** **

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# ****

# ** **

# **FORM 10-Q**

# **(Mark One)**

 

| ** ** | **x**                                | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
|------------|--------------------------------------|------------------------------------------------------------------------|
| ** ** | **SECURITIES  EXCHANGE ACT OF 1934** |

** **

## **For the quarterly period ended December 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 asspecified 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’stelephone number, including area code)

 

----

 

            Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES    x          NO o

 

            Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of 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 January 4,2008, 35,574,772 shares of the registrant’s common stock were outstanding.

 

###### ** **

 

 

 

----

 

###### ** **

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

###### ** **

** QUARTERLY REPORT ON FORM 10-Q**

 

**INDEX**

 

# **PART I**

# ** **

# **FINANCIAL INFORMATION**

# ** **

|    |   |                                                                         |   | **Page** |
|---------|--------|------------------------------------------------------------------------------|--------|----------|
|    |   |                                                                         |   |     |
| Item 1. |   | Unaudited Condensed  Consolidated Financial Statements:                      |   |     |
|    |   |                                                                         |   |     |
|    |   | Condensed  Consolidated Balance Sheet (Unaudited)                            |   |     |
|    |   | As of  December 1, 2007, March 3, 2007 and November 25, 2006  |   | 3        |
|    |   |                                                                         |   |     |
|    |   | Condensed  Consolidated Statement of Income (Unaudited)                      |   |     |
|    |   | For the Three  Months Ended December 1, 2007 and November 25, 2006 |   | 4        |
|    |   |                                                                         |   |     |
|    |   | Condensed  Consolidated Statement of Income (Unaudited)                      |   |     |
|    |   | For the Nine  Months Ended December 1, 2007 and November 25, 2006  |   | 5        |
|    |   |                                                                         |   |     |
|    |   | Condensed  Consolidated Statement of Cash Flows (Unaudited)                  |   |     |
|    |   | For the Nine Months  Ended December 1, 2007 and November 25, 2006  |   | 6        |
|    |   |                                                                         |   |     |
|    |   | Notes to Condensed Consolidated Financial Statements  (Unaudited)            |   | 7        |
|    |   |                                                                         |   |     |
| Item 2. |   | Management’s  Discussion and Analysis of                                |   |     |
|    |   | Financial  Condition and Results of Operations                               |   | 14       |
|    |   |                                                                         |   |     |
| Item 3. |   | Quantitative  and Qualitative Disclosures                                    |   |     |
|    |   | About Market  Risk                                                           |   | 21       |
|    |   |                                                                         |   |     |
| Item 4. |   | Controls and Procedures                                                      |   | 21       |

 

# **PART II**

# ** **

**OTHER INFORMATION**

 

| Item 1.  |   | Legal Proceedings                                            |   | 22     |
|----------|--------|--------------------------------------------------------------|--------|--------|
|     |   |                                                         |   |   |
| Item 1A. |   | Risk Factors                                                 |   | 22     |
|     |   |                                                         |   |   |
| Item 2.  |   | Unregistered Sales of  Equity Securities and Use of Proceeds |   | 22     |
|     |   |                                                         |   |   |
| Item 3.  |   | Defaults Upon Senior Securities                              |   | 23     |
|     |   |                                                         |   |   |
| Item 4.  |   | Submission of Matters to a  Vote of Security Holders         |   | 23     |
|     |   |                                                         |   |   |
| Item 5.  |   | Other Information                                            |   | 23     |
|     |   |                                                         |   |   |
| Item 6.  |   | Exhibits                                                     |   | 23     |
|     |   |                                                         |   |   |
|     |   | Signatures                                                   |   | 24     |
|     |   |                                                         |   |   |
|     |   | Index to Exhibits                                            |   | 25     |

 

 

 

2

----

 

 

# **CHRISTOPHER &BANKS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEET**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                    | ** ** | **December 1,** | ** **  | **March 3,** | ** ** | **November 25,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|-------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                    | ** ** | **2007**             | ** **  | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                    | ** ** | ** **           | ** **  | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                                                                                               |       |                 |        |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                    |       | $                    | 46,701,459  |              | $          | 53,991,398            |       | $ | 59,379,627 |   |
| Short-term  investments                                                                                                                                                                                                                                                       |       | 48,300,000           |        | 48,275,000        |       | 53,800,000            |       |
| Accounts  receivable                                                                                                                                                                                                                                                          |       | 6,811,678            |        | 4,481,624         |       | 6,523,830             |       |
| Merchandise  inventories                                                                                                                                                                                                                                                      |       | 46,943,191           |        | 52,354,944        |       | 55,421,481            |       |
| Prepaid expenses                                                                                                                                                                                                                                                              |       | 11,497,446           |        | 10,666,421        |       | 2,589,165             |       |
| Income taxes  receivable                                                                                                                                                                                                                                                      |       | —               |        | 2,076,717         |       | 2,064,032             |       |
| Other current  assets                                                                                                                                                                                                                                                         |       | 4,582,421            |        | 3,257,919         |       | 2,605,962             |       |
| Total current  assets                                                                                                                                                                                                                                                         |       | 164,836,195          |        | 175,104,023       |       | 182,384,097           |       |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Property, equipment and improvements, net                                                                                                                                                                                                                                     |       | 136,373,593          |        | 127,776,442       |       | 128,176,122           |       |
| Goodwill                                                                                                                                                                                                                                                                      |       | 3,587,052            |        | 3,587,052         |       | 3,587,052             |       |
| Intangible assets                                                                                                                                                                                                                                                             |       | 495,630              |        | 575,281           |       | 602,572               |       |
| Other assets                                                                                                                                                                                                                                                                  |       | 3,842,342            |        | 280,299           |       | 646,494               |       |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Total assets                                                                                                                                                                                                                                                                  |       | $                    | 309,134,812 |              | $          | 307,323,097           |       | $ | 315,396,337 |   |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                | ** ** | ** **           | ** **  | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                              |       | $                    | 8,483,503   |              | $          | 16,287,931            |       | $ | 7,058,148 |   |
| Accrued  salaries, wages and related expenses                                                                                                                                                                                                                                 |       | 9,529,895            |        | 7,797,470         |       | 8,861,133             |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                    |       | 20,902,975           |        | 22,164,741        |       | 16,412,468            |       |
| Total current  liabilities                                                                                                                                                                                                                                                    |       | 38,916,373           |        | 46,250,142        |       | 32,331,749            |       |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Non-current liabilities:                                                                                                                                                                                                                                                      |       |                 |        |              |       |                  |       |
| Deferred lease  incentives                                                                                                                                                                                                                                                    |       | 22,336,658           |        | 23,646,261        |       | 21,896,081            |       |
| Deferred rent  obligations                                                                                                                                                                                                                                                    |       | 11,673,329           |        | 10,678,341        |       | 10,581,792            |       |
| Other                                                                                                                                                                                                                                                                         |       | 3,362,258            |        | 983,137           |       | —                |       |
| Total non-current liabilities                                                                                                                                                                                                                                                 |       | 37,372,245           |        | 35,307,739        |       | 32,477,873            |       |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Commitments                                                                                                                                                                                                                                                                   |       | —               |        | —            |       | —                |       |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                    |       |                 |        |              |       |                  |       |
| Preferred stock  — $0.01 par value, 1,000,000 shares authorized, none outstanding                                                                                                                                                                                   |       | —               |        | —            |       | —                |       |
| Common stock —  $0.01 par value, 74,000,000 shares authorized, 45,052,590, 45,038,310 and  44,982,810 shares issued and 35,574,772, 36,521,451 and 37,832,074 shares  outstanding at December 1, 2007, March 3, 2007 and  November 25, 2006, respectively |       | 450,526              |        | 450,383           |       | 449,828               |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                   |       | 109,766,765          |        | 106,806,885       |       | 105,561,337           |       |
| Retained  earnings                                                                                                                                                                                                                                                            |       | 232,341,185          |        | 213,264,385       |       | 213,551,634           |       |
| Common stock  held in treasury, 9,477,818, 8,516,859 and 7,150,736 shares at cost at  December 1, 2007, March 3, 2007 and November 25, 2006,  respectively                                                                                                     |       | (109,712,282         | )           | (94,756,437       | )          | (68,976,084           | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                              |       | 232,846,194          |        | 225,765,216       |       | 250,586,715           |       |
|                                                                                                                                                                                                                                                                          |       |                 |        |              |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                              |       | $                    | 309,134,812 |              | $          | 307,323,097           |       | $ | 315,396,337 |   |

 

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

 

3

----

 

**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF INCOME**

(Unaudited)

 

