**Tableof Contents**

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark  One)**                                          |
|----------------------------------------------------------|
| ** **                                               |
| **x**                                                    | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                               |
| **For the  quarterly period ended August 29, 2009** |
| ** **                                               |
| **or**                                                   |
| ** **                                               | ** ** |
| **o**                                                    | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from                        to                         .**

 

**Commission File Number 001-31390**

 

### **CHRISTOPHER & BANKS CORPORATION**

(Exact name of registrant as specified in its charter)

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

 

**(763)551-5000**

(Registrant’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 checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  **YES** **o**  **NO ****o**

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). **YES** **o**  **NO ****x**

 

As of September 25,2009, 35,997,260 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**

 
| ** ** | ** **                                                                                  | **Page** |
|------------|---------------------------------------------------------------------------------------------|----------|
|       |                                                                                        |     |
|       | **PART I**                                                                             |     |
|       | ** **                                                                                  |     |
|       | **FINANCIAL  INFORMATION**                                                                  |     |
|       |                                                                                        |     |
| Item 1.    | Financial Statements:                                                                       |     |
|       |                                                                                        |     |
|       | Condensed Consolidated Balance  Sheet (Unaudited)                                           |     |
|       | As of August 29, 2009,  February 28, 2009 and August 30, 2008                | 3        |
|       |                                                                                        |     |
|       | Condensed Consolidated  Statement of Operations (Unaudited)                                 |     |
|       | For the Three Months  Ended August 29, 2009 and August 30, 2008                   | 4        |
|       |                                                                                        |     |
|       | Condensed Consolidated  Statement of Operations (Unaudited)                                 |     |
|       | For the Six Months  Ended August 29, 2009 and August 30, 2008                     | 5        |
|       |                                                                                        |     |
|       | Condensed Consolidated Statement of  Cash Flows (Unaudited)                                 |     |
|       | For the Six Months Ended  August 29, 2009 and August 30, 2008                     | 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                                 | 28       |
|       |                                                                                        |     |
| Item 4.    | Controls and Procedures                                                                     | 29       |
|       |                                                                                        |     |
|       | **PART II**                                                                            |     |
|       |                                                                                        |     |
|       | **OTHER INFORMATION**                                                                       |     |
|       |                                                                                        |     |
| Item 1.    | Legal Proceedings                                                                           | 29       |
|       |                                                                                        |     |
| Item 1A.   | Risk Factors                                                                                | 30       |
|       |                                                                                        |     |
| Item 2.    | Unregistered Sales of Equity  Securities and Use of Proceeds                                | 30       |
|       |                                                                                        |     |
| Item 3.    | Defaults Upon Senior Securities                                                             | 30       |
|       |                                                                                        |     |
| Item 4.    | Submission of Matters to a Vote of  Security Holders                                        | 30       |
|       |                                                                                        |     |
| Item 5.    | Other Information                                                                           | 31       |
|       |                                                                                        |     |
| Item 6.    | Exhibits                                                                                    | 31       |
|       |                                                                                        |     |
|       | Signatures                                                                                  | 32       |
|       |                                                                                        |     |
|       | Index  to Exhibits                                                                          | 33       |

 

2

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Table of Contents

 

# **PART I — FINANCIAL INFORMATION**

 

**ITEM 1.**

**FINANCIAL STATEMENTS**

# **CHRISTOPHER & BANKS CORPORATION**

# **CONDENSED CONSOLIDATED BALANCE SHEET**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                     | ** ** | **August 29,** | ** ** | **February 28,** | ** ** | **August 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                                                                                     | ** ** | **2009**            | ** ** | **2009**              | ** ** | **2008**            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                     |       |                |       |                  |       |                |       |
| Current  assets:                                                                                                                                                                                                                               |       |                |       |                  |       |                |       |
| Cash  and cash equivalents                                                                                                                                                                                                                     |       | $                   | 83,384     |                  | $          | 78,814              |       | $ | 84,037 |   |
| Short-term  investments                                                                                                                                                                                                                        |       | 16,400              |       | —                |       | —              |       |
| Accounts  receivable                                                                                                                                                                                                                           |       | 3,728               |       | 3,921                 |       | 4,311               |       |
| Merchandise  inventories                                                                                                                                                                                                                       |       | 38,285              |       | 38,828                |       | 51,532              |       |
| Prepaid  expenses                                                                                                                                                                                                                              |       | 2,768               |       | 1,938                 |       | 12,176              |       |
| Income  taxes receivable                                                                                                                                                                                                                       |       | 7,750               |       | 18,747                |       | 1,117               |       |
| Current  deferred tax asset                                                                                                                                                                                                                    |       | 3,779               |       | 3,795                 |       | 5,104               |       |
| Other  current assets                                                                                                                                                                                                                          |       | 2,650               |       | —                |       | —              |       |
| Total  current assets                                                                                                                                                                                                                          |       | 158,744             |       | 146,043               |       | 158,277             |       |
|                                                                                                                                                                                                                                           |       |                |       |                  |       |                |       |
| Property,  equipment and improvements, net                                                                                                                                                                                                     |       | 109,751             |       | 120,347               |       | 131,772             |       |
| Long-term  investments                                                                                                                                                                                                                         |       | —              |       | 16,400                |       | 18,536              |       |
| Deferred  tax asset                                                                                                                                                                                                                            |       | 6,597               |       | 4,328                 |       | 6,338               |       |
| Other  assets                                                                                                                                                                                                                                  |       | 326                 |       | 3,024                 |       | 342                 |       |
| Total  assets                                                                                                                                                                                                                                  |       | $                   | 275,418    |                  | $          | 290,142             |       | $ | 315,265 |   |
|                                                                                                                                                                                                                                           |       |                |       |                  |       |                |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                 | ** ** | ** **          | ** ** | ** **            | ** ** | ** **          | ** ** |
|                                                                                                                                                                                                                                           |       |                |       |                  |       |                |       |
| Current  liabilities:                                                                                                                                                                                                                          |       |                |       |                  |       |                |       |
| Accounts  payable                                                                                                                                                                                                                              |       | $                   | 16,121     |                  | $          | 19,806              |       | $ | 11,290 |   |
| Accrued  salaries, wages and related expenses                                                                                                                                                                                                  |       | 8,860               |       | 9,588                 |       | 9,192               |       |
| Other  accrued liabilities                                                                                                                                                                                                                     |       | 18,290              |       | 22,103                |       | 27,357              |       |
| Other  current liabilities                                                                                                                                                                                                                     |       | 487                 |       | 487                   |       | —              |       |
| Total  current liabilities                                                                                                                                                                                                                     |       | 43,758              |       | 51,984                |       | 47,839              |       |
|                                                                                                                                                                                                                                           |       |                |       |                  |       |                |       |
| Non-current  liabilities:                                                                                                                                                                                                                      |       |                |       |                  |       |                |       |
| Deferred  lease incentives                                                                                                                                                                                                                     |       | 21,443              |       | 23,506                |       | 24,191              |       |
| Deferred  rent obligations                                                                                                                                                                                                                     |       | 9,869               |       | 10,318                |       | 10,880              |       |
| Other                                                                                                                                                                                                                                          |       | 3,969               |       | 4,110                 |       | 4,450               |       |
| Total  non-current liabilities                                                                                                                                                                                                                 |       | 35,281              |       | 37,934                |       | 39,521              |       |
|                                                                                                                                                                                                                                           |       |                |       |                  |       |                |       |
| Commitments                                                                                                                                                                                                                                    |       | —              |       | —                |       | —              |       |
| Stockholders’  equity:                                                                                                                                                                                                                    |       |                |       |                  |       |                |       |
| Preferred  stock – $0.01 par value, 1,000 sharesauthorized, none outstanding                                                                                                                                                         |       | —              |       | —                |       | —              |       |
| Common  stock – $0.01 par value, 74,000 sharesauthorized, 45,788, 45,258 and 45,324shares issued and 35,997, 35,467 and  35,520shares  outstanding at August 29, 2009,February 28, 2009 and  August 30, 2008, respectively |       | 458                 |       | 453                   |       | 453                 |       |
| Additional  paid-in capital                                                                                                                                                                                                                    |       | 112,606             |       | 111,763               |       | 111,511             |       |
| Retained  earnings                                                                                                                                                                                                                             |       | 196,027             |       | 200,720               |       | 229,814             |       |
| Common  stock held in treasury, 9,791 shares atcost at August 29, 2009 and  February 28, 2009, and9,804 shares at cost at August 30, 2008                                                                                       |       | (112,712            | )          | (112,712              | )          | (112,859            | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                 |       | —              |       | —                |       | (1,014              | )          |
| Total  stockholders’ equity                                                                                                                                                                                                               |       | 196,379             |       | 200,224               |       | 227,905             |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                               |       | $                   | 275,418    |                  | $          | 290,142             |       | $ | 315,265 |   |

 

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

 

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**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS**

(In thousands,except per share data)

(Unaudited)

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **August  29,**   | ** ** | **August 30,** | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net  sales                                                    |       | $                      | 101,182    |   | $ | 128,451 |   |
|                                                          |       |                   |       |   |   |
| Costs  and expenses:                                          |       |                   |       |   |   |
| Merchandise,  buying and occupancy                            |       | 66,152                 |       | 78,714 |   |
| Selling,  general and administrative                          |       | 32,220                 |       | 40,241 |   |
| Depreciation  and amortization                                |       | 6,286                  |       | 6,697 |   |
| Total  costs and expenses                                     |       | 104,658                |       | 125,652 |   |
|                                                          |       |                   |       |   |   |
| Operating  income (loss)                                      |       | (3,476                 | )          | 2,799 |   |
|                                                          |       |                   |       |   |   |
| Other  income                                                 |       | 228                    |       | 586 |   |
|                                                          |       |                   |       |   |   |
| Income  (loss) from continuing operations before income taxes |       | (3,248                 | )          | 3,385 |   |
|                                                          |       |                   |       |   |   |
| Income  tax provision (benefit)                               |       | (1,116                 | )          | 1,347 |   |
|                                                          |       |                   |       |   |   |
| Income  (loss) from continuing operations                     |       | (2,132                 | )          | 2,038 |   |
|                                                          |       |                   |       |   |   |
| Loss  from discontinued operations, net of income tax         |       | —                 |       | (1,202 | ) |
|                                                          |       |                   |       |   |   |
| Net  income (loss)                                            |       | $                      | (2,132     | ) | $ | 836 |   |
|                                                          |       |                   |       |   |   |
| Basic  earnings (loss) per share:                             |       |                   |       |   |   |
| Continuing  operations                                        |       | $                      | (0.06      | ) | $ | 0.06 |   |
| Discontinued  operations                                      |       | —                 |       | (0.03 | ) |
|                                                          |       |                   |       |   |   |
| Earnings  (loss) per basic share                              |       | $                      | (0.06      | ) | $ | 0.02 |   |
|                                                          |       |                   |       |   |   |
| Basic  shares outstanding                                     |       | 35,176                 |       | 35,099 |   |
|                                                          |       |                   |       |   |   |
| Diluted  earnings (loss) per share:                           |       |                   |       |   |   |
| Continuing  operations                                        |       | $                      | (0.06      | ) | $ | 0.06 |   |
| Discontinued  operations                                      |       | —                 |       | (0.03 | ) |
|                                                          |       |                   |       |   |   |
| Earnings  (loss) per diluted share                            |       | $                      | (0.06      | ) | $ | 0.02 |   |
|                                                          |       |                   |       |   |   |
| Diluted  shares outstanding                                   |       | 35,176                 |       | 35,122 |   |
|                                                          |       |                   |       |   |   |
| Dividends  per share                                          |       | $                      | 0.06       |   | $ | 0.06 |   |

