Tableof Contents

 

 

 

**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 SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended November 28,2009**

 

**or**

 

**o****  ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from                    to                    .**

 

**Commission File Number 001-31390**

 

**CHRISTOPHER & BANKSCORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

**(763)551-5000**

(Registrant’stelephone number, including area code)

 

**Not Applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   **YES ****x****  NO ****o**

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).   **YES ****o****  NO ****o**

 

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

 

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

 

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

 

As of December 24,2009, 35,989,910 shares of the registrant’s common stock were outstanding.

 

 

 

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

###### ** **

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| ** **            | ** **                                                                                                                      | **Page** |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
|                  |                                                                                                                            |     |
|                  | **PART I**                                                                                                                 |     |
|                  | **FINANCIAL  INFORMATION**                                                                                                      |     |
|                  |                                                                                                                            |     |
| Item  1.              | Financial  Statements:                                                                                                          |     |
|                  |                                                                                                                            |     |
|                  | Condensed Consolidated  Balance Sheet (Unaudited)  As of November 28, 2009, February 28, 2009 and November 29, 2008             | 3        |
|                  |                                                                                                                            |     |
|                  | Condensed Consolidated  Statement of Operations (Unaudited)  For the Three Months Ended November 28, 2009 and November 29, 2008 | 4        |
|                  |                                                                                                                            |     |
|                  | Condensed Consolidated  Statement of Operations (Unaudited)  For the Nine Months Ended November 28, 2009 and November 29, 2008  | 5        |
|                  |                                                                                                                            |     |
|                  | Condensed Consolidated  Statement of Cash Flows (Unaudited)  For the Nine Months Ended November 28, 2009 and November 29, 2008  | 6        |
|                  |                                                                                                                            |     |
|                  | Notes to  Condensed Consolidated Financial Statements (Unaudited)                                                               | 7        |
|                  |                                                                                                                            |     |
| Item 2.               | Management’s Discussion and Analysis of    Financial Condition and Results of Operations                                   | 18       |
|                  |                                                                                                                            |     |
| Item 3.               | Quantitative and Qualitative  Disclosures   About Market Risk                                                                   | 29       |
|                  |                                                                                                                            |     |
| Item 4.               | Controls and Procedures                                                                                                         | 30       |
|                  |                                                                                                                            |     |
| **PART II**      |
| **OTHER INFORMATION** |
|                  |                                                                                                                            |     |
| Item 1.               | Legal Proceedings                                                                                                               | 30       |
|                  |                                                                                                                            |     |
| Item 1A.              | Risk Factors                                                                                                                    | 30       |
|                  |                                                                                                                            |     |
| Item 2.               | Unregistered Sales of Equity Securities  and Use of Proceeds                                                                    | 30       |
|                  |                                                                                                                            |     |
| Item 3.               | Defaults Upon Senior Securities                                                                                                 | 30       |
|                  |                                                                                                                            |     |
| Item 4.               | Submission of Matters to a Vote of  Security Holders                                                                            | 31       |
|                  |                                                                                                                            |     |
| Item 5.               | Other Information                                                                                                               | 31       |
|                  |                                                                                                                            |     |
| Item 6.               | Exhibits                                                                                                                        | 31       |
|                  |                                                                                                                            |     |
|                  | Signatures                                                                                                                      | 32       |
|                  |                                                                                                                            |     |
|                  | Index to Exhibits                                                                                                               | 33       |

 

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# **PART I – FINANCIAL INFORMATION**

**ITEM 1.**

**FINANCIAL STATEMENTS**

# **CHRISTOPHER & BANKS CORPORATION**

# **CONDENSED CONSOLIDATED BALANCE SHEET**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                            | ** ** | **November 28,** | ** ** | **February 28,** | ** ** | **November 29,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                            | ** ** | **2009**              | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                            |       |                  |       |                  |       |                  |       |
| Current  assets:                                                                                                                                                                                                                                      |       |                  |       |                  |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                                            |       | $                     | 43,518     |                  | $          | 78,814                |       | $ | 74,087 |   |
| Short-term  investments                                                                                                                                                                                                                               |       | 48,968                |       | —                |       | —                |       |
| Accounts  receivable                                                                                                                                                                                                                                  |       | 5,841                 |       | 3,921                 |       | 6,742                 |       |
| Merchandise  inventories                                                                                                                                                                                                                              |       | 41,824                |       | 38,828                |       | 53,151                |       |
| Prepaid  expenses                                                                                                                                                                                                                                     |       | 2,476                 |       | 1,938                 |       | 11,243                |       |
| Income  taxes receivable                                                                                                                                                                                                                              |       | —                |       | 18,747                |       | 11,268                |       |
| Current  deferred tax asset                                                                                                                                                                                                                           |       | 3,965                 |       | 3,795                 |       | 5,201                 |       |
| Other  current assets                                                                                                                                                                                                                                 |       | 2,628                 |       | —                |       | —                |       |
| Total  current assets                                                                                                                                                                                                                                 |       | 149,220               |       | 146,043               |       | 161,692               |       |
| Property,  equipment and improvements, net                                                                                                                                                                                                            |       | 104,709               |       | 120,347               |       | 129,067               |       |
| Long-term  investments                                                                                                                                                                                                                                |       | 9,669                 |       | 16,400                |       | 15,876                |       |
| Deferred  tax asset                                                                                                                                                                                                                                   |       | 7,809                 |       | 4,328                 |       | 4,781                 |       |
| Other  assets                                                                                                                                                                                                                                         |       | 325                   |       | 3,024                 |       | 4,014                 |       |
| Total  assets                                                                                                                                                                                                                                         |       | $                     | 271,732    |                  | $          | 290,142               |       | $ | 315,430 |   |
|                                                                                                                                                                                                                                                  |       |                  |       |                  |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                        | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                                                                  |       |                  |       |                  |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                                 |       |                  |       |                  |       |                  |       |
| Accounts  payable                                                                                                                                                                                                                                     |       | $                     | 6,491      |                  | $          | 19,806                |       | $ | 14,794 |   |
| Accrued  salaries, wages and related expenses                                                                                                                                                                                                         |       | 7,795                 |       | 9,588                 |       | 8,088                 |       |
| Other  accrued liabilities                                                                                                                                                                                                                            |       | 21,568                |       | 22,103                |       | 22,288                |       |
| Other  current liabilities                                                                                                                                                                                                                            |       | —                |       | 487                   |       | —                |       |
| Total  current liabilities                                                                                                                                                                                                                            |       | 35,854                |       | 51,984                |       | 45,170                |       |
| Non-current  liabilities:                                                                                                                                                                                                                             |       |                  |       |                  |       |                  |       |
| Deferred  lease incentives                                                                                                                                                                                                                            |       | 20,755                |       | 23,506                |       | 24,823                |       |
| Deferred  rent obligations                                                                                                                                                                                                                            |       | 9,621                 |       | 10,318                |       | 10,038                |       |
| Other                                                                                                                                                                                                                                                 |       | 3,717                 |       | 4,110                 |       | 4,219                 |       |
| Total  non-current liabilities                                                                                                                                                                                                                        |       | 34,093                |       | 37,934                |       | 39,080                |       |
|                                                                                                                                                                                                                                                  |       |                  |       |                  |       |                  |       |
| Commitments                                                                                                                                                                                                                                           |       | —                |       | —                |       | —                |       |
| Stockholders’  equity:                                                                                                                                                                                                                           |       |                  |       |                  |       |                  |       |
| Preferred  stock – $0.01 par value, 1,000 shares authorized, none outstanding                                                                                                                                                               |       | —                |       | —                |       | —                |       |
| Common  stock – $0.01 par value, 74,000 shares authorized, 45,781, 45,258 and 45,303 shares  issued and 35,990, 35,467 and 35,499 shares outstanding at November 28,  2009, February 28, 2009 and November 29, 2008, respectively |       | 458                   |       | 453                   |       | 453                   |       |
| Additional  paid-in capital                                                                                                                                                                                                                           |       | 113,139               |       | 111,763               |       | 111,931               |       |
| Retained  earnings                                                                                                                                                                                                                                    |       | 200,864               |       | 200,720               |       | 231,655               |       |
| Common  stock held in treasury, 9,791 shares at cost at November 28, 2009 and  February 28, 2009, and 9,804 shares at cost at November 29, 2008                                                                                        |       | (112,712              | )          | (112,712              | )          | (112,859              | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                        |       | 36                    |       | —                |       | —                |       |
| Total  stockholders’ equity                                                                                                                                                                                                                      |       | 201,785               |       | 200,224               |       | 231,180               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                      |       | $                     | 271,732    |                  | $          | 290,142               |       | $ | 315,430 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements

 

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**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS**

(In thousands,except per share data)

(Unaudited)

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **November 28,**  | ** ** | **November 29,** | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net  sales                                                    |       | $                      | 132,000    |   | $ | 143,004 |   |
|                                                          |       |                   |       |   |   |
| Costs  and expenses:                                          |       |                   |       |   |   |
| Merchandise,  buying and occupancy                            |       | 78,205                 |       | 91,914 |   |
| Selling,  general and administrative                          |       | 37,535                 |       | 45,204 |   |
| Depreciation  and amortization                                |       | 6,469                  |       | 6,548 |   |
| Total  costs and expenses                                     |       | 122,209                |       | 143,666 |   |
|                                                          |       |                   |       |   |   |
| Operating  income (loss)                                      |       | 9,791                  |       | (662 | ) |
|                                                          |       |                   |       |   |   |
| Other  income                                                 |       | 107                    |       | 619 |   |
|                                                          |       |                   |       |   |   |
| Income  (loss) from continuing operations before income taxes |       | 9,898                  |       | (43 | ) |
|                                                          |       |                   |       |   |   |
| Income  tax provision (benefit)                               |       | 2,926                  |       | (7,080 | ) |
|                                                          |       |                   |       |   |   |
| Income  from continuing operations                            |       | 6,972                  |       | 7,037 |   |
|                                                          |       |                   |       |   |   |
| Loss  from discontinued operations, net of income tax         |       | —                 |       | (3,077 | ) |
|                                                          |       |                   |       |   |   |
| Net  income                                                   |       | $                      | 6,972      |   | $ | 3,960 |   |
|                                                          |       |                   |       |   |   |
| Basic  earnings (loss) per share:                             |       |                   |       |   |   |
| Continuing  operations                                        |       | $                      | 0.20       |   | $ | 0.20 |   |
| Discontinued  operations                                      |       | —                 |       | (0.09 | ) |
|                                                          |       |                   |       |   |   |
| Earnings  per basic share                                     |       | $                      | 0.20       |   | $ | 0.11 |   |
|                                                          |       |                   |       |   |   |
| Basic  shares outstanding                                     |       | 35,178                 |       | 35,099 |   |
|                                                          |       |                   |       |   |   |
| Diluted  earnings (loss) per share:                           |       |                   |       |   |   |
| Continuing  operations                                        |       | $                      | 0.19       |   | $ | 0.20 |   |
| Discontinued  operations                                      |       | —                 |       | (0.09 | ) |
|                                                          |       |                   |       |   |   |
| Earnings  per diluted share                                   |       | $                      | 0.19       |   | $ | 0.11 |   |
|                                                          |       |                   |       |   |   |
| Diluted  shares outstanding                                   |       | 35,351                 |       | 35,116 |   |
|                                                          |       |                   |       |   |   |
| Dividends  per share                                          |       | $                      | 0.06       |   | $ | 0.06 |   |

 

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

 

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**CHRISTOPHER & BANKS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF OPERATIONS**

(In thousands,except per share data)

(Unaudited)

