Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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# **FORM 10-Q**

 

**(Mark One)**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

## **For the quarterly periodended May 30, 2009**

 

##### **or**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to             .**

 

**Commission File Number 001-31390**

 

### **CHRISTOPHER &BANKS CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                    | ** ** | **06 - 1195422**    |
|-------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                 |       | (I.R.S. Employer    |
| incorporation or organization)                  |       | Identification No.) |
|                                            |       |                |
| **2400 Xenium Lane North, Plymouth, Minnesota** | ** ** | **55441**           |
| (Address of principal executive offices)        |       | (Zip Code)          |

 

**(763) 551-5000**

(Registrant’s telephonenumber, including area code)

 

**Not Applicable**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  YES  x  NO  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  YES  o  NO  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                                              |   | Accelerated filer x         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o

(Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

 

As of June 26,2009, 35,942,156 shares of the registrant’s common stock were outstanding.

 

 

 

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###### **CHRISTOPHER &BANKS CORPORATION**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| ** **                | ** **                                                                                                                      | **Page** |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
|                      |                                                                                                                            |     |
| **PART I**           |
| **FINANCIAL INFORMATION** |
|                      | ** **                                                                                                                      |     |
| Item 1.                   | Financial Statements:                                                                                                           |     |
|                      |                                                                                                                            |     |
|                      | Condensed  Consolidated Balance Sheet (Unaudited)  As of May 30, 2009, February 28, 2009 and May 31, 2008        | 3        |
|                      |                                                                                                                            |     |
|                      | Condensed  Consolidated Statement of Operations (Unaudited)  For the Three Months Ended May 30, 2009 and May 31, 2008 | 4        |
|                      |                                                                                                                            |     |
|                      | Condensed  Consolidated Statement of Cash Flows (Unaudited)  For the Three Months Ended May 30, 2009 and May 31, 2008 | 5        |
|                      |                                                                                                                            |     |
|                      | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                               | 6        |
|                      |                                                                                                                            |     |
| Item 2.                   | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                                     | 16       |
|                      |                                                                                                                            |     |
| Item 3.                   | Quantitative and Qualitative  Disclosures About Market Risk                                                                     | 24       |
|                      |                                                                                                                            |     |
| Item 4.                   | Controls and Procedures                                                                                                         | 25       |
|                      |                                                                                                                            |     |
| **PART II**          |
| **OTHER INFORMATION**     |
|                      |                                                                                                                            |     |
| Item 1.                   | Legal Proceedings                                                                                                               | 25       |
| Item 1A.                  | Risk Factors                                                                                                                    | 25       |
| Item 2.                   | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                    | 25       |
| Item 3.                   | Defaults Upon Senior Securities                                                                                                 | 25       |
| Item 4.                   | Submission of Matters to a Vote of  Security Holders                                                                            | 26       |
| Item 5.                   | Other Information                                                                                                               | 26       |
| Item 6.                   | Exhibits                                                                                                                        | 26       |
|                      | Signatures                                                                                                                      | 27       |
|                      | Index to Exhibits                                                                                                               | 28       |

 

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# **PART I — FINANCIALINFORMATION**

 

**ITEM 1.**

**FINANCIAL STATEMENTS**

# **CHRISTOPHER & BANKSCORPORATION**

# **CONDENSED CONSOLIDATEDBALANCE SHEET**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                        | ** ** | **May 30,** | ** ** | **February 28,** | ** ** | **May 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                        | ** ** | **2009**         | ** ** | **2009**              | ** ** | **2008**         | ** ** |
| ** **                                                                                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **            |       |             |       |
| **ASSETS**                                                                                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **            |       |             |       |
| Current assets:                                                                                                                                                                                                                                   |       |             |       |                  |       |             |       |
| Cash and cash  equivalents                                                                                                                                                                                                                        |       | $                | 88,306     |                  | $          | 78,814           |       | $ | 88,033 |   |
| Short-term  investments                                                                                                                                                                                                                           |       | —           |       | —                |       | 5,000            |       |
| Accounts  receivable                                                                                                                                                                                                                              |       | 4,371            |       | 3,921                 |       | 6,699            |       |
| Merchandise  inventories                                                                                                                                                                                                                          |       | 32,570           |       | 38,828                |       | 42,103           |       |
| Prepaid expenses                                                                                                                                                                                                                                  |       | 2,608            |       | 1,938                 |       | 11,901           |       |
| Income taxes  receivable                                                                                                                                                                                                                          |       | 16,597           |       | 18,747                |       | —           |       |
| Current deferred  tax asset                                                                                                                                                                                                                       |       | 4,114            |       | 3,795                 |       | 4,324            |       |
| Total current  assets                                                                                                                                                                                                                             |       | 148,566          |       | 146,043               |       | 158,060          |       |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| Property,  equipment and improvements, net                                                                                                                                                                                                        |       | 114,759          |       | 120,347               |       | 135,225          |       |
| Long-term  investments                                                                                                                                                                                                                            |       | 16,400           |       | 16,400                |       | 18,536           |       |
| Deferred tax  asset                                                                                                                                                                                                                               |       | 5,206            |       | 4,328                 |       | 5,784            |       |
| Other assets                                                                                                                                                                                                                                      |       | 3,026            |       | 3,024                 |       | 412              |       |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| Total assets                                                                                                                                                                                                                                      |       | $                | 287,957    |                  | $          | 290,142          |       | $ | 318,017 |   |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                    |       |             | ** ** | ** **            | ** ** | ** **       | ** ** |
| Current  liabilities:                                                                                                                                                                                                                             |       |             |       |                  |       |             |       |
| Accounts payable                                                                                                                                                                                                                                  |       | $                | 22,570     |                  | $          | 19,806           |       | $ | 10,347 |   |
| Accrued  salaries, wages and related expenses                                                                                                                                                                                                     |       | 7,485            |       | 9,588                 |       | 7,662            |       |
| Other accrued  liabilities                                                                                                                                                                                                                        |       | 20,362           |       | 22,103                |       | 30,186           |       |
| Other current  liabilities                                                                                                                                                                                                                        |       | 487              |       | 487                   |       | —           |       |
| Total current  liabilities                                                                                                                                                                                                                        |       | 50,904           |       | 51,984                |       | 48,195           |       |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| Non-current  liabilities:                                                                                                                                                                                                                         |       |             |       |                  |       |             |       |
| Deferred lease  incentives                                                                                                                                                                                                                        |       | 22,471           |       | 23,506                |       | 25,258           |       |
| Deferred rent  obligations                                                                                                                                                                                                                        |       | 10,153           |       | 10,318                |       | 11,646           |       |
| Other                                                                                                                                                                                                                                             |       | 4,162            |       | 4,110                 |       | 4,260            |       |
| Total  non-current liabilities                                                                                                                                                                                                                    |       | 36,786           |       | 37,934                |       | 41,164           |       |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| Commitments                                                                                                                                                                                                                                       |       | —           |       | —                |       | —           |       |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| Stockholders’  equity:                                                                                                                                                                                                                       |       |             |       |                  |       |             |       |
| Preferred stock  — $0.01 par value, 1,000 shares authorized, none outstanding                                                                                                                                                           |       | —           |       | —                |       | —           |       |
| Common stock —  $0.01 par value, 74,000 shares authorized, 45,658, 45,258 and 45,219  shares issued and 35,867, 35,467 and 35,415  shares outstanding at May 30, 2009, February 28, 2009 and  May 31, 2008, respectively |       | 457              |       | 453                   |       | 452              |       |
| Additional  paid-in capital                                                                                                                                                                                                                       |       | 112,233          |       | 111,763               |       | 110,987          |       |
| Retained  earnings                                                                                                                                                                                                                                |       | 200,289          |       | 200,720               |       | 231,092          |       |
| Common stock  held in treasury, 9,791 shares at cost at May 30, 2009 and  February 28, 2009, and 9,804 shares at cost at May 31, 2008                                                                                              |       | (112,712         | )          | (112,712              | )          | (112,859         | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                    |       | —           |       | —                |       | (1,014           | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                  |       | 200,267          |       | 200,224               |       | 228,658          |       |
|                                                                                                                                                                                                                                              |       |             |       |                  |       |             |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                  |       | $                | 287,957    |                  | $          | 290,142          |       | $ | 318,017 |   |

 

The accompanying notes are an integral part ofthese unaudited condensed consolidated financial statements.

 

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**CHRISTOPHER & BANKSCORPORATION**

**CONDENSED CONSOLIDATEDSTATEMENT OF OPERATIONS**

(In thousands, except per share data)

(Unaudited)

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **May 30,**       | ** ** | **May 31,** | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net sales                                              |       | $                      | 120,367    |   | $ | 155,395 |   |
|                                                   |       |                   |       |   |   |
| Costs and  expenses:                                   |       |                   |       |   |   |
| Merchandise,  buying and occupancy                     |       | 75,458                 |       | 86,734 |   |
| Selling, general  and administrative                   |       | 36,144                 |       | 43,565 |   |
| Depreciation and  amortization                         |       | 6,311                  |       | 6,408 |   |
| Total costs and  expenses                              |       | 117,913                |       | 136,707 |   |
|                                                   |       |                   |       |   |   |
| Operating income                                       |       | 2,454                  |       | 18,688 |   |
|                                                   |       |                   |       |   |   |
| Interest income                                        |       | 115                    |       | 827 |   |
|                                                   |       |                   |       |   |   |
| Income from  continuing operations before income taxes |       | 2,569                  |       | 19,515 |   |
|                                                   |       |                   |       |   |   |
| Income tax  provision                                  |       | 884                    |       | 7,767 |   |
|                                                   |       |                   |       |   |   |
| Income from  continuing operations                     |       | 1,685                  |       | 11,748 |   |
|                                                   |       |                   |       |   |   |
| Loss from  discontinued operations, net of income tax  |       | —                 |       | (475 | ) |
|                                                   |       |                   |       |   |   |
| Net income                                             |       | $                      | 1,685      |   | $ | 11,273 |   |
|                                                   |       |                   |       |   |   |
| Basic earnings  (loss) per share:                      |       |                   |       |   |   |
| Continuing  operations                                 |       | $                      | 0.05       |   | $ | 0.33 |   |
| Discontinued  operations                               |       | —                 |       | (0.01 | ) |
|                                                   |       |                   |       |   |   |
| Earnings per  basic share                              |       | $                      | 0.05       |   | $ | 0.32 |   |
|                                                   |       |                   |       |   |   |
| Basic shares  outstanding                              |       | 35,132                 |       | 35,071 |   |
|                                                   |       |                   |       |   |   |
| Diluted earnings  (loss) per share:                    |       |                   |       |   |   |
| Continuing  operations                                 |       | $                      | 0.05       |   | $ | 0.33 |   |
| Discontinued  operations                               |       | —                 |       | (0.01 | ) |
|                                                   |       |                   |       |   |   |
| Earnings per  diluted share                            |       | $                      | 0.05       |   | $ | 0.32 |   |
|                                                   |       |                   |       |   |   |
| Diluted shares  outstanding                            |       | 35,137                 |       | 35,138 |   |
|                                                   |       |                   |       |   |   |
| Dividends per  share                                   |       | $                      | 0.06       |   | $ | 0.06 |   |

 

The accompanying notes are anintegral part of these unaudited condensed consolidated financial statements.