 

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

 

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**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS**

(In thousands,except per share data)

(Unaudited)

 
| ** **                                                    | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **August  29,** | ** ** | **August 30,** | ** ** |
| ** **                                                    | ** ** | **2009**             | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net  sales                                                    |       | $                    | 221,549    |   | $ | 283,846 |   |
|                                                          |       |                 |       |   |   |
| Costs  and expenses:                                          |       |                 |       |   |   |
| Merchandise,  buying and occupancy                            |       | 141,609              |       | 165,449 |   |
| Selling,  general and administrative                          |       | 68,364               |       | 83,806 |   |
| Depreciation  and amortization                                |       | 12,597               |       | 13,104 |   |
| Total  costs and expenses                                     |       | 222,570              |       | 262,359 |   |
|                                                          |       |                 |       |   |   |
| Operating  income (loss)                                      |       | (1,021               | )          | 21,487 |   |
|                                                          |       |                 |       |   |   |
| Other  income                                                 |       | 343                  |       | 1,413 |   |
|                                                          |       |                 |       |   |   |
| Income  (loss) from continuing operations before income taxes |       | (678                 | )          | 22,900 |   |
|                                                          |       |                 |       |   |   |
| Income  tax provision (benefit)                               |       | (232                 | )          | 9,114 |   |
|                                                          |       |                 |       |   |   |
| Income  (loss) from continuing operations                     |       | (446                 | )          | 13,786 |   |
|                                                          |       |                 |       |   |   |
| Loss  from discontinued operations, net of income tax         |       | —               |       | (1,678 | ) |
|                                                          |       |                 |       |   |   |
| Net  income (loss)                                            |       | $                    | (446       | ) | $ | 12,108 |   |
|                                                          |       |                 |       |   |   |
| Basic  earnings (loss) per share:                             |       |                 |       |   |   |
| Continuing  operations                                        |       | $                    | (0.01      | ) | $ | 0.39 |   |
| Discontinued  operations                                      |       | —               |       | (0.05 | ) |
|                                                          |       |                 |       |   |   |
| Earnings  (loss) per basic share                              |       | $                    | (0.01      | ) | $ | 0.34 |   |
|                                                          |       |                 |       |   |   |
| Basic  shares outstanding                                     |       | 35,134               |       | 35,086 |   |
|                                                          |       |                 |       |   |   |
| Diluted  earnings (loss) per share:                           |       |                 |       |   |   |
| Continuing  operations                                        |       | $                    | (0.01      | ) | $ | 0.39 |   |
| Discontinued  operations                                      |       | —               |       | (0.05 | ) |
|                                                          |       |                 |       |   |   |
| Earnings  (loss) per diluted share                            |       | $                    | (0.01      | ) | $ | 0.34 |   |
|                                                          |       |                 |       |   |   |
| Diluted  shares outstanding                                   |       | 35,134               |       | 35,112 |   |
|                                                          |       |                 |       |   |   |
| Dividends  per share                                          |       | $                    | 0.12       |   | $ | 0.12 |   |

 

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

 

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**CHRISTOPHER & BANKSCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF CASH FLOWS**

(In thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                | ** ** | **August 29,**  | ** ** | **August 30,** | ** ** |
| ** **                                                                                | ** ** | **2009**             | ** ** | **2008** | ** ** |
|                                                                                      |       |                 |       |   |   |
| Cash  flows from operating activities:                                                    |       |                 |       |   |   |
| Net  income (loss)                                                                        |       | $                    | (446       | ) | $ | 12,108 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                            |       | 12,597               |       | 13,205 |   |
| Impairment  of store assets                                                               |       | —               |       | 1,221 |   |
| Deferred  income taxes                                                                    |       | (2,246               | )          | (1,207 | ) |
| Stock-based  compensation expense                                                         |       | 848                  |       | 1,154 |   |
| Loss  on disposal of furniture, fixtures and equipment                                    |       | 130                  |       | 348 |   |
| Gain  on investments                                                                      |       | (150                 | )          | — |   |
| Changes  in operating assets and liabilities:                                             |       |                 |       |   |   |
| Sales  of trading securities                                                              |       | 200                  |       | — |   |
| Decrease  in accounts receivable                                                          |       | 193                  |       | 912 |   |
| (Increase)  decrease in merchandise inventory                                             |       | 543                  |       | (7,691 | ) |
| Increase  in prepaid expenses and other current assets                                    |       | (972                 | )          | (579 | ) |
| Decrease  in prepaid income taxes                                                         |       | 10,997               |       | 3,914 |   |
| Decrease  in other assets                                                                 |       | 133                  |       | 6 |   |
| Decrease  in accounts payable                                                             |       | (2,405               | )          | (4,091 | ) |
| Decrease  in accrued liabilities                                                          |       | (4,541               | )          | (885 | ) |
| Decrease  in deferred lease incentives                                                    |       | (2,063               | )          | (663 | ) |
| Decrease  in deferred rent obligations                                                    |       | (449                 | )          | (840 | ) |
| Increase  (decrease) in other liabilities                                                 |       | (141                 | )          | 728 |   |
| Net  cash provided by operating activities                                                |       | 12,228               |       | 17,640 |   |
|                                                                                      |       |                 |       |   |   |
| Cash  flows from investing activities:                                                    |       |                 |       |   |   |
| Purchases  of property, equipment and improvements                                        |       | (3,411               | )          | (12,873 | ) |
| Sales  of investments                                                                     |       | —               |       | 5,000 |   |
| Net  cash used in investing activities                                                    |       | (3,411               | )          | (7,873 | ) |
|                                                                                      |       |                 |       |   |   |
| Cash  flows from financing activities:                                                    |       |                 |       |   |   |
| Dividends  paid                                                                           |       | (4,247               | )          | (4,222 | ) |
| Net  cash used in financing activities                                                    |       | (4,247               | )          | (4,222 | ) |
|                                                                                      |       |                 |       |   |   |
| Net  increase in cash and cash equivalents                                                |       | 4,570                |       | 5,545 |   |
|                                                                                      |       |                 |       |   |   |
| Cash  and cash equivalents at beginning of period                                         |       | 78,814               |       | 78,492 |   |
|                                                                                      |       |                 |       |   |   |
| Cash  and cash equivalents at end of period                                               |       | $                    | 83,384     |   | $ | 84,037 |   |

 

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 February 28, 2009.

 

The results of operations for the interim periods reflected in thisreport are not necessarily indicative of results to be expected for the fullfiscal year.  In the opinion ofmanagement, the information contained herein reflects all adjustments,consisting only of normal adjustments except as otherwise stated in thesenotes, necessary to present fairly the Company’s financial position as of August 29,2009 and August 30, 2008, and its results of operations and cash flows forthe three and six month periods ended August 29, 2009 and August 30,2008.  The Company has evaluatedsubsequent events through October 8, 2009, the date of issuance of theCompany’s unaudited condensed consolidated financial statements and determinedthat no such events occurred requiring disclosure in its unaudited condensedconsolidated financial statements.

 

*RecentlyAdopted Accounting Pronouncements*

 

In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. 157-2, “Effective Date ofFASB Statement No. 157”**(“FSP157-2”).  FSP 157-2 delays the effectivedate of the application of Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements”**(“SFAS No. 157”), to fiscalyears beginning after November 15, 2008 for all nonfinancial assets andnonfinancial liabilities that are recognized at fair value in the financialstatements on a nonrecurring basis. The Company adopted FSP 157-2 effective March 1,2009. See Note 12, Fair Value Measurements, for additional disclosures requiredunder FSP 157-2 for non-financial assets and liabilities recognized ordisclosed at fair value in the Company’s consolidated financialstatements.  Other than such disclosures,the adoption of FSP 157-2 did not have a material impact on the Company’sconsolidated financial statements as reported herein.

 

In June 2008, theFASB issued FSP Emerging Issues Task Force (“EITF”) No. 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities (“FSP-EITF No. 03-6-1”).  Under FSP-EITF 03-6-1, unvested share-basedpayment awards that contain rights to receive non-forfeitable dividends(whether paid or unpaid) are considered participating securities and should beincluded in the two-class method of computing earnings per share.  FSP-EITF 03-6-1 was adopted by the Companyeffective March 1, 2009 and impacted the Company’s calculation of earningsper share beginning in the first quarter of the fiscal year ending February 27,2010 (“Fiscal 2010”).  See Note 11,Earnings per Share, for further disclosure regarding the impact of the adoptionof FSP-EITF 03-6-1.

 

In April 2009, theFASB issued FSP No. 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value ofFinancial Instruments” (“FSP 107-1 and APB-21”)*. *FSP 107-1 and APB 28-1amends SFAS No. 107, “Disclosuresabout Fair Value of Financial Instruments,” to require disclosures aboutfair value of financial instruments in interim as well as in annual financialstatements. This standard also amends APB Opinion No. 28, “Interim Financial Reporting,” torequire disclosures in all interim financial statements. This standard iseffective for interim and annual financial periods ending after June 15,2009.  The Company adopted FSP 107-1 andAPB 28-1 effective May 31, 2009. The adoption of this standard did not have a material impact on theCompany’s consolidated financial statements as reported herein.

 

In May 2009, theFASB issued SFAS No. 165, “SubsequentEvents”**(“SFAS No. 165”),which establishes general standards of accounting for and disclosure of eventsthat occur after the balance sheet date but before financial statements areissued. The standard is based on the same principles as those that currentlyexist in the auditing standards. This standard is effective for interim orannual financial periods ending after June 15, 2009, and shall be appliedprospectively. The Company adopted SFAS No. 165 effective May 31,2009.  The adoption of this standard didnot have a material impact on the Company’s consolidated financial statementsas reported herein.

 

*Recently Issued AccountingPronouncements*

 

In June 2009, theFASB issued SFAS No. 166, “Accountingfor Transfers of Financial Assets — an amendment of FASB Statement No. 14”**(“SFAS No. 166”).  SFAS No. 166 was issued to improve therelevance and comparability of the information that a reporting entity providesin its financial statements about a transfer of 

 

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financial assets, the effects of such a transfer on its financialposition, financial performance and cash flows, and requires the reportingentity to provide information as to a transferor’s continuing involvement, ifany, in transferred financial assets. SFAS No. 166 is effective for the Company’s fiscal year beginning February 28,2010. The Company is in the process of evaluating the impact, if any, SFAS No. 166will have on its consolidated financial statements.

 

In June 2009, theFASB issued SFAS No. 168, “FASBAccounting Standards Codification” (“Codification”) as the single sourceof authoritative nongovernmental generally accepted accounting principles inthe United States (“GAAP”) to be launched on July 1, 2009.  The Codification does not change currentGAAP, but is intended to simplify user access to all authoritative GAAP byproviding all the authoritative literature related to a particular topic in oneplace.  All existing accounting standard documentswill be superseded and all other accounting literature not included in theCodification will be considered non-authoritative.  However, SEC accounting and reportingstandards will continue to be authoritative for SEC reporting entities.  The Codification is effective for the Companyin its third fiscal quarter of fiscal 2010. The Codification is for disclosure purposes only and the Codificationwill not impact the Company’s financial position, results of operations or cashflows.

 

## **NOTE2 — DISCONTINUED OPERATIONS**

## ** **

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

 

The operating results ofall Acorn stores have been presented as discontinued operations, in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS No. 144”), in the Condensed ConsolidatedStatement of Operations for the three and six month periods ended August 30,2008.  There was no activity relating tothe Company’s discontinued Acorn operations during the three and six monthperiods ended August 29, 2009.

 

The operating results ofthe discontinued operations for the three and six month periods ended August 30,2008 are summarized below (in thousands).

