Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended September 27, 2008**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom                   to                   **

 

**Commission File Number: 0-10345**

 

**CACHE, INC.**

(Exactname of registrant 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)

 

 

(Formername, 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 registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller 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) |   |                             |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes  o   No x

 

As of October 31 2008,13,243,036 common shares were outstanding.

 

 

 

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Table of Contents

 

CACHE, INC. AND SUBSIDIARIES

 

INDEX

** **
| PART I. FINANCIAL INFORMATION | 3                                                                                                                                                     |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                                                  |   |
|  Item 1.                      | Condensed Consolidated Financial Statements (unaudited)                                                                                               | 3 |
|                                    | Condensed  Consolidated Balance Sheets as of September 27, 2008, December 29,  2007 and September 29, 2007                             | 3 |
|                                    | Condensed  Consolidated Statements of Income for the thirty-nine and thirteen week periods  ended September 27, 2008 and September 29, 2007 | 4 |
|                                    | Condensed  Consolidated Statements of Cash Flows for the thirty-nine week periods ended September 27, 2008 and September 29,  2007          | 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                                                                                           | 18 |
|  Item 4.                      | Controls and Procedures                                                                                                                               | 18 |
|                                    |                                                                                                                                                  |   |
| PART II. OTHER INFORMATION    | 19                                                                                                                                                    |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders                                                                                                  | 19 |
|                                    |                                                                                                                                                  |   |
| Item 6.                            | Exhibits                                                                                                                                              | 19 |
|                                    |                                                                                                                                                  |   |
| SIGNATURES                              | 20                                                                                                                                                    |

 

2

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Tableof Contents

 

**PART I - FINANCIAL INFORMATION**

 

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

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                     | ** ** | **September 27,** | ** **      | **December 29,** | ** ** | **September 29,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                     | ** ** | **2008**               | ** **      | **2007**              | ** ** | **2007**               | ** ** |
| ** **                                                                                                     | ** ** | **(Unaudited)**        | ** **      | **(Audited)**         | ** ** | **(Unaudited)**        | ** ** |
| **ASSETS**                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Current  assets:**                                                                                           | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Cash and equivalents**                                                                                       | ** ** | **$**                  | **2,023,000**   | ** **            | **$**      | **7,243,000**          | ** ** | **$** | **8,975,000** | ** ** |
| **Marketable securities**                                                                                      | ** ** | **23,570,000**         | ** **      | **42,887,000**        | ** ** | **40,245,000**         | ** ** |
| **Receivables, net**                                                                                           | ** ** | **4,848,000**          | ** **      | **4,788,000**         | ** ** | **4,571,000**          | ** ** |
| **Inventories, net**                                                                                           | ** ** | **33,802,000**         | ** **      | **30,547,000**        | ** ** | **36,329,000**         | ** ** |
| **Prepaid expenses and other current assets**                                                                  | ** ** | **5,611,000**          | ** **      | **2,465,000**         | ** ** | **5,439,000**          | ** ** |
| **Total current assets**                                                                                       | ** ** | **69,854,000**         | ** **      | **87,930,000**        | ** ** | **95,559,000**         | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Equipment and leasehold improvements, net**                                                                  | ** ** | **46,393,000**         | ** **      | **49,298,000**        | ** ** | **49,768,000**         | ** ** |
| **Goodwill**                                                                                                   | ** ** | **10,089,000**         | ** **      | **10,089,000**        | ** ** | **9,972,000**          | ** ** |
| **Intangible assets, net**                                                                                     | ** ** | **1,334,000**          | ** **      | **1,423,000**         | ** ** | **1,482,000**          | ** ** |
| **Other assets**                                                                                               | ** ** | **389,000**            | ** **      | **385,000**           | ** ** | **383,000**            | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Total assets**                                                                                               | ** ** | **$**                  | **128,059,000** | ** **            | **$**      | **149,125,000**        | ** ** | **$** | **157,164,000** | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                 | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Current  liabilities:**                                                                                      | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Accounts payable**                                                                                           | ** ** | **$**                  | **8,931,000**   | ** **            | **$**      | **10,510,000**         | ** ** | **$** | **12,623,000** | ** ** |
| **Note payable**                                                                                               | ** ** | **1,248,000**          | ** **      | **1,586,000**         | ** ** | **1,695,000**          | ** ** |
| **Accrued compensation**                                                                                       | ** ** | **2,682,000**          | ** **      | **1,910,000**         | ** ** | **2,589,000**          | ** ** |
| **Accrued liabilities**                                                                                        | ** ** | **10,366,000**         | ** **      | **14,252,000**        | ** ** | **10,489,000**         | ** ** |
| **Total current liabilities**                                                                                  | ** ** | **23,227,000**         | ** **      | **28,258,000**        | ** ** | **27,396,000**         | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Note payable**                                                                                               | ** ** | **3,450,000**          | ** **      | **4,348,000**         | ** ** | **4,640,000**          | ** ** |
| **Other liabilities**                                                                                          | ** ** | **16,335,000**         | ** **      | **16,172,000**        | ** ** | **15,983,000**         | ** ** |
| **Deferred income taxes, net**                                                                                 | ** ** | **133,000**            | ** **      | **83,000**            | ** ** | **198,000**            | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Commitments and contingencies**                                                                              | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **STOCKHOLDERS’  EQUITY**                                                                                 | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Common stock, par value $.01; authorized, 20,000,000 shares; issued  16,410,036, 16,319,358 and 16,309,358** | ** ** | **164,000**            | ** **      | **163,000**           | ** ** | **163,000**            | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Additional paid-in capital**                                                                                 | ** ** | **47,075,000**         | ** **      | **46,136,000**        | ** ** | **45,800,000**         | ** ** |
| **Retained earnings**                                                                                          | ** ** | **76,581,000**         | ** **      | **78,175,000**        | ** ** | **73,243,000**         | ** ** |
| **Treasury stock, 3,167,000,  1,695,032 and 637,029 shares, at cost**                                          | ** ** | **(38,906,000**        | **)**           | **(24,210,000**       | **)**      | **(10,259,000**        | **)**      |
| **Total stockholders’ equity**                                                                            | ** ** | **84,914,000**         | ** **      | **100,264,000**       | ** ** | **108,947,000**        | ** ** |
| ** **                                                                                                     | ** ** | ** **             | ** **      | ** **            | ** ** | ** **             | ** ** |
| **Total liabilities and stockholders’ equity**                                                            | ** ** | **$**                  | **128,059,000** | ** **            | **$**      | **149,125,000**        | ** ** | **$** | **157,164,000** | ** ** |

 

**The accompanying Notes to Condensed Consolidated Financial Statementsare an integral part of these statements.**

 

3

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**CACHE,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**FOR THETHIRTY-NINE WEEKS ENDED**

