**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 September 1, 2007**                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **                                                                                               |
| **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 No.** **001-31390**

 

**CHRISTOPHER & BANKS CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **06 - 1195422**       |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

# **2400 Xenium Lane North, Plymouth, Minnesota**

(Address of principal executive offices)

 

# **55441**

(Zip Code)

 

**(763) 551-5000**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

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

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

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

 

As of October 5,2007, 35,418,625 shares of the registrant’s common stock were outstanding.

 

 

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

###### ** **

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEX**

 

# **PART I**

# **FINANCIAL INFORMATION**

# ** **

|                  |       |                                                                                                                      |       | **Page**   |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                  |       |                                                                                                                      |       |       |
| Item 1.               |       | Unaudited  Consolidated Condensed Financial Statements:                                                                   |       |       |
|                  |       |                                                                                                                      |       |       |
|                  |       | Consolidated Condensed  Balance Sheet  As of September 1, 2007, March 3, 2007 and August 26, 2006          |       | 3          |
|                  |       |                                                                                                                      |       |       |
|                  |       | Consolidated Condensed  Statement of Income  For the Three Months Ended September 1, 2007 and August 26, 2006   |       | 4          |
|                  |       |                                                                                                                      |       |       |
|                  |       | Consolidated Condensed  Statement of Income  For the Six Months Ended September 1, 2007 and August 26, 2006     |       | 5          |
|                  |       |                                                                                                                      |       |       |
|                  |       | Consolidated Condensed  Statement of Cash Flows  For the Six Months Ended September 1, 2007 and August 26, 2006 |       | 6          |
|                  |       |                                                                                                                      |       |       |
|                  |       | Notes to Consolidated  Condensed Financial Statements                                                                     |       | 7          |
|                  |       |                                                                                                                      |       |       |
| Item 2.               |       | Management’s  Discussion and Analysis of   Financial Condition and Results of Operations                             |       | 13         |
|                  |       |                                                                                                                      |       |       |
| Item 3.               |       | Quantitative  and Qualitative Disclosures   About Market Risk                                                             |       | 19         |
|                  |       |                                                                                                                      |       |       |
| Item 4.               |       | Controls and  Procedures                                                                                                  |       | 20         |
|                  |       |                                                                                                                      |       |       |
| **PART II**      | ** ** | ** **                                                                                                                |
| ** **            | ** ** | ** **                                                                                                                | ** ** | ** ** |
| **OTHER INFORMATION** |       |                                                                                                                      |
|                  |       |                                                                                                                      |       |       |
| Item 1.               |       | Legal Proceedings                                                                                                         |       | 20         |
|                  |       |                                                                                                                      |       |       |
| Item 1A.              |       | Risk Factors                                                                                                              |       | 20         |
|                  |       |                                                                                                                      |       |       |
| Item 2.               |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              |       | 21         |
|                  |       |                                                                                                                      |       |       |
| Item 3.               |       | Defaults Upon  Senior Securities                                                                                          |       | 21         |
|                  |       |                                                                                                                      |       |       |
| Item 4.               |       | Submission of  Matters to a Vote of Security Holders                                                                      |       | 21         |
|                  |       |                                                                                                                      |       |       |
| Item 5.               |       | Other Information                                                                                                         |       | 22         |
|                  |       |                                                                                                                      |       |       |
| Item 6.               |       | Exhibits                                                                                                                  |       | 23         |
|                  |       |                                                                                                                      |       |       |
|                  |       | Signatures                                                                                                                |       | 24         |
|                  |       |                                                                                                                      |       |       |
|                  |       | Index to Exhibits                                                                                                         |       | 25         |

 

2

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# **CHRISTOPHER & BANKSCORPORATION**

# **CONSOLIDATED CONDENSEDBALANCE SHEET**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                  | ** ** | **September 1,** | ** **  | **March 3,** | ** ** | **August 26,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                                                                                                                  | ** ** | **2007**              | ** **  | **2007**          | ** ** | **2006**            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                  |       |                  |        |              |       |                |       |
| Current assets:                                                                                                                                                                                                                                                             |       |                  |        |              |       |                |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                   |       | $                     | 47,421,468  |              | $          | 53,991,398          |       | $ | 82,423,025 |   |
| Short-term investments                                                                                                                                                                                                                                                      |       | 43,450,000            |        | 48,275,000        |       | 44,325,000          |       |
| Accounts receivable                                                                                                                                                                                                                                                         |       | 5,713,892             |        | 4,481,624         |       | 5,264,056           |       |
| Merchandise inventories                                                                                                                                                                                                                                                     |       | 50,164,552            |        | 52,354,944        |       | 44,427,051          |       |
| Prepaid expenses                                                                                                                                                                                                                                                            |       | 10,970,362            |        | 10,666,421        |       | 6,258,297           |       |
| Other current assets                                                                                                                                                                                                                                                        |       | 8,813,608             |        | 5,334,636         |       | 6,018,272           |       |
| Total current assets                                                                                                                                                                                                                                                        |       | 166,533,882           |        | 175,104,023       |       | 188,715,701         |       |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Property, equipment and improvements, net                                                                                                                                                                                                                                   |       | 132,583,350           |        | 127,776,442       |       | 124,592,473         |       |
| Goodwill                                                                                                                                                                                                                                                                    |       | 3,587,052             |        | 3,587,052         |       | 3,587,052           |       |
| Intangible assets                                                                                                                                                                                                                                                           |       | 520,699               |        | 575,281           |       | 629,863             |       |
| Other assets                                                                                                                                                                                                                                                                |       | 2,544,876             |        | 280,299           |       | 280,488             |       |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Total assets                                                                                                                                                                                                                                                                |       | $                     | 305,769,859 |              | $          | 307,323,097         |       | $ | 317,805,577 |   |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                               | ** ** | ** **            | ** **  | ** **        | ** ** | ** **          | ** ** |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Current liabilities:                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Accounts payable                                                                                                                                                                                                                                                            |       | $                     | 12,407,603  |              | $          | 16,287,931          |       | $ | 10,826,707 |   |
| Accrued salaries, wages and related expenses                                                                                                                                                                                                                                |       | 8,158,886             |        | 7,574,930         |       | 8,730,714           |       |
| Other accrued liabilities                                                                                                                                                                                                                                                   |       | 20,046,848            |        | 22,387,281        |       | 17,807,559          |       |
| Total current liabilities                                                                                                                                                                                                                                                   |       | 40,613,337            |        | 46,250,142        |       | 37,364,980          |       |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Non-current liabilities:                                                                                                                                                                                                                                                    |       |                  |        |              |       |                |       |
| Deferred lease incentives                                                                                                                                                                                                                                                   |       | 23,332,654            |        | 23,646,261        |       | 21,659,041          |       |
| Deferred rent obligations                                                                                                                                                                                                                                                   |       | 11,429,871            |        | 10,678,341        |       | 10,292,713          |       |
| Other                                                                                                                                                                                                                                                                       |       | 3,607,544             |        | 983,137           |       | 1,710,605           |       |
| Total non-current liabilities                                                                                                                                                                                                                                               |       | 38,370,069            |        | 35,307,739        |       | 33,662,359          |       |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Commitments                                                                                                                                                                                                                                                                 |       | —                |        | —            |       | —              |       |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                  |       |                  |        |              |       |                |       |
| Preferred stock — $0.01 par value, 1,000,000 shares  authorized, none outstanding                                                                                                                                                                                 |       | —                |        | —            |       | —              |       |
| Common stock — $0.01 par value, 74,000,000 shares  authorized, 44,950,343, 45,038,310 and 44,866,525 shares issued and  35,772,325, 36,521,451 and 38,037,789 shares outstanding at September 1,  2007, March 3, 2007 and August 26, 2006, respectively |       | 449,503               |        | 450,383           |       | 448,665             |       |
| Additional paid-in capital                                                                                                                                                                                                                                                  |       | 107,812,881           |        | 106,806,885       |       | 101,511,980         |       |
| Retained earnings                                                                                                                                                                                                                                                           |       | 224,233,794           |        | 213,264,385       |       | 206,593,855         |       |
| Common stock held in treasury, 9,178,018, 8,516,859  and 6,828,736 shares at cost at September 1, 2007, March 3, 2007  and August 26, 2006, respectively                                                                                                |       | (105,709,725          | )           | (94,756,437       | )          | (61,776,262         | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                             |       | 226,786,453           |        | 225,765,216       |       | 246,778,238         |       |
|                                                                                                                                                                                                                                                                        |       |                  |        |              |       |                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                             |       | $                     | 305,769,859 |              | $          | 307,323,097         |       | $ | 317,805,577 |   |

 

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

 

3

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**CHRISTOPHER & BANKSCORPORATION**