** **
| ** **                                             | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **November  28,** | ** ** | **November 29,** | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net  sales                                             |       | $                      | 353,549    |   | $ | 426,850 |   |
|                                                   |       |                   |       |   |   |
| Costs  and expenses:                                   |       |                   |       |   |   |
| Merchandise,  buying and occupancy                     |       | 219,816                |       | 257,361 |   |
| Selling,  general and administrative                   |       | 105,898                |       | 129,010 |   |
| Depreciation  and amortization                         |       | 19,066                 |       | 19,654 |   |
| Total  costs and expenses                              |       | 344,780                |       | 406,025 |   |
|                                                   |       |                   |       |   |   |
| Operating  income                                      |       | 8,769                  |       | 20,825 |   |
|                                                   |       |                   |       |   |   |
| Other  income                                          |       | 451                    |       | 2,031 |   |
|                                                   |       |                   |       |   |   |
| Income  from continuing operations before income taxes |       | 9,220                  |       | 22,856 |   |
|                                                   |       |                   |       |   |   |
| Income  tax provision                                  |       | 2,694                  |       | 2,034 |   |
|                                                   |       |                   |       |   |   |
| Income  from continuing operations                     |       | 6,526                  |       | 20,822 |   |
|                                                   |       |                   |       |   |   |
| Loss  from discontinued operations, net of income tax  |       | —                 |       | (4,754 | ) |
|                                                   |       |                   |       |   |   |
| Net  income                                            |       | $                      | 6,526      |   | $ | 16,068 |   |
|                                                   |       |                   |       |   |   |
| Basic  earnings (loss) per share:                      |       |                   |       |   |   |
| Continuing  operations                                 |       | $                      | 0.18       |   | $ | 0.59 |   |
| Discontinued  operations                               |       | —                 |       | (0.14 | ) |
|                                                   |       |                   |       |   |   |
| Earnings  per basic share                              |       | $                      | 0.18       |   | $ | 0.46 |   |
|                                                   |       |                   |       |   |   |
| Basic  shares outstanding                              |       | 35,135                 |       | 35,091 |   |
|                                                   |       |                   |       |   |   |
| Diluted  earnings (loss) per share:                    |       |                   |       |   |   |
| Continuing  operations                                 |       | $                      | 0.18       |   | $ | 0.59 |   |
| Discontinued  operations                               |       | —                 |       | (0.14 | ) |
|                                                   |       |                   |       |   |   |
| Earnings  per diluted share                            |       | $                      | 0.18       |   | $ | 0.46 |   |
|                                                   |       |                   |       |   |   |
| Diluted  shares outstanding                            |       | 35,175                 |       | 35,094 |   |
|                                                   |       |                   |       |   |   |
| Dividends  per share                                   |       | $                      | 0.18       |   | $ | 0.18 |   |

 

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

 

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**CHRISTOPHER & BANKSCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTOF CASH FLOWS**

(In thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **November 28,** | ** ** | **November 29,** | ** ** |
| ** **                                                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                               | ** ** |                  |       |   |   |
| Cash  flows from operating activities:                                             |       |                  |       |   |   |
| Net  income                                                                        |       | $                     | 6,526      |   | $ | 16,068 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation  and amortization                                                     |       | 19,066                |       | 19,754 |   |
| Impairment  of store assets                                                        |       | —                |       | 1,221 |   |
| Deferred  income taxes                                                             |       | (3,718                | )          | 254 |   |
| Stock-based  compensation expense                                                  |       | 1,382                 |       | 1,578 |   |
| Loss  on disposal of furniture, fixtures and equipment                             |       | 130                   |       | 553 |   |
| Gain  on trading securities                                                        |       | (150                  | )          | — |   |
| Changes  in operating assets and liabilities:                                      |       |                  |       |   |   |
| Sales  of trading securities                                                       |       | 350                   |       | — |   |
| Increase  in accounts receivable                                                   |       | (1,920                | )          | (1,519 | ) |
| Increase  in merchandise inventory                                                 |       | (2,996                | )          | (9,311 | ) |
| (Increase)  decrease in prepaid expenses and other current assets                  |       | (516                  | )          | 354 |   |
| (Increase)  decrease in income taxes receivable                                    |       | 18,747                |       | (6,237 | ) |
| Decrease  in other assets                                                          |       | 65                    |       | 9 |   |
| Decrease  in accounts payable                                                      |       | (12,035               | )          | (587 | ) |
| Decrease  in accrued liabilities                                                   |       | (2,719                | )          | (7,057 | ) |
| Decrease  in deferred lease incentives                                             |       | (2,752                | )          | (31 | ) |
| Decrease  in deferred rent obligations                                             |       | (697                  | )          | (1,683 | ) |
| Increase  (decrease) in other liabilities                                          |       | (488                  | )          | 497 |   |
| Net  cash provided by operating activities                                         |       | 18,275                |       | 13,863 |   |
|                                                                               |       |                  |       |   |   |
| Cash  flows from investing activities:                                             |       |                  |       |   |   |
| Purchases  of property, equipment and improvements                                 |       | (4,838                | )          | (16,922 | ) |
| Sales  of investments                                                              |       | 2,620                 |       | 5,000 |   |
| Purchases  of investments                                                          |       | (44,970               | )          | — |   |
| Net  cash used in investing activities                                             |       | (47,188               | )          | (11,922 | ) |
|                                                                               |       |                  |       |   |   |
| Cash  flows from financing activities:                                             |       |                  |       |   |   |
| Dividends  paid                                                                    |       | (6,383                | )          | (6,346 | ) |
| Net  cash used in financing activities                                             |       | (6,383                | )          | (6,346 | ) |
|                                                                               |       |                  |       |   |   |
| Net  decrease in cash and cash equivalents                                         |       | (35,296               | )          | (4,405 | ) |
|                                                                               |       |                  |       |   |   |
| Cash  and cash equivalents at beginning of period                                  |       | 78,814                |       | 78,492 |   |
|                                                                               |       |                  |       |   |   |
| Cash  and cash equivalents at end of period                                        |       | $                     | 43,518     |   | $ | 74,087 |   |

 

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

 

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**CHRISTOPHER & BANKS CORPORATION**

# **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

## **NOTE 1 — BASIS OFPRESENTATION**

 

The unauditedcondensed consolidated financial statements included in this Form 10-Qhave been prepared by Christopher & Banks Corporation and itssubsidiaries (the “Company”) pursuant to the rules and regulations of theUnited States Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed, or omitted, pursuant to such rules and regulations.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and related notes included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended February 28, 2009.

 

The results of operations for the interim periods reflected in thisreport are not necessarily indicative of results to be expected for the fullfiscal year.  In the opinion ofmanagement, the information contained herein reflects all adjustments,consisting only of normal adjustments except as otherwise stated in thesenotes, necessary to present fairly the Company’s financial position as of November 28,2009 and November 29, 2008, and its results of operations and cash flowsfor the three and nine month periods ended November 28, 2009 and November 29,2008.  The Company has evaluatedsubsequent events through January 7, 2010, the date of issuance of theCompany’s unaudited condensed consolidated financial statements, and determinedthat no such events have occurred requiring disclosure in its unauditedcondensed consolidated financial statements.

 

*RecentlyAdopted Accounting Pronouncements*

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Codification (“ASC”) 105-10, “Generally AcceptedAccounting Principles,” as the single source of authoritative nongovernmentalgenerally accepted accounting principles in the United States (“GAAP”).  ASC 105-10 does not change existing GAAP, butis intended to simplify user access to all authoritative GAAP by providing allthe authoritative literature related to a particular topic in one place.  All existing accounting standard documentswere superseded and all other accounting literature not included in ASC 105-10has been considered non-authoritative. However, SEC accounting and reporting standards will continue to beauthoritative for SEC reporting entities. The Company adopted ASC 105-10 during the third quarter of fiscal2010.  ASC 105-10 is for disclosurepurposes only and the adoption of ASC 105-10 did not impact the Company’sfinancial position, results of operations or cash flows.

 

In September 2006,the FASB issued amendments to ASC 820-10, “Fair Value Measurements andDisclosures.”  Subsequently, in February 2008,the portion of these amendments related to non-financial assets andnon-financial liabilities that are recognized or disclosed at fair value in thefinancial statements on a non-recurring basis was deferred by the FASB for oneyear.  The Company adopted the deferredportion of the amendments to ASC 820-10 on March 1, 2009.  See Note 12, Fair Value Measurements, foradditional disclosures required under these amendments to ASC 820-10 fornon-financial assets and liabilities recognized or disclosed at fair value inthe Company’s consolidated financial statements.  Other than such disclosures, the adoption ofthese amendments to ASC 820-10 did not have a material impact on the Company’sconsolidated financial statements as reported herein.

 

In June 2008, theFASB issued amendments to ASC 260-10, “Earnings Per Share,” which require thatunvested share-based payment awards that contain rights to receivenon-forfeitable dividends (whether paid or unpaid) are considered participatingsecurities and should be included in the two-class method of computing earningsper share.  These amendments to ASC260-10 were adopted by the Company effective March 1, 2009 and impactedthe Company’s calculation of earnings per share beginning in the first quarterof the fiscal year ending February 27, 2010 (“Fiscal 2010”).  See Note 11, Earnings per Share, for furtherdisclosure regarding the impact of the adoption of these amendments to ASC260-10.

 

In April 2009, theFASB issued amendments to ASC 820-10, “Fair Value Measurements and Disclosures,”which require disclosures aboutthe fair value of financial instruments in interim as well as in annualfinancial statements.  These amendmentsare effective for interim and annual financial periods ending after June 15,2009.  The Company adopted theseamendments to ASC 820-10 effective May 31, 2009.   The Company updated its disclosures asrequired by these amendments.

 

In May 2009, theFASB issued amendments to ASC 855-10, “Subsequent Events,” which establishgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued.  The amendments are based on the sameprinciples as those that currently exist in the auditing standards.  The amendments are effective for interim orannual financial periods ending after June 15, 2009, and shall be appliedprospectively. The Company adopted these amendments to ASC 855-10 effective May 31,2009.

 

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*Recently Issued AccountingPronouncements*

 

In June 2009, theFASB issued SFAS No. 166, “Accountingfor Transfers of Financial Assets — an amendment of FASB Statement No. 14”**(“SFAS No. 166”).  SFAS No. 166 was issued to improve therelevance and comparability of the information that a reporting entity providesin its financial statements about a transfer of financial assets, the effectsof such a transfer on its financial position, financial performance and cashflows, and requires the reporting entity to provide information as to atransferor’s continuing involvement, if any, in transferred financialassets.  SFAS No. 166 is effectivefor the Company’s fiscal year beginning February 28, 2010. The Companydoes not believe the adoptions of SFAS No. 166 will have any impact on itsfinancial position, results of operations or cash flows.

 

In June 2009, theFASB issued SFAS No. 167, Amendments to FASB interpretation No. 46(R).  SFAS No. 167 seeks to improve financialreporting by requiring that entities perform an analysis to determine whetherany variable interest or interest that they have give them a controllingfinancial interest in a variable interest entity. SFAS No. 167 iseffective for annual financial periods beginning after November 15, 2009,and interim periods within that annual period, and therafter, and shall beapplied prospectively.  Early adoption isprohibited.  The Company does not believethe adoption of SFAS No. 167 will have any impact on its financial position,results of operations or cash flows.

 

## **NOTE2 — DISCONTINUED OPERATIONS**

## ** **

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

 

The operating results ofall Acorn stores have been presented as discontinued operations, in accordancewith ASC 205-20, “Discontinued Operations,” in the Condensed ConsolidatedStatement of Operations for the three and nine month periods ended November 29,2008.  There was no activity relating tothe Company’s discontinued Acorn operations during the three and nine monthperiods ended November 28, 2009.

