**Tableof Contents**

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# ****

# ** **

# **FORM 10-Q**

**(Mark One)**

# ** **

| **x**                                                      | **QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE**SECURITIES  EXCHANGE ACT OF 1934 |
|------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ** **                                                 |
| ** **                                                 |
| **For the quarterly period ended November 29,  2008** |
| ** **                                                 |
| **or**                                                     |
| ** **                                                 |
| **o**                                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**SECURITIES EXCHANGE ACT OF 1934 |
| ** **                                                 |

 

**For the transition period from                        to                         .**

 

**Commission File Number 001-31390**

 

### **CHRISTOPHER &BANKS CORPORATION**

(Exact name ofregistrant 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’stelephone number, including area code)

 

**Not Applicable**

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. 

 

**YES  ****x****  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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

**YES  ****o****  NO  ****x**

 

As of January 2,2009 35,498,980 shares of the registrant’s common stock were outstanding.

 

 

 

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###### **Tableof Contents**

 

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

###### ** **

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 

# **PART I**

 

# **FINANCIAL INFORMATION**

# ** **

| ** ** | ** ** | ** **                                                                   | **Page**   |
|------------|------------|------------------------------------------------------------------------------|------------|
|       |       |                                                                         |       |
| Item 1.    |       | Financial Statements:                                                        |       |
|       |       |                                                                         |       |
|       |       | Condensed Consolidated Balance Sheet (Unaudited)                             |       |
|       |       | As of November 29, 2008, March 1, 2008  and December 1, 2007  | 3          |
|       |       |                                                                         |       |
|       |       | Condensed Consolidated Statement of  Operations (Unaudited)                  |       |
|       |       | For the Three Months Ended  November 29, 2008 and December 1, 2007 | 4          |
|       |       |                                                                         |       |
|       |       | Condensed  Consolidated Statement of Operations (Unaudited)                  |       |
|       |       | For the Nine  Months Ended November 29, 2008 and December 1, 2007  | 5          |
|       |       |                                                                         |       |
|       |       | Condensed  Consolidated Statement of Cash Flows (Unaudited)                  |       |
|       |       | For the Nine  Months Ended November 29, 2008 and December 1, 2007  | 6          |
|       |       |                                                                         |       |
|       |       | Notes to  Condensed Consolidated Financial Statements (Unaudited)            | 7          |
|       |       |                                                                         |       |
| Item 2.    |       | Management’s Discussion and Analysis of                                 |       |
|       |       | Financial Condition and Results of  Operations                               | 18         |
|       |       |                                                                         |       |
| Item 3.    |       | Quantitative and Qualitative Disclosures                                     |       |
|       |       | About Market Risk                                                            | 29         |
|       |       |                                                                         |       |
| Item 4.    |       | Controls and Procedures                                                      | 30         |
|       |       |                                                                         |       |
| ** ** | ** ** | **PART II**                                                             | ** ** |
| ** ** | ** ** | ** **                                                                   | ** ** |
|       |       | **OTHER INFORMATION**                                                        |       |
|       |       |                                                                         |       |
| Item 1.    |       | Legal Proceedings                                                            | 30         |
|       |       |                                                                         |       |
| Item 1A.   |       | Risk Factors                                                                 | 30         |
|       |       |                                                                         |       |
| Item 2.    |       | Unregistered Sales of  Equity Securities and Use of Proceeds                 | 30         |
|       |       |                                                                         |       |
| Item 3.    |       | Defaults Upon Senior Securities                                              | 31         |
|       |       |                                                                         |       |
| Item 4.    |       | Submission of Matters to a  Vote of Security Holders                         | 31         |
|       |       |                                                                         |       |
| Item 5.    |       | Other Information                                                            | 31         |
|       |       |                                                                         |       |
| Item 6.    |       | Exhibits                                                                     | 31         |
|       |       |                                                                         |       |
|       |       | Signatures                                                                   | 32         |
|       |       |                                                                         |       |
|       |       | Index to Exhibits                                                            | 33         |

 

2

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Tableof Contents

 

# **PART I — FINANCIAL INFORMATION**

# ** **

**ITEM 1.**

**FINANCIAL STATEMENTS**

 

# **CHRISTOPHER & BANKS CORPORATION**

# **CONDENSED CONSOLIDATED BALANCE SHEET**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                    | ** ** | **November 29,** | ** **  | **March 1,** | ** ** | **December 1,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **2008**              | ** **  | **2008**          | ** ** | **2007**             | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                    | ** ** | ** **            | ** **  | ** **        | ** ** | ** **           | ** ** |
| Current assets:                                                                                                                                                                                                                                                               |       |                  |        |              |       |                 |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                    |       | $                     | 74,086,872  |              | $          | 78,492,297           |       | $ | 46,701,459 |   |
| Short-term  investments                                                                                                                                                                                                                                                       |       | —                |        | —            |       | 48,300,000           |       |
| Accounts  receivable                                                                                                                                                                                                                                                          |       | 6,742,115             |        | 5,222,976         |       | 6,811,678            |       |
| Merchandise  inventories                                                                                                                                                                                                                                                      |       | 53,151,343            |        | 43,840,338        |       | 46,943,191           |       |
| Prepaid expenses                                                                                                                                                                                                                                                              |       | 11,242,887            |        | 11,597,280        |       | 11,497,446           |       |
| Other current  assets                                                                                                                                                                                                                                                         |       | 11,136,411            |        | 9,482,393         |       | 4,582,421            |       |
| Total current  assets                                                                                                                                                                                                                                                         |       | 156,359,628           |        | 148,635,284       |       | 164,836,195          |       |
| Property,  equipment and improvements, net                                                                                                                                                                                                                                    |       | 129,067,110           |        | 133,598,580       |       | 136,373,593          |       |
| Long-term  investments                                                                                                                                                                                                                                                        |       | 15,875,812            |        | 23,350,000        |       | —               |       |
| Goodwill                                                                                                                                                                                                                                                                      |       | —                |        | —            |       | 3,587,052            |       |
| Other assets                                                                                                                                                                                                                                                                  |       | 8,794,687             |        | 6,207,858         |       | 4,337,972            |       |
| Total assets                                                                                                                                                                                                                                                                  |       | $                     | 310,097,237 |              | $          | 311,791,722          |       | $ | 309,134,812 |   |
|                                                                                                                                                                                                                                                                          |       |                  |        |              |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                 | ** ** | ** **            | ** **  | ** **        | ** ** | ** **           | ** ** |
|                                                                                                                                                                                                                                                                          |       |                  |        |              |       |                 |       |
| Current  liabilities:                                                                                                                                                                                                                                                         |       |                  |        |              |       |                 |       |
| Accounts payable                                                                                                                                                                                                                                                              |       | $                     | 14,793,920  |              | $          | 15,380,692           |       | $ | 8,483,503 |   |
| Accrued  salaries, wages and related expenses                                                                                                                                                                                                                                 |       | 8,087,824             |        | 9,246,050         |       | 9,529,895            |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                    |       | 22,288,773            |        | 28,040,623        |       | 20,902,975           |       |
| Total current  liabilities                                                                                                                                                                                                                                                    |       | 45,170,517            |        | 52,667,365        |       | 38,916,373           |       |
| Non-current liabilities:                                                                                                                                                                                                                                                      |       |                  |        |              |       |                 |       |
| Deferred lease  incentives                                                                                                                                                                                                                                                    |       | 24,822,736            |        | 24,854,278        |       | 22,336,658           |       |
| Deferred rent  obligations                                                                                                                                                                                                                                                    |       | 10,037,563            |        | 11,720,689        |       | 11,673,329           |       |
| Other                                                                                                                                                                                                                                                                         |       | 4,219,500             |        | 3,722,195         |       | 3,362,258            |       |
| Total  non-current liabilities                                                                                                                                                                                                                                                |       | 39,079,799            |        | 40,297,162        |       | 37,372,245           |       |
|                                                                                                                                                                                                                                                                          |       |                  |        |              |       |                 |       |
| Commitments                                                                                                                                                                                                                                                                   |       | —                |        | —            |       | —               |       |
|                                                                                                                                                                                                                                                                          |       |                  |        |              |       |                 |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                   |       |                  |        |              |       |                 |       |
| Preferred stock –  $0.01 par value, 1,000,000 shares authorized, none outstanding                                                                                                                                                                                   |       | —                |        | —            |       | —               |       |
| Common stock –  $0.01 par value, 74,000,000 shares authorized, 45,302,778, 45,050,290 and  45,052,590 shares issued and 35,498,980, 35,259,572 and 35,574,772 shares  outstanding at November 29, 2008, March 1, 2008 and  December 1, 2007, respectively |       | 453,028               |        | 450,503           |       | 450,526              |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                   |       | 111,930,607           |        | 110,359,847       |       | 109,766,765          |       |
| Retained  earnings                                                                                                                                                                                                                                                            |       | 226,322,245           |        | 221,928,654       |       | 232,341,185          |       |
| Common stock  held in treasury, 9,803,798, 9,790,718 and 9,477,818 shares at cost at  November 29, 2008, March 1, 2008 and December 1, 2007,  respectively                                                                                                     |       | (112,858,959          | )           | (112,711,809      | )          | (109,712,282         | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                                |       | —                |        | (1,200,000        | )          | —               |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                              |       | 225,846,921           |        | 218,827,195       |       | 232,846,194          |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                              |       | $                     | 310,097,237 |              | $          | 311,791,722          |       | $ | 309,134,812 |   |

 

The accompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

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**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS**

(Unaudited)

 
| ** **                                                    | ** ** | **Three Months Ended** | ** **  |
|---------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                    | ** ** | **November 29,**            | ** **  | **December 1,** | ** ** |
| ** **                                                    | ** ** | **2008**                         | ** **  | **2007** | ** ** |
| ** **                                                    | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Net sales                                                     |       | $                                | 143,003,908 |   | $ | 155,242,697 |   |
|                                                          |       |                             |        |   |   |
| Costs and  expenses:                                          |       |                             |        |   |   |
| Merchandise,  buying and occupancy                            |       | 91,914,238                       |        | 90,522,545 |   |
| Selling, general  and administrative                          |       | 45,204,023                       |        | 42,933,371 |   |
| Depreciation and  amortization                                |       | 6,548,133                        |        | 5,430,983 |   |
| Total costs and  expenses                                     |       | 143,666,394                      |        | 138,886,899 |   |
|                                                          |       |                             |        |   |   |
| Operating income  (loss)                                      |       | (662,486                         | )           | 16,355,798 |   |
|                                                          |       |                             |        |   |   |
| Interest income                                               |       | 619,178                          |        | 1,163,225 |   |
|                                                          |       |                             |        |   |   |
| Income (loss)  from continuing operations before income taxes |       | (43,308                          | )           | 17,519,023 |   |
|                                                          |       |                             |        |   |   |
| Income tax  provision (benefit)                               |       | (3,855                           | )           | 6,447,001 |   |
|                                                          |       |                             |        |   |   |
| Income (loss)  from continuing operations                     |       | (39,453                          | )           | 11,072,022 |   |
|                                                          |       |                             |        |   |   |
| Loss from  discontinued operations, net of income tax         |       | (1,334,013                       | )           | (833,852 | ) |
|                                                          |       |                             |        |   |   |
| Net income  (loss)                                            |       | $                                | (1,373,466  | ) | $ | 10,238,170 |   |
|                                                          |       |                             |        |   |   |
| Basic earnings  (loss) per share:                             |       |                             |        |   |   |
| Continuing  operations                                        |       | $                                | —      |   | $ | 0.31 |   |
| Discontinued  operations                                      |       | (0.04                            | )           | (0.02 | ) |
|                                                          |       |                             |        |   |   |
| Earnings (loss)  per basic share                              |       | $                                | (0.04       | ) | $ | 0.29 |   |
|                                                          |       |                             |        |   |   |
| Basic shares  outstanding                                     |       | 35,099,129                       |        | 35,447,855 |   |
|                                                          |       |                             |        |   |   |
| Diluted earnings  (loss) per share:                           |       |                             |        |   |   |
| Continuing  operations                                        |       | $                                | —      |   | $ | 0.31 |   |
| Discontinued  operations                                      |       | (0.04                            | )           | (0.02 | ) |
|                                                          |       |                             |        |   |   |
| Earnings (loss)  per diluted share                            |       | $                                | (0.04       | ) | $ | 0.29 |   |
|                                                          |       |                             |        |   |   |
| Diluted shares  outstanding                                   |       | 35,099,129                       |        | 35,528,352 |   |
|                                                          |       |                             |        |   |   |
| Dividends per  share                                          |       | $                                | 0.06        |   | $ | 0.06 |   |