 

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**CHRISTOPHER &BANKS CORPORATION**

**CONDENSED CONSOLIDATEDSTATEMENT OF CASH FLOWS**

(In thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **May 30,**       | ** ** | **May 31,** | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                             |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 1,685      |   | $ | 11,273 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                     |       | 6,311                  |       | 6,458 |   |
| Deferred income  taxes                                                             |       | (1,197                 | )          | 128 |   |
| Stock-based  compensation expense                                                  |       | 474                    |       | 629 |   |
| Loss on disposal  of furniture, fixtures and equipment                             |       | 77                     |       | 170 |   |
| Changes in  operating assets and liabilities:                                      |       |                   |       |   |   |
| Increase in  accounts receivable                                                   |       | (450                   | )          | (1,475 | ) |
| Decrease in  merchandise inventories                                               |       | 6,258                  |       | 1,738 |   |
| Increase in  prepaid expenses                                                      |       | (670                   | )          | (304 | ) |
| Decrease in  prepaid income taxes                                                  |       | 2,150                  |       | 5,032 |   |
| (Increase)  decrease in other assets                                               |       | (2                     | )          | 7 |   |
| Increase  (decrease) in accounts payable                                           |       | 3,813                  |       | (5,034 | ) |
| Increase  (decrease) in accrued liabilities                                        |       | (3,844                 | )          | 414 |   |
| Increase  (decrease) in deferred lease incentives                                  |       | (1,035                 | )          | 403 |   |
| Decrease in  deferred rent obligations                                             |       | (165                   | )          | (75 | ) |
| Increase in  other liabilities                                                     |       | 52                     |       | 538 |   |
| Net cash  provided by operating activities                                         |       | 13,457                 |       | 19,902 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from  investing activities:                                             |       |                   |       |   |   |
| Purchases of  property, equipment and improvements                                 |       | (1,849                 | )          | (8,252 | ) |
| Net cash used in  investing activities                                             |       | (1,849                 | )          | (8,252 | ) |
|                                                                               |       |                   |       |   |   |
| Cash flows from  financing activities:                                             |       |                   |       |   |   |
| Dividends paid                                                                     |       | (2,116                 | )          | (2,109 | ) |
| Net cash used in  financing activities                                             |       | (2,116                 | )          | (2,109 | ) |
|                                                                               |       |                   |       |   |   |
| Net increase in  cash and cash equivalents                                         |       | 9,492                  |       | 9,541 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 78,814                 |       | 78,492 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                      | 88,306     |   | $ | 88,033 |   |
|                                                                               |       |                   |       |   |   |
| Supplemental  cash flow information:                                               |       |                   |       |   |   |
| Income taxes  paid, net of refunds received                                        |       | $                      | 87         |   | $ | 353 |   |
| Purchases of  equipment and improvements, accrued, not paid                        |       | $                      | 240        |   | $ | 131 |   |

 

The accompanying notes are an integral part ofthese unaudited condensed consolidated financial statements.

 

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**CHRISTOPHER & BANKS CORPORATION**

# **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

## **NOTE 1 — BASIS OFPRESENTATION**

 

The unauditedcondensed consolidated financial statements included in this Form 10-Qhave been prepared by Christopher & Banks Corporation and itssubsidiaries (the “Company”) pursuant to the rules and regulations of theUnited States Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed, or omitted, pursuant to such rules and regulations.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and related notes included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended February 28, 2009.

 

The results of operations for the interim periods shown in this reportare not necessarily indicative of results to be expected for the full fiscalyear.  In the opinion of management, theinformation contained herein reflects all adjustments, consisting of onlynormal adjustments except as otherwise stated in these notes, necessary topresent fairly the Company’s financial position as of May 30, 2009 and May 31,2008, and its results of operations and cash flows for the three month periodsended May 30, 2009 and May 31, 2008.

 

*Recently Adopted Accounting Pronouncements*

 

In June 2008, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment TransactionsAre Participating Securities (“FSP-EITF No. 03-6-1”).  Under FSP-EITF 03-6-1, unvested share-basedpayment awards that contain rights to receive nonforfeitable dividends (whetherpaid or unpaid) are considered participating securities and should be includedin the two-class method of computing earnings per share.  FSP-EITF 03-6-1 was adopted by the Companyeffective March 1, 2009 and impacted the Company’s calculation of earningsper share beginning in the first quarter of the fiscal year ending February 27,2010 (“Fiscal 2010”).  See Note 10 -Earnings per Share for further disclosure regarding the impact of the adoptionof FSP-EITF 03-6-1.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R),“Business Combinations”**(“SFAS No. 141(R)”), which isa revision of SFAS No. 141, “BusinessCombinations”.  SFAS No. 141(R) retainsthe fundamental requirements in SFAS No. 141 that the acquisition methodof accounting be used for all business combinations and for an acquirer to beidentified for each business combination. This statement includes changes in the measurement of fair value of theassets acquired, the liabilities assumed and any noncontrolling interest in theacquiree as of the acquisition date, with limited exceptions.  This statement requires in general thattransaction costs and costs to restructure the acquired company be expensed andcontractual contingencies be recorded at their acquisition-date fair values.  The Company adopted SFAS No. 141(R) prospectivelyeffective March 1, 2009.  Theadoption had no impact on the Company’s consolidated financial position,results of operations or cash flows as the Company did not execute anyacquisitions or business combinations in the first quarter of fiscal 2010.

 

*Recently Issued Accounting Pronouncements*

 

In April 2009, theFASB issued FSP FAS 157-4, “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly”(“FSP FAS 157-4”).  FSP FAS 157-4 amendsSFAS 157 and provides additional guidance for estimating fair value inaccordance with SFAS No. 157 when the volume and level of activity for theasset or liability have significantly decreased and also includes guidance onidentifying circumstances that indicate a transaction is not orderly for fairvalue measurements.  This FSP shall beapplied prospectively with retrospective application not permitted.  This FSP shall be effective for interim andannual periods ending after June 15, 2009, with early adoption permittedfor periods ending after March 15, 2009. The Company is currently in the process of evaluating this new FSP butdoes not believe it will have a significant impact on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

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In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments”.  This FSP amends SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments”, to require disclosures about fair value of financialinstruments not measured on the balance sheet at fair value in interimfinancial statements as well as in annual financial statements.  Prior to this FSP, fair values for theseassets and liabilities were only disclosed annually. This FSP applies to allfinancial instruments within the scope of SFAS No. 107 and requires allentities to disclose the method(s) and significant assumptions used toestimate the fair value of financial instruments.  This FSP shall be effective for interimperiods ending after June 15, 2009, with early adoption permitted forperiods ending after March 15, 2009. This FSP does not require disclosures for earlier periods presented forcomparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparativedisclosures only for periods ending after initial adoption.  The Company is currently in the process ofevaluating this new FSP but does not believe it will have a significant impacton the Company’s consolidated financial position, results of operations or cashflows.

 

In May 2009, theFASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”).  SFAS No. 165 establishes generalstandards of accounting for and disclosures of events that occur after thebalance sheet date but before the date through which an entity has evaluatedsubsequent events.   SFAS No. 165 iseffective for interim and annual periods ending after June 15, 2009.  The Company does not anticipate the adoptionof the provisions of SFAS No. 165 will have a material impact on itsfinancial position, results of operations or cash flows.

 

## **NOTE2 — DISCONTINUED OPERATIONS**

 

In July 2008, theCompany announced its decision to exit its Acorn business when the Companyconcluded, after a comprehensive review and evaluation, that the concept hadnot demonstrated the potential to deliver an acceptable long-term return on theCompany’s investment.  The Company closedall of its Acorn stores by December 31, 2008, allowing the Company tofocus its resources on its two core brands, Christopher & Banks andC.J. Banks.

 

The operating results ofall Acorn stores have been presented as discontinued operations, in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS No. 144”), in the Condensed ConsolidatedStatement of Operations for the three month period ended May 31,2008.  There was no activity relating tothe Company’s discontinued Acorn operations during the three months ended May 30,2009.

 

The operating results ofthe discontinued operations for the three months ended May 31, 2008 are summarizedbelow (in thousands).

 
| Net sales                          |   | $      | 4,247  |   |
|------------------------------------|--------|--------|--------|--------|
|                               |   |   |   |
| Loss before income tax  benefit    |   | $      | (789   | )      |
| Income tax benefit                 |   | (314   | )      |
|                               |   |   |   |
| Loss from discontinued  operations |   | $      | (475   | )      |

 

Income taxes have beenallocated to continuing and discontinued operations based on the methodologyrequired by Financial Accounting Interpretation No. 18, “Accounting forIncome Taxes in Interim Periods” (“FIN No. 18”).  Income taxes allocated to the results ofdiscontinued operations are determined on the basis of a computation of taxeswith and without the impact of results from discontinued operations with thedifference in taxes between these computations allocated to discontinuedoperations.

 

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## **NOTE3 — MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY**

 

Merchandise inventoriesconsisted of the following (in thousands):

 
| ** **                | ** ** | **May 30,** | ** ** | **February 28,** | ** ** | **May 31,** | ** ** |
|---------------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| **Description**           | ** ** | **2009**    | ** ** | **2009**         | ** ** | **2008**    | ** ** |
|                      |       |        |       |             |       |        |       |
| Merchandise - in  store   |       | $           | 31,140     |             | $          | 35,280      |       | $ | 36,684 |   |
| Merchandise - in  transit |       | 1,430       |       | 3,548            |       | 5,419       |       |
|                      |       |        |       |             |       |        |       |
|                      |       | $           | 32,570     |             | $          | 38,828      |       | $ | 42,103 |   |

 

**The Company does not havelong-term purchase commitments or arrangements with any of its suppliers or agents. **During the quarter ended May 30,2009, one of the Company’s vendors supplied approximately 25% of the Company’smerchandise purchases and a second vendor supplied approximately 14% of theCompany’s merchandise purchases.  TheCompany did not purchase significant amounts of goods from these two vendorsduring the three months ended May 31, 2008.  In addition, the Company purchasedapproximately 5% and 11% of its merchandise from another supplier during thethree months ended May 30, 2009 and May 31, 2008, respectively.

