit expire within one year from theend of the reporting period, or as Non-Current when the underlying Letters ofCredit expire after one year from the end of the reporting period.

 

***Allowance fordoubtful accounts***. The allowance fordoubtful accounts, which is regularly reviewed, is an estimate of probablecredit losses in the existing accounts receivable. The allowance is determinedbased on historical write-off experience and the current retailer environment.Balances over 90 days past due and over a specified amount are reviewedindividually for collectability; other balances are considered on an aggregatebasis considering the aging of balances. Account balances are written off against the allowance when it isprobable the receivable will not be recovered. There is no off-balance sheetcredit exposure related to our customers. Management believes that the riskassociated with trade accounts receivable is adequately provided for in theallowance for doubtful accounts.  Duringthe 26-week period ended June 27, 2009, we recorded a reserve ofapproximately $502,000 and utilized $547,000, resulting in an aggregate reserveamount of $66,000 as of June 27, 2009. As of December 27, 2008, theCompany reported a reserve balance of $111,000.

** **

*Inventories**.*The Company’s finished goods inventoriesat our retail stores are valued at the lower of cost or market using the retailinventory method. Under the retail inventory method (“RIM”), the valuation ofinventories at cost and the resulting gross margins are calculated by applyinga calculated cost to retail ratio to the retail value of inventories. RIM is anaveraging

 

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method that is widely used in the retail industry dueto its practicality. Additionally, it is recognized that the use of RIM willresult in valuing inventories at the lower of cost or market if markdowns arecurrently taken as a reduction of the retail value of inventories. Inherent inthe RIM calculation are certain significant management judgments including,among others, merchandise markon, markups, and markdowns, which significantlyimpact the ending inventory valuation at cost as well as the resulting grossmargins. We take markdowns due to changes in fashion and style, based on thefollowing factors: (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 valuationthat results in a carrying value at the lower of cost or market. For our AVDdivision, which made up approximately 15.3% of total inventory as of June 27,2009, the raw materials, work in process and finished goods inventories arevalued at the lower of cost or market value, using the first-in-first-outvaluation method. The Company ensures that the raw materials, work in processand finished goods are properly valued by taking into account any obsolescenceand recording a reserve in accordance with our established policy.

 

***Finite-longlived assets.***  The Company’s judgmentregarding the existence of impairment indicators is based on market andoperational performance. We assess the impairment of long-lived assets,primarily fixed assets, whenever events or changes in circumstances indicatethat the carrying value may not be recoverable and exceeds the fair marketvalue. Factors we consider important which could trigger an impairment reviewinclude the following:

** **

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

** **

**·**       significant negativeindustry or economic trends;

** **

**·**       storeclosings; or

** **

**·**       underperformingbusiness trends.

** **

The Company evaluates finite-lived assets in accordancewith SFAS No.144, “*Accounting for theImpairment or Disposal of Long-lived Assets*” (“SFAS No. 144”).Finite-lived assets are evaluated for recoverability in accordance with SFAS No. 144whenever events or changes in circumstances indicate that an asset may havebeen impaired. In evaluating an asset for recoverability, the Company estimatesthe future cash flows expected to result from the use and eventual dispositionof the asset. If the sum of the expected future cash flows (undiscounted and withoutinterest charges) is less than the carrying amount of the asset, an impairmentloss, equal to the excess of the carrying amount over the fair market value ofthe asset is recognized. Various factors including future sales growth andprofit margins are included in this analysis. To the extent these futureprojections or strategies change, the conclusion regarding impairment maydiffer from the current estimates. No impairment charges were recorded duringthe 26-week period ended June 27, 2009 and June 28, 2008. Cacherecorded an impairment charge of $1.1 million for 12 stores during the fourthquarter of fiscal 2008.