 

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

 

4

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**Table ofContents**

** **

**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS**

(Unaudited)

 
| ** **                                             | ** ** | **Nine Months Ended** | ** **  |
|--------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                             | ** ** | **November 29,  2008**     | ** **  | **December 1,  2007** | ** ** |
| ** **                                             | ** ** | ** **                      | ** **  | ** ** | ** ** |
| Net sales                                              |       | $                               | 426,850,378 |   | $ | 438,623,317 |   |
|                                                   |       |                            |        |   |   |
| Costs and  expenses:                                   |       |                            |        |   |   |
| Merchandise,  buying and occupancy                     |       | 257,361,338                     |        | 262,171,413 |   |
| Selling, general  and administrative                   |       | 129,010,326                     |        | 120,214,677 |   |
| Depreciation and  amortization                         |       | 19,653,754                      |        | 15,702,721 |   |
| Total costs and  expenses                              |       | 406,025,418                     |        | 398,088,811 |   |
|                                                   |       |                            |        |   |   |
| Operating income                                       |       | 20,824,960                      |        | 40,534,506 |   |
|                                                   |       |                            |        |   |   |
| Interest income                                        |       | 2,031,770                       |        | 3,382,476 |   |
|                                                   |       |                            |        |   |   |
| Income from  continuing operations before income taxes |       | 22,856,730                      |        | 43,916,982 |   |
|                                                   |       |                            |        |   |   |
| Income tax  provision                                  |       | 2,034,248                       |        | 16,161,450 |   |
|                                                   |       |                            |        |   |   |
| Income from  continuing operations                     |       | 20,822,482                      |        | 27,755,532 |   |
|                                                   |       |                            |        |   |   |
| Loss from  discontinued operations, net of income tax  |       | (10,087,651                     | )           | (2,452,735 | ) |
|                                                   |       |                            |        |   |   |
| Net income                                             |       | $                               | 10,734,831  |   | $ | 25,302,797 |   |
|                                                   |       |                            |        |   |   |
| Basic earnings  (loss) per share:                      |       |                            |        |   |   |
| Continuing  operations                                 |       | $                               | 0.59        |   | $ | 0.78 |   |
| Discontinued  operations                               |       | (0.28                           | )           | (0.07 | ) |
|                                                   |       |                            |        |   |   |
| Earnings per  basic share                              |       | $                               | 0.31        |   | $ | 0.71 |   |
|                                                   |       |                            |        |   |   |
| Basic shares  outstanding                              |       | 35,091,041                      |        | 35,835,063 |   |
|                                                   |       |                            |        |   |   |
| Diluted earnings  (loss) per share:                    |       |                            |        |   |   |
| Continuing  operations                                 |       | $                               | 0.59        |   | $ | 0.77 |   |
| Discontinued  operations                               |       | (0.28                           | )           | (0.07 | ) |
|                                                   |       |                            |        |   |   |
| Earnings per  diluted share                            |       | $                               | 0.31        |   | $ | 0.70 |   |
|                                                   |       |                            |        |   |   |
| Diluted shares  outstanding                            |       | 35,093,991                      |        | 35,925,734 |   |
|                                                   |       |                            |        |   |   |
| Dividends per  share                                   |       | $                               | 0.18        |   | $ | 0.18 |   |

 

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

 

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**CHRISTOPHER & BANKSCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **November 29,  2008**     | ** ** | **December 1,  2007** | ** ** |
| Cash flows from  operating activities:                                             |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 10,734,831 |   | $ | 25,302,797 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                     |       | 19,754,489                      |       | 17,391,107 |   |
| Impairment of  store assets                                                        |       | 1,220,550                       |       | — |   |
| Deferred income  taxes                                                             |       | 253,923                         |       | (5,585,486 | ) |
| Excess income  tax benefit on exercise of stock options                            |       | —                          |       | (14,738 | ) |
| Stock-based  compensation expense                                                  |       | 1,577,843                       |       | 1,788,292 |   |
| Loss on disposal  of furniture, fixtures and equipment                             |       | 553,289                         |       | 221,928 |   |
| Changes in operating  assets and liabilities:                                      |       |                            |       |   |   |
| Increase in  accounts receivable                                                   |       | (1,519,139                      | )          | (2,330,054 | ) |
| (Increase)  decrease in merchandise inventories                                    |       | (9,311,005                      | )          | 5,411,753 |   |
| Decrease  (increase) in prepaid expenses                                           |       | 354,393                         |       | (831,025 | ) |
| (Increase)  decrease in prepaid income taxes and income taxes payable              |       | (903,712                        | )          | 2,091,455 |   |
| Decrease  (increase) in other assets                                               |       | 8,993                           |       | (64,541 | ) |
| Decrease in  accounts payable                                                      |       | (586,772                        | )          | (7,876,176 | ) |
| (Decrease)  increase in accrued liabilities                                        |       | (7,057,224                      | )          | 470,658 |   |
| Decrease in  deferred lease incentives                                             |       | (31,542                         | )          | (500,116 | ) |
| (Decrease)  increase in deferred rent obligations                                  |       | (1,683,126                      | )          | 994,988 |   |
| Increase in  other liabilities                                                     |       | 497,305                         |       | 3,362,258 |   |
| Net cash  provided by operating activities                                         |       | 13,863,096                      |       | 39,833,100 |   |
|                                                                               |       |                            |       |   |   |
| Cash flows from  investing activities:                                             |       |                            |       |   |   |
| Purchases of  property, equipment and improvements                                 |       | (16,922,724                     | )          | (26,868,274 | ) |
| Purchases of  investments                                                          |       | —                          |       | (96,850,000 | ) |
| Sales of  investments                                                              |       | 5,000,000                       |       | 96,825,000 |   |
| Net cash used in  investing activities                                             |       | (11,922,724                     | )          | (26,893,274 | ) |
|                                                                               |       |                            |       |   |   |
| Cash flows from  financing activities:                                             |       |                            |       |   |   |
| Proceeds from  exercise of stock options                                           |       | —                          |       | 1,156,993 |   |
| Dividends paid                                                                     |       | (6,345,797                      | )          | (6,445,651 | ) |
| Excess income  tax benefit on exercise of stock options                            |       | —                          |       | 14,738 |   |
| Acquisition of  common stock held in treasury                                      |       | —                          |       | (14,955,845 | ) |
| Net cash used in  financing activities                                             |       | (6,345,797                      | )          | (20,229,765 | ) |
|                                                                               |       |                            |       |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (4,405,425                      | )          | (7,289,939 | ) |
|                                                                               |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 78,492,297                      |       | 53,991,398 |   |
| Cash and cash  equivalents at end of period                                        |       | $                               | 74,086,872 |   | $ | 46,701,459 |   |

 

The accompanying notes are an integral part of these unaudited condensedconsolidated 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 March 1, 2008.

 

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 November 29, 2008and December 1, 2007, and its results of operations and cash flows for thethree and nine month periods ended November 29, 2008 and December 1,2007.

 

## **NOTE2 — DISCONTINUED OPERATIONS**

## ** **

On July 31, 2008,the Company announced its decision to exit its Acorn business when managementconcluded, after a comprehensive review and evaluation, that the concept hadnot demonstrated the potential to deliver an acceptable long-term return on theCompany’s investment.  On July 30,2008, the Company’s Board of Directors authorized a plan to close all of theCompany’s 36 Acorn stores by December 31, 2008, allowing the Company tofocus its resources on its two core brands, Christopher & Banks andC.J. Banks.

 

The Company closed 29 ofits 36 Acorn stores during its third fiscal quarter ended November 29,2008 and closed its seven remaining Acorn stores on December 24,2008.  The operating results of all Acornstores have been presented as discontinued operations, in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),in the Condensed Consolidated Statement of Operations for the three and ninemonth periods ended November 29, 2008 as the impact of the remainingstores open as of November 29, 2008 were not material to the results ofoperations for these periods and because, upon closure of the remaining stores,the results of operations for all periods would be retroactively included indiscontinued operations.

 

In addition tostore-level operating losses, the loss from discontinued operations for thenine months ended November 29, 2008 includes approximately $3.9 million oflease termination costs, $1.2 million of long-lived asset impairment chargesand $0.3 million of severance costs incurred in connection with exiting theAcorn division business.  The Companyexpects to incur approximately $0.7 million of additional charges related toclosing the seven remaining Acorn stores during the fourth quarter of fiscal2009.

 

The operating results ofthe discontinued operations are summarized below.

 

| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **November 29,  2008**      | ** ** | **December 1,  2007** | ** ** |
|                            |       |                             |       |   |   |
| Net sales                       |       | $                                | 3,015,273  |   | $ | 4,733,459 |   |
| Loss before  income tax benefit |       | (4,712,733                       | )          | (1,404,169 | ) |
| Income tax  provision (benefit) |       | (3,378,720                       | )          | (570,317 | ) |
| Net loss                        |       | (1,334,013                       | )          | (833,852 | ) |
| Net loss per  share             |       | $                                | (0.04      | ) | $ | (0.02 | ) |

 

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| ** **                      | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **November 29,**           | ** ** | **December 1,** | ** ** |
| ** **                      | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                            |       |                            |       |   |   |
| Net sales                       |       | $                               | 10,448,260 |   | $ | 11,851,788 |   |
| Loss before income  tax benefit |       | (7,499,321                      | )          | (3,106,018 | ) |
| Income tax  provision (benefit) |       | 2,588,330                       |       | (653,283 | ) |
| Net loss                        |       | (10,087,651                     | )          | (2,452,735 | ) |
| Net loss per  share             |       | $                               | (0.28      | ) | $ | (0.07 | ) |

 

Income taxes have beenallocated to continuing and discontinued operations based on the methodologyrequired by Financial Accounting Interpretation No. 18 (“FIN 18”).  As required by this authoritative guidance,income taxes are computed with and without the impact of results fromdiscontinued operations and the difference in taxes between these computationsis allocated to discontinued operations.

 

Income taxes allocated tothe loss from discontinued operations for the three and nine month interimperiods ended November 29, 2008, result from the fact that the estimatedeffective tax rate on continuing operations for these interim periods is8.9%, while the effective tax rate for all operations, including combinedresults for continuing and discontinued operations is estimated to be 30.1%. The difference in taxes between those allocable to continuing operationsand total taxes previously estimated for all operations are allocated todiscontinued operations. ** **Actual tax rates for fiscal2009 could differ significantly from estimated rates based on the results ofoperations in the fourth quarter of fiscal 2009.

 

The balance sheet impactof the discontinued operations included current assets and current liabilitiesof approximately $600,000 each as of November 29, 2008.

 

For comparison purposes,the Company’s results from continuing and discontinued operations for thequarters ended March 1, 2008, May 31, 2008 and August 30, 2008have been provided below.