**(Unaudited)**

 
| ** **                                        | ** ** | **September 27,** | ** **      | **September 29,** | ** ** |
|---------------------------------------------------|------------|------------------------|-----------------|------------------------|------------|
| ** **                                        | ** ** | **2008**               | ** **      | **2007**               | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Net sales**                                     | ** ** | **$**                  | **199,820,000** | ** **             | **$**      | **195,953,000** | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Cost of sales, including buying and occupancy** | ** ** | **111,599,000**        | ** **      | **105,361,000**        | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Gross profit**                                  | ** ** | **88,221,000**         | ** **      | **90,592,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Expenses**                                      | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Store operating expenses**                      | ** ** | **71,741,000**         | ** **      | **72,703,000**         | ** ** |
| **General and administrative expenses**           | ** ** | **16,676,000**         | ** **      | **17,399,000**         | ** ** |
| **Store exit costs**                              | ** ** | **2,757,000**          | ** **      | **(78,000**            | **)**      |
| **Total expenses**                                | ** ** | **91,174,000**         | ** **      | **90,024,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Operating income (loss)**                       | ** ** | **(2,953,000**         | **)**           | **568,000**            | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Other  income (expense):**                      | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Interest expense**                              | ** ** | **(189,000**           | **)**           | **(78,000**            | **)**      |
| **Interest income**                               | ** ** | **612,000**            | ** **      | **2,007,000**          | ** ** |
| **Total other income, net**                       | ** ** | **423,000**            | ** **      | **1,929,000**          | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Income (loss) before income taxes**             | ** ** | **(2,530,000**         | **)**           | **2,497,000**          | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Income tax provision (benefit)**                | ** ** | **(936,000**           | **)**           | **908,000**            | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Net income (loss)**                             | ** ** | **$**                  | **(1,594,000**  | **)**                  | **$**      | **1,589,000** | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Basic earnings (loss) per share**               | ** ** | **$**                  | **(0.12**       | **)**                  | **$**      | **0.10** | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Diluted earnings (loss) per share**             | ** ** | **$**                  | **(0.12**       | **)**                  | **$**      | **0.10** | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Basic weighted average shares outstanding**     | ** ** | **13,372,000**         | ** **      | **16,189,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Diluted weighted average shares outstanding**   | ** ** | **13,372,000**         | ** **      | **16,454,000**         | ** ** |

 

**The accompanying Notes to Condensed Consolidated Financial Statementsare an integral part of these statements.**

 

4

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**CACHE,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**FOR THETHIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                        | ** ** | **September 27,** | ** **     | **September 29,** | ** ** |
|---------------------------------------------------|------------|------------------------|----------------|------------------------|------------|
| ** **                                        | ** ** | **2008**               | ** **     | **2007**               | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net sales**                                     | ** ** | **$**                  | **58,139,000** | ** **             | **$**      | **60,572,000** | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Cost of sales, including buying and occupancy** | ** ** | **32,525,000**         | ** **     | **32,905,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Gross profit**                                  | ** ** | **25,614,000**         | ** **     | **27,667,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Expenses**                                      | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Store operating expenses**                      | ** ** | **23,040,000**         | ** **     | **23,072,000**         | ** ** |
| **General and administrative expenses**           | ** ** | **4,805,000**          | ** **     | **4,906,000**          | ** ** |
| **Store exit costs**                              | ** ** | **449,000**            | ** **     | **(78,000**            | **)**      |
| **Total expenses**                                | ** ** | **28,294,000**         | ** **     | **27,900,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Operating loss**                                | ** ** | **(2,680,000**         | **)**          | **(233,000**           | **)**      |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Other  income (expense):**                      | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Interest expense**                              | ** ** | **(58,000**            | **)**          | **(78,000**            | **)**      |
| **Interest income**                               | ** ** | **125,000**            | ** **     | **523,000**            | ** ** |
| **Total other income, net**                       | ** ** | **67,000**             | ** **     | **445,000**            | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Income (loss) before income taxes**             | ** ** | **(2,613,000**         | **)**          | **212,000**            | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Income tax provision (benefit)**                | ** ** | **(967,000**           | **)**          | **51,000**             | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net income (loss)**                             | ** ** | **$**                  | **(1,646,000** | **)**                  | **$**      | **161,000** | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Basic earnings (loss) per share**               | ** ** | **$**                  | **(0.12**      | **)**                  | **$**      | **0.01** | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Diluted earnings (loss) per share**             | ** ** | **$**                  | **(0.12**      | **)**                  | **$**      | **0.01** | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Basic weighted average shares outstanding**     | ** ** | **13,229,000**         | ** **     | **15,988,000**         | ** ** |
| ** **                                        | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Diluted weighted average shares outstanding**   | ** ** | **13,229,000**         | ** **     | **16,187,000**         | ** ** |

 

**The accompanying Notes to Condensed Consolidated Financial Statementsare an integral part of these statements.**

 

5

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**CACHE,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THETHIRTY-NINE WEEKS ENDED**

**(Unaudited)**

** **
| ** **                                                                                                  | ** ** | **September 27,** | ** **     | **September 29,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **2008**               | ** **     | **2007**               | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net income (loss)**                                                                                       | ** ** | **$**                  | **(1,594,000** | **)**                  | **$**      | **1,589,000** | ** ** |
| **Adjustments  to reconcile net income (loss) to net cash****provided  by (used in) operating activities:** | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Depreciation and amortization**                                                                           | ** ** | **9,406,000**          | ** **     | **8,719,000**          | ** ** |
| **Write down of equipment and leasehold improvements, net of deferred  rent**                               | ** ** | **1,570,000**          | ** **     | **—**             | ** ** |
| **Provision for sales allowance and doubtful accounts, net**                                                | ** ** | **(8,000**             | **)**          | **—**             | ** ** |
| **Stock-based compensation**                                                                                | ** ** | **224,000**            | ** **     | **718,000**            | ** ** |
| **Non-cash interest expense on note payable**                                                               | ** ** | **58,000**             | ** **     | **78,000**             | ** ** |
| **Deferred income taxes**                                                                                   | ** ** | **50,000**             | ** **     | **(1,870,000**         | **)**      |
| **Gift card breakage**                                                                                      | ** ** | **(222,000**           | **)**          | **(222,000**           | **)**      |
| **Amortization of deferred rent**                                                                           | ** ** | **(1,713,000**         | **)**          | **(1,160,000**         | **)**      |
| **Excess tax benefit from stock-based compensation**                                                        | ** ** | **(155,000**           | **)**          | **—**             | ** ** |
| **Non-cash Lillie Rubin exit costs**                                                                        | ** ** | **—**             | ** **     | **(78,000**            | **)**      |
| **Other**                                                                                                   | ** ** | **—**             | ** **     | **(18,000**            | **)**      |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Change  in assets and liabilities:**                                                                      | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Decrease (increase) in receivables**                                                                      | ** ** | **(52,000**            | **)**          | **223,000**            | ** ** |
| **Increase in inventories**                                                                                 | ** ** | **(3,255,000**         | **)**          | **(487,000**           | **)**      |
| **Decrease (increase) in prepaid expenses and other current assets**                                        | ** ** | **(2,995,000**         | **)**          | **1,778,000**          | ** ** |
| **Increase (decrease) in accounts payable**                                                                 | ** ** | **(1,579,000**         | **)**          | **419,000**            | ** ** |
| **Increase (decrease) in accrued liabilities, accrued compensation and  other liabilities**                 | ** ** | **(78,000**            | **)**          | **2,872,000**          | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net cash provided by (used in) operating activities**                                                     | ** ** | **(343,000**           | **)**          | **12,561,000**         | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Purchase of marketable securities**                                                                       | ** ** | **(29,482,000**        | **)**          | **(69,257,000**        | **)**      |
| **Maturities of marketable securities**                                                                     | ** ** | **48,799,000**         | ** **     | **71,106,000**         | ** ** |
| **Purchase of assets from Adrienne Victoria Designs**                                                       | ** ** | **—**             | ** **     | **(5,701,000**         | **)**      |
| **Purchase of equipment and leasehold improvements**                                                        | ** ** | **(8,920,000**         | **)**          | **(9,274,000**         | **)**      |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net cash provided by (used in) investing activities**                                                     | ** ** | **10,397,000**         | ** **     | **(13,126,000**        | **)**      |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Proceeds from the issuance of common stock**                                                              | ** ** | **561,000**            | ** **     | **436,000**            | ** ** |
| **Excess tax benefit from stock-based compensation**                                                        | ** ** | **155,000**            | ** **     | **—**             | ** ** |
| **Repayment of note payable**                                                                               | ** ** | **(1,294,000**         | **)**          | **—**             | ** ** |
| **Repurchase of common stock**                                                                              | ** ** | **(14,696,000**        | **)**          | **(10,259,000**        | **)**      |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net cash used in financing activities**                                                                   | ** ** | **(15,274,000**        | **)**          | **(9,823,000**         | **)**      |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Net decrease in cash and equivalents**                                                                    | ** ** | **(5,220,000**         | **)**          | **(10,388,000**        | **)**      |
| **Cash and equivalents, at beginning of period**                                                            | ** ** | **7,243,000**          | ** **     | **19,363,000**         | ** ** |
| **Cash and equivalents, at end of period**                                                                  | ** ** | **$**                  | **2,023,000**  | ** **             | **$**      | **8,975,000** | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Supplemental  disclosure of cash flow information:**                                                      | ** ** | ** **             | ** **     | ** **             | ** ** |
| ** **                                                                                                  | ** ** | ** **             | ** **     | ** **             | ** ** |
| **Interest paid**                                                                                           | ** ** | **$**                  | **205,000**    | ** **             | **$**      | **—** | ** ** |
| **Income taxes paid**                                                                                       | ** ** | **$**                  | **1,901,000**  | ** **             | **$**      | **1,880,000** | ** ** |
| **Issuance of note payable in connection with acquisition of assets of  Adrienne Victoria Designs**         | ** ** | **$**                  | **—**     | ** **             | **$**      | **6,257,000** | ** ** |
| **Accrued equipment and leasehold improvements**                                                            | ** ** | **$**                  | **564,000**    | ** **             | **$**      | **696,000** | ** ** |