**CONSOLIDATED CONDENSEDSTATEMENT OF INCOME**

(Unaudited)

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** **  |
|--------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                     | ** ** | **September 1,**            | ** **  | **August 26,** | ** ** |
| ** **                                                                     | ** ** | **2007**                         | ** **  | **2006** | ** ** |
|                                                                           |       |                             |        |   |   |
| Net sales                                                                      |       | $                                | 141,127,615 |   | $ | 131,553,342 |   |
|                                                                           |       |                             |        |   |   |
| Costs and expenses:                                                            |       |                             |        |   |   |
| Merchandise, buying and occupancy, exclusive of  depreciation and amortization |       | 90,594,806                       |        | 78,802,797 |   |
| Selling, general and administrative                                            |       | 40,626,872                       |        | 36,111,556 |   |
| Depreciation and amortization                                                  |       | 5,510,041                        |        | 5,017,119 |   |
| Total costs and expenses                                                       |       | 136,731,719                      |        | 119,931,472 |   |
|                                                                           |       |                             |        |   |   |
| Operating income                                                               |       | 4,395,896                        |        | 11,621,870 |   |
|                                                                           |       |                             |        |   |   |
| Interest income                                                                |       | 1,160,228                        |        | 1,325,425 |   |
|                                                                           |       |                             |        |   |   |
| Income before income taxes                                                     |       | 5,556,124                        |        | 12,947,295 |   |
|                                                                           |       |                             |        |   |   |
| Income tax provision                                                           |       | 2,166,888                        |        | 5,023,550 |   |
|                                                                           |       |                             |        |   |   |
| Net income                                                                     |       | $                                | 3,389,236   |   | $ | 7,923,745 |   |
|                                                                           |       |                             |        |   |   |
| Basic earnings per common share:                                               |       |                             |        |   |   |
|                                                                           |       |                             |        |   |   |
| Net income                                                                     |       | $                                | 0.09        |   | $ | 0.21 |   |
|                                                                           |       |                             |        |   |   |
| Basic shares outstanding                                                       |       | 35,846,747                       |        | 37,401,006 |   |
|                                                                           |       |                             |        |   |   |
| Diluted earnings per common share:                                             |       |                             |        |   |   |
|                                                                           |       |                             |        |   |   |
| Net income                                                                     |       | $                                | 0.09        |   | $ | 0.21 |   |
|                                                                           |       |                             |        |   |   |
| Diluted shares outstanding                                                     |       | 35,948,514                       |        | 38,049,065 |   |
|                                                                           |       |                             |        |   |   |
| Dividends per share                                                            |       | $                                | 0.06        |   | $ | 0.04 |   |

 

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

 

4

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**CHRISTOPHER & BANKSCORPORATION**

**CONSOLIDATED CONDENSEDSTATEMENT OF INCOME**

(Unaudited)

 
| ** **                                                                     | ** ** | **Six Months Ended** | ** **  |
|--------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                     | ** ** | **September 1,**          | ** **  | **August 26,** | ** ** |
| ** **                                                                     | ** ** | **2007**                       | ** **  | **2006** | ** ** |
|                                                                           |       |                           |        |   |   |
| Net sales                                                                      |       | $                              | 290,498,949 |   | $ | 274,083,631 |   |
|                                                                           |       |                           |        |   |   |
| Costs and expenses:                                                            |       |                           |        |   |   |
| Merchandise, buying and occupancy, exclusive of  depreciation and amortization |       | 177,510,927                    |        | 157,364,637 |   |
| Selling, general and administrative                                            |       | 79,705,995                     |        | 72,192,257 |   |
| Depreciation and amortization                                                  |       | 10,805,168                     |        | 9,998,738 |   |
| Total costs and expenses                                                       |       | 268,022,090                    |        | 239,555,632 |   |
|                                                                           |       |                           |        |   |   |
| Operating income                                                               |       | 22,476,859                     |        | 34,527,999 |   |
|                                                                           |       |                           |        |   |   |
| Interest income                                                                |       | 2,219,251                      |        | 2,286,956 |   |
|                                                                           |       |                           |        |   |   |
| Income before income taxes                                                     |       | 24,696,110                     |        | 36,814,955 |   |
|                                                                           |       |                           |        |   |   |
| Income tax provision                                                           |       | 9,631,483                      |        | 14,284,202 |   |
|                                                                           |       |                           |        |   |   |
| Net income                                                                     |       | $                              | 15,064,627  |   | $ | 22,530,753 |   |
|                                                                           |       |                           |        |   |   |
| Basic earnings per common share:                                               |       |                           |        |   |   |
|                                                                           |       |                           |        |   |   |
| Net income                                                                     |       | $                              | 0.42        |   | $ | 0.61 |   |
|                                                                           |       |                           |        |   |   |
| Basic shares outstanding                                                       |       | 35,900,270                     |        | 36,901,264 |   |
|                                                                           |       |                           |        |   |   |
| Diluted earnings per common share:                                             |       |                           |        |   |   |
|                                                                           |       |                           |        |   |   |
| Net income                                                                     |       | $                              | 0.42        |   | $ | 0.60 |   |
|                                                                           |       |                           |        |   |   |
| Diluted shares outstanding                                                     |       | 36,010,301                     |        | 37,573,303 |   |
|                                                                           |       |                           |        |   |   |
| Dividends per share                                                            |       | $                              | 0.12        |   | $ | 0.08 |   |

 

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

 

5

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**CHRISTOPHER & BANKSCORPORATION**

**CONSOLIDATED CONDENSEDSTATEMENT OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **September 1,**          | ** ** | **August 26,** | ** ** |
| ** **                                                                         | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                              |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 15,064,627 |   | $ | 22,530,753 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 10,805,168                     |       | 9,998,738 |   |
| Deferred income taxes                                                              |       | (3,118,303                     | )          | (1,762,585 | ) |
| Excess tax benefit related to stock-based  compensation                            |       | (21,152                        | )          | (5,283,450 | ) |
| Stock-based compensation expense                                                   |       | 940,808                        |       | 2,272,675 |   |
| Loss on disposal of furniture, fixtures and  equipment                             |       | 114,707                        |       | 89,386 |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Decrease (increase) in merchandise inventories                                     |       | 2,190,392                      |       | (6,555,676 | ) |
| Increase in accounts receivable                                                    |       | (1,232,268                     | )          | (510,753 | ) |
| (Increase) decrease in income taxes receivable                                     |       | 300,320                        |       | (6,258,297 | ) |
| Increase in other current assets                                                   |       | (303,941                       | )          | (388,231 | ) |
| Increase in other assets                                                           |       | (60,353                        | )          | (70,619 | ) |
| Increase (decrease) in accounts payable                                            |       | (3,953,255                     | )          | 960,232 |   |
| Increase (decrease) in accrued liabilities                                         |       | (1,756,477                     | )          | 5,891,399 |   |
| Decrease in deferred lease incentives                                              |       | (313,607                       | )          | (143,828 | ) |
| Increase in deferred rent obligations                                              |       | 751,530                        |       | 682,714 |   |
|                                                                               |       |                           |       |   |   |
| Net cash provided by operating activities                                          |       | 19,408,196                     |       | 21,452,458 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from investing activities:                                              |       |                           |       |   |   |
| Purchases of property, equipment and improvements                                  |       | (15,599,274                    | )          | (16,271,343 | ) |
| Purchases of short-term investments                                                |       | (61,100,000                    | )          | (31,325,000 | ) |
| Redemptions of short-term investments                                              |       | 65,925,000                     |       | 17,000,000 |   |
|                                                                               |       |                           |       |   |   |
| Net cash used in investing activities                                              |       | (10,774,274                    | )          | (30,596,343 | ) |
|                                                                               |       |                           |       |   |   |
| Cash flows from financing activities:                                              |       |                           |       |   |   |
| Proceeds from exercise of stock options                                            |       | 43,073                         |       | 28,033,502 |   |
| Dividends paid                                                                     |       | (4,314,790                     | )          | (2,934,873 | ) |
| Excess tax benefit related to stock-based  compensation                            |       | 21,152                         |       | 5,283,450 |   |
| Acquisition of common stock held in treasury                                       |       | (10,953,287                    | )          | (1,200,168 | ) |
|                                                                               |       |                           |       |   |   |
| Net cash provided by (used in) financing activities                                |       | (15,203,852                    | )          | 29,181,911 |   |
|                                                                               |       |                           |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | (6,569,930                     | )          | 20,038,026 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 53,991,398                     |       | 62,384,999 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash equivalents at end of period                                         |       | $                              | 47,421,468 |   | $ | 82,423,025 |   |
|                                                                               |       |                           |       |   |   |
| Supplemental cash flow information:                                                |       |                           |       |   |   |
| Income taxes paid                                                                  |       | $                              | 12,199,530 |   | $ | 17,690,582 |   |
| Purchases of equipment and improvements, accrued,  not paid                        |       | $                              | 72,927     |   | $ | 13,130 |   |

 

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

 

6

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**CHRISTOPHER & BANKSCORPORATION**

# **NOTES TO CONSOLIDATEDCONDENSED FINANCIAL STATEMENTS**

(Unaudited)

 

## **NOTE 1 – BASIS OF PRESENTATION**

## ** **

Theunaudited consolidated condensed financial statements included in this Form 10-Qhave been prepared by Christopher & Banks Corporation and subsidiaries(the “Company”) pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed, or omitted, pursuant to such rules and regulations. Theseunaudited consolidated condensed financial statements should be read inconjunction with the financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the fiscal year ended March 3,2007.