 

The operating results ofthe discontinued operations for the three and nine month periods ended November 29,2008 are summarized below (in thousands).

 
| ** **                         | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended**      | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **November 29, 2008** | ** ** | **November 29, 2008** | ** ** |
| Net  sales                         |       | $                          | 3,015      |                       | $          | 10,448 |   |
|                               |       |                       |       |                       |       |
| Loss  before income tax benefit    |       | $                          | (4,713     | )                          | $          | (7,499 | ) |
| Income  tax benefit                |       | (1,636                     | )          | (2,745                     | )          |
|                               |       |                       |       |                       |       |
| Loss  from discontinued operations |       | $                          | (3,077     | )                          | $          | (4,754 | ) |

 

Income taxes have beenallocated to continuing and discontinued operations based on the methodologyrequired by ASC 740-270, “Income Taxes — Interim Reporting.”  Income taxes allocated to the results ofdiscontinued operations are determined on the basis of a computation of taxeswith and without the impact of results from discontinued operations and thedifference in taxes between these computations is allocated to discontinuedoperations.

 

## **NOTE3 — INVESTMENTS**

 

Investments consisted ofthe following (in thousands):

 

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| ** **                                 | ** ** | **November 28, 2009** | ** ** | **February 28, 2009** | ** ** | **November 29, 2008** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Estimated**              | ** ** | **Amortized**              | ** ** | **Estimated**              | ** ** | **Amortized** | ** ** | **Estimated** | ** ** | **Amortized** | ** ** |
| **Description**                            | ** ** | **Fair Value**             | ** ** | **Cost**                   | ** ** | **Fair Value**             | ** ** | **Cost** | ** ** | **Fair Value** | ** ** | **Cost** | ** ** |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Available-for-sale  securities short-term: |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Variable  Rate Demand Obligations          |       | $                          | 19,450     |                       | $          | 19,450                     |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Municipal  Bonds                           |       | 13,047                     |       | 13,040                     |       | —                     |       | — |   | — |   | — |   |
| U.S.  Agency Securities                    |       | 199                        |       | 199                        |       | —                     |       | — |   | — |   | — |   |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Trading  securities short-term:            |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Auction  Rate Securities                   |       | 16,272                     |       | 16,272                     |       | —                     |       | — |   | — |   | — |   |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Total  short-term investments              |       | 48,968                     |       | 48,961                     |       | —                     |       | — |   | — |   | — |   |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Available-for-sale  securities long-term:  |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Municipal  Bonds                           |       | 3,152                      |       | 3,132                      |       | —                     |       | — |   | — |   | — |   |
| U.S.  Agency Securities                    |       | 6,517                      |       | 6,485                      |       | —                     |       | — |   | — |   | — |   |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Trading  securities long-term:             |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Auction  Rate Securities                   |       | —                     |       | —                     |       | 16,400                     |       | 16,400 |   | 15,876 |   | 15,876 |   |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Total  long-term investments               |       | 9,669                      |       | 9,617                      |       | 16,400                     |       | 16,400 |   | 15,876 |   | 15,876 |   |
|                                       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Total  investments                         |       | $                          | 58,637     |                       | $          | 58,578                     |       | $ | 16,400 |   | $ | 16,400 |   | $ | 15,876 |   | $ | 15,876 |   |

 

The Company accounts forits investments in accordance with ASC 320-10 “Investments — Debt and EquitySecurities” and, accordingly, its investment securities have been characterizedas either “available-for-sale” or “trading.” Available-for-sale securities are carried at fair value with unrealizedgains and losses reported in shareholders’ equity as accumulated othercomprehensive income (loss) net of tax. Fair value for the Company’s available-for-sale securities is based onunadjusted quoted market prices for the securities in active markets withsufficient volume and frequency.  At November 28,2009, gross unrealized losses on available for sale securities totaledapproximately $5,000 (pre-tax) while gross unrealized gains totaledapproximately $64,000 (pre-tax).   Grossrealized gains and losses on the sale of available for sale securities duringthe nine months ended November 28, 2009 were not material.  Trading securities are measured at fair valueeach period with gains or losses resulting from changes in fair market valuereported as realized gains or losses and included in earnings as other income(loss).  The Company’s primary investmentstrategy is preservation of principle. The Company does not enter into investments for speculative purposes.

 

As of November 28,2009, the Company’s available-for-sale investment securities were comprised ofvariable rate demand obligations, municipal bonds and U.S. Agencysecurities.  The Company had approximately$16.3 million of short-term trading securities as of November 28, 2009,which consisted solely of $19.1 million of auction rate securities (“ARS”) atcost, less a fair value adjustment of approximately $2.8 million.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS are expected to be held.

 

Substantially all of the Company’s ARS are collateralized by studentloans. As of November 28, 2009, a majority of its ARS had AAA (Standard &Poor’s), Aaa (Moody’s), or AAA (Fitch) credit ratings.  As of November 28, 2009, the repaymentof approximately 80% of the student loans, which serve as collateral for theARS held by the Company, was substantially backed by the United Statesgovernment.

 

Until February 2008, the ARS market was liquid and auctions forARS held by the Company did not fail. However, beginning in February 2008, auctions for the ARS held bythe Company began to fail and have continued to fail up to and as of the dateof this report.  Based on current marketconditions, management believes that it is likely that auctions related to theCompany’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited theCompany’s ability to access these funds.

 

All of the ARS owned bythe Company were purchased through UBS Financial Services, Inc., asubsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, byUBS.  In November 2008, the Companyaccepted a settlement offer from UBS to restore liquidity to its clients whohold ARS.  The settlement grants theCompany certain ARS rights.  These ARSrights provide the Company the ability to redeem its ARS at par during atwo-year time period beginning June 30, 2010.  During this time, the Company may choose tocontinue to hold some, or all, of its ARS and earn interest or sell some, orall, of its ARS to UBS at par plus accrued interest.  The 

 

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ARS rights are nottransferable, tradable or marginable and will not be listed or quoted on anysecurities or exchange or any electronic communications network.  As the Company has the ability and intent toredeem its ARS at June 30, 2010, it reclassified the ARS to short-terminvestments as of August 29, 2009.

 

Upon acceptance of thesettlement offer, the Company classified its ARS as trading securities andelected to record the ARS rights at fair value on a recurring basis utilizingsignificant unobservable inputs in accordance with ASC 820-10, “Fair ValueMeasurements and Disclosures.”  The fairvalue of the ARS rights was estimated utilizing the Black-Scholes optionpricing model and the forward contract method. As of November 28, 2009, the fair value of the ARS rights wasdetermined to be approximately $2.6 million and the ARS rights were recordedwithin other current assets on the consolidated financial statements.  The Company redeemed $350,000 of ARS duringthe first nine months of fiscal 2010.

 

The balance ofinvestments by contractual maturities at November 28, 2009 is shown below(in thousands).  Actual maturities maydiffer from contractual maturities because the issuers of the securities mayhave the right to prepay the obligations without prepayment penalties.

 
| ** **                                | ** ** | **November 28,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** |
| Due  in one year or less                  |       | $                     | 48,968     |   |
| Due after  one year through three years   |       | 9,102                 |       |
| Due  after three years through five years |       | —                |       |
| Due  after five years                     |       | 567                   |       |
|                                      |       |                  |       |
| Total  investment securities              |       | $                     | 58,637     |   |

 

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

 

Merchandise inventoriesconsisted of the following (in thousands):

 
| ** **                | ** ** | **November 28,** | ** ** | **February 28,** | ** ** | **November 29,** | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| **Description**           | ** ** | **2009**              | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|                      |       |                  |       |                  |       |                  |       |
| Merchandise  - in store   |       | $                     | 40,115     |                  | $          | 35,280                |       | $ | 51,859 |   |
| Merchandise  - in transit |       | 1,709                 |       | 3,548                 |       | 1,292                 |       |
|                      |       |                  |       |                  |       |                  |       |
|                      |       | $                     | 41,824     |                  | $          | 38,828                |       | $ | 53,151 |   |

 

**The Company does not havelong-term purchase commitments or arrangements with any of its suppliers or agents. **During the three and nine monthperiods ended November 28, 2009, three of the Company’s vendors eachsupplied the Company with greater than 10% of its merchandise inventorypurchases.  For the third quarter offiscal 2010, these three vendors supplied approximately 25%, 20% and 16% of theCompany’s merchandise purchases.  In thenine month period ended November 28, 2009, the three vendors suppliedapproximately 25%, 12% and 16% of the Company’s merchandise purchases.

** **

**Although the Company has positiverelationships with these three vendors, there can be no assurance that theserelationships can be maintained in the future or that the vendors will continueto supply merchandise to the Company.  If there should be any significantdisruption in the supply of merchandise from these vendors, management believesthat it will be able to shift production to other suppliers to continue tosecure the required volume of merchandise.  Nevertheless, it is possiblethat any significant disruption in supply could have a material adverse impacton the Company’s financial position or results of operations.**

** **

**In the nine months ended November 29,2008, the Company purchased approximately 32% of its merchandise through onebuying agent (the “Agent”).  The Companyand the Agent terminated their sourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase anymerchandise through the Agent in the first nine months of fiscal 2010.**

 

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

## ** **

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

 
| ** **                                                                  | ** ** | **Estimated**                              | ** ** | **November 28,** | ** ** | **February 28,** | ** ** | **November 29,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| **Description**                                                             | ** ** | **Useful Life**                            | ** ** | **2009**              | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|                                                                        |       |                                       |       |                  |       |                  |       |                  |       |
| Land                                                                        |       | —                                     |       | $                     | 1,597      |                  | $          | 1,597                 |       | $ | 1,597 |   |
| Corporate  office, distribution center and related building improvements    |       | 25 years                                   |       | 12,012                |       | 12,020                |       | 12,020                |       |
| Store  leasehold improvements                                               |       | Term of related  lease, typically 10 years |       | 94,602                |       | 95,251                |       | 97,497                |       |
| Store  furniture and fixtures                                               |       | Three to 10  years                         |       | 113,189               |       | 113,697               |       | 115,404               |       |
| Point  of sale hardware and software                                        |       | Five years                                 |       | 14,959                |       | 15,173                |       | 15,343                |       |
| Computer  hardware and software                                             |       | Three to five  years                       |       | 21,168                |       | 21,123                |       | 16,796                |       |
| Corporate  office and distribution center furniture, fixtures and equipment |       | Seven years                                |       | 3,822                 |       | 3,634                 |       | 3,163                 |       |
| Construction  in progress                                                   |       | —                                     |       | 3,839                 |       | 1,432                 |       | 5,408                 |       |
|                                                                        |       |                                       |       | 265,188               |       | 263,927               |       | 267,228               |       |
| Less  accumulated depreciation and amortization                             |       |                                       |       | 160,479               |       | 143,580               |       | 138,161               |       |
|                                                                        |       |                                       |       |                  |       |                  |       |                  |       |
| Net  property, equipment and improvements                                   |       |                                       |       | $                     | 104,709    |                  | $          | 120,347               |       | $ | 129,067 |   |

 

The Company reviewslong-lived assets with definite lives at least annually or whenever events orchanges in circumstances indicate that the carrying value of the asset may notbe recoverable.  The Company recorded noimpairments of long-lived assets in the three and nine month periods ended November 28,2009.  However, the general economicuncertainty affecting the retail industry makes it reasonably possible that theCompany may identify and record long-lived asset impairments in future periods.

