Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**                                                    | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  | ** ** |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|------------|
|                                                     |                                                                                                     |       |
| **For the quarterly period ended  August 28, 2010** |
|                                                     |
| **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 asspecified in its charter)

 

| **Delaware**                    | ** ** | **06 - 1195422**    |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

| **2400 Xenium Lane North,  Plymouth, Minnesota** | ** ** | **55441**  |
|--------------------------------------------------|------------|------------|
| (Address of principal  executive offices)        |       | (Zip Code) |

 

**(763) 551-5000**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. YES x    NO o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES o    NO o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “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 check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). YES o    NO x

 

Asof September 25, 2010, 35,844,154 shares of the registrant’s common stockwere outstanding.

 

 

 

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Table of Contents

 

**CHRISTOPHER & BANKSCORPORATION**

** **

**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 28, 2010, February 27, 2010 and August 29, 2009       | 3        |
|       |                                                                                                                                |     |
|       | Condensed Consolidated Income Statement (Unaudited)  For the Three Months Ended August 28, 2010 and August 29, 2009       | 4        |
|       |                                                                                                                                |     |
|       | Condensed Consolidated Income Statement (Unaudited)  For the Six Months Ended August 28, 2010 and August 29, 2009         | 5        |
|       |                                                                                                                                |     |
|       | Condensed Consolidated Statement of Cash Flows  (Unaudited)  For the Six Months Ended August 28, 2010 and August 29, 2009 | 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                                                                                                                        | 29       |
|       |                                                                                                                                |     |
| Item 2.    | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                        | 29       |
|       |                                                                                                                                |     |
| Item 3.    | Defaults Upon Senior Securities                                                                                                     | 29       |
|       |                                                                                                                                |     |
| Item 4.    | (Removed and Reserved)                                                                                                              | 30       |
|       |                                                                                                                                |     |
| Item 5.    | Other Information                                                                                                                   | 30       |
|       |                                                                                                                                |     |
| Item 6.    | Exhibits                                                                                                                            | 30       |
|       |                                                                                                                                |     |
|       | Signatures                                                                                                                          | 31       |
|       |                                                                                                                                |     |
|       | Index  to Exhibits                                                                                                                  | 32       |

 

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

 

**ITEM 1.**

**FINANCIAL STATEMENTS**

**CHRISTOPHER & BANKSCORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEET**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                        | ** ** | **August 28,** | ** ** | **February 27,** | ** ** | **August 29,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                                                                                        | ** ** | **2010**            | ** ** | **2010**              | ** ** | **2009**            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                        | ** ** | ** **          | ** ** | ** **            |       |                |       |
| Current assets:                                                                                                                                                                                                                                   |       |                |       |                  |       |                |       |
| Cash and cash equivalents                                                                                                                                                                                                                         |       | $                   | 37,760     |                  | $          | 37,073              |       | $ | 83,384 |   |
| Short-term investments                                                                                                                                                                                                                            |       | 58,231              |       | 62,251                |       | 16,400              |       |
| Accounts receivable                                                                                                                                                                                                                               |       | 5,136               |       | 4,245                 |       | 3,728               |       |
| Merchandise inventories                                                                                                                                                                                                                           |       | 40,109              |       | 38,496                |       | 38,285              |       |
| Prepaid expenses                                                                                                                                                                                                                                  |       | 3,213               |       | 1,642                 |       | 2,768               |       |
| Income taxes receivable                                                                                                                                                                                                                           |       | 1,195               |       | 394                   |       | 7,750               |       |
| Current deferred tax asset                                                                                                                                                                                                                        |       | 4,376               |       | 3,509                 |       | 3,779               |       |
| Other current assets                                                                                                                                                                                                                              |       | —              |       | 2,000                 |       | 2,650               |       |
| Total current assets                                                                                                                                                                                                                              |       | 150,020             |       | 149,610               |       | 158,744             |       |
|                                                                                                                                                                                                                                              |       |                |       |                  |       |                |       |
| Property, equipment and improvements, net                                                                                                                                                                                                         |       | 88,466              |       | 96,109                |       | 109,751             |       |
| Long-term investments                                                                                                                                                                                                                             |       | 13,408              |       | 13,622                |       | —              |       |
| Deferred tax asset                                                                                                                                                                                                                                |       | 8,600               |       | 7,631                 |       | 6,597               |       |
| Other assets                                                                                                                                                                                                                                      |       | 317                 |       | 325                   |       | 326                 |       |
| Total assets                                                                                                                                                                                                                                      |       | $                   | 260,811    |                  | $          | 267,297             |       | $ | 275,418 |   |
|                                                                                                                                                                                                                                              |       |                |       |                  |       |                |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                     |       |                | ** ** | ** **            | ** ** | ** **          | ** ** |
| Current liabilities:                                                                                                                                                                                                                              |       |                |       |                  |       |                |       |
| Accounts payable                                                                                                                                                                                                                                  |       | $                   | 11,841     |                  | $          | 13,654              |       | $ | 16,121 |   |
| Accrued salaries, wages and related expenses                                                                                                                                                                                                      |       | 7,890               |       | 8,472                 |       | 8,860               |       |
| Other accrued liabilities                                                                                                                                                                                                                         |       | 17,129              |       | 19,164                |       | 18,290              |       |
| Other current liabilities                                                                                                                                                                                                                         |       | —              |       | —                |       | 487                 |       |
| Total current liabilities                                                                                                                                                                                                                         |       | 36,860              |       | 41,290                |       | 43,758              |       |
| Non-current liabilities:                                                                                                                                                                                                                          |       |                |       |                  |       |                |       |
| Deferred lease incentives                                                                                                                                                                                                                         |       | 17,245              |       | 19,578                |       | 21,443              |       |
| Other                                                                                                                                                                                                                                             |       | 11,881              |       | 12,699                |       | 13,838              |       |
| Total non-current liabilities                                                                                                                                                                                                                     |       | 29,126              |       | 32,277                |       | 35,281              |       |
|                                                                                                                                                                                                                                              |       |                |       |                  |       |                |       |
| Commitments                                                                                                                                                                                                                                       |       | —              |       | —                |       | —              |       |
| Stockholders’ equity:                                                                                                                                                                                                                        |       |                |       |                  |       |                |       |
| Preferred stock — $0.01 par value, 1,000 shares authorized,  none outstanding                                                                                                                                                           |       | —              |       | —                |       | —              |       |
| Common stock — $0.01 par value, 74,000 shares authorized,  45,635, 45,735 and 45,788 shares issued and 35,844, 35,944 and 35,997 shares  outstanding at August 28, 2010, February 27, 2010 and  August 29, 2009, respectively |       | 456                 |       | 457                   |       | 458                 |       |
| Additional paid-in capital                                                                                                                                                                                                                        |       | 115,109             |       | 113,584               |       | 112,606             |       |
| Retained earnings                                                                                                                                                                                                                                 |       | 191,890             |       | 192,361               |       | 196,027             |       |
| Common stock held in treasury, 9,791 shares at cost  at August 28, 2010, February 27, 2010 and August 29, 2009,  respectively                                                                                                      |       | (112,712            | )          | (112,711              | )          | (112,712            | )          |
| Accumulated other comprehensive income                                                                                                                                                                                                            |       | 82                  |       | 39                    |       | —              |       |
| Total stockholders’ equity                                                                                                                                                                                                                   |       | 194,825             |       | 193,730               |       | 196,379             |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                   |       | $                   | 260,811    |                  | $          | 267,297             |       | $ | 275,418 |   |

 

**The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.**

 

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**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED INCOMESTATEMENT**

(In thousands, except per share data)

(Unaudited)

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **August 28,**              | ** ** | **August 29,** | ** ** |
| ** **                          | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net sales                           |       | $                                | 101,340    |   | $ | 101,182 |   |
|                                |       |                             |       |   |   |
| Costs and expenses:                 |       |                             |       |   |   |
| Merchandise, buying and occupancy   |       | 65,536                           |       | 66,152 |   |
| Selling, general and administrative |       | 33,795                           |       | 32,220 |   |
| Depreciation and amortization       |       | 6,434                            |       | 6,286 |   |
| Total costs and expenses            |       | 105,765                          |       | 104,658 |   |
|                                |       |                             |       |   |   |
| Operating loss                      |       | (4,425                           | )          | (3,476 | ) |
|                                |       |                             |       |   |   |
| Other income                        |       | 127                              |       | 228 |   |
|                                |       |                             |       |   |   |
| Loss before income taxes            |       | (4,298                           | )          | (3,248 | ) |
|                                |       |                             |       |   |   |
| Income tax benefit                  |       | (1,760                           | )          | (1,116 | ) |
|                                |       |                             |       |   |   |
| Net loss                            |       | $                                | (2,538     | ) | $ | (2,132 | ) |
|                                |       |                             |       |   |   |
| Basic earnings (loss) per share:    |       |                             |       |   |   |
| Net loss                            |       | $                                | (0.07      | ) | $ | (0.06 | ) |
|                                |       |                             |       |   |   |
| Basic shares outstanding            |       | 35,354                           |       | 35,176 |   |
|                                |       |                             |       |   |   |
| Diluted earnings (loss) per share:  |       |                             |       |   |   |
| Net loss                            |       | $                                | (0.07      | ) | $ | (0.06 | ) |
|                                |       |                             |       |   |   |
| Diluted shares outstanding          |       | 35,501                           |       | 35,176 |   |
|                                |       |                             |       |   |   |
| 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 INCOMESTATEMENT**

(In thousands, except per share data)

(Unaudited)