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** **  |
|--------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                     | ** ** | **December 1,**   | ** **  | **November 25,** | ** ** |
| ** **                                                                     | ** ** | **2007**               | ** **  | **2006** | ** ** |
| ** **                                                                     | ** ** | ** **             | ** **  | ** ** | ** ** |
| Net sales                                                                      |       | $                      | 159,976,156 |   | $ | 139,265,259 |   |
|                                                                           |       |                   |        |   |   |
| Costs and expenses:                                                            |       |                   |        |   |   |
| Merchandise,  buying and occupancy, exclusive of depreciation and amortization |       | 94,102,758             |        | 84,611,297 |   |
| Selling, general  and administrative                                           |       | 44,335,830             |        | 35,793,571 |   |
| Depreciation and  amortization                                                 |       | 6,585,939              |        | 5,137,780 |   |
|                                                                           |       |                   |        |   |   |
| Total costs and  expenses                                                      |       | 145,024,527            |        | 125,542,648 |   |
|                                                                           |       |                   |        |   |   |
| Operating income                                                               |       | 14,951,629             |        | 13,722,611 |   |
|                                                                           |       |                   |        |   |   |
| Interest income                                                                |       | 1,163,225              |        | 1,353,399 |   |
|                                                                           |       |                   |        |   |   |
| Income before  income taxes                                                    |       | 16,114,854             |        | 15,076,010 |   |
|                                                                           |       |                   |        |   |   |
| Income tax provision                                                           |       | 5,876,684              |        | 5,849,493 |   |
|                                                                           |       |                   |        |   |   |
| Net income                                                                     |       | $                      | 10,238,170  |   | $ | 9,226,517 |   |
|                                                                           |       |                   |        |   |   |
| Basic earnings per common share:                                               |       |                   |        |   |   |
|                                                                           |       |                   |        |   |   |
| Net income                                                                     |       | $                      | 0.29        |   | $ | 0.24 |   |
|                                                                           |       |                   |        |   |   |
| Basic shares  outstanding                                                      |       | 35,447,855             |        | 37,743,349 |   |
|                                                                           |       |                   |        |   |   |
| Diluted earnings per common share:                                             |       |                   |        |   |   |
|                                                                           |       |                   |        |   |   |
| Net income                                                                     |       | $                      | 0.29        |   | $ | 0.24 |   |
|                                                                           |       |                   |        |   |   |
| Diluted shares  outstanding                                                    |       | 35,528,352             |        | 38,233,169 |   |
|                                                                           |       |                   |        |   |   |
| Dividends per share                                                            |       | $                      | 0.06        |   | $ | 0.06 |   |

 

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

** **

**4**

----

** **

**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF INCOME**

(Unaudited)

 
| ** **                                                                     | ** ** | **Nine  Months Ended** | ** **  |
|--------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                     | ** ** | **December 1,**   | ** **  | **November 25,** | ** ** |
| ** **                                                                     | ** ** | **2007**               | ** **  | **2006** | ** ** |
| ** **                                                                     | ** ** | ** **             | ** **  | ** ** | ** ** |
| Net sales                                                                      |       | $                      | 450,475,105 |   | $ | 413,348,890 |   |
|                                                                           |       |                   |        |   |   |
| Costs and expenses:                                                            |       |                   |        |   |   |
| Merchandise,  buying and occupancy, exclusive of depreciation and amortization |       | 271,613,686            |        | 241,975,934 |   |
| Selling, general  and administrative                                           |       | 124,041,825            |        | 107,985,828 |   |
| Depreciation and  amortization                                                 |       | 17,391,107             |        | 15,136,518 |   |
|                                                                           |       |                   |        |   |   |
| Total costs and  expenses                                                      |       | 413,046,618            |        | 365,098,280 |   |
|                                                                           |       |                   |        |   |   |
| Operating income                                                               |       | 37,428,487             |        | 48,250,610 |   |
|                                                                           |       |                   |        |   |   |
| Interest income                                                                |       | 3,382,477              |        | 3,640,355 |   |
|                                                                           |       |                   |        |   |   |
| Income before  income taxes                                                    |       | 40,810,964             |        | 51,890,965 |   |
|                                                                           |       |                   |        |   |   |
| Income tax provision                                                           |       | 15,508,167             |        | 20,133,695 |   |
|                                                                           |       |                   |        |   |   |
| Net income                                                                     |       | $                      | 25,302,797  |   | $ | 31,757,270 |   |
|                                                                           |       |                   |        |   |   |
| Basic earnings per common share:                                               |       |                   |        |   |   |
|                                                                           |       |                   |        |   |   |
| Net income                                                                     |       | $                      | 0.71        |   | $ | 0.86 |   |
|                                                                           |       |                   |        |   |   |
| Basic shares  outstanding                                                      |       | 35,835,063             |        | 37,051,099 |   |
|                                                                           |       |                   |        |   |   |
| Diluted earnings per common share:                                             |       |                   |        |   |   |
|                                                                           |       |                   |        |   |   |
| Net income                                                                     |       | $                      | 0.70        |   | $ | 0.84 |   |
|                                                                           |       |                   |        |   |   |
| Diluted shares  outstanding                                                    |       | 35,925,734             |        | 37,617,374 |   |
|                                                                           |       |                   |        |   |   |
| Dividends per share                                                            |       | $                      | 0.18        |   | $ | 0.14 |   |

 

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

 

5

----

 

**CHRISTOPHER & BANKSCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **December 1,**  | ** ** | **November 25,** | ** ** |
| ** **                                                                         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                              |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 25,302,797 |   | $ | 31,757,270 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation and  amortization                                                     |       | 17,391,107            |       | 15,136,518 |   |
| Deferred income  taxes                                                             |       | (2,223,228            | )          | (3,878,237 | ) |
| Excess tax  benefit related to stock-based compensation                            |       | (14,738               | )          | (5,766,662 | ) |
| Stock-based  compensation expense                                                  |       | 1,788,292             |       | 3,855,639 |   |
| (Gain) loss on  disposal of furniture, fixtures and equipment                      |       | 221,928               |       | 92,511 |   |
| Changes in  operating assets and liabilities:                                      |       |                  |       |   |   |
| Decrease  (increase) in merchandise inventories                                    |       | 5,411,753             |       | (17,550,106 | ) |
| Increase in  accounts receivable                                                   |       | (2,330,054            | )          | (1,770,527 | ) |
| Decrease in  income taxes receivable                                               |       | 2,091,455             |       | 3,730,055 |   |
| (Increase)  decrease in prepaid expenses                                           |       | (831,025              | )          | 473,656 |   |
| Increase in  other assets                                                          |       | (64,541               | )          | (70,320 | ) |
| Decrease in  accounts payable                                                      |       | (7,876,176            | )          | (3,553,659 | ) |
| Increase  (decrease) in accrued liabilities and income taxes payable               |       | 470,658               |       | (656,723 | ) |
| Increase  (decrease) in deferred lease incentives                                  |       | (500,116              | )          | 93,212 |   |
| Increase in  deferred rent obligations                                             |       | 994,988               |       | 971,793 |   |
|                                                                               |       |                  |       |   |   |
| Net cash  provided by operating activities                                         |       | 39,833,100            |       | 22,864,420 |   |
|                                                                               |       |                  |       |   |   |
| Cash flows from  investing activities:                                             |       |                  |       |   |   |
| Purchases of  property, equipment and improvements                                 |       | (26,868,274           | )          | (24,223,274 | ) |
| Purchases of  short-term investments                                               |       | (96,850,000           | )          | (79,177,900 | ) |
| Redemptions of  short-term investments                                             |       | 96,825,000            |       | 55,377,900 |   |
|                                                                               |       |                  |       |   |   |
| Net cash used in  investing activities                                             |       | (26,893,274           | )          | (48,023,274 | ) |
|                                                                               |       |                  |       |   |   |
| Cash flows from  financing activities:                                             |       |                  |       |   |   |
| Proceeds from  exercise of stock options                                           |       | 1,156,993             |       | 30,017,846 |   |
| Dividends paid                                                                     |       | (6,445,651            | )          | (5,203,611 | ) |
| Excess tax  benefit related to stock-based compensation                            |       | 14,738                |       | 5,739,237 |   |
| Acquisition of  common stock held in treasury                                      |       | (14,955,845           | )          | (8,399,990 | ) |
|                                                                               |       |                  |       |   |   |
| Net cash  provided by (used in) financing activities                               |       | (20,229,765           | )          | 22,153,482 |   |
|                                                                               |       |                  |       |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (7,289,939            | )          | (3,005,372 | ) |
|                                                                               |       |                  |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 53,991,398            |       | 62,384,999 |   |
|                                                                               |       |                  |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                     | 46,701,459 |   | $ | 59,379,627 |   |
|                                                                               |       |                  |       |   |   |
| Supplemental  cash flow information:                                               |       |                  |       |   |   |
| Income taxes  paid                                                                 |       | $                     | 12,199,530 |   | $ | 21,307,134 |   |
| Purchases of  equipment and improvements, accrued, not paid                        |       | $                     | 71,748     |   | $ | 758,462 |   |

 

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

 

6

----

** **

**CHRISTOPHER &BANKS CORPORATION**

# **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

## **NOTE1 — BASIS OF PRESENTATION**

## ** **

The unauditedcondensed consolidated 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 footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed, oromitted, pursuant to such rules and regulations.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the financialstatements and related notes included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 3, 2007.