 

The results of operationsfor the interim periods shown in this report are not necessarily indicative ofresults to be expected for the fiscal year. In the opinion of management, theinformation contained herein reflects all adjustments necessary to make theresults of operations for the interim periods a fair statement of suchoperations. All such adjustments are of a normal recurring nature.

 

## **NOTE 2 – CEO TRANSITION**

## ** **

On August 30, 2007, the Company announced that its Board ofDirectors had appointed Lorna Nagler as President and Chief Executive Officereffective August 31, 2007. Ms. Nagler was also elected as a member ofthe Company’s Board of Directors as of August 31, 2007. Ms. Naglermost recently served as President of Lane Bryant and has 29 years of experiencein the women’s apparel retail industry.

 

Matthew P. Dillon resigned as President and Chief Executive Officer,and as a member of the Company’s Board of Directors, effective August 30,2007. The Company incurred a pre-tax charge of approximately $2.1 million, or$0.04 per diluted share, related to the transition of the CEO position from Mr. Dillonto Ms. Nagler.

 

## **NOTE 3 – INCOME TAXES**

## ** **

TheCompany adopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”),on March 4, 2007. FIN No. 48 prescribes a minimum recognitionthreshold and measurement process for recording uncertain tax positions in thefinancial statements. Additionally, FIN No. 48 provides guidance onderecognition, classification, accounting and disclosure related to uncertaintax positions.

 

Implementationof FIN No. 48 resulted in an adjustment to the Company’s liability forunrecognized tax benefits of approximately $0.2 million with a correspondingincrease to retained earnings. As of the date of adoption, the total amount ofunrecognized tax benefits was $3.4 million. Of that amount, approximately $2.3million represents the amount of unrecognized tax benefits that would, ifrecognized, favorably affect the Company’s effective income tax rate in futureperiods.

 

TheCompany recognizes interest and penalties related to unrecognized tax benefitsas components of income tax expense. At March 4, 2007, the Company hadaccrued $0.7 million for the potential payment of interest and penalties.

 

TheCompany and its subsidiaries file income tax returns in the U.S. Federaljurisdiction and various state jurisdictions. The Internal Revenue Service hascompleted their audit for tax years through fiscal 2006. The Company is notsubject to state income tax examination by tax authorities for taxable yearsprior to fiscal 2004.

 

7

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## **NOTE 4 – SHORT-TERM INVESTMENTS**

## ** **

 Short-term investments consisted of thefollowing:

 
| ** **                             | ** ** | **September 1,** | ** ** | **March 3,** | ** ** | **August 26,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------|------------|---------------------|------------|
| **Description**                        | ** ** | **2007**              | ** ** | **2007**          | ** ** | **2006**            | ** ** |
|                                   |       |                  |       |              |       |                |       |
| Tax advantaged auction rate securities |       | $                     | 43,450,000 |              | $          | 48,275,000          |       | $ | 37,325,000 |   |
| U.S. Government debt securities        |       | —                |       | —            |       | 7,000,000           |       |
|                                   |       |                  |       |              |       |                |       |
|                                   |       | $                     | 43,450,000 |              | $          | 48,275,000          |       | $ | 44,325,000 |   |

 

## **NOTE 5 – MERCHANDISE INVENTORIES**

 

Merchandiseinventories consisted of the following:

 
| ** **                        | ** ** | **September 1,** | ** ** | **March 3,** | ** ** | **August 26,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------------|------------|---------------------|------------|
| **Description**                   | ** ** | **2007**              | ** ** | **2007**          | ** ** | **2006**            | ** ** |
|                              |       |                  |       |              |       |                |       |
| Merchandise - in store            |       | $                     | 41,205,114 |              | $          | 41,099,342          |       | $ | 34,993,547 |   |
| Merchandise - in transit          |       | 10,005,014            |       | 11,888,367        |       | 10,250,650          |       |
| Allowance for permanent markdowns |       | (1,045,576            | )          | (632,765          | )          | (817,146            | )          |
|                              |       |                  |       |              |       |                |       |
|                              |       | $                     | 50,164,552 |              | $          | 52,354,944          |       | $ | 44,427,051 |   |

 

TheCompany purchased approximately 14% and 13% of its merchandise from its largestoverseas supplier during the first six months of fiscal 2008 and 2007,respectively.

 

## **NOTE 6 – PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET**

## ** **

Property,equipment and improvements, net consisted of the following:

 
| ** **                                                                  | ** ** | **Estimated**                             | ** ** | **September 1,** | ** **  | **March 3,** | ** ** | **August 26,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------|-------------|-------------------|------------|---------------------|------------|
| **Description**                                                             | ** ** | **Useful Life**                      | ** ** | **2007**              | ** **  | **2007**          | ** ** | **2006**            | ** ** |
| Land                                                                        |       | —                                    |       | $                     | 1,596,898   |              | $          | 1,596,898           |       | $ | 1,596,898 |   |
| Corporate office, distribution center and related  building improvements    |       | 25 years                                  |       | 11,823,129            |        | 11,663,704        |       | 11,412,094          |       |
| Store leasehold improvements                                                |       | Term of related lease, typically 10 years |       | 90,623,054            |        | 87,288,395        |       | 78,958,448          |       |
| Store furniture and fixtures                                                |       | Three to 10 years                         |       | 105,637,453           |        | 101,486,350       |       | 91,231,896          |       |
| Point of sale hardware and software                                         |       | Five years                                |       | 8,946,617             |        | 8,625,579         |       | 8,266,314           |       |
| Corporate office and distribution center furniture,  fixtures and equipment |       | Seven years                               |       | 2,868,716             |        | 2,751,805         |       | 2,615,705           |       |
| Computer hardware and software                                              |       | Three to five years                       |       | 7,038,697             |        | 5,771,237         |       | 4,699,105           |       |
| Construction in progress                                                    |       | —                                    |       | 10,410,235            |        | 5,429,824         |       | 11,397,597          |       |
|                                                                        |       |                                      |       | 238,944,799           |        | 224,613,792       |       | 210,178,057         |       |
| Less accumulated depreciation and amortization                              |       |                                      |       | 106,361,449           |        | 96,837,350        |       | 85,585,584          |       |
|                                                                        |       |                                      |       |                  |        |              |       |                |       |
| Net property, equipment and improvements                                    |       |                                      |       | $                     | 132,583,350 |              | $          | 127,776,442         |       | $ | 124,592,473 |   |

 

8

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## **NOTE 7 – GOODWILL**

 

## **The Company recognizes the excess cost of an acquiredentity over the net amount assigned to assets acquired and liabilities assumedas goodwill. Goodwill will be tested for impairment on an annual basis in thefourth quarter and between annual tests whenever impairment is indicated. Fairvalues are calculated based on an estimate of future cash flows, compared tothe corresponding carrying value of the acquired entity, including goodwill. Impairmentlosses will be recognized whenever the implied fair value is less than thecarrying value of the related asset. There were no impairments or other changesto the recorded amounts of goodwill for the periods presented.**

 

## **NOTE 8 – INTANGIBLE ASSETS**

 

## **Intangible assets consisted of the following:**

 
| ** **               | ** ** | **September 1,** | ** ** | **March 3,** | ** ** | **August 26,** | ** ** |
|--------------------------|------------|-----------------------|------------|-------------------|------------|---------------------|------------|
| ** **               | ** ** | **2007**              | ** ** | **2007**          | ** ** | **2006**            | ** ** |
| ** **               | ** ** | ** **            | ** ** | ** **        | ** ** | ** **          | ** ** |
| Customer lists           |       | $                     | 830,000    |              | $          | 830,000             |       | $ | 830,000 |   |
| Accumulated amortization |       | (309,301              | )          | (254,719          | )          | (200,137            | )          |
|                     |       | $                     | 520,699    |              | $          | 575,281             |       | $ | 629,863 |   |

 

Aggregateamortization expense for the six months ended September 1, 2007 was$54,582. Estimated aggregate amortization expense for fiscal 2008 and the nextfive fiscal years is as follows:

