XNYS:CBK Christopher & Banks Corp Annual Report 10-KT Filing - 1/28/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-K

 

(Mark One)

 

o                   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

or

 

x                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from February 27, 2011 to January 28, 2012.

 

Commission File No. 001-31390

 

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

06 - 1195422

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2400 Xenium Lane North, Plymouth, Minnesota

 

55441

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (763) 551-5000

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o  YES  x  NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o  YES  x  NO

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

The aggregate market value of the Common Stock, par value $0.01 per share, held by non-affiliates of the registrant as of August 26, 2011, was approximately $162,187,000 based on the closing price of such stock as quoted on the New York Stock Exchange ($4.60) on such date.

 

The number of shares outstanding of the registrant’s Common Stock, par value $0.01 per share, was 36,004,981 as of March 24, 2012 (excluding treasury shares of 9,790,718).

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held June 28, 2012 (the “Proxy Statement”) are incorporated by reference into Part III.

 

 

 



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

2012 TRANSITION REPORT ON FORM 10-K

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I

 

 

 

 

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

7

 

 

 

Item 1B.

Unresolved Staff Comments

18

 

 

 

Item 2.

Properties

18

 

 

 

Item 3.

Legal Proceedings

20

 

 

 

Item 4.

Mine Safety Disclosures

20

 

 

 

Item 4A.

Executive Officers of the Registrant

21

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

 

 

 

Item 6.

Selected Financial Data

24

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 8.

Financial Statements and Supplementary Data

44

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

78

 

 

 

Item 9A.

Controls and Procedures

78

 

 

 

Item 9B.

Other Information

79

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

79

 

 

 

Item 11.

Executive Compensation

79

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

80

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

80

 

 

 

Item 14.

Principal Accounting Fees and Services

80

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

80

 

 

 

 

Signatures

87

 



Table of Contents

 

Introductory Note

 

On January 6, 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year will end at the close of business on that Saturday in January or February which falls closest to the last day of January.  Prior to this change, our fiscal year ended at the close of business on that Saturday in February or March which fell closest to the last day of February.  As a result, this Transition Report on Form 10-K covers the transition period consisting of the eleven months (48 weeks) ended January 28, 2012 (“transition period” or “transition year”).  The fiscal years ended February 26, 2011 (“fiscal 2011”) and February 27, 2010 (“fiscal 2010”) each consisted of twelve months (52 weeks).  Therefore, when our results of operations for the transition period are being compared to the results for fiscal 2011, we are comparing results for an 11-month period to results for a 12-month period.  In addition, our fourth quarter for the transition period was shortened to the two-month period ended January 28, 2012.  In this Transition Report on Form 10-K our current fiscal year, the 53-week period ending February 2, 2013, is referred to as (“fiscal 2012”).  We believe the change in our fiscal year end will provide certain benefits, including aligning our reporting periods to be more consistent with those of other specialty retail apparel companies.

 

PART I

ITEM 1.
BUSINESS

 

General

 

Christopher & Banks Corporation is a Minneapolis, Minnesota-based retailer of women’s apparel and accessories, which operates retail stores through its wholly owned subsidiaries, Christopher & Banks, Inc. and Christopher & Banks Company (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”).  As of January 28, 2012, we operated 686 stores in 44 states, including 402 Christopher & Banks stores, 199 C.J. Banks stores, 62 dual-concept stores and 23 outlet stores.  We also operate e-Commerce web sites for each of our brands at www.christopherandbanks.com and www.cjbanks.com.

 

History

 

Christopher & Banks Corporation, a Delaware corporation, was incorporated in 1986 to acquire Braun’s Fashions, Inc., which had operated as a family-owned business since 1956.  We became a publicly traded corporation in 1992 and, in July 2000, our stockholders approved a company name change from Braun’s Fashions Corporation to Christopher & Banks Corporation.  Our women’s plus size C.J. Banks brand was developed internally and we opened our first C.J. Banks stores in August 2000.  Our Christopher & Banks and C.J. Banks e-commerce websites began operating in February 2008 to further meet our customers’ needs for unique style, quality, value and convenience.

 

Christopher & Banks/C.J. Banks brands

 

Our Christopher & Banks brand offers distinctive fashions featuring exclusively designed, coordinated assortments of women’s apparel in missy sizes 4 to 16 and petite sizes 4P to 16P in our 402 Christopher & Banks stores and on our Christopher & Banks e-commerce web site.  Our C.J. Banks brand offers similar assortments of apparel in women’s plus sizes 14W to 26W in our 199 C.J. Banks stores and on our C.J. Banks e-commerce web site.  Our dual-concept stores (“dual stores”) offer merchandise from both of our Christopher & Banks and C.J. Banks brands, and all three size ranges (petite, missy and women’s plus) within each store, resulting in a greater opportunity to service our customers while increasing productivity and enhancing operating efficiencies.  Our outlet stores also offer an assortment of both Christopher & Banks and C.J. Banks apparel servicing the petite, missy and women’s plus size customer in one location.

 

The casual lifestyle brand fashions sold by Christopher & Banks and C.J. Banks are typically suitable for both work and leisure activities and are offered at moderate price points.  The target customer for Christopher & Banks and C.J. Banks generally ranges in age from 45 to 55 and is typically part of the female baby boomer demographic.

 

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Segments

 

For details regarding the operating performance of our reportable segments, see Note 20, Segment Reporting, to the consolidated financial statements.

 

Strategy

 

We strive to provide our customers with fashionable, versatile, quality apparel at a great value and with a consistent fit.  Our overall strategy for our two brands, Christopher & Banks and C.J. Banks, is to offer a compelling, evolving merchandise assortment through our stores and e-commerce web sites in order to satisfy our customers’ expectations for style, quality, value, versatility and fit, while providing knowledgeable and personalized customer service.

 

We have positioned ourselves to offer merchandise assortments balancing updated unique, novelty apparel with more classic styles, at affordable prices.  To differentiate ourselves from our competitors, our buyers, working in conjunction with our internal design group, strive to create a merchandise assortment of coordinated outfits, the majority of which are manufactured exclusively for us under our proprietary Christopher & Banks and C.J. Banks brand names.

 

Merchandise

 

In our transition period, our merchandise assortments included women’s apparel generally consisting of knit tops, woven tops, jackets, sweaters, skirts, denim bottoms, bottoms made of other fabrications and dresses in petite, missy and women’s plus sizes.  We also offered a selection of jewelry and accessories in all stores and online.  Our merchant team is currently focused on delivering increased sales and improved gross profit through executing the following initiatives:

 

·Provide a balanced merchandise assortment

 

In the third and fourth quarters of the transition period, the majority of our merchandise assortments consisted of higher-priced, fashion-forward styles.  We provided our customers with too many upscale choices at prices our customers were unwilling to pay.  The result was a significant increase in markdown levels in order to compel our customers to purchase and allow us to clear through slow-selling styles.

 

Our merchants began impacting a portion of our Summer fiscal 2012 product deliveries by editing the number of styles offered and reducing retail ticket prices to levels more in-line with our traditional offerings and more acceptable to our customers.  Going forward, our merchants are focusing on building assortments that are more balanced by increasing the amount of ‘good’ and ‘better’ product offerings and decreasing the number of ‘best’ styles.  This involves increasing the penetration of core product in our deliveries, including basic knit layering pieces and classic bottoms, increasing the representation of mid-priced ‘better’ selections, while reducing the number of higher priced ‘best’ styles.  Our goal is to reduce the overall number of unique styles we carry, which will allow us to present a more focused and compelling product assortment with fewer, more relevant selections. We expect these efforts will be fully reflected in our September in-store product offerings.

 

·Reduction and simplification of price points

 

We increased our retail ticket prices in our transition period and our customers failed to respond positively.  The price increases resulted from elevated commodities costs and providing more intricately constructed styles.  Our customers were highly resistant to the increased price points.  As we move forward, our goal is to mitigate markdown levels by offering more attractive opening price points and simplifying the number of price points offered to our customers.

 

The change in our approach to pricing in fiscal 2012 is intended to work hand-in-hand with our ‘good, better, best’ product initiative.  As we increase the penetration of core product offerings in our assortments, we expect to be able to drive sales volume by offering more styles at attractive opening price points that we believe our customers will accept without steep discounting.  In addition, we will reduce the number of price points across all categories to simplify the shopping experience.  Finally, we are committed to offering our customers value.  All styles, including those falling into our ‘better’ and ‘best’ classifications, will be priced at levels that are more attractive to our customers. We believe that this will result in improved sales, reduced markdowns and increased gross profit.

 

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·Implement a more targeted promotional cadence and markdown strategy

 

We are analyzing our promotional cadence and adjusting our markdown strategy in an effort to minimize and reverse the significant merchandise margin erosion we experienced in the transition period.  While we anticipate that in order to be competitive we will need to continue to be promotional this year, we are testing and implementing more targeted, unique promotions in an effort to improve merchandise margins and lessen our reliance on storewide promotional events.  In addition, we have adopted a more focused and timely approach to our markdown process that quickly addresses underperforming styles in an effort to utilize our markdowns as efficiently as possible.

 

·Improve product flow and speed to market and reduce lead times

 

Historically we have developed and delivered a full, unique merchandise assortment to our stores on a monthly basis.  In order to simplify and accelerate our product development process, we will reduce the number of major product deliveries by half to six times annually beginning in September 2012.  To maintain product freshness, we will supplement the major deliveries with a consistent flow of replenishment product and select new colors and styles to all stores on an ongoing basis.

 

Sourcing

 

We are analyzing all aspects of our product development and sourcing practices to identify opportunities to simplify and accelerate the process.  Improving speed to market is one of our critical initiatives in fiscal 2012 to help increase sales and gross profit by allowing us to react more quickly to current selling trends in-season.  We imported approximately 16% of our merchandise purchases directly from overseas manufacturers during the transition period, which resulted in longer product lead times.  Going forward we anticipate we will be working with a number of domestically-based apparel importers and manufacturers who can typically address and fill orders faster than overseas manufacturers.  In addition, we intend to concentrate more of our merchandise purchases with fewer key suppliers in our next fiscal year to become more significant to our vendor base.  We believe this will allow us to achieve better pricing by leveraging larger order quantities and receive faster delivery times from these key vendors.  We also plan to continue to streamline and reduce costs related to our inbound supply chain including renegotiating contracts and consolidating service providers for ocean freight, customs brokerage services and truck and rail transportation.