 

| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **March 1,  2008**               | ** ** | **May 31,  2008** | ** ** | **August 30,  2008** | ** ** |
| Net sales                                                     |       | $                                | 122,289    |   | $ | 155,395 |   | $ | 128,451 |   |
| Costs and expenses:                                           |       |                             |       |   |   |   |   |
| Merchandise,  buying and occupancy                            |       | 79,756                           |       | 86,734 |   | 78,715 |   |
| Selling, general  and administrative                          |       | 40,965                           |       | 43,565 |   | 40,241 |   |
| Depreciation and  amortization                                |       | 6,472                            |       | 6,408 |   | 6,696 |   |
| Total costs and  expenses                                     |       | 127,193                          |       | 136,707 |   | 125,652 |   |
| Operating income  (loss)                                      |       | (4,904                           | )          | 18,688 |   | 2,799 |   |
| Interest income                                               |       | 1,279                            |       | 827 |   | 586 |   |
| Income (loss) from  continuing operations before income taxes |       | (3,625                           | )          | 19,515 |   | 3,385 |   |
| Income tax  provision (benefit)                               |       | (1,334                           | )          | 1,737 |   | 301 |   |
| Income (loss) from  continuing operations                     |       | (2,291                           | )          | 17,778 |   | 3,084 |   |
| Loss from  discontinued operations, net of income tax         |       | (5,993                           | )          | (6,506 | ) | (2,248 | ) |
| Net income  (loss)                                            |       | $                                | (8,284     | ) | $ | 11,272 |   | $ | 836 |   |
|                                                          |       |                             |       |   |   |   |   |
| Basic earnings  (loss) per share:                             |       |                             |       |   |   |   |   |
| Continuing  operations                                        |       | $                                | (0.06      | ) | $ | 0.51 |   | $ | 0.09 |   |
| Discontinued  operations                                      |       | (0.17                            | )          | (0.19 | ) | (0.06 | ) |
| Earnings (loss) per  basic share                              |       | $                                | (0.23      | ) | $ | 0.32 |   | $ | 0.03 |   |
| Basic shares  outstanding                                     |       | 35,287                           |       | 35,071 |   | 35,099 |   |
|                                                          |       |                             |       |   |   |   |   |
| Diluted earnings  (loss) per share:                           |       |                             |       |   |   |   |   |
| Continuing  operations                                        |       | $                                | (0.06      | ) | $ | 0.51 |   | $ | 0.08 |   |
| Discontinued  operations                                      |       | (0.17                            | )          | (0.19 | ) | (0.06 | ) |
| Earnings (loss) per  diluted share                            |       | $                                | (0.23      | ) | $ | 0.32 |   | $ | 0.02 |   |
| Diluted shares  outstanding                                   |       | 35,287                           |       | 35,138 |   | 35,122 |   |
| Dividends per  share                                          |       | $                                | 0.06       |   | $ | 0.06 |   | $ | 0.06 |   |

 

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## **NOTE3 — INVESTMENTS**

## ** **

The Company’s investments consist of the following:

 

| **Description**                                    | ** ** | **November 29,  2008** | ** ** | **March 1,  2008** | ** ** | **December 1,  2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                               |       |                        |       |                    |       |                       |       |
| Tax-advantaged,  auction rate, trading securities: |       |                        |       |                    |       |                       |       |
| Short-term                                         |       | $                           | —     |                    | $          | —                     |       | $ | 48,300,000 |   |
| Long-term                                          |       | 15,875,812                  |       | 23,350,000              |       | —                     |       |
|                                               |       |                        |       |                    |       |                       |       |
|                                               |       | $                           | 15,875,812 |                    | $          | 23,350,000                 |       | $ | 48,300,000 |   |

 

As of November 29, 2008, the Company hadapproximately $15.9 million of long-term investments, which consisted solely of$19.6 million of auction rate securities (“ARS”) at cost, less a fair valueadjustment of $3.7 million.  Fair valuewas based on management’s analysis of impairment factors taking into accountthe credit quality of the underlying securities and reflects the lack ofliquidity of the Company’s investments. All of the Company’s ARS are collateralized by student loans andcurrently have AAA (S&P) or Aaa (Moody’s) credit ratings.  As of November 29, 2008, the repaymentof approximately 80% of the student loans, which serve as collateral for theARS held by the Company, is substantially backed by the United Statesgovernment.  Until February 2008, theARS market was liquid and auctions for ARS held by the Company did not fail.However, beginning in February 2008, auctions for the ARS held by theCompany began to fail and have continued to fail up to and as of the date ofthis 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.  TheCompany reclassified its ARS to long-term investments at March 1, 2008 toreflect the lack of liquidity of these investments.

 

All of the ARS owned bythe Company were purchased from UBS Financial Services, Inc., a subsidiaryof UBS AG (“UBS”) and are held, for the benefit of the Company, by UBS.  In August 2008, UBS announced a settlement inprinciple with the Securities and Exchange Commission, the New York AttorneyGeneral and other state regulatory agencies to restore liquidity to remainingclients who hold ARS.  On October 7,2008, UBS issued a prospectus to the Company formalizing the settlement offerand offering the Company certain ARS rights. Under the settlement, these ARS rights provide the Company the abilityto redeem its ARS at par during a two-year time period beginning June 30,2010.  During this time, the Company may choose to continue to hold someor all of its ARS and earn interest or sell some or all of them to UBS at parplus accrued interest.  The ARS rightsare not transferable, tradeable or marginable and will not be listed or quotedon any securities exchange or any electronic communications network.

 

On November 7, 2008,the Company’s Board of Directors accepted the UBS settlement offer.  Consequently, the Company reclassified theARS from available-for-sale to trading securities and elected, pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),to record the ARS rights at fair value on a recurring basis utilizingsignificant unobservable inputs in accordance with SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”).

 

The Company determinedthe fair value of the ARS rights to be approximately $3.7 million, whichsubstantially offset the unrealized loss recorded within selling, general andadministrative expense related to the fair value adjustment on the ARS.  The ARS rights were recorded within othernon-current assets on the consolidated balance sheet.  Please see Note 12 for further disclosureregarding the Company’s accounting for fair value measurements.

 

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## **NOTE4 — MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY**

## ** **

Merchandise inventoriesconsisted of the following:

 

| **Description**           | ** ** | **November 29,  2008** | ** ** | **March 1,  2008** | ** ** | **December 1,  2007** | ** ** |
|---------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                      |       |                        |       |                    |       |                       |       |
| Merchandise - in  store   |       | $                           | 51,859,445 |                    | $          | 37,303,879                 |       | $ | 43,885,126 |   |
| Merchandise - in  transit |       | 1,291,898                   |       | 6,536,459               |       | 3,058,065                  |       |
|                      |       |                        |       |                    |       |                       |       |
|                      |       | $                           | 53,151,343 |                    | $          | 43,840,338                 |       | $ | 46,943,191 |   |

 

**The Company does not havelong-term purchase commitments or arrangements with any of its suppliers oragents. **The Company purchased approximately17% and 19% of its merchandise from its largest overseas supplier during thefirst nine months of fiscal 2009 and 2008, respectively.  Althoughthe Company has an established operating history with its largest vendor, therecan be no assurance that this relationship can be maintained in the future orthat the vendor will continue to supply merchandise to the Company.  Ifthere should be any significant disruption in the supply of merchandise fromthis vendor, management believes that it will be able to shift production to othersuppliers so as to continue to secure the required volume of product. Nevertheless, it is possible that any significant disruption in supply couldhave a material adverse impact on the Company’s financial position or resultsof operations.

** **

In the three and ninemonth periods ended November 29, 2008, the Company purchased approximately 20% and 32% of its merchandise,respectively, through one buying agent (the “Agent”).  The Company hascontinued the process of establishing relationships with additional primarysuppliers, which are intended to reduce its reliance on the Agent.  The Agent also has informed the Company thatit desires to cease serving as an intermediary with manufacturers on behalf ofthe Company.  Therefore, the Company andthe Agent agreed to terminate their arrangement as of the end of December 2008.  While management believes the actions it istaking to mitigate the risks of reliance on the Agent will be successful, anysignificant disruption in supply from vendors working through the Agent couldhave a material adverse impact on the Company’s financial position or resultsof operations.

 

## **NOTE5 — PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET**

## ** **

Property, equipment andimprovements, net consisted of the following:

 
| **Description**                                                             | ** ** | **Estimated  Useful Life**            | ** ** | **November 29,  2008** | ** **  | **March 1,  2008** | ** ** | **December 1,  2007** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------|-------------|-------------------------|------------|----------------------------|------------|
|                                                                        |       |                                       |       |                        |        |                    |       |                       |       |
| Land                                                                        |       | —                                     |       | $                           | 1,596,898   |                    | $          | 1,596,898                  |       | $ | 1,596,898 |   |
| Corporate  office, distribution center and related building improvements    |       | 25 years                                   |       | 12,020,131                  |        | 12,014,667              |       | 11,856,863                 |       |
| Store leasehold  improvements                                               |       | Term of related lease, typically  10 years |       | 97,497,444                  |        | 97,525,439              |       | 92,834,115                 |       |
| Store furniture  and fixtures                                               |       | Three to 10 years                          |       | 115,404,408                 |        | 113,585,852             |       | 107,502,097                |       |
| Computer  hardware and software                                             |       | Three to five years                        |       | 32,138,294                  |        | 21,595,000              |       | 18,172,079                 |       |
| Corporate office  and distribution center furniture, fixtures and equipment |       | Seven years                                |       | 3,162,791                   |        | 3,055,898               |       | 2,902,305                  |       |
| Construction in  progress                                                   |       | —                                     |       | 5,408,364                   |        | 9,474,738               |       | 16,239,065                 |       |
|                                                                        |       |                                       |       | 267,228,330                 |        | 258,848,492             |       | 251,103,422                |       |
| Less accumulated  depreciation and amortization                             |       |                                       |       | 138,161,220                 |        | 125,249,912             |       | 114,729,829                |       |
| Net property,  equipment and improvements                                   |       |                                       |       | $                           | 129,067,110 |                    | $          | 133,598,580                |       | $ | 136,373,593 |   |

 

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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.  While the Company recorded no impairments oflong-lived assets employed in continuing operations in the three and nine monthperiods ended November 29, 2008, the current challenging economicenvironment, combined with the continued instability in the housing, credit,stock and financial markets, and increasing general economic uncertaintyaffecting the retail industry, make it reasonably possible that long-livedasset impairments could be identified and recorded in future periods.

 

## **NOTE6 — ACCRUED LIABILITIES**

## ** **

Other accrued liabilitiesconsisted of the following:

 

| **Description**                                        | ** ** | **November 29,  2008** | ** ** | **March 1,  2008** | ** ** | **December 1,  2007** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                                   |       |                        |       |                    |       |                       |       |
| Gift card,  certificate and store credit liabilities   |       | $                           | 7,687,104  |                    | $          | 13,545,500                 |       | $ | 8,411,824 |   |
| Accrued  un-invoiced merchandise inventory receipts    |       | 5,314,893                   |       | 4,949,370               |       | 3,290,751                  |       |
| Accrued workers  compensation self-insurance liability |       | 2,444,385                   |       | 2,252,571               |       | 2,011,514                  |       |
| Accrued income,  sales and other taxes payable         |       | 2,899,986                   |       | 2,161,038               |       | 3,202,595                  |       |
| Accrued  occupancy-related expenses                    |       | 1,126,467                   |       | 992,584                 |       | 2,612,302                  |       |
| Other                                                  |       | 2,815,938                   |       | 4,139,560               |       | 1,373,989                  |       |
|                                                   |       |                        |       |                    |       |                       |       |
|                                                   |       | $                           | 22,288,773 |                    | $          | 28,040,623                 |       | $ | 20,902,975 |   |

 

## **NOTE7 — CREDIT FACILITY**

## ** **

The Company maintains anAmended and Restated Revolving Credit Facility (the “Credit Facility”) withWells Fargo Bank, National Association (“Wells Fargo”).  The Credit Facility provides the Company withrevolving credit loans and letters of credit of up to $50.0 million, in theaggregate, subject to a borrowing base formula based on inventory levels.

 

In the firstquarter of fiscal 2009, the Company and Wells Fargo entered into a ThirdAmendment to the Credit Facility (the “Third Amendment”).  The Third Amendment extended the maturitydate of the Credit Facility by three years from June 30, 2008 to June 30,2011.  In addition, the Third Amendmentreduced the interest rate under the Credit Facility from the prime rate plus0.25% to the prime rate minus 0.25%.  Asof November 29, 2008, Wells Fargo’s prime rate was 4.0%.  The Third Amendment also provided the Companywith the ability to borrow under the Credit Facility at an interest rate tiedto the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29,2008.

 

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 nine months ended November 29,2008, fees related to the Credit Facility totaled $21,082.  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 nine months of fiscal2009.  Historically, the Credit Facilityhas been utilized by the Company only to open letters of credit to facilitatethe import of merchandise.  The borrowingbase at November 29, 2008 was $36.2 million.  As of November 29, 2008, the Company hadoutstanding letters of credit in the amount of $4.2 million.  Accordingly, the availability of revolvingcredit loans under the Credit Facility was $32.0 million at November 29,2008.

 

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 November 29, 2008,the most recent measurement date, the Company was in compliance with all ofthese restrictive covenants under the Credit Facility.

 

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## **NOTE8 — STOCKHOLDERS’ EQUITY**

## ** **

In fiscal 2008,the Company’s Board of Directors authorized and subsequently announced aone-year stock repurchase program enabling the Company to purchase up to $20.0million of its common stock, subject to market conditions.  As of May 24, 2008, the expiration dateof the repurchase program, the Company had repurchased 948,800 shares of itscommon stock under the program for a total cost, including commissions, ofapproximately $12.1 million.  Norepurchases were made under the program in the first nine months of fiscal2009.