 

**The accompanying Notes to Condensed Consolidated Financial Statementsare an integral part of these statements.**

 

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**CACHE,INC.**

**NOTES TOCONDENSED CONSOLIDATED 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 currently operate two chains of women’s apparelspecialty stores, of which 286 stores are operated under the trade name “Cache”and nine stores are operated under the trade name “Cache Luxe”.

 

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 consist primarilyof normal recurring accruals and estimates that impact the carrying value ofassets and liabilities. Actual results may materially differ from theseestimates.

 

Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements for the year ended December 29,2007, 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 29,2007 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 52 or53 weeks. The years ended December 29, 2007 (“fiscal 2007”) and December 27,2008 (“fiscal 2008”) are each 52-week years.

 

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

 

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

 

TheCompany records compensation expense associated with stock options inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “*Share-BasedPayment*”, as interpreted by SEC Staff Accounting Bulletin No. 107.During the 39 and 13-week periods ended September 27, 2008, the Companyrecognized approximately $224,000 and $75,000, respectively, in stock basedcompensation expense and for the same periods ended September 29, 2007,the Company recognized $718,000 and $117,000, respectively. The grant date fairvalue is calculated using the Black-Scholes option valuation model. There were15,000 options granted during the 39-week period ended September 27, 2008and 155,000 options granted during the 39-week period ended September 29,2007. No options were granted during the 13-week period ended September 27,2008 and 100,000 options were granted during the 13-week period ended September 29,2007. The Company recognized $155,000 in excess tax benefits from the exerciseof stock options for the 39-week period ended September 27, 2008 and noexcess tax benefits were recognized from the exercise of stock options for the39-week period ended September 29, 2007.

 

Theweighted-average fair value of options granted during the 39-week period ended September 27,2008 was $3.14. The grant date fair value is calculated using the Black-Scholesoption valuation model. The following assumptions 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 Per Share*”, basic earnings per share has beencomputed based upon the weighted average of common shares outstanding. Dilutedearnings per share gives effect to outstanding stock options. Earnings per common share has been computedas follows:

 
| ** **                                                 | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | **September 27,**  | ** ** | **September 29,**  | ** ** | **September 27,** | ** ** | **September 29,** | ** ** |
| ** **                                                 | ** ** | **2008**                | ** ** | **2007**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income (loss)                                          |       | $                       | (1,594,000 | )                  | $          | 1,589,000 |   | $ | (1,646,000 | )  | $ | 161,000 |   |
| Basic weighted number of average shares outstanding        |       | 13,372,000              |       | 16,189,000              |       | 13,229,000 |   | 15,988,000 |   |
| Incremental shares from assumed issuances of stock options |       | —                  |       | 265,000                 |       | — |   | 199,000 |   |
|                                                       |       |                    |       |                    |       |   |   |   |   |
| Diluted weighted average number of shares outstanding      |       | 13,372,000              |       | 16,454,000              |       | 13,229,000 |   | 16,187,000 |   |
|                                                       |       |                    |       |                    |       |   |   |   |   |
| Net income (loss) per share - Basic                        |       | $                       | (0.12      | )                  | $          | 0.10 |   | $ | (0.12 | )  | $ | 0.01 |   |
| - Diluted                                                  |       | $                       | (0.12      | )                  | $          | 0.10 |   | $ | (0.12 | )  | $ | 0.01 |   |

 

Optionsto purchase 732,675 common shares were excluded from the computation of dilutedearnings per share for the 39 and 13-week period ended September 27, 2008,because of the net loss incurred by the Company.

 

**4.****             ****RECENT DEVELOPMENTS**

 

TheCompany has no recent developments to report.

 

**5.****              RECENT ACCOUNTINGPRONOUNCEMENTS**

 

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

 

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

 

DuringDecember 2007, the FASB issued SFAS No. 141R, *“BusinessCombinations”* (“SFAS No. 141R”). Under Statement 141R, anacquiring entity will be required to recognize all the assets acquired andliabilities assumed in a transaction at the acquisition-date fair value withlimited exceptions. In addition, acquisition costs will generally be expensedas incurred. The revised statement also includes a substantial number of newdisclosure requirements. SFAS 141R is effective prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.

 

InMarch 2008, the FASB issued SFAS No. 161, “*Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133*” (“SFAS No. 161”). SFAS No. 161requires enhanced disclosures about how and 

 

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whyan entity uses derivative instruments, how derivative instruments and relatedhedged items are accounted for, and how they affect an entity’s financialposition, financial performance, and cash flows. The Statement is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged. The Company iscurrently evaluating the effect, if any, of SFAS No. 161 on its financialstatements.

 

InMay 2008, the FASB issued SFAS No. 162, “*TheHierarchy of Generally Accepted Accounting Principles*” (“SFAS No. 162”).SFAS No. 162 identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles in the United States.This Statement will become effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411,“The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.” The Company does not anticipate a material impact on itsconsolidated financial statements from the adoption of SFAS No. 162.

 

InMay 2008, the FASB issued SFAS No. 163, *“Accountingfor Financial Guarantee Insurance Contracts—an interpretation of FASB StatementNo. 60”* (“SFAS No. 163”). SFAS 163 requires recognition ofan insurance claim liability prior to an event of default when there isevidence that credit deterioration has occurred in an insured financialobligation. SFAS 163 is effective for financial statements issued for fiscalyears beginning after December 15, 2008, and all interim periods withinthose fiscal years. Early application is not permitted. The Company’s adoptionof SFAS 163 will not have a material effect on the Consolidated FinancialStatements.