 

Our merchandise costs throughout the transition period were impacted by higher prices for cotton and synthetic fibers, along with increased production labor and transportation costs.  Although we passed some of these price increases on to our customers in the transition period, there was resistance to the higher prices.  As a result, we intend to increase our efforts to provide quality merchandise to our customers at an attractive price, which will likely result in continued pressure on merchandise margins in fiscal 2012.  While product costs remained elevated in the beginning of fiscal 2012, we currently expect product costs to begin to decline in the second quarter of fiscal 2012, as compared to the second quarter of the transition period, and to continue to trend below transition period levels during the remainder of fiscal 2012.

 

Restructuring/Store Closing Initiative

 

On November 11, 2011, we announced that, following an in-depth analysis of our store portfolio, the Board approved a plan to close approximately 100 stores, most of which were underperforming.  Ultimately, 103 stores were identified for closure, and these closings are expected to positively impact results of operations in our next fiscal year.  This group of stores generated approximately $35 million of sales and store-level operating losses of approximately $11 million, which included approximately $7 million of non-cash impairment charges, on a trailing 12-month basis through January 28, 2012.  Ninety of the 103 stores identified for closure were closed in the transition period, with two closing in November, seven closing in December and 81 closing in January.  We closed five stores in February 2012 and expect to close eight additional stores in March 2012 and beyond.

 

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In addition to the store closures, we are seeking to restructure the occupancy costs of a majority of our remaining stores and to convert or consolidate a number of existing Christopher & Banks and C.J. Banks stores into dual stores.  In 19 of the centers where we closed stores in the fourth quarter, we converted the remaining Christopher & Banks or C.J. Banks store (a “sister store”) into a dual-store location in order to continue to serve all of our missy, petite and women’s plus size customers in those locations.  The store closings resulted in the termination of approximately 27% of our store operations field management team and 14% of our overall full-time and part-time store sales associate positions.  The Company also reduced its corporate office headcount by approximately 15% during the third and fourth quarters of the transition period.

 

The Company recorded total restructuring and asset impairment charges of approximately $21.2 million in the transition period.  In the third quarter, we recorded $11.4 million of non-cash asset impairment charges, which consisted of approximately $7.4 million of asset impairment charges related to stores identified for closure and a non-cash charge of approximately $4.0 million related to store level asset impairments for stores which the company will continue to operate.  We also recorded a $0.8 million charge in the third quarter related to severance charges for field management and corporate office personnel who were terminated in October 2011 and for field associates who were terminated as a result of the store closures.

 

In the fourth quarter of the transition period, we recorded total restructuring charges of $9.0 million.  Approximately $8.3 million related to accrued lease termination fees associated with the 103 stores identified for closure.  The charge also included approximately $0.4 million of severance charges related to additional terminations at our corporate office and in our field organization and $0.3 million of other miscellaneous store closing costs.

 

The Company expects to incur additional lease termination fees of approximately $0.7 million in the first half of fiscal 2012 in conjunction with the 13 stores identified for closure which were still operating as of January 28, 2012.

 

Real Estate

 

In addition to the store closing/restructuring initiative, we have reevaluated our overall real estate strategy, including converting and combining existing Christopher & Banks and C.J. Banks locations into dual stores and reducing the number of new dual and outlet store openings.  We began the transition period with 517 Christopher & Banks stores, 252 C.J. Banks stores, three dual stores and three outlet stores.  During the year, we opened nine new dual stores, 20 new outlet stores and one new Christopher & Banks store.  In addition to the nine new dual stores requiring a capital investment, we opened 22 dual stores where we combined a Christopher & Banks store and a C.J. Banks store into one of the existing locations.  We also converted 29 existing, stand-alone Christopher & Banks stores into dual stores during the year by adding women’s plus size merchandise to the assortment.

 

We closed 119 stores in the transition period, including the 90 stores closed in connection with our store restructuring initiative.  As a result, we ended the year with 402 Christopher & Banks stores, 199 C.J. Banks stores, 62 dual stores and 23 outlet stores.  For fiscal 2012, we intend to conserve cash by minimizing capital expenditures related to new store openings.  New store projects will be limited to a few strategic repositionings and combinations of existing Christopher & Banks and C.J. Banks stores.  We also intend to open outlet locations in markets where we deem it strategically important to maintain a store location.

 

Customer Experience

 

In an effort to drive overall productivity, we continue to strive to enhance our customer experience. We have focused our associates on strengthening our selling culture while providing more knowledgeable selling and personalized service to our customers.  In the transition period, we reintroduced a selling program that includes a significant focus on grass roots connections with our customers and improving our store associates’ product knowledge.  We also continue to strive to deliver exceptional personalized customer service in a warm and inviting store environment.

 

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In addition, we continue to refine and add new visual merchandising elements to our stores to maximize merchandise displays to provide more compelling and clearer product messages.  This is intended to drive increased numbers of new and existing customers into our stores through a more organized presentation of merchandise and product outfitting options.

 

Marketing

 

In the transition period, we spent approximately 1.7% of sales on marketing-related efforts, up from approximately 1.5% of sales in fiscal 2011.  In fiscal 2012 we plan to spend slightly less on marketing as a percent of sales than in the transition period.  Our marketing efforts will continue to be focused on strengthening communications with our customers through e-mail and direct mail.

 

During the transition period, we delivered 10 direct mail pieces and we plan to execute approximately 10 direct mail campaigns again in fiscal 2012.  We utilize a customer relationship management system to track customer transactions and analyze strategic decisions for our e-mail and direct mail initiatives.  In the transition period, we also completed an initiative to develop a stronger brand presence to ensure consistency in the messages we are sending to our customers, including delivering a consistent look and feel across our stores and e-commerce web sites.

 

In fiscal 2011, we launched our Friendship® Rewards loyalty program.  Friendship Rewards is a point-based program where members earn points based on purchases.  After reaching a certain level of accumulated points, members are rewarded with a certificate which may be applied towards purchases at our stores or web sites.  The program has helped us to build our customer database and we will continue to refine the program to encourage increased purchases by our Friendship Rewards members.

 

In April 2012, we plan to launch our Christopher & Banks/C.J. Banks private label credit card.  This program will work in conjunction with Friendship Rewards to provide our customers who place purchases on their card with special benefits and incentives.  In addition, we plan to utilize a number of direct mail and e-mail campaigns, along with in-store contests, to promote the new Christopher & Banks/C.J. Banks card.

 

e-Commerce

 

In February 2008, we launched separate e-commerce web sites for our Christopher & Banks and C.J. Banks brands at www.christopherandbanks.com and www.cjbanks.com.  Today, these sites generally offer the entire assortment of merchandise carried at our Christopher & Banks, C.J. Banks, dual and outlet stores in addition to exclusive e-commerce products and extended sizes and lengths.  Inventory and order fulfillment for our e-commerce operations are handled by a third-party provider.

 

The web sites referenced above and elsewhere in this Transition Report on Form 10-K are for textual reference only and such references are not intended to incorporate our web sites into this Transition Report on Form 10-K.

 

Store Operations

 

We manage our store organization in a manner that encourages participation by our field associates in the execution of our business and operational strategies.  Our store operations are organized into districts and regions.  Each district is managed by a district manager, who typically supervises an average of 14 stores.  We have three regional managers who supervise our district managers.

 

Information Technology

 

We have built and maintain a scalable, cost-effective and integrated information technology infrastructure that makes the design, procurement and distribution of our products more efficient.  Our integrated systems provide, among other things, comprehensive product lifecycle management, sophisticated merchandise planning and allocation, order processing, efficient merchandise receiving and distribution, flexible point-of-sale transaction processing, robust customer relationship management capabilities and timely and reliable financial reporting.

 

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Competition

 

The women’s retail apparel business is highly competitive.  We believe that the principal basis upon which we compete is by providing fashionable, versatile, quality merchandise assortments at a great value and with a consistent fit.  We also believe our visual merchandise presentation, personalized customer service and store locations help to differentiate us from our competition.  Our competitors include a broad range of national and regional retail chains that sell similar merchandise, including department stores, specialty stores, discount stores, mass merchandisers and Internet-based retailers.  Many of these competitors are larger and have greater financial resources than us allowing them to engage in significant marketing campaigns and aggressive promotions.  We believe that our unique merchandise assortments, strong visual presentation, product quality, affordable merchandise price and customer service can enable us to compete effectively.

 

Employees

 

As of March 24, 2012, we had approximately 1,500 full-time and 4,900 part-time associates.  The number of part-time associates typically increases during November and December in connection with the holiday selling season and during our semi-annual Friends & Family events.  Approximately 225 of our associates are employed at our corporate office and distribution center facility, with the remaining associates employed in our store field organization.  None of our employees is represented by a labor union or is subject to a collective bargaining agreement.  We have never experienced a work stoppage and consider our relationship with our employees to be good.

 

Seasonality

 

Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, shifts in the timing of certain holidays and shifts in the timing of promotional events.  Traditionally, we have had higher sales, in the first and third quarters of our fiscal year, and have had lower sales in our second and fourth fiscal quarters.  In addition, the shift in our fiscal year to one ending at the close of business on that Saturday in January or February which falls closest to the last day of January from one that ended at the close of business on that Saturday in February or March which fell closest to the last day of February, and the related shift in the timing of our fiscal quarterly reporting periods may also have an impact on the seasonality of our business by reported quarter, especially when compared to prior periods.

 

Trademarks and Service Marks

 

The Company, through our wholly owned subsidiary, Christopher & Banks Company, is the owner of the federally registered trademarks and service marks “christopher & banks,” which is our predominant private brand, and “cj banks,” our women’s plus size private brand.  Management believes these primary marks are important to our business and are recognized in the women’s retail apparel industry.  Accordingly, we intend to maintain these marks and the related registrations.  U.S. trademark registrations are for a term of ten years and are renewable every ten years as long as the trademarks are used in the regular course of trade.  Management is not aware of any challenges to our right to use these marks in the United States.

 

Available Information

 

We make available free of charge, on or through our web site, located at www.christopherandbanks.com under the heading Investor Relations, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

 

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ITEM 1A.
RISK FACTORS

 

Our business is subject to a variety of risks and thus an investment in our stock is also subject to risk.  The following risk factors should be read carefully in connection with evaluating our business and in the forward-looking statements that are contained in this Transition Report on Form 10-K, as well as in some of our other filings with the Securities and Exchange Commission (“SEC”).  If any of the risks and uncertainties described below actually occurs, our business, financial condition and results of operations could be materially and adversely affected.  Additional risks that we do not yet know of or currently believe are immaterial may also impact our business operations.