 

The results of operations for the interim periods shown in this reportare not necessarily indicative of results to be expected for the fiscalyear.  In the opinion of management, theinformation contained herein reflects all adjustments necessary to presentfairly the Company’s financial position as of December 1, 2007 and November 25,2006 and its results of operations and cash flows for the three and nine monthperiods ended December 1, 2007 and November 25, 2006.  All such adjustments are of a normalrecurring nature.

 

## **NOTE 2 — CEO TRANSITION**

## ** **

On August 30,2007, the Company announced that its Board of Directors had appointed LornaNagler as President and Chief Executive Officer effective August 31,2007.  Ms. Nagler was also electedas a member of the Company’s Board of Directors as of August 31,2007.  Ms. Nagler most recentlyserved as President of Lane Bryant and has 29 years of experience in the women’sapparel retail industry.

 

Matthew P. Dillonresigned as President and Chief Executive Officer, and as a member of theCompany’s Board of Directors, effective August 30, 2007.  In the second quarter of fiscal 2008, theCompany incurred a pre-tax charge of approximately $2.1 million, or $0.04 perdiluted share, related to the transition of the CEO position from Mr. Dillonto Ms. Nagler.

 

## **NOTE 3 — INCOME TAXES**

## ** **

The Companyadopted 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. 48prescribes a minimum recognition threshold and measurement process forrecording uncertain tax positions in the financial statements.  Additionally, FIN No. 48 providesguidance on derecognition, classification, accounting and disclosure related touncertain tax 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 thedate of adoption, the total amount of unrecognized tax benefits was $3.4million.  Of that amount, approximately$2.3 million represents the amount of unrecognized tax benefits that would, ifrecognized, favorably affect the Company’s effective income tax rate in futureperiods.

 

The Companyrecognizes interest and penalties related to unrecognized tax benefits ascomponents of income tax expense.  At March 4,2007, the Company had accrued $0.7 million for the potential payment ofinterest and penalties.

 

The Company andits subsidiaries file income tax returns in the U.S. Federal jurisdiction andvarious state jurisdictions.  TheInternal Revenue Service has completed their audit for tax years through fiscal2006.  The Company is not subject tostate income tax examination by tax authorities for taxable years prior tofiscal 2004.

 

In the thirdquarter of fiscal 2008, the Company’s effective tax rate was 36.5% compared to38.8% in the third quarter of fiscal 2007. The decrease in effective tax rate resulted from an adjustment to theCompany’s liability for unrecognized tax benefits as the statute of limitationswith respect to the Company’s tax returns expired in a number of states andother tax jurisdictions in which the Company operates.

 

7

----

 

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

## ** **

Short-term investments consisted of the following:

 

| ** **                             | ** ** | **December 1,** | ** ** | **March 3,** | ** ** | **November 25,** | ** ** |
|----------------------------------------|------------|----------------------|------------|-------------------|------------|-----------------------|------------|
| **Description**                        | ** ** | **2007**             | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                   |       |                 |       |              |       |                  |       |
| Tax advantaged auction rate securities |       | $                    | 48,300,000 |              | $          | 48,275,000            |       | 51,800,000 |   |
| U.S. Government debt securities        |       | —               |       | —            |       | 2,000,000             |       |
|                                   |       |                 |       |              |       |                  |       |
|                                   |       | $                    | 48,300,000 |              | $          | 48,275,000            |       | $ | 53,800,000 |   |
|                                        |            |                      |            |                   |            |                       |            |  |  |  |

 

As of December 1, 2007, the Company’s taxadvantaged auction rate securities consisted solely of investments in studentloans.  These securities are rated AAA bythe credit rating service providers of Standard & Poor’s and/or Moody’sInvestors Service.  In addition, thesesecurities are fully insured by private insurers or guaranteed by the UnitedStates Department of Education and are collateralized by the underlying studentloans.  As of January 10, 2008,management is not aware of any failed auctions of such student loan auction ratesecurities.

 

## **NOTE 5 — MERCHANDISE INVENTORIES**

## ** **

Merchandise inventories consisted of the following:

 

| ** **               | ** ** | **December 1,** | ** ** | **March 3,** | ** ** | **November 25,** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------|------------|-----------------------|------------|
| **Description**          | ** ** | **2007**             | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                     |       |                 |       |              |       |                  |       |
| Merchandise - in store   |       | $                    | 43,885,126 |              | $          | 40,466,577            |       | $ | 48,798,797 |   |
| Merchandise - in transit |       | 3,058,065            |       | 11,888,367        |       | 6,622,684             |       |
|                     |       |                 |       |              |       |                  |       |
|                     |       | $                    | 46,943,191 |              | $          | 52,354,944            |       | $ | 55,421,481 |   |

 

The Company purchased approximately 19% and 17% of itsmerchandise from its largest overseas supplier during the first nine months offiscal 2008 and 2007, respectively.

 

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

 

Property, equipment andimprovements, net consisted of the following:

 
| ** **                                                                  | ** ** | **Estimated**          | ** ** | **December 1,** | ** **  | **March 3,** | ** ** | **November 25,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------|-------------|-------------------|------------|-----------------------|------------|
| **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               |       | 11,856,863           |        | 11,663,704        |       | 11,594,204            |       |
| Store leasehold improvements                                                |       | Term of related lease, |       |                 |        |              |       |                  |       |
|                                                                        |       | typically 10 years     |       | 92,834,115           |        | 87,288,395        |       | 81,947,965            |       |
| Store furniture and fixtures                                                |       | Three to 10 years      |       | 107,502,097          |        | 101,486,350       |       | 95,394,673            |       |
| Point of sale hardware and software                                         |       | Five years             |       | 9,840,905            |        | 8,625,579         |       | 8,421,081             |       |
| Corporate office  and distribution center furniture, fixtures and equipment |       | Seven years            |       | 2,902,305            |        | 2,751,805         |       | 2,664,462             |       |
| Computer hardware and software                                              |       | Three to five years    |       | 8,331,174            |        | 5,771,237         |       | 5,191,478             |       |
| Construction in progress                                                    |       | —                 |       | 16,239,065           |        | 5,429,824         |       | 11,725,924            |       |
|                                                                        |       |                   |       |                 |        |              |       |                  |       |
|                                                                        |       |                   |       | 251,103,422          |        | 224,613,792       |       | 218,536,685           |       |
| Less accumulated depreciation and amortization                              |       |                   |       | 114,729,829          |        | 96,837,350        |       | 90,360,563            |       |
|                                                                        |       |                   |       |                 |        |              |       |                  |       |
| Net property, equipment and improvements                                    |       |                   |       | $                    | 136,373,593 |              | $          | 127,776,442           |       | $ | 128,176,122 |   |

 

8

----

 

The Company reviews long-lived assets with definitelives at least annually, or whenever events or changes in circumstancesindicate that the carrying value of such assets may not be recoverable.  This review includes the evaluation ofindividual underperforming stores and assessing the recoverability of thecarrying value of the improvements and equipment related to these stores.  In the third quarter of fiscal 2008, theCompany recorded an impairment charge of approximately $915,000 related to the improvementsand equipment at three underperforming stores.

 

## **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 forimpairment on an annual basis in the fourth quarter and between annual testswhenever impairment is indicated.  Fairvalues are calculated based on an estimate of future cash flows, compared tothe corresponding carrying value of the acquired entity, includinggoodwill.  Impairment losses will berecognized whenever the implied fair value is less than the carrying value ofthe related asset.  There were noimpairments or other changes to the recorded amounts of goodwill for theperiods presented.

## ** **

## **NOTE 8 — INTANGIBLE ASSETS**

## ** **

Intangible assets consisted of the following:

 

| ** **               | ** ** | **December 1,** | ** ** | **March 3,** | ** ** | **November  25,** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------|------------|------------------------|------------|
| ** **               | ** ** | **2007**             | ** ** | **2007**          | ** ** | **2006**               | ** ** |
| ** **               | ** ** | ** **           | ** ** | ** **        | ** ** | ** **             | ** ** |
| Customer lists           |       | $                    | 830,000    |              | $          | 830,000                |       | $ | 830,000 |   |
| Accumulated amortization |       | (334,370             | )          | (254,719          | )          | (227,428               | )          |
|                     |       | $                    | 495,630    |              | $          | 575,281                |       | $ | 602,572 |   |

 

Aggregate amortization expense for the nine monthsended December 1, 2007 was $79,651. 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 |    |

 

The straight-line method of amortization reflects anappropriate allocation of the cost of the intangible assets to earnings inproportion to the amount of economic benefit obtained by the Company in eachreporting period.