 

**6.****              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:

 

·                  Level1 – Unadjusted quoted market prices in active markets for identical assets orliabilities that the Company has the ability to access at the measurement date.

 

·                  Level2 – Quoted prices for similar assets or liabilities in active markets, quotedprices for identical or similar assets or liabilities in markets that are notactive, inputs other than quoted prices that are observable for the asset orliability (i.e., interest rates, yield curves, etc.) and inputs that arederived principally from or corroborated by observable market data bycorrelation or other means.

 

·                  Level3 – Unobservable inputs that reflect assumptions about what market participantswould use in pricing assets or liabilities based on the best informationavailable.

 

As of September 27,2008, the Company’s marketable securities primarily consist of short-termUnited States Treasury bills and tax-exempt municipal bonds. The Companyclassifies its short-term investments as held-to-maturity. Held-to-maturitysecurities are those securities in which the Company has the ability and intentto hold the securities until maturity. Because the Company’s held-to-maturitysecurities mature within one year of the purchase date, the securities areclassified as short-term marketable securities. Held-to-maturity debtsecurities are recorded at amortized cost, adjusted for the amortization oraccretion of premiums or discounts and such carrying values approximate fairvalue. A decline in the market value of any held-to-maturity security belowcost that is deemed to be other than temporary results in a reduction in carryingamount to fair value. The impairment is charged to earnings and a new costbasis 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.Entities that choose the fair value option will recognize unrealized gains andlosses on items 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 valueof our marketable securities, which was determined based upon Level 1 inputs,totaled $23.6 million, $42.9 million and $40.2 million as of September 27,2008, December 29, 2007 and September 29, 2007, respectively. For thefiscal periods ended September 27, 2008, December 29, 2007 and September 29,2007, the aggregate amount of marketable securities (maturing greater than 90days and less than one year) totaled approximately $23.6 million, $42.9 millionand $40.2 million, respectively. The Company noted small variances between thebook value and fair value due to the remaining unamortized premiums. As aresult, no impairment has occurred for the fiscal periods presented herein.Premiums and discounts are amortized or accreted over the life of the relatedheld-to-maturity investments. Interest income is recognized when earned.

 

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**7.****              RECEIVABLES**

 
| ** **                | ** ** | **September 27,** | ** ** | **December 29,** | ** ** | **September 29,** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| Construction allowances   |       | $                      | 607,000    |                  | $          | 683,000                |       | $ | 568,000 |   |
| Third party credit card   |       | 2,727,000              |       | 2,522,000             |       | 2,999,000              |       |
| Accounts receivables, net |       | 369,000                |       | 596,000               |       | 622,000                |       |
| Other                     |       | 1,145,000              |       | 987,000               |       | 382,000                |       |
|                      |       | $                      | 4,848,000  |                  | $          | 4,788,000              |       | $ | 4,571,000 |   |

 

Accounts receivable, netincludes sales for the Company’s Mary L. division, which are recorded net ofany returns, chargebacks, discounts and allowances. The Company recordedapproximately $1.3 million and utilized $1.3 million of provisions for salesallowances and doubtful accounts during the 39-week period ended September 27,2008, which resulted in an aggregate reserve amount of $226,000, as of September 27,2008.

 

**8.****              INVENTORIES**

 
| ** **      | ** ** | **September 27,** | ** ** | **December 29,** | ** ** | **September 29,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **      | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| Raw materials   |       | $                      | 2,896,000  |                  | $          | 1,242,000              |       | $ | 1,923,000 |   |
| Work in process |       | 2,591,000              |       | 832,000               |       | 1,231,000              |       |
| Finished goods  |       | 28,315,000             |       | 28,473,000            |       | 33,175,000             |       |
|            |       | $                      | 33,802,000 |                  | $          | 30,547,000             |       | $ | 36,329,000 |   |

 

**9.****              EQUIPMENT****AND LEASEHOLD IMPROVEMENTS**

 
| ** **                                      | ** ** | **September 27,** | ** ** | **December 29,** | ** ** | **September 29,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2007**               | ** ** |
|                                            |       |                   |       |                  |       |                   |       |
| Leasehold improvements                          |       | $                      | 55,315,000 |                  | $          | 55,088,000             |       | $ | 55,112,000 |   |
| Furniture, fixtures and equipment               |       | 53,252,000             |       | 49,772,000            |       | 48,805,000             |       |
|                                            |       | 108,567,000            |       | 104,860,000           |       | 103,917,000            |       |
| Less: accumulated depreciation and amortization |       | (62,174,000            | )          | (55,562,000           | )          | (54,149,000            | )          |
|                                            |       | $                      | 46,393,000 |                  | $          | 49,298,000             |       | $ | 49,768,000 |   |

 

**10.****       GOODWILL****AND INTANGIBLE ASSETS**

 

The Company’sgoodwill and its indefinite-lived intangible assets are reviewed annually forimpairment or more frequently, if impairment indicators arise. The annualvaluation is performed during the fourth quarter of each year. The carryingamounts of intangible assets as of September 27, 2008, December 29,2007 and September 29, 2007 are as follows:

 
| ** **                           | ** ** | **September 27,** | ** ** | **December 29,** | ** ** | **September 29,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| 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       |       | (148,000               | )          | (59,000               | )          | —                 |       |
|                                 |       | 612,000                |       | 701,000               |       | 760,000                |       |
|                                 |       |                   |       |                  |       |                   |       |
| Total intangible assets, net         |       | $                      | 1,334,000  |                  | $          | 1,423,000              |       | $ | 1,482,000 |   |

 

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**11.****       ACCRUED LIABILITIES**

 
| ** **                                                                    | ** ** | **September 27,** | ** ** | **December 29,** | ** ** | **September 29,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| Operating expenses                                                            |       | $                      | 2,243,000  |                  | $          | 3,954,000              |       | $ | 4,076,000 |   |
| Taxes, including income taxes                                                 |       | 1,905,000              |       | 2,364,000             |       | 1,974,000              |       |
| Share repurchase liability                                                    |       | —                 |       | 2,033,000             |       | —                 |       |
| Group insurance                                                               |       | 625,000                |       | 557,000               |       | 683,000                |       |
| Sales return reserve                                                          |       | 597,000                |       | 752,000               |       | 659,000                |       |
| Leasehold additions                                                           |       | 564,000                |       | 752,000               |       | 696,000                |       |
| Gift cards, merchandise credit cards and other customer deposits and  credits |       | 3,532,000              |       | 3,840,000             |       | 2,401,000              |       |
| Store exit costs                                                              |       | 622,000                |       | —                |       | —                 |       |
| Deferred income                                                               |       | 278,000                |       | —                |       | —                 |       |
|                                                                          |       | $                      | 10,366,000 |                  | $          | 14,252,000             |       | $ | 10,489,000 |   |

 

Leasehold additions generally represent aliability to general contractors for a final 10% payable for store constructionor renovation contracts.

 

**12.****       BANK DEBT**

 

During November 2005,the Company reached an agreement with its bank to amend the amount availableunder the Amended Revolving Credit Facility. Pursuant to the Amended RevolvingCredit Facility, $17,500,000 is available until expiration at November 30,2008. The amounts outstanding under the credit facility bear interest at amaximum per annum rate equal to the bank’s prime rate, currently 5.0% at September 27,2008, less 0.25%. The agreement contains selected financial and othercovenants. Effective upon the occurrence of an Event of Default under theAmended Revolving Credit Facility, the Company grants to the bank a securityinterest in the Company’s inventory and certain receivables. The Company hasbeen in compliance with all financial loan covenants during the fiscal periodspresented.  The Company is currentlynegotiating the terms for a new line of credit.