 

| Fiscal 2008 |   | $      | 100,278 |   |
|-------------|--------|--------|---------|--------|
| Fiscal 2009 |   | 82,500 |    |
| Fiscal 2010 |   | 82,500 |    |
| Fiscal 2011 |   | 82,500 |    |
| Fiscal 2012 |   | 82,500 |    |
| Fiscal 2013 |   | 82,500 |    |

 

## **NOTE 9 – ACCRUED LIABILITIES**

 

Otheraccrued liabilities consisted of the following:

 
| ** **                                          | ** ** | **September 1,** | ** ** | **March 3,** | ** ** | **August 26,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-------------------|------------|---------------------|------------|
| **Description**                                     | ** ** | **2007**              | ** ** | **2007**          | ** ** | **2006**            | ** ** |
|                                                |       |                  |       |              |       |                |       |
| Gift card, certificate and store credit liabilities |       | $                     | 8,104,900  |              | $          | 13,174,041          |       | $ | 7,303,644 |   |
| Accrued income, sales and other taxes payable       |       | 2,934,270             |       | 2,499,410         |       | 2,881,542           |       |
| Accrued occupancy related expenses                  |       | 1,219,971             |       | 640,985           |       | 887,466             |       |
| Other accrued liabilities                           |       | 7,787,707             |       | 6,072,845         |       | 6,734,907           |       |
|                                                |       |                  |       |              |       |                |       |
|                                                |       | $                     | 20,046,848 |              | $          | 22,387,281          |       | $ | 17,807,559 |   |

 

## **NOTE 10 – STOCK-BASED COMPENSATION**

 

TheCompany accounts for stock-based compensation in accordance with the provisionsof Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-BasedPayment” (“SFAS 123R”), which was adopted February 26, 2006 using themodified prospective transition method. Under this transition method,stock-based compensation expense recognized for share-based awards includes: (a) compensationexpense for all stock-based compensation awards granted prior to, but not yetvested as of February 25, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123, and (b) compensationexpense for all stock-based compensation awards granted subsequent to February 25,2006, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R.

 

9

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Totalpre-tax compensation expense related to stock-based awards for the three monthsended September 1, 2007 and August 26, 2006 was approximately$482,000 and $1.4 million, respectively. For the six months ended September 1,2007 and August 26, 2006, pre-tax stock-based compensation expense totaledapproximately $941,000 and $2.3 million, respectively. The decrease instock-based compensation expense in the first six months of fiscal 2008compared to the same period in fiscal 2007 was a result of lower expenseassociated with performance-based restricted stock, a reversal of expenserelated to forfeited stock options and restricted stock awards originallygranted to the Company’s former CEO and the impact of awards granted in January 2004which became fully vested by the end of fiscal 2007 and had no expense underSFAS 123R in fiscal 2008. Stock-based compensation expense was included inmerchandise, buying and occupancy expenses for the Company’s buying anddistribution employees and in selling, general and administrative expenses forall other employees.

 

*MethodologyAssumptions*

 

TheCompany uses the Black-Scholes option-pricing model to value the Company’sstock options for grants to its employees and non-employee directors. Usingthis option-pricing model, the fair value of each stock option award isestimated on the date of grant. The fair value of the Company’s stock optionawards, which are generally subject to pro-rata vesting, is expensed on astraight-line basis over the vesting period of the stock options. The expectedvolatility assumption is based on the historical volatility of the Company’sstock over a term equal to the expected term of the option granted. Theexpected term of stock option awards granted is derived from historicalexercise experience. The expected term assumption incorporates the contractualterm of an option grant, as well as the vesting period of an award. Therisk-free interest rate is based on the implied yield on a U.S. Treasuryconstant maturity with a remaining term equal to the expected term of theoption granted.

 

Theweighted average assumptions relating to the valuation of the Company’s stockoption grants for the three and six month periods ended September 1, 2007and August 26, 2006 were as follows:

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **September 1,**            | ** ** | **August 26,**            | ** ** | **September 1,** | ** ** | **August 26,** | ** ** |
| ** **              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected divdend yield  |       | 1.43                             | %          | 0.86                           | %          | 1.35 | % | 0.80 | % |
| Expected volatility     |       | 44.38                            | %          | 41.51                          | %          | 44.77 | % | 42.26 | % |
| Risk-free interest rate |       | 4.43                             | %          | 5.21                           | %          | 4.51 | % | 5.13 | % |
| Expected term in years  |       | 4.07                             |       | 3.53                           |       | 4.17 |   | 3.66 |   |

 

*Stock-BasedCompensation Activity*

 

Thefollowing table presents a summary of the Company’s stock option activity forthe six months ended September 1, 2007:

 
| ** **                       | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted  Average  Fair Value** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|
|                             |       |                   |       |                                   |       |                            |       |                                   |       |                                                |       |
| Outstanding, beginning of period |       | 2,072,876              |       | $                                      | 19.44      |                            | $          | 721,549                                |       | $                                                   | 6.85       |   |   |   |
| Vested                           |       | 1,765,038              |       | 19.30                                  |       | 721,549                         |       | 6.69                                   |       |                                                |       |
| Unvested                         |       | 307,838                |       | 20.24                                  |       | —                          |       | 7.78                                   |       |                                                |       |
| Granted                          |       | 398,950                |       | 15.88                                  |       | —                          |       | 5.92                                   |       |                                                |       |
| Exercised                        |       | (5,283                 | )          | 8.18                                   |       | 53,690                          |       | 3.45                                   |       |                                                |       |
| Canceled - Vested                |       | (237,869               | )          | 21.79                                  |       | —                          |       | 6.05                                   |       |                                                |       |
| Canceled - Unvested (Forfeited)  |       | (52,966                | )          | 18.74                                  |       | —                          |       | 7.02                                   |       |                                                |       |
| Outstanding, end of period       |       | 2,175,708              |       | 18.57                                  |       | 699,681                         |       | 6.78                                   |       | 5.86                                                |       |
| Vested                           |       | 1,583,722              |       | 19.00                                  |       | 699,681                         |       | 6.85                                   |       | 4.57                                                |       |
| Unvested                         |       | 591,986                |       | 17.44                                  |       | —                          |       | 6.58                                   |       | 9.32                                                |       |
|                             |       |                   |       |                                   |       |                            |       |                                   |       |                                                |       |
| Exercisable, end of period       |       | 1,583,722              |       | 19.00                                  |       | 699,681                         |       | 6.85                                   |       | 4.57                                                |       |
|                                  |            |                        |            |                                        |            |                                 |            |                                        |            |                                                     |            |  |  |  |

 

10

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TheCompany may also grant shares of restricted stock to its employees andnon-employee members of its Board of Directors. Restricted stock awards areindependent of option grants and are subject to forfeiture if employment orservice terminates prior to the lapse of the restrictions. In addition, certainof the Company’s restricted stock awards are performance based and are subjectto forfeiture if the defined performance conditions are not achieved. TheCompany values the restricted shares based on the closing price of the Company’scommon stock on the date of grant. The resulting expense is recorded on astraight line basis over the vesting period of the restricted award.

 

Thefollowing table presents a summary of the Company’s restricted stock activityfor the six months ended September 1, 2007:

 
| ** **                      | ** ** | **Number** | ** ** | **Aggregate** | ** ** | **Weighted**        | ** ** |
|---------------------------------|------------|------------|------------|---------------|------------|---------------------|------------|
| ** **                      | ** ** | **of**     | ** ** | **Intrinsic** | ** ** | **Average**         | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Value**     | ** ** | **Fair Value** | ** ** |
|                            |       |       |       |          |       |                |       |
| Unvested, beginning of period   |       | 53,717     |       | $             | 648,901    |                | $          | 20.04 |   |
| Granted                         |       | 119,800    |       | 1,447,184     |       | 15.38               |       |
| Vested                          |       | (8,417     | )          | 101,677       |       | 19.46               |       |
| Canceled - Unvested (Forfeited) |       | (15,150    | )          | 183,012       |       | 18.66               |       |
| Unvested, end of period         |       | 149,950    |       | 1,811,396     |       | 16.49               |       |
|                                 |            |            |            |               |            |                     |            |  |  |

 

## **NOTE 11 – LONG-TERM DEBT**

## ** **

The Company maintains an Amended and Restated Revolving Credit Facilitywith Wells Fargo Bank, National Association (the “Wells Fargo Revolver”) whichexpires on June 30, 2008. The Wells Fargo Revolver provides the Companywith revolving credit loans and letters of credit of up to $50.0 million,subject to a borrowing base formula based on inventory levels.