 

## **NOTE6 — ACCRUED LIABILITIES**

 

Other accrued liabilitiesconsisted of the following (in thousands):

 
| ** **                                               | ** ** | **November 28,** | ** ** | **February 28,** | ** ** | **November 29,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| **Description**                                          | ** ** | **2009**              | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|                                                     |       |                  |       |                  |       |                  |       |
| Gift  card, certificate and store credit liabilities     |       | $                     | 7,117      |                  | $          | 11,434                |       | $ | 7,687 |   |
| Accrued  merchandise inventory receipts not yet invoiced |       | 2,959                 |       | 3,008                 |       | 5,315                 |       |
| Accrued  income, sales and other taxes payable           |       | 6,177                 |       | 1,877                 |       | 2,900                 |       |
| Accrued  workers compensation liability                  |       | 867                   |       | 1,601                 |       | 2,444                 |       |
| Accrued  occupancy-related expenses                      |       | 1,238                 |       | 693                   |       | 1,126                 |       |
| Other                                                    |       | 3,210                 |       | 3,490                 |       | 2,816                 |       |
|                                                     |       | $                     | 21,568     |                  | $          | 22,103                |       | $ | 22,288 |   |

 

## **TheCompany moved from a self insured to a fully insured workers compensationinsurance program effective March 1, 2009. The accrual balance at November 28, 2009 represents the estimatedremaining current liability under the self insured program.  The estimated remaining non-current liabilityunder the self insured program was approximately $700,000 as of November 28,2009.**

## ** **

## **NOTE7 — CREDIT FACILITY**

 

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

 

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Loans under the CreditFacility bear interest at the prime rate minus 0.25%.  As of November 28, 2009, the prime ratewas 3.25%.  The Credit Facility alsoprovides the Company with the ability to borrow under the Credit Facility at aninterest rate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tiedto the one, three, or six month LIBOR rate based on the length of time thecorresponding advance is outstanding.

 

Interest under theCredit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unusedportion of the facility as defined in the agreement, a collateral monitoringfee and a guarantee service charge. Borrowings under the Credit Facility are collateralized by the Company’sequipment, intangible assets, inventory, inventory letters of credit and letterof credit rights.  The Company had norevolving credit loan borrowings under the Credit Facility during the firstnine months of fiscal 2010 or fiscal 2009. Historically, the Credit Facility has been utilized by the Company onlyto open letters of credit to facilitate the import of merchandise.  The borrowing base at November 28, 2009was $26.6 million.  The Company had nooutstanding letters of credit as of November 28, 2009.  Accordingly, the availability of revolvingcredit loans under the Credit Facility was $26.6 million at November 28,2009.

 

The CreditFacility contains certain restrictive covenants, including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of November 28, 2009,the most recent measurement date, the Company was in compliance with all of therestrictive covenants under the Credit Facility.

 

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

 

The Company accounts forstock-based compensation in accordance with the provisions of ASC 718-10, “StockCompensation.”  Total pre-taxcompensation expense related to stock-based awards for the three months ended November 28,2009 and November 29, 2008 was approximately $534,000 and $420,000,respectively.  For the nine months ended November 28,2009 and November 29, 2008, pre-tax stock-based compensation expensetotaled approximately $1.4 million and $1.6 million, respectively.  Stock-based compensation expense was includedin merchandise, buying and occupancy expenses for the Company’s buying anddistribution employees and in selling, general and administrative expenses forall other employees.

 

*Methodology Assumptions:*

 

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

 

The weighted averageassumptions relating to the valuation of the Company’s stock option grants forthe three and nine month periods ended November 28, 2009 and November 29,2008 were as follows:

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **November 28,**  | ** ** | **November 29,** | ** ** | **November 28,** | ** ** | **November 29,** | ** ** |
| ** **               | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Expected  dividend yield |       | 3.35                   | %          | 2.74                  | %          | 4.83 | % | 2.36 | % |
| Expected  volatility     |       | 68.26                  | %          | 51.05                 | %          | 68.69 | % | 49.37 | % |
| Risk-free  interest rate |       | 2.34                   | %          | 2.92                  | %          | 2.09 | % | 2.72 | % |
| Expected  term in years  |       | 5.0                    |       | 5.0                   |       | 4.67 |   | 4.40 |   |

 

*Stock-Based CompensationActivity:*

 

The following tablepresents a summary of the Company’s stock option activity for the nine monthsended November 28, 2009:

 

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| ** **                        | ** ** | ** ** | ** ** | ** **   | ** ** | ** **         | ** ** | ** **     | ** ** | **Weighted**    | ** ** |
|-----------------------------------|------------|------------|------------|--------------|------------|--------------------|------------|----------------|------------|-----------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Aggregate**      | ** ** | ** **     | ** ** | **Average**     | ** ** |
| ** **                        | ** ** | **Number** | ** ** | **Average**  | ** ** | **Intrinsic**      | ** ** | **Weighted**   | ** ** | **Remaining**   | ** ** |
| ** **                        | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Value**          | ** ** | **Average**    | ** ** | **Contractual** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** | **Life**        | ** ** |
|                              |       |       |       |         |       |               |       |           |       |            |       |
| Outstanding,  beginning of period |       | 1,587,345  |       | $            | 16.31      |               | $          | 3              |       | $               | 5.90       |   |   |   |
| Vested                            |       | 1,145,968  |       | 17.84        |       | —             |       | 6.36           |       |            |       |
| Unvested                          |       | 441,377    |       | 12.32        |       | 3                  |       | 4.70           |       |            |       |
| Granted                           |       | 653,500    |       | 5.42         |       | 598                |       | 2.24           |       |            |       |
| Exercised                         |       | —     |       | —       |       | —             |       | —         |       |            |       |
| Canceled  - vested                |       | (500,459   | )          | 18.25        |       | —             |       | 5.60           |       |            |       |
| Canceled  - unvested (forfeited)  |       | (45,317    | )          | 14.98        |       | 2                  |       | 5.93           |       |            |       |
| Outstanding,  end of period       |       | 1,695,069  |       | 11.71        |       | 611                |       | 4.30           |       | 7.40            |       |
| Vested                            |       | 796,762    |       | 16.93        |       | 2                  |       | 5.99           |       | 5.41            |       |
| Unvested                          |       | 898,307    |       | 7.08         |       | 609                |       | 2.81           |       | 9.17            |       |
| Exercisable,  end of period       |       | 796,762    |       | 16.93        |       | 2                  |       | 5.99           |       | 5.41            |       |
|                                   |            |            |            |              |            |                    |            |                |            |                 |            |  |  |  |

 

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

 

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

 

The following tablepresents a summary of the Company’s restricted stock activity for employees andnon-employee directors for the nine months ended November 28, 2009:

 
| ** **                       | ** ** | ** ** | ** ** | **Aggregate**      | ** ** | ** **     | ** ** |
|----------------------------------|------------|------------|------------|--------------------|------------|----------------|------------|
| ** **                       | ** ** | **Number** | ** ** | **Intrinsic**      | ** ** | **Weighted**   | ** ** |
| ** **                       | ** ** | **of**     | ** ** | **Value**          | ** ** | **Average**    | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** |
|                             |       |       |       |               |       |           |       |
| Unvested,  beginning of period   |       | 282,418    |       | $                  | 1,099      |           | $          | 10.54 |   |
| Granted                          |       | 721,900    |       | 4,303              |       | 4.64           |       |
| Vested                           |       | (46,518    | )          | 277                |       | 11.32          |       |
| Canceled  - Unvested (Forfeited) |       | (145,950   | )          | 870                |       | 9.52           |       |
| Unvested,  end of period         |       | 811,850    |       | 4,839              |       | 5.44           |       |
|                                  |            |            |            |                    |            |                |            |  |  |

 

## **NOTE9 — OTHER INCOME**

 

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

 

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| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **November 28,**  | ** ** | **November 29,** | ** ** | **November 28,** | ** ** | **November 29,** | ** ** |
| **Description**                            | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Interest  income, net                      |       | $                      | 107        |                  | $          | 619 |   | $ | 301 |   | $ | 2,031 |   |
| Gain  on investments carried at fair value |       | —                 |       | —                |       | 150 |   | — |   |
|                                       |       | $                      | 107        |                  | $          | 619 |   | $ | 451 |   | $ | 2,031 |   |

 

## **NOTE10 — INCOME TAXES**

 

The Company’seffective tax rate for the three and nine month periods ended November 28,2009 was 29.6% and 29.2%, respectively, which differed from the statutory ratedue to the impact of permanent differences and state taxes on the annualeffective tax rate and discrete income tax benefits of approximately $400,000related to reductions to the reserve for unrecognized tax benefits.

 

As of November 28,2009, the Company’s liability for unrecognized tax benefits associated withuncertain tax positions was approximately $3.0 million and the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate was $1.7 million.  The Companyrecognizes interest and penalties related to unrecognized tax benefits ascomponents of income tax expense.  At November 28,2009, the Company had accrued approximately $0.8 million for the potentialpayment of interest and penalties.

 

The Company and itssubsidiaries are subject to U.S. federal income tax and the income tax ofvarious state and local jurisdictions. The Internal Revenue Service has completed its audit for tax yearsthrough fiscal 2006.  The Company is notsubject to state income tax examination by taxing authorities for taxable yearsprior to fiscal 2004. During the quarter ended November 28, 2009, theCompany settled a tax examination with a state tax authority decreasing theliability for unrecognized tax benefits by $300,000.  At November 28, 2009, the Company hadongoing audits with various other jurisdictions.  The Company does not believe that settlementof these examinations will have a significant impact on its liability forunrecognized tax benefits.

 

As of November 28,2009, the Company had net deferred tax assets of $11.8 million.  Deferred income tax assets representpotential future income tax benefits. Realization of these assets is ultimately dependent upon future taxableincome.  No valuation allowance has beenprovided for deferred tax assets because management believes realization of thefull amount of net deferred tax assets is more likely than not.  While the Company has a history of profits,its profitability has declined over the last three years and the Companyrecorded a net loss in fiscal 2009. Therefore, earnings results in fiscal 2010 will be a significant factorin determining the Company’s ability to continue to carry these deferred taxassets without any valuation allowance. The Company’s accounting for deferred taxes represents its best estimateof future events.  If future results fromthe Company’s operations are less than projected, a valuation allowance may berequired to reduce deferred tax assets, which could have a material impact onthe Company’s results of operations in the period in which it is recorded. Significant negative events, including losses in future periods, wouldmake it reasonably possible that valuation allowances against deferred taxassets would be required in future periods.

 

As of November 28,2009, the Company had state net operating loss carryforwards which will resultin state tax benefits of approximately $0.5 million.  These state net loss carryforwards will beginto expire in fiscal 2014.  Additionally,the Company has charitable contribution carryforwards that will expire fully infiscal 2014.

 

## **NOTE11 — EARNINGS PER SHARE**

 

On March 1,2009, the Company adopted FASB amendments to ASC 260-10, “Earnings Per Share,”which clarified that unvested share-based payment awards that containnonforfeitable rights to receive dividends or dividend equivalents (whetherpaid or unpaid) are participating securities, and thus, should be included inthe two-class method of computing earnings per share (“EPS”).  Participating securities under this statementinclude the Company’s unvested employee restricted stock awards with time-basedvesting, which receive nonforfeitable dividend payments.  The calculation of EPS for the Company’scommon stock shown below excludes the income 

 

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attributable tothese unvested employee restricted stock awards from the numerator and excludesthe dilutive impact of these shares from the denominator.  All prior period EPS data presented has beenadjusted retrospectively.