** **

**Although the Company has strongpartnerships with these vendors, there can be no assurance that theserelationships can be maintained in the future or that the vendors will continueto supply merchandise to the Company.  If there should be any significantdisruption in the supply of merchandise from these vendors, management believesthat it will be able to shift production to other suppliers so as to continueto secure the required volume of product.  Nevertheless, it is possible thatany significant disruption in supply could have a material adverse impact onthe Company’s financial position or results of operations.**

** **

**In the first quarter of fiscal2009, the Company purchased approximately 53% of its merchandise through onebuying agent (the “Agent”).  The Companyand the Agent terminated their sourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase anymerchandise through the Agent in the first quarter of fiscal 2010.**

 

## **NOTE4 — PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET**

 

Property, equipment andimprovements, net consisted of the following (in thousands):

 
| ** **                                                                  | ** ** | **Estimated**          | ** ** | **May 30,** | ** ** | **February 28,** | ** ** | **May 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| **Description**                                                             | ** ** | **Useful Life**        | ** ** | **2009**         | ** ** | **2009**              | ** ** | **2008**         | ** ** |
|                                                                        |       |                   |       |             |       |                  |       |             |       |
| Land                                                                        |       | —                 |       | $                | 1,597      |                  | $          | 1,597            |       | $ | 1,597 |   |
| Corporate office,  distribution center and related building improvements    |       | 25 years               |       | 12,005           |       | 12,020                |       | 12,015           |       |
| Store leasehold  improvements                                               |       | Term of related lease, |       |             |       |                  |       |             |       |
|                                                                        |       | typically  10 years    |       | 94,994           |       | 95,251                |       | 98,952           |       |
| Store furniture and  fixtures                                               |       | Three to 10 years      |       | 113,497          |       | 113,697               |       | 115,465          |       |
| Point of sale hardware  and software                                        |       | Five years             |       | 15,162           |       | 15,173                |       | 10,924           |       |
| Computer hardware and  software                                             |       | Three to five years    |       | 21,328           |       | 21,123                |       | 12,159           |       |
| Corporate office and  distribution center furniture, fixtures and equipment |       | Seven years            |       | 3,587            |       | 3,634                 |       | 3,089            |       |
| Construction in  progress                                                   |       | —                 |       | 1,940            |       | 1,432                 |       | 12,301           |       |
|                                                                        |       |                   |       | 264,110          |       | 263,927               |       | 266,502          |       |
| Less accumulated  depreciation and amortization                             |       |                   |       | 149,351          |       | 143,580               |       | 131,277          |       |
| Net property, equipment  and improvements                                   |       |                   |       | $                | 114,759    |                  | $          | 120,347          |       | $ | 135,225 |   |

 

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As of May 30, 2009and February 28, 2009, construction in progress consisted primarily ofstore-related information technology system projects in progress.  As of May 31, 2008, construction inprogress consisted primarily of capital expenditures related to new storeswhich opened in the second and third quarters of fiscal 2009.

 

The Company reviewslong-lived assets with definite lives at least annually or whenever events orchanges in circumstances indicate that the carrying value of the asset may notbe recoverable in accordance with SFAS No. 144.  The Company recorded no impairments oflong-lived assets in the three month period ended May 30, 2009, however,the general economic uncertainty affecting the retail industry makes itreasonably possible that long-lived asset impairments may be identified andrecorded in future periods.

 

## **NOTE5 — LONG-TERM INVESTMENTS**

 

As of May 30,2009, the Company had approximately $16.4 million of long-term investments,which consisted solely of $19.5 million of auction rate securities (“ARS”) atcost, less a fair value adjustment of approximately $3.1 million.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS are expected to be held.

 

Substantially all of the Company’s ARS are collateralized by studentloans and a majority have AAA (S&P), Aaa (Moody’s), or Fitch (AAA) creditratings as of May 30, 2009.  As of May 30,2009, the repayment of approximately 80% of the student loans, which serve ascollateral for the ARS held by the Company, was substantially backed by theUnited States Government.  Until February 2008,the ARS market was liquid and auctions for ARS held by the Company did notfail. However, beginning in February 2008, auctions for the ARS held bythe Company began to fail and have continued to fail up to and as of the dateof this report.

 

Based on current marketconditions, management believes that it is likely that auctions related to theCompany’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited theCompany’s ability to access these funds. Management anticipates the liquidity of the ARS will continue to berestricted until there is a successful auction, until such time as anothermarket for the ARS develops, until the ARS are called by the issuer or until theyare redeemed as described below.

 

All of the ARS owned bythe Company were purchased through UBS Financial Services, Inc., asubsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, byUBS.  In November 2008, the Companyaccepted a settlement offer from UBS to restore liquidity to its clients whohold ARS.  The settlement offer grantsthe Company certain ARS rights.  TheseARS rights provide the Company the ability to redeem its ARS at par during atwo-year time period beginning June 30, 2010.  During this time, the Company may choose tocontinue to hold some or all of its ARS and earn interest or sell some or allof them to UBS at par plus accrued interest. The ARS rights are not transferable, tradable, or marginable and willnot be listed or quoted on any securities or exchange or any electroniccommunications network.

 

Upon acceptance of thesettlement offer, the Company classified the ARS as trading securities andelected, pursuant to SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS No. 159”), to record the ARSrights at fair value on a recurring basis utilizing significant unobservableinputs in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).

 

The fair value of the ARS rights was estimated utilizing theBlack-Scholes option pricing model and the forward contract method.  As of May 30, 2009, the fair value ofthe ARS rights was determined to be approximately $2.7 million.  The ARS rights are recorded as a non-current asseton the consolidated financial statements.

 

Prior to acceptance of the UBS settlement offer, the Company classifiedits ARS as available-for-sale securities. As of May 31, 2008, the Company had approximately $18.5 million oflong-term investments consisting solely of $19.5 million of ARS, less avaluation allowance of $1.0 million, which reflected management’s estimate offair value given the current lack of liquidity of these investments whiletaking into account the current credit quality of the underlyingsecurities.  Additionally, the Companyhad $5.0 million in ARS which were classified as short-term investments as of May 31,2008 as they were called by the issuers and redeemed for par value in July 2008.

 

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## **NOTE6 — ACCRUED LIABILITIES**

 

Other accrued liabilitiesconsisted of the following (in thousands):

 
| ** **                                             | ** ** | **May 30,** | ** ** | **February 28,** | ** ** | **May 31,** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| **Description**                                        | ** ** | **2009**         | ** ** | **2009**              | ** ** | **2008**         | ** ** |
|                                                   |       |             |       |                  |       |             |       |
| Gift card, certificate  and store credit liabilities   |       | $                | 8,991      |                  | $          | 11,434           |       | $ | 10,094 |   |
| Accrued un-invoiced  merchandise inventory receipts    |       | 3,781            |       | 3,008                 |       | 7,541            |       |
| Accrued income, sales  and other taxes payable         |       | 2,357            |       | 1,877                 |       | 4,440            |       |
| Accrued workers  compensation self-insurance liability |       | 1,184            |       | 1,601                 |       | 2,378            |       |
| Accrued  occupancy-related expenses                    |       | 841              |       | 693                   |       | 1,946            |       |
| Other                                                  |       | 3,208            |       | 3,490                 |       | 3,787            |       |
|                                                   |       |             |       |                  |       |             |       |
|                                                   |       | $                | 20,362     |                  | $          | 22,103           |       | $ | 30,186 |   |

 

## **NOTE7 — CREDIT FACILITY**

 

The Company maintains anAmended and Restated Revolving Credit Facility (the “Credit Facility”) withWells Fargo Bank, National Association (“Wells Fargo”) which expires on June 30,2011.  The Credit Facility provides theCompany with revolving credit loans and letters of credit of up to $50 million,in the aggregate, subject to a borrowing base formula based on inventorylevels.

 

Loans under the CreditFacility bear interest at the prime rate minus 0.25%.  As of May 30, 2009 the prime rate was3.25%.  The Credit Facility also providesthe Company with the ability to borrow under the Credit Facility at an interestrate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tiedto the one, three, or six month LIBOR rate based on the length of time thecorresponding advance is outstanding.

 

Interest under theCredit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unusedportion as defined in the agreement, and a collateral monitoring fee.  For the three months ended May 30, 2009,fees related to the Credit Facility totaled $12,933.  Borrowings under the Credit Facility arecollateralized by the Company’s equipment, intangible assets, inventory,inventory letters of credit and letter of credit rights.  The Company had no revolving credit loanborrowings under the Credit Facility during the first three months of fiscal2010.  Historically, the Credit Facilityhas been utilized by the Company only to open letters of credit to facilitatethe import of merchandise.  The borrowingbase at May 30, 2009 was $20.6 million. As of May 30, 2009, the Company had outstanding letters of creditin the amount of $0.2 million. Accordingly, the availability of revolving credit loans under the CreditFacility was $20.4 million at May 30, 2009.

 

The CreditFacility contains certain restrictive covenants, including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of May 30, 2009, themost recent measurement date, the Company was in compliance with all of therestrictive covenants under the Credit Facility.

 

## **NOTE8 — STOCK-BASED COMPENSATION**

 

The Company accounts forstock-based compensation in accordance with the provisions of SFAS No. 123R,“Share-Based Payment” (“SFAS 123R”). Under this method, stock-based compensation expense recognized forshare-based awards includes: (a) compensation expense for all stock-basedcompensation awards granted prior to, but not yet vested as of, February 25,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS 123, and (b) compensation expense for allstock-based compensation awards granted subsequent to February 25, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123R.

 

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Total pre-taxcompensation expense related to stock-based awards for the three months ended May 30,2009 and May 31, 2008 was approximately $474,000 and $629,000,respectively.  Stock-based compensationexpense was included in merchandise, buying and occupancy expenses for theCompany’s buying and distribution employees and in selling, general andadministrative expenses for all other employees.

 

*Methodology Assumptions*

The Company uses theBlack-Scholes option-pricing model to value the Company’s stock options forgrants to its employees and non-employee directors.  Using this option-pricing model, the fairvalue of each stock option award is estimated on the date of grant.  The fair value of the Company’s stock optionawards, which are generally subject to pro-rata vesting, is expensed on astraight-line basis over the vesting period of the stock options.  The expected volatility assumption is basedon the historical volatility of the Company’s stock over a term equal to theexpected term of the option granted.  Theexpected term of stock option awards granted is derived from historicalexercise experience.  The expected termassumption incorporates the contractual term of an option grant, as well as thevesting period of an award.  Therisk-free interest rate is based on the implied yield on a U.S. Treasuryconstant maturity with a remaining term equal to the expected term of theoption granted.