 

All of our stores are located within the United States, making us highly susceptible to macroeconomic conditions in the United States and their impact on consumer demand for our apparel and accessories.

 

General economic conditions, particularly those in the United States, may adversely affect our business.  All of our stores are located within the United States, making our results highly dependent on U.S. macroeconomic conditions and their impact on consumer spending.  In addition, a significant portion of our total sales is derived from stores located in nine states:  Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, New York, Pennsylvania and Wisconsin, resulting in further dependence on local economic conditions in these states.

 

While the United States and many other international economies have improved since the global financial crisis in 2008, a prolonged economic downturn and slow recovery, including higher rates of unemployment, rising commodity prices and declining real estate market values, have had, and may continue to have, a material negative effect on our business, financial condition and results of operations.  In addition, economic conditions could negatively impact the Company’s retail landlords and their ability to maintain their shopping centers in a first-class condition and otherwise perform their obligations, which in turn could negatively impact our sales.

 

Our ability to attract customers to our stores that are located in regional malls and other shopping centers depends heavily on the success of the malls and the centers in which our stores are located and any decrease in customer traffic could cause our net sales to be less than expected.

 

The vast majority of our current stores are located in shopping malls and other retail centers.  Sales at these stores are derived in considerable part from the volume of traffic generated in those malls or retail centers and surrounding areas.  Our stores benefit from the ability of adjacent tenants to generate consumer traffic near our stores and the continuing popularity of the regional malls and outlet, lifestyle and power centers where our stores are located.  Customer traffic and, in turn, our sales volume may be adversely affected by, among other things, economic downturns nationally or regionally, high fuel prices, increased competition, changes in consumer demographics or a closing of an anchor store.  A reduction in customer traffic as a result of these and any other factors could result in lower sales and leave us with excess inventory.  In such circumstances, we may have to respond by increasing markdowns or initiating marketing promotions to reduce excess inventory, which could adversely impact our merchandise margins and operating income.

 

To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain stores in desirable locations where competition for suitable store locations is strong.

 

Our failure to reverse declining gross margins would have a material adverse impact on our business, profitability and liquidity.

 

We experienced declines in our overall gross margin over the past several fiscal quarters.  If we are unable to reverse this trend during fiscal 2012, it is possible that our working capital and cash flows from operating activities would not be sufficient to meet our operating requirements and we would be required to access some, if not all, of our credit facility and potentially require other sources of financing to fund our operations.

 

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We operate in a highly competitive retail industry.  The size and resources of some of our competitors may allow them to compete more effectively than we can, which could reduce our revenues, profits and market share.

 

The women’s specialty retail apparel business is highly competitive.  We believe we compete primarily with department stores, specialty stores, discount stores, mass merchandisers and Internet-based retailers that sell women’s apparel.  Many of our competitors are companies with greater financial, marketing and other resources available to them and may offer a broader selection of merchandise than we do.  They may be able to adapt to changes in customer preferences more quickly, devote greater resources to the marketing and sale of their products, generate greater national brand recognition or adopt more aggressive pricing policies than we can.  In addition, the women’s specialty apparel industry has become more promotional over the past several years.  As a result, we are likely to continue to experience pricing pressure, which in turn could lead to increased marketing expenditures and loss of market share.  In addition to competing for sales, we compete for favorable store locations, lease terms and qualified associates.  Increased competition in these areas may result in higher costs, which could reduce our sales and margins and adversely affect our results of operations.

 

If we are unable to anticipate or react to changing consumer preferences in a timely manner and offer a compelling product at an attractive price, our sales, gross margins and results of operations would be adversely impacted.

 

Our success largely depends on our ability to consistently gauge and respond on a timely basis to fashion trends and provide a balanced assortment of merchandise that satisfies changing fashion tastes and customer demands.  Forecasting consumer demand for our merchandise is difficult.  In addition, our merchandise assortment differs from season to season and, at any given time, our assortment may not resonate with our customers.  On average, we begin the design process for apparel six to eight months before the merchandise is available to customers, and we typically begin to make purchase commitments four to six months in advance of delivery to stores.  These lead times make it difficult for us to respond quickly to changes in the demand for our products or to adjust the cost of the product in response to customers’ fashion or price preferences.  Any missteps may affect merchandise desirability, gross margins and inventory levels.  Our failure to anticipate, identify or react appropriately in a timely manner to changes in customers’ preferences could lead to more frequent and larger markdowns, which could result in lower sales and gross margins, reduce our profits and negatively impact our results of operations.  In addition, our margins may be impacted by changes in our merchandise mix and a shift toward merchandise with a lower gross margin at full retail.  These changes could have an adverse effect on our results of operations.  This could also negatively impact our image with our customers and result in diminished brand loyalty.  On the other hand, if we underestimate demand for our merchandise, we may experience inventory shortages, resulting in missed sales and lost revenues.

 

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

 

The Christopher & Banks and C.J. Banks brand names are integral to our business.  Maintaining, promoting, positioning and growing our brands will depend largely on the success of our design, merchandising and marketing efforts and on our ability to provide a consistent, high quality customer experience.  Our business could be adversely affected if we fail to achieve these objectives for our brands.  In addition, our public image and reputation could be tarnished by negative publicity.  Any of these events could negatively impact sales.

 

We also believe that our “christopher & banks” and “cj banks” trademarks are important to our success and we register the majority of our trademarks in an effort to protect them.  If we cannot adequately protect our marks or prevent infringement of them, our business and financial performance could suffer.  In addition, others may assert rights in, or ownership of, trademarks and other intellectual property rights or in marks that are similar to ours, and we may not be able to successfully resolve these types of conflicts to our satisfaction.  In some cases, there may be holders who have prior rights to similar marks.  Failure to protect our trademarks could adversely affect our business.

 

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There are risks associated with our e-commerce business.

 

We sell merchandise over the internet through our web sites, www.christopherandbanks.com and www.cjbanks.com.  Our e-commerce operations are subject to numerous risks, including:

 

·                  the successful implementation of new systems and internet platforms;

 

·                  reliance on a single third party fulfillment center;

 

·                  rapid technological change;

 

·                  reliance on third party computer hardware and software;

 

·                  diversion of sales from our stores;

 

·                  liability for online content;

 

·                  lack of compliance with or violations of applicable state or federal laws and regulations, including those relating to online privacy and the resulting impact on consumer purchases;

 

·                  credit card fraud;

 

·                  system failures or security breaches and the costs to address and remedy such failures or breaches; and

 

·                  timely delivery of our merchandise to our customers by third parties.

 

There also can be no assurance that our e-commerce operations will meet our sales and profitability plans, and the failure to do so could negatively impact our revenues and earnings.

 

If third parties who manage some aspects of our business do not adequately perform their functions, we might experience disruptions in our business, resulting in decreased profits or losses and damage to our reputation.

 

We use third parties in various aspects of our business or to support our operations.  We have a long-term contract with a third party to manage much of our e-commerce operations, including order management, order fulfillment, customer care, and channel management services.  We rely on third parties to inspect the factories where our products are made for compliance with our vendor code of conduct.  We may rely on a third party for the implementation and/or management of certain aspects of our information technology infrastructure.  We also rely on third parties to transport merchandise and deliver it to our distribution center, as well as to ship merchandise to our stores and to our third party e-commerce fulfillment center.

 

Failure by any of these third parties to perform these functions effectively and properly could disrupt our operations and negatively impact our profitability and reputation.

 

Extreme and/or unseasonable weather conditions could have a disproportionately large effect on our business, financial condition and results of operations.

 

Extreme weather conditions in the areas in which our stores are located could have an adverse effect on our business, financial condition and results of operations.  For example, heavy snowfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores.  Our business is also susceptible to unseasonable weather conditions.  For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions in the affected areas of the United States.  Any such prolonged unseasonable weather conditions could adversely affect our business, financial condition and results of operations.

 

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Natural disasters, unusually adverse weather conditions (whether or not attributable to climate change), pandemic outbreaks, terrorist acts and global political events could cause permanent or temporary distribution center or store closures, impair our ability to purchase, receive or replenish inventory or cause customer traffic to decline, all of which could result in lost sales and otherwise adversely affect our financial performance.

 

The occurrence of one or more natural disasters, such as tornadoes, fires, flood and earthquakes, unusually adverse weather conditions (whether or not attributable to climate change), pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliers are located, or similar disruptions could adversely affect our operations and financial performance.  To the extent these events result in the closure of our distribution center and corporate headquarters, or a significant number of our stores, or impact one or more of our key suppliers, our operations and financial performance could be materially adversely affected.  These events also could have indirect consequences, such as increases in the cost of insurance, if they were to result in significant loss of property or other insurable damage.

 

We may not successfully implement our strategic and tactical initiatives.

 

In conjunction with recent changes in the chief executive officer position and in our merchant team, as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Transition Report on Form 10-K, the Company has begun to undertake a series of initiatives to improve sales, gross margins and earnings in order to return the Company to profitability.  In particular, we are transforming our merchandise strategy and processes to better align with our customers’ fashion preferences, to improve our speed to market and to improve our ability to respond rapidly to customer preferences.  While some progress on these initiatives has begun, our ability to continue to make progress depends upon a number of factors which could result in unexpected costs, delays or failure to meet our internal expectations.  If we are unable to improve our financial performance, our results of operations and ability to generate cash flow could be adversely affected.

 

We are subject to risks associated with leasing all of our store locations.

 

We currently lease all of our store locations.  Our leases range from month-to-month to approximately ten years.  A number of our leases have early termination provisions if we do not achieve specified sales levels after an initial term and, in some cases, allow us to pay rent based on a percent of sales if we fail to achieve certain specified sales levels.  Approximately 40% of our store base is currently paying reduced rent as a percent of sales and the leases for approximately 67% of our store base expire between now and January 2015.  We believe that over the last few years we have been able to negotiate favorable rental rates and extend leases due in part to the state of the economy and higher than usual vacancy rates.  It is possible this trend may not continue and that we will either need to pay higher operating costs or close stores in connection with such lease extension negotiations which could adversely impact our financial performance, results of operations and ability to generate cash flow.  Given the current state of our business, we have very few store openings planned for fiscal 2012.