 

There havebeen no borrowings against the line of credit during fiscal 2007 and fiscal2008. There were outstanding letters of credit of $550,000, $774,000 and$608,000, pursuant to the Amended Revolving Credit Facility, at September 27,2008, December 29, 2007 and September 29, 2007, respectively.

 

**13. STORE EXIT COSTS**

 

During the quarter ended March 29, 2008,the Company recorded a pre-tax charge of $2.3 million for asset write down andstore closing costs for 14 underperforming stores.  For the 13-week period ended September 27,2008, the Company added two additional stores to the original 14underperforming stores and, as such, recorded an additional pre-tax charge of$449,000, net of deferred rent, for asset write down and store closing costs.  For the 13-week period ended September 27,2008, the Company also recorded payments for severance and lease terminationcosts.  The schedule below identifies theexit costs and the payments recognized during fiscal 2008.

 
| ** **                                          | ** ** | **Liability  Balance**          | ** ** | ** **  | ** ** | ** **             | ** ** | **Liability  Balance**      | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|-------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **Beginning of Year** | ** ** | **Charges** | ** ** | **Cash Payments** | ** ** | **End of Period** | ** ** |
| Write down  of equipment and leasehold improvements |       | $                               | —     |        | $          | 2,319,000              |       | $                           | —     |   | $ | — |   |
| Severance                                           |       | —                          |       | 198,000     |       | 104,000                |       | 94,000                      |       |
| Reversal of  deferred rent liability                |       | —                          |       | (750,000    | )          | —                 |       | —                      |       |
| Lease  termination costs                            |       | —                          |       | 990,000     |       | 368,000                |       | 622,000                     |       |
|                                                |       | $                               | —     |        | $          | 2,757,000              |       | $                           | 472,000    |   | $ | 716,000 |   |

 

The Company does not expect to incursignificant additional exit costs upon the closing of these stores.  The Company has closed five underperformingstores as of September 27, 2008 and expect to close the remaining storesover the balance of fiscal 2008 and early 2009.

 

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**14. CONTINGENCIES**

 

The Company is exposed to a number of asserted and unasserted potentialclaims.  Management does not believe thatthe resolution of these matters will result in a material loss.  We have not provided any third partyfinancial guarantees as of and for the 39 and 13-week periods ended September 27,2008 and September 29, 2007, respectively, and for the 52-week periodended December 29, 2007.

 

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

 

Except for the historical information contained in this Form 10-Q,the matters addressed herein are forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  Forward-looking statements represent theCompany’s expectation or belief concerning future events.  Without limiting the foregoing, the words “believes,”“thinks,” “anticipates,” “estimates,” “plans,” “expects” and similarexpressions are intended to identify forward-looking statements.  The Company cautions that forward-lookingstatements are subject to risks, uncertainties, assumptions and other importantfactors that could cause actual results to differ materially, or otherwise,from those expressed or implied in the forward-looking statements, including,without limitation, the effect of economic and market conditions andcompetition, the ability to open new stores and expand into new markets, therisks relating to foreign importing operations and the other risks detailedfrom time to time in the Company’s most recent Form 10-K, Forms 10-Q andother reports filed with the Securities and Exchange Commission.  Other unknown or unpredictable factors alsocould 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-lookingstatements, whether as a result of new information, future events or otherwise,except to the extent required by applicable securities laws.

 

**RESULTS OF OPERATIONS**

 

The following table sets forth our results ofoperations for the 39 and 13-week periods ended September 27, 2008 and September 29,2007, respectively, expressed as a percentage of net sales.  Amounts include the combined results of ourCache and Cache Luxe stores.

 
| ** **                           | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **September 27,**  | ** ** | **September 29,**  | ** ** | **September 27,** | ** ** | **September 29,** | ** ** |
| ** **                           | ** ** | **2008**                | ** ** | **2007**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Cost of  sales                       |       | 55.9                    |       | 53.8                    |       | 55.9 |   | 54.3 |   |
| Gross profit                         |       | 44.1                    |       | 46.2                    |       | 44.1 |   | 45.7 |   |
| Store  operating expenses            |       | 35.9                    |       | 37.1                    |       | 39.6 |   | 38.1 |   |
| General and  administrative expenses |       | 8.3                     |       | 8.9                     |       | 8.3 |   | 8.1 |   |
| Store exit  costs                    |       | 1.4                     |       | (0.0                    | )          | 0.8 |   | (0.1 | ) |
| Operating  income (loss)             |       | (1.5                    | )          | 0.2                     |       | (4.6 | ) | (0.4 | ) |
| Interest  expense                    |       | (0.1                    | )          | 0.0                     |       | (0.1 | ) | (0.1 | ) |
| Interest  income                     |       | 0.3                     |       | 1.0                     |       | 0.2 |   | 0.9 |   |
| Income  (loss) before income taxes   |       | (1.3                    | )          | 1.2                     |       | (4.5 | ) | 0.4 |   |
| Income tax  provision (benefit)      |       | (0.5                    | )          | 0.5                     |       | (1.7 | ) | 0.1 |   |
| Net income  (loss)                   |       | (0.8                    | )%         | 0.7                     | %          | (2.8 | )% | 0.3 | % |

 

We use a number of key indicators offinancial condition and operating performance to evaluate the performance ofour business, some of which are set forth in the following table:

 
| ** **                                            | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **September 27,**  | ** ** | **September 29,**  | ** ** | **September 27,** | ** ** | **September 29,** | ** ** |
| ** **                                            | ** ** | **2008**                | ** ** | **2007**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Total store count, at end of period                   |       | 295                     |       | 296                     |       | 295 |   | 296 |   |
| Net sales growth (decrease)                           |       | 2.0                     | %          | 0.3                     | %          | (4.0 | )% | 1.1 | % |
| Comparable store sales growth                         |       | 1                       | %          | 2                       | %          | (4 | )% | 4 | % |
| Average sales per transaction decrease                |       | (1.5                    | )%         | (7.8                    | )%         | (1.2 | )% | (6.7 | )% |
| Average number of transactions growth (decrease)      |       | 2.5                     | %          | 10.6                    | %          | (2.8 | )% | 11.0 | % |
| Net sales per average square foot                     |       | $                       | 319        |                    | $          | 319 |   | $ | 93 |   | $ | 98 |   |
| Total square footage, at end of period (in thousands) |       | 596                     |       | 604                     |       | 596 |   | 604 |   |
|                                                       |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

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Net sales

 

During the 39-week period ended September 27,2008, net sales increased to $199.8 million from $195.9 million, an increase of$3.9 million, or 2.0%, over the same 39-week period last year.  This reflects $1.8 million of additional netsales, as a result of a 1% increase in comparable store sales, an increase of$2.3 million of net sales from our Mary L. division, and a decrease of $198,000from our non-comparable store sales. During the first half of fiscal 2008,comparable store sales increased due to strong customer response to thesportswear assortment and the Company’s aggressive pricing strategy.  This increase was partially offset by adecrease in comparable store sales during the 13-week period ended September27, 2008, as discussed below.  Theincrease in net sales in fiscal 2008 at Cache stores reflected a 2.5% increasein sales transactions, which was partially offset by a 1.5% decrease in averagedollars per transactions, primarily due to the new pricing strategy.