 

The weighted averageassumptions relating to the valuation of the Company’s stock option grants forthe three month periods ended May 30, 2009 and May 31, 2008 were asfollows:

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **May 30,**       | ** ** | **May 31,** | ** ** |
| ** **              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Expected dividend yield |       | 5.5                    | %          | 2.3 | % |
| Expected volatility     |       | 66.2                   | %          | 48.3 | % |
| Risk-free interest rate |       | 1.8                    | %          | 2.6 | % |
| Expected term in years  |       | 5.0                    |       | 4.7 |   |

 

*Stock-Based Compensation Activity*

The following tablepresents a summary of the Company’s stock option activity for the three monthsended May 30, 2009:

 
| ** **                        | ** ** | ** ** | ** ** | ** **   | ** ** | ** **          | ** ** | ** **     | ** ** | **Weighted**    | ** ** |
|-----------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|----------------|------------|-----------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Aggregate**       | ** ** | ** **     | ** ** | **Average**     | ** ** |
| ** **                        | ** ** | **Number** | ** ** | **Average**  | ** ** | **Intrinsic**       | ** ** | **Weighted**   | ** ** | **Remaining**   | ** ** |
| ** **                        | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Value**           | ** ** | **Average**    | ** ** | **Contractual** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in  thousands)** | ** ** | **Fair Value** | ** ** | **Life**        | ** ** |
|                              |       |       |       |         |       |                |       |           |       |            |       |
| Outstanding, beginning  of period |       | 1,587,345  |       | $            | 16.31      |                | $          | 3              |       | $               | 5.90       |   |   |   |
| Vested                            |       | 1,145,968  |       | 17.84        |       | —              |       | 6.36           |       |            |       |
| Unvested                          |       | 441,377    |       | 12.32        |       | 3                   |       | 4.70           |       |            |       |
| Granted                           |       | 312,500    |       | 4.18         |       | 313                 |       | 1.58           |       |            |       |
| Exercised                         |       | —     |       | —       |       | —              |       | —         |       |            |       |
| Canceled - Vested                 |       | (31,985    | )          | 21.30        |       | —              |       | 8.50           |       |            |       |
| Canceled - Unvested  (Forfeited)  |       | (27,267    | )          | 15.85        |       | —              |       | 6.50           |       |            |       |
| Outstanding, end of  period       |       | 1,840,593  |       | 14.21        |       | 321                 |       | 5.13           |       | 6.32            |       |
| Vested                            |       | 1,205,750  |       | 17.42        |       | —              |       | 6.21           |       | 4.78            |       |
| Unvested                          |       | 634,843    |       | 8.12         |       | 321                 |       | 3.09           |       | 9.23            |       |
| Exercisable, end of  period       |       | 1,205,750  |       | 17.42        |       | —              |       | 6.21           |       | 4.78            |       |
|                                   |            |            |            |              |            |                     |            |                |            |                 |            |  |  |  |

 

The Company may alsogrant shares of restricted stock to its employees and non-employeedirectors.  Restricted stock awards areindependent of option grants and are generally subject to forfeiture ifemployment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’srestricted stock awards have performance-based vesting provisions and aresubject to forfeiture if these performance conditions are not achieved.

 

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The Company assesses, onan ongoing basis, the probability of whether the performance criteria areprojected to be achieved and, if it is deemed probable, recognizes compensationexpense over the relevant performance period. For those awards not subject to performance criteria, the Companyexpenses the cost of the restricted stock awards, which is determined to be thefair market value of the shares at the date of grant, on a straight-line basisover the vesting period.  The fair marketvalue of the Company’s restricted stock is determined based on the closingprice of the Company’s common stock on the grant date.

 

The following tablepresents a summary of the Company’s restricted stock activity for the threemonths ended May 30, 2009:

 
| ** **                       | ** ** | ** ** | ** ** | **Aggregate**       | ** ** | ** **     | ** ** |
|----------------------------------|------------|------------|------------|---------------------|------------|----------------|------------|
| ** **                       | ** ** | **Number** | ** ** | **Intrinsic**       | ** ** | **Weighted**   | ** ** |
| ** **                       | ** ** | **of**     | ** ** | **Value**           | ** ** | **Average**    | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **(in  thousands)** | ** ** | **Fair Value** | ** ** |
|                             |       |       |       |                |       |           |       |
| Unvested, beginning of  period   |       | 282,418    |       | $                   | 1,099      |           | $          | 10.54 |   |
| Granted                          |       | 553,750    |       | 2,868               |       | 4.18           |       |
| Vested                           |       | (44,000    | )          | 228                 |       | 10.79          |       |
| Canceled - Unvested  (Forfeited) |       | (111,600   | )          | 578                 |       | 10.04          |       |
| Unvested, end of period          |       | 680,568    |       | 3,525               |       | 5.43           |       |
|                                  |            |            |            |                     |            |                |            |  |  |

 

## **NOTE9 — INCOME TAXES**

 

As of May 30, 2009,the Company’s liability for unrecognized tax benefits associated with uncertaintax positions was approximately $3.5 million and the total amount of unrecognizedtax benefits that, if recognized, would affect the effective tax rate was $2.1million.  The Company recognizes interestand penalties related to unrecognized tax benefits as components of income taxexpense.  At May 30, 2009, theCompany had accrued approximately $0.8 million for the potential payment ofinterest and penalties.

 

The Company and itssubsidiaries are subject to U.S. federal income tax and the income tax ofvarious state and local jurisdictions. The Internal Revenue Service has completed its audit for tax yearsthrough fiscal 2006.  The Company is notsubject to state income tax examination by taxing authorities for taxable yearsprior to fiscal 2004.  At May 30,2009, the Company has ongoing audits in various jurisdictions in which itexpects settlements by the end of fiscal 2010, but it does not expect itsliability for unrecognized tax benefits to significantly increase or decreasein the next nine months.

 

As of May 30, 2009,the Company has net deferred tax assets of $9.3 million.  Deferred income tax assets represent potentialfuture income tax benefits.  Realizationof these assets is ultimately dependent upon future taxable income.  No valuation allowance has been provided fordeferred tax assets because management believes realization of the full amountof net deferred tax assets is more likely than not.  While the Company has a history of profits,its profitability has declined over the last three years and the Companyrecorded a net loss in fiscal 2009. Therefore, earnings results in fiscal 2010 will be a significant factorin determining the Company’s ability to continue to carry these deferred taxassets.  The Company’s accounting fordeferred taxes represents its best estimate of future events.  If future results from the Company’soperations are less than projected, a valuation allowance may be required toreduce deferred tax assets, which could have a material impact on the Company’sresults of operations in the period in which it is recorded.  Significantnegative events, including losses in future periods, would make it reasonablypossible that valuation allowances against deferred tax assets would berequired in future periods.

 

As of May 30, 2009,the Company has state net operating loss carry forwards which will result instate tax benefits of approximately $0.5 million.  These state net loss carry forwards willexpire in fiscal 2014 and beyond. Additionally, the Company has charitable contribution carry forwardsthat will expire in fiscal 2014.

 

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## **NOTE 10 — EARNINGSPER SHARE**

 

On March 1, 2009, the Company adopted FSP No. EITF03-6-1, “Determining Whether Instruments Granted in Share-Based PaymentTransactions are Participating Securities” (“FSP No. EITF 03-6-1”), whichclarified that unvested share-based payment awards that contain nonforfeitablerights to receive dividends or divided equivalents (whether paid or unpaid) areparticipating securities, and thus, should be included in the two-class methodof computing earnings per share (“EPS”). Participating securities under this statement include the Company’sunvested employee restricted stock awards with time-based vesting, whichreceive nonforfeitable dividend payments. The calculation of EPS for common stock shown below excludes the incomeattributable to these unvested employee restricted stock awards from thenumerator and excludes the dilutive impact of these shares from thedenominator.  All prior period EPS datapresented has been adjusted retrospectively.

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **May 30,**       | ** ** | **May 31,** | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Numerator**(in thousands)**:**                                            |       |                   |       |   |   |
| Net income attributable to Christopher & Banks Corporation         |       | $                      | 1,685      |   | $ | 11,273 |   |
| Income allocated to participating securities                                |       | (9                     | )          | (43 | ) |
| Net income available to common shareholders                                 |       | $                      | 1,676      |   | $ | 11,230 |   |
|                                                                        |       |                   |       |   |   |
| **Denominator**(in thousands)**:**                                          |       |                   |       |   |   |
| Weighted average common shares outstanding - basic                          |       | 35,132                 |       | 35,071 |   |
| Dilutive shares                                                             |       | 5                      |       | 67 |   |
| Weighted average common and common equivalent shares outstanding -  diluted |       | 35,137                 |       | 35,138 |   |
|                                                                        |       |                   |       |   |   |
| **Net income per common share:**                                            |       |                   |       |   |   |
| Basic                                                                       |       | $                      | 0.05       |   | $ | 0.32 |   |
| Diluted                                                                     |       | $                      | 0.05       |   | $ | 0.32 |   |

 

There was no material impact on the previouslyreported fiscal 2009 EPS due to the adoption of FSP No. EITF 03-6-1.

 

Stock options of 2,161,543 and 1,898,852 were excludedfrom the shares used in the computation of diluted earnings per share for thethree month periods ended May 30, 2009 and May 31, 2008,respectively, as they were anti-dilutive.

 

**NOTE 11 — FAIRVALUE MEASUREMENTS**

 

The Company adopted SFAS No. 157, “Fair ValueMeasurements,” effective March 1, 2008, with respect to fair valuemeasurements of (a) nonfinancial assets and liabilities that arerecognized or disclosed at fair value in the Company’s financial statements ona recurring basis (at least annually) and (b) all financial assets andliabilities.

 

Under SFAS No. 157, fair value is defined as theexit price, or the amount that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants as of themeasurement date.  SFAS No. 157 alsoestablishes a hierarchy for inputs used in measuring fair value that maximizesthe use of observable inputs and minimizes the use of unobservable inputs byrequiring that the most observable inputs be used when available.  Observable inputs are inputs marketparticipants would use in valuing the asset or liability developed based onmarket data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflectthe Company’s assumptions about the factors market participants would use invaluing the asset or liability developed based upon the best informationavailable in the circumstances.  Thehierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets foridentical assets or liabilities.

 

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Level 2 inputsinclude quoted prices for similar assets or liabilities in active markets,quoted prices for identical or similar assets or liabilities in markets thatare not active and inputs (other than quoted prices) that are observable forthe asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs forthe asset or liability.   Categorizationwithin the valuation hierarchy is based upon the lowest level of input that issignificant to the fair value measurement.