 

| ** **                         | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **August 30, 2008** | ** ** | **August 30, 2008** | ** ** |
| Net  sales                         |       | $                        | 3,186      |                     | $          | 7,433 |   |
|                               |       |                     |       |                     |       |
| Loss  before income tax benefit    |       | $                        | (1,997     | )                        | $          | (2,787 | ) |
| Income  tax benefit                |       | (795                     | )          | (1,109                   | )          |
|                               |       |                     |       |                     |       |
| Loss  from discontinued operations |       | $                        | (1,202     | )                        | $          | (1,678 | ) |

 

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

 

## **NOTE3 — SHORT-TERM INVESTMENTS**

## ** **

As of August 29,2009, the Company had approximately $16.4 million of short-term investments,which consisted solely of $19.3 million of auction rate securities (“ARS”) atcost, less a fair value adjustment of approximately $2.9 million.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS are expected to be held.

 

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Substantially all of the Company’s ARS are collateralized by studentloans. As of August 29, 2009, a majority of its ARS had AAA (Standard &Poor’s), Aaa (Moody’s), or AAA (Fitch) credit ratings.  As of August 29, 2009, the repayment ofapproximately 80% of the student loans, which serve as collateral for the ARSheld by the Company, was substantially backed by the United States government.  Until February 2008, the ARS market wasliquid and auctions for ARS held by the Company did not fail. However,beginning in February 2008, auctions for the ARS held by the Company beganto fail and have continued to fail up to and as of the date of this report.

 

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

 

All of the ARS owned bythe Company were purchased through UBS Financial Services, Inc., asubsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, byUBS.  In November 2008, the Companyaccepted a settlement offer from UBS to restore liquidity to its clients whohold ARS.  The settlement grants theCompany certain ARS rights.  These ARSrights provide the Company the ability to redeem its ARS at par during a two-yeartime period beginning June 30, 2010. During this time, the Company may choose to continue to hold some, orall, of its ARS and earn interest or sell some, or all, of its ARS to UBS atpar plus accrued interest.  The ARSrights are not transferable, tradable or marginable and will not be listed orquoted on any securities or exchange or any electronic communicationsnetwork.  As the Company has the abilityand intent to redeem its ARS at June 30, 2010, it reclassified the ARS toshort-term investments as of August 29, 2009.

 

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

 

The fair value of the ARS rights was estimated utilizing theBlack-Scholes option pricing model and the forward contract method.  As of August 29, 2009, the fair value ofthe ARS rights was determined to be approximately $2.7 million and the ARSrights were recorded within other current assets on the consolidated financialstatements.

 

Prior to acceptance of the UBS settlement offer, the Company classifiedits ARS as available-for-sale securities. As of August 30, 2008, the Company had approximately $18.5 millionof long-term investments consisting solely of $19.5 million of ARS, less avaluation allowance of $1.0 million, which reflected management’s estimate offair value given the current lack of liquidity of these investments, whiletaking into account the current credit quality of the underlying securities.

 

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

## ** **

Merchandise inventoriesconsisted of the following (in thousands):

 

| ** **                | ** ** | **August 29,** | ** ** | **February 28,** | ** ** | **August 30,** | ** ** |
|---------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| **Description**           | ** ** | **2009**            | ** ** | **2009**              | ** ** | **2008**            | ** ** |
|                      |       |                |       |                  |       |                |       |
| Merchandise  - in store   |       | $                   | 34,444     |                  | $          | 35,280              |       | $ | 39,960 |   |
| Merchandise  - in transit |       | 3,841               |       | 3,548                 |       | 11,572              |       |
|                      |       |                |       |                  |       |                |       |
|                      |       | $                   | 38,285     |                  | $          | 38,828              |       | $ | 51,532 |   |

 

**The Company does not havelong-term purchase commitments or arrangements with any of its suppliers oragents. **During the three and six monthperiods ended August 29, 2009, two of the Company’s vendors each suppliedthe Company with greater than 10% of its merchandise inventory purchases.  For the second quarter of fiscal 2010, thesetwo vendors supplied approximately 26% and 17% of the Company’s merchandisepurchases, and for the six month period ended August 29, 2009, the twovendors supplied approximately 26% and 15% of the Company’s merchandisepurchases.

 

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

** **

**In the six months ended August 30,2008, the Company purchased approximately 42% of its merchandise through onebuying agent (the “Agent”).  The Companyand the Agent terminated their sourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase anymerchandise through the Agent in the first six months of fiscal 2010.**

** **

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

## ** **

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

 
| ** **                                                                  | ** ** | **Estimated**                              | ** ** | **August 29,** | ** ** | **February 28,** | ** ** | **August 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| **Description**                                                             | ** ** | **Useful Life**                            | ** ** | **2009**            | ** ** | **2009**              | ** ** | **2008**            | ** ** |
|                                                                        |       |                                       |       |                |       |                  |       |                |       |
| Land                                                                        |       | —                                     |       | $                   | 1,597      |                  | $          | 1,597               |       | $ | 1,597 |   |
| Corporate  office, distribution center and related building improvements    |       | 25 years                                   |       | 12,012              |       | 12,020                |       | 12,015              |       |
| Store  leasehold improvements                                               |       | Term of related  lease, typically 10 years |       | 94,262              |       | 95,251                |       | 100,131             |       |
| Store  furniture and fixtures                                               |       | Three to 10  years                         |       | 112,705             |       | 113,697               |       | 116,741             |       |
| Point  of sale hardware and software                                        |       | Five years                                 |       | 14,959              |       | 15,173                |       | 15,483              |       |
| Computer  hardware and software                                             |       | Three to five  years                       |       | 21,160              |       | 21,123                |       | 12,051              |       |
| Corporate  office and distribution center furniture, fixtures and equipment |       | Seven years                                |       | 3,605               |       | 3,634                 |       | 3,141               |       |
| Construction  in progress                                                   |       | —                                     |       | 3,461               |       | 1,432                 |       | 8,956               |       |
|                                                                        |       |                                       |       | 263,761             |       | 263,927               |       | 270,115             |       |
| Less  accumulated depreciation and amortization                             |       |                                       |       | 154,010             |       | 143,580               |       | 138,343             |       |
| Net  property, equipment and improvements                                   |       |                                       |       | $                   | 109,751    |                  | $          | 120,347             |       | $ | 131,772 |   |

 

As of August 29,2009 and February 28, 2009, construction in progress consisted primarilyof store-related information technology system projects.  As of August 30, 2008, construction inprogress consisted primarily of capital expenditures related to new storeswhich opened in the second and third quarters of fiscal 2009.

 

The Company reviewslong-lived assets with definite lives at least annually or whenever events orchanges in circumstances indicate that the carrying value of the asset may notbe recoverable in accordance with SFAS No. 144.  The Company recorded no impairments oflong-lived assets in the three and six month periods ended August 29,2009.  However, the general economicuncertainty affecting the retail industry makes it reasonably possible that theCompany may identify and record long-lived asset impairments in future periods.

 

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## **NOTE6 — ACCRUED LIABILITIES**

## ** **

Other accrued liabilitiesconsisted of the following (in thousands):

 

| ** **                                               | ** ** | **August 29,** | ** ** | **February 28,** | ** ** | **August 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| **Description**                                          | ** ** | **2009**            | ** ** | **2009**              | ** ** | **2008**            | ** ** |
|                                                     |       |                |       |                  |       |                |       |
| Gift  card, certificate and store credit liabilities     |       | $                   | 7,753      |                  | $          | 11,434              |       | $ | 8,433 |   |
| Accrued  merchandise inventory receipts not yet invoiced |       | 3,749               |       | 3,008                 |       | 9,523               |       |
| Accrued  income, sales and other taxes payable           |       | 2,287               |       | 1,877                 |       | 2,434               |       |
| Accrued  workers compensation liability                  |       | 774                 |       | 1,601                 |       | 2,450               |       |
| Accrued  occupancy-related expenses                      |       | 734                 |       | 693                   |       | 1,632               |       |
| Other                                                    |       | 2,993               |       | 3,490                 |       | 2,885               |       |
|                                                     |       | $                   | 18,290     |                  | $          | 22,103              |       | $ | 27,357 |   |

 

The Company moved from a self insured to a fullyinsured workers compensation insurance program effective March 1, 2009. Theaccrual balance at August 29, 2009 represents the estimated remaining liabilityunder the self insured program.

 

## **NOTE7 — CREDIT FACILITY**

 

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

 

Loans under the CreditFacility bear interest at the prime rate minus 0.25%.  As of August 29, 2009, the prime ratewas 3.25%.  The Credit Facility alsoprovides the Company with the ability to borrow under the Credit Facility at aninterest rate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tiedto the one, three, or six month LIBOR rate based on the length of time thecorresponding advance is outstanding.

 

Interest under theCredit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unusedportion of the facility as defined in the agreement, a collateral monitoringfee and a guarantee service charge.  Forthe six months ended August 29, 2009, fees and charges related to theCredit Facility totaled $27,663. Borrowings under the Credit Facility are collateralized by the Company’sequipment, intangible assets, inventory, inventory letters of credit and letterof credit rights.  The Company had norevolving credit loan borrowings under the Credit Facility during the first sixmonths of fiscal 2010 or 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 August 29, 2009was $26.0 million. The Company had no outstanding letters of credit as of August 29,2009.  Accordingly, the availability ofrevolving credit loans under the Credit Facility was $26.0 million at August 29,2009.

 

The CreditFacility contains certain restrictive covenants, including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of August 29, 2009,the most recent measurement date, the Company was in compliance with all of therestrictive covenants under the Credit Facility.

 

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

 

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

 

Total pre-taxcompensation expense related to stock-based awards for the three months ended August 29,2009 and August 30, 2008 was approximately $374,000 and $524,000,respectively.  For the six months ended August 29,2009 and August 30, 2008, pre-tax stock-based compensation expense totaledapproximately $848,000 and $1.2 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.

 

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*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 six month periods ended August 29, 2009 and August 30,2008 were as follows:

 

| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **August 29,**    | ** ** | **August 30,**  | ** ** | **August 29,** | ** ** | **August 30,** | ** ** |
| ** **               | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Expected  dividend yield |       | 4.4                    | %          | 2.6                  | %          | 5.0 | % | 2.3 | % |
| Expected  volatility     |       | 71.5                   | %          | 52.0                 | %          | 68.7 | % | 49.3 | % |
| Risk-free  interest rate |       | 2.3                    | %          | 3.0                  | %          | 2.1 | % | 2.7 | % |
| Expected  term in years  |       | 4.2                    |       | 3.4                  |       | 4.6 |   | 4.4 |   |

 

*Stock-Based Compensation Activity*

 

The following tablepresents a summary of the Company’s stock option activity for the six monthsended August 29, 2009:

 
| ** **                        | ** ** | ** ** | ** ** | ** **   | ** ** | ** **         | ** ** | ** **     | ** ** | **Weighted**    | ** ** |
|-----------------------------------|------------|------------|------------|--------------|------------|--------------------|------------|----------------|------------|-----------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Aggregate**      | ** ** | ** **     | ** ** | **Average**     | ** ** |
| ** **                        | ** ** | **Number** | ** ** | **Average**  | ** ** | **Intrinsic**      | ** ** | **Weighted**   | ** ** | **Remaining**   | ** ** |
| ** **                        | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Value**          | ** ** | **Average**    | ** ** | **Contractual** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** | **Life**        | ** ** |
|                              |       |       |       |         |       |               |       |           |       |            |       |
| Outstanding,  beginning of period |       | 1,587,345  |       | $            | 16.31      |               | $          | 3              |       | $               | 5.90       |   |   |   |
| Vested                            |       | 1,145,968  |       | 17.84        |       | —             |       | 6.36           |       |            |       |
| Unvested                          |       | 441,377    |       | 12.32        |       | 3                  |       | 4.70           |       |            |       |
| Granted                           |       | 598,500    |       | 5.33         |       | 1,113              |       | 2.18           |       |            |       |
| Exercised                         |       | —     |       | —       |       | —             |       | —         |       |            |       |
| Canceled  - vested                |       | (497,126   | )          | 17.92        |       | —             |       | 5.37           |       |            |       |
| Canceled  - unvested (forfeited)  |       | (27,267    | )          | 15.85        |       | 6                  |       | 6.50           |       |            |       |
|                              |       |       |       |         |       |               |       |           |       |            |       |
| Outstanding,  end of period       |       | 1,661,452  |       | 11.94        |       | 1,141              |       | 4.38           |       | 7.61            |       |
| Vested                            |       | 789,678    |       | 16.99        |       | 2                  |       | 6.01           |       | 5.81            |       |
| Unvested                          |       | 871,774    |       | 7.37         |       | 1,139              |       | 2.90           |       | 9.24            |       |
|                              |       |       |       |         |       |               |       |           |       |            |       |
| Exercisable,  end of period       |       | 789,678    |       | 16.99        |       | 2                  |       | 6.01           |       | 5.81            |       |
|                                   |            |            |            |              |            |                    |            |                |            |                 |            |  |  |  |

 

The Company may alsogrant shares of restricted stock to its employees and non-employeedirectors.  Restricted stock awards areindependent of option grants and are generally subject to forfeiture ifemployment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’srestricted stock awards granted to employees have performance-based vestingprovisions and are subject to forfeiture if these performance conditions arenot achieved.