 
| ** **                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **August 28,**            | ** ** | **August 29,** | ** ** |
| ** **                          | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net sales                           |       | $                              | 227,574    |   | $ | 221,549 |   |
|                                |       |                           |       |   |   |
| Costs and expenses:                 |       |                           |       |   |   |
| Merchandise, buying and occupancy   |       | 138,393                        |       | 141,609 |   |
| Selling, general and administrative |       | 69,994                         |       | 68,364 |   |
| Depreciation and amortization       |       | 12,964                         |       | 12,597 |   |
| Total costs and expenses            |       | 221,351                        |       | 222,570 |   |
|                                |       |                           |       |   |   |
| Operating income (loss)             |       | 6,223                          |       | (1,021 | ) |
|                                |       |                           |       |   |   |
| Other income                        |       | 243                            |       | 343 |   |
|                                |       |                           |       |   |   |
| Income (loss) before income taxes   |       | 6,466                          |       | (678 | ) |
|                                |       |                           |       |   |   |
| Income tax provision (benefit)      |       | 2,664                          |       | (232 | ) |
|                                |       |                           |       |   |   |
| Net income (loss)                   |       | $                              | 3,802      |   | $ | (446 | ) |
|                                |       |                           |       |   |   |
| Basic earnings (loss) per share:    |       |                           |       |   |   |
| Net income (loss)                   |       | $                              | 0.11       |   | $ | (0.01 | ) |
|                                |       |                           |       |   |   |
| Basic shares outstanding            |       | 35,329                         |       | 35,134 |   |
|                                |       |                           |       |   |   |
| Diluted earnings (loss) per share:  |       |                           |       |   |   |
| Net income (loss)                   |       | $                              | 0.11       |   | $ | (0.01 | ) |
|                                |       |                           |       |   |   |
| Diluted shares outstanding          |       | 35,525                         |       | 35,134 |   |
|                                |       |                           |       |   |   |
| 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 28,**            | ** ** | **August 29,** | ** ** |
| ** **                                                                                | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                                                                                | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                                     |       |                           |       |   |   |
| Net income (loss)                                                                         |       | $                              | 3,802      |   | $ | (446 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                             |       | 12,964                         |       | 12,597 |   |
| Amortization of premium on investments                                                    |       | 243                            |       | — |   |
| Excess tax benefit on stock-based compensation                                            |       | (224                           | )          | — |   |
| Deferred income taxes                                                                     |       | (1,864                         | )          | (2,246 | ) |
| Stock-based compensation expense                                                          |       | 1,646                          |       | 848 |   |
| Loss on disposal of furniture, fixtures and  equipment                                    |       | 18                             |       | 130 |   |
| Gain on investments, net                                                                  |       | (56                            | )          | (150 | ) |
| Changes in operating assets and liabilities:                                              |       |                           |       |   |   |
| Sales of trading securities                                                               |       | 14,850                         |       | 200 |   |
| (Increase) decrease in accounts receivable                                                |       | (891                           | )          | 193 |   |
| (Increase) decrease in merchandise inventories                                            |       | (1,613                         | )          | 543 |   |
| Increase in prepaid expenses and other current  assets                                    |       | (1,571                         | )          | (972 | ) |
| (Increase) decrease in income taxes receivable                                            |       | (576                           | )          | 10,997 |   |
| Decrease in other assets                                                                  |       | 35                             |       | 133 |   |
| Decrease in accounts payable                                                              |       | (1,664                         | )          | (2,405 | ) |
| Decrease in accrued liabilities                                                           |       | (3,048                         | )          | (4,541 | ) |
| Decrease in deferred lease incentives                                                     |       | (2,333                         | )          | (2,063 | ) |
| Decrease in other liabilities                                                             |       | (818                           | )          | (590 | ) |
| Net cash provided by operating activities                                                 |       | 18,900                         |       | 12,228 |   |
|                                                                                      |       |                           |       |   |   |
| Cash flows from investing activities:                                                     |       |                           |       |   |   |
| Purchases of property, equipment and improvements                                         |       | (5,488                         | )          | (3,411 | ) |
| Purchases of investments                                                                  |       | (37,696                        | )          | — |   |
| Sales of investments                                                                      |       | 28,936                         |       | — |   |
| Net cash used in investing activities                                                     |       | (14,248                        | )          | (3,411 | ) |
|                                                                                      |       |                           |       |   |   |
| Cash flows from financing activities:                                                     |       |                           |       |   |   |
| Exercise of stock options                                                                 |       | 84                             |       | — |   |
| Excess tax benefit on stock-based compensation                                            |       | 224                            |       | — |   |
| Dividends paid                                                                            |       | (4,273                         | )          | (4,247 | ) |
| Net cash used in financing activities                                                     |       | (3,965                         | )          | (4,247 | ) |
|                                                                                      |       |                           |       |   |   |
| Net increase in cash and cash equivalents                                                 |       | 687                            |       | 4,570 |   |
|                                                                                      |       |                           |       |   |   |
| Cash and cash equivalents at beginning of period                                          |       | 37,073                         |       | 78,814 |   |
|                                                                                      |       |                           |       |   |   |
| Cash and cash equivalents at end of period                                                |       | $                              | 37,760     |   | $ | 83,384 |   |

 

**The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.**

 

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**CHRISTOPHER & BANKS CORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

(Unaudited)

 

**NOTE 1 — BASIS OF PRESENTATION**

 

The unaudited condensed consolidated financial statements included inthis Form 10-Q have been prepared by Christopher & BanksCorporation and its subsidiaries (the “Company”) pursuant to the rules andregulations of the United 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. Theseunaudited condensed consolidated financial statements should be read inconjunction with the audited financial statements and related notes included inthe Company’s Annual Report on Form 10-K for the fiscal year ended February 27,2010.

 

The results of operations for the interim periods shown in this reportare not necessarily indicative of results to be expected for the full fiscalyear.  In the opinion of management, theinformation contained herein reflects all adjustments, consisting of onlynormal adjustments, except as otherwise stated in these notes, necessary topresent fairly the Company’s financial position as of August 28, 2010, February 27,2010 and August 29, 2009, and its results of operations and cash flows forthe three and six month periods ended August 28, 2010 and August 29,2009.

 

*Loyalty Program*

 

During the first quarter of fiscal 2011, the Company launched itsFriendship Rewards loyalty program. Under the program, customers accumulatepoints based on purchase activity.  Oncea Friendship Rewards member achieves a certain point level, the member earnsawards certificates that may be redeemed for merchandise.  Points are accrued as unearned revenue andrecorded as a reduction of net sales and a current liability as they areaccumulated by members and certificates are earned.  The liability is recorded net of estimatedbreakage based on redemption patterns and trends.  The reward certificates expire approximatelysix weeks after issuance.

 

*Recently Adopted Accounting Pronouncements*

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2009-17, “Consolidations,” which seeks to improve financial reporting byrequiring that entities perform an analysis to determine whether any variableinterest or interests that they have give them a controlling financial interestin a variable interest entity.  TheCompany adopted ASU 2009-17 during the first quarter of fiscal 2011.  The adoption of ASU 2009-17 had no impact onthe Company’s financial statements.

 

InJanuary 2010, the FASB issued ASU 2010-06, “New Guidance andClarifications for Improving Disclosures about Fair Value Measurements.”  This guidance requires enhanced disclosuresregarding transfers in and out of the levels within the fair value hierarchy.  Separate disclosures are required fortransfers in and out of Level 1 and 2 fair value measurements, and thereasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separatedisclosures are required for purchases, sales, issuances, and settlements on agross basis.  The new disclosures andclarifications of existing disclosures are effective for interim and annualreporting periods beginning after December 15, 2009, except for thedisclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which areeffective for interim and annual reporting periods beginning afterDecember 15, 2010.  The Companyadopted the disclosure requirements effective February 28, 2010.  See Note 10, Fair Value Measurements, for theadditional disclosures required under the guidance. The Company intends toadopt the remaining Level 3 disclosure requirements effective February 27,2011.   The Company is in the process ofevaluating the additional disclosure requirements and does not expect that theadditional requirements will have a significant impact on its consolidatedfinancial statements.

 

*Recently Issued Accounting Pronouncements*

 

InOctober 2009, the FASB issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements.” ASU 2009-13 amendsAccounting Standards Codification (“ASC”) 605-10, “Revenue Recognition,” and addresses accounting formultiple-deliverable arrangements to enable vendors to account for products orservices (deliverables) separately rather than as a combined unit, and providesguidance regarding how to measure and allocate arrangement consideration to oneor more units of accounting.  ASU 2009-13is effective for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010.  Early adoption is permitted, but certainrequirements must be met.  The Company isin the process of evaluating ASU 2009-13 and does not expect that it will havea significant impact on its consolidated financial statements.

 

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**NOTE 2 — INVESTMENTS**

 

Investmentsconsisted of the following (in thousands):

 
| ** **                       | ** ** | **August 28, 2010** | ** ** |
|----------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Amortized**                 | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **Description**                  | ** ** | **Cost**                      | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
|                             |       |                          |       |   |   |   |   |   |   |
| Short-term investments:          |       |                          |       |   |   |   |   |   |   |
| Available-for-sale securities:   |       |                          |       |   |   |   |   |   |   |
| Variable rate demand obligations |       | $                             | 28,320     |   | $ | — |   | $ | — |   | $ | 28,320 |   |
| Municipal commercial paper       |       | 1,000                         |       | — |   | — |   | 1,000 |   |
| Municipal bonds                  |       | 23,087                        |       | 13 |   | 4 |   | 23,096 |   |
| U.S. Agency securities           |       | 5,800                         |       | 19 |   | 4 |   | 5,815 |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Trading securities:              |       |                          |       |   |   |   |   |   |   |
| Auction Rate Securities          |       | —                        |       | — |   | — |   | — |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Total short-term investments     |       | 58,207                        |       | 32 |   | 8 |   | 58,231 |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Long-term investments:           |       |                          |       |   |   |   |   |   |   |
| Available-for-sale securities:   |       |                          |       |   |   |   |   |   |   |
| Municipal bonds                  |       | 13,295                        |       | 119 |   | 6 |   | 13,408 |   |
| U.S. Agency securities           |       | —                        |       | — |   | — |   | — |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Total long-term investments      |       | 13,295                        |       | 119 |   | 6 |   | 13,408 |   |
|                             |       |                          |       |   |   |   |   |   |   |
| Total investments                |       | $                             | 71,502     |   | $ | 151 |   | $ | 14 |   | $ | 71,639 |   |

 
| ** **                       | ** ** | **February 27, 2010** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **Description**                  | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
|                             |       |                            |       |   |   |   |   |   |   |
| Short-term investments:          |       |                            |       |   |   |   |   |   |   |
| Available-for-sale securities:   |       |                            |       |   |   |   |   |   |   |
| Variable rate demand obligations |       | $                               | 24,900     |   | $ | — |   | $ | — |   | $ | 24,900 |   |
| Municipal commercial paper       |       | 1,000                           |       | — |   | — |   | 1,000 |   |
| Municipal bonds                  |       | 22,999                          |       | 28 |   | 11 |   | 23,016 |   |
| U.S. Agency securities           |       | 536                             |       | 1 |   | 2 |   | 535 |   |
|                             |       |                            |       |   |   |   |   |   |   |
| Trading securities:              |       |                            |       |   |   |   |   |   |   |
| Auction Rate Securities          |       | 12,800                          |       | — |   | — |   | 12,800 |   |
|                             |       |                            |       |   |   |   |   |   |   |
| Total short-term investments     |       | 62,235                          |       | 29 |   | 13 |   | 62,251 |   |
|                             |       |                            |       |   |   |   |   |   |   |
| Long-term investments:           |       |                            |       |   |   |   |   |   |   |
| Available-for-sale securities:   |       |                            |       |   |   |   |   |   |   |
| Municipal bonds                  |       | 6,572                           |       | 37 |   | 2 |   | 6,607 |   |
| U.S. Agency securities           |       | 7,002                           |       | 13 |   | — |   | 7,015 |   |
|                             |       |                            |       |   |   |   |   |   |   |
| Total long-term investments      |       | 13,574                          |       | 50 |   | 2 |   | 13,622 |   |
|                             |       |                            |       |   |   |   |   |   |   |
| Total investments                |       | $                               | 75,809     |   | $ | 79 |   | $ | 15 |   | $ | 75,873 |   |

 

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| ** **                   | ** ** | **August 29, 2009** | ** ** |
|------------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **Amortized**                 | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **Description**              | ** ** | **Cost**                      | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
|                         |       |                          |       |   |   |   |   |   |   |
| Trading securities:          |       |                          |       |   |   |   |   |   |   |
| Auction Rate Securities      |       | $                             | 16,400     |   | $ | — |   | $ | — |   | $ | 16,400 |   |
|                         |       |                          |       |   |   |   |   |   |   |
| Total short-term investments |       | 16,400                        |       | — |   | — |   | 16,400 |   |
|                         |       |                          |       |   |   |   |   |   |   |
| Total investments            |       | $                             | 16,400     |   | $ | — |   | $ | — |   | $ | 16,400 |   |

 

Inan effort to improve yield without increasing the risk of a loss in principal,the Company diversified its investment portfolio in fiscal 2010 to includeholdings of select, highly-rated, short-duration variable rate demandobligations, municipal bonds, municipal commercial paper and U.S. Agencysecurities.

 

TheCompany accounts for its investments in accordance with ASC 320-10, “Investments— Debt and Equity Securities” and, accordingly, its investment securities havebeen characterized as either available-for-sale or trading. As of August 28,2010, the Company’s available-for-sale investment securities were comprised ofvariable rate demand obligations, municipal bonds, municipal commercial paperand U.S. Agency securities.  Thesesecurities were classified as available-for-sale as the Company did not enterinto these investments for speculative purposes or intend to actively buy andsell the securities in order to generate profits on differences in price.  The Company’s primary investment objective ispreservation of principal.  During thefirst six months of fiscal 2011, purchases of available-for-sale securitiestotaled approximately $37.7 million, while proceeds from the sale ofavailable-for-sale securities were $28.9 million.  Gross realized gains and losses on the saleof available-for-sale securities during the six months ended August 28,2010 were not material.