 

Increasing our store productivity will be largely dependent upon our success in continuing to rationalize our existing store portfolio as well as in maintaining or increasing customer traffic in our stores.

 

Over the past six years, the average sales per square foot in our stores have steadily declined.  Improving the profitability of our existing stores and optimizing store productivity is critical to our future growth and profitability and will also depend on customer acceptance of our merchandise in all of our stores, including our dual and outlet stores.  Our ability to increase the productivity of our stores will be largely dependent upon our ability to continue to rationalize our existing store portfolio as well as our ability to generate customer traffic to our stores and to convert that traffic into sales.

 

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In November 2011, we announced our plan to close approximately 100 stores.  The majority of these stores have already been closed.  We also announced our intention to restructure the occupancy costs at the majority of our remaining stores as part of this process.  We expect that the reduction in store locations will help to increase our store productivity by eliminating overlap in certain markets and allowing management to focus its resources, such as store merchandise inventories and capital expenditures, on a more streamlined and productive store base.  If we are unable to execute successfully on this program to the extent or within the time that we expect or, if the restructured occupancy costs or improvements in store productivity are not at the level that we expect, our revenues, margins, liquidity and results of operations could be adversely affected.

 

Customer traffic depends upon our ability to promote our brand successfully with our existing customers and potential new customers by providing merchandise that satisfies customer demand in terms of price, quality, fit and in-stock position.  There can be no assurance that our efforts to generate customer traffic in our stores and the resulting sales from that traffic will be successful or at the levels we would expect, which could negatively impact our sales and store productivity and may leave us with excess inventory.  We may need to respond to any declines in customer traffic or sales generated from such traffic by increasing markdowns or initiating or continuing additional promotions to attract customers to our stores, which would adversely impact our margins and operating results.

 

The costs to close underperforming stores may be significant and may negatively impact our cash flows and our results of operations.

 

We regularly assess our portfolio of stores for profitability, and we close certain underperforming stores when appropriate under the circumstances.  We recently closed approximately 100 stores, most of which were underperforming, in order to reduce operating losses and to achieve improved long-term performance of our store base.  In closing underperforming stores, we negotiate with landlords to mitigate the amount of remaining lease obligations.  While most of those stores have closed we have not completed the negotiation of the lease termination for approximately 25 stores as of March 24, 2012.  There is no assurance we will reach acceptable negotiated lease settlements and, in some cases, the landlords may decide to pursue litigation.  As a result, costs to close underperforming stores may be significant and may negatively impact our cash flows and our results of operations.  The estimated costs and charges associated with store closings are also based on management’s assumptions and projections, and actual amounts may vary materially from our forecasts and expectations.  Additionally, while our goal in closing certain stores is to increase the productivity of our store portfolio, reductions in our overall number of stores will negatively impact our net sales.

 

The impact of potential consolidation of commercial and retail landlords could adversely impact our business, financial condition and results of operations.

 

Continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future.  Should significant consolidation continue, a large proportion of our store base could be concentrated with one or a few entities that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage.  If we are unable to negotiate favorable lease terms with these entities, this could affect our ability to profitably operate our stores, which could adversely impact our business, financial condition and results of operations.

 

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If our stores’ long-lived assets become impaired, we may need to record significant non-cash impairment charges.

 

We monitor the performance and productivity of our store portfolio.  When we determine that a store is underperforming or is to be closed, we reassess the recoverability of the store’s long-lived assets, which in some cases can result in an impairment charge.  When a store is identified for impairment analysis, we estimate the fair value of the store assets using an income approach, which is based on estimates of future operating cash flows at the store level.  These estimates, which include estimates of future net store sales, direct store expenses, and non-cash store adjustments, are based on the experience and knowledge of management, including historical store operating results.  These estimates can be affected by factors that can be difficult to predict, such as future operating results, customer activity and future economic conditions, and require management to apply judgment.  In addition to any other potential or actual future store closings or any negative trends in our store performance, any decision to close, consolidate or downsize a store may result in additional future impairments of store assets.

 

We are highly dependent on a few suppliers and our business could suffer if we needed to replace them.

 

We do not own or operate any manufacturing facilities.  Instead we depend on independent third parties to manufacture our merchandise.  In the transition period, our ten largest suppliers accounted for approximately 55% of the merchandise we purchased and we purchased 18.6%, 9.5% and 7.9% of our goods respectively from our three largest suppliers.

 

We generally maintain non-exclusive relationships with the suppliers that manufacture our merchandise and we compete with other companies for production facilities.  As a result, we have no contractual assurances of continued supply or pricing, and any supplier could discontinue selling to us at any time.  Moreover, a key supplier may not be able to supply our inventory needs due to capacity constraints, financial instability or other factors beyond our control, or we could decide to stop using a supplier due to quality or other issues.  If we were required to change suppliers or if a key supplier were unable to supply desired merchandise in sufficient quantities on acceptable terms, we could experience delays in receipt of inventory until alternative supply arrangements were secured.  These delays could result in lost sales and a decline in customer satisfaction.  It is also possible that the inability of our suppliers to access credit, or concerns suppliers or their lenders may have with our creditworthiness, may cause them to extend less favorable terms to us, which could adversely affect our cash flows, margins and financial condition, as well as limit the availability under our revolving line of credit.  Additionally, delays by our suppliers in supplying our inventory needs could cause us to incur more expensive transportation charges, which may adversely affect our margins.

 

Our reliance on foreign sources of production poses various risks.

 

In the transition period, we directly imported approximately 16% of our merchandise and much of the merchandise we purchase domestically is made overseas.  Substantially all of our directly imported merchandise is manufactured in Asia.  The majority of these goods are produced in China and Indonesia. Any event causing a sudden disruption of manufacturing or imports from Asia or elsewhere, including the imposition of additional import restrictions, could harm our operations.

 

Because a significant portion of our merchandise is produced overseas, we are subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as:

 

·                  significant delays in the delivery of cargo due to port security considerations;

 

·                  disruption in the operation of the ports where our products are imported;

 

·                  imposition of or increases in duties, taxes or other charges on imports;

 

·                  imposition of new legislation or regulations relating to import quotas or other restrictions that may limit or prohibit merchandise that may be imported into the United States from countries or regions where we do business;

 

·                  financial or political instability in any of the countries in which our merchandise is manufactured;

 

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·                  fluctuation in the value of the U.S. dollar against foreign currencies or restrictions on the transfer of funds;

 

·                  potential recalls or cancellations of orders for any merchandise that does not meet our quality standards;

 

·                  inability to meet our production needs due to raw material or labor shortages;

 

·                  disruption of imports by labor disputes and local business practices;

 

·                  political or military conflict involving the United States, which could cause a delay in the transportation of the Company’s products and an increase in transportation costs;

 

·                  heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; and

 

·                  natural disasters, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas.

 

Any of the foregoing factors, or a combination of them, could have an adverse effect on our business.

 

Our raw material costs may increase, which could negatively impact our profitability.

 

The raw materials used to manufacture our products, in particular cotton, and our transportation and contract manufacturing labor costs are subject to availability constraints and price volatility.  Consequently, higher product costs could have a negative effect on our gross profit margin and increased selling prices could have a negative effect on our sales volume.  We may not be able to pass all or a portion of such higher sourcing costs on to our customers, which could negatively impact our profitability.

 

We rely on independent third party transportation providers for substantially all of our merchandise shipments.

 

We currently rely upon independent third party transportation providers for substantially all of our merchandise shipments, including shipments to our stores, our e-commerce fulfillment center and our e-commerce customers.  Our use of outside delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact a shipper’s ability to provide delivery services that adequately meet our shipping needs.  If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such a change.  Moreover, we may not be able to obtain terms as favorable as those received from independent third party transportation providers we currently use, which would increase our costs.

 

Our business could suffer if one or more of our suppliers fails to comply with applicable laws, including a failure to follow acceptable labor practices.

 

Our suppliers source the merchandise sold in our stores from manufacturers both inside and outside of the United States.  We expect manufacturers of the goods that we sell to operate in compliance with applicable laws and regulations and comply with our social compliance program and, although each of our purchase orders requires adherence to accepted labor practices, applicable laws and compliance with our vendor code of conduct, we do not supervise or control our suppliers or the manufacturers that produce the merchandise we sell.  Our social compliance program is intended to promote ethical business practices, and our staff and the staff of the third party auditing service company periodically visit or inspect the operations of our independent manufacturers to assess compliance with our vendor code of conduct.  Nonetheless, the violation of any labor, immigration, manufacturing safety or other laws by any of our suppliers or their U.S. and non-U.S. manufacturers, such as use of child labor, could damage our brand image or subject us to boycotts by our customers or activist groups.

 

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We have experienced significant management turnover and our future success will depend to a significant extent on our ability to retain the current management team and their ability and that of the current and future chief executive officer to execute a successful business strategy.

 

Over the past two years, we have experienced a number of changes in our executive ranks, including the positions of president and chief executive officer, chief financial officer and head merchant.  Also, our Board of Directors is currently conducting a search for a permanent chief executive officer (“CEO”).  The loss of any of our key personnel could have a material adverse effect on our business, as we may not be able to find suitable individuals to replace them on a timely basis.  In addition, any departures of key management could be viewed in a negative light by investors and analysts, which could cause our common stock price to decline.  Our future success will depend to a significant extent on the current and future CEO and management team’s ability to implement a successful business strategy, to lead and motivate our employees, and to work effectively together.  If this management team is not successful in that regard, our ability to execute our business strategy and tactical initiatives could be adversely affected.  Future turnover within senior management could adversely impact the execution of our business strategies and our results of operations, and it may make recruiting for future management positions more difficult.

 

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

 

Our success depends to a significant extent on our ability to attract, hire, motivate and retain qualified employees, including store personnel.  Competition for experienced managers in the retail industry is considerable, and our operations could be adversely affected if we cannot retain our experienced managers or if we fail to attract additional qualified individuals.  Our performance also depends in large part on the talents and contributions of engaged and skilled associates in all areas of our organization.  The turnover rate in the retail industry’s store operations is high, and qualified individuals of the requisite caliber and number needed to fill open positions may be in short supply in some geographic areas.  If we are unable to identify, hire, develop, motivate and retain talented individuals or if there is a significant increase in employee turnover rates, we may be unable to compete effectively and our business could be adversely impacted.