 

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

 

The following tablepresents a summary of the Company’s restricted stock activity for employees andnon-employee directors for the six months ended August 29, 2009:

 

| ** **                       | ** ** | ** ** | ** ** | **Aggregate**      | ** ** | ** **     | ** ** |
|----------------------------------|------------|------------|------------|--------------------|------------|----------------|------------|
| ** **                       | ** ** | **Number** | ** ** | **Intrinsic**      | ** ** | **Weighted**   | ** ** |
| ** **                       | ** ** | **of**     | ** ** | **Value**          | ** ** | **Average**    | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** |
|                             |       |       |       |               |       |           |       |
| Unvested,  beginning of period   |       | 282,418    |       | $                  | 1,099      |           | $          | 10.54 |   |
| Granted                          |       | 694,900    |       | 4,996              |       | 4.57           |       |
| Vested                           |       | (46,518    | )          | 334                |       | 11.32          |       |
| Canceled  - Unvested (Forfeited) |       | (111,600   | )          | 802                |       | 10.04          |       |
| Unvested,  end of period         |       | 819,200    |       | 5,890              |       | 5.50           |       |
|                                  |            |            |            |                    |            |                |            |  |  |

 

## **NOTE9 — OTHER INCOME**

 

## **Otherincome consisted of the following:**

 

| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **August 29,**    | ** ** | **August 30,**  | ** ** | **August 29,** | ** ** | **August 30,** | ** ** |
| **Description**                            | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Interest  income, net                      |       | $                      | 78         |                 | $          | 586 |   | $ | 193 |   | $ | 1,413 |   |
| Gain  on investments carried at fair value |       | 150                    |       | —               |       | 150 |   | — |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
|                                       |       | $                      | 228        |                 | $          | 586 |   | $ | 343 |   | $ | 1,413 |   |

 

## **NOTE10 — INCOME TAXES**

## ** **

As of August 29,2009, the Company’s liability for unrecognized tax benefits associated withuncertain tax positions was approximately $3.3 million and the total amount of unrecognizedtax benefits that, if recognized, would affect the effective tax rate was $2.0million.   The Company recognizes interestand penalties related to unrecognized tax benefits as components of income taxexpense.  At August 29, 2009, theCompany had accrued approximately $0.8 million for the potential payment ofinterest and penalties.

 

The Company and itssubsidiaries are subject to U.S. federal income tax and the income tax ofvarious state and local jurisdictions. The Internal Revenue Service has completed its audit for tax yearsthrough fiscal 2006.  The Company is notsubject to state income tax examination by taxing authorities for taxable yearsprior to fiscal 2004.  At August 29,2009, the Company had ongoing audits in various jurisdictions in which itexpects settlements by the end of fiscal 2010, but it does not expect itsliability for unrecognized tax benefits to significantly increase or decreasein the remainder of the fiscal year.

 

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As of August 29,2009, the Company had net deferred tax assets of $10.4 million.  Deferred income tax assets representpotential future income tax benefits. Realization of these assets is ultimately dependent upon future taxableincome.  No valuation allowance has beenprovided for deferred tax assets because management believes realization of thefull amount of net deferred tax assets is more likely than not.  While the Company has a history of profits,its profitability has declined over the last three years and the Companyrecorded a net loss in fiscal 2009. Therefore, earnings results in fiscal 2010 will be a significant factorin determining the Company’s ability to continue to carry these deferred taxassets without any valuation allowance. The Company’s accounting for deferred taxes represents its best estimateof future events.  If future results fromthe Company’s operations are less than projected, a valuation allowance may berequired to reduce deferred tax assets, which could have a material impact onthe Company’s results of operations in the period in which it is recorded. Significant negative events, including losses in future periods, wouldmake it reasonably possible that valuation allowances against deferred taxassets would be required in future periods.

 

As of August 29,2009, the Company had state net operating loss carryforwards which will resultin state tax benefits of approximately $0.5 million.  These state net loss carryforwards willexpire in fiscal 2014 and beyond. Additionally, the Company has charitable contribution carryforwards thatwill expire in fiscal 2014.

 

## **NOTE11 — EARNINGS PER SHARE**

## ** **

On March 1,2009, the Company adopted FSP No. EITF 03-6-1, “Determining WhetherInstruments Granted in Share-Based Payment Transactions are ParticipatingSecurities” (“FSP-EITF 03-6-1”), which clarified that unvested share-basedpayment awards that contain nonforfeitable rights to receive dividends ordividend equivalents (whether paid or unpaid) are participating securities, andthus, should be included in the two-class method of computing earnings pershare (“EPS”).  Participating securitiesunder this statement include the Company’s unvested employee restricted stockawards with time-based vesting, which receive nonforfeitable dividendpayments.  The calculation of EPS forcommon stock shown below excludes the income attributable to these unvestedemployee restricted stock awards from the numerator and excludes the dilutiveimpact of these shares from the denominator. All prior period EPS data presented has been adjusted retrospectively.

 

| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **August 29,**    | ** ** | **August 30,** | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Numerator**(in thousands)**:**                                            |       |                   |       |   |   |
| Net  income (loss) attributable to Christopher & Banks Corporation |       | $                      | (2,132     | ) | $ | 836 |   |
| (Income)  loss allocated to participating securities                        |       | 23                     |       | (3 | ) |
| Net  income (loss) available to common shareholders                         |       | $                      | (2,109     | ) | $ | 833 |   |
|                                                                        |       |                   |       |   |   |
| **Denominator**(in thousands)**:**                                          |       |                   |       |   |   |
| Weighted  average common shares outstanding - basic                         |       | 35,176                 |       | 35,099 |   |
| Dilutive  shares                                                            |       | —                 |       | 23 |   |
| Weighted  average common and common equivalent shares outstanding - diluted |       | 35,176                 |       | 35,122 |   |
|                                                                        |       |                   |       |   |   |
| **Net income (loss) per common share:**                                     |       |                   |       |   |   |
| Basic                                                                       |       | $                      | (0.06      | ) | $ | 0.02 |   |
| Diluted                                                                     |       | $                      | (0.06      | ) | $ | 0.02 |   |

 

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| ** **                                                                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | **August 29,**  | ** ** | **August 30,** | ** ** |
| ** **                                                                  | ** ** | **2009**             | ** ** | **2008** | ** ** |
| **Numerator**(in thousands)**:**                                            |       |                 |       |   |   |
| Net  income (loss) attributable to Christopher & Banks Corporation |       | $                    | (446       | ) | $ | 12,108 |   |
| (Income)  loss allocated to participating securities                        |       | 3                    |       | (48 | ) |
| Net  income (loss) available to common shareholders                         |       | $                    | (443       | ) | $ | 12,060 |   |
|                                                                        |       |                 |       |   |   |
| **Denominator**(in thousands)**:**                                          |       |                 |       |   |   |
| Weighted  average common shares outstanding - basic                         |       | 35,134               |       | 35,086 |   |
| Dilutive  shares                                                            |       | —               |       | 26 |   |
| Weighted  average common and common equivalent shares outstanding - diluted |       | 35,134               |       | 35,112 |   |
|                                                                        |       |                 |       |   |   |
| **Net income (loss) per common share:**                                     |       |                 |       |   |   |
| Basic                                                                       |       | $                    | (0.01      | ) | $ | 0.34 |   |
| Diluted                                                                     |       | $                    | (0.01      | ) | $ | 0.34 |   |

 

The calculation ofbasic and diluted earnings per share for fiscal 2009 has been modified toreflect FSP-EITF 03-6-1.  The earnings per share for the three and the sixmonth periods ended August 30, 2008 have been adjusted to reflect theimpact of this new accounting guidance to present them on a comparable basiswith fiscal 2010. The impact of this modification resulted in a $0.01 per sharedecrease in reported basic earnings per share for the six month period ended August 30,2008.  There was no material impact ondiluted EPS for the six months ended August 30, 2008.  In addition, FSP-EITF 03-6-1 had no materialimpact on basic or diluted EPS for the second quarter of fiscal 2009.

 

Total stockoptions of approximately 1.5 million and 1.9 million were excluded from theshares used in the computation of diluted EPS for the three and six monthperiods ended August 29, 2009, respectively, as they wereanti-dilutive.  Total stock options ofapproximately 2.1 million were excluded from the shares used in the computationof diluted EPS for the three and six month periods ended August 30, 2008as they were anti-dilutive.

 

**NOTE 12 — FAIR VALUE MEASUREMENTS**

** **

The Company adopted SFAS No. 157,“Fair Value Measurements,” effective March 2, 2008, with respect to fairvalue measurements of (a) nonfinancial assets and liabilities that arerecognized or disclosed at fair value in the Company’s financial statements ona recurring basis and (b) all financial assets and liabilities.  On March 1, 2009, the Company adoptedSFAS No. 157 for nonrecurring nonfinancial assets and nonfinancialliabilities that had been delayed by FSP 157-2. The adoption of FSP 157-2 did not have a material impact on the Company’sconsolidated financial statements as reported herein.

 

Under SFAS No. 157,fair value is defined as the exit price, or the amount that would be receivedto sell an asset or paid to transfer a liability in an orderly transactionbetween market participants as of the measurement date.  SFAS No. 157 also establishes ahierarchy for inputs used in measuring fair value that maximizes the use ofobservable inputs and minimizes the use of unobservable inputs by requiringthat the most observable inputs be used when available.  Observable inputs are inputs marketparticipants would use in valuing the asset or liability developed based onmarket data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect theCompany’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.   Level2 inputs include quoted prices for similar assets or liabilities in activemarkets, quoted prices for identical or similar assets or liabilities inmarkets that are not active and inputs (other than quoted prices) that areobservable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs forthe asset or liability.   Categorizationwithin the valuation hierarchy is based upon the lowest level of input that issignificant to the fair value measurement.

 

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

 

For the six month periodsended August 29, 2009 and August 30, 2008, fair value under SFAS No. 157applied to the Company’s ARS and ARS rights. These financial assets are carried at fair value following therequirements of SFAS No. 157.