 

TheCompany’s available-for-sale securities are reviewed for possible impairment atleast quarterly, or more frequently if circumstances arise which may indicateimpairment.  When the fair value of thesecurities declines below the amortized cost basis, impairment is indicated andit must be determined whether it is other-than-temporary.  Impairment is considered to beother-than-temporary if the Company (i) intends to sell the security, (ii) willmore likely than not be forced to sell the security before recovering its cost,or (iii) does not expect to recover the securities’ amortized costbasis.  If the decline in fair value isconsidered other-than-temporary, the cost basis of the security is adjusted toits fair market value and the realized loss is reported in earnings.  Subsequent increases or decreases in fairvalue are reported in equity as other comprehensive income (loss).  As of August 28, 2010, there were noother-than-temporary impairments of the Company’s available-for-sale securities.

 

InNovember 2008, the Company entered into a settlement agreement with UBSFinancial Services, Inc., a subsidiary of USB AG (“UBS”) related to theCompany’s investment in Auction Rate Securities (“ARS”) purchased throughUBS.  Under the terms of the settlementagreement, the Company received rights that enabled it to sell its ARS to UBSat par value at any time during the two year period beginning June 30,2010.  On June 30, 2010, the Companyexercised its ARS rights and sold its remaining $7.1 million investment in ARSto UBS at par value. As of August 28, 2010, the Company had no investmentsin ARS.  The Company had approximately$12.8 million and $16.4 million of trading securities as of February 27,2010 and August 29, 2009, respectively, which consisted solely of $14.8million and $19.3 million of ARS at cost, less fair value adjustments ofapproximately $2.0 million and $2.9 million, respectively.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS were expected to be held.

 

Expectedmaturities of the Company’s investments are as follows (in thousands):

 
| ** **                             | ** ** | **August 28,** | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **2010**            | ** ** |
| Due in one year or less                |       | $                   | 58,231     |   |
| Due after one year through three years |       | 12,882              |       |
| Due after three years                  |       | 526                 |       |
|                                   |       |                |       |
| Total investment securities            |       | $                   | 71,639     |   |

 

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TheCompany has $28.3 million of Variable Rate Demand Obligations (“VRDOs”) as of August 28,2010.  These investments maintain aconstant par value, have variable rates of return tied to short-term interestrates which reset weekly, and may be tendered for sale upon notice to the trustee.  Although the Company’s VRDOs are issued andrated as long-term securities, with maturities ranging from 2013 through 2041,they are priced and traded as short-term investments as each VRDO contains aput feature, which is supported by highly rated financial institutions.  The Company classified its VRDOs asshort-term investments maturing in one year or less as it expects to realizethe proceeds from its VRDOs within that time period.  Actual maturities may differ from expectedmaturities because the issuers of the securities may have the right to prepaythe obligations without prepayment penalties.

 

**NOTE 3 — MERCHANDISE INVENTORIESAND SOURCES OF SUPPLY**

 

Merchandiseinventories consisted of the following (in thousands):

 
| ** **                        | ** ** | **August 28,** | ** ** | **February 27,** | ** ** | **August 29,** | ** ** |
|-----------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| **Description**                   | ** ** | **2010**            | ** ** | **2010**              | ** ** | **2009**            | ** ** |
|                              |       |                |       |                  |       |                |       |
| Merchandise - in store/e-Commerce |       | $                   | 37,180     |                  | $          | 36,522              |       | $ | 34,444 |   |
| Merchandise - in transit          |       | 2,929               |       | 1,974                 |       | 3,841               |       |
|                              |       |                |       |                  |       |                |       |
|                              |       | $                   | 40,109     |                  | $          | 38,496              |       | $ | 38,285 |   |

 

The Company does not have long-term purchase commitmentsor arrangements with any of its suppliers or agents.  During the three and sixmonth periods ended August 28, 2010 and August 29, 2009, two of theCompany’s vendors each supplied the Company with greater than 10% of itsmerchandise inventory purchases.  For thesecond quarter of fiscal 2011, these two vendors supplied approximately 28% and17% of the Company’s merchandise purchases, compared to 26% and 17% in thesecond quarter of fiscal 2010.  For thesix month period ended August 28, 2010, these vendors suppliedapproximately 29% and 18% of the Company’s merchandise purchases, compared to26% and 15% during the first six months of fiscal 2010.

 

Although the Company has strong relationships withthese vendors, there can be no assurance that these relationships can bemaintained in the future or that the vendors will continue to supplymerchandise to the Company.  If there should be any significant disruptionin the supply of merchandise from these vendors, management believes that itwill be able to shift production to other suppliers so as to continue to securethe required volume of product.  Nevertheless, it is possible that anysignificant disruption in supply could have a material adverse impact on theCompany’s financial position or results of operations.

 

**NOTE 4 — PROPERTY, EQUIPMENT ANDIMPROVEMENTS, NET**

 

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

 
| ** **                                                                  | ** ** | **Estimated**                              | ** ** | **August 28,** | ** ** | **February 27,** | ** ** | **August 29,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| **Description**                                                             | ** ** | **Useful Life**                       | ** ** | **2010**            | ** ** | **2010**              | ** ** | **2009**            | ** ** |
| Land                                                                        |       | —                                     |       | $                   | 1,597      |                  | $          | 1,597               |       | $ | 1,597 |   |
| Corporate office, distribution center and related  building improvements    |       | 25 years                                   |       | 12,053              |       | 12,027                |       | 12,012              |       |
| Store leasehold improvements                                                |       | Term of related lease, typically  10 years |       | 91,570              |       | 93,894                |       | 94,262              |       |
| Store furniture and fixtures                                                |       | Three to 10 years                          |       | 110,664             |       | 112,815               |       | 112,705             |       |
| Point of sale hardware and software                                         |       | Five years                                 |       | 14,881              |       | 15,056                |       | 14,959              |       |
| Computer hardware and software                                              |       | Three to five years                        |       | 24,736              |       | 24,176                |       | 21,160              |       |
| Corporate office and distribution center furniture,  fixtures and equipment |       | Seven years                                |       | 5,366               |       | 5,315                 |       | 3,605               |       |
| Construction in progress                                                    |       | —                                     |       | 4,193               |       | 73                    |       | 3,461               |       |
|                                                                        |       |                                       |       | 265,060             |       | 264,953               |       | 263,761             |       |
| Less accumulated depreciation and amortization                              |       |                                       |       | 176,594             |       | 168,844               |       | 154,010             |       |
|                                                                        |       |                                       |       |                |       |                  |       |                |       |
| Net property, equipment and improvements                                    |       |                                       |       | $                   | 88,466     |                  | $          | 96,109              |       | $ | 109,751 |   |

 

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TheCompany reviews long-lived assets with definite lives for impairment at leastannually or whenever events or changes in circumstances indicate that thecarrying value of the asset may not be recoverable.  The Company recorded no impairments oflong-lived assets in the six month period ended August 28, 2010.  The general economic uncertainty affectingthe retail industry makes it reasonably possible, however, that long-livedasset impairments may be identified and recorded in future periods.

 

**NOTE 5 — ACCRUED LIABILITIES**

 

Otheraccrued liabilities consisted of the following (in thousands):

 
| ** **                                               | ** ** | **August 28,** | ** ** | **February 27,** | ** ** | **August 29,** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| **Description**                                          | ** ** | **2010**            | ** ** | **2010**              | ** ** | **2009**            | ** ** |
| Gift card and store credit liabilities                   |       | $                   | 7,118      |                  | $          | 10,884              |       | $ | 7,753 |   |
| Accrued merchandise inventory receipts not yet  invoiced |       | 2,048               |       | 1,539                 |       | 3,749               |       |
| Accrued Friendship Rewards loyalty liability             |       | 1,745               |       | —                |       | —              |       |
| Accrued income, sales and other taxes payable            |       | 2,428               |       | 2,081                 |       | 2,287               |       |
| Accrued workers compensation liability                   |       | 285                 |       | 600                   |       | 774                 |       |
| Accrued occupancy-related expenses                       |       | 738                 |       | 665                   |       | 734                 |       |
| Other                                                    |       | 2,767               |       | 3,395                 |       | 2,993               |       |
|                                                     |       | $                   | 17,129     |                  | $          | 19,164              |       | $ | 18,290 |   |

 

**NOTE 6 — CREDIT FACILITY**

 

TheCompany maintains an Amended and Restated Revolving Credit Facility (the “CreditFacility”) with Wells Fargo Bank, National Association (“Wells Fargo”) whichexpires on June 30, 2011.  TheCredit Facility provides the Company with revolving credit loans and letters ofcredit of up to $50 million, in the aggregate, subject to a borrowing baseformula based on inventory levels.

 

Loansunder the Credit Facility bear interest at the prime rate minus 0.25%.  As of August 28, 2010, 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.

 

Interestunder the Credit Facility is payable monthly in arrears.  The Credit Facility carries a facility fee of0.25%, based on the unused portion as defined in the agreement, a collateralmonitoring fee and a guarantee service charge. 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 2011 or fiscal 2010. 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 28, 2010was $28.1 million and the Company had open on-demand letters of credit in theamount of $1.3 million.  Accordingly, theavailability of revolving credit loans under the Credit Facility was $26.8million at August 28, 2010.

 

TheCredit Facility contains certain restrictive covenants, including restrictionson incurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of August 28, 2010,the most recent measurement date, the Company was in compliance with allfinancial covenants under the Credit Facility.

 

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**NOTE 7 — STOCK-BASED COMPENSATION**

 

TheCompany accounts for stock-based compensation in accordance with the provisionsof ASC 718-10, “Stock Compensation.” Under various plans, the Company may grantoptions to purchase common stock to employees and non-employee members of itsBoard of Directors at a price not less than 100% of the fair market value ofthe Company’s common stock on the option grant date.  In general, options granted to employees vestover three to five years and are exercisable up to ten years from the date ofgrant, and options granted to Directors vest immediately and are exercisable upto ten years from the grant date.

 

TheCompany may also grant shares of restricted stock to its employees andnon-employee members of its Board of Directors. The grantee cannot transfer the shares before the respective sharesvest.  Shares of nonvested restrictedstock are considered to be currently issued and outstanding.  Restricted stock grants to employees haveoriginal vesting schedules of three to seven years, while restricted grants toDirectors are fully vested on the date of grant.

 

TheCompany’s restricted stock awards are generally subject to forfeiture ifemployment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’srestricted stock awards have performance-based vesting provisions and aresubject to forfeiture in whole or in part if these performance conditions arenot achieved.  The Company assesses, onan ongoing basis, the probability of whether the performance criteria will beachieved and, once it is deemed probable, the Company begins recognizingcompensation expense over the relevant performance period.  For those awards not subject to performancecriteria, the Company expenses the cost of the restricted stock awards, whichis determined to be the fair market value of the shares at the date of grant,on a straight-line basis over the vesting period.  The fair market value of the Company’srestricted stock is determined based on the closing price of the Company’scommon stock on the grant date.

 

Totalpre-tax compensation expense related to stock-based awards for the three monthsended August 28, 2010 and August 29, 2009 was approximately $1.0million and $374,000, respectively.  Forthe six months ended August 28, 2010 and August 29, 2009, pre-taxstock-based compensation expense totaled approximately $1.6 million and$848,000, respectively.

 

*MethodologyAssumptions*

 

TheCompany uses the Black-Scholes option-pricing model to value the Company’sstock options for grants 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 and isexpensed on a straight-line basis over the vesting period, as the stock optionsare subject to pro-rata vesting.  Theexpected volatility assumption is based on the historical volatility of theCompany’s stock over a term equal to the expected term of the option granted.  The expected term of stock option awardsgranted is derived from historical exercise experience and represents theperiod of time that awards are expected to be outstanding.  The risk-free interest rate is based on theimplied yield on a U.S. Treasury constant maturity with a remaining term equalto the expected term of the option granted.