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **November 28,**  | ** ** | **November  29,** | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Numerator**(in thousands)**:**                                            |       |                   |       |   |   |
| Net  income attributable to Christopher & Banks Corporation        |       | $                      | 6,972      |   | $ | 3,960 |   |
| Income  allocated to participating securities                               |       | (86                    | )          | (21 | ) |
| Net  income available to common shareholders                                |       | $                      | 6,886      |   | $ | 3,939 |   |
|                                                                        |       |                   |       |   |   |
| **Denominator**(in thousands)**:**                                          |       |                   |       |   |   |
| Weighted  average common shares outstanding - basic                         |       | 35,178                 |       | 35,099 |   |
| Dilutive  shares                                                            |       | 173                    |       | 17 |   |
| Weighted  average common and common equivalent shares outstanding - diluted |       | 35,351                 |       | 35,116 |   |
|                                                                        |       |                   |       |   |   |
| **Net income per common share:**                                            |       |                   |       |   |   |
| Basic                                                                       |       | $                      | 0.20       |   | $ | 0.11 |   |
| Diluted                                                                     |       | $                      | 0.19       |   | $ | 0.11 |   |

 
| ** **                                                                  | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **November 28,** | ** ** | **November  29,** | ** ** |
| ** **                                                                  | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Numerator**(in thousands)**:**                                            |       |                  |       |   |   |
| Net  income attributable to Christopher & Banks Corporation        |       | $                     | 6,526      |   | $ | 16,068 |   |
| Income  allocated to participating securities                               |       | (57                   | )          | (69 | ) |
| Net  income available to common shareholders                                |       | $                     | 6,469      |   | $ | 15,999 |   |
|                                                                        |       |                  |       |   |   |
| **Denominator**(in thousands)**:**                                          |       |                  |       |   |   |
| Weighted  average common shares outstanding - basic                         |       | 35,135                |       | 35,091 |   |
| Dilutive  shares                                                            |       | 40                    |       | 3 |   |
| Weighted  average common and common equivalent shares outstanding - diluted |       | 35,175                |       | 35,094 |   |
|                                                                        |       |                  |       |   |   |
| **Net income per common share:**                                            |       |                  |       |   |   |
| Basic                                                                       |       | $                     | 0.18       |   | $ | 0.46 |   |
| Diluted                                                                     |       | $                     | 0.18       |   | $ | 0.46 |   |

 

The calculation ofbasic and diluted earnings per share for fiscal 2009 has been modified to reflectthe requirements of the amendments to ASC 260-10.  The earnings per sharefor the three and the nine month periods ended November 29, 2008 have beenadjusted to reflect the impact of this new accounting guidance to present themon a comparable basis with fiscal 2010. Diluted earnings per share for thequarter ended November 28, 2009 was reduced by $0.01 due to theapplication of ASC 260-10.  Basic anddiluted earnings per share were reduced by $0.01 for the nine months ended November 28,2009 due to the application of ASC 260-10.

 

Total stockoptions of approximately 1.4 million and 1.6 million were excluded from theshares used in the computation of diluted EPS for the three and nine monthperiods ended November 28, 2009, respectively, as they were anti-dilutive.  Total stock options of approximately 1.9million were excluded from the shares used in the computation of diluted EPSfor the three and nine month periods ended November 29, 2008 as they wereanti-dilutive.

 

**NOTE 12 — FAIR VALUE MEASUREMENTS**

 

The Company adoptedprovisions of ASC 820-10, “Fair Value Measurement and Disclosure,” effective March 2,2008, with respect to fair value measurements of (a) nonfinancial assetsand liabilities that are recognized or disclosed at fair value in the Company’sfinancial statements on a recurring basis and (b) all financial assets andliabilities.  On March 1, 2009, theCompany adopted the provisions of ASC 820-10 relating to nonrecurringnonfinancial assets and nonfinancial liabilities.  The adoption of these provisions of ASC820-10 did not have a material impact on the Company’s consolidated financialstatements as reported herein.

 

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Under ASC 820-10, fairvalue is defined as the exit price, or the amount that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants as of the measurement date. ASC 820-10 also establishes a hierarchy for inputs used in measuringfair value that maximizes the use of observable inputs and minimizes the use ofunobservable inputs by requiring that the most observable inputs be used whenavailable.  Observable inputs are inputs marketparticipants would use in valuing the asset or liability developed based onmarket data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflectthe Company’s assumptions about the factors market participants would use invaluing the asset or liability developed based upon the best informationavailable in the circumstances.  Thehierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets foridentical assets or liabilities.   Level2 inputs include quoted prices for similar assets or liabilities in activemarkets, quoted prices for identical or similar assets or liabilities inmarkets that are not active and inputs (other than quoted prices) that areobservable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs forthe asset or liability.   Categorizationwithin the valuation hierarchy is based upon the lowest level of input that issignificant to the fair value measurement.

 

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

 

For the nine monthperiods ended November 28, 2009 and November 29, 2008, fair valueunder ASC 820-10 applied to the Company’s available-for-sale investmentsecurities, ARS and ARS rights.  Thesefinancial assets are carried at fair value pursuant to the requirements of ASC820-10.

 

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

 

The following tablesprovide information by level for assets and liabilities that are measured atfair value, as defined by ASC 820-10, on a recurring basis (in thousands).

 
| ** **                     | ** ** | ** **                 | ** ** | **Fair Value Measurements**    | ** ** |
|--------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **Fair Value at**          | ** ** | **Using Inputs Considered as** | ** ** |
| **Description**                | ** ** | **November 28, 2009** | ** ** | **Level 1**                    | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                           |       |                       |       |                           |       |   |   |   |   |
| Assets:                        |       |                       |       |                           |       |   |   |   |   |
| Available-for-sale  securities |       | $                          | 42,365     |                           | $          | 42,365 |   | $ | — |   | $ | — |   |
| Trading  securities            |       |                       | 16,272     |                           |       | — |   |   | — |   |   | 16,272 |   |
| ARS  rights                    |       |                       | 2,628      |                           |       | — |   |   | — |   |   | 2,628 |   |
|                           |       |                       |       |                           |       |   |   |   |   |
| Liabilities:                   |       | $                          | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 
| ** **                     | ** ** | ** **                 | ** ** | **Fair Value Measurements**    | ** ** |
|--------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **Fair Value at**          | ** ** | **Using Inputs Considered as** | ** ** |
| **Description**                | ** ** | **November 29, 2008** | ** ** | **Level 1**                    | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                           |       |                       |       |                           |       |   |   |   |   |
| Assets:                        |       |                       |       |                           |       |   |   |   |   |
| Available-for-sale  securities |       | $                          | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| ARS                            |       |                       | 15,876     |                           |       | — |   |   | — |   |   | 15,876 |   |
| ARS  rights                    |       |                       | 3,674      |                           |       | — |   |   | — |   |   | 3,674 |   |
|                           |       |                       |       |                           |       |   |   |   |   |
| Liabilities:                   |       | $                          | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

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

 

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| ** **                              | ** ** | **Nine Months Ended**      | ** ** | **Nine Months Ended**      | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **November 28, 2009** | ** ** | **November 29, 2008** | ** ** |
| ** **                              | ** ** | **ARS**                    | ** ** | **ARS Rights**             | ** ** | **ARS** | ** ** | **ARS Rights** | ** ** |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Beginning  balance                      |       | $                          | 16,400     |                       | $          | 2,700 |   | $ | 23,350 |   | $ | — |   |
| Total  gains (losses):                  |       |                       |       |                       |       |   |   |   |   |
| Included  in earnings                   |       | 222                        |       | (72                        | )          | (3,674 | ) | 3,674 |   |
| Included  in other comprehensive income |       | —                     |       | —                     |       | 1,200 |   | — |   |
| Purchases,  issuances and settlements   |       | (350                       | )          | —                     |       | (5,000 | ) | — |   |
| Transfers  in and/or out of level 3     |       | —                     |       | —                     |       | — |   | — |   |
|                                    |       |                       |       |                       |       |   |   |   |   |
| Ending  balance                         |       | $                          | 16,272     |                       | $          | 2,628 |   | $ | 15,876 |   | $ | 3,674 |   |

 

The Company did not haveany financial assets, other than its available-for-sale securities, ARS and ARSrights, or nonfinancial assets or liabilities carried at fair value as of November 28,2009 that were subject to disclosure within the three-tier hierarchyestablished by ASC 820-10.  The Company’sfinancial instruments, other than its available-for-sale securities, ARS andARS rights, consist primarily of cash and cash equivalents, accounts receivableand accounts payable, the carrying value of which approximates fair value dueto the short-term nature of the instruments.

 

**NOTE 13 — COMPREHENSIVE INCOME**

 

Comprehensive incomeconsisted of the following:

 
| ** **                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **November  28,** | ** ** | **November 29,** | ** ** | **November  28,** | ** ** | **November 29,** | ** ** |
| ** **                                                             | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                   |       |                   |       |                  |       |   |   |   |   |
| Net  income                                                            |       | $                      | 6,972      |                  | $          | 3,960 |   | $ | 6,526 |   | $ | 16,068 |   |
| Unrealized  gains on investments, net of tax                           |       | 36                     |       | —                |       | 36 |   | — |   |
| Unrealized  losses on investments reclassified to earnings, net of tax |       | —                 |       | 1,200                 |       | — |   | 1,200 |   |
|                                                                   |       |                   |       |                  |       |   |   |   |   |
| Total  comprehensive income                                            |       | $                      | 7,008      |                  | $          | 5,160 |   | $ | 6,562 |   | $ | 17,268 |   |

 

**NOTE 14 — COMMITMENTS AND CONTINGENCIES**

 

*Legal Proceedings*

 

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

 

## **NOTE15 — SEGMENT REPORTING**

 

The Company operates inthe retail apparel industry in which it primarily designs, sources and sellswomen’s apparel catering to females generally ranging in age from 40 to 60 whoare typically part of a segment of the baby boomer demographic.  The Company has identified two operatingsegments (christopher & banks and cj banks) as defined ASC 280-10, “SegmentReporting.”

 

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The Company’s christopher &banks and cj banks operating segments have been aggregated into one reportablesegment based on the similar nature of products sold, methods of sourcing,merchandising and distribution processes involved, target customers, andeconomic characteristics of the two brands. The Company previously reported the results of its Acorn stores as a separatereportable segment.  Beginning in thethird quarter of fiscal 2009, the results of all Acorn stores have been removedfrom continuing operations and are presented as discontinued operations.

 

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

 

**SegmentReporting:**

 
| ** **                                     | ** ** | **christopher & banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                     | ** ** | **cj banks**                      | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Three Months Ended November 28, 2009:** |       |                              |       |               |       |             |       |
| Net  sales                                     |       | $                                 | 132,000    |               | $          | —           |       | $ | 132,000 |   |
| Operating  income (loss)                       |       | $                                 | 23,749     |               | $          | (13,958          | )          | $ | 9,791 |   |
| Total  assets                                  |       | $                                 | 152,392    |               | $          | 119,340          |       | $ | 271,742 |   |
|                                           |       |                              |       |               |       |             |       |
| **Three Months Ended November 29, 2008:** |       |                              |       |               |       |             |       |
| Net  sales                                     |       | $                                 | 143,004    |               | $          | —           |       | $ | 143,004 |   |
| Operating  income (loss)                       |       | $                                 | 16,737     |               | $          | (17,399          | )          | $ | (662 | ) |
| Total  assets                                  |       | $                                 | 145,851    |               | $          | 169,579          |       | $ | 315,430 |   |

 
| ** **                                    | ** ** | **christopher & banks/** | ** ** | **Corporate/**     | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                    | ** ** | **cj banks**                      | ** ** | **Administrative** | ** ** | **Consolidated** | ** ** |
| **Nine Months Ended November 28, 2009:** |       |                              |       |               |       |             |       |
| Net  sales                                    |       | $                                 | 353,549    |               | $          | —           |       | $ | 353,549 |   |
| Operating  income (loss)                      |       | $                                 | 46,821     |               | $          | (38,052          | )          | $ | 8,769 |   |
| Total  assets                                 |       | $                                 | 152,392    |               | $          | 119,340          |       | $ | 271,732 |   |
|                                          |       |                              |       |               |       |             |       |
| **Nine Months Ended November 29, 2008:** |       |                              |       |               |       |             |       |
| Net  sales                                    |       | $                                 | 426,850    |               | $          | —           |       | $ | 426,850 |   |
| Operating  income (loss)                      |       | $                                 | 71,107     |               | $          | (50,285          | )          | $ | 20,822 |   |
| Total  assets                                 |       | $                                 | 145,851    |               | $          | 169,579          |       | $ | 315,430 |   |

 

**ITEM 2.**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

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

 

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**Executive Overview**

 

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

 

**As of November 28, 2009, theCompany operated 812 stores in 46 states, including 543 christopher &banks stores, 268 cj banks stores and one dual-concept store.  The Company’s christopher & banksbrand offers distinctive fashions featuring exclusively designed, coordinatedassortments of women’s apparel primarily in sizes four to 16. The Company’s cjbanks brand offers similar assortments of women’s apparel primarily in sizes14W to 24W.  The Company’s dual-conceptstore offers an assortment of both christopher & banks and cj banksapparel servicing the petite, misses and plus size customer in one store.  The Company also operates e-commerce websites for its two brands at**www.christopherandbanks.com and www.cjbanks.com which, in addition to offering theapparel found in the Company’s christopher & banks and cj banksstores, also offer exclusive sizes and styles available only online.