 

*Assetsand Liabilities that are Measured at Fair Value on a Recurring Basis:*

For the three month periods ended May 30, 2009and May 31, 2008, fair value under SFAS No. 157 applied to theCompany’s ARS and ARS rights.  Thesefinancial assets are carried at fair value following the requirements of SFAS No. 157.

 

As discussed in Note 5, auctions for ARS held by theCompany failed beginning in February 2008, and have continued to failthrough the date of this report.  As aresult, investments in ARS are valued to reflect the current lack of liquidityof these investments while taking into account the credit quality of theunderlying securities.  As also discussedin Note 5, on November 7, 2008, the Company accepted UBS’s ARS settlementoffer.  This resulted in the Companyreceiving ARS rights, which the Company has elected to account for at fairvalue.

 

The following tables provide information by level forassets and liabilities that are measured at fair value, as defined by SFAS No. 157,on a recurring basis (in thousands).

 
| ** **      | ** ** | ** **            | ** ** | **Fair Value Measurements**    | ** ** |
|-----------------|------------|-----------------------|------------|--------------------------------|------------|
| ** **      | ** ** | **Fair Value at**     | ** ** | **Using Inputs Considered as** | ** ** |
| **Description** | ** ** | **May 30, 2009** | ** ** | **Level 1**                    | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|            |       |                  |       |                           |       |   |   |   |   |
| Assets:         |       |                  |       |                           |       |   |   |   |   |
| ARS             |       | $                     | 16,400     |                           | $          | — |   | $ | — |   | $ | 16,400 |   |
| ARS rights      |       | $                     | 2,700      |                           | $          | — |   | $ | — |   | $ | 2,700 |   |
|            |       |                  |       |                           |       |   |   |   |   |
| Liabilities:    |       | $                     | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

 

There was no change in the fair value of the Company’sARS or ARS rights based on significant unobservable inputs (Level 3) in thefirst quarter of fiscal 2010.

 
| ** **      | ** ** | ** **             | ** ** | **Fair  Value Measurements**    | ** ** |
|-----------------|------------|------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | **Fair  Value at**     | ** ** | **Using  Inputs Considered as** | ** ** |
| **Description** | ** ** | **May 31,  2008** |       | **Level 1**                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:         |       |                   |       |                            |       |   |   |   |   |
| ARS             |       | $                      | 23,536     |                            | $          | — |   | $ | — |   | $ | 23,536 |   |
| ARS rights      |       | $                      | —     |                            | $          | — |   | $ | — |   | $ | — |   |
|            |       |                   |       |                            |       |   |   |   |   |
| Liabilities:    |       | $                      | —     |                            | $          | — |   | $ | — |   | $ | — |   |

 

There was no change in the fair value of the Company’sARS based on significant unobservable inputs (Level 3) in the first quarter offiscal 2009.

 

**NOTE 12 —COMPREHENSIVE INCOME**

 

Comprehensive income consisted of the following:

 

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| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **May 30,**       | ** ** | **May 31,** | ** ** |
|                                                       | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                       |       |                   |       | ** ** |   |
| Net income                                                 |       | $                      | 1,685      |   | $ | 11,273 |   |
| Unrealized  losses on investments reclassified to earnings |       | —                 |       | 186 |   |
|                                                       |       |                   |       | ** ** |   |
| Total  comprehensive income                                |       | $                      | 1,685      |   | $ | 11,459 |   |

 

**NOTE 13 —COMMITMENTS AND CONTINGENCIES**

** **

*LegalProceedings*

The Company issubject, from time to time, to various claims, lawsuits or actions that arisein the ordinary course of business.  Althoughthe amount of any liability that could arise with respect to any currentproceedings cannot, in our opinion, be accurately predicted, any such liabilityis not expected to have a material adverse impact on the Company’s financialposition, results of operations or liquidity.

 

## **NOTE 14 — SEGMENTREPORTING**

 

The Company operates in the retail apparel industry inwhich it primarily designs, sources and sells women’s apparel catering tocustomers generally ranging in age from 40 to 60 who are typically part of asegment of the female baby boomer demographic. The Company has identified two operating segments (Christopher &Banks and C.J. Banks) as defined by SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFAS No. 131”).  The Company’s Christopher & Banksand C.J. Banks operating segments have been aggregated into one reportablesegment based on the similar nature of products sold, methods of sourcing,merchandising and distribution processes involved, target customers, andeconomic characteristics of the two brands. The Company previously reported the results of its Acorn stores as aseparate reportable segment.  Beginningin the third quarter of fiscal 2009, the results of all Acorn stores have beenremoved from continuing operations and are presented as discontinuedoperations.

 

In the table below, the “Christopher &Banks/C.J. Banks” reportable segment includes activity generated by the Company’sChristopher & Banks and C.J. Banks operations.  The “Corporate/Administrative” column, whichprimarily represents operating activity at the Company’s corporate office anddistribution center, is presented to allow for reconciliation of segment-levelnet sales, operating income (loss) and total assets to the Company’s consolidatednet sales, operating income (loss) and total assets.  Segment operating income (loss) includes onlynet sales, merchandise gross margin and direct store expenses with noallocation of corporate overhead.

 

**Segment Reporting:**

 
| ** **                                 | ** ** | **Christopher & Banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                 | ** ** | **C.J. Banks**                    | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Three  Months Ended May 30, 2009:** |       |                              |       |               |       | ** **       |       |
| Net sales                                  |       | $                                 | 120,367    |               | $          | —           |       | $ | 120,367 |   |
| Operating income  (loss)                   |       | $                                 | 16,009     |               | $          | (13,555          | )          | $ | 2,454 |   |
| Total assets                               |       | $                                 | 163,054    |               | $          | 124,903          |       | $ | 287,957 |   |
| ** **                                 | ** ** | ** **                        | ** ** | ** **         | ** ** | ** **       | ** ** |
| **Three  Months Ended May 31, 2008:** |       |                              |       |               |       | ** **       |       |
| Net sales                                  |       | $                                 | 155,395    |               | $          | —           |       | $ | 155,395 |   |
| Operating income  (loss)                   |       | $                                 | 35,622     |               | $          | (16,934          | )          | $ | 18,688 |   |
| Total assets                               |       | $                                 | 180,700    |               | $          | 134,465          |       | $ | 318,017 |   |

 

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**ITEM 2.**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**The following management’s discussion and analysis offinancial condition and results of operations (“MD&A”) should be read inconjunction with the consolidated financial statements and notes included inItem 1 of this Form 10-Q and the consolidated financial statements, notesand MD&A contained in the Company’s Annual Report on Form 10-K for thefiscal year ended February 28, 2009.**

** **

**Executive Overview**

**Christopher & Banks Corporation, a Delawarecorporation, is a Minneapolis-based retailer of women’s apparel, which operatesretail stores through its wholly-owned subsidiaries.  The Company was incorporated in 1986 toacquire Braun’s Fashions, Inc., which had operated as a family-ownedbusiness since 1956.  In July 2000,the Company’s stockholders approved a change in the Company’s name from Braun’sFashions Corporation to Christopher & Banks Corporation.**

** **

**As of May 30, 2009, the Company operated 816 stores in46 states, including 546 Christopher & Banks stores and 270 C.J. Banksstores.  The Company’s Christopher &Banks brand offers distinctive fashions featuring exclusively designed,coordinated assortments of women’s apparel in sizes four to 16. The Company’sC.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to24W.  The Company also operatese-commerce web sites for its two brands at**www.christopherandbanks.com and www.cjbanks.com.

** **

**The Company strives to provide its customers qualityapparel at a great value with a perfect fit. The Company’s overall strategy for its two brands, Christopher &Banks and C.J. Banks, is to consistently offer a fashionable apparel assortmentthrough its stores and e-commerce web sites in order to satisfy its targetcustomers’ expectations for style, quality, value and fit, while providingexceptional, personalized customer service.**

** **

**The Company has competitively positioned itself tooffer merchandise assortments reflecting current fashion, balanced betweenclassic and trend right apparel, at affordable prices.  To differentiate itself from its competitors,the Company’s buyers, working in conjunction with the Company’s internal designgroup, create a merchandise assortment of coordinated outfits which ismanufactured exclusively for the Company under its proprietary Christopher &Banks and C.J. Banks brand names.**

 

*Fiscal2010 First Quarter Summary*

The Company’s results of operations for the firstquarter of fiscal 2010 continued to be impacted by the challengingmacro-economic environment.  Continuedinstability in the housing and financial markets, combined with generaleconomic uncertainty, have impacted consumer spending patterns, particularlyfor discretionary retail purchases. Same-store sales declined 24% during the quarter.  Approximately two-thirds of the decline wasrelated to a decrease in the number of transactions per average store, whileroughly one-third of the decline was a result of a decrease in the averagetransaction value.

 

Despite the pressure on sales, the Company generatedpositive cash flow, reduced inventory levels, and made significant reductionsin selling, general and administrative (“SG&A”) expenses.  The Company increased its combined cash andlong-term investment balance from $95.2 million at February 28, 2009 to$104.7 million as of May 30, 2009. Total inventory decreased from $42.1 million at the end of last year’sfirst quarter to $32.6 million at the end of the first quarter of fiscal 2010,which represents a 22% year-over-year reduction in inventory on a per-storebasis, which excludes e-commerce inventory. The reduction in inventory levels resulted in a sequential improvementin merchandise margins throughout the quarter. SG&A expenses decreased from $43.6 million during the first quarterof fiscal 2009, to $36.1 million during the first quarter of fiscal 2010.  As a result, the Company achievedapproximately $7.5 million in SG&A savings in the first quarter of fiscal2010 compared to the first quarter of fiscal 2009.

 

The Company recorded net income from continuingoperations of $1.7 million, or $0.05 per diluted share, in the first quarter offiscal 2010, as compared to net income from continuing operations of $11.7million, or $0.33 per diluted share, for the first quarter of fiscal 2009.   In the first quarter, the Company opened twonew C.J. Banks stores, closed one Christopher & Banks store andconverted one Christopher & Banks store to a C.J. Banks store.

 

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*Fiscal2010 Outlook*

Given the uncertain economic environment, the Companyis approaching the balance of fiscal 2010 with a continued focus on operatingeffectiveness, expense controls, disciplined inventory management andconservative capital spending.  TheCompany anticipates inventory per-store will continue to decline to levelsmodestly below fiscal 2009 for the remainder of the fiscal year.  Going forward, the Company plans to proceedcautiously with new store growth.  TheCompany currently plans to open two additional new stores in fiscal 2010including one dual store concept.