 

## **NOTE 9 — ACCRUED LIABILITIES**

## ** **

Other accrued liabilities consisted of the following:

 

| ** **                                          | ** ** | **December 1,** | ** ** | **March 3,** | ** ** | **November 25,** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|-------------------|------------|-----------------------|------------|
| **Description**                                     | ** ** | **2007**             | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                                |       |                 |       |              |       |                  |       |
| Gift card, certificate and store credit liabilities |       | $                    | 8,411,824  |              | $          | 13,174,041            |       | $ | 7,351,350 |   |
| Accrued income, sales and other taxes payable       |       | 3,202,595            |       | 2,499,410         |       | 3,063,606             |       |
| Accrued occupancy related expenses                  |       | 2,612,302            |       | 640,985           |       | 922,250               |       |
| Other accrued liabilities                           |       | 6,676,254            |       | 5,850,305         |       | 5,075,262             |       |
|                                                |       |                 |       |              |       |                  |       |
|                                                |       | $                    | 20,902,975 |              | $          | 22,164,741            |       | $ | 16,412,468 |   |

 

9

----

 

 

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

## ** **

The Company accounts forstock-based compensation in accordance with the provisions of Statement ofFinancial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS123R”), which was adopted February 26, 2006 using the modified prospectivetransition method.  Under this transitionmethod, stock-based compensation expense recognized for share-based awardsincludes: (a) compensation expense for all stock-based compensation awardsgranted prior to, but not yet vested as of February 25, 2006, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123, and (b) compensation expense for all stock-based compensationawards granted subsequent to February 25, 2006, based on the grant datefair value estimated in accordance with the provisions of SFAS 123R.

 

Total pre-taxcompensation expense related to stock-based awards for the three months ended December 1,2007 and November 25, 2006 was approximately $847,000 and $1.6 million,respectively.  For the nine months ended December 1,2007 and November 25, 2006, pre-tax stock-based compensation expensetotaled approximately $1.8 and $3.9 million, respectively.  The decrease in stock-based compensationexpense in the third quarter and first nine months of fiscal 2008, compared tothe same periods in fiscal 2007, was evenly attributable to lower expenseassociated with performance-based restricted stock and the impact of awardsgranted in January 2004 which became fully vested by the end of fiscal2007 and had no expense under SFAS 123R in fiscal 2008.  Stock-based compensation expense is includedin merchandise, buying and occupancy expenses for the Company’s buying anddistribution employees and in selling, general and administrative expenses forall other employees.

 

*Methodology Assumptions*

 

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

 

The weighted averageassumptions relating to the valuation of the Company’s stock option grants forthe three and nine month periods ended December 1, 2007 and November 25,2006 were as follows:

 

| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **December 1,**   | ** ** | **November 25,** | ** ** | **December 1,** | ** ** | **November 25,** | ** ** |
| ** **              | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected divdend yield  |       | 1.79%                  |       | 0.86%                 |       | 1.38% |   | 0.83% |   |
| Expected volatility     |       | 45.14%                 |       | 48.40%                |       | 44.79% |   | 46.77% |   |
| Risk-free interest rate |       | 4.15%                  |       | 4.71%                 |       | 4.49% |   | 4.95% |   |
| Expected term in years  |       | 4.75                   |       | 3.87                  |       | 4.20 |   | 3.51 |   |

 

 

 

10

----

* *

*Stock-Based Compensation Activity*

 

The followingtable presents a summary of the Company’s stock option activity for the ninemonths ended December 1, 2007:

 

| ** **                       | ** ** | ** ** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** | **Weighted**    | ** ** |
|----------------------------------|------------|------------|------------|--------------|------------|---------------|------------|----------------|------------|-----------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** **    | ** ** | ** **     | ** ** | **Average**     | ** ** |
| ** **                       | ** ** | **Number** | ** ** | **Average**  | ** ** | **Aggregate** | ** ** | **Weighted**   | ** ** | **Remaining**   | ** ** |
| ** **                       | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Intrinsic** | ** ** | **Average**    | ** ** | **Contractual** | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Value**     | ** ** | **Fair Value** | ** ** | **Life**        | ** ** |
|                             |       |       |       |         |       |          |       |           |       |            |       |
| Outstanding, beginning of period |       | 2,072,876  |       | $            | 19.44      |          | $          | 1,430,937      |       | $               | 6.85       |   |   |   |
| Vested                           |       | 1,765,038  |       | 19.30        |       | 1,420,157     |       | 6.69           |       |            |       |
| Unvested                         |       | 307,838    |       | 20.24        |       | 10,780        |       | 7.78           |       |            |       |
| Granted                          |       | 423,200    |       | 15.73        |       | 572,983       |       | 5.87           |       |            |       |
| Exercised                        |       | (112,530   | )          | 10.28        |       | 498,687       |       | 4.20           |       |            |       |
| Canceled - Vested                |       | (278,242   | )          | 21.41        |       | 11,262        |       | 6.25           |       |            |       |
| Canceled - Unvested (Forfeited)  |       | (82,014    | )          | 18.80        |       | —        |       | 7.08           |       |            |       |
| Outstanding, end of period       |       | 2,023,290  |       | 18.93        |       | 1,335,203     |       | 6.87           |       | 5.66            |       |
| Vested                           |       | 1,465,103  |       | 19.63        |       | 762,220       |       | 7.05           |       | 4.32            |       |
| Unvested                         |       | 558,187    |       | 17.07        |       | 572,983       |       | 6.40           |       | 9.19            |       |
| Exercisable, end of period       |       | 1,465,103  |       | 19.63        |       | 762,220       |       | 7.05           |       | 4.32            |       |
|                                  |            |            |            |              |            |               |            |                |            |                 |            |  |  |  |

 

The Company may alsogrant shares of restricted stock to its employees and non-employee members ofits Board of Directors.  Restricted stockawards are independent of option grants and are subject to forfeiture ifemployment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’srestricted stock awards are performance based and are subject to forfeiture ifthe defined performance conditions are not achieved.  The Company values the restricted sharesbased on the closing price of the Company’s common stock on the date ofgrant.  The resulting expense is recordedon a straight line basis over the vesting period of the restricted award.

 

The following tablepresents a summary of the Company’s restricted stock activity for the ninemonths ended December 1, 2007:

 

| ** **                      | ** ** | **Number** | ** ** | **Aggregate** | ** ** | **Weighted**   | ** ** |
|---------------------------------|------------|------------|------------|---------------|------------|----------------|------------|
| ** **                      | ** ** | **of**     | ** ** | **Intrinsic** | ** ** | **Average**    | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Value**     | ** ** | **Fair Value** | ** ** |
|                            |       |       |       |          |       |           |       |
| Unvested, beginning of period   |       | 53,717     |       | $             | 865,918    |           | $          | 20.04 |   |
| Granted                         |       | 121,900    |       | 1,965,028     |       | 15.35          |       |
| Vested                          |       | (9,917     | )          | 159,862       |       | 19.01          |       |
| Canceled - Unvested (Forfeited) |       | (22,250    | )          | 358,670       |       | 18.64          |       |
| Unvested, end of period         |       | 143,450    |       | 2,312,414     |       | 16.35          |       |
|                                 |            |            |            |               |            |                |            |  |  |

 

## ** **

## **NOTE 11 — LONG-TERM DEBT**

## ** **

The Company maintains anAmended and Restated Revolving Credit Facility with Wells Fargo Bank, NationalAssociation (the “Wells Fargo Revolver”) which expires on June 30,2008.  The Wells Fargo Revolver providesthe Company with revolving credit loans and letters of credit of up to $50.0million, subject to a borrowing base formula based on inventory levels.

 

Loans under the WellsFargo Revolver bear interest at Wells Fargo’s floating rate, 7.50% as of December 1,2007, plus 0.25%.  Interest is payablemonthly in arrears.  The Wells FargoRevolver carries a facility fee of 0.25% based on the unused portion as definedin the agreement.  Facility fees totaled$6,011 for the nine months ended December 1, 2007.  The credit facility is collateralized by theCompany’s equipment, general intangibles, inventory, inventory letters ofcredit and letter of credit rights.

 

11

----

 

The Company had norevolving credit loan borrowings under the Wells Fargo Revolver during thefirst nine months of fiscal 2008.  Historically,the Wells Fargo Revolver has been utilized by the Company only to open lettersof credit to facilitate the import of merchandise.  The borrowing base at December 1, 2007was $39.5 million.  As of December 1,2007, the Company had outstanding letters of credit in the amount of $14.9million.  Accordingly, the availabilityof revolving credit loans under the Wells Fargo Revolver was $24.6 million at December 1,2007.