 

Theweighted average assumptions relating to the valuation of the Company’s stockoption grants for the three and six month periods ended August 28, 2010and August 29, 2009 were as follows:

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **August 28,**              | ** ** | **August 29,**            | ** ** | **August 28,** | ** ** | **August 29,** | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Expected dividend yield |       | 2.73                             | %          |                           | 4.40       | % |   | 3.02 | % |   | 5.00 | % |   |
| Expected volatility     |       | 70.7                             | %          |                           | 71.5       | % |   | 70.2 | % |   | 68.7 | % |   |
| Risk-free interest rate |       | 1.78                             | %          |                           | 2.30       | % |   | 2.36 | % |   | 2.10 | % |   |
| Expected term in years  |       | 5.0                              |       |                           | 4.2        |   |   | 4.9 |   |   | 4.6 |   |   |

 

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*Stock-BasedCompensation Activity*

 

Thefollowing table presents a summary of the Company’s stock option activity forthe six months ended August 28, 2010.

 
| ** **                       | ** ** | ** ** | ** ** | ** **   | ** ** | ** **              | ** ** | ** **          | ** ** | **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 |       | 1,592,670  |       | $            | 11.56      |                    | $          | 922                 |       | $               | 4.24       |   |   |   |
| Vested                           |       | 744,628    |       | 16.62        |       | 5                       |       | 5.84                |       |            |       |
| Unvested                         |       | 848,042    |       | 7.11         |       | 916                     |       | 2.83                |       |            |       |
| Granted                          |       | 332,900    |       | 10.06        |       | —                  |       | 4.83                |       |            |       |
| Exercised                        |       | (18,500    | )          | 4.68         |       | 110                     |       | 1.78                |       |            |       |
| Canceled - vested (expired)      |       | (3,318     | )          | 10.86        |       | —                  |       | 3.96                |       |            |       |
| Canceled - unvested (forfeited)  |       | (138,633   | )          | 7.21         |       | 120                     |       | 3.19                |       |            |       |
| Outstanding, end of period       |       | 1,765,119  |       | 11.69        |       | 566                     |       | 4.46                |       | 7.05            |       |
| Vested                           |       | 967,538    |       | 14.81        |       | 115                     |       | 5.28                |       | 5.52            |       |
| Unvested                         |       | 797,581    |       | 7.91         |       | 451                     |       | 3.45                |       | 8.92            |       |
| Exercisable, end of period       |       | 967,538    |       | 14.81        |       | 115                     |       | 5.28                |       | 5.52            |       |
|                                  |            |            |            |              |            |                         |            |                     |            |                 |            |  |  |  |

 

Theaggregate intrinsic value in the preceding table represents the total pre-taxintrinsic value (the difference between the Company’s closing stock price onthe last trading day of the quarter and the exercise price, multiplied by thenumber of in-the-money options) that would have been received by the optionholders had all option holders exercised their options on August 28, 2010.

 

Thefollowing table presents a summary of the Company’s restricted stock activityfor the six months ended August 28, 2010:

 
| ** **                      | ** ** | **Number** | ** ** | **Weighted**        | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|
| ** **                      | ** ** | **of**     | ** ** | **Average**         | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                            |       |       |       |                |       |
| Unvested, beginning of period   |       | 702,450    |       | $                   | 5.34       |   |
| Granted                         |       | 326,921    |       | 9.36                |       |
| Vested                          |       | (209,052   | )          | 6.36                |       |
| Canceled - unvested (forfeited) |       | (377,633   | )          | 4.97                |       |
| Unvested, end of period         |       | 442,686    |       | 8.13                |       |
|                                 |            |            |            |                     |            |  |

 

Thetotal fair value of shares of restricted stock that vested during the sixmonths ended August 28, 2010 and August 29, 2009 was approximately$1.3 million and $0.5 million, respectively.

 

Asof August 28, 2010, there was approximately $3.4 million of unrecognizedstock-based compensation expense, which is expected to be recognized over aweighted average period of approximately 2.4 years.

 

**NOTE 8 — INCOME TAXES**

 

Asof August 28, 2010, the Company’s liability for unrecognized tax benefitsassociated with uncertain tax positions was approximately $2.7 million and thetotal amount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate was $1.7 million. The Company recognizes interest andpenalties related to unrecognized tax benefits as components of income taxexpense. At August 28, 2010, the Company had accrued approximately $0.9million for the potential payment of interest and penalties.

 

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TheCompany and its subsidiaries are subject to U.S. federal income tax and theincome tax of various state and local jurisdictions.  The Internal Revenue Service has completedits audit for tax years through fiscal 2006. The Company had submitted a report to the Internal Revenue Service forreview by the Joint Committee on Taxation regarding the Company’s refund claimfor the carryback of its fiscal 2009 loss. This reporting process is standardfor all claims greater than $2.0 million. The Company has received the refund and was notified in May theJoint Committee has taken no exception and has begun the process to close thecase.  With few exceptions, the Companyis not subject to state income tax examination by tax authorities for taxableyears prior to fiscal 2006.  At August 28,2010, the Company has ongoing audits in various jurisdictions.  The Company does not believe that settlementof these examinations will have a significant impact on its liability forunrecognized tax benefits.

 

Asof August 28, 2010, the Company has net deferred tax assets ofapproximately $13.0 million.  Deferredincome tax assets represent potential future income tax benefits.  Realization of these assets is ultimatelydependent upon future taxable income.  Novaluation allowance has been provided for deferred tax assets becausemanagement believes realization of the full amount of net deferred tax assetsis more likely than not.  While theCompany has a history of profits, the Company recorded a net loss in fiscal2009 and near break-even results in fiscal 2010.  Therefore, achievement of profitability inthe future is a significant factor in determining the Company’s continuingability to carry these deferred tax assets. 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, depending on the magnitude ofthe allowance, could have a material impact on the Company’s results ofoperations in the period in which it is recorded.  Significant negativeevents, including losses in future periods, would make it reasonably possiblethat valuation allowances against deferred tax assets would be required infuture periods.

 

Asof August 28, 2010, the Company has state net operating loss carryforwardswhich will result in state tax benefits of approximately $0.3 million.  These state net loss carryforwards willexpire in fiscal 2014 and beyond. Additionally, the Company has charitable contribution carryforwards thatwill expire in fiscal 2014.

 

**NOTE 9 — EARNINGS PER SHARE**

 

OnMarch 1, 2009, the Company adopted ASC 260-10, “Earnings per Share,” whichclarified that unvested share-based payment awards that contain nonforfeitablerights to receive dividends or dividend equivalents (whether paid or unpaid) areconsidered participating securities, and thus, should be included in thetwo-class method of computing earnings per share (“EPS”).  Participating securities under this statementinclude the Company’s unvested employee restricted stock awards with time-basedvesting, which receive nonforfeitable dividend payments.

 

Thecalculation of EPS for common stock shown below excludes the incomeattributable to these unvested employee restricted stock awards from thenumerator and excludes the dilutive impact of these shares from thedenominator.

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **August 28,**              | ** ** | **August 29,** | ** ** |
| ** **                                                                  | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Numerator**(in  thousands)**:**                                           |       |                             |       |   |   |
| Net income (loss) attributable to  Christopher & Banks Corporation |       | $                                | (2,538     | ) | $ | (2,132 | ) |
| Income (loss) allocated to participating  securities                        |       | (21                              | )          | 23 |   |
| Net income (loss) available to common shareholders                          |       | $                                | (2,559     | ) | $ | (2,109 | ) |
| ** **                                                                  |       |                             |       |   |   |
| **Denominator**(in  thousands)**:**                                         |       |                             |       |   |   |
| Weighted average common shares outstanding - basic                          |       | 35,354                           |       | 35,176 |   |
| Dilutive shares                                                             |       | —                           |       | — |   |
| Weighted average common and common equivalent  shares outstanding - diluted |       | 35,354                           |       | 35,176 |   |
|                                                                        |       |                             |       |   |   |
| **Net income (loss) per common  share:**                                    |       |                             |       |   |   |
| Basic                                                                       |       | $                                | (0.07      | ) | $ | (0.06 | ) |
| Diluted                                                                     |       | $                                | (0.07      | ) | $ | (0.06 | ) |

 

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| ** **                                                                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **August 28,**            | ** ** | **August 29,** | ** ** |
| ** **                                                                  | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| **Numerator**(in  thousands)**:**                                           |       |                           |       |   |   |
| Net income (loss) attributable to  Christopher & Banks Corporation |       | $                              | 3,802      |   | $ | (446 | ) |
| Income (loss) allocated to participating  securities                        |       | (38                            | )          | 3 |   |
| Net income (loss) available to common shareholders                          |       | $                              | 3,764      |   | $ | (443 | ) |
|                                                                        |       |                           |       |   |   |
| **Denominator**(in  thousands)**:**                                         |       |                           |       |   |   |
| Weighted average common shares outstanding - basic                          |       | 35,329                         |       | 35,134 |   |
| Dilutive shares                                                             |       | 196                            |       | — |   |
| Weighted average common and common equivalent  shares outstanding - diluted |       | 35,525                         |       | 35,134 |   |
|                                                                        |       |                           |       |   |   |
| **Net income (loss) per common  share:**                                    |       |                           |       |   |   |
| Basic                                                                       |       | $                              | 0.11       |   | $ | (0.01 | ) |
| Diluted                                                                     |       | $                              | 0.11       |   | $ | (0.01 | ) |

 

Stockoptions of approximately 1.6 million and 1.5 million were excluded from theshares used in the computation of diluted earnings per share for the three andsix month periods ended August 28, 2010, respectively, as they wereanti-dilutive.  Total stock options ofapproximately 1.5 million and 1.9 million were excluded from the shares used inthe computation of diluted EPS for the three and six month periods ended August 29,2009, respectively, as they were anti-dilutive.

 

**NOTE 10— FAIR VALUE MEASUREMENTS**

 

UnderASC 820-10, “Fair Value Measurements and Disclosures,” fair value is defined asthe exit price, or the amount that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsas of the measurement date.  ASC 820-10also establishes a hierarchy for inputs used in measuring fair value thatmaximizes the use of observable inputs and minimizes the use of unobservableinputs by requiring that the most observable inputs be used whenavailable.  Observable inputs are inputsmarket participants would use in valuing the asset or liability and aredeveloped based on market data obtained from sources independent of theCompany.  Unobservable inputs are inputsthat reflect the Company’s assumptions about the factors market participants woulduse in valuing the asset or liability that are developed based upon the bestinformation available in the circumstances. The hierarchy is broken down into three levels.  Level 1 inputs are quoted prices (unadjusted)in active markets for identical assets or liabilities.   Level 2 inputs include quoted prices forsimilar assets or liabilities in active markets, quoted prices for identical orsimilar assets or liabilities in markets that are not active and inputs (otherthan quoted prices) that are observable for the asset or liability, eitherdirectly or indirectly.  Level 3 inputsare unobservable inputs for the asset or liability.   Categorization within the valuation hierarchyis based upon the lowest level of input that is significant to the fair valuemeasurement.

 

*Assets and Liabilities that are Measured at Fair Value on aRecurring Basis:*

 

Forthe six month periods ended August 28, 2010 and August 29, 2009, fairvalue under ASC 820-10 applied to the Company’s available-for-sale securities,ARS and ARS rights.  These financialassets are carried at fair value following the requirements of ASC 820-10.