 

System security risk issues could disrupt our internal operations or information technology systems, and any such disruption could harm our net revenues, increase our expenses and harm our reputation, results of operations and stock price.  In addition, incidents in which we fail to protect our customers’ information against security breaches could result in monetary damages against us and could otherwise damage our reputation, harm our businesses and adversely impact our results of operations.

 

We rely on information systems to manage our operations, including a full range of retail, financial, sourcing and merchandising systems, and regularly make investments to upgrade, enhance or replace these systems.  The reliability and capacity of our information systems are critical.  Despite our preventative efforts, experienced computer programmers and hackers, or even internal users, may be able to penetrate, create systems disruptions or cause shutdowns of our information systems or that of third party companies with which we have contracted to provide payment processing services.  As a result, we could incur significant expenses addressing problems created by these breaches.  This risk is heightened because we collect and store customer information for marketing purposes.  Any limitations imposed on the use of such customer information, whether imposed by federal or state governments or business partners, could have an adverse effect on our future marketing activities.  In addition, any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth.  Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or data breaches.  In addition, sophisticated hardware and operating system software and applications that we buy or license from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the systems.  The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services provided to us, could be significant, and efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

 

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In addition, almost all states have adopted breach of data security statutes or regulations that require notification to consumers if the security of their personal information is breached.  Governmental focus on data security may lead to additional legislative action, and the increased emphasis on information security may lead customers to request that we take additional measures to enhance security.  As a result, we may have to modify our business with the goal of further improving data security, which would result in increased expenses and operating complexity.  Lastly, our reputation may be damaged by any compromise of security, loss or theft of customer data in our possession, which could negatively impact our business, financial condition or results of operations.

 

We depend on a single facility to conduct our operations and distribution of merchandise and our business would suffer a material adverse effect if this facility were shut down or its operations severely disrupted.

 

Our corporate headquarters and our only distribution facility are located in one facility in Plymouth, Minnesota.  Our distribution facility supports our retail stores and supplies merchandise to our third party e-commerce provider.  Virtually all of our merchandise is shipped from our suppliers to the distribution facility and then packaged and shipped to our stores or to our third party e-commerce provider.  Our stores and our third party e-commerce provider must receive merchandise in a timely manner in order to stay current with the fashion preferences of our customers.  If we encounter difficulties associated with the distribution facility or if it were to be shut down for any reason, we could face inventory shortages and delays in shipments.  In addition, much of our computer equipment and all of our senior management, including critical resources dedicated to merchandising, finance and administrative functions, are located at our corporate headquarters.  In the event of a disaster or fire, our management and operations distribution staff would have to find an alternative location, causing further disruption and expense to our business and operations.

 

Although we maintain business interruption and property insurance, management cannot be assured that our insurance coverage will be sufficient or that any insurance proceeds will be timely paid to us if our distribution center or operations were shut down for any unplanned reason.

 

Tightening of credit markets may adversely affect our business.

 

Tightening of the credit markets could make it more difficult for us to enter into agreements for new indebtedness (we had no debt outstanding as of January 28, 2012) or to obtain funding through the issuance of our securities.  Worsening economic conditions could also result in difficulties for financial institutions and other parties that we may do business with, which could potentially impair our ability to access financing under our existing Credit Facility.

 

The sufficiency and availability of our sources of liquidity may be affected by a variety of factors.

 

The sufficiency and availability of our sources of liquidity may be affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which are impacted by consumer acceptance of our merchandise, general economic conditions and the level of consumer discretionary spending; and (ii) our ability to maintain borrowing availability and to comply with applicable covenants contained in our Credit Facility.

 

As a specialty retailer dependent upon consumer discretionary spending, we have been adversely affected by the current economic environment, which has impacted our sales, margins, cash flows, liquidity, results of operations and financial condition.  Our ability to become profitable and to generate positive cash flows is dependent upon many factors, including improvement in economic conditions and consumer spending and our ability to execute successfully our financial plan and strategic initiatives.  There can be no assurance that our cash flows from operations will be sufficient at all times to support our Company without additional financing or credit availability.

 

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Should we be unable to borrow under the Credit Facility in the future, it is possible, depending on the cause of our inability to borrow, that we may not have sufficient cash resources for our operations and our liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations.

 

Our Credit Facility contains borrowing base and other provisions that may restrict our ability to access it.

 

Lower than expected sales that negatively impact our cash flows could require us to borrow under our existing Credit Facility.  Although we currently do not have any borrowings under this facility, we use it periodically for letters of credit, which reduces the amount available for borrowings.  The actual amount of credit that is available from time to time under our Credit Facility is limited to a borrowing base amount that is determined according to the value of eligible inventory, as reduced by certain reserve amounts per the terms of the Credit Facility.  Consequently, it is possible that, should we need to access our Credit Facility, it may not be available in full.  Moreover, under our Credit Facility, we are subject to various covenants and requirements.  Should we be unable to comply with certain of the covenants and requirements in the Credit Facility, we may be unable to borrow under our Credit Facility.

 

Access to additional financing from the capital markets may be limited.

 

Primarily as a result of our operating losses during fiscal 2012, our cash, cash equivalents and short and long-term investments have decreased from $105.6 million at February 26, 2011 to $61.7 million at January 28, 2012.  While we have availability under our Credit Facility to bolster our liquidity, we may need additional capital to fund our operations, particularly if our operating results and cash flows from operating activities do not improve substantially compared to recent periods or if the Credit Facility were unavailable.  The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders.  If we borrow under our Credit Facility or incur other debt, our expenses will increase and we could be subject to additional covenants that may restrict our operating flexibility.  Newly issued securities may have rights, preferences and privileges that are senior or otherwise superior to those of our common stock.  There is no assurance that equity or debt financing will be available in amounts or on terms acceptable to us.  Without sufficient liquidity, we will be more vulnerable to further downturns in our business or the general economy, we may not be able to react to changes in our business or to take advantage of opportunities as they arise and we could be forced to curtail our operations, all of which could result in material adverse consequences to our business, results of operations and financial condition.

 

We do not expect to pay any cash dividends for the foreseeable future.

 

The Company recently suspended the payment of its quarterly dividend.  We do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future.  Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions relating to indebtedness we may incur, restrictions imposed by applicable law and other factors our Board of Directors deems relevant.

 

Our stock price has fluctuated and may continue to fluctuate widely.

 

The market price for our common stock has experienced, and could continue to experience in the future, substantial volatility as a result of many factors.  Failure to meet market expectations, particularly with respect to sales, earnings and same-store sales, would likely result in a decline in the market value of our stock.

 

In addition, stock markets generally have experienced a high level of price and volume volatility and market prices for the stock of many companies, including ours, have experienced wide price fluctuations not necessarily related to their operating performance.

 

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The reported high and low sales prices of our common stock were $7.12 per share and $2.00 per share, respectively, during the transition period.  The current price of our common stock may not be indicative of future market prices.  The fluctuation of the market price of our common stock may have a negative impact on our liquidity and access to capital.  In addition, price volatility of our common stock may expose us to stockholder litigation, which may adversely affect our financial condition, results of operations and cash flows.

 

Failure to comply with legal and regulatory requirements could damage our reputation, financial condition and market price of our stock.

 

We are subject to numerous regulations and laws that govern our operations, marketing and sale of our merchandise, corporate structure, and financial controls and disclosures.  Our policies, procedures and internal controls are designed to comply with those applicable laws and regulations, including those imposed by the SEC and the New York Stock Exchange (“NYSE”), as well as applicable employment and consumer protection laws.  Any changes in regulations, the imposition of additional regulations or the enactment of any new legislation may increase the complexity of the regulatory environment in which we operate and the related cost of compliance.  Failure to comply with such laws and regulations may damage our reputation, impact our financial condition or reduce the market price of our stock.

 

We may be subject to adverse outcomes in current or future litigation matters.

 

We are involved from time-to-time in litigation and other claims against our business.  There are also other types of claims that could be asserted against us based on litigation that has been asserted against others, particularly in the retail industry, such as intellectual property infringement (as discussed below), customer and employment claims, including class action lawsuits claiming violation of federal or state laws.  These matters typically arise in the ordinary course of business but, in some cases, could also raise complex factual and legal issues requiring significant management time and, if determined adversely to the Company, could subject the Company to material liabilities.

 

In recent years, there has been increasing activity by companies which have acquired intellectual property rights but do not practice those rights (sometimes referred to as “patent trolls”) to engage in very broad licensing programs aimed at a large number of companies in a wide variety of businesses, or at retail companies specifically.  These efforts typically involve proposing licenses in exchange for a payment of money and may also include the threat or actual initiation of litigation for that purpose.  Any such litigation can be quite costly to defend, even if unsubstantiated or invalid.  There is one such matter pending against us as to which our third party e-commerce provider has agreed to defend and indemnify us, subject to the terms of our e-commerce agreement with them.  We also receive from time-to-time communications from patent trolls relating to proposed licenses.  It is not possible to predict the impact, if any, of such claims on our business and operations.

 

If, for any reason, we do not meet the NYSE continued listing requirements, our common stock could be delisted.

 

The continued listing requirements of the NYSE require, among other things, that the average closing price of our common stock be above $1.00 for over 30 consecutive trading days, and that our market capitalization meet certain minimum levels.  To date for this calendar year, through March 24, 2012, the lowest closing price for our stock during trading on the NYSE has been $2.02 per share; we have, therefore, been in compliance with the NYSE’s listing requirements.  Should we become non-compliant, we generally would have a specified period of time to cure any non-compliance, and we would intend to take steps to cure any such non-compliance.  If at the end of any cure period, however, we were unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting, which may reduce the liquidity and market price of our common stock and reduce the number of investors willing to hold or acquire our common stock.

 

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Provisions in our charter documents and Delaware law may inhibit a takeover and discourage, delay or prevent stockholders from replacing or removing current directors or management.

 

Provisions in our certificate of incorporation and by-laws may have the effect of delaying or preventing a merger with or acquisition of us, even where the stockholders may consider it to be favorable.  These provisions could also prevent or hinder an attempt by stockholders to replace current directors or management and include:

 

·                  prohibiting cumulative voting in the election of directors;

·                  authorizing the Board to designate and issue “blank check” preferred stock;

·                  limiting persons who can call special meetings of the Board of Directors or stockholders;

·                  prohibiting stockholder action by written consent; and

·                  establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted on by stockholders at a stockholders meeting.