 

## **NOTE9 — 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.

 

Total pre-taxcompensation expense related to stock-based awards for the three months ended November 29,2008 and December 1, 2007 was approximately $420,000 and $847,000,respectively.  For the nine months ended November 29,2008 and December 1, 2007, pre-tax stock-based compensation expensetotaled approximately $1.6 million and $1.8 million, respectively.  Stock-based compensation expense was includedin merchandise, buying and occupancy expenses for the Company’s buying anddistribution employees and in selling, general and administrative expenses forall 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 and nine month periods ended November 29, 2008 and December 1,2007 were as follows:

 

| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **November 29,  2008**      | ** ** | **December 1,  2007**      | ** ** | **November 29,  2008** | ** ** | **December 1,  2007** | ** ** |
| Expected divdend  yield  |       | 2.74                             | %          | 1.79                            | %          | 2.36 | % | 1.38 | % |
| Expected volatility      |       | 51.05                            | %          | 45.14                           | %          | 49.37 | % | 44.79 | % |
| Risk-free  interest rate |       | 2.92                             | %          | 4.15                            | %          | 2.72 | % | 4.49 | % |
| Expected term in  years  |       | 5.00                             |       | 4.75                            |       | 4.40 |   | 4.20 |   |

 

*Stock-Based Compensation Activity*

 

The following tablepresents a summary of the Company’s stock option activity for the nine monthsended November 29, 2008:

 

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| ** **                        | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted  Average  Fair Value** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|
|                              |       |                   |       |                                   |       |                            |       |                                   |       |                                                |       |
| Outstanding,  beginning of period |       | 1,889,454              |       | $                                      | 18.83      |                            | $          | —                                 |       | $                                                   | 6.79       |   |   |   |
| Vested                            |       | 1,485,011              |       | 19.34                                  |       | —                          |       | 6.83                                   |       |                                                |       |
| Unvested                          |       | 404,443                |       | 16.97                                  |       | —                          |       | 6.63                                   |       |                                                |       |
| Granted                           |       | 409,250                |       | 9.96                                   |       | —                          |       | 3.58                                   |       |                                                |       |
| Exercised                         |       | —                 |       | —                                 |       | —                          |       | —                                 |       |                                                |       |
| Canceled -  Vested                |       | (405,163               | )          | 20.73                                  |       | —                          |       | 7.09                                   |       |                                                |       |
| Canceled -  Unvested (Forfeited)  |       | (88,829                | )          | 15.85                                  |       | —                          |       | 5.94                                   |       |                                                |       |
| Outstanding, end  of period       |       | 1,804,712              |       | 16.56                                  |       | —                          |       | 6.04                                   |       | 6.02                                                |       |
| Vested                            |       | 1,204,222              |       | 18.67                                  |       | —                          |       | 6.74                                   |       | 4.49                                                |       |
| Unvested                          |       | 600,490                |       | 12.34                                  |       | —                          |       | 4.63                                   |       | 9.07                                                |       |
|                              |       |                   |       |                                   |       |                            |       |                                   |       |                                                |       |
| Exercisable, end  of period       |       | 1,204,222              |       | 18.67                                  |       | —                          |       | 6.74                                   |       | 4.49                                                |       |
|                                   |            |                        |            |                                        |            |                                 |            |                                        |            |                                                     |            |  |  |  |

 

The Company may alsogrant shares of restricted stock to its employees and non-employee members ofits Board of Directors.  Restricted stockawards are independent of option grants and are generally subject to forfeitureif employment or service terminates prior to the lapse of therestrictions.  In addition, certain ofthe Company’s restricted stock awards have performance-based vesting provisionsand are subject to forfeiture if these performance conditions are notachieved.  The Company assesses, on anongoing 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 ninemonths ended November 29, 2008:

 

| ** **                       | ** ** | **Number  of  Shares** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------|------------|----------------------------------------|------------|
|                             |       |                   |       |                            |       |                                   |       |
| Unvested,  beginning of period   |       | 118,484                |       | $                               | 399,291    |                                   | $          | 16.26 |   |
| Granted                          |       | 318,483                |       | 1,073,288                       |       | 9.71                                   |       |
| Vested                           |       | (41,666                | )          | 461,595                         |       | 12.28                                  |       |
| Canceled -  Unvested (Forfeited) |       | (47,950                | )          | 161,592                         |       | 14.65                                  |       |
| Unvested, end of  period         |       | 347,351                |       | 1,170,573                       |       | 10.96                                  |       |
|                                  |            |                        |            |                                 |            |                                        |            |  |  |

 

## **NOTE10 — INCOME TAXES**

## ** **

As of November 29,2008, the Company’s liability for unrecognized tax benefits associated withuncertain tax positions was approximately $4.2 million and the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate was $2.4 million.   The Companyrecognizes interest and penalties related to unrecognized tax benefits ascomponents of income tax expense.  At November 29,2008, the Company had accrued approximately $0.9 million for the potentialpayment of interest 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 November 29,2008, the Company did not expect its liability for unrecognized tax benefits tosignificantly increase or decrease in the remainder of fiscal 2009 or in fiscal2010.

 

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Income taxes have beenallocated to continuing and discontinued operations based on the methodologyrequired by Financial Accounting Interpretation No. 18 (“FIN 18”).  As required by this authoritative guidance,income taxes are computed with and without the impact of results fromdiscontinued operations and the difference in taxes between these computationsis allocated to discontinued operations.

 

## **Incometaxes allocated to the loss from discontinued operations for the three and ninemonth interim periods ended November 29, 2008, result from the fact thatthe estimated effective tax rate on continuing operations for theseinterim periods is 8.9%, while the effective tax rate for all operations,including combined results for continuing and discontinued operations isestimated to be **30.1%.  The difference in taxes between those allocableto continuing operations and total taxes previously estimated for alloperations are allocated to discontinued operations.  Actual tax rates for fiscal 2009could differ significantly from estimated rates based on the results ofoperations in the fourth quarter of fiscal 2009.

## ** **

## **NOTE11 — NET INCOME PER SHARE**

## ** **

Basic earnings pershare (“EPS”) is computed based on the weighted average number of shares ofcommon stock outstanding during the applicable periods, while diluted EPS iscomputed based on the weighted average number of shares of common stock andcommon equivalent shares outstanding. The Company’s reconciliation of EPS includes the individual shareeffects of all securities affecting EPS which consist solely of the effects ofdilution from awards granted under the Company’s stock-based compensationplans.

 

The following is areconciliation of the number of shares and per share amounts used in the basicand diluted EPS computations:

 

| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **November 29, 2008**  | ** ** | **December 1, 2007** | ** ** |
| ** **                                              | ** ** | **Shares**                       | ** ** | **Net  Income  Per Share** | ** ** | **Shares** | ** ** | **Net  Income  Per Share** | ** ** |
|                                                    |       |                             |       |   |   |   |   |   |   |
| Basic                                                   |       | 35,099,129                       |       | $ | (0.04 | ) | 35,447,855 |   | $ | 0.29 |   |
| Effect of  dilution from stock-based compensation plans |       | —                           |       | — |   | 80,497 |   | — |   |
|                                                    |       |                             |       |   |   |   |   |   |   |
| Diluted                                                 |       | 35,099,129                       |       | $ | (0.04 | ) | 35,528,352 |   | $ | 0.29 |   |

 

| ** **                                              | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **November 29, 2008** | ** ** | **December 1, 2007** | ** ** |
| ** **                                              | ** ** | **Shares**                      | ** ** | **Net  Income  Per Share** | ** ** | **Shares** | ** ** | **Net  Income  Per Share** | ** ** |
|                                                    |       |                            |       |   |   |   |   |   |   |
| Basic                                                   |       | 35,091,041                      |       | $ | 0.31 |   | 35,835,063 |   | $ | 0.71 |   |
| Effect of  dilution from stock-based compensation plans |       | 2,950                           |       | — |   | 90,671 |   | (0.01 | ) |
|                                                    |       |                            |       |   |   |   |   |   |   |
| Diluted                                                 |       | 35,093,991                      |       | $ | 0.31 |   | 35,925,734 |   | $ | 0.70 |   |

 

Stock options of1,944,630 and 1,897,740 were excluded from the shares used in the computationof diluted EPS for the three and nine month periods ended November 29,2008, respectively, as they were anti-dilutive. Stock options of 1,815,600 and 1,643,100 were excluded from the sharesused in the computation of diluted EPS for the three and nine month periodsended December 1, 2007 as they were anti-dilutive.

 

**NOTE 12 — FAIR VALUE MEASUREMENTS**

** **

The Company adopted SFAS No. 157,“Fair Value Measurements,” (as impacted by FSP Nos. 157-1 and 157-2) effective March 1,2008, with respect to fair value measurements of (a) nonfinancial assetsand liabilities that are recognized or disclosed at fair value in the Company’sfinancial statements on a recurring basis (at least annually) and (b) allfinancial assets and liabilities.

 

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Under SFAS No. 157, fair value is defined as theexit price, or the amount that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants asof the measurement date.  SFAS No. 157also establishes a hierarchy for inputs used in measuring fair value thatmaximizes the use of observable inputs and minimizes the use of unobservableinputs by requiring that the most observable inputs be used whenavailable.  Observable inputs are inputsmarket participants would use in valuing the asset or liability developed basedon market 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. Level 2 inputs include quoted prices forsimilar assets or liabilities in active markets, quoted prices for identical orsimilar assets or liabilities in markets that are not active and inputs (otherthan quoted prices) that are observable for the asset or liability, eitherdirectly or indirectly.  Level 3 inputsare unobservable inputs for the asset or liability.   Categorization within the valuationhierarchy is based upon the lowest level of input that is significant to thefair value measurement.

 

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

 

For the three and nine month periods ended November 29,2008, fair value under SFAS No. 157 (as impacted by FSP Nos. 157-1 and157-2) applied to the Company’s ARS and ARS rights.  These financial assets are carried at fairvalue in accordance with SFAS No. 159 following the requirements of SFAS No. 157.

 

Following is a description of the valuationmethodologies used for financial assets and liabilities measured at fair value:

 

ARS and ARS rights:

 

As discussed in Note 3, 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 3, 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 tableprovides information by level for assets and liabilities that are measured atfair value, as defined by SFAS No. 157, on a recurring basis.

 
| ** **      | ** ** | ** **                      | ** ** | **Fair Value Measurements**         | ** ** |
|-----------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
| ** **      | ** ** | **Fair Value at**     | ** ** | **Using Inputs Considered as** | ** ** |
| **Description** | ** ** | **November 29, 2008** | ** ** | **Level 1**                              | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|            |       |                            |       |                                          |       |   |   |   |   |
| Assets:         |       |                            |       |                                          |       |   |   |   |   |
| ARS             |       | $                               | 15,875,812 |                                          | $          | — |   | $ | — |   | $ | 15,875,812 |   |
| ARS rights      |       | $                               | 3,674,188  |                                          | $          | — |   | $ | — |   | $ | 3,674,188 |   |
|            |       |                            |       |                                          |       |   |   |   |   |
| Liabilities:    |       | $                               | —     |                                          | $          | — |   | $ | — |   | $ | — |   |

 

The following table provides a reconciliation of thebeginning and ending balances of items measured at fair value on a recurringbasis in the table above that used significant unobservable inputs (Level 3).

 
| ** **                              | ** ** | **ARS**    | ** ** |
|-----------------------------------------|------------|------------|------------|
| Beginning  balance, March 1, 2008  |       | $          | 23,350,000 |   |
| Total gains  (losses):                  |       |       |       |
| Included in  earnings                   |       | (3,674,188 | )          |
| Included in  other comprehensive income |       | 1,200,000  |       |
| Purchases, issuances  and settlements   |       | (5,000,000 | )          |
| Transfers in  and/or out of Level 3     |       | —     |       |
| Ending balance,  November 29, 2008 |       | $          | 15,875,812 |   |

 

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

 

During the nine months ended November 29, 2008,the Company had no measurements of assets or liabilities at fair value (asdefined in SFAS No. 157) on a nonrecurring basis subsequent to theirinitial recognition.

 

The aspects of SFAS No. 157 for which theeffective date for the Company was deferred under FSP No. 157-2 until March 1,2009, relate to nonfinancial assets and liabilities that are measured at fairvalue but are recognized or disclosed at fair value on a nonrecurring basis.This deferral applies to such items as nonfinancial assets and liabilitiesinitially measured at fair value in a business combination (but not measured atfair value in subsequent periods) or nonfinancial long-lived asset groupsmeasured at fair value for an impairment assessment.