 

*KeyBusiness Initiatives*

The Company will continue to execute its cost-savingsinitiative in fiscal 2010.  SG&Asavings, primarily store-related expenses, marketing expenditures and travelcosts, of approximately $7.5 million were realized in the first quarter offiscal 2010.  The Company expects to savean additional $7.5 million of SG&A expenses in the aggregate in the second,third and fourth quarters of fiscal 2010. It is anticipated that this will result in at least $15.0 million oftotal SG&A savings for the year.  TheCompany will also continue to focus on reducing occupancy costs throughaggressive lease renegotiations and diligently exercising rent reductionsrelated to sales volume and co-tenancy lease violations.  Total fiscal 2010 capital expenditures areplanned to range from $8 million to $9 million, down approximately 50% from the$18.4 million of capital expenditures in fiscal 2009.

 

The Company will also continue to employ strictinventory controls in fiscal 2010, targeting continued inventory reductions inthe first half of the year.  During theyear, the Company will continue to enhance inventory productivity through SKUrationalization and improved store assorting based on sales volume, climate,size and fashion preferences.

 

The Company will continue to strengthen its CustomerRelationship Management (“CRM”) programs throughout fiscal 2010.  The Company plans to migrate to a new CRMapplication in the second half of fiscal 2010 which will provide more robustdata collection and analysis capabilities. In addition, the Company will continue to accumulate and incorporatecustomer data into its existing and new CRM program to drive additionalcustomer traffic to its stores and web sites, encourage cross shopping betweenits stores and online sites and increase overall brand awareness.  CRM efforts will focus primarily on emailcommunication, which the Company believes is the most cost-effective andefficient method of communicating with customers.  In addition, the Company is tailoring itsemail messages to segmented groups of customers in an effort to provide morerelevant and compelling offers and to drive stronger response rates from itsmessages.

 

The Company is increasing its focus on the smallermarkets that have traditionally been the foundation of the Company’s success.  Approximately 50% of the Company’s stores arelocated in small, rural and captive markets. While same-store sales have declined in these markets, the declines havebeen slightly less than in the remainder of the Company’s stores.  In addition to adjusting the merchandise mixin these areas, the Company plans to further develop its grass roots marketingefforts to increase communication and connections with customers in thesemarkets.  Stores located in the smaller,rural markets generally have higher productivity and lower occupancy costs,resulting in higher operating margins.

 

The Company will continue to place additional focus ongrowth opportunities with its plus size brand, C.J. Banks.  The Company plans to open its first dualstore concept during the second quarter. This will give it the opportunity to offer both of its brands,Christopher & Banks and C.J. Banks, and all three size ranges, missy,petite and plus, within one store, resulting in greater productivity andoperating efficiencies.  In addition, inthe fall of 2009, the Company intends to introduce edited assortments of itsC.J. Banks plus size merchandise in a select test group of approximately 30Christopher & Banks stores to further capitalize on increasing itsplus size market share.

 

The Company plans to continue to grow its Christopher &Banks and C.J. Banks e-commerce businesses. The Company plans to enhance web site visual presentation and to expandmerchandise offerings to include exclusive online-only merchandise categories,styles, sizes and lengths.  In an effortto drive additional traffic to its web sites, the Company intends to continueto increase its online marketing efforts and leverage its online associateordering system, which allows the Company’s store associates the opportunity toservice customers through direct access to the Company’s e-commerce sites.

 

While the Company’s management believes the retail andmacro-economic environments will remain challenging throughout the remainder offiscal 2010, it also believes that it is taking actions to position the Companyfor stronger operating performance when economic conditions become morefavorable.

 

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**Key Performance Indicators**

The Company’smanagement evaluates the following items, which are considered key performanceindicators, in assessing the Company’s performance:

* *

*Same-storesales*

The Company’s same-store sales data is calculatedbased on the change in net sales for stores that have been open for more than13 full months and includes stores, if any, that have been relocated within thesame mall, though the Company typically does not expand or relocate storeswithin a mall.

 

Stores where square footage has been changed by morethan 25 percent within the past 13 months are excluded from the same-storesales calculation.  Stores closed duringthe year are included in the same-store sales calculation only for the fullmonths of the year the stores were open. In addition, sales which are initiated in stores but fulfilled throughthe company’s ecommerce website are included in the calculation of same-storesales.

 

Managementconsiders same-store sales to be an important indicator of the Company’sperformance.  Same-store sales resultsare important in achieving leveraging of costs, including store payroll, storeoccupancy, depreciation and other general and administrative expenses.  Year-over-year increases in same-store salescontribute to greater leveraging of costs, while declining same-store salescontribute to deleveraging of costs. Same-store sales results also have a direct impact on the Company’stotal net sales, cash and cash equivalents and working capital.

* *

*Merchandise,buying and occupancy costs, exclusive of depreciation and amortization*

The merchandisemargin component of merchandise, buying and occupancy costs, which includes thecost of merchandise, markdowns and shrink expense, exclusive of depreciationand amortization, measures whether the Company is appropriately optimizing theprice of its merchandise.  Buying andoccupancy costs include freight into and out of the Company’s distributioncenter, buyer and distribution center salaries, buyer travel, rent and otheroccupancy-related costs, various merchandise design and development costs,miscellaneous merchandise expenses and other costs related to the Company’sdistribution network.

* *

*Operatingincome*

The Company’smanagement views operating income as a key indicator of the Company’ssuccess.  The key drivers of operatingincome are same-store sales; merchandise, buying and occupancy costs; and theCompany’s ability to control its other operating costs.

* *

*Storeproductivity*

Store productivitymeasures, including sales per square foot, average unit retail selling price,number of transactions per store, number of units per transaction, averageretail dollars per transaction, customer traffic and conversion rates (thepercentage of customers who enter the Company’s stores and make a purchase) areevaluated by management in assessing the operational performance of individualstores and of the Company.

* *

*Inventoryturnover*

The Company’smanagement evaluates inventory turnover as a measure of how productivelyinventory is bought and sold.  Decliningrates of inventory turnover are important as they signal that inventory isbecoming slow-moving.

 

*Cash flowand liquidity*

Management evaluates cash flow from operations,investing activities and financing activities in determining the sufficiency ofthe Company’s cash position.  Cash flowfrom operations has historically been sufficient to cover the Company’s uses ofcash.  The Company expects its cash andcash equivalents, combined with cash flows from operations, to be sufficient tofund anticipated capital expenditures, working capital and other requirementsfor liquidity during fiscal 2010.

 

**CriticalAccounting Policies and Estimates**

The Company’s critical accounting policies are morefully described in Note 1 of the notes to consolidated financial statementscontained within the Company’s Annual Report on Form 10-K for the fiscalyear ended February 28, 2009.  Therehave been no material changes in the Company’s critical accounting policies orestimates in the three months ended May 30, 2009.  Management’s discussion and analysis of theCompany’s financial condition and results of operations are based upon theCompany’s consolidated condensed financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.

 

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On an ongoing basis, the Company evaluates itsestimates, including those related to customer product returns, inventories,income taxes, medical and workers’ compensation claims and contingencies.  The Company bases its estimates on historicalexperience and on various other assumptions that it believes to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

The Company reviews long-lived assets with definitelives at least annually, or whenever events or changes in circumstancesindicate that the carrying value of the asset may not be recoverable inaccordance with SFAS No. 144.  Whilethe Company recorded no impairments of long-lived assets employed in continuingoperations in the three month period ended May 30, 2009, the currentchallenging economic environment, combined with the continued instability inthe housing, credit, stock and financial markets, and increasing generaleconomic uncertainty affecting the retail industry, make it reasonably possiblethat long-lived asset impairments could be identified and recorded in futureperiods.

 

As of May 30, 2009, the Company has net deferredtax assets of $9.3 million.  Deferredincome tax assets represent potential future income tax benefits.  Realization of these assets is ultimatelydependent upon future taxable income.  Novaluation allowance has been provided for deferred tax assets becausemanagement believes realization of the full amount of net deferred tax assetsis more likely than not.  While theCompany has a history of profits, its profitability has declined over the lastthree years and the Company recorded a net loss in fiscal 2009.  Therefore, earnings results in fiscal 2010will be a significant factor in determining the Company’s ability to continueto carry these deferred tax assets.  TheCompany’s accounting for deferred taxes represents its best estimate of futureevents.  If future results from theCompany’s operations are less than projected, a valuation allowance may berequired to reduce deferred tax assets, which could have a material impact onthe Company’s results of operations in the period in which it is recorded.  Significant negative events, including lossesin future periods, would make it reasonably possible that valuation allowancesagainst deferred tax assets would be required in future periods.

 

**Results of Operations**

The following table setsforth consolidated operating statement data expressed as a percentage of netsales for the periods indicated.

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **May 30,**       | ** ** | **May 31,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net sales                                     |       | 100.0                  | %          | 100.0 | % |
| Merchandise,  buying and occupancy costs      |       | 62.7                   |       | 55.8 |   |
| Selling, general  and administrative expenses |       | 30.0                   |       | 28.0 |   |
| Depreciation and  amortization                |       | 5.2                    |       | 4.1 |   |
| Operating income                              |       | 2.1                    |       | 12.1 |   |
| Interest income                               |       | —                 |       | 0.5 |   |
| Income tax  provision                         |       | 0.7                    |       | 5.0 |   |
| Income from  continuing operations            |       | 1.4                    |       | 7.6 |   |
| Loss on  discontinued operations, net of tax  |       | —                 |       | (0.3 | ) |
| Net income                                    |       | 1.4                    | %          | 7.3 | % |

 

**ThreeMonths Ended May 30, 2009 Compared to Three Months Ended May 31, 2008**

 

***Net Sales from ContinuingOperations.**** *Net sales from continuing operations for the threemonths ended May 30, 2009 were $120.4 million, a decrease of $35.0million, or approximately 23%, from $155.4 million for the three months ended May 31,2008.  The decrease in net sales fromcontinuing operations was a result of a decline in same-store sales, partiallyoffset by an increase in sales at the company’s two e-commerce websites.  The Company operated 816 stores at May 30,2009 compared to 814 stores, excluding Acorn stores, as of May 31, 2008.

 

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The Company’s same-store sales from continuingoperations for the first quarter of fiscal 2010 declined 24% when compared tothe corresponding period in fiscal 2009. Approximately two-thirds of the decline was related to a decrease in thenumber of transactions per average store, while roughly one-third of thedecline was a result of a decrease in the average transaction value.  In addition, units sold per transactiondecreased by approximately 6% during the first quarter of fiscal 2010 comparedto the prior year period.