 

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Thefollowing tables provide information by level for assets and liabilities thatare measured at fair value on a recurring basis (in thousands).

 
| ** **                    | ** ** | ** **                    | ** ** | **Fair Value Measurements**         | ** ** |
|-------------------------------|------------|-------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **Fair Value at**   | ** ** | **Using Inputs Considered as** | ** ** |
| **Description**               | ** ** | **August 28, 2010** | ** ** | **Level 1**                              | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                       |       |                          |       |                                          |       |   |   |   |   |
| Available-for-sale securities |       | $                             | 71,639     |                                          | $          | — |   | $ | 71,639 |   | $ | — |   |
| Trading securities            |       | —                        |       | —                                        |       | — |   | — |   |
| ARS rights                    |       | —                        |       | —                                        |       | — |   | — |   |
|                          |       |                          |       |                                          |       |   |   |   |   |
| Liabilities:                  |       | $                             | —     |                                          | $          | — |   | $ | — |   | $ | — |   |

 
| ** **                    | ** ** | ** **                    | ** ** | **Fair Value Measurements**         | ** ** |
|-------------------------------|------------|-------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **Fair Value at**   | ** ** | **Using Inputs Considered as** | ** ** |
| **Description**               | ** ** | **August 29, 2009** | ** ** | **Level 1**                              | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                       |       |                          |       |                                          |       |   |   |   |   |
| Available-for-sale securities |       | $                             | —     |                                          | $          | — |   | $ | — |   | $ | — |   |
| Trading securities            |       | 16,400                        |       | —                                        |       | — |   | 16,400 |   |
| ARS rights                    |       | 2,650                         |       | —                                        |       | — |   | 2,650 |   |
|                          |       |                          |       |                                          |       |   |   |   |   |
| Liabilities:                  |       | $                             | —     |                                          | $          | — |   | $ | — |   | $ | — |   |

 

Followingis a description of the valuation methodologies used for financial assets andliabilities measured at fair value:

 

*Available-for-salesecurities:*  As of August 28,2010, the Company’s available-for-sale securities were valued based on quotedprices for similar assets in active markets or quoted prices for identical orsimilar assets in markets in which there were fewer transactions.

 

*Tradingsecurities:*  The Company’strading securities consist solely of ARS as of August 29, 2009.  See Note 2, Investments, for furtherdisclosure regarding the Company’s ARS.

 

*ARSrights:*  As discussed in Note 2, Investments,in November 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.

 

Thefollowing table provides a reconciliation of the beginning and ending balancesof items measured at fair value on a recurring basis in the table above thatused significant unobservable inputs (Level 3) (in thousands).

 
| ** **                                   | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **August 28, 2010**  | ** ** | **August 29, 2009**  | ** ** |
| ** **                                   | ** ** | **ARS**                        | ** ** | **ARS Rights**            | ** ** | **ARS** | ** ** | **ARS Rights** | ** ** |
|                                         |       |                           |       |                           |       |   |   |   |   |
| Beginning balance                            |       | $                              | 12,800     |                           | $          | 2,000 |   | $ | 16,400 |   | $ | 2,700 |   |
|                                         |       |                           |       |                           |       |   |   |   |   |
| Total gains (losses):                        |       |                           |       |                           |       |   |   |   |   |
| Included in earnings                         |       | 2,050                          |       | (2,000                         | )          | 200 |   | (50 | ) |
| Purchases (sales), issuances and settlements |       | (14,850                        | )          | —                         |       | (200 | ) | — |   |
|                                         |       |                           |       |                           |       |   |   |   |   |
| Ending balance                               |       | $                              | —     |                           | $          | — |   | $ | 16,400 |   | $ | 2,650 |   |

 

*Assets and Liabilities that are Measured at Fair Value on aNon-recurring Basis:*

 

TheCompany measures certain assets and liabilities at fair value on anon-recurring basis.  Specifically, the Company’snonfinancial long-lived asset groups are measured at fair value for impairmentassessments.  There were no impairmentcharges related to assets measured at fair value on a non-recurring basisrecorded during the three and six months ended August 28, 2010 and August 29,2009.

 

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**NOTE 11— COMPREHENSIVE INCOME (LOSS)**

 

Comprehensiveincome (loss) consisted of the following (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **August 28,**              | ** ** | **August 29,**            | ** ** | **August 28,** | ** ** | **August 29,** | ** ** |
| ** **                           | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                    |       | $                                | (2,538     | )                              | $          | (2,132 | ) | $ | 3,802 |   | $ | (446 | ) |
| Fair value adjustment on investments |       | 58                               |       | —                         |       | 43 |   | — |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Total comprehensive income (loss)    |       | $                                | (2,480     | )                              | $          | (2,132 | ) | $ | 3,845 |   | $ | (446 | ) |

 

**NOTE 12— LEGAL PROCEEDINGS**

 

TheCompany is subject, from time to time, to various claims, lawsuits or actionsthat arise in the ordinary course of business. Although the amount of any liability that could arise with respect toany current proceedings cannot, in our opinion, be accurately predicted, anysuch liability is not expected to have a material adverse impact on the Company’sfinancial position, results of operations or liquidity.

 

**NOTE 13 — SEGMENT REPORTING**

 

TheCompany operates in the retail apparel industry in which it primarily designs,sources and sells women’s apparel catering to customers who are typically partof the female baby boomer demographic. The Company has identified two operating segments (Christopher &Banks and C.J. Banks) as defined by ASC 820, “Disclosures about Segments of anEnterprise and Related Information.”  TheCompany’s Christopher & Banks and C.J. Banks operating segments havebeen aggregated into one reportable segment based on the similar nature ofproducts sold, methods of sourcing, merchandising and distribution processesinvolved, target customers, and economic characteristics of the two brands.

 

Inthe table below, the “Christopher & Banks/C.J. Banks” reportablesegment includes activity generated by the Company’s Christopher &Banks and C.J. Banks operations.  The “Corporate/Administrative”column, which primarily represents operating activity at the Company’scorporate office and distribution center, is presented to allow forreconciliation of segment-level net sales, operating income and total assets tothe Company’s consolidated net sales, operating income  and total assets.  Segment operating income includes only netsales, merchandise gross margin and direct store expenses with no allocation ofcorporate overhead.

 

**Segment Reporting (in thousands):**

 
| ** **                                    | ** ** | **christopher & banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                    | ** ** | **cj banks**                      | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Three Months Ended  August 28, 2010**  |       |                                   |       |               |       |             |       |
| Net sales                                     |       | $                                      | 101,340    |               | $          | —           |       | $ | 101,340 |   |
| Operating income (loss)                       |       | $                                      | 7,688      |               | $          | (12,113          | )          | $ | (4,425 | ) |
| Total assets                                  |       | $                                      | 149,673    |               | $          | 111,138          |       | $ | 260,811 |   |
|                                          |       |                                   |       |               |       |             |       |
| **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 |   |

 

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**Segment Reporting (in thousands):**

 
| ** **                                  | ** ** | **christopher & banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                  | ** ** | **cj banks**                      | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Six Months Ended August 28,  2010:** |       |                                   |       |               |       |             |       |
| Net sales                                   |       | $                                      | 227,574    |               | $          | —           |       | $ | 227,574 |   |
| Operating income (loss)                     |       | $                                      | 32,490     |               | $          | (26,267          | )          | $ | 6,223 |   |
| Total assets                                |       | $                                      | 149,673    |               | $          | 111,138          |       | $ | 260,811 |   |
|                                        |       |                                   |       |               |       |             |       |
| **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 |   |

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing management’s discussion and analysis of financial condition andresults of operations (“MD&A”) should be read in conjunction with theconsolidated financial statements and notes included in Item 1 of this Form 10-Qand the consolidated financial statements, notes and MD&A contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended February 27,2010.

 

**ExecutiveOverview**

 

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

 

Asof August 28, 2010, the Company operated 789 stores in 46 states,including 530 Christopher & Banks stores, 257 C.J. Banks stores andtwo dual stores.  The Company’sChristopher & Banks brand offers distinctive fashions featuringexclusively designed, coordinated assortments of women’s apparel in sizes fourto 16. The Company’s C.J. Banks brand offers similar assortments of women’sapparel in sizes 14W to 26W.   TheCompany’s dual stores offer an assortment of both Christopher & Banksand C.J. Banks apparel servicing the petite, misses and plus size customer inone store. The Company also operates e-Commerce web sites for its two brands at**www.christopherandbanks.com** and **www.cjbanks.com** which, in addition to offering the apparelfound in the Company’s stores, also offer exclusive sizes and styles availableonly online.

 

The Company strives to provide its customers qualityapparel at a great value with a consistent fit. The Company’s overall strategy for its two brands, Christopher &Banks and C.J. Banks, is to offer a compelling, evolving assortment of apparelthrough its stores and e-Commerce web sites in order to satisfy its customers’expectations for style, quality, value and fit, while providing exceptional,personalized customer service.

 

The Company has competitively positioned itself tooffer merchandise assortments balancing unique, novelty apparel with moreclassic, basic styles, at affordable prices. To differentiate itself from its competitors, the Company’s buyers,working in conjunction with the Company’s internal design group, strive tocreate a merchandise assortment of coordinated outfits, the majority of whichis manufactured exclusively for the Company under its proprietary Christopher &Banks and C.J. Banks brand names.

 

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*Fiscal2011 Second Quarter Summary*

 

Inthe second quarter of fiscal 2011, the Company reported a 1% increase insame-store sales.  Customer trafficcontinued to be challenging, resulting in a decrease in average transactionsper store compared to the prior year. This decrease was partially offset by improved conversion rates (thepercentage of customers who enter the Company’s stores and make a purchase, ascompared to the total number of customers entering the Company’s stores).  In addition, the decreased transactions weremore than offset by an increase in the average dollar sale during the quarter,as compared to last year’s second quarter, which was driven by increased unitspurchased per transaction, partially offset by a decrease in the average retailprice per unit sold.

 

Merchandisemargins decreased during the quarter due to increased promotional activityrequired to clear through early deliveries of fall merchandise.  Customers did not respond favorably to themerchandise assortment introduced in August that contained darker colorsand heavier fabrications than the assortments delivered in June andJuly.  However, customers did respondfavorably to selections of sweaters and bottoms where new silhouettes, fabricsand color choices were offered.  Inaddition, the Company’s collection of petite-size merchandise and its expandedjewelry assortment were positively received.

 

TheCompany opened one new C.J. Banks store and one new dual store in the firsthalf of fiscal 2011.  It closed 10Christopher & Banks and nine C.J. Banks stores during the first sixmonths of the year.  The Companycurrently plans to open two new outlet stores and one new dual store in thesecond half of the year for a total of five new store openings in fiscal2011.  This is down from the Company’sinitial plans to open approximately 10 new stores in fiscal 2011 as several newstore openings originally planned for the fourth quarter have shifted to thefirst quarter of fiscal 2012.

 

**Fiscal2011 Outlook and Key Business Initiatives**

 

In addition to approaching the Company’s operationswith continued financial discipline and rigor, the Company is placingadditional emphasis on the following key initiatives in fiscal 2011.

 

*Increasingstore productivity*

 

TheCompany introduced edited assortments, or “capsules,” of its C.J. Banks plussize merchandise in a select test group of 30 Christopher & Banksstores (“capsule stores”) in the third quarter of fiscal 2010.  The C.J. Banks assortments were added to thecapsule stores without a reduction in the Christopher & Banksmerchandise assortments at these stores. Based on the improved productivity and same store sales performance atthe initial 30 capsule stores,  theCompany expanded the number of capsule stores to 61 as of the end of the secondquarter and plans to operate approximately 80 total capsule stores for theupcoming holiday season.

 

TheCompany opened its first dual-concept store during fiscal 2010 and oneadditional dual store during the first quarter of fiscal 2011.  These stores offer merchandise from both ofthe Company’s Christopher & Banks and C.J. Banks brands, and all threesize ranges, misses, petite and plus, within each store, resulting in a greateropportunity to service the Company’s customers while increasing productivityand enhancing operating efficiencies. The Company will continue to test the performance of its dual storeconcept and plans to open one additional dual store in the fourth quarter offiscal 2011.