 

As discussed in Note 3,auctions for ARS held by the Company failed beginning in February 2008,and have continued to fail through the date of this report.  As a result, investments in ARS are valued toreflect the current lack of liquidity of these investments while taking intoaccount the credit quality of the underlying securities.  As also discussed in Note 3, on November 7,2008, the Company accepted UBS’s ARS settlement offer.  This resulted in the Company receiving ARSrights, which the Company has elected to account for at fair value.

 

The following tablesprovide information by level for assets and liabilities that are measured atfair value, as defined by SFAS No. 157, on a recurring basis (inthousands).

 
| ** **      | ** ** | ** **                | ** ** | **Fair Value Measurements**     | ** ** |
|-----------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | **Fair Value at**         | ** ** | **Using Inputs Considered as**  | ** ** |
| **Description** | ** ** | **August 29, 2009**  | ** ** | **Level 1**                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|            |       |                      |       |                            |       |   |   |   |   |
| Assets:         |       |                      |       |                            |       |   |   |   |   |
| ARS             |       | $                         | 16,400     |                            | $          | — |   | $ | — |   | $ | 16,400 |   |
| ARS  rights     |       | $                         | 2,650      |                            | $          | — |   | $ | — |   | $ | 2,650 |   |
|            |       |                      |       |                            |       |   |   |   |   |
| Liabilities:    |       | $                         | —     |                            | $          | — |   | $ | — |   | $ | — |   |
|            |       |                      |       |                            |       |   |   |   |   |
| ** **      | ** ** | ** **                | ** ** | **Fair  Value Measurements**    | ** ** |
| ** **      | ** ** | **Fair  Value at**        | ** ** | **Using  Inputs Considered as** | ** ** |
| **Description** | ** ** | **August 30,  2008** | ** ** | **Level  1**                    | ** ** | **Level  2** | ** ** | **Level  3** | ** ** |
| Assets:         |       |                      |       |                            |       |   |   |   |   |
| ARS             |       | $                         | 18,536     |                            | $          | — |   | $ | — |   | $ | 18,536 |   |
| ARS  rights     |       | $                         | —     |                            | $          | — |   | $ | — |   | $ | — |   |
|            |       |                      |       |                            |       |   |   |   |   |
| Liabilities:    |       | $                         | —     |                            | $          | — |   | $ | — |   | $ | — |   |

 

The following tableprovides a reconciliation of the beginning and ending balances of itemsmeasured at fair value on a recurring basis in the table above that usedsignificant unobservable inputs (Level 3).

 
| ** **                              | ** ** | **Six Months Ended**     | ** ** | **Six Months Ended**     | ** ** |
|-----------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **August 29, 2009** | ** ** | **August 30, 2008** | ** ** |
| ** **                              | ** ** | **ARS**                  | ** ** | **ARS Rights**           | ** ** | **ARS** | ** ** | **ARS Rights** | ** ** |
|                                    |       |                     |       |                     |       |   |   |   |   |
| Beginning  balance                      |       | $                        | 16,400     |                     | $          | 2,700 |   | $ | 23,350 |   | $ | — |   |
|                                    |       |                     |       |                     |       |   |   |   |   |
| Total  gains (losses):                  |       |                     |       |                     |       |   |   |   |   |
| Included  in earnings                   |       | 200                      |       | (50                      | )          | — |   | — |   |
| Included  in other comprehensive income |       | —                   |       | —                   |       | 186 |   | — |   |
| Purchases,  issuances and settlements   |       | (200                     | )          | —                   |       | (5,000 | ) | — |   |
| Transfers  in and/or out of level 3     |       | —                   |       | —                   |       | — |   | — |   |
|                                    |       |                     |       |                     |       |   |   |   |   |
| Ending  balance                         |       | $                        | 16,400     |                     | $          | 2,650 |   | $ | 18,536 |   | $ | — |   |

 

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The Company did not haveany financial assets, other than its ARS and ARS rights, or nonfinancial assetsor liabilities carried at fair value as of August 29, 2009 that weresubject to disclosure within the three-tier hierarchy established by SFAS No. 157.  The Company’s financial instruments, otherthan its ARS and ARS rights, consist primarily of cash and cash equivalents,accounts receivable and accounts payable, the carrying value of whichapproximates fair value due to the short-term nature of the instruments.

 

**NOTE 13 — COMPREHENSIVE INCOME**

** **

Comprehensive incomeconsisted of the following:

 

| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **August  29,**   | ** ** | **August 30,**  | ** ** | **August  29,** | ** ** | **August 30,** | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Net  income (loss)                                         |       | $                      | (2,132     | )                    | $          | 836 |   | $ | (446 | ) | $ | 12,108 |   |
| Unrealized  losses on investments reclassified to earnings |       | —                 |       | —               |       | — |   | 186 |   |
| Total  comprehensive income                                |       | $                      | (2,132     | )                    | $          | 836 |   | $ | (446 | ) | $ | 12,294 |   |

 

**NOTE 14 — COMMITMENTS AND CONTINGENCIES**

** **

*Legal Proceedings*

 

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

 

## **NOTE15 — SEGMENT REPORTING**

## ** **

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

 

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

 

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| **Segment Reporting:**                        | ** ** | ** **                        | ** ** | ** **         | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                    | ** ** | ** **                        | ** ** | ** **         | ** ** | ** **       | ** ** |
| ** **                                    | ** ** | **christopher & banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
| ** **                                    | ** ** | **cj banks**                      | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Three Months Ended August 29, 2009:**  |       |                              |       |               |       |             |       |
| Net  sales                                    |       | $                                 | 101,182    |               | $          | —           |       | $ | 101,182 |   |
| Operating  income (loss)                      |       | $                                 | 7,063      |               | $          | (10,539          | )          | $ | (3,476 | ) |
| Total  assets                                 |       | $                                 | 151,519    |               | $          | 123,899          |       | $ | 275,418 |   |
|                                          |       |                              |       |               |       |             |       |
| **Three Months Ended August  30, 2008:** |       |                              |       |               |       |             |       |
| Net  sales                                    |       | $                                 | 128,451    |               | $          | —           |       | $ | 128,451 |   |
| Operating  income (loss)                      |       | $                                 | 18,513     |               | $          | (15,714          | )          | $ | 2,799 |   |
| Total  assets                                 |       | $                                 | 162,600    |               | $          | 152,665          |       | $ | 315,265 |   |

 
| ** **                                  | ** ** | **christopher & banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                  | ** ** | **cj banks**                      | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Six Months Ended August 29, 2009:**  |       |                              |       |               |       |             |       |
| Net  sales                                  |       | $                                 | 221,549    |               | $          | —           |       | $ | 221,549 |   |
| Operating  income (loss)                    |       | $                                 | 23,073     |               | $          | (24,094          | )          | $ | (1,021 | ) |
| Total  assets                               |       | $                                 | 151,519    |               | $          | 123,899          |       | $ | 275,418 |   |
|                                        |       |                              |       |               |       |             |       |
| **Six Months Ended August  30, 2008:** |       |                              |       |               |       |             |       |
| Net  sales                                  |       | $                                 | 283,846    |               | $          | —           |       | $ | 283,846 |   |
| Operating  income (loss)                    |       | $                                 | 54,135     |               | $          | (32,648          | )          | $ | 21,487 |   |
| Total  assets                               |       | $                                 | 162,600    |               | $          | 152,665          |       | $ | 315,265 |   |

 

**ITEM 2.**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**The management’s discussion andanalysis of financial condition and results of operations (“MD&A”) thatfollows should be read in conjunction with the consolidated financial statementsand notes included in Item 1 of this Form 10-Q and the consolidatedfinancial statements, notes and MD&A contained in the Company’s AnnualReport on Form 10-K for the fiscal year ended February 28, 2009.**

** **

**Executive Overview**

** **

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

** **

**As of August 29, 2009, theCompany operated 811 stores in 46 states, including 542 christopher &banks stores, 268 cj banks stores and one dual-concept store.  The Company’s christopher & banksbrand offers distinctive fashions featuring exclusively designed, coordinatedassortments of women’s apparel primarily in sizes four to 16. The Company’s cjbanks brand offers similar assortments of women’s apparel primarily in sizes14W to 24W.  The Company’s dual-conceptstore offers an assortment of both christopher & banks and cj banksapparel servicing the petite, misses and plus size customer in one store.  The Company also operates e-commerce websites for its two brands at**www.christopherandbanks.com and www.cjbanks.com, which offer exclusive sizes andstyles available only online.

 

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** **

**The Company strives to provideits customers with quality apparel at a great value and a perfect fit.  The Company’s overall strategy for its twobrands, christopher & banks and cj banks, is to consistently offer afashionable apparel assortment through its stores and e-commerce web sites inorder to satisfy its target customers’ expectations for style, quality, valueand fit, while providing exceptional, personalized customer service.**

** **

**The Company has competitivelypositioned itself to offer merchandise assortments balancing unique, noveltyapparel with more classic, basic styles, at affordable prices.  To differentiate itself from its competitors,the Company’s buyers, working in conjunction with the Company’s internal designgroup, create a merchandise assortment of coordinated outfits, the majority ofwhich is manufactured exclusively for the Company under its proprietarychristopher & banks and cj banks brand names.**

** **

*Fiscal 2010 Second QuarterSummary*

 

The Company’s results ofoperations for the second quarter of fiscal 2010 continued to be impacted bythe challenging macro-economic environment. Continued instability in the housing market and higher levels of unemployment,combined with general economic uncertainty, have impacted consumer spendingpatterns, particularly for discretionary retail purchases.

 

Same store sales declined22% during the second quarter of fiscal 2010 compared to the prior yearperiod.  This decrease was primarily aresult of fewer transactions per store, while the average transaction value wasessentially flat for the quarter compared to the second quarter of fiscal 2009.

 

Despite the pressure onsales, the Company ended the quarter with better than anticipated gross marginsand above-plan cost savings.  Selling,general and administrative (“SG&A”) expenses declined by approximately $8.0million in the second quarter of fiscal 2010 compared to the second quarter offiscal 2009.  Markdowns and inventorywere well controlled during the quarter resulting in a 24% decline in inventorylevels on a per-store basis, excluding e-commerce inventory, at the end of thesecond quarter compared to the end of the prior year second quarter.  The Company ended the quarter withapproximately $100 million of cash, cash equivalents and short-terminvestments.

 

The Company recorded anet loss of $2.1 million, or ($0.06) per share, in the second quarter of fiscal2010, compared to net income from continuing operations of $2.0 million, or$0.06 per diluted share, for the second quarter of fiscal 2009.  In the first half of fiscal 2010, the Companyopened three new cj banks stores and its first dual-concept store.  Six christopher & banks stores andtwo cj banks stores were closed during the first six months of fiscal 2010.

 

*Fiscal 2010 Outlook and KeyBusiness Initiatives*

 

Given the uncertaineconomic environment, the Company is approaching the balance of fiscal 2010with a continued focus on operating effectiveness, expense controls,disciplined inventory management and conservative capital spending.  The Company anticipates inventory per-storewill continue to be managed at levels modestly below fiscal 2009 for theremainder of the fiscal year.  Goingforward, the Company plans to proceed cautiously with new store growth.  The Company currently plans to open oneadditional new store in fiscal 2010.

 

The Company continued toexecute its cost reduction initiative in fiscal 2010.  SG&A savings, primarily reductions instore payroll and other store-related expenses, marketing expenditures andtravel costs, of approximately $15.4 million were realized in the first sixmonths of the fiscal year.  The Companyexpects to realize total SG&A savings of $17 million to $18 million in allof fiscal 2010, with at least $1.0 million of savings anticipated in the thirdquarter.  The Company also continues tofocus on reducing occupancy costs through aggressive lease renegotiations anddiligently exercising rent reductions related to sales volume and co-tenancylease violations.  Total fiscal 2010capital expenditures are planned to range from $8 million to $9 million, downapproximately 50% from the $18.4 million of capital expenditures in fiscal2009.