 

Changes in accounting rules and regulations may adversely affect our results of operations.

 

Changes to existing accounting rules or regulations may impact our future results of operations or cause the perception that we are more highly leveraged.  Other new accounting rules or regulations and varying interpretations of existing accounting rules and regulations have occurred and may occur in the future.  For instance, accounting regulatory authorities have indicated that they may begin to require lessees to capitalize operating leases in their financial statements in the next few years.  If adopted, such a change would require us to record a significant amount of lease related assets and liabilities on our balance sheet and make other changes to the recording and classification of lease-related expenses on our statements of operations and cash flow.  This and other future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our results of operations and financial position.

 

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

There are no matters which are required to be reported under Item 1B.

 

ITEM 2.

PROPERTIES

 

Store Locations

 

Our stores are located primarily in shopping malls and retail centers in smaller to mid-sized cities and suburban areas.  Approximately 83% of our stores are located in enclosed malls that typically have numerous specialty stores and two or more general merchandise chains or department stores as anchor tenants.  The remainder of our Christopher & Banks, C.J. Banks and dual stores are located in power, strip and lifestyle shopping centers.  We opened our first outlet stores in fiscal 2011 and operated 25 locations in outlet centers as of March 24, 2012.

 

At March 24, 2012 Christopher & Banks, C.J. Banks, dual and outlet stores averaged approximately 3,300, 3,600, 3,800 and 3,900 square feet, respectively.  Approximately 85% of the total aggregate store square footage is allocated to selling space.

 

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Table of Contents

 

At March 24, 2012, we operated 673 stores in 44 states as follows:

 

 

 

Christopher

 

 

 

 

 

 

 

 

 

State

 

& Banks

 

C.J. Banks

 

Dual

 

Outlet

 

Total Stores

 

Alabama

 

1

 

1

 

 

 

2

 

Alaska

 

 

 

 

 

 

Arizona

 

7

 

 

1

 

 

8

 

Arkansas

 

6

 

1

 

 

 

7

 

California

 

7

 

 

 

 

7

 

Colorado

 

16

 

7

 

1

 

1

 

25

 

Connecticut

 

3

 

 

 

 

3

 

Delaware

 

1

 

 

1

 

 

2

 

Florida

 

8

 

 

 

 

8

 

Georgia

 

3

 

 

1

 

 

4

 

Hawaii

 

 

 

 

 

 

Idaho

 

6

 

2

 

1

 

 

9

 

Illinois

 

16

 

13

 

6

 

1

 

36

 

Indiana

 

16

 

12

 

2

 

1

 

31

 

Iowa

 

15

 

9

 

5

 

1

 

30

 

Kansas

 

10

 

6

 

3

 

1

 

20

 

Kentucky

 

9

 

3

 

1

 

 

13

 

Louisiana

 

 

 

 

 

 

Maine

 

3

 

2

 

 

 

5

 

Maryland

 

6

 

1

 

 

 

7

 

Massachusetts

 

4

 

 

1

 

 

5

 

Michigan

 

21

 

14

 

4

 

2

 

41

 

Minnesota

 

25

 

10

 

6

 

3

 

44

 

Mississippi

 

 

 

 

 

 

 

Missouri

 

12

 

10

 

2

 

1

 

25

 

Montana

 

5

 

2

 

1

 

 

8

 

Nebraska

 

12

 

7

 

 

 

19

 

Nevada

 

 

 

 

 

 

New Hampshire

 

3

 

 

 

 

3

 

New Jersey

 

2

 

 

 

 

2

 

New Mexico

 

2

 

1

 

 

 

3

 

New York

 

15

 

10

 

5

 

 

30

 

North Carolina

 

5

 

1

 

1

 

 

7

 

North Dakota

 

6

 

4

 

 

 

10

 

Ohio

 

27

 

21

 

6

 

2

 

56

 

Oklahoma

 

7

 

1

 

 

1

 

9

 

Oregon

 

5

 

1

 

1

 

1

 

8

 

Pennsylvania

 

30

 

15

 

3

 

2

 

50

 

Rhode Island

 

 

 

 

 

 

South Carolina

 

2

 

 

 

1

 

3

 

South Dakota

 

4

 

1

 

2

 

 

7

 

Tennessee

 

5

 

3

 

4

 

1

 

13

 

Texas

 

11

 

2

 

 

 

13

 

Utah

 

9

 

3

 

 

 

12

 

Vermont

 

2

 

 

 

 

2

 

Virginia

 

10

 

4

 

1

 

 

 

15

 

Washington

 

14

 

6

 

2

 

2

 

24

 

West Virginia

 

6

 

4

 

1

 

 

11

 

Wisconsin

 

17

 

9

 

1

 

4

 

31

 

Wyoming

 

3

 

2

 

 

 

5

 

 

 

397

 

188

 

63

 

25

 

673

 

 

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Table of Contents

 

Store Leases

 

All of our store locations are leased.  Lease terms typically include a rental period of ten years and may contain a renewal option.  Leases generally require payments of fixed minimum rent and contingent percentage rent, calculated based on a percent of sales in excess of a specified threshold.

 

The following table, which covers all of the stores operated by us at March 24, 2012, indicates the number of leases expiring during the periods indicated and the number of such leases with renewal options.  The number of stores with leases expiring in less than twelve months includes those stores which currently are operating on month-to-month terms.

 

 

 

Number of

 

Number with

 

Period

 

Leases Expiring

 

Renewal Options

 

< 12 months

 

218

 

0

 

12-24 months

 

130

 

1

 

25-36 months

 

108

 

2

 

37-48 months

 

75

 

0

 

49-60 months

 

57

 

2

 

> 60 months

 

85

 

12

 

Total

 

673

 

17

 

 

For leases that expire in a given period, we plan to evaluate the projected future performance of each store location prior to lease expiration to determine if we will seek to negotiate a new lease for that particular location.

 

Corporate Office and Distribution Center Facility

 

In fiscal 2002, we purchased our 210,000 square foot corporate office and distribution center facility, located in Plymouth, Minnesota.  Prior to fiscal 2002, we leased this facility.  We utilize the entire facility for our corporate office and distribution center requirements and receive and distribute all of our merchandise for all of our stores through this one facility.  Management believes our corporate office and distribution center facility space is sufficient to meet our requirements for the next year.

 

e-Commerce Web Sites

 

In February 2008, we launched separate e-commerce web sites for our Christopher & Banks and C.J. Banks brands at www.christopherandbanks.com and www.cjbanks.com.  Web site hosting, order taking, customer service and order fulfillment related to our e-commerce operations are outsourced to a third-party provider.

 

ITEM 3.
LEGAL PROCEEDINGS

 

We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business.  Although the amount of any liability that could arise with respect to any current proceedings cannot, in management’s opinion, be accurately predicted, any such liability is not expected to have a material adverse impact on our financial position, results of operations or liquidity.

 

ITEM 4.
MINE SAFETY DISCLOSURES

 

Not applicable.

 

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Table of Contents

 

ITEM 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following table sets forth certain information regarding our executive officers as of March 24, 2012.

 

Name

 

Age

 

Positions and Offices

 

Joel N. Waller

 

72

 

President and Chief Executive Officer

 

Monica L. Dahl

 

45

 

Senior Vice President, Multi-Channel Marketing, Investor Relations and and Business Strategy

 

Luke R. Komarek

 

58

 

Senior Vice President, General Counsel and Corporate Secretary

 

Michael J. Lyftogt

 

43

 

Senior Vice President, Chief Financial Officer

 

Michelle L. Rice

 

37

 

Senior Vice President, Store Operations

 

 

Joel N. Waller was elected Chief Executive Officer effective February 17, 2012. Mr. Waller joined Christopher & Banks on December 14, 2011 as President for a one-year term.  Mr. Waller has more than 30 years of retail experience.  From 2008 to 2010, Mr. Waller served as President of the A.M. Retail Group, a specialty retailer of leather outerwear, accessories and apparel.  From 2005 to 2008, he was the Chief Executive Officer of The Wet Seal, Inc., a specialty retailer of juniors clothing, shoes and accessories.  Prior to that, he was the Chief Executive Officer of Wilsons Leather, a specialty retailer of leather outerwear, accessories and apparel, for approximately twenty years.  Mr. Waller has also served as an executive retail consultant.

 

Monica L. Dahl has served as Senior Vice President, Multi-Channel Marketing, Investor Relations and Business Strategy since November 2011.  From July 2010 through November 2011, Ms. Dahl served as Senior Vice President, e-Commerce, Planning & Allocation, and Strategy.  From August 2008 to July 2010, Ms. Dahl served as Senior Vice President, Planning & Allocation and e-Commerce.  From December 2005 to July 2008, she was Executive Vice President and Chief Operating Officer.  Ms. Dahl served as Vice President of Business Development from November 2004 to December 2005.  Upon joining the Company in May 2004, Ms. Dahl was Director of Business Development.  From January 1993 to April 2004, Ms. Dahl held various positions with Wilsons Leather, including Director of Sourcing; Divisional Merchandise Manager — Women’s Apparel; Director of Merchandise Planning; and several positions in the Finance department.  Ms. Dahl was with Arthur Andersen LLP from December 1987 to December 1992.

 

Luke R. Komarek has served as Senior Vice President, General Counsel since May 2007.  He was named Corporate Secretary in August 2007.  Prior to joining the Company, Mr. Komarek served as General Counsel, Chief Compliance Officer and Secretary at PNA Holdings, LLC and Katun Corporation, an office imaging and parts supplier, from March 2004 to May 2007.  Previously, Mr. Komarek served as Vice President of Legal Affairs and Compliance at Centerpulse Spine-Tech Inc. from February 2003 to March 2004.  Mr. Komarek was employed by FSI International, Inc., a semiconductor equipment company, from 1995 to 2002, most recently serving as Vice President, General Counsel and Corporate Secretary.

 

Michael J. Lyftogt was elected Senior Vice President, Chief Financial Officer in February 2011.  From July 2010 to February 2011 Mr. Lyftogt served as Chief Accounting Officer and Interim Chief Financial Officer.  Prior to his appointment as Chief Accounting Officer in July 2010, he served as Vice President, Finance from March 2006 to July 2010 and was the Company’s Controller from March 1998 through February 2006.  He also served as Interim Chief Financial Officer from December 2008 to June 2009.  Prior to joining the Company, Mr. Lyftogt was Controller for M.F. Bank & Company, Inc.  Mr. Lyftogt also has previous experience in public accounting.