 

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 December 1, 2007,the most recent measurement date, the Company was in compliance with allcovenants of the Wells Fargo Revolver.

 

 

## **NOTE 12 — STOCKHOLDERS’ EQUITY**

## ** **

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 shares at a total cost, includingcommissions, of approximately $34.2 million. In March 2007, the Company completed the repurchase program bypurchasing an additional 325,059 shares of its common stock for a total cost,including commissions, of $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.

 

In May 2007,the Company’s Board of Directors authorized another stock repurchase programenabling the company to purchase up to $20 million of its common stock, subjectto market conditions.  As of December 1,2007, the Company had repurchased 635,900 shares of its common stock for a totalcost, including commissions, of approximately $9.1 million.

 

The common stockrepurchased under these two programs is being held in treasury and has reducedthe number of shares of the Company’s common stock outstanding by approximately7%.  All of the Company’s sharerepurchases were executed in the open market and no shares were repurchasedfrom related parties.  In addition, allof the Company’s share repurchases were executed in accordance with the safeharbor provision of Rule 10b-18 of the Securities Exchange Act of 1934, asamended.

 

Infiscal 2007, the Company’s Board of Directors authorized an increase in theCompany’s quarterly cash dividend to $0.06 per share of common stock, effectivebeginning with the October 2006 dividend payment.  The dividend rate was previously $0.04 pershare of common stock.  The Company hasdeclared and paid a dividend each quarter since its first declaration in fiscal2004.

 

 

## **NOTE 13 — NET INCOME PER SHARE**

## ** **

Basic earnings pershare (“EPS”) is computed based on the weighted average number of shares ofcommon stock outstanding during the applicable periods, while diluted EPS iscomputed based on the weighted average number of common and common equivalentshares (dilutive stock options) outstanding. The Company’s reconciliation of earnings per share includes theindividual share effects of all securities affecting earnings per share whichconsist solely of the effects of dilution from awards granted under the Company’sstock-based compensation plans.

 

12

----

 

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

 

| ** **                                              | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **December 1, 2007**  | ** ** | **November 25, 2006** | ** ** |
| ** **                                              | ** ** | ** **                 | ** ** | **Net Income** | ** ** | ** ** | ** ** | **Net Income** | ** ** |
| ** **                                              | ** ** | **Shares**                 | ** ** | **Per Share** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Basic                                                   |       | 35,447,855                 |       | $ | 0.29 |   | 37,743,349 |   | $ | 0.24 |   |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Effect of  dilution from stock-based compensation plans |       | 80,497                     |       | — |   | 489,820 |   | — |   |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Diluted                                                 |       | 35,528,352                 |       | $ | 0.29 |   | 38,233,169 |   | $ | 0.24 |   |
|                                                    |       |                       |       |   |   |   |   |   |   |
| ** **                                              | ** ** | **Nine  Months Ended**     | ** ** |
| ** **                                              | ** ** | **December 1,  2007** | ** ** | **November 25,  2006** | ** ** |
| ** **                                              | ** ** | ** **                 | ** ** | **Net Income** | ** ** | ** ** | ** ** | **Net Income** | ** ** |
| ** **                                              | ** ** | **Shares**                 | ** ** | **Per  Share** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Basic                                                   |       | 35,835,063                 |       | $ | 0.71 |   | 37,051,099 |   | $ | 0.86 |   |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Effect of  dilution from stock-based compensation plans |       | 90,671                     |       | (0.01 | ) | 566,275 |   | (0.02 | ) |
|                                                    |       |                       |       |   |   |   |   |   |   |
| Diluted                                                 |       | 35,925,734                 |       | $ | 0.70 |   | 37,617,374 |   | 0.84 |   |

 

Stock options of1,815,600 and 1,643,100 were excluded from the shares used in the computationof diluted EPS for the three and nine months ended December 1, 2007 asthey were anti-dilutive.  Stock optionsof 114,000 and 124,700 were excluded from the shares used in the computation ofdiluted EPS for the three and nine months ended November 25, 2006,respectively, as they were anti-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.  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles and expands fair value measurementdisclosures.  The Company is currentlyevaluating the impact of adopting SFAS No. 157, but does not anticipate itwill have a material effect on its financial position, results of operations orcash 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. 159 permits entities to measuremany financial instrument and certain other assets and liabilities at fairvalue on an instrument-by-instrument basis under a fair value option.  SFAS No. 159 is effective for fiscalyears 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 currentlyevaluating the impact of adopting SFAS No. 159, but does not anticipate itwill have a material effect on its financial position, results of operations orcash flows.

 

13

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**ITEM 2.**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

(Unaudited)

 

 

The following management’sdiscussion and analysis of financial condition and results of operations (“MD&A”)should be read in conjunction with the consolidated financial statements andnotes included in Item 1 of this Form 10-Q.

** **

**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 been changed by more than 25% areexcluded from the same-store sales calculation. Stores closed during the year are included in the same-store salescalculation only for the full months of the year the stores were open.

 

Management considerssame-store sales to be an important indicator of the Company’sperformance.  Same-store sales resultsare important in achieving leveraging of costs, including store payroll, storeoccupancy, depreciation and other general and administrative expenses.  Positive same-store sales above a certainlevel contribute to greater leveraging of costs while negative same-store salescontribute to deleveraging of costs. Same-store sales also have a direct impact on the Company’s total netsales, cash and cash equivalents and working capital.

 

*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 costsinclude the cost of merchandise, markdowns, shrink, freight into and out fromthe Company’s distribution center, buyer and distribution center salaries,buyer travel, rent and other occupancy related costs, various merchandisedesign and development costs, miscellaneous merchandise expenses and othercosts related to the Company’s distribution network.  Any inability to obtain acceptable levels ofinitial markups or any significant increase in the Company’s markdowns couldhave an adverse effect on the Company’s results of operations.  In addition, an inability to locate suitablestore sites or to negotiate favorable lease terms could also negatively impactthe Company’s results of operations.

 

*Operatingincome*

 

The Company’s managementviews operating income as a key indicator of the Company’s success.  The key drivers of operating income aresame-store sales, merchandise, buying and occupancy costs and the Company’sability to control operating costs.

 

*Storeproductivity*

 

Store productivity,including sales per square foot, average unit retail price, number of transactionsper store and number of units per transaction, is evaluated by management inassessing 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 isimportant as it can signal slow moving inventory, which can be critical indetermining the need to take markdowns on merchandise.

 

*Cash flowand liquidity*

 

Managementevaluates cash flow from operations, investing activities and financingactivities in determining the sufficiency of the Company’s cash position.  Cash flow from operations has historicallybeen sufficient to cover the Company’s requirements for liquidity.

 

14

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**Executive Overview:**

 

Christopher &Banks Corporation is a Minneapolis-based retailer of women’s specialty apparel,which operates stores through its wholly-owned subsidiaries:  Christopher & Banks, Inc.,Christopher & Banks Company and Christopher & Banks ServicesCompany, collectively referred to as the “Company.”  As of December 1, 2007, the Companyoperated 841 stores in 45 states, including 546 Christopher & Banksstores, 256 C.J. Banks stores and 39 Acorn stores.  The Company’s Christopher & Banksstores offer distinctive fashions featuring exclusively designed, coordinatedassortments of sportswear and sweaters in sizes four to 16.  The Company’s C.J. Banks stores offer similarassortments of women’s specialty apparel in sizes 14 and up.  The Company’s Acorn stores offer upscalewomen’s fashions along with complementary jewelry and accessories under privateand branded labels.

 

In the first ninemonths of fiscal 2008, the Company opened 24 new Christopher & Banksstores, 38 new C.J. Banks stores and four new Acorn stores.  The Company closed two Christopher &Banks stores and one Acorn store during the first nine months of the year.  In the fourth quarter of fiscal 2008, theCompany anticipates it will open approximately four additional new stores, fora total of approximately 70 fiscal 2008 new store openings.  The Company also plans to close sixChristopher & Banks stores and two Acorn stores in the fourthquarter.  In fiscal 2009, the Companyexpects to open 30 to 40 new stores and plans to close approximately 10underperforming stores.

 

On August 30,2007, the Company announced that its Board of Directors had appointed LornaNagler as President and Chief Executive Officer effective August 31,2007.  Ms. Nagler was also electedas a member of the Company’s Board of Directors as of August 31,2007.  Ms. Nagler most recentlyserved as President of Lane Bryant and has 29 years of experience in the women’sapparel retail industry.

 

Matthew P. Dillonresigned as President and Chief Executive Officer, and as a member of theCompany’s Board of Directors, effective August 30, 2007.  In the second quarter of fiscal 2008, theCompany incurred a pre-tax charge of approximately $2.1 million, or $0.04 perdiluted share, related to the transition of the CEO position from Mr. Dillonto Ms. Nagler.