 

Loans under the Wells Fargo Revolver bear interest at Wells Fargo’sfloating rate, 8.25% as of September 1, 2007, plus 0.25%. Interest ispayable monthly in arrears. The Wells Fargo Revolver carries a facility fee of0.25% based on the unused portion as defined in the agreement. Facility feestotaled $3,882 for the six months ended September 1, 2007. The creditfacility is collateralized by the Company’s equipment, general intangibles,inventory, inventory letters of credit and letter of credit rights. The Companyhad no revolving credit loan borrowings under the Wells Fargo Revolver duringthe first six months of fiscal 2008. Historically, the Wells Fargo Revolver hasbeen utilized by the Company only to open letters of credit to facilitate theimport of merchandise. The borrowing base at September 1, 2007 was $44.7million. As of September 1, 2007, the Company had outstanding letters ofcredit in the amount of $24.0 million. Accordingly, the availability ofrevolving credit loans under the Wells Fargo Revolver was $20.7 million at September 1,2007.

 

The Wells Fargo Revolver contains certain restrictive covenantsincluding restrictions on incurring additional indebtedness and limitations oncertain types of investments, as well as requiring the maintenance of certainfinancial covenants. As of September 1, 2007, the most recent measurementdate, the Company was in compliance with all covenants of the Wells FargoRevolver.

 

## **NOTE 12 – STOCKHOLDERS’ EQUITY**

## ** **

In fiscal 2007, the Company’s Board of Directors authorized a stockrepurchase program enabling the Company to purchase up to $40.0 million of itscommon stock, subject to market conditions. During fiscal 2007, the Companyrepurchased 1,732,123 shares at a total cost, including commissions, ofapproximately $34.2 million. In March 2007, the Company completed therepurchase program by purchasing an additional 325,059 shares of its commonstock for a total cost, including commissions, of $5.8 million, bringing thetotal number of shares repurchased under this program to 2,057,182 at a totalcost, including commissions, of approximately $40.0 million.

 

11

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In May 2007, the Company’s Board of Directors authorized anotherstock repurchase program enabling the company to purchase up to $20 million ofits common stock, subject to market conditions. As of October 5, 2007, theCompany had repurchased 486,100 shares of its common stock for a total cost,including commissions, of approximately $7.0 million. Of the 486,100 sharesthat were repurchased, 336,100 shares were repurchased through September 1,2007 at a total cost, including commissions, of approximately $5.1 million.

 

The common stock repurchased under these programs is being held intreasury and has reduced the number of shares of the Company’s common stockoutstanding by approximately 6%. All of the Company’s share repurchases wereexecuted in the open market and no shares were repurchased from related parties.In addition, all of the Company’s share repurchases were executed in accordancewith the safe harbor provision of Rule 10b-18 of the Securities ExchangeAct of 1934, as amended.

 

In fiscal 2007,the Company’s Board of Directors authorized an increase in the Company’squarterly cash dividend to $0.06 per share of common stock, effective beginningwith the October 2006 dividend payment. The dividend rate was previously$0.04 per share of common stock. The Company has declared and paid a dividendeach quarter since its first declaration in fiscal 2004.

 

## **NOTE 13 – NET INCOME PER SHARE**

## ** **

Basic earnings per share (“EPS”) is computed based on the weightedaverage number of shares of common stock outstanding during the applicableperiods, while diluted EPS is computed based on the weighted average number ofcommon and common equivalent shares (dilutive stock options) outstanding. TheCompany’s reconciliation of earnings per share includes the individual shareeffects of all securities affecting earnings per share which consist solely ofthe effects of dilution from awards granted under the Company’s stock-basedcompensation plans.

 

The following is a reconciliation of the number of shares and per shareamounts used in the basic and diluted EPS computations:

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **September 1, 2007**  | ** ** | **August 26, 2006** | ** ** |
| ** **                                              | ** ** | ** **                       | ** ** | **Net** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                              | ** ** | ** **                       | ** ** | **Income** | ** ** | ** ** | ** ** | **Income** | ** ** |
| ** **                                              | ** ** | **Shares**                       | ** ** | **Per Share** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                                    |       |                             |       |   |   |   |   |   |   |
| Basic                                                   |       | 35,846,747                       |       | $ | 0.09 |   | 37,401,006 |   | $ | 0.21 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |
| Effect of dilution from stock-based compensation  plans |       | 101,767                          |       | — |   | 648,059 |   | — |   |
|                                                    |       |                             |       |   |   |   |   |   |   |
| Diluted                                                 |       | 35,948,514                       |       | $ | 0.09 |   | 38,049,065 |   | $ | 0.21 |   |

 
| ** **                                              | ** ** | **Six Months Ended**       | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **September 1, 2007** | ** ** | **August 26, 2006** | ** ** |
| ** **                                              | ** ** | ** **                 | ** ** | **Net** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                              | ** ** | ** **                 | ** ** | **Income** | ** ** | ** ** | ** ** | **Income** | ** ** |
| ** **                                              | ** ** | **Shares**                 | ** ** | **Per Share** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Basic                                                   |       | 35,900,270                 |       | $ | 0.42 |   | 36,901,264 |   | $ | 0.61 |   |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Effect of dilution from stock-based compensation  plans |       | 110,031                    |       | — |   | 672,039 |   | 0.01 |   |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Diluted                                                 |       | 36,010,301                 |       | $ | 0.42 |   | 37,573,303 |   | $ | 0.60 |   |

 

12

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Stock options of 1,711,179 and 1,639,179 were excluded from the sharesused in the computation of diluted EPS for the three and six months ended September 1,2007 as they were anti-dilutive. Stock options of 4,175 and 26,185 wereexcluded from the shares used in the computation of diluted EPS for the threeand six months ended August 26, 2006, respectively, as they wereanti-dilutive.

 

## **NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS**

## ** **

In September 2006,the Financial Accounting Standards Boards (“FASB”) issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measures” (“SFAS No. 157”),which is effective for fiscal years beginning after November 15, 2007. SFASNo. 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsfair value measurement disclosures. The Company is currently evaluating theimpact of adopting SFAS No. 157, but does not anticipate it will have amaterial effect on its financial position, results of operations or cash flows.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities Including anAmendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159permits entities to measure many financial instrument and certain other assetsand liabilities at fair value on an instrument-by-instrument basis under a fairvalue option. SFAS No. 159 is effective for fiscal years beginning after November 15,2007. Early adoption is permitted as of the beginning of the previous fiscalyear provided that the entity makes that choice in the first 120 days of thatfiscal year. The Company is currently evaluating the impact of adopting SFAS No. 159,but does not anticipate it will have a material effect on its financialposition, results of operations or cash flows.

 

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

(Unaudited)

 

**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-Q.**

** **

**Executive Summary - Key Performance Indicators**

** **

The Company’s managementevaluates the following items, which are considered key performance indicators,in assessing the Company’s performance:

 

*Same-storesales*

 

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

 

Management considerssame-store sales to be an important indicator of the Company’s performance. Same-storesales results are important in achieving leveraging of costs, including storepayroll, store occupancy, depreciation and other general and administrativeexpenses. Positive same-store sales above a certain level contribute to greaterleveraging of costs while negative same-store sales contribute to deleveragingof costs. Same-store sales also have a direct impact on the Company’s total netsales, cash and cash equivalents and working capital.

 

13

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

 

Merchandise, buying andoccupancy costs, exclusive of depreciation and amortization, measure whetherthe Company is appropriately optimizing the price of its merchandise. Merchandise,buying and occupancy costs include the cost of merchandise, markdowns, shrink,freight into and out from the Company’s distribution center, buyer anddistribution center salaries, buyer travel, rent and other occupancy relatedcosts, various merchandise design and development costs, miscellaneousmerchandise expenses and other costs related to the Company’s distributionnetwork. Any inability to obtain acceptable levels of initial markups or anysignificant increase in the Company’s markdowns could have an adverse effect onthe Company’s results of operations. In addition, an inability to locatesuitable store sites or to negotiate favorable lease terms could alsonegatively impact the Company’s results of operations.

 

*Operatingincome*

 

The Company’s managementviews operating income as a key indicator of the Company’s success. The keydrivers of operating income are same-store sales, merchandise, buying andoccupancy costs and the Company’s ability to control operating costs.

 

*Storeproductivity*

 

Store productivity,including sales per square foot, average unit retail price, number oftransactions per store and number of units per transaction, is evaluated bymanagement in assessing the operational performance of the Company.

 

*Inventoryturnover*

 

The Company’s managementevaluates inventory turnover as a measure of how productively inventory isbought and sold. Inventory turnover is important as it can signal slow movinginventory, which can be critical in determining the need to take markdowns onmerchandise.

 

*Cash flowand liquidity*

 

Management evaluates cash flow from operations, investing activitiesand financing activities in determining the sufficiency of the Company’s cashposition. Cash flow from operations has historically been sufficient to coverthe Company’s requirements for liquidity.