** **

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

** **

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

** **

*Fiscal 2010 Third Quarter Summary*

 

The Company’s results ofoperations for the third quarter of fiscal 2010 continued to be impacted by thechallenging macro-economic environment. Continued instability in the housing market and higher levels ofunemployment, combined with general economic uncertainty, have impactedconsumer spending patterns, particularly for discretionary retail purchases.

 

Same store sales declined8% during the third quarter of fiscal 2010 compared to the prior yearperiod.  This decrease was primarily aresult of fewer transactions per store, partially offset by an increase in theaverage transaction value during the quarter compared to the third quarter offiscal 2009.

 

Despite the pressure onsales, the Company ended the quarter with better than anticipated gross marginsand above-plan cost savings.  Stronginventory controls exercised during the third quarter resulted in reducedmarkdown levels and improved gross profit. Selling, general and administrative (“SG&A”) expenses declined byapproximately $7.7 million in the third quarter of fiscal 2010 compared to thethird quarter of fiscal 2009.  Inventoryon a per-store basis, excluding e-commerce inventory, was down 23% at the endof the third quarter compared to the end of the prior year period and theCompany ended the quarter with $102.2 million of cash, cash equivalents andshort-term and long-term investments.

 

The Company recorded netincome of $7.0 million, or $0.19 per diluted share, in the third quarter offiscal 2010, compared to net income from continuing operations of $7.0 million,or $0.20 per diluted share, for the third quarter of fiscal 2009.  In the first nine months of fiscal 2010, theCompany opened one new christopher & banks store, three new cj banksstores and its first dual-concept store. Six christopher & banks stores and two cj banks stores wereclosed during the first nine months of fiscal 2010.

 

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*Fiscal 2010 Outlook and KeyBusiness Initiatives*

 

Given the uncertaineconomic environment, the Company is approaching the fourth quarter of fiscal2010 and the first half of fiscal 2011 with a continued focus on operatingeffectiveness, expense controls, disciplined inventory management andconservative capital spending.  TheCompany anticipates ending the fourth quarter of fiscal 2010 with per-storeinventory levels up slightly on a percentage basis compared to levels at theend of the fourth quarter of fiscal 2009. In the fourth quarter of fiscal 2010 and into fiscal 2011, the Companyplans to proceed cautiously with inventory management and new storegrowth.  The Company currently plans forper-store inventory levels to increase modestly in the first half of fiscal2011 as compared to the first half of fiscal 2010.  Additionally, the Company plans to open approximatelyten new stores in fiscal 2011.

 

The Company continues toexecute its cost reduction initiative. In the first nine months of fiscal 2010, the Company achieved totalSG&A savings of $23.1 million driven mainly by reductions in store payrolland other store-related operating expenses, marketing expenditures, benefitsand IT-related costs.  The Companycurrently expects to achieve total SG&A cost savings of approximately $25million for the full year of fiscal 2010. The Company also continues to focus on reducing occupancy costs throughlease renegotiations and diligently exercising rent reductions related to salesvolume and co-tenancy lease violations. Total fiscal 2010 capital expenditures are planned to be approximately$7 million, down from the $18.4 million of capital expenditures in fiscal 2009.

 

The Company alsocontinues to employ strict inventory controls. The Company plans to continue to enhance inventory productivity throughSKU rationalization and improved store assorting based on sales volume,climate, size and fashion preferences.

 

The Company plans tocontinue to strengthen its Customer Relationship Management (“CRM”) programs infiscal 2010 and fiscal 2011.  The Companyhas completed its migration to a new CRM database management system which isdesigned to ensure better customer data consistency across all channels,provide more robust customer and marketing analytics and to enable managementof more complex and segmented communications campaigns.  In addition, the Company plans to continue toaccumulate and incorporate customer data into its existing and new CRM programsto drive additional customer traffic to its stores and web sites, encouragecross shopping between its stores and online sites and increase overall brandawareness.  CRM efforts will focusprimarily on email communication, which the Company believes is the mostcost-effective and efficient method of communicating with customers.  In addition, the Company is tailoring more ofits email messages to segmented groups of customers in an effort to providemore relevant and compelling offers and to drive stronger response rates fromits messages.  The Company also plans toenhance its overall customer experience this Spring with the launch of aloyalty program.

 

The Company alsocontinues to focus on smaller markets that have traditionally been thefoundation of the Company’s success. Approximately 50% of the Company’s stores are located in small, ruraland captive markets.  While same storesales have declined in these markets, as have overall same store sales, thedeclines have been slightly less than in the remainder of the Company’sstores.  In addition to adjusting themerchandise mix in these areas, the Company plans to further develop itsgrassroots marketing efforts to increase communication with customers in thesemarkets.  Stores located in the smaller,rural markets generally have higher productivity and lower occupancy costs,resulting in higher operating margins.

 

The Company continues toplace additional focus on growth opportunities for its plus size brand, cjbanks.  The Company opened its firstdual-concept store during the second quarter of fiscal 2010.  This store offers merchandise from both ofits christopher & banks and cj banks brands, and all three size ranges,misses, petite and plus, within one store, resulting in a greater opportunityto service the Company’s customers while increasing productivity and enhancingoperating efficiencies.

 

In addition, during September 2009,the Company introduced edited assortments, or “capsules,” of its cj banks plussize merchandise in a select test group of approximately 30 christopher &banks stores to further capitalize on increasing its plus size marketshare.  Overall productivity of thesetest stores is expected to increase as the cj banks capsule assortments wereadded to these stores without a reduction in the planned christopher &banks assortment.

 

The Company expects itschristopher & banks and cj banks e-commerce businesses to continue togrow.  The Company plans to furtherenhance each web site’s visual presentation and to expand merchandise offeringsto include increased levels of exclusive online-only merchandise categories,styles, sizes and lengths.  In an effortto drive additional traffic to its web sites, the Company intends to continueto increase its online marketing efforts and 

 

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leverage its onlineassociate ordering system, which allows the Company’s store associates theopportunity to service customers through direct access to the Company’se-commerce sites.

 

While the Company’smanagement believes the retail and macro-economic environments will remain challengingin the fourth quarter of fiscal 2010 and into fiscal 2011, it also believesthat it is taking actions to position the Company for stronger operatingperformance when economic conditions become more favorable.

 

**Key PerformanceIndicators**

 

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

 

*Samestore sales*

 

The Company’s same storesales data is calculated based on the change in net sales for stores that havebeen open for more than 13 full months and includes stores, if any, that havebeen relocated within the same mall. Stores where square footage has beenchanged by more than 25 percent within the past 13 months are excluded from thesame store sales calculation.  Storesclosed during the year are included in the same store sales calculation onlyfor the full months of the year the stores were open in both years.  In addition, sales which are initiated instores but fulfilled through the Company’s e-commerce websites are included inthe calculation of same store sales.

 

Management considers same store sales to be animportant indicator of the Company’s performance.  Same store sales results are important inachieving leveraging of costs, including store payroll, store occupancy,depreciation and other general and administrative expenses.  Year-over-year increases in same store salescontribute to greater leveraging of costs, while declining same store salescontribute to deleveraging of costs. Same store sales results also have a direct impact on the Company’stotal net sales, cash and cash equivalents, investments and working capital.

 

*Merchandise,buying and occupancy costs*

 

The merchandise margin component of merchandise,buying and occupancy costs, which includes the cost of merchandise, markdownsand shrink expense, exclusive of depreciation and amortization, measureswhether the Company is appropriately optimizing the price of itsmerchandise.  Buying and occupancy costsinclude freight into and out of the Company’s distribution center, buyer anddistribution center salaries, buyer travel, rent and other occupancy-relatedcosts, various merchandise design and development costs, miscellaneousmerchandise expenses and other costs related to the Company’s distributionnetwork.

 

*Operatingincome*

 

The Company’s management views operating income as akey indicator of the Company’s success. The key drivers of operating income are sales; merchandise, buying andoccupancy costs; and the Company’s ability to control its other operatingcosts.

 

*Storeproductivity*

 

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

 

*Inventoryturnover*

 

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

 

*Cash flowand liquidity*

 

Management evaluatescash flow from operations, investing activities and financing activities indetermining the sufficiency of the Company’s cash position.  Cash flow from operations has historicallybeen sufficient to cover the Company’s uses of cash.

 

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**Critical Accounting Policies andEstimates**

 

The Company’s criticalaccounting policies are more fully described in Note 1 of the notes toconsolidated financial statements contained within the Company’s Annual Reporton Form 10-K for the fiscal year ended February 28, 2009.  There have been no material changes in theCompany’s critical accounting policies or estimates in the three and nine monthperiods ended November 29, 2009. Management’s discussion and analysis of the Company’s financialcondition and results of operations are based upon the Company’s consolidatedcondensed financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.

 

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

 

The Company reviewslong-lived assets with definite lives at least annually, or whenever events orchanges in circumstances indicate that the carrying value of the asset may notbe recoverable.  While the Companyrecorded no impairments of long-lived assets employed in continuing operationsin the three or nine month periods ended November 28, 2009, the currentchallenging economic environment, combined with the continued instability inthe housing market, higher levels of unemployment and general economicuncertainty affecting the retail industry, make it reasonably possible that long-livedasset impairments could be identified and recorded in future periods.

 

As of November 28,2009, the Company had net deferred tax assets of approximately $11.8million.  Deferred income tax assetsrepresent potential future income tax benefits. Realization of these assets is ultimately dependent upon future taxableincome.  No valuation allowance has beenprovided for deferred tax assets because management believes realization of thefull amount of net deferred tax assets is more likely than not.  While the Company has a history of profits,its profitability has declined over the last three years and the Companyrecorded a net loss in fiscal 2009. Therefore, earnings results in fiscal 2010 will be a significant factorin determining the Company’s ability to continue to carry these deferred taxassets without any valuation allowance. The Company’s accounting for deferred taxes represents its best estimateof future events.  If future results fromthe Company’s operations are less than projected, a valuation allowance may berequired to reduce deferred tax assets, which could have a material impact onthe Company’s results of operations in the period in which it is recorded. Significant negative events, including losses in future periods, wouldmake it reasonably possible that valuation allowances against deferred taxassets would be required in future periods.

 

**Results of Operations**

 

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

 

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| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **November 28,**  | ** ** | **November 29,** | ** ** | **November 28,** | ** ** | **November 29,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                          | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                    |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Merchandise,  buying and occupancy costs      |       | 59.2                   |       | 64.3                  |       | 62.2 |   | 60.3 |   |
| Selling,  general and administrative expenses |       | 28.4                   |       | 31.6                  |       | 29.9 |   | 30.2 |   |
| Depreciation  and amortization                |       | 5.0                    |       | 4.6                   |       | 5.4 |   | 4.6 |   |
| Operating  income (loss)                      |       | 7.4                    |       | (0.5                  | )          | 2.5 |   | 4.9 |   |
| Other  income                                 |       | 0.1                    |       | 0.5                   |       | 0.1 |   | 0.5 |   |
| Income  tax provision (benefit)               |       | 2.2                    |       | (5.0                  | )          | 0.8 |   | 0.5 |   |
| Income  from continuing operations            |       | 5.3                    |       | 5.0                   |       | 1.8 |   | 4.9 |   |
| Loss  on discontinued operations, net of tax  |       | —                 |       | (2.2                  | )          | — |   | (1.1 | ) |
| Net  income                                   |       | 5.3                    | %          | 2.8                   | %          | 1.8 | % | 3.8 | % |

 

**Three Months Ended November 28, 2009 Comparedto Three Months Ended November 29, 2008**

 

***NetSales.**** *Net sales for the three months ended November 28,2009 were $132.0 million, a decrease of $11.0 million or approximately 7.7%,from $143.0 million for the three months ended November 29, 2008.  The Company’s sales were negatively impactedin the third quarter of fiscal 2010 by the challenging macro-economicenvironment and related factors.  In particular,continued instability in the housing market and higher levels of unemployment,combined with general economic uncertainty, impacted consumer spendingpatterns, particularly for discretionary retail purchases.