 

On June 18,2007, the Company announced that Susan Connell would join the Company asExecutive Vice President and Chief Merchandise Officer effective July 9,2007.  Ms. Connell is responsiblefor overseeing product development, sourcing and other merchandising activitiesfor the Company’s three retail concepts. Prior to joining the Company, Ms. Connell was Senior Vice President— General Merchandising Manager with Lane Bryant.

 

On May 25,2007, the Company’s Board of Directors authorized a one-year stock repurchaseprogram enabling the Company to repurchase up to $20 million of its commonstock, subject to market conditions.  Asof December 1, 2007, the Company had repurchased 635,900 shares of itscommon stock for a total cost, including commissions, of approximately $9.1million.

 

**CriticalAccounting Policies and Estimates:**

 

The Company’s criticalaccounting policies are more fully described in Note 1 of the notes toconsolidated financial statements contained within the Company’s Annual Reporton Form 10-K for the fiscal year ended March 3, 2007.  Management’s discussion and analysis of theCompany’s financial condition and results of operations are based upon theCompany’s condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.

 

On an ongoing basis, theCompany evaluates its estimates, including those related to customer productreturns, inventories, income taxes, medical and workers’ compensation claimsand contingencies.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.  There has been no material changes in theCompany’s critical accounting policies during the nine months ended December 1,2007.

 

15

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**Results of Operations:**

 

The followingtable sets forth, for the periods indicated, certain items from the Company’scondensed consolidated statement of income expressed as a percentage of netsales:

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **December 1,**   | ** ** | **November  25,** | ** ** | **December 1,** | ** ** | **November 25,** | ** ** |
| ** **                                                                           | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                 |       |                   |       |                   |       |   |   |   |   |
| Net sales                                                                            |       | 100.0                  | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Merchandise,  buying and occupancy costs, exclusive of depreciation and amortization |       | 58.9                   |       | 60.8                   |       | 60.3 |   | 58.5 |   |
| Selling, general and administrative expenses                                         |       | 27.7                   |       | 25.7                   |       | 27.5 |   | 26.1 |   |
| Depreciation and amortization                                                        |       | 4.1                    |       | 3.6                    |       | 3.9 |   | 3.7 |   |
| Operating income                                                                     |       | 9.3                    |       | 9.9                    |       | 8.3 |   | 11.7 |   |
| Interest income                                                                      |       | 0.7                    |       | 0.9                    |       | 0.8 |   | 0.9 |   |
| Income before income taxes                                                           |       | 10.0                   |       | 10.8                   |       | 9.1 |   | 12.6 |   |
| Income tax provision                                                                 |       | 3.6                    |       | 4.2                    |       | 3.5 |   | 4.9 |   |
| Net income                                                                           |       | 6.4                    | %          | 6.6                    | %          | 5.6 | % | 7.7 | % |

 

 

**Three Months Ended December 1,2007 Compared to Three Months Ended November 25, 2006**

 

***NetSales.**** *Net sales for the three months ended December 1,2007 were $160.0 million, an increase of $20.7 million or 15%, from $139.3million for the three months ended November 25, 2006.  The increase in net sales resulted from an increasein the number of stores operated by the Company combined with a 9% increase insame-store sales.  The Company operated841 stores at December 1, 2007, compared to 778 stores at November 25,2006.  The Company’s same-store saleswere calculated by comparing the 13-week period ended December 1, 2007 tothe 13-week period ended December 2, 2006. The resulting 9% increase in same-store sales was primarily attributableto an approximate 14% increase in transaction value, partially offset by anapproximate 6% decline in the number of transactions per average store.  Sales during the third quarter were driven inpart by strong customer response to the Company’s first-ever, two-day “Friendsand Family” event.  Management believessales in the third quarter of fiscal 2008 were negatively affected by thegenerally challenging and highly promotional women’s specialty apparel retailenvironment.  In the third quarter,same-store sales for the Company’s stores opened in fiscal 2005, 2006 and 2007increased approximately 11%, while the mature base of stores, opened in fiscal2004 and earlier, posted a same-store sales increase of approximately 8%.

 

***Merchandise,Buying and Occupancy Costs, exclusive of depreciation and amortization. ***Merchandise, buying and occupancy costs, exclusive ofdepreciation and amortization, were $94.1million, or 58.9% of net sales, duringthe third quarter of fiscal 2008, compared to $84.6 million, or 60.8% of netsales, during the same period in fiscal 2007, resulting in approximately 190 basispoints of positive leverage.  Themajority of this positive leverage was due to improved merchandise marginsresulting from a decreased level of markdowns necessary to clear inventory asthe Company’s customers responded positively to its casual lifestyle assortmentin the third quarter.  In addition,positive leverage of occupancy costs contributed approximately 80 basis pointsto the overall positive leverage of merchandise, buying and occupancy costs.  Also, the Company recorded virtually no bonusexpense related to its merchandise staff in the third quarter of fiscal2008.  In the third quarter of fiscal2007, the Company reversed approximately $1.0 million of previously accruedbonuses for its merchandising staff which positively impacted merchandise,buying and occupancy expenses in the third quarter last year by approximately70 basis points.

 

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***Selling,General and Administrative Expenses. ***Selling, general and administrativeexpenses for the three months ended December 1, 2007 were $44.3 million,or 27.7% of net sales, compared to $35.8 million, or 25.7% of net sales, forthe three months ended November 25, 2006, resulting in approximately 200basis points of negative leverage.  Majorcomponents of the negative leverage included 140 basis points of negativeleverage of bonus expense related to its corporate staff in the third quarterof fiscal 2008.  In the third quarter offiscal 2007, the Company reversed approximately $1.5 million of previouslyaccrued bonuses for its corporate management employees which positivelyimpacted selling, general and administrative expenses in the third quarter lastyear by approximately 110 basis points. With the 9% increase in same-store sales in the third quarter of fiscal2008, the Company achieved positive leverage in most other expensecategories.  However, much of thepositive leverage was offset by 70 basis points of negative leverage from anincreased level of marketing related expense, 40 basis points of negativeleverage related to higher medical claims and 30 basis points of negativeleverage resulting from contract computer service expenses pertaining tovarious information technology related projects.

 

***Depreciationand Amortization.***  Depreciation and amortizationwas $6.6 million, or 4.1% of net sales, in the third quarter of fiscal 2008,compared to $5.1 million, or 3.6% of net sales, in the third quarter of fiscal2007.  The increase in the amount ofdepreciation and amortization expense was a result of capital expenditures madeby the Company over the past year.  TheCompany opened 66 new stores in the first nine months of fiscal 2008 and 78 newstores in all of fiscal 2007.  Inaddition, the Company recorded an impairment charge of approximately $915,000on assets at three underperforming stores in the third quarter of fiscal 2008.

 

***OperatingIncome.***  As a result of the foregoing factors,operating income for the three months ended December 1, 2007 was $15.0million, or 9.3% of net sales, compared to operating income of $13.7 million,or 9.9% of net sales, for the three months ended November 25, 2006.

 

***InterestIncome. ***For the three months ended December 1,2007, interest income decreased to $1.2 million from $1.4 million for the threemonths ended November 25, 2006.  Thedecrease resulted from a lower average balance of cash equivalents and shortterm investments in the third quarter of fiscal 2008 compared to the thirdquarter of fiscal 2007.

 

***IncomeTaxes. ***Income tax expense in the third quarterof fiscal 2008 was $5.9 million, with an effective tax rate of 36.5%, comparedto $5.8 million, with an effective tax rate of 38.8%, in the third quarter offiscal 2007.  The decreased effective taxrate resulted from an adjustment to the Company’s liability for unrecognizedtax benefits as the statute of limitations with respect to the Company’s taxreturns expired in a number of states and other tax jurisdictions in which theCompany operates.

 

***NetIncome. ***As a result of the foregoing factors, netincome for the three months ended December 1, 2007 was $10.2 million, or6.4% of net sales, and $0.29 per diluted share, compared to net income of $9.2million, or 6.6% of net sales, and $0.24 per diluted share, for the threemonths ended November 25, 2006.

 

 

**Nine months Ended December 1,2007 Compared to Nine months Ended November 25, 2006**

 

***NetSales.**** *Net sales for the nine months ended December 1,2007 were $450.5 million, an increase of $37.2 million or 9%, from $413.3million for the nine months ended November 25, 2006.  The increase in net sales was due to anincrease in the number of stores operated by the Company, combined with a 3%increase in same-store sales.  TheCompany operated 841 stores at December 1, 2007, compared to 778 stores atNovember 25, 2006.  Managementbelieves that sales were negatively impacted in the first quarter by adverseweather conditions in a significant portion of the Company’s comparative-storebase in April.  Sales during the secondquarter were driven in part by increased promotional activity in June and July toclear excess inventory.