 

**Executive Overview**

 

Christopher & Banks Corporation is a Minneapolis-basedretailer of women’s specialty apparel, which operates stores through itswholly-owned subsidiaries:  Christopher &Banks, Inc., Christopher & Banks Company and Christopher &Banks Services Company, collectively referred to as the “Company.”  As of September 1, 2007, the Companyoperated 807 stores in 45 states, including 531 Christopher & Banks stores,239 C.J. Banks stores and 37 Acorn stores. The Company’s Christopher &Banks stores offer distinctive fashions featuring exclusively designed,coordinated assortments of sportswear and sweaters in sizes four to 16. TheCompany’s C.J. Banks stores offer similar assortments of women’s specialtyapparel in sizes 14W and up. The Company’s Acorn stores offer upscale women’sfashions along with complementary jewelry and accessories under private andbranded labels.

 

In the first six months of fiscal 2008, the Company opened nine newChristopher & Banks stores, 21 new C.J. Banks stores and two new Acornstores. The Company closed two Christopher & Banks stores and oneAcorn store during the first half of fiscal 2008. In the third quarter offiscal 2008, the Company anticipates it will open approximately 39 additionalstores, for a total of approximately 71 new store openings in fiscal 2008.

 

On August 30, 2007, the Company announced that its Board ofDirectors had appointed Lorna Nagler as President and Chief Executive Officereffective August 31, 2007. Ms. Nagler was also elected as a member ofthe Company’s Board of Directors as of August 31, 2007. Ms. Naglermost recently served as President of Lane Bryant and has 29 years of experiencein the women’s apparel retail industry.

 

Matthew P. Dillon resigned as President and Chief Executive Officer,and as a member of the Company’s Board of Directors, effective August 30,2007. The Company incurred a pre-tax charge of approximately $2.1 million, or$0.04 per diluted share, related to the transition of the CEO position from Mr. Dillonto Ms. Nagler.

 

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On June 18, 2007, the Company announced that Susan Connell wouldjoin the Company as Executive Vice President and Chief Merchandise Officereffective July 9, 2007. Ms. Connell is responsible for overseeingproduct development, sourcing and other merchandising activities for theCompany’s three retail concepts. Prior to joining the Company, Ms. Connellwas Senior Vice President – General Merchandising Manager with Lane Bryant.

 

On May 25, 2007, the Company’s Board of Directors authorized aone-year stock repurchase program enabling the Company to repurchase up to $20million of its common stock, subject to market conditions. As of October 5,2007, the Company had repurchased 486,100 shares of its common stock for atotal cost, including commissions, of approximately $7.0 million.

 

**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 March 3, 2007. Management’sdiscussion and analysis of the Company’s financial condition and results ofoperations are based upon the Company’s consolidated condensed financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.

 

On anongoing basis, the Company evaluates its estimates, including those related tocustomer product returns, inventories, income taxes, medical and workers’compensation claims and contingencies. The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions. There has beenno material changes in the Company’s critical accounting policies during thesix months ended September 1, 2007.

 

**Results of Operations**

 

The following table sets forth, for the periods indicated, certainitems from the Company’s consolidated condensed statement of income expressedas a percentage of net sales:

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **September 1,**            | ** ** | **August 26,**            | ** ** | **September 1,** | ** ** | **August 26,** | ** ** |
| ** **                                                                           | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                            |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Merchandise, buying and occupancy costs, exclusive  of depreciation and amortization |       | 64.2                             |       | 59.9                           |       | 61.1 |   | 57.4 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative expenses                                         |       | 28.8                             |       | 27.5                           |       | 27.5 |   | 26.3 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 3.9                              |       | 3.8                            |       | 3.7 |   | 3.7 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Operating income                                                                     |       | 3.1                              |       | 8.8                            |       | 7.7 |   | 12.6 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                      |       | 0.8                              |       | 1.0                            |       | 0.8 |   | 0.8 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Income before income taxes                                                           |       | 3.9                              |       | 9.8                            |       | 8.5 |   | 13.4 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Income tax provision                                                                 |       | 1.5                              |       | 3.8                            |       | 3.3 |   | 5.2 |   |
|                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                           |       | 2.4                              | %          | 6.0                            | %          | 5.2 | % | 8.2 | % |

 

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**Three Months Ended September 1,2007 Compared to Three Months Ended August 26, 2006**

 

***Net Sales.***Net sales for the three months ended September 1,2007 were $141.1 million, an increase of $9.5 million or 7%, from $131.6million for the three months ended August 26, 2006. The increase in netsales resulted from an increase in the number of stores operated by the Companycombined with a 3% increase in same-store sales. The Company operated 807stores at September 1, 2007, compared to 753 stores at August 26,2006. The Company’s same-store sales were calculated by comparing the 13-weekperiod ended September 1, 2007 to the 13-week period ended September 2,2006. The resulting 3% increase in same-store sales was attributable to anapproximate 5% increase in the average number of transactions per store,partially offset by a decrease in the average value per transaction. Salesduring the second quarter were driven in part by an increased level ofmarkdowns to clear excess inventory in June and July. In the secondquarter, same-store sales for the Company’s stores opened in fiscal 2005, 2006and 2007 increased 5%, while the mature base of stores, opened in fiscal 2004and earlier, posted a 2% increase in same-store sales.

 

***Merchandise, Buying and Occupancy Costs, exclusive of depreciation andamortization.***Merchandise, buying and occupancy costs,exclusive of depreciation and amortization, were $90.6 million, or 64.2% of netsales, during the second quarter of fiscal 2008, compared to $78.8 million, or59.9% of net sales, during the same period in fiscal 2007. Merchandise, buyingand occupancy costs as a percent of net sales had approximately 430 basispoints of negative leverage. This negative leverage was substantially due tolower merchandise margins resulting from higher markdowns taken to clear excessinventory in June and July. In addition, increased occupancy costscontributed approximately 20 basis points of negative leverage.

 

***Selling, General and Administrative Expenses.***Selling,general and administrative expenses for the three months ended September 1,2007 were $40.6 million, or 28.8% of net sales, compared to $36.1 million, or27.5% of net sales, for the three months ended August 26, 2006, resultingin approximately 130 basis points of negative leverage. Major components of thenegative leverage included approximately $2.1 million of CEO transitionexpenses and a combination of increased professional fees, expenses related tonew systems installations, increased marketing-related expenses and an increasein staff at the Company’s corporate headquarters. This was partially offset bypositive leverage gained from decreases in stock-based compensation and bonusexpense during the quarter.

 

***Depreciation and Amortization.***Depreciation andamortization was $5.5 million, or 3.9% of net sales, in the second quarter offiscal 2008, compared to $5.0 million, or 3.8% of net sales, in the secondquarter of fiscal 2007. The increase in the amount of depreciation andamortization expense was a result of capital expenditures made by the Companyover the past year. The Company opened 32 new stores in the first six months offiscal 2008 and 78 new stores in all of fiscal 2007.

 

***Operating Income.***As a result of the foregoingfactors, operating income for the three months ended September 1, 2007 was$4.4 million, or 3.1% of net sales, compared to operating income of $11.6million, or 8.8% of net sales, for the three months ended August 26, 2006.

 

***Interest Income.***For the quarter ended September 1,2007, interest income decreased to $1.2 million from $1.3 million for thequarter ended August 26, 2006. The decrease resulted from a lower averagebalance of cash equivalents and short term investments during the secondquarter of fiscal 2008 compared to the second quarter of fiscal 2007.

 

***Income Taxes.***Income tax expense in the secondquarter of fiscal 2008 was $2.2 million, with an effective tax rate of 39.0%,compared to $5.0 million, with an effective tax rate of 38.8%, in the secondquarter of fiscal 2007.

 

***Net Income.***As a result of the foregoing factors,net income for the three months ended September 1, 2007 was $3.4 million,or 2.4% of net sales, and $0.09 per diluted share, compared to net income of$7.9 million, or 6.0% of net sales, and $0.21 per diluted share, for the threemonths ended August 26, 2006.

 

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**Six Months Ended September 1, 2007 Compared to SixMonths Ended August 26, 2006**

 

***NetSales.***Net sales for the six months ended September 1,2007 were $290.5 million, an increase of $16.4 million or 6%, from $274.1million for the six months ended August 26, 2006. The increase in net sales wasdue to an increase in the number of stores operated by the Company, offset by a1% decrease in same-store sales. The Company operated 807 stores at September1, 2007, compared to 753 stores at August 26, 2006. Management believes thatsales were negatively impacted in the first quarter by adverse weatherconditions in a significant portion of the Company’s comparative-store base inApril. Sales during the second quarter were driven in part by increasedpromotional activity to clear excess inventory in June and July. Managementbelieves sales in both quarters were negatively affected by the generallychallenging women’s specialty apparel retail environment.