 

The Company’s same storesales for the third quarter of fiscal 2010 declined 8% when compared to thecorresponding period in fiscal 2009. This decrease was primarily due to reduced customer traffic in theCompany’s stores, which resulted in fewer transactions per store and fewerunits sold overall.  These declines werepartially offset by an increase in average unit retail price and averagetransaction value resulting from reduced levels of markdowns compared to theprior year period.

 

The decline in same storesales in the third quarter was partially offset by an increase in sales at theCompany’s two e-commerce websites.  TheCompany operated 812 stores at November 28, 2009, compared to 821 stores,excluding Acorn stores, as of November 29, 2008.

 

***Merchandise,Buying and Occupancy Costs. ***Merchandise, buying and occupancy costs,exclusive of depreciation and amortization, were $78.2 million, or 59.2% of netsales, during the third quarter of fiscal 2010, compared to $91.9 million, or64.3% of net sales, during the same period in fiscal 2009, resulting inapproximately 510 basis points of positive leverage compared to the prior yearperiod.

 

Strong inventorycontrols exercised during the third quarter resulted in reduced markdown levelswhich was the main factor driving improved merchandise and gross profitmargins.  The relatively fixed componentsof buying and occupancy costs were essentially flat as a percentage of netsales in the third quarter of fiscal 2010 when compared to the same period infiscal 2009.

 

***Selling,General and Administrative Expenses. ***Selling, general and administrativeexpenses for the three months ended November 28, 2009 were $37.5 million, or28.4% of net sales, compared to $45.2 million, or 31.6% of net sales, for thethree months ended November 29, 2008, resulting in approximately 320 basispoints of positive leverage.

 

SG&A expenseswere reduced by approximately $7.7 million in the third quarter of fiscal 2010compared to the third quarter of fiscal 2009 primarily as a result of theCompany’s cost reduction efforts.  Significantsavings were realized in store payroll and other store-related operatingexpenses, marketing expenditures, benefits and IT-related costs.

 

***Depreciationand Amortization.***  Depreciation and amortizationwas $6.5 million, or 5.0% of net sales, in the third quarter of fiscal 2010,compared to $6.5 million, or 4.6% of net sales, in the third quarter of fiscal2009.

 

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***OperatingIncome (Loss). ***Based on the foregoing, the Companyrecorded operating income of $9.8 million, or 7.4% of net sales for the quarterended November 28, 2009, compared to an operating loss of $0.7 million, or0.5% of net sales for the quarter ended November 29, 2008.

 

***OtherIncome. ***For the three month periods ended November 28,2009 and November 29, 2008, other income consisted solely of $107,000 and$619,000, respectively, of interest income. The decrease in interest income resulted from lower interest rates oncash, cash-equivalents and investments in the third quarter of fiscal 2010compared to the third quarter of fiscal 2009.

 

***IncomeTaxes. ***Income tax expense in the third quarterof fiscal 2010 was $2.9 million, with an effective tax rate of 29.6%, comparedto an income tax benefit of $7.1 million in the third quarter of fiscal2009.  The effective tax rate in thethird quarter of fiscal 2010 was affected by the impact of permanentdifferences and state taxes on the annual effective tax rate and discreteincome tax benefits of approximately $400,000 related to reductions to thereserve for unrecognized tax benefits.

 

Income taxes in the thirdquarter of fiscal 2009 were allocated to continuing and discontinued operationsbased on the methodology required by ASC 740-270, “Income Taxes — InterimReporting.”  Income taxes allocated tothe results of discontinued operations were determined on the basis of acomputation of taxes with and without the impact of results from discontinuedoperations and the difference in taxes between these computations was allocatedto discontinued operations.

 

***Incomefrom Continuing Operations.***  As a result ofthe foregoing factors, the Company reported income from continuing operationsof $7.0 million, or 5.3% of net sales, for the three months ended November 28,2009, compared to income from continuing operations of $7.0 million, or 5.0% ofnet sales, for the three months ended November 29, 2008.

 

***Losson Discontinued Operations, Net of Tax.*** The Company reported a pre-tax loss on discontinuedoperations of $4.7 million for the three months ended November 29, 2008related to store-level operating losses at the Company’s Acorn stores.  Net of tax, the loss on discontinuedoperations was $3.1 million.  There were noexpenses related to discontinued operations recorded during the third quarterof fiscal 2010.

 

***NetIncome. ***As a result of the foregoing factors, theCompany recorded net income of $7.0 million, or 5.3% of net sales and $0.19 perdiluted share, for the three months ended November 28, 2009, compared tonet income of $4.0 million, or 2.8 % of net sales and $0.11 per diluted share,for the three months ended November 29, 2008.

 

**Nine Months Ended November 28, 2009 Comparedto Nine Months Ended November 29, 2008**

 

***NetSales.**** *Net sales from for the nine months ended November 28,2009 were $353.5 million, a decrease of $73.4 million, or approximately 17.2%,from $426.9 million for the nine month period ended November 29,2008.  The Company’s sales were negativelyimpacted in the first nine months of fiscal 2010 by the challengingmacro-economic environment and related factors. In particular, continued instability in the housing market and higherlevels of unemployment, combined with general economic uncertainty, impactedconsumer spending patterns, particularly for discretionary retail purchases.

 

The Company’s same storesales declined 18% in the first nine months of fiscal 2010 when compared to thecorresponding period in fiscal 2009. This decrease was primarily due to reduced customer traffic at theCompany’s stores resulting in fewer transactions per store and fewer units soldoverall, partially offset by an increase in average unit retail.  In addition, the average transaction valuedeclined slightly in the first nine months of the year compared to the firstnine months of fiscal 2009.  By quarter,the Company’s same store sales declined 24%, 22% and 8% in the first, secondand third quarters of fiscal 2010, compared to the first, second and thirdquarters of fiscal 2009, respectively.

 

The decline in same storesales was partially offset by an increase in sales at the Company’s twoe-commerce websites.  The Companyoperated 812 stores at November 28, 2009, compared to 821 stores,excluding Acorn stores, as of November 29, 2008.

 

***Merchandise,Buying and Occupancy Costs. ***Merchandise, buying and occupancy costs,exclusive of depreciation and amortization, were $219.8 million, or 62.2% ofnet sales, during the first nine months of fiscal 

 

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2010, compared to$257.4 million, or 60.3% of net sales, during the same period in fiscal 2009,resulting in approximately 190 basis points of deleverage compared to the prioryear period.

 

The decline ingross profit margin in the first nine months of fiscal 2010, compared to thefirst nine months of fiscal 2009, was attributable to erosion of merchandisemargins due to elevated markdown levels and promotional activity in the firstand second quarters, partially offset by reduced markdown levels in the thirdquarter and deleveraging of buying and occupancy costs associated with the 18%decline in same store sales in the first nine months of fiscal 2010.

 

***Selling,General and Administrative Expenses. ***Selling, general and administrativeexpenses for the nine months ended November 28, 2009 were $105.9 million, or29.9% of net sales, compared to $129.0 million, or 30.2% of net sales, for thenine months ended November 29, 2008, resulting in approximately 30 basispoints of positive leverage.

 

SG&A expenseswere reduced by approximately $23.1 million in the first nine months of fiscal2010 compared to the first nine months of fiscal 2009, primarily as a result ofthe Company’s cost reduction initiatives. Significant savings were realized in store payroll and otherstore-related operating expenses, marketing expenditures, travel, benefits andIT-related costs.  Approximately $0.02per share of the savings realized in the first nine months of fiscal 2010 wasnon-recurring, related to lower compensation costs and a legal settlement.

 

***Depreciationand Amortization.***  Depreciation and amortizationwas $19.1 million, or 5.4% of net sales, in the first nine months of fiscal2010, compared to $19.7 million, or 4.6% of net sales, in the first nine monthsof fiscal 2009.  The decrease in theamount of depreciation and amortization resulted from a reduction of capitalexpenditures in fiscal 2010 compared to fiscal 2009 and from asset impairmentcharges recorded in the fourth quarter of fiscal 2009.  Capital expenditures in the first nine monthsof fiscal 2010 totaled $4.8 million, compared to $16.9 million in the firstnine months of fiscal 2009, while approximately $4.6 million of assetimpairment charges were recorded in the fourth quarter of fiscal 2009.

 

***OperatingIncome (Loss). ***Based on the foregoing, the Companyrecorded operating income of $8.8 million, or 2.5% of net sales, for the ninemonths ended November 28, 2009, compared to operating income of $20.8million, or 4.9% of net sales, for the nine months ended November 29,2008.

 

***OtherIncome. ***For the nine months ended November 28,2009, other income included interest income of $301,000 and $150,000 of netunrealized gains on the Company’s ARS and ARS Rights.  In the nine months ended November 29,2008, other income consisted solely of $2.0 million of interest income.  The decrease in interest income resulted fromlower interest rates on cash, cash-equivalents and investments in the firstthree quarters of fiscal 2010 compared to the first three quarters of fiscal2009.

 

***IncomeTaxes. ***Income tax expense in the first ninemonths of fiscal 2010 was $2.7 million, with an effective tax rate of 29.2%,compared to $2.0 million, with an effective tax rate of 8.9%, in the first ninemonths of fiscal 2009.  The effective taxrate in the first nine months of fiscal 2010 was affected by the impact ofpermanent differences and state taxes on the annual effective tax rate anddiscrete income tax benefits of approximately $400,000 related to reductions tothe reserve for unrecognized tax benefits.

 

Income taxes in the firstnine months of fiscal 2009 were allocated to continuing and discontinuedoperations based on the methodology required by ASC 740-270, “Income Taxes —Interim Reporting.”  Income taxesallocated to the results of discontinued operations were determined on thebasis of a computation of taxes with and without the impact of results fromdiscontinued operations and the difference in taxes between these computationswas allocated to discontinued operations.

 

***Incomefrom Continuing Operations.***  As a result ofthe foregoing factors, the Company reported income from continuing operationsof $6.5 million, or 1.8% of net sales, for the nine months ended November 28,2009, compared to income from continuing operations of $20.8 million, or 4.9%of net sales, for the nine months ended November 29, 2008.

 

***Losson Discontinued Operations, Net of Tax.***  The Company reporteda pre-tax loss on discontinued operations of $7.5 million for the nine monthsended November 29, 2008 related to store-level operating losses at theCompany’s Acorn stores and impairment charges related to Acorn storeassets.  Net of tax, the loss on 

 

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discontinuedoperations was $4.8 million.  There wereno expenses related to discontinued operations recorded during the nine monthsended November 28, 2009.

 

***NetIncome (Loss). ***As a result of the foregoing factors, theCompany recorded net income of $6.5 million, or 1.8% of net sales and $0.18 perdiluted share, for the nine months ended November 28, 2009, compared tonet income of $16.1 million, or 3.8% of net sales and $0.46 per diluted share,for the nine months ended November 29, 2008.

 

**Liquidity and Capital Resources**

 

The Company’s principalon-going cash requirements are to fund working capital needs, such aspurchasing merchandise inventory, financing the construction of new stores,remodeling of certain existing stores and making information technology-relatedand other capital expenditures. Merchandise purchases vary on a seasonal basis, peaking in thefall.  As a result, the Company’s cashrequirements historically reach their peak in October or November, duringthe Company’s third fiscal quarter. Conversely, the Company’s cash balances typically peak for the year inJanuary, during the Company’s fourth fiscal quarter, after the holiday sellingseason is completed.