 

During the 13-week period ended September 27,2008, net sales decreased to $58.1 million from $60.6 million, a decrease of$2.5 million, or 4.0%, below the same 13-week period last year.  This reflects a $2.2 million decrease in netsales, as a result of a 4% decrease in comparable stores sales and a $473,000decrease in net sales from our Mary L. division.  These decreases were partially offset by a$263,000 increase in net sales from our non-comparable stores.  Comparable store sales decreased due to thechallenging economy, which heightened in severity in September causing adramatic reduction in mall traffic.   The decrease in net sales in fiscal 2008 at Cache stores reflected a2.8% decrease in sales transactions and a 1.2% decrease in average dollars pertransaction, primarily due to our new pricing strategy.

 

Gross profit

 

During the 39-week period ended September 27,2008, gross profit decreased to $88.2 million from $90.6 million, a decrease of$2.4 million, or 2.6%, as compared to the same 39-week period last year.  As a percentage of net sales, gross profitdecreased to 44.1% from 46.2%, last year. This decrease was primarily due tothe Company’s implementation of the new pricing strategy, as compared to thesame period last year, and an increase in operational costs related to oursubsidiary – Adrienne Victoria Designs or “AVD”.  These costs were partially offset by savingsfrom increased direct sourcing of merchandise through AVD and a decrease inbuying expense, as compared to the same period last year.

 

During the 13-week period ended September 27,2008, gross profit decreased to $25.6 million from $27.7 million, a decrease of$2.1 million, or 7.4%, as compared to the same 13-week period last year.  As a percentage of net sales, gross profitdecreased to 44.1% from 45.7%, last year. The decrease of 160 basis points was due to the Company’s implementationof the new pricing strategy, as compared to the same period last year, andpartially due to an increase in operational costs related to AVD.  These costs were partially offset by savingsfrom increased direct sourcing of merchandise through AVD and a decrease inbuying and occupancy expense, as compared to the same period last year.  The decrease in gross profit of $2.1 million wasa result of the decrease in sales due to the challenging economy, whichheightened in severity in September, causing a dramatic reduction in malltraffic.

 

Store operating expenses

 

During the 39-week period ended September 27,2008, store operating expenses decreased to $71.7 million from $72.7 million, adecrease of $962,000, or 1.3%, as compared to the same 39-week period lastyear. As a percentage of net sales, store operating expenses decreased to 35.9%from 37.1%, for the 39-week period last year. Store operating expenses decreased principally due to lower marketingexpenses ($3.1 million), which was primarily caused by the Company eliminatingall branding (TVand print) efforts in fiscal 2008, along with a reduction indirect mail advertisements mailed to customers. The decrease in marketing expense was partially offset by an increase indepreciation and amortization expense ($674,000), due to full nine monthsdepreciation on assets purchased towards the latter part of fiscal 2007, assetspurchased to enhance our customer service department and installation of secondregisters at a majority of our stores, self insured medical expense ($611,000),due to an increase in claim payments to the insurance company, payroll expense($573,000), primarily due to annual increases and other miscellaneous expensecategories.

 

During the 13-week period ended September 27,2008, store operating expenses decreased to $23.0 million from $23.1 million, adecrease of $32,000, or 0.1%, as compared to the same 13-week period last year.As a percentage of net sales, store operating expenses increased to 39.6% from38.1%, for the 13-week period last year. Store operating expenses decreased,principally due to lower marketing expenses ($126,000) and lower payrollexpense ($405,000), primarily due to a reduction in hours 

 

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offered to employees paid on an hourly basisand reductions in other miscellaneous expense categories, partially offset byan increase in self insured medical expense ($619,000), due to an increase inclaim payments to the insurance company.

 

General and administrative expenses

 

During the 39-week period ended September 27,2008, general and administrative expenses decreased to $16.7 million from $17.4million, a decrease of $723,000, or 4.2%, below the same 39-week period lastyear. As a percentage of net sales, general and administrative expensesdecreased to 8.3% from 8.9%.  General andadministrative expenses decreased, primarily due to lower professional fees($2.0 million), which was due to lower audit fees during the current fiscalyear and the inclusion of nonrecurring legal settlement costs ($1.0 million) inthe same period last year.  The decreasewas partially offset by increases in shipping expense ($343,000), due to shipmentof products for our Mary L. division, sales commissions ($313,000), paid to an agentfor the sale of products related to our Mary L. division, outside services($282,000), repair and maintenance ($210,000), amortization ($89,000) ofintangibles acquired in connection with the acquisition of AVD and severalother miscellaneous expense categories.

 

During the 13-week period ended September 27,2008, general and administrative expenses decreased to $4.8 million from $4.9million, a decrease of $101,000, or 2.1%, below the same 13-week period lastyear. As a percentage of net sales, general and administrative expensesincreased to 8.3% from 8.1%.  General andadministrative expenses decreased, primarily due to a reduction in professionalfees ($107,000).

 

Store exit costs

 

During the 39-week period ended September 27,2008, the Company recorded a pre-tax charge of $2.8 million ($1.7 million aftertax or $0.13 per diluted share) for 16 underperforming stores.  Of the 16 underperforming stores, the Companyhas closed five during fiscal 2008 and expects to close the remaining storesover the balance of fiscal 2008 and early 2009. Included in the store exit costs is a write down of equipment andleasehold improvements and furniture and fixtures in the amount of $2.3million, severance accrual of $198,000 and lease termination costs of$990,000.  These costs were offset by thereversal of $750,000 of deferred rent accruals. Store exit costs of $449,000 were recorded during the 13-week periodended September 27, 2008, for additional store closure costs.

 

Other income/expense

 

During the 39-week period ended September 27,2008, other income (expense) decreased to $423,000 from $1.9 million, adecrease of $1.5 million, or 78.1%, as compared to the same 39-week period lastyear.  This decrease was due to areduction in interest income of $1.4 million, caused by lower interest ratesand lower average cash and marketable securities balances, coupled with chargesrelated to interest expense for the note payable recorded in connection withthe acquisition of AVD.  The reduction inaverage cash balances was primarily due to the repurchases of the Company’scommon stock.  During the 13-week periodended September 27, 2008, other income (expense) decreased to $67,000 from$445,000, a decrease of $378,000, or 85.0%, as compared to the same 13-weekperiod last year.  This decrease was dueto a reduction in interest income of $398,000, caused by lower interest ratesand lower average cash balances, coupled with charges related to interestexpense for the note payable recorded in connection with the acquisition ofAVD.

 

Income taxes

 

During the 39-week period ended September 27,2008, an income tax benefit of $936,000 was recorded as compared to a taxprovision of $908,000 recorded in the same 39-week period last year.  During the 13-week period ended September 27,2008, income tax benefit of $967,000 was recorded as compared to a taxprovision of $51,000 in the same 13-week period last year.  The estimated effective tax rate for fiscal2008 is projected to be 37.0%, as compared to the fiscal 2007 estimate of37.5%.