 

17

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In the third quarter offiscal 2008, same-store sales were positively impacted by the Company’sfirst-ever, two-day “Friends and Family” event. Management believes sales in all three quarters of fiscal 2008 werenegatively affected by the generally challenging and highly promotional women’sspecialty apparel retail environment.

 

***Merchandise,Buying and Occupancy Costs, exclusive of depreciation and amortization. ***Merchandise, buying expenses and occupancy costs,exclusive of depreciation and amortization, were $271.6 million, or 60.3% ofnet sales, during the first nine months of fiscal 2008, compared to $242.0million, or 58.5% of net sales, during the same period in fiscal 2007,resulting in approximately 180 basis points of negative leverage.  The negative leverage was a result of lowermerchandise margins in the first and second quarters related to higher markdownstaken to clear excess inventory.  Thiswas partially offset by higher merchandise margins in the third quarterresulting from a decreased level of markdowns necessary to clear inventory asthe Company’s customers responded positively to its casual lifestyleassortment.

 

***Selling,General and Administrative Expenses. ***Selling, general and administrativeexpenses for the nine months ended December 1, 2007 were $124.0 million,or 27.5% of net sales, compared to $108.0 million, or 26.1% of net sales, forthe nine months ended November 25, 2006, resulting in approximately 140basis points of negative leverage.  Majorcomponents of the negative leverage included approximately $2.1 million of CEOtransition expenses and a combination of increased professional fees, expensesrelated to new systems installations, increased marketing-related expenses andan increase in staff at the Company’s corporate headquarters.  This was partially offset by positiveleverage gained from decreases in stock-based compensation expense.  For the nine month periods ended December 1,2007 and November 25, 2006, pre-tax stock-based compensation expensetotaled approximately $1.8 million and $3.9 million, respectively.

 

***Depreciationand Amortization.***  Depreciation and amortizationwas $17.4 million, or 3.9% of net sales, in the first nine months of fiscal2008, compared to $15.1 million, or 3.7% of net sales, in the first nine monthsof fiscal 2007.  The increase in theamount of depreciation and amortization expense was a result of capitalexpenditures made during the past year. The Company opened 66 new stores in the first nine months of fiscal 2008and 78 new stores in all of fiscal 2007. In addition, the Company recorded an impairment charge of approximately$915,000 on assets at three underperforming stores in the third quarter offiscal 2008.

 

***OperatingIncome.***  As a result of the foregoing factors,operating income for the nine months ended December 1, 2007 was $37.4million, or 8.3% of net sales, compared to operating income of $48.3 million,or 11.7% of net sales, for the nine months ended November 25, 2006.

 

***InterestIncome. ***For the nine months ended December 1,2007, interest income decreased to approximately $3.4 million from $3.6 millionfor the nine months ended November 25, 2006.  The decrease resulted from a lower averagebalance of cash equivalents and short term investments in the first nine monthsof fiscal 2008 compared to the first nine months of fiscal 2007.

 

***IncomeTaxes. ***Income tax expense in the first ninemonths of fiscal 2008 was $15.5 million, with an effective tax rate of 38.0%,compared to $20.1 million, with an effective tax rate of 38.8%, in the firstnine months of fiscal 2007. The decreased effective tax rate resulted from anadjustment to the company’s liability for unrecognized tax benefits as thestatute of limitations with respect to the Company’s tax returns expired in anumber of states and other tax jurisdictions in which the Company operates.

 

***NetIncome. ***As a result of the foregoing factors, netincome for the nine months ended December 1, 2007 was $25.3 million, or5.6% of net sales, and $0.70 per diluted share, compared to net income of $31.8million, or 7.7% of net sales, and $0.84 per diluted share, for the nine monthsended November 25, 2006.

 

18

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**Stock-Based Compensation Expense:**

 

Total pre-taxcompensation expense related to stock-based awards for the three months ended December 1,2007 and November 25, 2006 was approximately $847,000 and $1.6 million,respectively.  For the nine months ended December 1,2007 and November 25, 2006, pre-tax stock-based compensation expensetotaled approximately $1.8 and $3.9 million, respectively.  The decrease in stock-based compensationexpense in the third quarter and first nine months of fiscal 2008, compared tothe same periods 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’s formerCEO 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 expensewas included in merchandise, buying and occupancy expenses for the Company’sbuying and distribution employees and in selling, general and administrativeexpenses for all other employees.

 

**Liquidity and Capital Resources:**

 

The Company’sprincipal on-going cash requirements are to finance the construction of new storesand the remodeling of certain existing stores, to make other capitalexpenditures, to purchase merchandise inventories and to fund other workingcapital requirements.  Merchandisepurchases vary on a seasonal basis, peaking in the fall.  As a result, the Company’s cash requirementshistorically reach their peak in October or November.  Conversely, cash balances reach their peak inJanuary after the holiday season is completed.

 

Net cash providedby operating activities totaled $39.8 million for the first nine months offiscal 2008, an increase of $16.9 million from $22.9 million for the first ninemonths of fiscal 2007.  Significantfluctuations in the Company’s working capital accounts included a $7.9 milliondecrease in accounts payable and a $5.4 million decrease in merchandiseinventories.  The declines in inventoryand accounts payable were both a result of the Company’s efforts to reduceinventories in the first nine months of fiscal 2008, which resulted in a 17%decline in total inventory per store as of December 1, 2007 when comparedto total inventory per store as of March 3, 2007.  The remainder of the change in cash providedby operating activities was a result of net income, depreciation expense,stock-based compensation expense and various other changes in the Company’sother operating assets and liabilities.

 

Net cash used ininvesting activities included $26.9 million of capital expenditures.  The Company opened 66 new stores andcompleted three major store remodels during the nine months ended December 1,2007.  Net cash of $20.2 million was usedin financing activities during the first nine months of fiscal 2008 as theCompany paid three quarterly cash dividends, together totaling approximately$6.4 million, and repurchased approximately $15.0 million of its common stock.

 

The Company plansto fund approximately $5 million of capital expenditures during the fourthquarter of fiscal 2008 to open approximately four additional new stores and tomake various capital investments in its information systems.  A portion of the capital expenditures willalso be incurred for stores scheduled to open in the first quarter of fiscal2009.  The Company expects its cash andshort-term investments, combined with cash flows from operations, to besufficient to meet its capital expenditure, working capital and otherrequirements for liquidity during the remainder of fiscal 2008 and throughoutfiscal 2009.

 

The Companymaintains an Amended and Restated Revolving Credit Facility with Wells FargoBank, National Association (the “Wells Fargo Revolver”) which expires on June 30,2008.  The Wells Fargo Revolver providesthe Company with revolving credit loans and letters of credit of up to $50.0million, subject to a borrowing base formula based on inventory levels.

 

Loans under the WellsFargo Revolver bear interest at Wells Fargo’s floating rate, 7.50% as of December 1,2007, plus 0.25%.  Interest is payablemonthly in arrears.  The Wells FargoRevolver carries a facility fee of 0.25% based on the unused portion as definedin the agreement.  Facility fees totaled$6,011 for the nine months ended December 1, 2007.  The credit facility is collateralized by theCompany’s equipment, general intangibles, inventory, inventory letters ofcredit and letter of credit rights.  TheCompany had no revolving credit loan borrowings under the Wells Fargo Revolverduring the first nine months of fiscal 2008. Historically, the Wells Fargo Revolver has been utilized by the Companyonly to open letters of credit to facilitate the import of merchandise.

 

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The borrowing base at December 1,2007 was $39.5 million.  As of December 1,2007, the Company had outstanding letters of credit in the amount of $14.9million.  Accordingly, the availabilityof revolving credit loans under the Wells Fargo Revolver was $24.6 million at December 1,2007.

 

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 December 1, 2007,the most recent measurement date, the Company was in compliance with allcovenants of the Wells Fargo Revolver.

 

**Merchandise Sourcing:**

 

The Companydirectly imported approximately 81% of its total merchandise purchases in thefirst three quarters of fiscal 2008. Substantially all of its remaining merchandise purchases were made fromdomestic importers.  This reliance onsourcing from foreign countries may cause the Company to be exposed to certainrisks as indicated below and as discussed in Part I, “Item 1A. RiskFactors” in the Company’s Annual Report on Form 10-K for the year ended March 3,2007.

 

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 flow could also be adversely affected bypolitical instability in any of the countries where its merchandise ismanufactured or by changes in the United States’ governmental policies towardsuch foreign countries.  In addition,merchandise receipts could be delayed due to interruptions in air, ocean andground shipments.