 

***Merchandise,Buying and Occupancy Costs, exclusive of depreciation and amortization.***Merchandise,buying expenses and occupancy costs, exclusive of depreciation andamortization, were $177.5 million, or 61.1% of net sales, during the first sixmonths of fiscal 2008, compared to $157.4 million, or 57.4% of net sales, duringthe same period in fiscal 2007. Merchandise, buying and occupancy costs as apercent of net sales had approximately 370 basis points of negative leverage. Thisnegative leverage was substantially due to lower merchandise margins resultingfrom higher markdowns taken to clear excess inventory. In addition, increasedoccupancy costs contributed approximately 50 basis points of negative leverage.

 

***Selling,General and Administrative Expenses.***Selling, general andadministrative expenses for the six months ended September 1, 2007 were $79.7million, or 27.5% of net sales, compared to $72.2 million, or 26.3% of netsales, for the six months ended August 26, 2006, resulting in approximately 120basis points of negative leverage. Major components of the negative leverageincluded approximately $2.1 million of CEO transition expenses and acombination of increased professional fees, expenses related to new systemsinstallations, increased marketing-related expenses, store level payrollexpenses and an increase in staff at the Company’s corporate headquarters whichcould not be leveraged with a 1% decline in same-store sales. This waspartially offset by positive leverage gained from decreases in stock-basedcompensation and bonus expense during the first half of fiscal 2008.

 

***Depreciationand Amortization.***Depreciation and amortization was $10.8million, or 3.7% of net sales, in the first half of fiscal 2008, compared to$10.0 million, or 3.7% of net sales, in the first half of fiscal 2007. Theincrease in the amount of depreciation and amortization expense was a result ofcapital expenditures made during the past year. The Company opened 32 newstores in the first six months of fiscal 2008 and 78 new stores in all offiscal 2007.

 

***OperatingIncome.***As a result of the foregoing factors, operatingincome for the six months ended September 1, 2007 was $22.5 million, or 7.7% ofnet sales, compared to operating income of $34.5 million, or 12.6% of netsales, for the six months ended August 26, 2006.

 

***InterestIncome.***For the six months ended September 1, 2007,interest income decreased to approximately $2.2 million from $2.3 million forthe six months ended August 26, 2006. The decrease resulted from a loweraverage balance of cash equivalents and short term investments during the firsthalf of fiscal 2008 compared to the first half of fiscal 2007.

 

***IncomeTaxes.***Income tax expense in the first half of fiscal2008 was $9.6 million, with an effective tax rate of 39.0%, compared to $14.3million, with an effective tax rate of 38.8%, in the first half of fiscal 2007.

 

***NetIncome.***As a result of the foregoing factors, net incomefor the six months ended September 1, 2007 was $15.1 million, or 5.2% of netsales, and $0.42 per diluted share, compared to net income of $22.5 million, or8.2% of net sales, and $0.60 per diluted share, for the six months ended August26, 2006.

 

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**Stock-BasedCompensation Expense**

 

Total pre-taxcompensation expense related to stock-based awards for the three months endedSeptember 1, 2007 and August 26, 2006 was approximately $482,000 and $1.4million, respectively. For the six months ended September 1, 2007 and August26, 2006, pre-tax stock-based compensation expense totaled approximately$941,000 and $2.3 million, respectively. The decrease in stock-basedcompensation expense in the first six months of fiscal 2008 compared to thesame period in fiscal 2007 was a result of lower expense associated withperformance-based restricted stock, a reversal of expense related to forfeitedstock options and restricted stock awards originally granted to the Company’sformer CEO and the impact of awards granted in January 2004 which became fullyvested by the end of fiscal 2007 and had no expense under SFAS 123R in fiscal2008. Stock-based compensation expense was included in merchandise, buying andoccupancy expenses for the Company’s buying and distribution employees and inselling, general and administrative expenses for all other employees.

 

**Liquidityand Capital Resources**

 

The Company’sprincipal on-going cash requirements are to finance the construction of newstores and the remodeling of certain existing stores, to make other capitalexpenditures, to purchase merchandise inventories and to fund other workingcapital requirements. Merchandise purchases vary on a seasonal basis, peakingin the fall. As a result, the Company’s cash requirements historically reachtheir peak in October or November. Conversely, cash balances reach their peakin January after the holiday season is completed.

 

Net cash providedby operating activities totaled $19.4 million for the first six months offiscal 2008, a decrease of $2.1 million from $21.5 million for the first sixmonths of fiscal 2007. Significant fluctuations in the Company’s workingcapital accounts included a $4.0 million decrease in accounts payable and a$2.2 million decrease in merchandise inventories. The declines in inventory andaccounts payable were both a result of the Company’s efforts to reduceinventories in the first half of fiscal 2008, which resulted in an 8% declinein total inventory per store during the six months ended September 1, 2007.

 

Net cash used ininvesting activities included $15.6 million of capital expenditures, partiallyoffset by net redemptions of short-term investments of approximately $4.8million. The Company opened 32 new stores and completed three major storeremodels during the six months ended September 1, 2007. Net cash of $15.2million was used in financing activities during the first half of fiscal 2008as the Company paid two quarterly cash dividends together totalingapproximately $4.3 million and repurchased approximately $11.0 million of itscommon stock.

 

The Company plansto fund approximately $16 million of capital expenditures during the secondhalf of fiscal 2008 to open approximately 39 additional new stores, to completean upgrade to its point of sale register equipment and to make various capitalinvestments at its corporate headquarters. A portion of the capital expenditureswill also be incurred for stores scheduled to open in the first quarter offiscal 2009. The Company expects its cash and short-term investments, combinedwith cash flows from operations, to be sufficient to meet its capitalexpenditure, working capital and other requirements for liquidity during theremainder of fiscal 2008.

 

The Companymaintains an Amended and Restated Revolving Credit Facility with Wells FargoBank, National Association (the “Wells Fargo Revolver”) which expires on June30, 2008. The Wells Fargo Revolver provides the Company with revolving creditloans and letters of credit of up to $50.0 million, subject to a borrowing baseformula based on inventory levels.

 

Loans under theWells Fargo Revolver bear interest at Wells Fargo’s floating rate, 8.25% as ofSeptember 1, 2007, plus 0.25%. Interest is payable monthly in arrears. TheWells Fargo Revolver carries a facility fee of 0.25% based on the unusedportion as defined in the agreement. Facility fees totaled $3,882 for the sixmonths ended September 1, 2007. The credit facility is collateralized by theCompany’s equipment, general intangibles, inventory, inventory letters ofcredit and letter of credit rights. The Company had no revolving credit loanborrowings under the Wells Fargo Revolver during the first six months of fiscal2008. Historically, the Wells Fargo Revolver has been utilized by the Companyonly to open letters of credit to facilitate the import of merchandise. Theborrowing base at September 1, 2007 was $44.7 million. As of September 1, 2007,the Company had outstanding letters of credit in the amount of $24.0 million. Accordingly,the availability of revolving credit loans under the Wells Fargo Revolver was$20.7 million at September 1, 2007.

 

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The Wells FargoRevolver contains certain restrictive covenants including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants. As of September 1, 2007, the most recent measurement date, theCompany was in compliance with all covenants of the Wells Fargo Revolver.

 

**MerchandiseSourcing**

 

The Companydirectly imported approximately 82% of its total merchandise purchases in thefirst half of fiscal 2008. Substantially all of its remaining merchandisepurchases were made from domestic importers. This reliance on sourcing fromforeign countries may cause the Company to be exposed to certain risks.

 

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 possibly have an adverse effect on the Company’s business,financial condition and results of operations. The Company’s merchandise flowcould also be adversely affected by political instability in any of thecountries where its merchandise is manufactured or by changes in the UnitedStates’ governmental policies toward such foreign countries. In addition,merchandise receipts could be delayed due to interruptions in air, ocean andground shipments.

 

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

 

The Companypurchased approximately 14% and 13% of its merchandise from its largestoverseas supplier during the first six months of fiscal 2008 and 2007,respectively. Although the Company believes that its relationship with thisparticular vendor is good, there can be no assurance that this relationship canbe maintained in the future or that the vendor will continue to supplymerchandise to the Company. If there should be any significant disruption inthe supply of merchandise from this vendor, management believes that it canshift production to other suppliers so as to continue to secure the requiredvolume of product. Nevertheless, there is some potential that any suchdisruption in supply could have a material adverse impact on the Company’sfinancial position and results of operations.