 

***Merchandise, Buying and OccupancyCosts, exclusive of depreciation and amortization. ***Merchandise, buying and occupancy costs, exclusive ofdepreciation and amortization, were $75.5 million, or 62.7% of net sales,during the first quarter of fiscal 2010, compared to $86.7 million, or 55.8% ofnet sales, during the same period in fiscal 2009, resulting in approximately690 basis points of deleverage compared to the prior year period.

 

The decline in gross profit margin in the firstquarter of fiscal 2010, compared to the first quarter of fiscal 2009, wasessentially equally attributable to erosion of merchandise margins, due toelevated markdown levels and promotional activity, and deleveraging of buyingand occupancy expenses associated with the 24% decline in same-store sales.

 

***Selling, General andAdministrative Expenses. ***Selling, general and administrativeexpenses for the three months ended May 30, 2009 were $36.1 million, or 30% ofnet sales, compared to $43.6 million, or 28.0% of net sales, for the threemonths ended May 31, 2008.  This resultedin approximately 200 basis points of deleverage due to the 24% decrease insame-store sales.

 

SG&A expenses were reduced by approximately $7.5million in the first quarter of fiscal 2010 as a result of the Company’s costreduction initiative.  Significantsavings were realized in store-related operating expenses, marketingexpenditures and travel costs.

 

***Depreciation and Amortization.*** Depreciation and amortization was $6.3 million, or 5.2% of net sales, inthe first quarter of fiscal 2010, compared to $6.4 million, or 4.1% of netsales, in the first quarter of fiscal 2009.

 

***Operating Income. ***Based on the foregoing, the Company recorded operatingincome of $2.5 million, or 2.1% of net sales for the quarter ended May 30,2009, compared to operating income of $18.7 million, or 12.1% of net sales forthe quarter ended May 31, 2008.

 

***Interest Income. ***For the three months ended May 30, 2009, interestincome was $115,000, compared to $827,000 for the three months ended May 31,2008.  The decrease resulted from lowerinterest rates on cash, cash-equivalents and investments in the first quarterof fiscal 2010 compared to the first quarter of fiscal 2009.

 

***Income Taxes. ***Income tax expense in the first quarter of fiscal 2010was $0.9 million, with an effective tax rate of 34.4%, compared to income taxexpense of $7.8 million, with an effective tax rate of 39.8%, in the firstquarter of fiscal 2009.  The decrease ineffective tax rate primarily resulted from the impact of permanent timingdifferences and state income taxes.

 

Income taxes for fiscal 2009 have been allocated tocontinuing and discontinued operations based on the methodology required byFinancial Accounting Interpretation No. 18 (“FIN 18”), whereby incometaxes are computed with and without the impact of results from discontinuedoperations and the difference in taxes between these computations is allocatedto discontinued operations.

 

***Income from ContinuingOperations.***  As a result of the foregoing factors, theCompany reported net income from continuing operations of $1.7 million, or 1.4%of net sales, for the three months ended May 30, 2009, compared to incomefrom continuing operations of $11.7 million, or 7.6% of net sales, for thethree months ended May 31, 2008.

 

***Loss on Discontinued Operations,Net of Tax.***  The Company reported a pre-tax loss ondiscontinued operations of $0.8 million for the three months ended May 31,2008 related to store-level operating losses at the Company’s Acornstores.  Net of tax, the loss ondiscontinued operations was $0.5 million. There were no expenses related to discontinued operations recorded inthe first quarter of fiscal 2010.

 

***Net Income. ***As a result of the foregoing factors, the Companyrecorded net income of $1.7 million, or 1.4% of net sales and $0.05 per dilutedshare, for the three months ended May 30, 2009, compared to net income of$11.3 million, or 7.3% of net sales and $0.32 per diluted share, for the threemonths ended May 31, 2008.

 

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**Liquidity and Capital Resources**

The Company’s principal on-going cash requirements areto fund working capital needs such as purchasing merchandise inventory, to financethe construction of new stores, the remodeling of certain existing stores andto make information technology-related and other capital expenditures.  Merchandise purchases vary on a seasonalbasis, peaking in the fall.  As a result,the Company’s cash requirements historically reach their peak in October orNovember, during the Company’s third fiscal quarter.  Conversely, cash balances peak in the fourthfiscal quarter in January, after the holiday season is completed.

* *

*Net cash provided by operatingactivities*

Net cash provided by operating activities totaled$13.5 million in the first three months of fiscal 2010, a decrease of $6.4million from $19.9 million for the first three months of fiscal 2009.

 

Significant fluctuations in the Company’s workingcapital accounts included a $6.3 million decrease in inventory, a $3.8 millionincrease in accounts payable and a $3.8 million decrease in accruedliabilities.  The Company’s inventorylevels were down approximately 22% on a per-store basis at May 30, 2009,compared to May 31, 2008.  TheCompany anticipates inventory levels will continue to decline on a percentagebasis by mid-to-high teens through the second quarter of fiscal 2010.  The decrease in accrued liabilities primarilyresulted from a $2.0 million decrease in accrued payroll and severance chargesand a decline in the amount of outstanding gift cards at May 30, 2009compared to May 31, 2008.

 

The remainder of the change in cash provided byoperating activities was substantially the result of net income earned duringthe first three months of fiscal 2010, after adjusting for non-cash charges,including depreciation expense,  deferredincome taxes, stock-based compensation expense, loss on the disposal of furniture,fixtures and equipment and various other changes in the Company’s otheroperating assets and liabilities.

* *

*Net cash used in investingactivities*

Net cash used in investing activities in the firstthree months of fiscal 2010 consisted solely of $1.8 million of capitalexpenditures.  The Company opened two newstores during the quarter.  The Companyalso made other investments at its stores, corporate office and distributioncenter facility during the three months ended May 30, 2009.

 

The Company expects to fund approximately $6 millionto $7 million of additional capital expenditures in the last three quarters offiscal 2010.  The Company plans to opentwo additional stores in the second quarter including the Company’s first dualstore, which will incorporate both the Company’s Christopher & Banksand C.J. Banks brands in one store.  TheCompany also currently plans to open one additional Christopher &Banks store in the third quarter.  Inaddition, the Company plans to continue to make improvements at itsdistribution center facility.  The Companyanticipates its cash and cash equivalents, combined with cash flows fromoperations, will be sufficient to meet its capital expenditure, working capitaland other requirements for liquidity for the remainder of fiscal 2010.

* *

*Net cash used in financingactivities*

Net cash of $2.1 million was used in financingactivities for the payment of a quarterly cash dividend in the first threemonths of fiscal 2010.

* *

*Credit facility*

The Company maintains anAmended and Restated Revolving Credit Facility (the “Credit Facility”) withWells Fargo Bank, National Association (“Wells Fargo”) which expires on June 30,2011.  The Credit Facility provides theCompany with revolving credit loans and letters of credit of up to $50 million,in the aggregate, subject to a borrowing base formula based on inventorylevels.

 

Loans under the CreditFacility bear interest at the prime rate minus 0.25%.  As of May 30, 2009 the prime rate was3.25%.  The Credit Facility also providesthe Company with the ability to borrow under the Credit Facility at an interestrate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tiedto the one, three, or six month LIBOR rate based on the length of time thecorresponding advance is outstanding.

 

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Interest under theCredit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unusedportion as defined in the agreement, and a collateral monitoring fee.  For the three months ended May 30, 2009,fees related to the Credit Facility totaled $12,933.  Borrowings under the Credit Facility arecollateralized by the Company’s equipment, intangible assets, inventory,inventory letters of credit and letter of credit rights.  The Company had no revolving credit loanborrowings under the Credit Facility during the first three months of fiscal2010.  Historically, the Credit Facilityhas been utilized by the Company only to open letters of credit to facilitatethe import of merchandise.  The borrowingbase at May 30, 2009 was $20.6 million. As of May 30, 2009, the Company had outstanding letters of creditin the amount of $0.2 million. Accordingly, the availability of revolving credit loans under the CreditFacility was $20.4 million at May 30, 2009.

 

The CreditFacility contains certain restrictive covenants, including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of May 30, 2009, themost recent measurement date, the Company was in compliance with all of therestrictive covenants under the Credit Facility.

 

*Auction Rate Securities*

As of May 30, 2009,the Company had approximately $16.4 million of long-term investments, whichconsisted solely of $19.5 million of auction rate securities (“ARS”) at cost,less a fair value adjustment of approximately $3.1 million.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS are expected to be held.

 

Substantially all of the Company’s ARS arecollateralized by student loans and a majority have AAA (S&P), Aaa (Moody’s),or Fitch (AAA) credit ratings as of May 30, 2009.  As of May 30, 2009, the repayment ofapproximately 80% of the student loans, which serve as collateral for the ARSheld by the Company, was substantially backed by the United StatesGovernment.  Until February 2008, the ARSmarket was liquid and auctions for ARS held by the Company did not fail.However, beginning in February 2008, auctions for the ARS held by the Companybegan to fail and have continued to fail up to and as of the date of thisreport.

 

Based on current marketconditions, management believes that it is likely that auctions related to theCompany’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited theCompany’s ability to access these funds. Management anticipates the liquidity of the ARS will continue to berestricted until there is a successful auction, until such time as anothermarket for the ARS develops, until the ARS are called by the issuer or untilthey are redeemed as described below.

 

All of the ARS owned bythe Company were purchased through UBS Financial Services, Inc., asubsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, byUBS.  In November 2008, the Companyaccepted a settlement offer from UBS to restore liquidity to its clients whohold ARS.  The settlement offer grantsthe Company certain ARS rights.  TheseARS rights provide the Company the ability to redeem its ARS at par during atwo-year time period beginning June 30, 2010.  During this time, the Company may choose tocontinue to hold some or all of its ARS and earn interest or sell some or allof them to UBS at par plus accrued interest. The ARS rights are not transferable, tradable, or marginable and willnot be listed or quoted on any securities or exchange or any electroniccommunications network.

 

Upon acceptance of thesettlement offer, the Company classified the ARS as trading securities andelected, pursuant to SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS No. 159”), to record the ARS rights atfair value on a recurring basis utilizing significant unobservable inputs inaccordance with SFAS No. 157, “Fair Value Measurements.”

 

The fair value of the ARS rights was estimatedutilizing the Black-Scholes option pricing model and the forward contractmethod.  As of May 30, 2009, thefair value of the ARS rights was determined to be approximately $2.7million.  The ARS rights are recorded asa non-current asset on the consolidated financial statements.

 

Prior to acceptance of the UBS settlement offer, theCompany classified its ARS as available-for-sale securities.  As of May 31, 2008, the Company hadapproximately $18.5 million of long-term investments consisting solely of $19.5million of ARS, less a valuation allowance of $1.0 million, which reflectedmanagement’s estimate of fair value given the current lack of liquidity ofthese investments while taking into account the current credit quality of theunderlying securities.  Additionally, theCompany had $5.0 million in ARS which were classified as short-term investmentsas of May 31, 2008 as they were called by the issuers and redeemed for parvalue in July 2008.