 

The Company alsocontinues to employ strict inventory controls in fiscal 2010.  During the year, the Company plans tocontinue to enhance inventory productivity through SKU rationalization andimproved store assorting based on sales volume, climate, size and fashionpreferences.

 

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The Company plans tocontinue to strengthen its Customer Relationship Management (“CRM”) programsthroughout fiscal 2010.  The Company isin the midst of migrating to a new CRM database management system which isdesigned to ensure better customer data consistency across all channels,provide more robust customer and marketing analytics and enable management ofmore complex and segmented communications campaigns.  In addition, the Company plans to continue toaccumulate and incorporate customer data into its existing and new CRM programsto drive additional customer traffic to its stores and web sites, encouragecross shopping between its stores and online sites and increase overall brandawareness.  CRM efforts will focusprimarily on email communication, which the Company believes is the mostcost-effective and efficient method of communicating with customers.  In addition, the Company is tailoring itsemail messages to segmented groups of customers in an effort to provide morerelevant and compelling offers and to drive stronger response rates from itsmessages.

 

The Company continues tofocus on smaller markets that have traditionally been the foundation of theCompany’s success.  Approximately 50% ofthe Company’s stores are located in small, rural and captive markets.  While same store sales have declined in thesemarkets, the declines have been slightly less than in the remainder of theCompany’s stores.  In addition toadjusting the merchandise mix in these areas, the Company plans to furtherdevelop its grassroots marketing efforts to increase communication withcustomers in these markets.  Storeslocated in the smaller, rural markets generally have higher productivity andlower occupancy costs, resulting in higher operating margins.

 

The Company continues toplace additional focus on growth opportunities for its plus size brand, cjbanks.  The Company opened its firstdual-concept store during the second quarter of fiscal 2010.  This store offers merchandise from both ofits brands, christopher & banks and cj banks, and all three sizeranges, misses, petite and plus, within one store, resulting in a greateropportunity to service the Company’s customers while increasing productivityand enhancing operating efficiencies.  Inaddition, during September 2009, the Company introduced editedassortments, or “capsules,” of its cj banks plus size merchandise in a selecttest group of approximately 30 christopher & banks stores to furthercapitalize on increasing its plus size market share.  Overall productivity of these test stores isexpected to increase as the cj banks capsule assortments were added to thesestores without a reduction in the planned christopher & banksassortment.

 

The Company expects itschristopher & banks and cj banks e-commerce businesses to continue togrow.  The Company plans to furtherenhance web site visual presentation and to expand merchandise offerings toinclude exclusive online-only merchandise categories, styles, sizes andlengths.  In an effort to driveadditional traffic to its web sites, the Company intends to continue toincrease its online marketing efforts and leverage its online associateordering system, which allows the Company’s store associates the opportunity toservice customers through direct access to the Company’s e-commerce sites.

 

While the Company’smanagement believes the retail and macro-economic environments will remain challengingthroughout the remainder of fiscal 2010, it also believes that it is takingactions to position the Company for stronger operating performance wheneconomic conditions become more favorable.

 

**Key PerformanceIndicators**

** **

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

 

*Samestore sales*

 

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 squarefootage has been changed by more than 25 percent within the past 13 months areexcluded from the same store sales calculation. Stores closed during the year are included in the same store salescalculation only for the full months of the year the stores were open.  In addition, sales which are initiated in storesbut fulfilled through the Company’s e-commerce websites are included in thecalculation of same store sales.

 

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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, investments and working capital.

 

*Merchandise,buying and occupancy costs*

 

The merchandise margin component of merchandise, buyingand occupancy costs, which includes the cost of merchandise, markdowns andshrink expense, exclusive of depreciation and amortization, measures whetherthe Company is appropriately optimizing the price of its merchandise.  Buying and occupancy costs include freightinto and out of the Company’s distribution center, buyer and distributioncenter salaries, buyer travel, rent and other occupancy-related costs, variousmerchandise design and development costs, miscellaneous merchandise expensesand other costs related to the Company’s distribution 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*

 

Storeproductivity measures, including sales per square foot, average unit retailselling price, number of transactions per store, number of units pertransaction, average retail dollars per transaction, customer traffic andconversion rates (the percentage of customers who enter the Company’s storesand make a purchase) are evaluated by management in assessing the operationalperformance 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.

 

*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.

 

**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 February 28, 2009.  There have been no material changes in theCompany’s critical accounting policies or estimates in the three and six monthperiods ended August 29, 2009. Management’s discussion and analysis of the Company’s financialcondition and results of operations are based upon the Company’s consolidatedcondensed financial statements, which have been prepared in accordance withaccounting principles generally accepted in 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.

 

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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 month periodended August 29, 2009, the current challenging economic environment,combined with the continued instability in the housing, credit, stock andfinancial markets, and general economic uncertainty affecting the retailindustry, make it reasonably possible that long-lived asset impairments couldbe identified and recorded in future periods.

 

As of August 29,2009, the Company had net deferred tax assets of $10.4 million.  Deferred income tax assets representpotential future income tax benefits. Realization of these assets is ultimately dependent upon future taxableincome.  No valuation allowance has beenprovided for deferred tax assets because management believes realization of thefull amount of net deferred tax assets is more likely than not.  While the Company has a history of profits,its profitability has declined over the last three years and the Companyrecorded a net loss in fiscal 2009. Therefore, earnings results in fiscal 2010 will be a significant factorin determining the Company’s ability to continue to carry these deferred taxassets without any valuation allowance. The Company’s accounting for deferred taxes represents its best estimateof future events.  If future results fromthe Company’s operations are less than projected, a valuation allowance may berequired to reduce deferred tax assets, which could have a material impact onthe Company’s results of operations in the period in which it is recorded. Significant negative events, including losses in future periods, wouldmake it reasonably possible that valuation allowances against deferred taxassets would be required in future periods.

 

**Results of Operations**

 

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

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **August 29,**    | ** ** | **August 30,**  | ** ** | **August 29,** | ** ** | **August 30,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                    |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Merchandise,  buying and occupancy costs      |       | 65.4                   |       | 61.3                 |       | 63.9 |   | 58.3 |   |
| Selling,  general and administrative expenses |       | 31.8                   |       | 31.3                 |       | 30.9 |   | 29.5 |   |
| Depreciation  and amortization                |       | 6.2                    |       | 5.2                  |       | 5.7 |   | 4.6 |   |
| Operating  income (loss)                      |       | (3.4                   | )          | 2.2                  |       | (0.5 | ) | 7.6 |   |
| Other  income                                 |       | 0.2                    |       | 0.5                  |       | 0.2 |   | 0.5 |   |
| Income  tax provision (benefit)               |       | (1.1                   | )          | 1.1                  |       | (0.1 | ) | 3.2 |   |
| Income  (loss) from continuing operations     |       | (2.1                   | )          | 1.6                  |       | (0.2 | ) | 4.9 |   |
| Loss  on discontinued operations, net of tax  |       | —                 |       | (0.9                 | )          | — |   | (0.6 | ) |
| Net  income (loss)                            |       | (2.1                   | )%         | 0.7                  | %          | (0.2 | )% | 4.3 | % |

 

**Three Months Ended August 29, 2009 Comparedto Three Months Ended August 30, 2008**

 

***NetSales from Continuing Operations.**** *Net sales from continuing operations forthe three months ended August 29, 2009 were $101.2 million, a decrease of$27.3 million or approximately 21%, from $128.5 million for the three monthsended August 30, 2008.  The Company’ssales were negatively impacted in the second quarter of fiscal 2010 by thechallenging macro-economic environment. Continued instability in the housing market and higher levels ofunemployment, combined with general economic uncertainty, impacted consumerspending patterns, particularly for discretionary retail purchases.

 

The Company’s same storesales from continuing operations for the second quarter of fiscal 2010 declined22% when compared to the corresponding period in fiscal 2009.  This decrease was primarily due to fewer 

 

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transactions per storeand fewer units sold overall, partially offset by an increase in average unitretail.  Average transaction value wasessentially flat for the quarter compared to the prior year period.

 

The decline in same storesales was partially offset by an increase in sales at the Company’s twoe-commerce websites.  The Companyoperated 811 stores at August 29, 2009, compared to 818 stores, excludingAcorn stores, as of August 30, 2008.

 

***Merchandise,Buying and Occupancy Costs. ***Merchandise, buying and occupancy costs,exclusive of depreciation and amortization, were $66.2 million, or 65.4% of netsales, during the second quarter of fiscal 2010, compared to $78.7 million, or61.3% of net sales, during the same period in fiscal 2009, resulting inapproximately 410 basis points of deleverage compared to the prior year period.

 

As merchandisemargins were essentially flat in the second quarter of fiscal 2010 compared tothe second quarter of fiscal 2009, the decline in gross profit margin wasessentially due to deleveraging of buying and occupancy expenses associatedwith the 22% decline in same store sales.

 

***Selling,General and Administrative Expenses. ***Selling, general and administrativeexpenses for the three months ended August 29, 2009 were $32.2 million, or31.8% of net sales, compared to $40.2 million, or 31.3% of net sales, for thethree months ended August 30, 2008, resulting in approximately 50 basispoints of deleverage.

 

SG&A expenseswere reduced by approximately $8.0 million in the second quarter of fiscal 2010compared to the second quarter of fiscal 2009 primarily as a result of theCompany’s cost reduction efforts. Significant savings were realized in store payroll and otherstore-related operating expenses, marketing expenditures, benefits andIT-related costs.  Approximately $0.02per share of the savings realized in the second quarter was non-recurring,related to lower compensation costs and a legal settlement.

 

***Depreciationand Amortization.***  Depreciation and amortizationwas $6.3 million, or 6.2% of net sales, in the second quarter of fiscal 2010,compared to $6.7 million, or 5.2% of net sales, in the second quarter of fiscal2009.  The decrease in the amount ofdepreciation and amortization resulted from a reduction of capital expendituresin fiscal 2010 compared to fiscal 2009 and from asset impairment chargesrecorded in the fourth quarter of fiscal 2009. Capital expenditures in the first half of fiscal 2010 totaled $3.4million, compared to $12.9 million in the first half of fiscal 2009, whileapproximately $4.6 million of asset impairment charges were recorded in thefourth quarter of fiscal 2009.

 

***OperatingIncome (Loss). ***Based on the foregoing, the Companyrecorded an operating loss of $3.5 million, or 3.4% of net sales for the quarterended August 29, 2009, compared to operating income of $2.8 million, or2.2% of net sales for the quarter ended August 30, 2008.

 

***OtherIncome. ***For the three months ended August 29,2009, other income included interest income of $78,000 and $150,000 ofunrealized gains on short-term investments. In the three months ended August 30, 2008, other income consistedsolely of $586,000 of interest income. The decrease in interest income resulted from lower interest rates oncash, cash-equivalents and investments in the second quarter of fiscal 2010compared to the second quarter of fiscal 2009.

 

***IncomeTaxes. ***Income tax benefit in the second quarterof fiscal 2010 was $1.1 million, with an effective tax rate of 34.4%, comparedto income tax expense of $1.3 million, with an effective tax rate of 39.8%, inthe second quarter of fiscal 2009.  Thedecrease in the effective tax rate primarily resulted from the impact ofpermanent timing differences and state income taxes.