 

**QuarterlyResults and Seasonality**

 

The Company’squarterly results may fluctuate significantly depending on a number of factorsincluding timing of new store openings, adverse weather conditions, shifts inthe timing of certain holidays and customer response to the Company’s seasonalmerchandise mix.

 

**Inflation**

 

Although theoperations of the Company are influenced by general economic conditions, theCompany does not believe that inflation had a material effect on the results ofoperations during the quarters and six month periods ended September 1, 2007and August 26, 2006.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

The market risk inherentin the Company’s financial instruments and in its financial position representsthe potential loss arising from adverse changes in interest rates. The Company’sresults of operations could be negatively impacted by decreases in interestrates on its short-term investments.

 

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The Company ispotentially exposed to market risk from changes in interest rates relating toits Wells Fargo Revolver. Loans under the Wells Fargo Revolver bear interest atWells Fargo’s floating rate, 8.25% as of September 1, 2007, plus 0.25%. However,the Company had no revolving credit loan borrowings under the Wells FargoRevolver during the first six months of fiscal 2008 and, given its existingliquidity position, does not expect to utilize the Wells Fargo Revolver in thenear future except for its continuing use of the import letter of credit facility.

 

All of the Company’spurchase obligations placed with foreign suppliers are denominated in U.S.dollars. Therefore, the Company has minimal exposure to foreign currencyexchange risks. The Company does not hedge against foreign currency risks andbelieves that its foreign currency exchange risk is not significant.

 

The Company does not haveany derivative financial instruments and does not hold any such instruments fortrading purposes.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

*(a)*       Evaluation of DisclosureControls and Procedures.

* *

Under the supervision andwith the participation of its Chief Executive Officer and Chief FinancialOfficer, the Company’s management has evaluated the effectiveness and design ofthe Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisreport. Based upon the foregoing, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective in timely alerting them to the material informationrelating to the Company required to be included in the Company’s periodicreports to the Securities and Exchange Commission under the Exchange Act.

 

*(b)*       Internal Controls OverFinancial Reporting.

* *

There have not been anychanges in the Company’s internal controls over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringthe three months ended September 1, 2007 that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

**PARTII.**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

There are nomaterial legal proceedings pending against the Company.

 

**ITEM1A.RISK FACTORS**

 

In addition to theother information set forth in this Quarterly Report on Form 10-Q, the factorsdiscussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report onForm 10-K for the year ended March 3, 2007 should be carefully considered asthey could materially affect the Company’s business, financial condition orfuture results. The risks described in the Company’s Annual Report on Form 10-Kare not the only risks facing the Company. Additional risks and uncertaintiesnot currently known to the Company or that the Company currently deems to beimmaterial may also materially adversely affect the Company’s future business,financial condition and/or results of operations.

 

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**ITEM 2.UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

In fiscal 2007,the Company’s Board of Directors authorized a stock repurchase program enablingthe Company to purchase up to $40.0 million of its common stock, subject tomarket conditions. During fiscal 2007, the Company repurchased 1,732,123 sharesat a total cost, including commissions, of approximately $34.2 million. InMarch 2007, the Company completed the repurchase program by purchasing anadditional 325,059 shares of its common stock for a total cost, includingcommissions, of approximately $5.8 million, bringing the total number of sharesrepurchased under this program to 2,057,182 at a total cost, includingcommissions, of approximately $40.0 million.

 

On May 25, 2007,the Company’s Board of Directors authorized a one-year stock repurchase programenabling the Company to repurchase up to $20.0 million of its common stock,subject to market conditions. The following table sets forth informationconcerning purchases made by the Company of its common stock for the periodsindicated:

 
| ** **                         | ** ** | ** **            | ** ** | ** **          | ** ** | **Total Number**                 | ** ** | **Approximate**                       | ** ** |
|------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | ** **            | ** ** | ** **          | ** ** | **of Shares**                    | ** ** | **Dollar Value**                 | ** ** |
| ** **                         | ** ** | **Total Number** | ** ** | **Average**         | ** ** | **Purchased as**                 | ** ** | **of Shares that May** | ** ** |
| ** **                         | ** ** | **of Shares**    | ** ** | **Price Paid** | ** ** | **Part of a Publicly** | ** ** | **Yet be Purchased**        | ** ** |
| **Period**                         | ** ** | **Purchased**         | ** ** | **per Share**  | ** ** | **Announced Program**            | ** ** | **Under the Program**       | ** ** |
|                               |       |                  |       |                |       |                                  |       |                                  |       |
| Fiscal July:                       |       |                  |       |                |       |                                  |       |                                  |       |
| July 1, 2007- August  4, 2007      |       | 186,100               |       | $                   | 16.12      |                                  | 186,100    |                                  | $          | 17,000,000 |   |
|                               |       |                  |       |                |       |                                  |       |                                  |       |
| Fiscal August:                     |       |                  |       |                |       |                                  |       |                                  |       |
| August 5, 2007- September  1, 2007 |       | 150,000               |       | $                   | 14.24      |                                  | 336,100    |                                  | $          | 14,865,000 |   |

 

All of the Company’sshare repurchases were executed in accordance with the safe harbor provisionsof Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

 

**ITEM 3.DEFAULTS UPONSENIOR SECURITIES**

 

There has been nodefault with respect to any indebtedness of the Company.

 

**ITEM 4.SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

The Company heldits annual meeting of shareholders on August 1, 2007, in Minneapolis, Minnesota.The Company solicited proxies and filed definitive proxy statements with theUnited States Securities and Exchange Commission pursuant to Regulation 14A. Holdersof 34,427,204 shares of the Company’s common stock were present in person, orby proxy, representing 94.96% of the Company’s 36,255,905 shares outstanding onthe record date. The matters voted up and the votes cast at the meeting were asfollows:

 

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Item 1.    Election of two Class I directors (for aterm of three years expiring July 2010):

 
| **Vote**       | ** ** |
|----------------|------------|
| **Director**   | ** ** | **For** | ** ** | **Witheld** | ** ** |
| Anne L. Jones  |       | 30,922,002 |   | 3,505,202 |   |
| Robert Ezrilov |       | 30,984,122 |   | 3,443,082 |   |

 

Other individualswhose term of office as Director continued after the Company’s annual meetingincluded Larry C. Barenbaum, Donald D. Beeler, James J. Fuld, Jr., Mark A. Cohnand Matthew P. Dillon.

 

Item 2.    Approval of an amendment to the Company’s2006 Senior Executive Incentive Plan:

 
| **Vote**   | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
| 30,265,336 |       | 545,151 |   | 13,376 |   | 3,603,341 |   |

 

Item 3.    Approval of an increase in shares under the2005 Stock Incentive Plan from 800,000 to 1,800,000 shares:

 
| **Vote**   | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
| 25,675,219 |       | 5,138,351 |   | 10,293 |   | 3,603,341 |   |

 

Item 4.    Ratification and approval ofPricewaterhouseCoopers LLP as the Company’s independent registered public  accounting firm for the fiscal year endingMarch 1, 2007:

 
| **Vote**   | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Vote** | ** ** |
| 34,329,810 |       | 89,026 |   | 8,368 |   | — |   |

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

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**ITEM 6.EXHIBITS**

 

(a)           Thefollowing exhibits are filed with this report:

 
| 31.1   |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |
| 31.2   |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002             |
|   |   |                                                                                                                                                    |
| 32.1   |   | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                    |
| 32.2   |   | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

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

 

 

**CHRISTOPHER & BANKSCORPORATION**

 

 
| Dated:  October  11, 2007 | By     |   | /S/ LORNA NAGLER                       |   |
|-------------------------------------|--------|--------|----------------------------------------|--------|
|                                |   |   |                                   |
|                                |   |   | Lorna Nagler                           |
|                                |   |   | President and  Chief Executive Officer |
|                                |   |   |                                   |
|                                |   |   | Signing on  behalf of the              |
|                                |   |   | Registrant as  principal               |
|                                |   |   | executive  officer.                    |
|                                |   |   |                                   |
|                                |   |   |                                   |
| Dated:  October  11, 2007 | By     |   | /S/ ANDREW K.  MOLLER                  |   |
|                                |   |   |                                   |
|                                |   |   | Andrew K. Moller                       |
|                                |   |   | Executive Vice  President              |
|                                |   |   | and Chief  Financial Officer           |
|                                |   |   |                                   |
|                                |   |   | Signing on  behalf of the              |
|                                |   |   | Registrant as  principal               |
|                                |   |   | financial  officer.                    |
|                                     |        |        |                                        |        |  |

 

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**CHRISTOPHER & BANKSCORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                         |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                    |
| 31.1            |       | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002             |
|            |       |                                                                                                                                                    |
| 31.2            |       | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002             |
|            |       |                                                                                                                                                    |
| 32.1            |       | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|            |       |                                                                                                                                                    |
| 32.2            |       | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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