 

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

 

The Companypurchased approximately 19% and 17% of its merchandise from its largest overseassupplier during the first nine months of fiscal 2008 and 2007,respectively.  Although the Companybelieves that its relationship with this particular vendor is good, there canbe no assurance that this relationship can be maintained in the future or thatthe vendor will continue to supply merchandise to the Company.  If there should be any significant disruptionin the 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, thereis some risk that any such disruption in supply could have a material adverseimpact on the Company’s financial position and results of operations.

 

**Quarterly Results and Seasonality:**

 

The Company’squarterly results may fluctuate significantly depending on a number of factors,including 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 nine-month periods ended December 1, 2007and November 25, 2006.

 

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**ITEM 3.**

**QUANTITATIVEAND 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’s results of operations could benegatively impacted by decreases in interest rates on its short-terminvestments.

 

The Company ispotentially exposed to market risk from changes in interest rates relating toits Wells Fargo Revolver.  Loans underthe Wells Fargo Revolver bear interest at Wells Fargo’s floating rate, 7.50% asof December 1, 2007, plus 0.25%. However, the Company had no revolving credit loan borrowings under theWells Fargo Revolver during the first nine months of fiscal 2008 and, given itsexisting liquidity position, does not expect to utilize the Wells FargoRevolver in the near future except for its continuing use of the import letterof credit facility.

 

All of the Company’spurchase obligations placed with foreign suppliers are denominated in U.S.dollars.  Therefore, the Company hasminimal exposure to foreign currency exchange risks.  The Company does not hedge against foreigncurrency risks and believes that its foreign currency exchange risk is notsignificant.

 

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

 

**ITEM 4.**

**CONTROLSAND PROCEDURES**

 

*(a)*       Evaluation of Disclosure Controls and Procedures.

* *

Under the supervision andwith the participation of its Chief Executive Officer and Chief FinancialOfficer, the Company’s management has evaluated the effectiveness and design ofthe Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures wereeffective to ensure that information required to be disclosed by the Company inthe reports that it files or submits under the Exchange Act is (i) recorded,processed, summarized and reported within the time periods specified inapplicable rules and forms, and (ii) accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure.

 

*(b)*       Internal Controls Over Financial 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 theExchange Act) during the three months ended December 1, 2007 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal controls over financial reporting.

 

 

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**PART II.**

 

**ITEM 1.**

**LEGALPROCEEDINGS**

 

There are nomaterial legal proceedings pending against the Company.

 

**ITEM 1A.**

**RISKFACTORS**

 

In addition to theother information set forth in this Quarterly Report on Form 10-Q, thefactors discussed in Part I, “Item 1A. Risk Factors” in the Company’sAnnual Report on Form 10-K for the year ended March 3, 2007 should becarefully considered as they could materially affect the Company’s business,financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K arenot the only risks facing the Company. Additional risks and uncertainties not currently known to the Company orthat the Company currently deems to be immaterial may also materially adverselyaffect the Company’s future business, financial condition and/or results ofoperations.

 

**ITEM 2.**

**UNREGISTEREDSALES OF EQUITY**

**SECURITIES AND USE OF PROCEEDS**

 

In May 2007,the Company’s Board of Directors authorized a stock repurchase program enablingthe company to purchase up to $20 million of its common stock, subject tomarket conditions.  As of December 1,2007, the Company had repurchased 635,900 shares of its common stock for atotal cost, including commissions, of approximately $9.1 million.

 

  The following table sets forth informationconcerning purchases made by the Company of its common stock for the third quarterof fiscal 2008:

 
| ** **                      | ** ** | ** **        | ** ** | ** **      | ** ** | **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 September:               |       |              |       |            |       |                         |       |                    |       |
|  September 2, 2007 -  |       |              |       |            |       |                         |       |                    |       |
| September 29,  2007        |       | 150,000           |       | $12.23          |       | 486,100                      |       | $13,031,000             |       |
|                            |       |              |       |            |       |                         |       |                    |       |
| Fiscal October:                 |       |              |       |            |       |                         |       |                    |       |
|  September 30, 2007 - |       |              |       |            |       |                         |       |                    |       |
| November 3,  2007          |       | 75,000            |       | $13.35          |       | 561,100                      |       | $12,030,000             |       |
|                            |       |              |       |            |       |                         |       |                    |       |
| Fiscal November:                |       |              |       |            |       |                         |       |                    |       |
|  November 4, 2007 -   |       |              |       |            |       |                         |       |                    |       |
| December 1,  2007          |       | 74,800            |       | $15.60          |       | 635,900                      |       | $10,863,000             |       |

 

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

 

 

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**ITEM 3.**

**DEFAULTSUPON**

**SENIOR SECURITIES**

 

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

 

**ITEM 4.**

**SUBMISSIONOF MATTERS TO**

**A VOTE OF SECURITY HOLDERS**

 

There were no matters submitted to a vote of securityholders for the period ended December 1, 2007.

 

**ITEM 5.**

**OTHERINFORMATION**

 

None.

** **

**ITEM 6.**

**EXHIBITS**

 

(a)           The following exhibits are filed withthis report:

 
| 10.1                                                                                                    |   | Separation  Agreement and Release between the Company and Matthew Dillon, dated  August 30, 2007 (incorporated herein by reference as Exhibit 10.1  to Current Report on Form 8-K, filed September 27, 2007) |
|---------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 10.2                                                                                                    |   | Employment  Agreement by and between the Company and Lorna Nagler, dated August 30,  2007 (incorporated herein by reference as Exhibit 10.1 to Current Report  on Form 8-K, filed September 7, 2007)         |
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 10.3                                                                                                    |   | Restricted Stock  Agreement by and between the Company and Lorna Nagler dated August 31,  2007 (incorporated herein by reference as Exhibit 10.2 to Current Report  on Form 8-K, filed September 7, 2007)    |
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 10.4                                                                                                    |   | Amendment  No. 3 to Christopher & Banks Corporation 2005 Stock Incentive  Plan (incorporated herein by reference as Exhibit 10.1 to Current Report  on Form 8-K, filed October 10, 2007)            |
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 31.1*                                                                                                   |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                            |
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 31.2*                                                                                                   |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                            |
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 32.1*                                                                                                   |   | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                |
|                                                                                                    |   |                                                                                                                                                                                                                             |
| 32.2*                                                                                                   |   | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                |
|                                                                                                         |
| *              Filed with this report. |

 

 

23

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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: | January 10,  2008 |   |   |   |   |   | By     | /s/ LORNA NAGLER                       |   |
|--------|------------------------|--------|--------|--------|--------|--------|--------|----------------------------------------|--------|
|   |                   |   |   |   |   |   |   |                                   |
|   |                   |   |   |   |   |   |   | Lorna Nagler                           |
|   |                   |   |   |   |   |   |   | President and  Chief Executive Officer |
|   |                   |   |   |   |   |   |   | (Principal  Executive Officer)         |
|   |                   |   |   |   |   |   |   |                                   |
|   |                   |   |   |   |   |   |   |                                   |
| Dated: | January 10,  2008 |   |   |   |   |   | By     | /s/ ANDREW K.  MOLLER                  |   |
|   |                   |   |   |   |   |   |   |                                   |
|   | ** **             |   |   |   |   |   |   | Andrew K. Moller                       |
|   |                   |   |   |   |   |   |   | Executive Vice  President              |
|   |                   |   |   |   |   |   |   | and Chief  Financial Officer           |
|   |                   |   |   |   |   |   |   | (Principal  Financial Officer)         |

 

 

24

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**CHRISTOPHER & BANKSCORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEXTO EXHIBITS**

 

 
| **Exhibit No. **                                                                              | ** ** | **Description**                                                                                                                                                                                                                  |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 10.5                                                                                                    |       | Separation  Agreement and Release between the Company and Matthew Dillon, dated  August 30, 2007 (incorporated herein by reference as Exhibit 10.1  to Current Report on Form 8-K, filed September 27, 2007) |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 10.6                                                                                                    |       | Employment  Agreement by and between the Company and Lorna Nagler, dated August 30,  2007 (incorporated herein by reference as Exhibit 10.1 to Current Report  on Form 8-K, filed September 7, 2007)         |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 10.7                                                                                                    |       | Restricted Stock  Agreement by and between the Company and Lorna Nagler dated August 31,  2007 (incorporated herein by reference as Exhibit 10.2 to Current Report  on Form 8-K, filed September 7, 2007)    |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 10.8                                                                                                    |       | Amendment  No. 3 to Christopher & Banks Corporation 2005 Stock Incentive  Plan (incorporated herein by reference as Exhibit 10.1 to Current Report  on Form 8-K, filed October 10, 2007)            |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 31.1*                                                                                                   |       | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                            |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 31.2*                                                                                                   |       | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                            |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 32.1*                                                                                                   |       | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                |
|                                                                                                    |       |                                                                                                                                                                                                                             |
| 32.2*                                                                                                   |       | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                |
|                                                                                                         |
| *              Filed with this report. |

 

 

25

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