 

Income taxes for fiscal2009 were allocated to continuing and discontinued operations based on themethodology required by Financial Accounting Interpretation No. 18 (“FIN18”), whereby income taxes are computed with and without the impact of resultsfrom discontinued operations and the difference in taxes between thesecomputations is allocated to discontinued operations.

 

***Income(Loss) from Continuing Operations.***  As a result ofthe foregoing factors, the Company reported a net loss from continuingoperations of $2.1 million, or 2.1% of net sales, for the three months ended August 29,2009, compared to income from continuing operations of $2.0 million, or 1.6% ofnet sales, for the three months ended August 30, 2008.

 

***Losson Discontinued Operations, Net of Tax.***  The Companyreported a pre-tax loss on discontinued operations of $2.0 million for thethree months ended August 30, 2008 related to store-level operating lossesat the 

 

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Company’s Acornstores and impairment charges related to Acorn store assets.  Net of tax, the loss on discontinuedoperations was $1.2 million.  There wereno expenses related to discontinued operations recorded during the quarterended August 29, 2009.

 

***NetIncome (Loss). ***As a result of the foregoing factors, theCompany recorded a net loss of $2.1 million, or 2.1% of net sales and ($0.06)per share, for the three months ended August 29, 2009, compared to netincome of $0.8 million, or 0.7 % of net sales and $0.02 per diluted share, forthe three months ended August 30, 2008.

 

**Six Months Ended August 29, 2009 Compared toSix Months Ended August 30, 2008**

 

***NetSales from Continuing Operations.**** *Net sales from continuing operations forthe six months ended August 29, 2009 were $221.5 million, a decrease of$62.3 million, or approximately 22%, from $283.8 million for the six monthsended August 30, 2008.  The Company’ssales were negatively impacted in the first six months of fiscal 2010 by thechallenging macro-economic environment. Continued instability in the housing market and higher levels ofunemployment, combined with general economic uncertainty, impacted consumerspending patterns, particularly for discretionary retail purchases.

 

The Company’s same storesales from continuing operations for the first half of fiscal 2010 declined 23%when compared to the corresponding period in fiscal 2009.  This decrease was primarily due to fewertransactions per store and fewer units sold overall, partially offset by anincrease in average unit retail.  Inaddition, the average transaction value declined slightly in the first half ofthe year compared to the first six months of fiscal 2009.

 

The decline in same storesales was partially offset by an increase in sales at the Company’s twoe-commerce websites.  The Companyoperated 811 stores at August 29, 2009, compared to 818 stores, excludingAcorn stores, as of August 30, 2008.

 

***Merchandise,Buying and Occupancy Costs. ***Merchandise, buying and occupancy costs,exclusive of depreciation and amortization, were $141.6 million, or 63.9% ofnet sales, during the first six months of fiscal 2010, compared to $165.4million, or 58.3% of net sales, during the same period in fiscal 2009,resulting in approximately 560 basis points of deleverage compared to the prioryear period.

 

The decline ingross profit margin in the first half of fiscal 2010, compared to the firsthalf of fiscal 2009, was attributable to erosion of merchandise margins due toelevated markdown levels and promotional activity in the first quarter anddeleveraging of buying and occupancy costs in both the first and secondquarters associated with the 23% decline in same store sales.

 

***Selling,General and Administrative Expenses. ***Selling, general and administrativeexpenses for the six months ended August 29, 2009 were $68.4 million, or30.9% of net sales, compared to $83.8 million, or 29.5% of net sales, for thesix months ended August 30, 2008, resulting in approximately 140 basis pointsof deleverage.

 

SG&A expenseswere reduced by approximately $15.4 million in the first six months of fiscal2010 compared to the first half of fiscal 2009 primarily as a result of theCompany’s cost reduction initiative. Significant savings were realized in store payroll and otherstore-related operating expenses, marketing expenditures, travel, benefits andIT-related costs.  Approximately $0.02per share of the savings realized in the second quarter of fiscal 2010 wasnon-recurring, related to lower compensation costs and a legal settlement.

 

***Depreciationand Amortization.***  Depreciation and amortizationwas $12.6 million, or 5.7% of net sales, in the first six months of fiscal2010, compared to $13.1 million, or 4.6% of net sales, in the first six monthsof fiscal 2009.  The decrease in theamount of depreciation and amortization resulted from a reduction of capitalexpenditures in fiscal 2010 compared to fiscal 2009 and from asset impairmentcharges recorded in the fourth quarter of fiscal 2009.  Capital expenditures in the first half offiscal 2010 totaled $3.4 million, compared to $12.9 million in the first halfof fiscal 2009, while approximately $4.6 million of asset impairment chargeswere recorded in the fourth quarter of fiscal 2009.

 

***OperatingIncome (Loss). ***Based on the foregoing, the Companyrecorded an operating loss of $1.0 million, or 0.5% of net sales for the sixmonths ended August 29, 2009, compared to operating income of $21.5million, or 7.6% of net sales for the six months ended August 30, 2008.

 

***OtherIncome. ***For the six months ended August 29,2009, other income included interest income of $193,000 and $150,000 ofunrealized gains on short-term investments. In the six months ended August 30, 2008, 

 

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other incomeconsisted solely of $1.4 million of interest income.  The decrease in interest income resulted fromlower interest rates on cash, cash-equivalents and investments in the firsthalf of fiscal 2010 compared to the first half of fiscal 2009.

 

***IncomeTaxes. ***Income tax benefit in the first half offiscal 2010 was $0.2 million, with an effective tax rate of 34.2%, compared toincome tax expense of $9.1 million, with an effective tax rate of 39.8%, in thefirst half of fiscal 2009.  The decreasein the effective tax rate primarily resulted from the impact of permanenttiming differences and state income taxes.

 

Income taxes for fiscal2009 were allocated to continuing and discontinued operations based on themethodology required by Financial Accounting Interpretation No. 18 (“FIN18”), whereby income taxes are computed with and without the impact of resultsfrom discontinued operations and the difference in taxes between thesecomputations is allocated to discontinued operations.

 

***Income(Loss) from Continuing Operations.***  As a result ofthe foregoing factors, the Company reported net loss from continuing operationsof $0.4 million, or 0.2% of net sales, for the six months ended August 29,2009, compared to income from continuing operations of $13.8 million, or 4.9%of net sales, for the six months ended August 30, 2008.

 

***Losson Discontinued Operations, Net of Tax.***  The Companyreported a pre-tax loss on discontinued operations of $2.8 million for the sixmonths ended August 30, 2008 related to store-level operating losses atthe Company’s Acorn stores and impairment charges related to Acorn storeassets.  Net of tax, the loss ondiscontinued operations was $1.7 million. There were no expenses related to discontinued operations recordedduring the six months ended August 29, 2009.

 

***NetIncome (Loss). ***As a result of the foregoing factors, theCompany recorded a net loss of $0.4 million, or 0.2% of net sales and ($0.01)per share, for the six months ended August 29, 2009, compared to netincome of $12.1 million, or 4.3 % of net sales and $0.34 per diluted share, forthe six months ended August 30, 2008.

 

**Liquidity and Capital Resources**

 

The Company’s principalon-going cash requirements are to fund working capital needs such as purchasingmerchandise inventory, financing the construction of new stores, remodeling ofcertain existing stores and making information technology-related and other capitalexpenditures.  Merchandise purchases varyon a seasonal basis, peaking in the fall. As a result, the Company’s cash requirements historically reach theirpeak in October or November, during the Company’s third fiscalquarter.  Conversely, the Company’s cashbalances typically peak for the year in January, during the Company’s fourthfiscal quarter, after the holiday season is completed.

 

*Net cash provided by operatingactivities*

 

Net cash provided byoperating activities totaled $12.2 million in the first six months of fiscal2010, a decrease of approximately $5.4 million from $17.6 million for the firstsix months of fiscal 2009.  The decreasewas primarily a result of a $12.6 million decrease in net income, partiallyoffset by a $7.1 million decrease in prepaid income taxes.

 

Significant fluctuationsin the Company’s working capital accounts in the first half of fiscal 2010included an $11.0 million decrease in prepaid income taxes, a $4.5 milliondecrease in accrued liabilities and a $2.4 million decrease in accountspayable.  The decrease in prepaid incometaxes was due to refunds received on estimated tax payments made during thefirst half of fiscal 2009.  The decreasein accrued liabilities primarily resulted from a $3.7 million decline in theamount of outstanding gift cards combined with a $0.8 million decrease inaccrued payroll and severance charges. The decrease in accounts payable in the first six months of fiscal 2010resulted from shifts in the timing of merchandise inventory payments.

 

The remainder of thechange in cash provided by operating activities was substantially the result ofa net loss recorded during the first six months of fiscal 2010, after adjustingfor non-cash items, including depreciation and amortization expense, deferredincome taxes, stock-based compensation expense, loss on the disposal offurniture, fixtures and equipment and various other changes in the Company’sother operating assets and liabilities.

 

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*Net cash used in investingactivities*

 

Net cash used ininvesting activities in the first six months of fiscal 2010 consisted of $3.4million of capital expenditures.  TheCompany opened four new stores during the first half of fiscal 2010.  The Company also made other investments inits stores, corporate office and distribution center facility during the sixmonths ended August 29, 2009.  TheCompany expects to fund approximately $5 million to $6 million of additionalcapital expenditures in the last two quarters of fiscal 2010.

 

*Net cash used in financingactivities*

 

Net cash of $4.2 millionwas used in the first six months of fiscal 2010 for the payment of two quarterlycash dividends.

 

The Company anticipatesits cash and cash equivalents, combined with cash flows from operations, willbe sufficient to meet its capital expenditure, working capital and otherliquidity requirements for the remainder of fiscal 2010.

 

*Credit facility*

 

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

 

Loans under the CreditFacility bear interest at the prime rate minus 0.25%.  As of August 29, 2009, the prime ratewas 3.25%.  The Credit Facility alsoprovides the Company with the ability to borrow under the Credit Facility at aninterest rate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tiedto the one, three, or six month LIBOR rate based on the length of time thecorresponding advance is outstanding.

 

Interest under theCredit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unusedportion of the facility as defined in the agreement, a collateral monitoringfee and a guarantee service charge.  Forthe six months ended August 29, 2009, fees and charges related to theCredit Facility totaled $27,663. Borrowings under the Credit Facility are collateralized by the Company’sequipment, intangible assets, inventory, inventory letters of credit and letterof credit rights.  The Company had norevolving credit loan borrowings under the Credit Facility during the first sixmonths of fiscal 2010 or 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 August 29, 2009was $26.0 million. The Company had no outstanding letters of credit as of August 29,2009.  Accordingly, the availability ofrevolving credit loans under the Credit Facility was $26.0 million at August 29,2009.

 

The CreditFacility contains certain restrictive covenants, including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of August 29, 2009,the most recent measurement date, the Company was in compliance with all of therestrictive covenants under the Credit Facility.

 

*Auction Rate Securities*

 

As of August 29,2009, the Company had approximately $16.4 million of short-term investments,which consisted solely of $19.3 million of auction rate securities (“ARS”) atcost, less a fair value adjustment of approximately $2.9 million.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS are expected to be held.

 

Substantially all of the Company’s ARS are collateralized by studentloans. As of August 29, 2009, a majority of its ARS had AAA (Standard &Poor’s), Aaa (Moody’s), or AAA (Fitch) credit ratings.  As of August 29, 2009, the repayment ofapproximately 80% of the student loans, which serve as collateral for the ARSheld by the Company, was substantially backed by the United Statesgovernment.  Until February 2008,the ARS market was liquid and auctions for ARS held by the Company did notfail. However, beginning in February 2008, auctions for the ARS held bythe Company began to fail and have continued to fail up to and as of the dateof this report.