 

**NOTE 13 — COMPREHENSIVE INCOME**

** **

Comprehensive income consisted of the following.

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **November 29,**            | ** ** | **December 1,** | ** ** |
| ** **                                                 | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                       |       |                             |       |   |   |
| Net income  (loss)                                         |       | $                                | (1,373,466 | ) | $ | 10,238,170 |   |
| Unrealized  losses on investments reclassified to earnings |       | 1,200,000                        |       | — |   |
| Net loss                                                   |       |                             |       |   |   |
| Total  comprehensive income (loss)                         |       | $                                | (173,466   | ) | $ | 10,238,170 |   |

 
| ** **                                                 | ** ** | **Nine Months Months Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **November 29,**                       | ** ** | **December 1,** | ** ** |
| ** **                                                 | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
|                                                       |       |                                        |       |   |   |
| Net income  (loss)                                         |       | $                                           | 10,734,831 |   | $ | 25,302,797 |   |
| Unrealized  losses on investments reclassified to earnings |       | 1,200,000                                   |       | — |   |
| Net loss                                                   |       |                                        |       |   |   |
| Total  comprehensive income (loss)                         |       | $                                           | 11,934,831 |   | $ | 25,302,797 |   |

 

**NOTE 14 — COMMITMENTS AND CONTINGENCIES**

** **

*Legal Proceedings*

 

The Company is subject to various legal proceedingsand claims that arise in the ordinary course of business.  Although the amount of any liability thatcould arise with respect to these actions cannot be accurately predicted, anysuch liability is not expected to have a material adverse impact on the Company’sfinancial position or results of operations.

 

## **NOTE15 — SEGMENT REPORTING**

 

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 a separatereportable segment.  Beginning in thethird quarter of fiscal 2009, the results of all Acorn stores have been removedfrom continuing operations and presented as discontinued operations.

 

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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 facility, is presented to allow for reconciliation ofsegment-level net sales, operating income (loss) and total assets to theCompany’s consolidated net sales, operating income and total assets.  Segment operating income (loss) includes onlynet sales, merchandise gross margin and direct store expenses with noallocation of corporate overhead.  Netsales and operating income (loss) are the two components of segment operationsreviewed by the Company’s chief operating decision maker.

 

**SegmentReporting:**

 
| ** **                                      | ** ** | **Christopher & Banks/** | ** **  | **Corporate/**     | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|----------------------------------------|-------------|--------------------|------------|------------------|------------|
| ** **                                      | ** ** | **C.J. Banks**                    | ** **  | **Administrative** | ** ** | **Consolidated** | ** ** |
| ** **                                      | ** ** | ** **                             | ** **  | ** **         | ** ** | ** **       | ** ** |
| **Three  Months Ended November 29, 2008:** |       |                                   |        |               |       |             |       |
| Net sales                                       |       | $                                      | 143,003,908 |               | $          | —           |       | $ | 143,003,908 |   |
| Operating income  (loss)                        |       | 16,355,841                             |        | (17,018,327        | )          | (662,486         | )          |
| Total assets                                    |       | 145,258,338                            |        | 164,838,899        |       | 310,097,237      |       |
|                                            |       |                                   |        |               |       |             |       |
| **Three  Months Ended December 1, 2007:**  |       |                                   |        |               |       |             |       |
| Net sales                                       |       | $                                      | 155,242,697 |               | $          | —           |       | $ | 155,242,697 |   |
| Operating income  (loss)                        |       | 31,760,970                             |        | (15,405,172        | )          | 16,355,798       |       |
| Total assets                                    |       | 187,273,596                            |        | 121,861,216        |       | 309,134,812      |       |

 
| ** **                                     | ** ** | **Christopher & Banks/** | ** **  | **Corporate/**     | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|----------------------------------------|-------------|--------------------|------------|------------------|------------|
| ** **                                     | ** ** | **C.J. Banks**                    | ** **  | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Nine  Months Ended November 29, 2008:** |       |                                   |        |               |       |             |       |
| Net sales                                      |       | $                                      | 426,850,378 |               | $          | —           |       | $ | 426,850,378 |   |
| Operating income  (loss)                       |       | 70,490,850                             |        | (49,665,890        | )          | 20,824,960       |       |
| Total assets                                   |       | 145,258,338                            |        | 164,838,899        |       | 310,097,237      |       |
|                                           |       |                                   |        |               |       |             |       |
| **Nine  Months Ended December 1, 2007:**  |       |                                   |        |               |       |             |       |
| Net sales                                      |       | $                                      | 438,623,317 |               | $          | —           |       | $ | 438,623,317 |   |
| Operating income  (loss)                       |       | 83,667,025                             |        | (43,132,519        | )          | 40,534,506       |       |
| Total assets                                   |       | 187,273,596                            |        | 121,861,216        |       | 309,134,812      |       |

 

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**ITEM 2.**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**The following management’sdiscussion and analysis of financial condition and results of operations (“MD&A”)should be read in conjunction with the consolidated financial statements andnotes included in Item 1 of this Form 10-Q and the consolidated financialstatements, notes and MD&A contained in the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 1, 2008.**

** **

**Executive Overview**

** **

**Christopher & BanksCorporation, a Delaware corporation, is a Minneapolis-based retailer of women’sapparel, which operates retail stores through its wholly-ownedsubsidiaries.  The Company wasincorporated in 1986 to acquire Braun’s Fashions, Inc., which had operatedas a family-owned business since 1956. In July 2000, the Company’s stockholders approved a change in theCompany’s name from Braun’s Fashions Corporation to Christopher &Banks Corporation.**

** **

**As of November 29, 2008, theCompany operated 828 stores in 46 states, including 553 Christopher &Banks stores, 268 C.J. Banks stores and seven Acorn stores.  The Company also operates two e-commerceenabled websites at www.christopherandbanks.com and www.cjbanks.com.  The Company’s Christopher & Banksbrand offers distinctive fashions featuring exclusively designed, coordinatedassortments of women’s apparel in sizes 4 to 16. The Company’s C.J. Banks brandoffers similar assortments of women’s apparel in sizes 14W to 24W.**

** **

**On July 31, 2008, the Companyannounced plans to close all 36 of its Acorn stores by December 31,2008.  Beginning in the third quarter offiscal 2009, the Company reported the results of it Acorn division as discontinuedoperations.**

** **

*Fiscal 2009 Third Quarter Summary*

 

The Company’s results of operations for the thirdfiscal quarter were significantly impacted by the extremely challengingmacro-economic environment.  Consumerspending patterns, particularly for discretionary retail purchases, werematerially negatively effected, as compared to the third quarter of fiscal2008.  The Company recorded a net lossfrom continuing operations of $39,000, or $0.00 per share, in the third quarterof fiscal 2009, as compared to net income from continuing operations of $11.1million, or $0.31 per diluted share, for the third quarter of fiscal 2008.  The loss from Acorn’s discontinued operationswas $0.04 per share for the third quarter of fiscal 2009.  Same-store sales from continuing operationsdeclined 14%.  The significant decline inthe number of transactions per average store encountered in the first half offiscal 2009 continued throughout the third quarter.  The Company utilizes traffic counters inapproximately 50% of its stores and calculates its customer traffic metricsbased on traffic counts from these stores. In an effort to minimize the negative top line impact of reducedcustomer traffic, the Company increased promotional activity in the thirdquarter, which resulted in an approximate 400 basis point decline inmerchandise margins and a decline in the average transaction value over thethird quarter of fiscal 2008.  TheCompany ended the quarter with inventory levels up approximately 8.6% on aper-store basis over the prior year.

 

In the third quarter, the Company opened three newChristopher & Banks stores and three new C.J. Banks stores.  The Company closed two Christopher &Banks stores, one C.J. Banks store, and 29 Acorn stores during the quarter.  On July 31, 2008, the Company announcedits decision to exit its Acorn division business when the Company’s Board ofDirectors and management concluded, after a comprehensive review andevaluation, that the concept had not demonstrated the potential to deliver anacceptable long-term return on the Company’s investment.  On July 30, 2008, the Company’s Board ofDirectors authorized a plan to close all of the Company’s 36 Acorn stores by December 31,2008.  This decision will enable theCompany to focus its resources on its two core brands, Christopher &Banks and C.J. Banks.  During the threemonths ended November 29, 2008, the Company recorded approximately $4.2million of charges within the results of discontinued operations, includinglease termination fees and severance related to the exit of the Acorndivision.  The Company expects to incurapproximately $0.7 million of additional charges during the fourth quarter tocomplete the exit of its Acorn business. Such charges will be included in the results of discontinued operations.

 

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*Fiscal 2009 and 2010 Outlook*

 

The Company recorded income from continuing operationsof $20.8 million, or $0.59 per share, in the first nine months of fiscal 2009,as compared to net income from continuing operations of $27.8 million, or $0.77per diluted share, for the first nine months of fiscal 2008.  The loss from Acorn’s discontinued operationswas $0.28 per share for the three quarters ended November 29, 2008.  Same-store sales from continuing operationsdeclined 9%.

 

In the first nine monthsof fiscal 2009, the Company’s results were impacted by the extremelychallenging domestic macro-economic environment.  Continued and growing instability in thehousing, credit, stock and financial markets, and increasing general economicuncertainty, have placed pressure on consumer spending patterns.  Weak customer traffic encountered in thefirst nine months of the fiscal year has continued into December and theCompany anticipates that this weak traffic trend, and corresponding negativeimpact on sales and earnings, will likely persist throughout the fourth quarterof fiscal 2009 and into fiscal 2010.  TheCompany also anticipates that the heavily promotional environment will continuefor the remainder of fiscal 2009 and into fiscal 2010 resulting in ongoingpressures of merchandise margins.

 

Given the uncertaineconomic environment, the Company is approaching the balance of fiscal 2009 andall of fiscal 2010 with an increased focus on expense controls, inventorydiscipline and decreased capital expenditures. The Company expects per-store inventory balances to decline by the endof the fourth quarter to levels down mid single digits compared to the prioryear.  In fiscal 2010, the Companyanticipates inventory per-store will continue to decline to levels modestlybelow fiscal 2009.  In addition, theCompany continues to approach its real estate growth strategy cautiously.  The Company opened 15 new Christopher &Banks stores and 14 new C.J. Banks locations during the first nine months ofFiscal 2009.  The Company does not planto open any new stores in the fourth quarter of fiscal 2009.  Going forward, the Company plans to proceedcautiously with new store growth.  TheCompany currently plans to open a total of three to five new stores in fiscal2010 including one dual store concept.

 

*Key Business Initiatives*

 

During the first nine months fiscal 2009, the Companycontinued to make progress related to a number of key business initiatives asdescribed below.

 

**The Company launched two separatee-commerce websites in February 2008 for its Christopher & Banksand C.J. Banks brands.  These websitesgive customers the ability to view and purchase the Company’s merchandiseonline at www.christopherandbanks.com and www.cjbanks.com.  The Company currently sells essentially thesame selection of merchandise on its websites that it features in itsChristopher & Banks and C.J. Banks stores.  The Company’s customers have respondedfavorably to its two e-commerce sites in the first nine months of fiscal 2009and, in response, the Company has adjusted inventory levels for its onlinebusinesses to match anticipated demand for the remainder of the year.  I**n the second half of fiscal 2009, the Companybegan offering a greater selection of sizes through its e-commerce websitesthan are currently available in its stores.  Management believes that itswebsites provide the Company with an opportunity to generate incremental salesand offer convenience and product research capabilities to its customers.

** **

Management plans to continue to make upgrades tocritical components of its information systems. In the first quarter the Company completed the installation of newpoint-of-sale registers in 550 of its stores. The new registers provide the Company with updated point-of-saletechnology.  Management anticipates thesenew registers will help improve operating efficiencies and provide enhancedcommunication abilities with its stores. In the third quarter of fiscal 2009, the Company continued theinstallation of a new merchandise planning and allocation system.  The system allows enhanced product allocationmodels which give the Company increased flexibility regarding productdistribution by store sales volume, climate and customer size and fashionpreferences.  In addition, the financialplanning modules of this system have begun to provide the Company with morein-depth product analysis capabilities. Management expects to realize financial benefits from this systembeginning in late fiscal 2009, with additional benefits expected to be realizedin fiscal 2010.  The Company also substantially completed theimplementation of a new suite of financial software in the third quarter offiscal 2009.