 

Net income (loss)

 

As a result of the factors discussed above,net loss of $1.6 million was recorded during the 39 and 13-week periods ended September 27,2008, each. In fiscal 2007, net income of $1.6 million and $161,000 wasrecorded during the 39 and 13-week periods ended September 27, 2007,respectively.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’s cashrequirements are primarily for working capital, the construction of new stores,the remodeling of existing stores and to improve and enhance our informationtechnology systems. During the 39-week period ended 

 

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September 27, 2008, weused $343,000 of cash flow from operations, as compared to $12.6 milliongenerated for the same period in fiscal 2007. We expect to continue to meet ouroperating cash requirements primarily through cash flows from operatingactivities, existing cash and equivalents, and short-term investments.  In addition, we have available a $17.5million revolving credit facility (the “credit facility”) with Bank of AmericaRetail Finance, under which we have not had outstanding borrowings for severalyears.  The revolving credit facility of$17.5 million is available until expiration at November 30, 2008.  The Company is currently negotiatingthe terms for a new line of credit.  TheCompany expects the new terms to be similar to the existing line of credit.  At September 27,2008, we had working capital of $46.6 million, cash and marketable securitiesof $25.6 million and $4.7 million in third party debt outstanding related tothe purchase of AVD.

 

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

 
| ** **                                           | ** ** | **39-Weeks Ended** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **September 27,**  | ** ** | **September 29,** | ** ** |
| ** **                                           | ** ** | **2008**                | ** ** | **2007** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                       | (343,000   | ) | $ | 12,561,000 |   |
| Net cash  provided by (used in) investing activities |       | 10,397,000              |       | (13,126,000 | ) |
| Net cash  used in financing activities               |       | (15,274,000             | )          | (9,823,000 | ) |
| Net decrease  in cash and equivalents                |       | $                       | (5,220,000 | ) | $ | (10,388,000 | ) |

 

During the 39-week period ended September 27,2008, cash and equivalents decreased by $5.2 million, primarily due torepurchases of common stock under a previously announced stock buyback ($14.7million), amortization of deferred rent ($1.7 million), a seasonal increase ininventories ($3.3 million), an increase in prepaid expenses ($3.0 million)primarily due to estimated tax payments, a decrease in accounts payable ($1.6million), repayment of a note payable ($1.3 million) and a net loss of $1.6million.  Decreases in cash flows for thecurrent period also resulted from capital expenditures for our new storeexpansion and remodeling program totaling $8.9 million.  This decrease was partially offset byoperating cash flows from net maturities of marketable securities ($19.3million), depreciation and amortization expense ($9.4 million) and write downof equipment and leasehold improvements, net of deferred rent ($1.6 million).

 

The Company plans to open approximately 13new stores during fiscal 2008, 11 of which have been opened as of September 27,2008.  We also renovated 10 existing storesas of September 27, 2008.  We spentapproximately $8.9 million through September 27, 2008 and expect to spendan additional $1 million to $2 million during the balance of fiscal 2008, forboth new store and existing store construction and remodeling. We announced theclosure of 16 underperforming stores throughout fiscal 2008, which is notinclusive of nine stores closed in the normal course of business.  Of the 16 underperforming stores, we haveclosed five stores as of September 27, 2008 and we expect to close theremaining stores over the balance of fiscal 2008 and early 2009.

 

As of September 27,2008, the Company has repurchased during fiscal 2008, in the open market, atotal of 1,471,968 shares at a cost of $14.7 million or $9.98 per share for atotal repurchase, since inception of the buyback program in 2007, of 3,167,000shares, at a cost of $38.9 million or $12.28 per share.

 

There havebeen no borrowings against the line of credit during fiscal 2007 and fiscal2008. There were outstanding letters of credit of $550,000, $774,000 and$608,000 pursuant to the Amended Revolving Credit Facility, at September 27,2008, December 29, 2007 and September 29, 2007, respectively.  The Company is currently negotiating theterms for a new line of credit.

 

#### **Inflation / Recession**

#### ** **

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

 

Many believe the U.S.economy has entered into a recession. Recent economic events have affected, and continued economic weakness inthe United States is likely to continue to affect, the sales volume andprofitability levels of our company. Furthermore, a further reduction in the availability of consumer credit,especially of credit cards, is likely to adversely affect customer demand forour products, which could result in a decrease in our net sales, which couldadversely effect our business, financial condition and results of operations.

 

Many of our suppliers relyon working capital financing to finance their operations.  As a result of current economic conditions,lenders have over the last several months generally tightened credit standardsand terms.  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 effect our net sales or gross margins, whichcould adversely effect our business, financial condition and results ofoperations.

 

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

 

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

 

# **Critical Accounting Policies and Estimates**

# ** **

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

 

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

 

*Inventories**.* TheCompany’s finished goods inventories at our retail stores are valued at thelower of cost or market using the retail inventory method. Under the retailinventory method (“RIM”), the valuation of inventories at cost and theresulting gross margins are calculated by applying a calculated cost to retailratio to the retail value of inventories. RIM is an averaging method that iswidely used in the retail industry due to its practicality. Additionally, it isrecognized that the use of RIM will result in valuing inventories at the lowerof cost or market if markdowns are currently taken as a reduction of the retailvalue of inventories. Inherent in the RIM calculation are certain significantmanagement judgments including, among others, merchandise markon, markups, andmarkdowns, which significantly impact the ending inventory valuation at cost aswell as the resulting gross margins. We take markdowns due to changes infashion and style, based on the following factors: (i) supply on hand, (ii) historicalexperience and (iii) our expectations as to future sales. We do notanticipate any significant change in our markdown strategy that would cause asignificant change in our earnings. We believe that our RIM provides aninventory valuation that results in a carrying value at the lower of cost ormarket. For our AVD division, which makes up approximately 18% of totalinventory as of September 27, 2008, the raw materials, work in process andfinished goods inventories are valued at the lower of cost or market value,using the first-in-first-out valuation method. The Company ensures that the rawmaterials, work in process and finished goods are properly valued by takinginto account any obsolescence and recording a reserve in accordance with ourestablished policy.

 

***Reserve forsales allowance and doubtful accounts***. The allowance for doubtful accounts is the Company’s bestestimate of the amount of probable credit losses in existing accountsreceivable. The allowance is determined based on historical write-off experienceand the current retailer environment. We regularly review the allowance fordoubtful accounts. Balances over 90 days past due and over a specified amountare reviewed individually for collectability; other balances are considered onan aggregate basis considering the aging of balances.  Account balances are written off against theallowance when it is probable the receivable will not be recovered. There is nooff-balance sheet credit exposure related to our customers. Management believesthat the risk associated with trade accounts receivable is adequately providedfor in the allowance for doubtful accounts. During the 39-week period ended September 27, 2008, we recorded areserve of approximately $1.3 million and utilized $1.3 million, resulting in anaggregate reserve amount of $226,000 as of September 27, 2008. As of December 29,2007, the company reported a reserve balance of $234,000.

** **

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

** **

**·**       significantchanges in the manner of our use of assets or the strategy for our overallbusiness;

** **

**·**       significantnegative industry or economic trends;

** **

**·**       storeclosings; or

** **

**·**       underperformingbusiness trends.

 

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In theevaluation of the fair value and future benefits of finite long-lived assets,we perform an analysis by store of the anticipated undiscounted future net cashflows of the related finite long-lived assets. If the carrying value of therelated asset exceeds the undiscounted cash flows, the carrying value isreduced to its fair value. Various factors including future sales growth andprofit margins are included in this analysis. To the extent these futureprojections or strategies change, the conclusion regarding impairment maydiffer from the current estimates. In fiscal 2006, the Company recorded animpairment charge of $101,000 related to one store that the Company closed inearly 2007.  No impairment charges, otherthan the store exit costs, were recorded during the 39-week period ended September 27,2008. No impairment charges were recorded in the same period last year.