 

InSeptember, the Company opened its first two outlet stores, which contain missy,petite and plus size merchandise.  Whilethe Company has not yet finalized its outlet strategy, it believes the outletbusiness provides an additional opportunity to drive profitability.  Longer-term plans for the Company’s outletstores include offering a product assortment made specifically for thesestores, including best selling styles from the prior year’s collection andedited versions of the Company’s current styles, along with providingopportunities to sell clearance product from the Company’s Christopher &Banks, C.J. Banks and dual stores.

 

Inan effort to drive productivity at all stores, the Company increased its focuson customer service in fiscal 2010 and plans to enhance this focus through moreengaged store teams in fiscal 2011.  TheCompany is striving to enhance the customer experience by encouraging its storemanagers, or “shopkeepers,” to provide more personalized selling and service toits customers.  The Company has furtherenhanced its customer experience by providing an in-store e-Commerce orderingsystem which allows store associates to provide customers with a broaderselection of merchandise, including select buys and special sizes and lengthsavailable only online.

 

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*Branddifferentiation and messaging*

 

TheCompany is placing a greater emphasis on marketing in fiscal 2011.  In March 2010, the Company launched itsFriendship Rewards loyalty program. Friendship Rewards is a point-based program where members earn pointsbased on purchases.  After reaching acertain level of accumulated points, members are rewarded with a certificatewhich may be used for purchases at the Company’s stores or online websites.  The reward certificates expireapproximately six weeks after issuance. Program members will also be kept up-to-date on new product deliveries,special events and promotions to draw them into the Company’s stores and visitits websites.  The Company is alsoenhancing its Customer Relationship Management (“CRM”) customer segmentationcapabilities, including further refining its direct mail strategy to moreprecisely design and target customer mailings.

 

Inearly September 2010, the Company issued its first mini-catalog, or ‘magalog’.  The magalog, which showcased the Company’sfall merchandise assortment and provided information regarding versatileoutfitting capabilities and other product information, was sent to members ofthe Company’s Friendship Rewards loyalty program as well as to new customerprospects.  The Company plans to issue aholiday magalog in mid-November.

 

*Merchandising*

 

Infiscal 2011, the Company plans to continue to identify, test and, ifsuccessful, introduce new product categories in an effort to increase spendingby existing customers and to attract new customers to its brands.  Based on product tests conducted in fiscal2010, the Company rolled out a new assortment of jewelry to all of its storesduring the first quarter of fiscal 2011 and plans to increase the size of itsjewelry assortment throughout the year. In addition to the jewelry rollout, the Company plans to execute severaltests of other new product categories in fiscal 2011, including offering outerwearand sleepwear in select stores and extended sizes of other merchandise on itse-Commerce websites.

 

*Growthof e-Commerce channel*

 

TheCompany plans to continue to grow its Christopher & Banks and C.J.Banks e-Commerce channels in fiscal 2011, which have operated profitably since February 2008.  Focus will be placed on converting additionalcustomers into multi-channel shoppers and leveraging the branding benefits thee-Commerce channel can provide.  TheCompany also plans to grow its e-Commerce channel through increasing its onlinecustomer base and continuing to use the channel to test further product lineand size extensions.

 

*Infrastructureefficiency*

 

TheCompany is in the final stages of building a scalable, cost-effective andfully-integrated information technology infrastructure. While there will benormal, ongoing enhancements and investments, such as the completion of theCompany’s rollout of upgraded point-of-sale hardware and software to all storesin June and implementation of a new product lifecycle management system inAugust, it does not anticipate any additional significant informationtechnology infrastructure-related capital investments in the near term.

 

**KeyPerformance Indicators**

 

TheCompany’s management evaluates the following items, which are considered keyperformance indicators, in assessing the Company’s performance:

 

*Samestore sales*

 

TheCompany’s same store sales data is calculated based on the change in net salesfor stores that have been open for more than 13 full months and includesstores, if any, that have been relocated within the same mall.  Stores where square footage has been changedby more than 25 percent within the past 13 months are excluded from the samestore sales calculation.  Stores closedduring the year are included in the same store sales calculation only for thefull months of the year the stores were open. In addition, sales which are initiated in stores but fulfilled throughthe Company’s e-Commerce website are included in the calculation of same storesales.

 

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

 

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*Merchandise,buying and occupancy costs*

 

Merchandise,buying and occupancy costs, exclusive of depreciation and amortization, measurewhether the Company is appropriately optimizing the price of itsmerchandise.  Merchandise, buying andoccupancy costs include the cost of merchandise, markdowns, shrink, freightinto and out from 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*

 

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

 

*Storeproductivity*

 

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 are evaluated by management in assessing the operationalperformance of individual stores and of the Company.  The Company calculates conversion rates basedon the percentage of customers who enter the Company’s stores and make apurchase, as compared to the total number of customers entering the Company’sstores.  The Company currently haselectronic customer traffic counters in approximately half of its stores.

 

*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.

 

*Cashflow and liquidity*

 

Managementevaluates cash flow from operating, investing and financing activities indetermining the sufficiency of the Company’s cash position.  Cash flow from operations has historicallybeen sufficient to cover the Company’s uses of cash.  The Company anticipates its cash, cashequivalents and short-term investments, combined with cash flows generated fromoperations, will be sufficient to meet its capital expenditure, working capitaland other requirements for liquidity for the remainder of fiscal 2011.

 

**CriticalAccounting Policies and Estimates**

 

TheCompany’s critical accounting policies are more fully described in Note 1 ofthe notes to consolidated financial statements contained within the Company’sAnnual Report on Form 10-K for the fiscal year ended February 27,2010.  There have been no materialchanges in the Company’s critical accounting policies or estimates in the sixmonths ended August 28, 2010, except for the addition of a customerloyalty program as discussed below. Management’s discussion and analysis of theCompany’s financial condition and results of operations are based upon theCompany’s consolidated condensed financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.

 

Onan ongoing basis, the Company evaluates its estimates, including those relatedto customer product returns, inventories, income taxes, medical and workers’compensation claims and contingencies. The Company bases its estimates on historical experience and on variousother assumptions that it believes to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Duringthe first quarter of fiscal 2011, the Company launched its Friendship Rewardsloyalty program. Under the program, customers accumulate points based on purchaseactivity.  Once a Friendship Rewardsmember achieves a certain point level, the member earns awards certificatesthat may be redeemed for merchandise. Points are accrued as unearned revenue and recorded as a reduction ofnet sales and a current liability as they are accumulated by members andcertificates are earned.  The liabilityis recorded net of estimated breakage based on redemption patterns andtrends.  The reward certificates expireapproximately six weeks after issuance.

 

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TheCompany reviews long-lived assets with definite lives at least annually, orwhenever events or changes in circumstances indicate that the carrying value ofthe asset may not be recoverable.  Whilethe Company recorded no impairments of long-lived assets in the three monthperiod ended August 28, 2010, the current challenging economicenvironment, combined with continued instability in the housing and labormarkets, and general economic uncertainty affecting the retail industry, makeit reasonably possible that long-lived asset impairments could be identifiedand recorded in future periods.

 

Asof August 28, 2010, the Company had net deferred tax assets of $13.0million.  Deferred income tax assetsrepresent potential 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,the Company recorded a net loss in fiscal 2009 and near break even results infiscal 2010.  Therefore, achievement ofprofitability in the future is a significant factor in determining the Company’scontinuing ability to carry these deferred tax assets.  The Company’s accounting for deferred taxesrepresents its best estimate of future events.  If future results from the Company’soperations are less than projected, a valuation allowance may be required toreduce deferred tax assets, which could have a material impact on the Company’sresults of operations in the period in which it is recorded.  Significantnegative events, including losses in future periods, would make it reasonablypossible that valuation allowances against deferred tax assets may be requiredin future periods.

 

**Results of Operations**

 

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **August 28,**              | ** ** | **August 29,**            | ** ** | **August 28,** | ** ** | **August 29,** | ** ** |
| ** **                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                    |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Merchandise, buying and occupancy costs      |       | 64.7                             |       | 65.4                           |       | 60.8 |   | 63.9 |   |
| Selling, general and administrative expenses |       | 33.3                             |       | 31.8                           |       | 30.7 |   | 30.9 |   |
| Depreciation and amortization                |       | 6.3                              |       | 6.2                            |       | 5.7 |   | 5.7 |   |
| Operating income (loss)                      |       | (4.3                             | )          | (3.4                           | )          | 2.8 |   | (0.5 | ) |
| Other income                                 |       | 0.1                              |       | 0.2                            |       | 0.1 |   | 0.2 |   |
| Income tax provision (benefit)               |       | (1.7                             | )          | (1.1                           | )          | 1.2 |   | (0.1 | ) |
| Net income (loss)                            |       | (2.5                             | )%         | (2.1                           | )%         | 1.7 | % | (0.2 | )% |

 

**Three Months Ended August 28, 2010 Compared to Three Months Ended August 29,2009**

 

***Net Sales.***Net sales for the threemonths ended August 28, 2010 were $101.3 million, an increase ofapproximately $0.1 million or 0.2%, from $101.2 million for the three monthsended August 29, 2009.  The increasein net sales was primarily the result of a 1% increase in same store sales andincreases in revenues at the Company’s Christopher & Banks and C.J.Banks e-Commerce web sites, partially offset by a decrease in the number ofstores operated by the Company during the quarter and a reduction in salesrelated to accrued unearned revenue for points accumulated by customers andcertificates issued in conjunction with the Company’s new Friendship Rewardsloyalty program.

 

The1% increase in same stores sales in the second quarter was the result of higheraverage transaction values which were derived from an increase in units soldper transaction, offset slightly by a lower average selling price per unit dueto increased promotional activity required to drive sales and clear throughearly deliveries of fall merchandise.  Inaddition, increased conversion rates in the second quarter of fiscal 2011, ascompared to the second quarter of fiscal 2010, also helped to offset the impactof continued declines in customer traffic.

 

TheCompany operated 789 stores at August 28, 2010, compared to 811 stores asof August 29, 2009.

 

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***Merchandise, Buying and Occupancy Costs. ***Merchandise, buying andoccupancy costs, exclusive of depreciation and amortization, were $65.5million, or 64.7% of net sales, during the second quarter of fiscal 2011,compared to $66.2 million, or 65.4% of net sales, during the same period infiscal 2010, resulting in approximately 70 basis points of  positive leverage when compared to the prioryear period.

 

Thereduction in merchandise, buying and occupancy costs as a percentage of netsales in the second quarter of fiscal 2011, as compared to the second quarterof fiscal 2010, was a result of lower rent expense and positive leveraging ofbuying and occupancy costs associated with the 1% increase in same storessales.  This was partially offset by areduction in merchandise margins due to an increase in promotional markdownsneeded to drive sales and clear through early deliveries of fall merchandise inthe second quarter.

 

***Selling, General and Administrative Expenses. ***Selling, general andadministrative expenses, exclusive of depreciation and amortization, for thethree months ended August 28, 2010 were $33.8 million, or 33.3% of netsales, compared to $32.2 million, or 31.8% of net sales, for the three monthsended August 29, 2009, resulting in approximately 150 basis points ofnegative leverage.  The increase inSG&A expenses in the second quarter of fiscal 2011, compared to the sameperiod in fiscal 2010, primarily related to increased medical costs andstock-based compensation expense.  TheCompany also recorded a severance charge of approximately $0.5 million relatedto the separation of its former Chief Financial Officer in July 2010.  In addition, SG&A expense in the quarterended August 29, 2009 included pre-tax non-recurring benefits ofapproximately $1.2 million related largely to legal and contract settlements.

 

***Depreciation and Amortization.***  Depreciation and amortization was $6.4million, or 6.3% of net sales, in the second quarter of fiscal 2011, comparedto $6.3 million, or 6.2% of net sales, in the second quarter of fiscal 2010.