 

The Company also continues to analyze, realign andstrengthen its merchandise sourcing structure. In the three and nine month periods ended November 29, 2008, the Company purchased approximately 20% and 32%of its merchandise, respectively, through one buying agent (the “Agent”). The Company has continued the process of establishing relationships withadditional primary suppliers, which are intended to reduce its reliance on theAgent.

 

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TheAgent also has informed the Company that it desires to cease serving as anintermediary with manufacturers on behalf of the Company.  Therefore, the Company and the Agent agreedto terminate their arrangement as of the end of December 2008.  While management believes the actions it istaking to mitigate the risks of reliance on the Agent will be successful, anysignificant disruption in supply from vendors working through the Agent couldhave a material adverse impact on the Company’s financial position or resultsof operations.

 

In order to increase awareness of its brands, theCompany plans to continue expanding its marketing efforts in the remainder offiscal 2009.  The Company plans to spendapproximately 1.5% of its net sales on marketing-related expenditures in fiscal2009, compared to approximately 1.0% of sales in fiscal 2008.  The Company plans to continue its efforts toexpand its customer relationship management database and, in particular, focuson increasing its number of customer e-mail contacts.

 

**While the Company believes theretail and macro-economic environments will remain challenging for theforeseeable future, it also believes that it is taking actions to position theCompany for stronger operating performance when economic conditions become morefavorable.**

** **

**Key PerformanceIndicators**

** **

The Company’s management evaluates the followingitems, which are considered key performance indicators, in assessing theCompany’s performance:

 

*Same-storesales*

 

The Company’s same-storesales data is calculated based on the change in net sales for stores that havebeen open for more than 13 full months and includes stores, if any, that havebeen relocated within the same mall, though the Company typically does notexpand or relocate stores within a mall. Stores where square footage has been changed by more than 25 percentwithin the past 13 months are excluded from the same-store salescalculation.  Stores closed during theyear are included in the same-store sales calculation only for the full monthsof the year the stores were open.

 

Management considers same-store sales to be animportant indicator of the Company’s performance.  Same-store sales results are important inachieving leveraging of costs, including store payroll, store occupancy,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*

 

Merchandise, buying and occupancy costs, exclusive ofdepreciation and amortization, measure whether the Company is appropriatelyoptimizing the price of its merchandise. Merchandise, buying and occupancy costs include the cost of merchandise,markdowns, shrink, freight into and out of the Company’s distribution center,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’s management views operating income as akey indicator of the Company’s success. The key drivers of operating income are same-store sales; merchandise,buying and occupancy costs; and the Company’s ability to control its otheroperating costs.

 

*Storeproductivity*

 

Store productivity measures, including sales persquare foot, average unit retail selling price, number of transactions perstore, number of units per transaction, average retail dollars per transaction,customer traffic and conversion rates (the percentage of customers who enterthe Company’s stores and make a purchase) are evaluated by management inassessing the operational performance of individual stores and of the Company.

 

*Inventoryturnover*

 

TheCompany’s management evaluates inventory turnover as a measure of howproductively inventory is bought and sold. Declining rates of inventory turnover are important as they signal thatinventory is becoming slow-moving.

 

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*Cash flowand liquidity*

 

Managementevaluates cash flow from operations, investing activities and financingactivities in determining the sufficiency of the Company’s cash position.  Cash flow from operations has historicallybeen sufficient to cover the Company’s uses of cash.  The Company expects its cash and cashequivalents, combined with cash flows from operations, to be sufficient to fundanticipated capital expenditures, working capital and other requirements forliquidity during the remainder of fiscal 2009 and all of fiscal 2010.

 

**Critical Accounting Policies andEstimates**

 

The Company’s criticalaccounting policies are more fully described in Note 1 of the notes toconsolidated financial statements contained within the Company’s Annual Reporton Form 10-K for the fiscal year ended March 1, 2008.  There have been no material changes in theCompany’s critical accounting policies or estimates in the nine months ended November 29,2008.  Management’s discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated condensed financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America.

 

On an ongoing basis, theCompany evaluates its estimates, including those related to customer productreturns, inventories, income taxes, medical and workers’ compensation claimsand contingencies.  The Company bases itsestimates on historical experience and on various other assumptions that itbelieves to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

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.  While the Company recorded no impairments oflong-lived assets employed in continuing operations in the three and nine monthperiods ended November 29, 2008, the current challenging economicenvironment, combined with the continued instability in the housing, credit,stock and financial markets, and increasing general economic uncertaintyaffecting the retail industry, make it reasonably possible that long-livedasset impairments could be identified and recorded in future periods.

 

**Resultsof Operations**

 

The following table sets forth consolidated operating statement dataexpressed as a percentage of net sales for the periods indicated.

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **November 29,**            | ** ** | **December 1,**            | ** ** | **November 29,** | ** ** | **December 1,** | ** ** |
| ** **                                                                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                            |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Merchandise,  buying and occupancy costs, exclusive of depreciation and amortization |       | 64.3                             |       | 58.3                            |       | 60.3 |   | 59.8 |   |
| Selling, general  and administrative expenses                                        |       | 31.6                             |       | 27.7                            |       | 30.2 |   | 27.4 |   |
| Depreciation and  amortization                                                       |       | 4.6                              |       | 3.5                             |       | 4.6 |   | 3.6 |   |
| Operating income  (loss)                                                             |       | (0.5                             | )          | 10.5                            |       | 4.9 |   | 9.2 |   |
| Interest income                                                                      |       | 0.5                              |       | 0.8                             |       | 0.5 |   | 0.8 |   |
| Income tax  provision (benefit)                                                      |       | (0.0                             | )          | 4.2                             |       | 0.5 |   | 3.7 |   |
| Income (loss)  from continuing operations                                            |       | (0.0                             | )          | 7.1                             |       | 4.9 |   | 6.3 |   |
| Loss on  discontinued operations, net of tax                                         |       | (1.0                             | )          | (0.5                            | )          | (2.4 | ) | (0.5 | ) |
| Net income  (loss)                                                                   |       | (1.0                             | )%         | 6.6                             | %          | 2.5 | % | 5.8 | % |

 

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**Three Months Ended November 29, 2008 Comparedto Three Months Ended December 1, 2007**

 

***NetSales.**** *Net sales from continuingoperations for the three months ended November 29, 2008 were $143.0million, a decrease of $12.2 million, or approximately 8%, from $155.2 millionfor the three months ended December 1, 2007.  The decrease in net sales from continuingoperations was a result of a decline in same-store sales, partially offset bysales generated from an increase in the number of stores operated by theCompany.  The Company also had sales fromits two e-commerce websites in the third quarter of fiscal 2009, which were notoperating in the third quarter of fiscal 2008.

 

The Company’s same-storesales from continuing operations for the third quarter of fiscal 2009 declined14% when compared to the corresponding period in fiscal 2008.    The decline in same-store sales resultedfrom an approximate 9% decrease in the average number of transactions perstore, combined with an approximate 5% decrease in the average value pertransaction.  Units sold per transactionwere essentially flat in the third quarter of fiscal 2009 compared to the prioryear period.

 

In the third quarter of fiscal 2009, managementbelieves the Company’s sales were negatively impacted by the extremelychallenging domestic macro-economic environment.  Continued and growing instability in thehousing, credit, stock and financial markets, and increasing general economicuncertainty, have placed pressure on consumer spending patterns, which resultedin reduced customer traffic and a lower average number of transactions perstore.  The decreased customer trafficencountered in the first nine months of the fiscal year has continued into December andthe Company anticipates that this weak traffic trend, and correspondingnegative impact on sales, will likely persist throughout the fourth quarter offiscal 2009 and into fiscal 2010.  In aneffort to minimize the negative impact on sales, management respondedaggressively to the declining number of average transactions per store bysignificantly increasing the level of promotional activity during its thirdfiscal quarter.

 

Excluding Acorn, the Company operated approximately 2%more stores during the third quarter of fiscal 2009 compared to the same periodin fiscal 2008, which partially offset the 14% decline in same-storesales.  At November 29, 2008, theCompany operated 821 Christopher & Banks and C.J. Banks stores,compared to 802 Christopher & Banks and C.J. Banks stores at December 1,2007.

 

***Merchandise,Buying and Occupancy Costs, exclusive of depreciation and amortization. ***Merchandise, buying andoccupancy costs, exclusive of depreciation and amortization, were $91.9million, or 64.3% of net sales, during the third quarter of fiscal 2009,compared to $90.5 million, or 58.3% of net sales, during the same period infiscal 2008.  This resulted inapproximately 600 basis points of negative leverage compared to the prior yearperiod.  Merchandise margins declined byapproximately 400 basis points primarily due to increased markdowns.  During the quarter, the Company respondedaggressively to increased top line pressure resulting from reduced customertraffic by significantly increasing its promotional activity.  In addition to reduced merchandise margins,occupancy and buying expenses experienced approximately 200 basis points ofnegative leverage in connection with the 14% decline in same-store sales duringthe quarter.  On a per-store basis,inventory increased approximately 9% at the end of the third quarter of fiscal2009 compared to the same period in fiscal 2008.  In spite of the increase in inventory levels,the Company’s inventory turnover on a trailing twelve month basis improvedslightly over the prior year.  TheCompany’s retail inventory turnover increased to 3.2 for the twelve monthsended November 29, 2008 from 3.1 for the twelve months ended December 1,2007.

 

***Selling,General and Administrative Expenses. ***Selling,general and administrative expenses for the three months ended November 29,2008 were $45.2 million, or 31.6% of net sales, compared to $42.9 million, or27.7% of net sales, for the three months ended December 1, 2007.  The increase in selling, general andadministrative expenses in the third quarter of fiscal 2009 was primarily aresult of increased marketing expenditures related to the Company’s ongoinginitiative to build brand awareness, higher self-insured medical costs,expenses associated with the Company’s two e-commerce websites which were notoperating in the comparable period last year and increased informationtechnology support fees related to the Company’s efforts to upgrade and enhancecritical components of its information systems.

 

***Depreciationand Amortization.*** Depreciation and amortization was $6.5 million, or 4.6% of net sales, inthe third quarter of fiscal 2009, compared to $5.4 million, or 3.5% of netsales, in the third quarter of fiscal 2008. The increase in depreciation and amortization expense was a result ofcapital expenditures made by the Company over the past year.  The Company opened 29 new stores in the firstnine months of fiscal 2009, installed new point-of-sale registers at 550 of itsstores in the first quarter, and made other information technology-relatedimprovements at its corporate office and distribution center facility in thefirst, second and third quarters.  TheCompany also opened 69 new stores and made upgrades to certain of itsinformation technology systems in fiscal 2008.

 

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***OperatingIncome (Loss). ***Basedon the foregoing, the Company recorded an operating loss of $662,000, or 0.5%of net sales for the quarter ended November 29, 2008, compared to operatingincome of $16.4 million, or 10.5% of net sales for the quarter ended December 1,2007.

 

***InterestIncome. ***For thethree months ended November 29, 2008, interest income was $619,000compared to $1.2 million for the three months ended December 1, 2007.  The decrease resulted from lower interestrates on cash, cash-equivalents and investments in the third quarter of fiscal2009 compared to the third quarter of fiscal 2008.

 

***IncomeTaxes. ***Income taxbenefit in the third quarter of fiscal 2009 was $4,000, with an effective taxrate of 8.9%, compared to income tax expense of $6.4 million, with an effectivetax rate of 36.8%, in the third quarter of fiscal 2008.  The decrease in effective tax rate primarilyresulted from the impact of permanent timing differences, state income taxesand the proximity of the Company’s loss from continuing operations in the thirdquarter to breakeven.

 

Income taxes have beenallocated to continuing and discontinued operations based on the methodologyrequired by Financial Accounting Interpretation No. 18 (“FIN 18”).  As required by this authoritative guidance,income taxes are computed with and without the impact of results fromdiscontinued operations and the difference in taxes between these computationsis allocated to discontinued operations.

 

Income taxes allocated tothe loss from discontinued operations for the three and nine month interimperiods ended November 29, 2008, result from the fact that the estimatedeffective tax rate on continuing operations for these interim periods is8.9%, while the effective tax rate for all operations, including combinedresults for continuing and discontinued operations is estimated to be 30.1%. The difference in taxes between those allocable to continuing operationsand total taxes previously estimated for all operations are allocated todiscontinued operations. ** **Actual tax rates for fiscal2009 could differ significantly from estimated rates based on the results ofoperations in the fourth quarter of fiscal 2009.