 

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

 

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

 

*Gift Cards, Gift Certificates and Credits**.***The Companysells gift cards and gift certificates (collectively, “Gift Cards”) and issuescredits to its customers when merchandise is returned. These Gift Cards do nothave expiration dates. The Company recognizes sales from Gift Cards when theyare redeemed by the customer and income when the likelihood of the Gift Cardbeing redeemed by the customer is remote (Gift Card breakage) since the Companyhas determined that it does not have a legal obligation to remit the value ofunredeemed Gift Cards to the relevant jurisdiction as abandoned property. TheCompany determines Gift Card breakage income based upon historical redemptionpatterns and the remaining unredeemed percentage at the end of our historicaldata of 3.5 years.  Historicalredemptions of gift cards ranged from 64% in the first quarter to 0.03% in thefourteenth quarter subsequent to the issue date, resulting in an average ofapproximately 95% redeemed or 5% unredeemed gift cards over the historical dataof 3.5 years.  We have determined thatredemption would be remote based on the fact that, by the fourteenth quartersince issue date, the redemption rate approximated 0%, indicating that theprobability of such cards to be redeemed is remote.  As such, we have recorded breakage incomebased upon this 5%, which is continually reviewed on a quarterly basis forpropriety. Breakage income represents the balance of Gift Cards, for which theCompany believes the likelihood of redemption by the customer is remote. Atthat time, the Company will recognize breakage income for those Gift Cards. TheCompany recorded $222,000 and $222,000 of breakage income during the 39-week periodsended September 27, 2008 and September 29, 2007, respectively.

 

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

 

In connectionwith the acquisition of AVD, the Company also acquired the rights to the “MaryL.” trademark. Mary L. products are sold in upper tier department stores and,as a result, Mary L. sales are included under net sales when the merchandise isshipped to the department stores. Mary L. sales are recorded net of anyreturns, chargebacks, discounts and allowances. We also maintain a reserve as areduction to sales for potential returns, chargebacks, discounts andallowances. During the 39-week period ended September 27, 2008, werecorded a reserve of approximately $1.3 million and utilized $1.3 million,resulting in an aggregate reserve amount of $226,000 as of September 27,2008.

 

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During thesecond quarter of fiscal 2007, Cache introduced a co-branded customer creditcard program. Under this program, the Company receives from the issuing bank anon-refundable credit card activation fee for each new account that is openedand activated. These fees are initially deferred and recognized in consolidatednet sales as revenue over the life of the contract.  During the 39-week period ended September 27,2008, the Company received approximately $1.1 million in connection withactivated cards. The amount of fee income recorded in connection with activatedcredit cards was $288,000 through September 27, 2008 and insignificant infiscal 2007.

 

The Companyalso offers its credit card holders a program whereby points can be earned onnet purchases made with the co-branded credit card. Five reward points areawarded for each dollar spent at Cache and one reward point is awarded for eachdollar spent at non-Cache businesses.  A cardholderwhose credit 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.

 

The Companyalso receives from the issuing bank and Visa U.S.A Inc. a sales royalty, whichis based on a percentage of net purchases made by cardholders at Cache or otherbusinesses. Cache has determined that since it has not incurred any significantor recurring costs in relation to the co-branded credit card program the salesroyalties earned in connection to the agreement will be recorded under netsales. The fees that are incurred by the Company are cardholder incentives,which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. Theamount of sales royalty income recorded has been insignificant through September 27,2008.

 

***Income Taxes.***The Company accounts for income taxes in accordance withSFAS No. 109, “*Accounting for IncomeTaxes*.”  This statementrequires the Company to recognize deferred tax liabilities and assets for theexpected future tax consequences of events that have been recognized in theCompany’s financial statements or tax returns. Under this method, deferred taxliabilities and assets are determined based on the difference between thefinancial statement carrying amounts and tax bases of assets and liabilities,using applicable tax rates for the years in which the differences are expectedto reverse. When tax contingencies become probable, a liability for thecontingent amount is estimated based upon the Company’s best estimation of thepotential exposures associated with the timing and amount of deductions, aswell as various tax filing positions. As of September 27, 2008, theCompany did not have any tax contingencies. The Company adopted the provisionsof FIN 48, effective December 31, 2006. The impact of adoption did nothave a material impact on the consolidated financial statements.

** **

*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 and shifts in timingof certain holidays.  Our business issubject to seasonal influences, characterized by highest sales during thefourth quarter (October, November and December) and lowest sales duringthe third quarter (July, August and September).

 

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

 

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

 

Our exposure to market risk for changes ininterest rates relates to cash, cash equivalents and marketable securities. Asof September 27, 2008, our cash, equivalents and marketable securitiesconsisted primarily of funds invested in money market accounts, which bearinterest at a variable rate and U.S. treasury instruments, as well as municipalbonds, which bear interest at a fixed rate. Due to the average maturity and theconservative nature of our investment portfolio, we believe a sudden change ininterest rates would not have a material effect on the value of our investmentportfolio. As the interest rates on a material portion of our cash, cashequivalents and marketable securities are variable, a change in interest ratesearned on our investment portfolio would impact interest income along with cashflows, but would not materially impact the fair market value of the relatedunderlying instruments.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

The Company is committed to maintainingdisclosure controls and procedures designed to ensure that information requiredto be disclosed in our periodic reports filed under the Exchange Act of 1934,as amended (the “Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such 

 

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information is accumulated and communicatedto our management, including our chief executive officer and chief financialofficer, 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 nine months ended September 27,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Cache, Inc. held its annual meeting ofshareholders at its headquarters in New York, New York on July 1,2008.  Of the 13,266,616 sharesoutstanding as of the record date, 12,829,665 shares were represented by proxyat the meeting. Proxies were solicited by Cache pursuant to Regulation 14Aunder the Securities Exchange Act of 1934, as amended. At the meeting, Cache’sshareholders voted on the following matters:

 

(1)                                  Proposalto elect five directors to hold office for a one-year term and until theirsuccessors are elected and qualified.

 
| ** **          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Andrew M. Saul      |       | 12,309,297 |       | 520,368      |       |
| Thomas E. Reinckens |       | 12,380,778 |       | 448,887      |       |
| Gene G. Gage        |       | 12,784,296 |       | 45,369       |       |
| Arthur S. Mintz     |       | 12,784,296 |       | 45,369       |       |
| Morton J. Schrader  |       | 12,592,764 |       | 236,901      |       |

 

(2)                                  Proposalto ratify the appointment of Mahoney Cohen & Company, CPA, P.C. as theCompany’s independent auditors for the fiscal year ending December 27,2008.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 12,807,712 |       | 17,134      |       | 4,819       |       |

 

**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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Signatures

 

Pursuantto the requirement of Section 13 or 15 (d) of the Securities andExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | Dated: November 6,  2008 |
|--------|-------------------------------|
|   | CACHE,  INC.                  |
|   |                          |
|   |                          |
|   | BY:                           | /s/ Thomas  E. Reinckens |
|   | Thomas E.  Reinckens          |
|   | Chairman and  Chief           |
|   | Executive  Officer            |
|   | (Principal  Executive         |
|   | Officer)                      |
|   |                          |
|   |                          |
|   | BY:                           | /s/ Margaret  Feeney |
|   | Margaret  Feeney              |
|   | Executive  Vice President and |
|   | Chief  Financial Officer      |
|   | (Principal  Financial and     |
|   | Accounting  Officer)          |

 

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