 

***Operating Loss. ***Based on the foregoing, the Company recorded anoperating loss of $4.4 million, or 4.3% of net sales, for the quarter ended August 28,2010, compared to an operating loss of $3.5 million, or 3.4% of net sales, forthe quarter ended August 29, 2009.

 

***Interest Income. ***For the three months ended August 28, 2010,interest income was $0.1 million, compared to $0.2 million for the three monthsended August 29, 2009.

 

***Income Taxes. ***Income tax benefit in the second quarter of fiscal2011 was $1.8 million, with an effective tax rate of 40.9%, compared to incometax benefit of $1.1 million, with an effective tax rate of 34.4%, in the secondquarter of fiscal 2010.  The increase inthe effective tax rate reflects the Company’s expectation for improvedprofitability in fiscal 2011, as compared to the near break even resultsreported in fiscal 2010, as well as the impact of permanent differences andstate income taxes.

 

***Net Loss. ***As a result ofthe foregoing factors, the Company recorded a net loss of $2.5 million, or 2.5%of net sales and ($0.07) per share, for the three months ended August 28,2010, compared to 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.

 

**Six Months Ended August 28, 2010 Compared to Six Months Ended August 29,2009**

 

***Net Sales.  ***Net sales forthe six months ended August 28, 2010 were $227.6 million, an increase ofapproximately $6.1 million or 2.7% from $221.5 million for the six months endedAugust 29, 2009.  The increase innet sales was primarily the result of a 3% increase in same store sales andincreases in revenues at the Company’s Christopher & Banks and C.J.Banks e-Commerce web sites, partially offset by a decrease in the number ofstores operated by the Company and a reduction in sales related to accruedunearned revenue for points accumulated by customers and certificates issued inconjunction with the Company’s new Friendship Rewards loyalty program.

 

TheCompany operated 789 stores at August 28, 2010, compared to 811 stores asof August 29, 2009

 

***Merchandise, Buying and Occupancy Costs. ***Merchandise, buying andoccupancy costs, exclusive of depreciation and amortization, were $138.4million, or 60.8% of net sales, during the six months ended August 28,2010, compared to $141.6 million, or 63.9% of net sales, during the six monthsended August 29, 2009.  The 310basis point reduction in merchandise, buying and occupancy costs as a percentof sales in the first half of fiscal 2010, compared to the first half of fiscal2011, was mainly a result of reduced rent expense and positive leverage ofbuying and occupancy costs associated with the 3% increase in same storesales.  In addition, merchandise marginswere up slightly in the first six months of fiscal 2011 when compared to thesame period in the prior year.

 

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***Selling, General and Administrative Expenses. ***Selling, general andadministrative expenses, exclusive of depreciation and amortization, for thesix months ended August 28, 2010 were $70.0 million, or 30.7% of netsales, compared to $68.4 million, or 30.9% of net sales, for the six monthsended August 29, 2009.  The increasein SG&A expenses in the first half of fiscal 2011, compared to the sameperiod in fiscal 2010, primarily related to increases in stock-basedcompensation expense and severance costs. The Company recorded a severance charge in the second quarter ofapproximately $0.5 million related to the separation of its former ChiefFinancial Officer in July 2010.  Inaddition, SG&A expense in the second quarter of fiscal 2010 includedpre-tax non-recurring benefits of approximately $1.2 million related largely tolegal and contract settlements.

 

***Depreciation and Amortization.***  Depreciation and amortization was $13.0million, or 5.7% of net sales, in the first six months of fiscal 2011, comparedto $12.6 million, or 5.7% of net sales, in the first six months of fiscal 2010.

 

***Operating Income (loss). ***Based on the foregoing, theCompany recorded operating income of $6.2 million, or 2.8% of net sales, forthe six months ended August 28, 2010, compared to an operating loss of$1.0 million, or 0.5% of net sales, for the six months ended August 29,2009.

 

***Interest Income. ***For the six months ended August 28, 2010,interest income was $0.2 million, compared to $0.3 million for the six monthsended August 29, 2009.

 

***Income Taxes. ***Income tax expense in the first half of fiscal 2011was $2.7 million, with an effective tax rate of 41.2%, compared to an incometax benefit of $0.2 million, with an effective tax rate of 34.2%, in the firsthalf of fiscal 2010.  The increase in theeffective tax rate reflects the Company’s expectation for improvedprofitability in fiscal 2011, as compared to the near break even resultsreported in fiscal 2010, as well as the impact of permanent differences andstate income taxes.

 

***Net Income (Loss). ***As a result of the foregoing factors, the Companyrecorded net income of $3.8 million, or 1.7% of net sales and $0.11 per dilutedshare, for the six months ended August 28, 2010, compared to a net loss of$0.4 million, or 0.2% of net sales and ($0.01) per share, for the six monthsended August 29, 2009.

 

**Liquidityand Capital Resources**

 

TheCompany’s principal on-going cash requirements are to fund working capitalneeds such as purchasing merchandise inventory, to finance the construction ofnew stores and the remodeling of certain existing stores, and to makeinformation technology-related and other capital expenditures.  Merchandise purchases vary on a seasonalbasis, peaking in the fall.  As a result,the Company’s cash requirements historically reach their peak in October orNovember, during the Company’s third fiscal quarter.  Conversely, cash balances peak in the fourthfiscal quarter in January, after the holiday season is completed.  The Company’s balance of cash, cashequivalents and short and long-term investments was approximately $109 millionat the end of the second quarter of fiscal 2011 down from approximately $113million at the end of fiscal 2010 and up from approximately $100 million at theend of the second quarter of fiscal 2010. Please see Note 2, Investments, for further information regardingthe Company’s investment holdings.

 

*Netcash provided by operating activities*

 

Netcash provided by operating activities totaled $18.9 million in the first sixmonths of fiscal 2011, an increase of approximately $6.7 million from $12.2million in the first six months of fiscal 2010.

 

Approximately$14.9 million of the Company’s ARS were redeemed during the six months ended August 28,2010.  Significant fluctuations in theCompany’s working capital accounts included a $3.0 million decrease in accruedliabilities and a $2.3 million decrease in deferred lease incentives.  The decrease in accrued liabilities resultedfrom reductions in the company’s gift card and worker’s compensation claimliabilities.  The decrease in deferredlease incentives was due to ongoing amortization of tenant allowances and reductionsfor stores closed in the first half of fiscal 2011.

 

Theremainder of the change in cash provided by operating activities wassubstantially the result of net income earned during the first six months offiscal 2011, after adjusting for non-cash charges, including depreciation andamortization expense, deferred income taxes, stock-based compensation expenseand various other changes in the Company’s other operating assets andliabilities.

 

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*Netcash used in investing activities*

 

Netcash used in investing activities in the first six months of fiscal 2011consisted of $5.5 million of capital expenditures as well as approximately $8.8million of net purchases of available-for-sale securities.  The Company opened two new stores during thefirst half of the year and incurred capital expenditures related to two storesthat opened in the third quarter of fiscal 2011.  In addition, the Company made informationtechnology-related and other investments at its stores and corporate officefacility during the six months ended August 28, 2010.

 

TheCompany expects to fund approximately $5 million to $6 million of additional capitalexpenditures in the last two quarters of fiscal 2011.  The Company plans to open approximately threeadditional stores during the second half of fiscal 2011 and to fund additionalinvestments in its stores and information technology infrastructure.  In addition, the Company expects that aportion of these capital expenditures will relate to stores scheduled to openin the first quarter of fiscal 2012.

 

*Netcash used in financing activities*

 

Inthe first six months of fiscal 2011, approximately $4.3 million was used infinancing activities for the payment of two quarterly cash dividends, which waspartially offset by approximately $0.1 million of proceeds received from theexercise of stock options and $0.2 million of excess tax benefit on stock-basedcompensation.

 

TheCompany anticipates its cash, cash equivalents and investments, combined withcash flows generated from operations, will be sufficient to meet its capitalexpenditure, working capital and other requirements for liquidity for theremainder of fiscal 2011.

 

*Creditfacility*

 

TheCompany maintains an Amended and Restated Revolving Credit Facility (the “CreditFacility”) with Wells Fargo Bank, National Association (“Wells Fargo”) whichexpires on June 30, 2011.  TheCredit Facility provides the Company with revolving credit loans and letters ofcredit of up to $50 million, in the aggregate, subject to a borrowing baseformula based on inventory levels.

 

Loansunder the Credit Facility bear interest at the prime rate minus 0.25%.  As of August 28, 2010, 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.

 

Interestunder the Credit Facility is payable monthly in arrears.  The Credit Facility carries a facility fee of0.25%, based on the unused portion as defined in the agreement, a collateralmonitoring fee and a guarantee service charge. 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 2011 or fiscal 2010. 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 28, 2010was $28.1 million and the Company had open on-demand letters of credit in theamount of $1.3 million.  Accordingly, theavailability of revolving credit loans under the Credit Facility was $26.8million at August 28, 2010.

 

TheCredit Facility contains certain restrictive covenants, including restrictionson incurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of August 28, 2010,the most recent measurement date, the Company was in compliance with allfinancial covenants under the Credit Facility.

 

*AuctionRate Securities*

 

InNovember 2008, the Company entered into a settlement agreement with UBSFinancial Services, Inc., a subsidiary of USB AG (“UBS”) related to theCompany’s investment in Auction Rate Securities (“ARS”) purchased throughUBS.  Under the terms of the settlementagreement, the Company received rights that enabled it to sell its ARS to UBSat par value at any time during the two year period beginning June 30,2010.  On June 30, 2010, the Companyexercised its ARS rights and sold its remaining $7.1 million investment in ARSto UBS at par value on July 1, 2010. As of August 28, 2010, the Company had no investments in ARS.

 

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**MerchandiseSourcing**

 

TheCompany directly imported approximately 7% of its total merchandise purchasesin the six month periods ended August 28, 2010 and August 29,2009.  Substantially all of its remainingmerchandise purchases were made from U.S. based companies which import thegoods from overseas.  This reliance onsourcing from foreign countries may cause the Company to be exposed to certainrisks as indicated below and as discussed in Part I, “Item 1A. RiskFactors” in the Company’s Annual Report on Form 10-K for the year ended February 27,2010.

 

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

 

The Company does not have long-term purchasecommitments or arrangements with any of its suppliers or agents.  During the three and sixmonth periods ended August 28, 2010 and August 29, 2009, two of theCompany’s vendors each supplied the Company with greater than 10% of itsmerchandise inventory purchases.  For thesecond quarter of fiscal 2011, these two vendors supplied approximately 28% and17% of the Company’s merchandise purchases, compared to 26% and 17% for thesecond quarter of fiscal 2010.  For thesix month period ended August 28, 2010, these vendors supplied approximately29% and 18% of the Company’s merchandise purchases, compared to 26% and 15% ofthe Company’s merchandise purchases during the six months ended August 29, 2009.

 

Although the Company has strong relationships withthese vendors, there can be no assurance that these relationships can bemaintained in the future or that the vendors will continue to supplymerchandise to the Company.  If there should be any significant disruptionin the supply of merchandise from these vendors, management believes that itwill be able to shift production to other suppliers so as to continue to securethe required volume of product.  Nevertheless, it is possible that anysignificant disruption in supply could have a material adverse impact on theCompany’s financial position or results of operations.

 

TheCompany has recently experienced an increase in product costs for some of itsmerchandise orders to be delivered in the second half of fiscal 2011 and thefirst quarter of fiscal 2012.  The increase in costs consist primarily ofincreases in the price of cotton, labor and transportation.  In responseto these recent increases, the Company will continue to evaluate itsmerchandise sourcing initiatives in an effort to source product and make rawmaterial commitments to mitigate these increases.  In addition, managementis analyzing its retail prices and believes it has the flexibility to pass onsome of the increased product costs to its customers.  The Company intendsto maintain its commitment to providing quality merchandise to its customerswhile it works to reduce the impact of these potential cost increases. Nonetheless, the Company’s gross margins could be negatively impacted if it isunable to mitigate these increases in product costs or to pass such productcosts on to its customers.