 

***Income(Loss) from Continuing Operations.***  As a result of the foregoing factors, theCompany reported a loss from continuing operations of $39,000, or 0.0% of netsales, for the three months ended November 29, 2008, compared to incomefrom continuing operations of $11.1 million, or 7.1% of net sales, for thethree months ended December 1, 2007.

 

***Losson Discontinued Operations, Net of Tax.***  The Company reported a pre-tax loss ondiscontinued operations of $4.7 million for the three months ended November 29,2008, compared to $1.4 million for the three months ended December 1,2007.  Net of tax, the loss ondiscontinued operations was $1.3 million, or 1.0% of net sales, for the thirdquarter of fiscal 2009, compared to $834,000, or 0.5% of net sales, for thethird quarter of fiscal 2008.  Please seethe discussion above under the section *Income Taxes*regarding the allocation of taxes to income (loss) from continuing anddiscontinued operations.  In addition tohigher store operating losses, the increase in loss on discontinued operationsfor the third quarter of fiscal 2009, compared to the third quarter of fiscal2008, resulted from lease termination-related costs and severance charges, ofapproximately $4.2 million in the aggregate, recorded in the third quarter offiscal 2009 in conjunction the Company’s exit of its Acorn business.

 

***NetIncome (Loss). ***Asa result of the foregoing factors, the Company recorded a net loss of $1.4million, or 1.0% of net sales and $0.04 per share, for the three months ended November 29,2008, compared to net income of $10.2 million, or 6.6% of net sales and $0.29per diluted share, for the three months ended December 1, 2007.

 

**Nine Months EndedNovember 29, 2008 Compared to Nine Months Ended December 1, 2007**

 

***NetSales.**** *Net sales from continuing operationsfor the nine months ended November 29, 2008 were $426.9 million, adecrease of $11.7 million, or approximately 2.7%, from $438.6 million for thenine months ended December 1, 2007. The decrease in net sales from continuing operations was a result of adecline in same-store sales, partially offset by sales generated from anincrease in the number of stores operated by the Company.  The Company also had sales from its twoe-commerce websites in the first three quarters of fiscal 2009, which were notoperating in the same period of fiscal 2008.

 

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The Company’s same-storesales from continuing operations for the nine months ended November 29,2008 declined 9% when compared to the nine months ended December 1,2007.  An approximate 13% decrease in theaverage number of transactions per store was partially offset by an approximate4% increase in the average value per transaction, which was attributable to ahigher average retail price per unit and slightly more units sold pertransaction.  In the first nine months offiscal 2009, the decline in sales was primarily attributable to reducedcustomer traffic and a lower average number of transactions per store resultingfrom the challenging macro-economic environment.  This was partially offset by strong customerresponse to the Company’s “Friends and Family” promotional event held inApril.  In an effort to minimize the negativeimpact on sales, management responded aggressively to the declining number ofaverage transactions per store by significantly increasing the level ofpromotional activity in the third quarter of fiscal 2009.

 

Excluding Acorn, theCompany operated approximately 2% more stores during the first three quartersof fiscal 2009 compared to the same period in fiscal 2008, which partiallyoffset the 9% decline in same-store sales. At November 29, 2008, the Company operated 821 Christopher &Banks and C.J. Banks stores, compared to 802 Christopher & Banks andC.J. Banks stores at December 1, 2007.

 

***Merchandise,Buying and Occupancy Costs, exclusive of depreciation and amortization. ***Merchandise, buying andoccupancy costs, exclusive of depreciation and amortization, were $257.4million, or 60.3% of net sales, during the first nine months of fiscal 2009,compared to $262.2 million, or 59.8% of net sales, during the same period infiscal 2008.  This resulted inapproximately 50 basis points of negative leverage compared to the priornine-month period.  Merchandise marginsimproved by approximately 60 basis points, primarily resulting from a lowerlevel of markdowns in the first and second quarters, partially offset by increasedpromotional activity in the third quarter. The Company responded aggressively to increased top line pressureresulting from reduced customer traffic in the third quarter by significantlyincreasing promotional activity.  Thepositive leverage gained in merchandise margins was offset by approximately 110basis points of negative leverage of occupancy and buying expenses inconnection with the 9% decline in same-store sales.

 

On a per-storebasis, inventory increased approximately 9% at the end if the third quarter offiscal 2009 compared to the same period in fiscal 2008.  In spite of the increase in inventory levels,the Company’s inventory turnover on a trailing twelve month basis improvedslightly over the prior year.  TheCompany’s retail inventory turnover increased to 3.2 for the twelve monthsended November 29, 2008 from 3.1 for the twelve months ended December 1,2007.

 

***Selling,General and Administrative Expenses. ***Selling,general and administrative expenses for the nine months ended November 29,2008 were $129.0 million, or 30.2% of net sales, compared to $120.2 million, or27.4% of net sales, for the nine months ended December 1, 2007.  The increase in selling, general andadministrative expenses in the first nine months of fiscal 2009 was primarily aresult of increased marketing expenditures related to the Company’s ongoinginitiative to build brand awareness, higher self-insured medical costs,expenses associated with the Company’s two e-commerce websites which were notoperating in the comparable period last year, increased information technology support fees related to the Company’sefforts to upgrade and enhance critical components of its information systemsand higher store-level and administrative salaries.  Offsetting these factors, the Companyincurred $2.1 million of CEO transition-related expenses in the first ninemonths of fiscal 2008, with no comparable costs incurred in the first ninemonths of fiscal 2009.

 

***Depreciationand Amortization.*** Depreciation and amortization was $19.7 million, or 4.6% of net sales,in the first nine months of fiscal 2009, compared to $15.7 million, or 3.6% ofnet sales, in the first nine months of fiscal 2008.  The increase in depreciation and amortizationexpense was a result of capital expenditures made by the Company over the pastyear.  The Company opened 29 new storesin the first nine months of fiscal 2009, installed new point-of-sale registersat 550 of its stores in the first quarter, and made other informationtechnology-related improvements at its corporate office and distribution centerfacility in the first, second and third quarters.  The Company also opened 69 new stores andmade upgrades to certain of its information technology systems in fiscal 2008.

 

***OperatingIncome.***  As aresult of the foregoing factors, operating income for the nine months ended November 29,2008 was $20.8 million, or 4.9% of net sales, compared to operating income of$40.5 million, or 9.2% of net sales, for the nine months ended December 1,2007.

 

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***InterestIncome. ***For thenine months ended November 29, 2008, interest income was $2.0 millioncompared to $3.4 million for the nine months ended December 1, 2007.  The decrease resulted from lower interestrates on cash, cash-equivalents and investments in the first three quarters offiscal 2009 compared to the same period in fiscal 2008.

 

***IncomeTaxes. ***Income taxexpense for the first nine months of fiscal 2009 was $2.0 million, with aneffective tax rate of 8.9%, compared to income tax expense of $16.2 million,with an effective tax rate of 36.8%, for the first nine months of fiscal2008.  The decrease in effective tax rateprimarily resulted from the impact of permanent timing differences, stateincome taxes and the proximity of the Company’s loss from continuing operationsin the third quarter to breakeven.

 

Income taxes have been allocated to continuing and discontinuedoperations based on the methodology required by Financial AccountingInterpretation No. 18 (“FIN 18”). As required by this authoritative guidance, income taxes are computedwith and without the impact of results from discontinued operations and thedifference in taxes between these computations is allocated to discontinuedoperations.

 

Income taxesallocated to the loss from discontinued operations for the three and nine monthinterim periods ended November 29, 2008, result from the fact that theestimated effective tax rate on continuing operations for these interimperiods is 8.9%, while the effective tax rate for all operations, includingcombined results for continuing and discontinued operations is estimated tobe 30.1%.  The difference in taxes between thoseallocable to continuing operations and total taxes previously estimated for alloperations are allocated to discontinued operations. ** **Actual tax ratesfor fiscal 2009 could differ significantly from estimated rates based on theresults of operations in the fourth quarter of fiscal 2009.

 

***Income(Loss) from Continuing Operations.***  As a result of the foregoing factors, theCompany reported income from continuing operations of $20.8 million, or 4.9% ofnet sales, for the nine months ended November 29, 2008, compared to incomefrom continuing operations of $27.8 million, or 6.3% of net sales, for the ninemonths ended December 1, 2007.

 

***Losson Discontinued Operations, Net of Tax.***  The Company reported a pre-tax loss ondiscontinued operations of $7.5 million for the nine months ended November 29,2008, compared to $3.1 million for the nine months ended December 1,2007.  Net of tax, the loss ondiscontinued operations was $10.1 million, or 2.4% of net sales, for the firstthree quarters of fiscal 2009, compared to $2.5 million, or 0.5% of net sales,for the first three quarters of fiscal 2008. Please see the discussion above under the section *Income Taxes*regarding the allocation of taxes to income (loss) from continuing anddiscontinued operations.  In addition tohigher store operating losses, the increase in loss on discontinued operationsfor the first three quarters of fiscal 2009, compared to the first threequarters of fiscal 2008, resulted from lease termination-related costs andseverance charges, of approximately $4.2 million in the aggregate, recorded inthe third quarter of fiscal 2009 in conjunction the Company’s exit of its Acornbusiness.

 

***NetIncome (Loss). ***Asa result of the foregoing factors, the Company recorded net income of $10.7million, or 2.5% of net sales and $0.31 per diluted share, for the nine monthsended November 29, 2008, compared to net income of $25.3 million, or 5.8%of net sales and $0.70 per diluted share, for the nine months ended December 1,2007.

 

**Liquidity and Capital Resources**

 

The Company’s principalon-going cash requirements are to finance the construction of new stores andthe remodeling of certain existing stores, to make technology-related and othercapital expenditures, to purchase merchandise inventory and to fund otherworking capital requirements. Merchandise purchases vary on a seasonal basis, peaking in thefall.  As a result, the Company’s cashrequirements historically reach their peak in October or November, duringthe Company’s third fiscal quarter. Conversely, cash balances peak in the fourth fiscal quarter in January,after the holiday season is completed.

 

*Net cash provided by operating activities*

 

Net cash provided byoperating activities totaled $13.9 million in the first nine months of fiscal2009, a decrease of $25.9 million from $39.8 million for the first nine monthsof fiscal 2008.

 

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Significant fluctuationsin the Company’s working capital accounts included a $9.3 million increase ininventory and a $7.1 million decrease in accrued liabilities.  The Company’s inventory levels were upapproximately 9% on a per-store basis at November 29, 2008 compared to December 1,2007, while they were down approximately 22% on a per-store basis at thebeginning of fiscal 2009 compared to the beginning of fiscal 2008.  The Company anticipates inventory levels willdecline to levels consistent with the prior year on a per-store basis by theend of fiscal 2009.  The decrease inaccrued liabilities primarily resulted from a decline in the amount ofoutstanding gift cards at November 29, 2008 compared to March 1,2008.

 

The remainder of thechange in cash provided by operating activities was substantially the result ofnet income earned during the first nine months of fiscal 2009, after adjustingfor non-cash charges, including depreciation expense, asset impairment charges,deferred income taxes, stock-based compensation expense, loss on the disposalof furniture, fixtures and equipment and various other changes in the Company’sother operating assets and liabilities.

 

*Net cash used in investing activities*

 

Net cash used ininvesting activities in the first nine months of fiscal 2009 includedapproximately $16.9 million of capital expenditures, partially offset by $5.0million of redemptions of investments. The Company opened 29 new stores, completed remodeling of eight existingstores and installed new point-of-sale registers in 550 of its stores in thefirst nine months of fiscal 2009.  TheCompany also made other information technology-related investments at itsstores, corporate office and distribution center facility during the ninemonths ended November 29, 2008.

 

The Company expects tofund approximately $2.0 million of additional capital expenditures in thefourth quarter of fiscal 2009.  TheCompany is not opening any additional stores in the fourth quarter, though somecapital spending in the fourth quarter relating to stores planned to open inthe first quarter of fiscal 2010 is expected to occur.  In addition, the Company plans to continue tomake further information-technology related improvements at its stores in thefourth quarter of fiscal 2009.