 

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**MerchandiseSourcing**

In fiscal 2009,The Company underwent a significant shift in its sourcing structure by aligningitself with new key suppliers with expertise along all of the Company’smerchandise categories.  As a result ofpartnering with these new vendors, the Company was able to diversify country ofproduction, improve payment terms, increase flexibility and reduce risk.  Prior to fiscal 2009, the Company directlyimported the majority of its goods as the declared importer of record.  The Company directly imported approximately5% of its total merchandise purchases in the three month period ended May 30,2009, down from 84% for the quarter ended May 31, 2008.  Substantially all of its remainingmerchandise purchases were made from U.S.-based companies who import the goodsfrom overseas.  This reliance on sourcingfrom foreign countries may cause the Company to be exposed to certain risks asindicated below and as discussed in Part I, “Item 1A. Risk Factors” in theCompany’s Annual Report on Form 10-K for the year ended February 28,2009.

 

Importrestrictions, including tariffs and quotas, and changes in such restrictions,could affect the import of apparel and might result in increased costs, delaysin merchandise receipts or reduced supplies of apparel available to theCompany, and could have an adverse effect on the Company’s financial condition,results of operations and liquidity.  TheCompany’s merchandise flow could also be adversely affected by politicalinstability in any of the countries where its merchandise is manufactured or bychanges in the United States’ governmental policies toward such foreigncountries.  In addition, merchandisereceipts could be delayed due to interruptions in air, ocean and groundshipments.

** **

**TheCompany does not have long-term purchase commitments or arrangements with anyof its suppliers or agents. **During the quarterended May 30, 2009, one of the Company’s vendors supplied approximately25% of the Company’s merchandise purchases and a second vendor suppliedapproximately 14% of the Company’s merchandise purchases.  The Company did not purchase significantamounts of goods from these two vendors during the three months ended May 31,2008.  In addition, the Company purchasedapproximately 5% and 11% of its merchandise from another supplier during thethree months ended May 30, 2009 and May 31, 2008, respectively.

** **

**Althoughthe Company has strong partnerships with these vendors, there can be noassurance that these relationships can be maintained in the future or that thevendors will continue to supply merchandise to the Company.  If thereshould be any significant disruption in the supply of merchandise from these vendors,management believes that it will be able to shift production to other suppliersso as to continue to secure the required volume of product.  Nevertheless,it is possible that any significant disruption in supply could have a materialadverse impact on the Company’s financial position or results of operations.**

** **

**In thefirst quarter of fiscal 2009, the Company purchased approximately 53% of itsmerchandise through one buying agent (the “Agent”).  The Company and the Agent terminated theirsourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase anymerchandise through the Agent in the first quarter of fiscal 2010.**

** **

**QuarterlyResults and Seasonality**

The Company’squarterly results may fluctuate significantly depending on a number of factors,including general economic conditions, timing of promotional events and newstore openings, adverse weather conditions, shifts in the timing of certainholidays and customer response to the Company’s seasonal merchandise mix.

 

**Inflation**

As the operationsof the Company are influenced by general economic conditions, the Company’smanagement believes that rising prices, resulting particularly from highergasoline and food costs, had a negative effect on the Company’s results of operationsduring first and second quarters of fiscal 2009.  Management does not believe that inflationhad a material effect on the Company’s results of operations in the third andfourth quarters of fiscal 2009 or the first quarter of fiscal 2010.

 

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**Forward-Looking Statements**

The Company, through its management, may makeforward-looking statements reflecting the Company’s current views with respectto future events and financial performance. These forward-looking statements, which may be included in reports filedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”), inpress releases and in other documents and materials as well as in written ororal statements made by or on behalf of the Company, are subject to certainrisks and uncertainties, including those discussed in Item 1A of the Company’sAnnual Report on Form 10-K for the fiscal year ended February 28,2009, which could cause actual results to differ materially from historicalresults or those anticipated.

 

The words or phrases “will likely result,” “areexpected to,” “will continue,” “estimate,” “project,” “believe,” “expect, “ “anticipate,”“forecast,” “plans to,” “intend,” “intends” and similar expressions areintended to identify forward-looking statement within the meaning of Section 21eof the Exchange Act and Section 27A of the Securities Act of 1933, asamended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  In particular, the Company desires to takeadvantage of the protections of the PSLRA in connection with theforward-looking statements made in this Quarterly Report on Form 10-Q.

 

Readers are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date suchstatements are made.  In addition, theCompany wishes to advise readers that the factors listed in Item 1A of theCompany’s Annual Report on Form 10-K for the fiscal year ended February 28,2009, as well as other factors, could affect the Company’s performance andcould cause the Company’s actual results for future periods to differmaterially from any opinions or statements expressed about such futureperformance or results.  The Companyundertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

** **

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market riskinherent in the Company’s financial instruments and in its financial positionrepresents the potential loss arising from adverse changes in interestrates.  The Company’s results ofoperations could be negatively impacted by decreases in interest rates on itsinvestments, including its investments in ARS. Please see Note 5 to the Consolidated Financial Statements andManagement’s Discussion and Analysis of Financial Condition and Results ofOperation for further information regarding the Company’s investments in ARS.

 

The Company ispotentially exposed to market risk from changes in interest rates relating toits Credit Facility with Wells Fargo Bank. Loans under the Credit Facility bear interest at Wells Fargo’s primerate, 3.25% as of May 30, 2009, less 0.25%, or the one, three, or sixmonth LIBOR rate, based on the length of time the advance is outstanding.  However, the Company had no revolving creditloan borrowings under the Credit Facility during the first three months of fiscal2010 or fiscal 2009.  Given its existingliquidity position, the Company does not expect to utilize the Credit Facilityin the reasonably foreseeable future other than to use letters of credit tosupport the import of merchandise.

 

The Company entersinto certain purchase obligations outside the United States, which aredenominated and settled in U.S. dollars. Therefore, the Company has only minimal exposure to foreign currencyexchange risks.  The Company does nothedge against foreign currency risks and believes that its foreign currencyexchange risk is immaterial.  The Companydoes not have any derivative financial instruments and does not hold anyderivative financial instruments for trading purposes.

 

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**ITEM 4.**

**CONTROLS AND PROCEDURES**

 

*(a)*       Evaluation of Disclosure Controls andProcedures.

* *

Under the supervision andwith the participation of its Chief Executive Officer and Chief FinancialOfficer, the Company’s management has evaluated the effectiveness and design ofthe Company’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of theperiod covered by this report (the “Evaluation Date”).  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures were effectiveto ensure that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified inapplicable rules and forms, and (ii) accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure.

* *

*(b)*  Internal Control Over Financial Reporting.

* *

There have not been anychanges in the Company’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) during the three months ended May 30, 2009 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1.**

**LEGAL PROCEEDINGS**

 

The Company is subject, from time to time, to variousclaims, lawsuits or actions that arise in the ordinary course of business.  Although the amount of any liability thatcould arise with respect to any current proceedings cannot, in our opinion, beaccurately predicted, any such liability is not expected to have a materialadverse impact on the Company’s financial position, results of operations orliquidity.

 

**ITEM1A.**

**RISK FACTORS**

 

The factorsdiscussed in Part I, “Item 1A. Risk Factors” in the Company’s AnnualReport on Form 10-K for the year ended February 28, 2009 should becarefully considered as they could materially affect the Company’s business,financial condition or future results.

 

**ITEM 2.**

**UNREGISTERED SALES OF EQUITY**

**SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.**

**DEFAULTS UPON**

**SENIOR SECURITIES**

 

None.

 

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**ITEM 4.**

**SUBMISSION OF MATTERS TO**

**A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.**

**OTHER INFORMATION**

 

None.

 

**ITEM 6.**

**EXHIBITS**

 
| 10.1   |   | Offer Letter by and  between Christopher & Banks Corporation and Rodney Carter accepted  on June 1, 2009 (incorporated herein by reference to Exhibit 10.1  to Current Report on Form 8-K filed on June 5, 2009) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                          |
| 10.2   |   | Agreement by and  between Christopher & Banks Corporation and Rodney Carter effective June 4,  2009 (incorporated herein by reference to Exhibit 10.2 to Current Report  on Form 8-K filed on June 5, 2009)      |
|   |   |                                                                                                                                                                                                                                          |
| 31.1*  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                         |
|   |   |                                                                                                                                                                                                                                          |
| 31.2*  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                              |
|   |   |                                                                                                                                                                                                                                          |
| 32.1*  |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |
|   |   |                                                                                                                                                                                                                                          |
| 32.2*  |   | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |

 

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* Filed with this report.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| ** **                           | **CHRISTOPHER &  BANKS CORPORATION** |
|--------------------------------------|-----------------------------------------------|
|                                 |                                          |   |
|                                 |                                          |   |
| Dated:   July 9, 2009 | By                                            | /S/  LORNA E. NAGLER |
|                                 |                                          |   |
|                                 |                                          | Lorna  E. Nagler |
|                                 |                                          | President  and Chief Executive Officer |
|                                 |                                          | (Principal  Executive Officer) |
|                                 |                                          |   |
|                                 |                                          |   |
| Dated:   July 9, 2009 | By                                            | /S/  RODNEY CARTER |
|                                 |                                          |   |
|                                 |                                          | Rodney  Carter |
|                                 |                                          | Executive  Vice President, |
|                                 |                                          | Chief  Financial Officer |
|                                 |                                          | (Principal  Financial Officer) |

 

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**CHRISTOPHER & BANKSCORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                          |
| 10.1                 |       | Offer Letter by and  between Christopher & Banks Corporation and Rodney Carter accepted  on June 1, 2009 (incorporated herein by reference to Exhibit 10.1  to Current Report on Form 8-K filed on June 5, 2009) |
|                 |       |                                                                                                                                                                                                                                          |
| 10.2                 |       | Agreement by and  between Christopher & Banks Corporation and Rodney Carter effective  June 4, 2009 (incorporated herein by reference to Exhibit 10.2 to  Current Report on Form 8-K filed on June 5, 2009)      |
|                 |       |                                                                                                                                                                                                                                          |
| 31.1*                |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                         |
|                 |       |                                                                                                                                                                                                                                          |
| 31.2*                |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                         |
|                 |       |                                                                                                                                                                                                                                          |
| 32.1*                |       | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |
|                 |       |                                                                                                                                                                                                                                          |
| 32.2*                |       | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |

 

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* Filed with this report.

 

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