 

**QuarterlyResults and Seasonality**

 

TheCompany’s quarterly results may fluctuate significantly depending on a numberof factors, including general economic conditions, timing of promotional eventsand new store openings, adverse weather conditions, shifts in the timing ofcertain holidays and customer response to the Company’s seasonal merchandisemix.

 

**Inflation**

 

Managementdoes not believe that inflation had a material effect on the Company’s resultsof operations for the first six months of fiscal 2011 or fiscal 2010.

 

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**Forward-Looking Statements**

 

TheCompany, through its management, may make forward-looking statements reflectingthe Company’s current views with respect to future events and financialperformance.  These forward-lookingstatements, which may be included in reports filed under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), in press releases and inother documents and materials as well as in written or oral statements made byor on behalf of the Company, are subject to certain risks and uncertainties,including those discussed below and in Item 1A of the Company’s Annual Reporton Form 10-K for the fiscal year ended February 27, 2010, which couldcause actual results to differ materially from historical results or thoseanticipated.

 

Thewords or phrases “will likely result,” “are expected to,” “will continue,” “estimate,”“project,” “believe,” “expect,” “anticipate,” “forecast,” “plans to,” “intend,”“intends” and similar expressions are intended to identify forward-lookingstatements within the meaning of Section 21e of the Exchange Act and Section 27Aof the Securities Act of 1933, as amended, as enacted by the Private SecuritiesLitigation Reform Act of 1995 (“PSLRA”). In particular, the Company desires to take advantage of the protectionsof the PSLRA in connection with the forward-looking statements made in thisQuarterly Report on Form 10-Q.

 

Readersare cautioned not to place undue reliance on these forward-looking statements,which speak only as of the date such statements are made.  In addition, the Company wishes to advisereaders that the factors listed in Item 1A of the Company’s Annual Reporton Form 10-K for the fiscal year ended February 27, 2010, as well asother factors including those listed below, could affect the Company’sperformance and could cause the Company’s actual results for future periods todiffer materially from any opinions or statements expressed about such futureperformance or results:

 

·                  Economic conditions may cause a decline in businessand consumer spending which could adversely affect our financial performance.

·                  All of our stores are located within the UnitedStates, making us highly susceptible to deteriorations in U.S. macroeconomicconditions and consumer confidence.

·                  If we are unable to anticipate or react to changingconsumer preferences in a timely manner, our sales, merchandise margins andoperating income could decline.

·                  Our ability to manage inventory levels and abilityto predict or respond to customer demand may impact our results.

·                  Our success depends on a consistent and sufficientlevel of traffic to our stores and the absence of or a further reduction instore traffic could significantly reduce our sales revenues and impact ourmargins, as well as leave us with unsold inventory.

·                  We operate in a highly competitive retailindustry.  The size and resources of someof our competitors may allow them to compete more effectively than we can,which could result in a reduced level of sales and a loss of market share.

·                  Fluctuations in our level of same-store sales couldadversely affect our earnings growth.

·                  Our net sales and operating income fluctuate on aseasonal basis and decreases in sales or margins during our peak seasons couldhave a disproportionate effect on our overall financial condition and resultsof operations.

·                  Our results of operations could deteriorate if wefail to attract, develop and retain qualified employees.

·                  Extreme and/or unseasonable weather conditionscould have a disproportionately large effect on our business, financialcondition and results of operations and we could be forced to mark downinventory.

·                  Our ability to manage SG&A expenses and capitalexpenditures may impact our operating results.

·                  We are highly dependent on a few suppliers whoprimarily manufacture overseas and our reliance on foreign sources ofproduction poses various risks.

·                  The raw materials used to manufacture our products,in particular cotton, and our transportation and labor costs are subject toavailability constraints and price volatility and we have recently seen anincrease in such costs, which could adversely affect our margins or result inincreased prices which could result in lower sales.

·                  Our manufacturers may be unable to manufacture anddeliver products in a timely manner or meet our quality standards, which couldresult in lost sales, cancellation charges or excessive markdowns.

·                  Our inability to maintain the value of our brandsand our trademarks may adversely affect our business and financial performance.

·                  We face challenges to grow our business and tomanage our growth.

·                  Disruptions in our information systems could adversely affect oursales and profitability.

 

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·                  We depend significantly on a single operations anddistribution facility.

·                  There are risks associated with our e-Commerce sales.

·                  If third parties who manage some aspects of ourbusiness do not adequately perform their functions, we might experiencedisruptions in our business, resulting in decreased profits or losses.

·                  Effects of war, terrorism or other catastrophescould adversely impact our business or operations.

·                  Failure to comply with legal and regulatoryrequirements could damage our reputation, financial condition and the marketprice of our stock.

·                  Our business could suffer if any of themanufacturers of the goods that we sell fails to use acceptable laborpractices.

·                  Our marketing efforts rely upon the effective useof customer information.  Restrictions onthe availability or use of customer information or the unauthorized disclosureof sensitive or confidential information could adversely affect our marketingprograms or expose us to litigation, which could disrupt our operations andharm our business.

·                  Operating losses in tax jurisdictions with deferredtax assets could hinder our ability to continue to carry the deferred taxassets, which would result in a valuation allowance negatively impacting ourconsolidated results and net worth.

·                  Government healthcare requirements could adverselyaffect our profits.

·                  The bankruptcy or significant deterioration oflarge commercial and retail landlords could have a material adverse effect onour sales and operating results.

·                  The inability of our suppliers to obtain credit maycause us to experience delays in obtaining merchandise.

·                  A failure in the effectiveness of internal controlover financial reporting could adversely impact our business.

·                  We may be subject to adverse outcomes in current orfuture litigation matters.

 

TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Themarket risk inherent in the Company’s financial instruments and in itsfinancial position represents the potential loss arising from adverse changesin interest rates.  The Company’s resultsof operations could be negatively impacted by decreases in interest rates onits investments.

 

TheCompany is potentially exposed to market risk from changes in interest ratesrelating to its Credit Facility with Wells Fargo Bank.  Loans under the Credit Facility bear interestat Wells Fargo’s prime rate, 3.25% as of August 28, 2010, less 0.25%, orthe one, three or six month LIBOR rate, based on the length of time the advanceis outstanding.  However, the Company hadno revolving credit loan borrowings under the Credit Facility during the firstsix months of fiscal 2011 or fiscal 2010 and, given its existing liquidityposition, the Company does not expect to utilize the Credit Facility in thereasonably foreseeable future other than for letters of credit.

 

TheCompany enters into certain purchase obligations outside the United States,which are denominated and settled in U.S. dollars.  Therefore, the Company has only minimalexposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believesthat its foreign currency exchange risk is immaterial.

 

TheCompany does not have any derivative financial instruments and does not holdany derivative financial instruments for trading purposes.

 

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**ITEM 4.**

**CONTROLS AND PROCEDURES**

 

*(a)**      **Evaluation of Disclosure Controlsand Procedures.*

 

Underthe supervision and with the participation of its Chief Executive Officer andInterim Chief Financial Officer, the Company’s management has evaluated theeffectiveness and design of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of the period covered by this report (the “EvaluationDate”).  Based upon that evaluation, theCompany’s Chief Executive Officer and Interim Chief Financial Officer concludedthat, as of the Evaluation Date, the Company’s disclosure controls andprocedures were effective to ensure that information required to be disclosedby the Company in the reports that it files or submits under the Exchange Actis (i) recorded, processed, summarized and reported within the timeperiods specified in applicable rules and forms, and (ii) accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Interim Chief Financial Officer, to allow timely decisionsregarding required disclosure.

 

*(b)**      **Internal Control Over FinancialReporting.*

 

Therehave not been any changes in the Company’s internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) during the three months ended August 28, 2010 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**

 

TheCompany is subject, from time to time, to various claims, lawsuits or actionsthat arise in the ordinary course of business. Although the amount of any liability that could arise with respect toany current proceedings cannot, in our opinion, be accurately predicted, anysuch liability is not expected to have a material adverse impact on the Company’sfinancial position, results of operations or liquidity.

 

**ITEM 1A.**

**RISK FACTORS**

 

Therehave been no material changes to the factors discussed in Part I, “Item1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the yearended February 27, 2010.

 

**ITEM 2.**

**UNREGISTERED SALES OF EQUITY**

**SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.**

**DEFAULTS UPON**

**SENIOR SECURITIES**

 

None.

 

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**ITEM 4.**

**(REMOVED AND RESERVED)**

 

**ITEM 5.**

**OTHER INFORMATION**

 

None.

 

**ITEM 6.**

**EXHIBITS**

 

3.1*                                                  RestatedCertificate of Incorporation of Christopher & Banks Corporation, asamended through July 27, 2010

 

3.2*                                                  Fourth Amendedand Restated By-Laws of Christopher & Banks Corporation, as amendedthrough July 27, 2010

 

4.1*                                                  Form ofcertificate for shares of common stock of Christopher & Banks Corporation

 

10.1                                                   Second Amendedand Restated Christopher & Banks Corporation 2006 Equity IncentivePlan for Non-Employee Directors, effective July 27, 2010 (incorporatedherein by reference to Exhibit 10.1 to Current Report on Form 8-Kfiled August 2, 2010)

 

10.2                                                   Second Amendedand Restated Christopher & Banks Corporation 2005 Stock IncentivePlan, effective July 27, 2010 (incorporated herein by reference to Exhibit 10.2to Current Report on Form 8-K filed August 2, 2010)

 

31.1*                                            Certificationof Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuantto Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2*                                            Certificationof Interim Chief Financial Officer pursuant to Rule 13a-14(a), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1*                                            Certificationof the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2*                                            Certificationof the Interim 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**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                               | **CHRISTOPHER &  BANKS CORPORATION** |
|------------------------------------|-----------------------------------------------|
|                               | ** **                                    |
|                               |                                          |
| Dated:  October 7,  2010 | By:                                           | /s/  LORNA E. NAGLER |
|                               |                                          |   |
|                               |                                          | Lorna E. Nagler |
|                               |                                          | President and Chief Executive Officer |
|                               |                                          | (Principal Executive Officer) |
|                               |                                          |
|                               |                                          |
| Dated:  October 7,  2010 | By:                                           | /s/  MICHAEL J. LYFTOGT |
|                               |                                          |   |
|                               |                                          | Michael J. Lyftogt |
|                               |                                          | Vice President Finance, |
|                               |                                          | Chief Accounting Officer and |
|                               |                                          | Interim Chief Financial Officer |
|                               |                                          | (Principal Financial Officer) |

 

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Tableof Contents

 

**CHRISTOPHER & BANKS CORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEX TO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                   |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                              |
| 3.1*                 |       | Restated  Certificate of Incorporation of Christopher & Banks Corporation, as  amended through July 27, 2010                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                              |
| 3.2*                 |       | Fourth  Amended and Restated By-Laws of Christopher & Banks Corporation, as  amended through July 27, 2010                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                              |
| 4.1*                 |       | Form of  certificate for shares of common stock of Christopher & Banks  Corporation                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                              |
| 10.1                 |       | Second  Amended and Restated Christopher & Banks Corporation 2006 Equity  Incentive Plan for Non-Employee Directors, effective July 27, 2010  (incorporated herein by reference to Exhibit 10.1 to Current Report on  Form 8-K filed August 2, 2010) |
|                 |       |                                                                                                                                                                                                                                                                              |
| 10.2                 |       | Second  Amended and Restated Christopher & Banks Corporation 2005 Stock  Incentive Plan, effective July 27, 2010 (incorporated herein by  reference to Exhibit 10.2 to Current Report on Form 8-K filed  August 2, 2010)                             |
|                 |       |                                                                                                                                                                                                                                                                              |
| 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 Interim 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 Interim 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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