 

The Company plans tospend approximately $10 million on capital expenditures in fiscal 2010 to opena maximum of five new stores, to make further information-technology relatedimprovements at its stores and to invest in improving the efficiency of itsdistribution center facility.  TheCompany anticipates its cash and cash equivalents, combined with cash flowsfrom operations, to be sufficient to meet its capital expenditure, workingcapital and other requirements for liquidity in the fourth quarter of fiscal2009 and all of fiscal 2010.

 

*Net cash used in financing activities*

 

Net cash of $6.3 millionwas used in financing activities in the first nine months of fiscal 2009.  The Company declared and paid three quarterlycash dividends together totaling approximately $6.3 million.

 

The Company maintains an Amended and Restated Revolving Credit Facility(the “Credit Facility”) with Wells Fargo Bank, National Association (“WellsFargo”).  The Credit Facility providesthe Company with revolving credit loans and letters of credit of up to $50.0million, in the aggregate, subject to a borrowing base formula based oninventory levels.

 

In the firstquarter of fiscal 2009, the Company and Wells Fargo entered into a ThirdAmendment to the Credit Facility (the “Third Amendment”).  The Third Amendment extended the maturitydate of the Credit Facility by three years from June 30, 2008 to June 30,2011.  In addition, the Third Amendmentreduced the interest rate under the Credit Facility from the prime rate plus0.25% to the prime rate minus 0.25%.  Asof November 29, 2008, Wells Fargo’s prime rate was 4.0%.  The Third Amendment also provided the Companywith the ability to borrow under the Credit Facility at an interest rate tiedto the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29,2008.

 

Interest under the CreditFacility 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 nine months ended November 29,2008, fees related to the Credit Facility totaled $21,082.  Borrowings under the Credit Facility arecollateralized by the Company’s equipment, intangible assets, inventory,inventory letters of credit and letter of credit rights.

 

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The Company had norevolving credit loan borrowings under the Credit Facility during the firstnine months of fiscal 2009. Historically, the Credit Facility has been utilized by the Company onlyto open letters of credit to facilitate the import of merchandise.  The borrowing base at November 29, 2008was $36.2 million.  As of November 29,2008, the Company had outstanding letters of credit in the amount of $4.2million.  Accordingly, the availabilityof revolving credit loans under the Credit Facility was $32.0 million at November 29,2008.

 

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 November 29, 2008,the most recent measurement date, the Company was in compliance with all ofthese restrictive covenants under the Credit Facility.

 

*Auction Rate Securities*

 

As of November 29, 2008, the Company hadapproximately $15.9 million of long-term investments, which consisted solely of$19.6 million of auction rate securities (“ARS”) at cost, less a fair valueadjustment of $3.7 million.  Fair valuewas based on management’s analysis of impairment factors taking into accountthe credit quality of the underlying securities and reflects the lack ofliquidity of the Company’s investments. All of the Company’s ARS are collateralized by student loans andcurrently have AAA (S&P) or Aaa (Moody’s) credit ratings.  As of November 29, 2008, the repaymentof approximately 80% of the student loans, which serve as collateral for theARS held by the Company, is substantially backed by the United Statesgovernment.  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 market conditions, management believes that it islikely that auctions related to the Company’s ARS will continue to beunsuccessful for the near term. Unsuccessful auctions have limited the Company’s ability to access thesefunds.  Management anticipates theliquidity of the ARS will continue to be restricted until there is a successfulauction, until such time as another market for the ARS develops, until the ARSare called by the issuer or until they are redeemed as described below.  The Company reclassified its ARS to long-terminvestments at March 1, 2008 to reflect the lack of liquidity of theseinvestments.

 

All of the ARS owned by the Company were purchased from UBS FinancialServices, Inc., a subsidiary of UBS AG (“UBS”) and are held, for thebenefit of the Company, by UBS.  InAugust 2008, UBS announced a settlement in principle with the Securities andExchange Commission, the New York Attorney General and other state regulatoryagencies to restore liquidity to remaining clients who hold ARS.  On October 7, 2008, UBS issued aprospectus to the Company formalizing the settlement offer and offering theCompany certain ARS rights.  Under thesettlement, these ARS rights provide the Company the ability to redeem its ARSat par during a two-year time period beginning June 30, 2010.  Duringthis time, the Company may choose to continue to hold some or all of its ARSand earn interest or sell some or all of them to UBS at par plus accruedinterest.  The ARS rights are nottransferable, tradeable or marginable and will not be listed or quoted on anysecurities exchange or any electronic communications network.

 

On November 7,2008, the Company’s Board of Directors accepted the UBS settlement offer.  Consequently, the Company reclassified theARS from available-for-sale to trading securities and elected, pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),to record the ARS rights at fair value on a recurring basis utilizingsignificant unobservable inputs in accordance with SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”).

 

The Company determined the fair value of the ARS rights to beapproximately $3.7 million, which substantially offset the unrealized lossrecorded within selling, general and administrative expense related to the fairvalue adjustment on the ARS.  The ARSrights were recorded within other non-current assets on the consolidatedbalance sheet.  Please see Note 12 in theNotes to Condensed Consolidated Financial Statements for further disclosureregarding the Company’s accounting for fair value measurements.

 

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**MerchandiseSourcing**

 

The Companydirectly imported approximately 43% and 59% of its total merchandise purchasesin the three and nine-month periods ended November 29, 2008,respectively.  Substantially all of itsremaining merchandise purchases were made from U.S.-based companies who importthe goods from overseas.  This relianceon sourcing from foreign countries may cause the Company to be exposed tocertain risks as indicated below and as discussed in Part I, “Item 1A.Risk Factors” in the Company’s Annual Report on Form 10-K for the yearended March 1, 2008.

 

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 business, financialcondition and results of operations.  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.

 

A substantialportion of the Company’s directly imported merchandise is manufactured inSoutheast Asia.  The majority of thesegoods are currently produced in China, Hong Kong, Indonesia and Singapore.  The Company is not presently importingmerchandise produced in the Middle East.

 

**The Company purchased approximately17% and 19% of its merchandise from its largest overseas supplier during thefirst nine months of fiscal 2009 and 2008, respectively. **Although the Company has an establishedoperating history with its largest vendor, there can be no assurance that thisrelationship can be maintained in the future or that the vendor will continueto supply merchandise to the Company.  If there should be any significantdisruption in the supply of merchandise from this vendor, 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 possiblethat any significant disruption in supply could have a material adverse impacton the Company’s financial position or results of operations.

** **

In the three and ninemonth periods ended November 29, 2008, the Company purchased approximately 20% and 32% of its merchandise,respectively, through one buying agent (the “Agent”).  The Company hascontinued the process of establishing relationships with additional primarysuppliers, which are intended to reduce its reliance on the Agent.  The Agent also has informed the Company thatit desires to cease serving as an intermediary with manufacturers on behalf ofthe Company.  Therefore, the Company andthe Agent agreed to terminate their arrangement as of the end of December 2008.  While management believes the actions it istaking to mitigate the risks of reliance on the Agent will be successful, anysignificant disruption in supply from vendors working through the Agent couldhave a material adverse impact on the Company’s financial position or resultsof operations.

 

**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 ofoperations during first and second quarters if fiscal 2009.  Management does not believe that inflationhad a material effect on the Company’s results of operations in the thirdquarter of fiscal 2009 or during the three and nine month periods ended December 1,2007.

 

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**Forward-Looking Statements**

 

The Company, through its management, may make forward-lookingstatements reflecting the Company’s current views with respect to future eventsand financial performance.  Theseforward-looking statements, which may be included in reports filed under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), in pressreleases and in other documents and materials as well as in written or oralstatements made by or on behalf of the Company, are subject to certain risksand uncertainties, including those discussed in Item 1A of the Company’s AnnualReport on Form 10-K for the fiscal year ended March 1, 2008, whichcould cause actual results to differ materially from historical results orthose 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 on theseforward-looking statements, which speak only as of the date such statements aremade.  In addition, the Company wishes toadvise readers that the factors listed in Item 1A of the Company’s AnnualReport on Form 10-K for the fiscal year ended March 1, 2008, as wellas other factors, could affect the Company’s performance and could cause theCompany’s actual results for future periods to differ materially from anyopinions or statements expressed about such future performance or results.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVEDISCLOSURE 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 Auction Rate Securities.  Please see Note 3 to the ConsolidatedFinancial Statements and Management’s Discussion and Analysis of FinancialCondition and Results of Operation for further information regarding theCompany’s investments in Auction Rate Securities.

 

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, 4.0% as of November 29, 2008, less 0.25%, or at an interest ratetied to the London Interbank Market Offered Rate (LIBOR), which was 2.8% as of November 29,2008.  However, the Company had norevolving credit loan borrowings under the Wells Fargo Revolver during thefirst nine months of fiscal 2009 or fiscal 2008.  Given its existing liquidity position, theCompany does not expect to utilize the Credit Facility in the reasonablyforeseeable future other than to use letters of credit to support the import ofmerchandise.

 

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.**

**CONTROLSAND PROCEDURES**

 

*(a)*       Evaluation of DisclosureControls and Procedures.

* *

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 Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the period covered bythis report (the “Evaluation Date”). Based upon that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that, as of the Evaluation Date, the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is (i) recorded, processed, summarized and reportedwithin the time periods specified in applicable rules and forms, and (ii) accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosure.

 

*(b)*       Internal Control OverFinancial Reporting.

* *

There have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the three months ended November 29,2008 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.  TheCompany substantially completed the implementation of a new suite of financialsoftware in the third quarter of fiscal 2009.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.**

**LEGALPROCEEDINGS**

 

The Company is subject tovarious legal proceedings and claims that arise in the ordinary course ofbusiness.  Although the amount of anyliability that could arise with respect to these actions cannot be accuratelypredicted, any such liability is not expected to have a material adverse impacton the Company’s financial position or results of operations.

 

**ITEM 1A.**

**RISKFACTORS**

 

The factorsdiscussed in Part I, “Item 1A. Risk Factors” in the Company’s AnnualReport on Form 10-K for the year ended March 1, 2008 should becarefully considered as they could materially affect the Company’s business,financial condition or future results.

 

**ITEM 2.**

**UNREGISTEREDSALES OF EQUITY**

**SECURITIES AND USE OF PROCEEDS**

 

In fiscal 2008,the Company’s Board of Directors authorized and subsequently announced aone-year stock repurchase program enabling the Company to purchase up to $20.0million of its common stock, subject to market conditions.  No repurchases were executed under theprogram in the first nine months of fiscal 2009.  As of May 24, 2008, the expiration dateof the repurchase program, the Company had repurchased 948,800 shares of itscommon stock under the program for a total cost, including commissions, ofapproximately $12.1 million.

 

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**ITEM 3.**

**DEFAULTSUPON**

**SENIOR SECURITIES**

 

None.

 

**ITEM 4.**

**SUBMISSIONOF MATTERS TO**

**A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.**

**OTHERINFORMATION**

 

None.

 

**ITEM 6.**

**EXHIBITS**

 
| 10.1   |   | Separation Agreement  and Release Letter between Christopher & Banks Corporation and  Andrew K. Moller, dated December 2, 2008 (incorporated herein  by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on December 4, 2008) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                  |
| 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                                                                                                                                     |

 

----

* Filed with this report.

 

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**SIGNATURES**

 

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

 

 
| ** ** | ** **            | **CHRISTOPHER & BANKS CORPORATION** |
|------------|-----------------------|----------------------------------------------|
|       |                  |                                         |   |
|       |                  |                                         |   |
| Dated:     | January 8,  2009 | By                                           | /S/ LORNA E. NAGLER |
|       |                  |                                         |   |
|       |                  |                                         | Lorna E. Nagler |
|       |                  |                                         | President and Chief Executive Officer |
|       |                  |                                         | (Principal Executive Officer) |
|       |                  |                                         |   |
|       |                  |                                         |   |
| Dated:     | January 8,  2009 | By                                           | /S/ MICHAEL J. LYTOGT |
|       |                  |                                         |   |
|       |                  |                                         | Michael J. Lyftogt |
|       |                  |                                         | Vice President, Finance |
|       |                  |                                         | and Interim 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                 |       | Separation  Agreement and Release Letter between Christopher & Banks Corporation  and Andrew K. Moller, dated December 2, 2008 (incorporated  herein by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on December 4, 2008) |
|                 |       |                                                                                                                                                                                                                                                                                                  |
| 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                                                                                                                                     |

 

----

* Filed with this report.

 

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