 

*Goodwill and Intangible Assets*. The Company adopted SFAS No. 142, “*Goodwill and Other Intangible Assets*” (“SFASNo. 142”) on December 30, 2001. SFAS No. 142 requires thatratable amortization of goodwill be replaced with periodic tests of thegoodwill’s impairment. During fiscal 2007, in connection with the acquisitionof AVD, the Company recorded goodwill and other intangible assets. The Companyperforms impairment testing of its subsidiary—AVD, which considers the Company’sfair value to determine whether an impairment charge related to the carryingvalue of the Company’s recorded goodwill and other intangible assets isnecessary. This is reevaluated annually during the fourth quarter, or morefrequently if necessary. The Company considers many factors in evaluatingwhether the carrying value of the recorded goodwill will be recoverable.Factors used to determine this primarily include declines in stock price andthe market capitalization in relation to the book value of the Company,discounted projected cash flows of the reporting unit and valuation ofcompanies comparable to the reporting unit. No impairment charges were recordedduring the 26-week period ended June 27, 2009 and June 28, 2008.Cache recorded an impairment charge of approximately $1.0 million against thecarrying value of AVD’s goodwill during the fourth quarter of fiscal 2008.

 

*Self Insurance.*The Company is self-insured for losses andliabilities related primarily to employee health and welfare claims up tocertain thresholds. Losses are accrued based upon our estimates of theaggregate liability for claims incurred using certain actuarial assumptionsfollowed in the insurance industry and based on Company experience. Adjustmentsto earnings resulting from changes in historical loss trends have beeninsignificant for fiscal 2009 and 2008. Further, we do not anticipate anysignificant change in loss trends, settlements or other costs that would causea significant change in our earnings. We maintain stop-loss insurance coverage,which covers us for benefits paid in excess of limits as defined in the plan.

 

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*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 $123,000 and $159,000 ofbreakage income during the 26-week periods ended June 27, 2009 and June 28,2008, 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) to earnings resulting fromrevisions to estimates on our sales return provision were approximately$(210,000) and $(173,000) for the 26-week period ended June 27, 2009 and June 28,2008, respectively. Amounts billed to customers for shipping and handling feesare included in net sales at the time of shipment. Costs incurred at our storesfor shipping and handling are included in cost of sales. The Company recordsrevenues net of applicable sales tax.

 

In connection with theacquisition of AVD, the Company also acquired the rights to the “Mary L.”trademark. Mary L. products are sold in upper tier department stores and, as aresult, Mary L. sales are included under net sales when the merchandise isshipped to the department stores. Mary L. sales are recorded net of anyreturns, chargebacks, discounts and allowances. We also maintain a reserve as areduction to sales for potential returns, chargebacks, discounts andallowances. During the 26-week period ended June 27, 2009, we recorded areserve of approximately $502,000 and utilized $547,000, resulting in anaggregate reserve amount of $66,000 as of June 27, 2009.

 

Under Cache’s co-brandedvisa card program, the Company receives 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 26-week periods ended June 27, 2009 and June 28,2008, the Company received approximately $593,000 and $778,000 respectively, inconnection with activated cards. The amount of fee income recorded in connectionwith activated credit cards was $197,000 and $76,000 for the 26-week periodended June 27, 2009 and June 28, 2008, respectively.

 

The Company also receivesfrom the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on apercentage of net purchases made by cardholders at Cache or other businesses.Cache has determined that since it has not incurred any significant orrecurring costs in relation to the co-branded credit card program the salesroyalties earned in connection to the agreement will be recorded under netsales. The fees that are incurred by the Company are cardholder incentives,which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. Theamount of sales royalty income recorded was $145,000 and $100,000 for the 26-weekperiod ended June 27, 2009 and June 28, 2008, respectively.

 

The Company also offers itscard holders a program whereby points can be earned on net purchases made withthe co-branded credit card. Five reward points are awarded for each dollarspent at Cache and one reward point is awarded for each dollar spent atnon-Cache businesses.  A cardholder whosecredit card account is not delinquent, in default or closed will beautomatically eligible to receive a $25 Cache gift card upon accrual of 2,500reward points. The issuing bank bears the cost of the reward program and isresponsible for the administration and management of the program.