 

Based on current marketconditions, management believes that it is likely that auctions related to theCompany’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited the 

 

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Company’s ability toaccess these funds.  Managementanticipates the liquidity of the ARS will continue to be restricted until thereis a successful auction, such time as another market for the ARS develops, theARS are called by the issuer or they are redeemed as described below.

 

All of the ARS owned bythe Company were purchased through UBS Financial Services, Inc., asubsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, byUBS.  In November 2008, the Companyaccepted a settlement offer from UBS to restore liquidity to its clients whohold ARS.  The settlement grants theCompany certain ARS rights.  These ARSrights provide the Company the ability to redeem its ARS at par during atwo-year time period beginning June 30, 2010.  During this time, the Company may choose tocontinue to hold some, or all, of its ARS and earn interest or sell some, orall, of its ARS to UBS at par plus accrued interest.  The ARS rights are not transferable, tradableor marginable and will not be listed or quoted on any securities or exchange orany electronic communications network. The Company reclassified its ARS to short-term during the second quarterof fiscal 2010.

 

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

 

The fair value of the ARS rights was estimated utilizing theBlack-Scholes option pricing model and the forward contract method.  As of August 29, 2009, the fair value ofthe ARS rights was determined to be approximately $2.7 million and the ARSrights were recorded within other current assets on the consolidated financialstatements.

 

Prior to acceptance of the UBS settlement offer, the Company classifiedits ARS as available-for-sale securities. As of August 30, 2008, the Company had approximately $18.5 millionof long-term investments consisting solely of $19.5 million of ARS, less avaluation allowance of $1.0 million, which reflected management’s estimate offair value given the current lack of liquidity of these investments whiletaking into account the current credit quality of the underlying securities.

 

**MerchandiseSourcing**

 

In fiscal 2009,the Company underwent a significant shift in its sourcing structure by aligningitself with new key suppliers with expertise along all of the Company’smerchandise categories.  As a result ofpartnering with these new vendors, the Company was able to diversify country ofproduction, improve payment terms, increase flexibility and reduce risk.  Prior to fiscal 2009, the Company directlyimported the majority of its goods as the declared importer of record.  The Company directly imported approximately7% of its total merchandise purchases in the six month period ended August 29,2009, down from 70% for the six months ended August 30, 2008.  Substantially all of its remainingmerchandise purchases were made from U.S.-based companies who import goods fromoverseas.  This reliance on sourcing fromforeign countries may cause the Company to be exposed to certain risks asindicated below and as discussed in Part I, “Item 1A. Risk Factors” in theCompany’s Annual Report on Form 10-K for the year ended February 28,2009.

 

Importrestrictions, including tariffs and quotas, and changes in such restrictions,could affect the import of apparel and might result in increased costs, delaysin merchandise receipts and/or reduced supplies of apparel available to theCompany, and could therefore have an adverse effect on the Company’s financialcondition, results of operations and liquidity. The Company’s merchandise flow could also be adversely affected bypolitical instability in any of the countries in which its merchandise ismanufactured or by changes in the United States’ governmental policies towardsuch foreign countries.  In addition,merchandise receipts could be delayed due to interruptions in air, ocean andground shipments.

 

**The Company does not havelong-term purchase commitments or arrangements with any of its suppliers oragents. **During the three and six monthperiods ended August 29, 2009, two of the Company’s vendors each suppliedthe Company with greater than 10% of its merchandise inventory purchases.  For the second quarter of fiscal 2010, thesetwo vendors supplied approximately 26% and 17% of the Company’s merchandisepurchases, and for the six month period ended August 29, 2009, the twovendors supplied approximately 26% and 15% of the Company’s merchandisepurchases.

** **

**Although the Company has positiverelationships with these two vendors, there can be no assurance that theserelationships can be maintained in the future or that the vendors will continueto supply merchandise to the Company.  If there should be any significantdisruption in the supply of merchandise from these vendors,**

 

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** **

**management believes that it will be able to shiftproduction to other suppliers so as to continue to secure the required volumeof merchandise.  Nevertheless, it is possible that any significant disruptionin supply could have a material adverse impact on the Company’s financialposition or results of operations.**

** **

**In the six months ended August 30,2008, the Company purchased approximately 42% of its merchandise through onebuying agent (the “Agent”).  The Companyand the Agent terminated their sourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase anymerchandise through the Agent in the first six months of fiscal 2010.**

** **

**QuarterlyResults and Seasonality**

 

The Company’squarterly results may fluctuate significantly depending on a number of factors,including general economic conditions, timing of promotional events and newstore openings, adverse weather conditions, shifts in the timing of certain holidaysand 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 higher gasolineand food costs, had a negative effect on the Company’s results of operationsduring the first and second quarters of fiscal 2009.  Management does not believe that inflationhad a material effect on the Company’s results of operations in the third andfourth quarters of fiscal 2009 or the first half of fiscal 2010.

 

**Forward-Looking Statements**

 

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

 

The words or phrases “will likely result,” “areexpected to,” “will continue,” “estimate,” “project,” “believe,” “expect,” “anticipate,”“forecast,” “plans to,” “intend,” “intends” and similar expressions areintended to identify forward-looking statements 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 February 28, 2009, aswell as other factors, could affect the Company’s performance and could causethe Company’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 to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market riskinherent in the Company’s financial instruments and in its financial positionrepresents the potential loss arising from adverse changes in interestrates.  The Company’s results ofoperations could be negatively impacted by decreases in interest rates on itsinvestments, including its investments in ARS. Please see 

 

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Note 3 to theConsolidated Financial Statements and MD&A for further informationregarding the Company’s investments in ARS.

 

The Company ispotentially exposed to market risk from changes in interest rates relating toits Credit Facility with Wells Fargo. Loans under the Credit Facility bear interest at Wells Fargo’s primerate, 3.25% as of August 29, 2009, less 0.25%, or the one, three, or sixmonth LIBOR rate, based on the length of time the advance is outstanding.  However, the Company had no revolving creditloan borrowings under the Credit Facility during the first six months of fiscal2010 or fiscal 2009.  Given its existingliquidity position, the Company does not expect to utilize the Credit Facilityin the reasonably foreseeable future other than to potentially use letters ofcredit to support the import of merchandise.

 

The Company entersinto certain purchase obligations outside the United States, which aredenominated and settled in U.S. dollars. Therefore, the Company has only minimal exposure to foreign currencyexchange risks.  The Company does nothedge against foreign currency risks and believes that its foreign currencyexchange risk is immaterial.

 

The Company doesnot have any derivative financial instruments and does not hold any derivativefinancial instruments for trading purposes.

 

**ITEM 4.**

**CONTROLS AND PROCEDURES**

 

*(a)*       Evaluation of Disclosure Controls 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 Over Financial Reporting.

* *

There have not been anychanges in the Company’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the three months ended August 29, 2009 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1.**

**LEGAL PROCEEDINGS**

 

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

 

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**ITEM1A.**

**RISK FACTORS**

 

The factorsdiscussed in Part I, “Item 1A. Risk Factors” in the Company’s AnnualReport on Form 10-K for the year ended February 28, 2009 should becarefully considered as they could materially affect the Company’s business,financial condition or future results. There have been no material changes from the risk factors disclosed inthe Company’s Annual Report on Form 10-K for the fiscal year ended February 28,2009.

 

**ITEM 2.**

**UNREGISTERED SALES OF EQUITY**

**SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.**

**DEFAULTS UPON**

**SENIOR SECURITIES**

 

None.

 

**ITEM 4.**

**SUBMISSION OF MATTERS TO**

**A VOTE OF SECURITY HOLDERS**

 

The Company heldits annual meeting of stockholders on July 29, 2009, in Minneapolis, Minnesota.  The Company solicited proxies and filed adefinitive proxy statement with the United States Securities and ExchangeCommission pursuant to Regulation 14A. Holders of 33,954,525 shares of the Company’s common stock were presentin person, or by proxy, representing 95.59% of the Company’s 35,519,237 sharesof common stock entitled to vote on the record date.  The matters voted upon and the votes cast atthe meeting were as follows:

 

Item 1.             Electionof two Class III Directors (for a term of three years expiring in 2012):

 
| **Vote**                 | ** ** |
|--------------------------|------------|
| **Director**             | ** ** | **For** | ** ** | **Withheld** | ** ** |
| Mark  A. Cohn            |       | 27,200,141 |   | 6,754,384 |   |
| James  J. Fuld, Jr. |       | 27,043,866 |   | 6,910,659 |   |

 

Other individualswhose term of office as Director continued after the Company’s annual meetingincluded Larry C. Barenbaum, Martin L. Bassett, Robert Ezrilov, Anne L. Jones,and Lorna E. Nagler.

 

Item 2.             Proposalto Approve the Christopher & Banks Corporation 2009 Qualified AnnualIncentive Plan:

 
| **Vote**   | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
| 33,360,194 |       | 574,504 |   | 19,827 |   | — |   |

 

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Item 3.           Ratificationof the selection of PricewaterhouseCoopers LLP as the Company’s IndependentRegistered Public Accounting Firm for the fiscal year ending February 27,2010:

 
| **Vote**   | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
| 33,427,966 |       | 509,367 |   | 17,192 |   | — |   |

 

Item 4.           Considerationof a stockholder proposal requesting that the Board of Directors take thenecessary steps to declassify the Board of Directors:

 
| **Vote**   | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
| 26,327,687 |       | 5,738,471 |   | 62,403 |   | 1,825,964 |   |

 

**ITEM 5.**

**OTHER INFORMATION**

 

None.

 

**ITEM 6.**

**EXHIBITS**

 
| 10.1   |   | Christopher &  Banks Corporation 2009 Qualified Annual Incentive Plan (incorporated herein  by reference to Exhibit 10.1 to Current Report on Form 8-K filed on  August 4, 2009) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                     |
| 31.1*  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                    |
|   |   |                                                                                                                                                                                                     |
| 31.2*  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                         |
|   |   |                                                                                                                                                                                                     |
| 32.1*  |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                        |
|   |   |                                                                                                                                                                                                     |
| 32.2*  |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                        |

 

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*Filed with this report.

 

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**SIGNATURES**

 

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

 

 
| ** ** | ** **           | **CHRISTOPHER &  BANKS CORPORATION** |
|------------|----------------------|-----------------------------------------------|
| ** ** | ** **           | ** **                                    |
|       |                 |                                          |   |
| Dated:     | October 8, 2009 | By                                            | /S/ LORNA E. NAGLER |
|       |                 |                                          |   |
|       |                 |                                          | Lorna E. Nagler |
|       |                 |                                          | President and Chief  Executive Officer |
|       |                 |                                          | (Principal Executive  Officer) |
|       |                 |                                          |   |
|       |                 |                                          |   |
| Dated:     | October 8, 2009 | By                                            | /S/ RODNEY CARTER |
|       |                 |                                          |   |
|       |                 |                                          | Rodney Carter |
|       |                 |                                          | Executive Vice  President, |
|       |                 |                                          | Chief Financial Officer |
|       |                 |                                          | (Principal Financial  Officer) |

 

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**CHRISTOPHER & BANKSCORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                          |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                     |
| 10.1                 |       | Christopher &  Banks Corporation 2009 Qualified Annual Incentive Plan (incorporated herein  by reference to Exhibit 10.1 to Current Report on Form 8-K filed on  August 4, 2009) |
|                 |       |                                                                                                                                                                                                     |
| 31.1*                |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                    |
|                 |       |                                                                                                                                                                                                     |
| 31.2*                |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                         |
|                 |       |                                                                                                                                                                                                     |
| 32.1*                |       | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                        |
|                 |       |                                                                                                                                                                                                     |
| 32.2*                |       | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                        |

 

----

* Filed with thisreport.

 

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