 

Michelle L. Rice has served as Senior Vice President, Store Operations since January 2012.  From February 2011 through January 2012 she was Vice President, Store Operations.  From July 2010 until February 2011, Ms. Rice was Vice President, Stores and from August 2008, when she joined the Company, until July 2010 she was a Regional Vice President.  Ms. Rice has approximately 20 years of retail industry experience.  She was the Regional Sales Director at Fashion Bug, a division of Charming Shoppes, a fashion retailer of missy and plus size apparel, from November 2006 to August 2008 and was a District Operations Manager at TJX Corporation from 2003 to November 2006.

 

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Table of Contents

 

PART II

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the New York Stock Exchange under the symbol “CBK”.  The quarterly high and low closing stock sales price information for our common stock for the transition period and fiscal 2011 is included in the table below.

 

 

 

Market Price

 

Quarter Ended

 

High

 

Low

 

January 28, 2012

 

$

2.86

 

$

2.02

 

November 26, 2011

 

$

4.88

 

$

2.47

 

August 27, 2011

 

$

6.98

 

$

4.42

 

May 28, 2011

 

$

6.74

 

$

5.89

 

February 26, 2011

 

$

6.38

 

$

5.21

 

November 27, 2010

 

$

7.91

 

$

5.15

 

August 28, 2010

 

$

8.92

 

$

6.00

 

May 29, 2010

 

$

10.97

 

$

7.33

 

 

As of March 24, 2012, we had 106 holders of record of our common stock and approximately 4,500 beneficial owners.  The last reported sales price on the NYSE of our common stock on March 24, 2012 was $2.25.

 

In fiscal 2004, our Board of Directors declared our first cash dividend.  The declaration provided for an on-going cash dividend of $0.04 per share to be paid quarterly, subject to Board approval.  In July 2006, our Board of Directors authorized an increase in the quarterly cash dividend to $0.06 per share.  A quarterly dividend was paid each quarter through October 2011 and in December 2011 we announced that our Board of Directors had suspended the payment of a quarterly dividend.

 

The following table sets forth information concerning purchases of our common stock for the periods indicated.

 

 

 

 

 

 

 

Total Number

 

Maximum

 

 

 

 

 

 

 

of Shares

 

Number

 

 

 

 

 

 

 

Purchased as

 

of Shares that May

 

 

 

Total Number

 

Average

 

Part of Publicly

 

Yet Be Purchased

 

 

 

of Shares

 

Price Paid

 

Announced Plans

 

Under the Plans

 

Period

 

Purchased (1)

 

per Share

 

or Programs

 

or Programs

 

 

 

 

 

 

 

 

 

 

 

November 27, 2011 - December 24, 2011

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

December 25, 2011- January 28, 2012

 

736

 

$

2.31

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

736

 

$

2.31

 

 

$

 

 


(1) The shares of common stock in this column represent shares that were surrendered to the Company by stock plan participants in order to satisfy minimum withholding tax obligations related to vesting of restricted stock awards.

 

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Table of Contents

 

Comparative Stock Performance

 

The graph below compares the cumulative total stockholder return on the Company’s common stock (“CBK”) from March 3, 2007 to January 28, 2012 to the cumulative total stockholder return of the S&P 500 Index and the S&P Apparel Retail Index.  The comparisons assume $100 was invested on March 3, 2007 in our common stock, the S&P 500 Index and the S&P Apparel Retail Index and also assumes that any dividends are reinvested.

 

 

23


 


Table of Contents

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following selected financial data has been derived from our audited Consolidated Financial Statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Transition Report on Form 10-K and the Consolidated Financial Statements and related notes appearing in Item 8 of this Transition Report on Form 10-K.  The transition period ended January 28, 2012 consisted of 48 weeks.  All other years presented consisted of 52 weeks.

 

 

 

Fiscal Year Ended

 

 

 

(in thousands, except per share amounts and selected operating data)

 

 

 

Jan. 28,

 

Feb. 26,

 

Feb. 27,

 

Feb. 28,

 

Mar. 1,

 

 

 

2012(1)

 

2011

 

2010

 

2009

 

2008

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

412,796

 

$

448,130

 

$

455,402

 

$

530,742

 

$

560,912

 

Merchandise, buying and occupancy costs

 

311,925

 

292,713

 

289,134

 

341,734

 

341,928

 

Selling, general and administrative expenses

 

131,259

 

142,461

 

138,711

 

172,295

 

161,180

 

Depreciation and amortization

 

20,202

 

24,736

 

25,985

 

26,264

 

21,764

 

Impairment and restructuring

 

21,183

 

2,779

 

2,939

 

4,557

 

411

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(71,773

)

(14,559

)

(1,367

)

(14,108

)

35,629

 

Other income

 

324

 

450

 

728

 

1,809

 

4,662

 

Income (loss) from continuing operations before income taxes

 

(71,449

)

(14,109

)

(639

)

(12,299

)

40,291

 

Income tax provision (benefit)

 

(387

)

8,058

 

(797

)

(4,215

)

14,827

 

Income (loss) from continuing operations

 

(71,062

)

(22,167

)

158

 

(8,084

)

25,464

 

Loss from discontinued operations, net of income tax

 

 

 

 

(4,666

)

(8,446

)

Net income (loss)

 

$

(71,062

)

$

(22,167

)

$

158

 

$

(12,750

)

$

17,018

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.00

)

$

(0.63

)

$

 

$

(0.23

)

$

0.71

 

Discontinued operations

 

 

 

 

(0.13

)

(0.24

)

Earnings (loss) per basic share

 

$

(2.00

)

$

(0.63

)

$

 

$

(0.36

)

$

0.48

 

Basic shares outstanding

 

35,554

 

35,392

 

35,141

 

35,097

 

35,772

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(2.00

)

$

(0.63

)

$

 

$

(0.23

)

$

0.71

 

Discontinued operations

 

 

 

 

(0.13

)

(0.24

)

Earnings (loss) per diluted share

 

$

(2.00

)

$

(0.63

)

$

 

$

(0.36

)

$

0.47

 

Diluted shares outstanding

 

35,554

 

35,392

 

35,234

 

35,097

 

35,852

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.18

 

$

0.24

 

$

0.24

 

$

0.24

 

$

0.24

 

 


(1)  The year ended January 28, 2012 consisted of 48 weeks.  All other years presented consisted of 52 weeks.

 

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Table of Contents

 

 

 

Jan. 28,

 

Feb. 26,

 

Feb. 27,

 

Feb. 28,

 

Mar. 1,

 

 

 

2012(1)

 

2011

 

2010

 

2009

 

2008

 

Balance Sheet Data (at end of each period in thousands):

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

48,442

 

$

76,772

 

$

99,324

 

$

78,814

 

$

78,492

 

Merchandise inventory

 

39,455

 

39,211

 

38,496

 

38,828

 

43,840

 

Long-term investments

 

13,284

 

28,824

 

13,622

 

16,400

 

23,350

 

Total assets

 

166,016

 

234,163

 

267,297

 

290,142

 

311,792

 

Long-term debt

 

 

 

 

 

 

Stockholders’ equity

 

89,362

 

164,229

 

193,730

 

200,223

 

218,827

 

Working capital

 

45,160

 

83,415

 

108,321

 

94,059

 

95,968

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Same-store sales increase (decrease) (2) 

 

(5

)%

(1

)%

(15

)%

(12

)%

1

%

Stores at end of period

 

686

 

775

 

806

 

815

 

837

 

Net sales per gross square foot (3) 

 

$

147

 

$

154

 

$

156

 

$

188

 

$

215

 

 


(1)  The transition period ended January 28, 2012 consisted of 48 weeks.  All other years presented consisted of 52 weeks.

 

(2)  Same store sales data is calculated based on the change in net sales for stores that have been open for more than 13 full months and includes stores, if any, that have been relocated within the same mall.  We typically do not expand or relocate stores within a mall.  Stores where square footage has been changed by more than 25 percent are excluded from the same store sales calculation for 13 full months.  Stores closed during the year are included in the same store sales calculation only for the full months of the year during which the stores were open.  In addition, sales which are initiated in stores but fulfilled through our e-commerce websites are included in the calculation of same store sales.

 

(3) The computation of net sales per gross square foot includes stores which were open for all months of the fiscal year.  Relocated and expanded stores, if any, are included in the calculation.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8 of this Transition Report on Form 10-K.

 

Executive Overview

 

Christopher & Banks Corporation, a Delaware corporation, is a Minneapolis-based retailer of women’s apparel and accessories, which operates retail stores through its wholly owned subsidiaries.  On January 6, 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year will end at the close of business on that Saturday in January or February which falls closest to the last day of January.  Prior to this change, our fiscal year ended at the close of business on that Saturday in February or March which fell closest to the last day of February.  As a result, this Transition Report on Form 10-K covers the transition period consisting of the eleven months (48 weeks) ended January 28, 2012 (“transition period” or “transition year”).  The fiscal years ended February 26, 2011 (“fiscal 2011”) and February 27, 2010 (“fiscal 2010”) each consisted of twelve months (52 weeks).  Therefore, when our results of operations for the transition period are being compared to the results for fiscal 2011, we are comparing results for an 11-month period to results for a 12-month period.  In addition, our fourth quarter for the transition period was shortened to the two-month period ended January 28, 2012.  In this Transition Report on Form 10-K our current fiscal year, the 53-week period ending February 2, 2013, is referred to as “fiscal 2012”.  We believe the change in our fiscal year end will provide certain benefits, including aligning our reporting periods to be more consistent with those of other specialty retail apparel companies.

 

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Table of Contents

 

As of January 28, 2012, we operated 686 stores in 44 states, including 402 Christopher & Banks stores, 199 C.J. Banks stores, 62 dual concept stores and 23 outlet stores.  Our Christopher & Banks brand offers distinctive fashions featuring exclusively designed, coordinated assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P.  Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W.  Our dual concept and outlet stores offer an assortment of both Christopher & Banks and C.J. Banks apparel servicing the petite, missy and women-size customer in one location. We also operate e-Commerce web sites for our two brands at www.christopherandbanks.com and www.cjbanks.com which, in addition to offering the apparel and accessories found in our stores, also offer exclusive sizes and styles available only online.