 

*Income Taxes.*****The Company accounts for income taxes in accordancewith SFAS No. 109, “*Accounting forIncome Taxes*.” This statement requires the Company to recognizedeferred tax liabilities and assets for the expected future tax consequences ofevents that have been recognized in the Company’s financial statements or taxreturns. Under this method, deferred tax liabilities and assets are determinedbased on the difference between the financial statement carrying amounts andtax bases of assets and liabilities, using applicable tax rates for the yearsin which the differences are expected to reverse. When tax contingencies becomeprobable, a liability for the contingent amount is estimated based upon theCompany’s best estimation of the potential exposures associated with the 

 

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timing and amount of deductions, as well as varioustax filing positions. As of June 27, 2009, the Company has recorded a$288,000 reserve, net of federal benefit for potential tax contingencies. Nosuch reserves were recorded as of June 28, 2008.

 

Effective December 31, 2006, the Company adoptedthe provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48,“*Accounting for Uncertainty in Income Taxes*”(“FIN 48”). FIN 48 prescribes a comprehensive model of how a company shouldrecognize, measure, present and disclose in its financial statements uncertaintax positions that the company has taken or expects to take on a tax return.FIN 48 states that a tax benefit from an uncertain tax position may berecognized if it is “more likely than not” that the position is sustainable,based upon its technical merits. The tax benefit of a qualifying position isthe largest amount of tax benefit that has greater than a 50% likelihood ofbeing realized upon the ultimate settlement with a taxing authority having fullknowledge of all relevant information.

 

*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). We believe that historical quarterly trends were disrupted infiscal 2008 by macroeconomic conditions during the second half of the fiscalyear. These macroeconomic conditions may continue to disrupt historical trendsin fiscal 2009.

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our market risk relates primarily to changes ininterest rates. The interest rate risk involves the short-term investment ofexcess cash in short-term, investment-grade interest-bearing securities. Theseinvestments are included in cash and equivalents, marketable securities, and certificates of deposit — restricted on our balance sheet. If there are changes in interestrates, those changes would affect the investment income we earn on theseinvestments and, therefore, impact our cash flows and results of operations.

 

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**ITEM 4.CONTROLS AND PROCEDURES**

 

The Company is committed to maintainingdisclosure controls and procedures designed to ensure that information requiredto be disclosed in our periodic reports filed under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate, to allow for timely decisions regarding required disclosure.

 

Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the period covered bythis Report.  There are inherentlimitations to the effectiveness of any system of disclosure controls andprocedures, including the possibility of human error and the circumvention oroverriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can onlyprovide reasonable assurance of achieving their control objectives.  Based on this evaluation, our principalexecutive officer and our principal financial officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this Report.

 

There has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act) during the 26-weeks ended June 27,2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM1A.  RISK FACTORS**

 

***The Further Spread of H1N1 Influenza May Adversely Affect Our Business***

 

During April 2009,the World Health Organization issued a warning for the H1N1 virus. The furtherspread of H1N1 influenza, which is more commonly known as “swine flu,” mayadversely affect our business.  We couldbe adversely affected if one or more jurisdictions in which we have storesimpose mandatory store closures or seek voluntary closures.  Furthermore, shoppers may seek to avoidcrowded or enclosed locations such as malls, where substantially all of ourstores are located.  H1N1 influenza alsocould adversely affect our ability to adequately staff our stores, receivemerchandise deliveries on a timely basis and/or perform functions at thecorporate level.  Even if H1N1 influenzadoes not spread significantly or does not result in a significant number ofadditional fatalities, the perceived risk of infection or significant healthrisk may adversely affect our business.

 

**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: August 6, 2009 |
|--------|----------------------------|
|   | 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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