 

*Net cash provided by operatingactivities*

 

Net cash provided byoperating activities totaled $18.3 million in the first nine months of fiscal2010, an increase of approximately $4.4 million from $13.9 million for thefirst nine months of fiscal 2009.  Theincrease was primarily a result of a decrease in income taxes receivable,partially offset by a decrease in accounts payable and a decrease in net income.

 

Significant fluctuationsin the Company’s working capital accounts in the first nine months of fiscal2010 included an $18.7 million decrease in income taxes receivable, a $12.0million decrease in accounts payable and a $2.7 million decrease in accruedliabilities.  The decrease in incometaxes receivable was due to refunds received on estimated tax payments madeduring the first half of fiscal 2009 and net operating loss carrybacks.  The decrease in accounts payable in the firstnine months of fiscal 2010 resulted from shifts in the timing of merchandiseinventory payments.  The decrease inaccrued liabilities primarily resulted from a decline in the amount ofoutstanding gift cards.

 

The remainder of thechange in cash provided by operating activities was substantially the result ofnet income recorded during the first nine months of fiscal 2010, afteradjusting for non-cash items, including depreciation and amortization expense,deferred income taxes, stock-based compensation expense, loss on the disposalof furniture, fixtures and equipment and various other changes in the Company’sother operating assets and liabilities.

 

*Net cash used in investingactivities*

 

Net cash used ininvesting activities in the first nine months of fiscal 2010 consisted of $42.4million of net investment purchases and $4.8 million of capitalexpenditures.  The Company opened fivenew stores during the first nine months of fiscal 2010.  The Company also made other investments inits stores, corporate office and distribution center facility during the ninemonths ended November 28, 2009.  TheCompany expects to fund approximately $7 million of total capital expendituresfor all of fiscal 2010.

 

*Net cash used in financingactivities*

 

Net cash of $6.4 millionwas used in the first nine months of fiscal 2010 for the payment of threequarterly cash dividends.

 

The Company anticipatesits cash and cash equivalents, combined with cash flows from operations, willbe sufficient to meet its capital expenditure, working capital and otherliquidity requirements for the remainder of fiscal 2010 and all of fiscal 2011.

 

*Credit facility*

 

The Company maintains anAmended and Restated Revolving Credit Facility (the “Credit Facility”) withWells Fargo Bank, National Association (“Wells Fargo”) which expires on June 30,2011.  The Credit Facility 

 

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provides the Company withrevolving credit loans and letters of credit of up to $50 million, in theaggregate, subject to a borrowing base formula based on inventory levels.

 

Loans under the CreditFacility bear interest at the prime rate minus 0.25%.  As of November 28, 2009, the prime ratewas 3.25%.  The Credit Facility alsoprovides the Company with the ability to borrow under the Credit Facility at aninterest rate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tiedto the one, three, or six month LIBOR rate based on the length of time thecorresponding advance is outstanding.

 

Interest under theCredit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unusedportion of the facility as defined in the agreement, a collateral monitoringfee and a guarantee service charge. Borrowings under the Credit Facility are collateralized by the Company’sequipment, intangible assets, inventory, inventory letters of credit and letterof credit rights.  The Company had norevolving credit loan borrowings under the Credit Facility during the firstnine months of fiscal 2010 or fiscal 2009. Historically, the Credit Facility has been utilized by the Company onlyto open letters of credit to facilitate the import of merchandise.  The borrowing base at November 28, 2009was $26.6 million.  The Company had nooutstanding letters of credit as of November 28, 2009.  Accordingly, the availability of revolvingcredit loans under the Credit Facility was $26.6 million at November 28,2009.

 

The CreditFacility contains certain restrictive covenants, including restrictions onincurring additional indebtedness and limitations on certain types ofinvestments, as well as requiring the maintenance of certain financialcovenants.  As of November 28, 2009,the most recent measurement date, the Company was in compliance with all of therestrictive covenants under the Credit Facility.

 

*Auction Rate Securities*

 

TheCompany had approximately $16.3 million of short-term trading securities as of November 28,2009, which consisted solely of $19.1 million of auction rate securities (“ARS”)at cost, less a fair value adjustment of approximately $2.8 million.  The fair value of the ARS was determinedutilizing a discounted cash flow method based on market rates and an estimatedperiod of time the ARS are expected to be held.

 

Substantially all of the Company’s ARS are collateralized by studentloans. As of November 28, 2009, a majority of its ARS had AAA (Standard &Poor’s), Aaa (Moody’s), or AAA (Fitch) credit ratings.  As of November 28, 2009, the repaymentof approximately 80% of the student loans, which serve as collateral for theARS held by the Company, was substantially backed by the United Statesgovernment.  Until February 2008,the ARS market was liquid and auctions for ARS held by the Company did notfail.  However, beginning in February 2008,auctions for the ARS held by the Company began to fail and have continued tofail up to and as of the date of this report.

 

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

 

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

 

Upon acceptance of thesettlement offer, the Company classified its ARS as trading securities andelected to record the ARS rights at fair value on a recurring basis utilizingsignificant unobservable inputs in accordance with ASC 820-10, “Fair ValueMeasurements and Disclosures.”  The fairvalue of the ARS rights was estimated utilizing the Black-Scholes option pricingmodel and the forward contract method. As of November 28, 2009, the 

 

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fair value of the ARSrights was determined to be approximately $2.6 million and the ARS rights wererecorded within other current assets on the consolidated financial statements.

 

Please see Note 3and Note 12 to the Consolidated Financial Statements for further informationregarding the Company’s investments in ARS.

 

**MerchandiseSourcing**

 

In fiscal 2009,the Company underwent a significant shift in its sourcing structure by aligningitself with new key suppliers with expertise along all of the Company’smerchandise categories.  As a result ofpartnering with these new vendors, the Company was able to diversify country ofproduction, improve payment terms, increase flexibility and reduce risk.  Prior to fiscal 2009, the Company directlyimported the majority of its goods as the declared importer of record.  The Company directly imported approximately12% of its total merchandise purchases in the nine month period ended November 28,2009, down from 59% for the nine months ended November 29, 2008.  Substantially all of its remainingmerchandise purchases were made from U.S.-based companies who import goods fromoverseas.  This reliance on sourcing fromforeign countries may cause the Company to be exposed to certain risks asindicated below and as discussed in Part I, “Item 1A. Risk Factors” in theCompany’s Annual Report on Form 10-K for the year ended February 28,2009.

 

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

 

**The Company does not havelong-term purchase commitments or arrangements with any of its suppliers oragents. **During the three and nine monthperiods ended November 28, 2009, three of the Company’s vendors eachsupplied the Company with greater than 10% of its merchandise inventorypurchases.  For the third quarter offiscal 2010, these three vendors supplied approximately 25%, 20% and 16% of theCompany’s merchandise purchases.  In thenine month period ended November 28, 2009, the three vendors suppliedapproximately 25%, 12% and 16% of the Company’s merchandise purchases.

** **

**Although the Company has positiverelationships with these three vendors, there can be no assurance that theserelationships can be maintained in the future or that the vendors will continueto supply merchandise to the Company.  If there should be any significantdisruption in the supply of merchandise from these vendors, management believesthat it will be able to shift production to other suppliers to continue tosecure the required volume of merchandise.  Nevertheless, it is possiblethat any significant disruption in supply could have a material adverse impacton the Company’s financial position or results of operations.**

** **

**In the nine months ended November 29,2008, the Company purchased approximately 32% of its merchandise through onebuying agent (the “Agent”).  The Companyand the Agent terminated their sourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase anymerchandise through the Agent in the first nine months of fiscal 2010.**

** **

**QuarterlyResults and Seasonality**

 

The Company’squarterly results may fluctuate significantly depending on a number of factors,including general economic conditions, timing of promotional events and newstore openings, adverse weather conditions, shifts in the timing of certainholidays and customer response to the Company’s seasonal merchandise mix.

 

**Inflation**

 

As the operationsof the Company are influenced by general economic conditions, the Company’smanagement believes that rising prices, resulting particularly from highergasoline and food costs, had a negative effect on the Company’s results ofoperations during the first and second quarters of fiscal 2009.  Management does

 

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not believe thatinflation had a material effect on the Company’s results of operations in thethird and fourth quarters of fiscal 2009 or the first nine months of fiscal2010.

 

**Forward-Looking Statements**

 

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

 

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

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date such statements aremade.  In addition, the Company wishes toadvise readers that the factors listed in Item 1A of the Company’s AnnualReport on Form 10-K for the fiscal year ended February 28, 2009, aswell as other factors, could affect the Company’s performance and could causethe Company’s actual results for future periods to differ materially from anyopinions or statements expressed about such future performance or results.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market riskinherent in the Company’s financial instruments and in its financial positionrepresents the potential loss arising from adverse changes in interestrates.  The Company’s results ofoperations could be negatively impacted by decreases in interest rates on itsinvestments, including its investments in ARS. Please see Note 3 to the Consolidated Financial Statements and MD&Afor further information regarding the Company’s investments in ARS.

 

The Company ispotentially exposed to market risk from changes in interest rates relating toits Credit Facility with Wells Fargo. Loans under the Credit Facility bear interest at Wells Fargo’s primerate, 3.25% as of November 28, 2009, less 0.25%, or the one, three, or sixmonth LIBOR rate, based on the length of time the advance is outstanding.  However, the Company had no revolving creditloan borrowings under the Credit Facility during the first nine months offiscal 2010 or fiscal 2009.  Given itsexisting liquidity position, the Company does not expect to utilize the CreditFacility in the reasonably foreseeable future other than to potentially useletters of credit to support the import of merchandise.

 

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

 

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

 

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**ITEM 4.**

**CONTROLS AND PROCEDURES**

 

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

 

Under the supervision andwith the participation of its Chief Executive Officer and Chief FinancialOfficer, the Company’s management has evaluated the effectiveness and design ofthe Company’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of theperiod covered by this report (the “Evaluation Date”).  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 Control Over Financial Reporting.

* *

There have not been anychanges in the Company’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) during the three months ended November 28, 2009 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1.**

**LEGAL PROCEEDINGS**

 

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

 

**ITEM1A.**

**RISK FACTORS**

 

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

 

**ITEM 2.**

**UNREGISTERED SALES OF EQUITY**

**SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.**

**DEFAULTS UPON**

**SENIOR SECURITIES**

 

None.

 

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**ITEM 4.**

**SUBMISSION OF MATTERS TO**

**A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.**

**OTHER INFORMATION**

 

None.

 

**ITEM 6.**

**EXHIBITS**

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

 

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* Filed with this report.

 

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**SIGNATURES**

 

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

 

 
| ** **                              | **CHRISTOPHER &  BANKS CORPORATION** |
|-----------------------------------------|-----------------------------------------------|
| ** **                              |                                          |   |
|                                    |                                          |   |
| Dated:  January 7,  2010 | By                                            | /S/ LORNA E. NAGLER |
|                                    |                                          |   |
|                                    |                                          | Lorna E. Nagler |
|                                    |                                          | President and Chief  Executive Officer |
|                                    |                                          | (Principal Executive  Officer) |
|                                    |                                          |   |
|                                    |                                          |   |
| Dated:  January 7,  2010 | By                                            | /S/ RODNEY CARTER |
|                                    |                                          |   |
|                                    |                                          | Rodney Carter |
|                                    |                                          | Executive Vice  President, |
|                                    |                                          | Chief Financial Officer |
|                                    |                                          | (Principal Financial Officer) |

 

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**CHRISTOPHER & BANKSCORPORATION**

**QUARTERLY REPORT ON FORM 10-Q**

 

**INDEXTO EXHIBITS**

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

 

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* Filed with this report.

 

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