 

We strive to provide our customers quality apparel at a reasonable price with a consistent fit.  Our overall strategy for our two brands, Christopher & Banks and C.J. Banks, is to offer a compelling, evolving assortment of unique and classic apparel through our stores and e-Commerce web sites in order to satisfy our customers’ expectations for style, quality, value and fit, while providing exceptional, personalized customer service.

 

Transition Period Summary

 

The transition period was extremely challenging for Christopher & Banks as we reported a net loss of $71.1 million, or $2.00 per share.  Customers did not respond favorably to our merchandise assortment throughout the year, but particularly in the third and fourth quarters when we provided more fashion forward product at higher price points.  As a result, same store sales declined 5% for the year and merchandise margins declined by approximately 1,130 basis points when compared to fiscal 2011.  This dramatic reduction in merchandise margins was the result of a considerable increase in promotional activity as we took deeper markdowns to drive sales and clear through slower selling product.  Our merchandise margins were also impacted by year-over-year increases in product costs which we were not able to pass on to our customers, as there was poor acceptance of many of our product offerings at the full retail ticket price.

 

We ended the transition period with cash, cash equivalents, and short and long-term investments of $61.7 million, compared to $105.6 million as of February 26, 2011.  Total inventory was $39.5 million at January 28, 2012, compared to $39.2 million at February 26, 2011.  The increase in inventory was largely due to higher e-commerce inventory and to a shift in payment terms made by the Company in February 2011, which became effective in the second quarter of the transition period.

 

Other Developments

 

Effective February 17, 2012, we announced that our Board of Directors had elected Joel N. Waller as our President and Chief Executive Officer.  Mr. Waller joined Christopher & Banks on December 14, 2011 as President for a one-year term.  Mr. Waller replaced Larry C. Barenbaum, our former Chief Executive Officer, who resigned all positions with the Company, including the position of Director, effective February 17, 2012.  We incurred a pre-tax severance charge of approximately $0.3 million in the first quarter of fiscal 2012 in connection with Mr. Barenbaum’s resignation.  At the same time, we also announced that our Board of Directors had formed a committee to commence a search for a permanent Chief Executive Officer.

 

Our Board elected Lisa W. Pickrum to our Board effective June 1, 2011.  Effective July 27, 2011, Robert Ezrilov’s term as director ended and he retired from the Board.  As of March 24, 2012, the Board consisted of seven directors, all of whom are independent directors.

 

Outlook and Initiatives

 

Our results of operations for the eleven months ended January 28, 2012 reflect difficulties in improving net sales and in maintaining an acceptable gross margin, particularly given the level of our aggressive promotional activity.  We expect these trends will continue into the first and second quarters of fiscal 2012 as highly promotional activity will continue to be required to clear residual holiday/winter merchandise deliveries.  In addition, we anticipate margins will continue to be pressured in the first and second quarters of fiscal 2012 as we do not expect to be able to pass on the full impact of higher product costs to our customers, given the overall resistance of our customers to full retail ticket prices in the second half of the transition period.

 

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Based on our current plans for our next fiscal year, we believe cash flows from operating activities, working capital and borrowing availability under our Credit Facility will be sufficient to meet our operating and capital expenditure requirements for the next twelve months.  While we expect to see a continuation of challenging sales and gross profit margin trends in the first half of our next fiscal year, our operating plan contemplates improvements in net sales per store, operating results and cash flows from operations. The plan is dependent on our ability to consistently deliver merchandise that is appealing to our customer on a competitive and profitable basis and to effectively manage our costs in order to satisfy our working capital and other operating cash requirements.

 

The ability to achieve our operating plan is based on a number of assumptions which involve significant judgment and estimates of future performance.  If our sales, gross margins and operating results continue to fall short of our expectations, we may be required to access some, if not all, of our Credit Facility and potentially require other sources of financing to fund our operations.  We will continue to monitor our performance and liquidity and, if we believe it is appropriate or necessary to borrow under the Credit Facility or obtain additional liquidity, we would anticipate taking further steps intended to improve the Company’s financial position, such as modifying our operating plan, seeking to further reduce costs, decrease our cash spend and/or capital expenditures, as well as evaluating alternatives and opportunities to obtain additional sources of liquidity through the debt or equity markets.  It is possible these actions may not be sufficient or available or, if available, available on terms acceptable to us.

 

Chief Executive Officer

 

Joel N. Waller initially joined Christopher & Banks on December 14, 2011 as President for a one-year term.  On February 17, 2012, Mr. Waller was elected by our Board of Directors as Chief Executive Officer in connection with Larry C. Barenbaum’s resignation as Chief Executive Officer.  Mr. Waller brings extensive retail experience to Christopher & Banks, having served as Chief Executive Officer for Wilsons Leather and The Wet Seal, Inc.  While his initial focus has been on product development, sourcing and merchandising, Mr. Waller also brings significant management and operational experience to our organization that we believe will assist us in revitalizing our business in our efforts to return to profitability.

 

Merchandising

 

In the third quarter of the transition period, we also reestablished the position of Divisional General Merchandise Manager in our merchandise area.  We added two Divisional General Merchandise Managers, one for the Christopher & Banks division and one for the C.J. Banks division.  One of the Divisional General Merchandise Managers was promoted internally, while the other is a new hire.  Both individuals bring strong retail experience and merchandising disciplines to our merchant team.  With the recent addition of our new President and Chief Executive Officer, and the reestablishment of the Divisional General Merchandise Manager positions, we are in the process of reevaluating our merchandising and sourcing strategies.  Our merchant team is currently focused on delivering increased sales and improved gross profit through executing the following initiatives:

 

·Provide a balanced merchandise assortment

 

In the third and fourth quarters of the transition period, the majority of our merchandise assortments consisted of higher-priced, fashion-forward styles.  We provided our customer with too many upscale choices at prices our customers were unwilling to pay.  The result was a significant increase in markdown levels required to compel our customers to purchase and allow us to clear-through slow-selling styles.

 

Our merchants began impacting a portion of our Summer fiscal 2012 product deliveries by editing the number of styles offered and reducing retail ticket prices to levels more in-line with our traditional offerings and more acceptable to our customers.  Going forward, our merchants are focusing on building assortments that are more balanced by increasing the amount of ‘good’ and ‘better’ product offerings and decreasing the number of ‘best’ styles.  This involves increasing the penetration of core product in our deliveries, including basic knit layering pieces and classic bottoms, increasing the representation of mid-priced ‘better’ selections, while reducing the number of higher priced ‘best’ styles.  Our goal is to reduce the overall number of unique styles we carry, which will allow us to present a more focused and compelling product assortment with fewer, more relevant selections.  We expect these efforts will be fully reflected in our September in-store product offerings.

 

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·Reduction and simplification of price points

 

We increased our retail ticket prices in the transition period and our customers failed to respond positively.  The price increases resulted from elevated commodities costs and providing more intricately constructed styles.  Our customers were highly resistant to the increased price points.  As we move forward, our goal is to mitigate markdown levels by offering more attractive opening price points and simplifying the number of price points offered to our customers.

 

The change in our approach to pricing is intended to work hand-in-hand with our ‘good, better, best’ product initiative.  As we increase the penetration of core product offerings in our assortments, we expect to be able to drive sales volume by offering more styles at attractive opening price points that we believe our customers will accept without steep discounting.  In addition, we will reduce the number of price points across all categories to simplify the shopping experience.  Finally, we are committed to offering our customers value.  All styles, including those falling into our ‘better’ and ‘best’ classifications, will be priced at levels that are more attractive to our customers. We believe that this will result in improved sales, reduced markdowns and increased gross profit.

 

·Implement a more targeted promotional cadence and markdown strategy

 

We are analyzing our promotional cadence and adjusting our markdown strategy in an effort to minimize and reverse the significant merchandise margin erosion we experienced in the transition period.  While we anticipate that in order to be competitive we will need to continue to be promotional in fiscal 2012, we are testing and implementing more targeted, unique promotions in an effort to improve merchandise margins and lessen our reliance on storewide promotional events.  In addition, we have adopted a more focused and timely approach to our markdown process that quickly addresses underperforming styles on a unique basis in an effort to utilize our markdowns as efficiently as possible.

 

·Improve product flow, speed to market and reduce lead times

 

Historically we have developed and delivered a full, unique merchandise assortment to our stores on a monthly basis.  In order to simplify and accelerate our product development process, we will reduce the number of major product deliveries in half to six times annually beginning in September 2012.  To maintain product freshness, we will supplement the major deliveries with a consistent flow of replenishment product and select new colors and styles to all stores on an ongoing basis.

 

More robust product testing efforts will also be incorporated into our development process while we work with current and new suppliers to identify opportunities to shorten product lead times and enhance our ability to react quickly to current selling trends in-season.

 

Restructuring/Store Closing Initiative

 

On November 11, 2011, we announced that, following an in-depth analysis of our store portfolio, the Board approved a plan to close approximately 100 stores, most of which were underperforming.  Ultimately, 103 stores were identified for closure, and these closings are expected to positively impact results of operations in our next fiscal year.  This group of stores generated approximately $35 million of sales and store-level operating losses of approximately $11 million, which included approximately $7 million of non-cash impairment charges, on a trailing 12-month basis through January 28, 2012.  Ninety of the 103 stores identified for closure were closed in the transition period, with two closing in November, seven closing in December and 81 closing in January.  We closed five stores in February 2012, six stores in March 2012 and expect to close the remaining two stores by the end of fiscal 2012.

 

In addition to the store closures, we are seeking to restructure the occupancy costs of a majority of our remaining stores and to convert or consolidate a number of existing Christopher & Banks and C.J. Banks stores into dual stores.  In 19 of the centers where we closed stores in the fourth quarter, we converted the remaining sister store into a dual-store location in order to continue to serve all of our missy, petite and women’s plus size customers in those locations.  The store closings resulted in the termination of approximately 27% of our store operations field management team and 14% of our overall full-time and part-time store sales associate positions.  The Company also reduced its corporate office headcount by approximately 15% during the third and fourth quarters of the transition period.

 

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The Company recorded total restructuring and asset impairment charges of approximately $21.2 million in the transition period.  In the third quarter, we recorded $11.4 million of non-cash asset impairment charges, which consisted of approximately $7.4 million of asset impairment charges related to stores identified for closure and a non-cash charge of approximately $4.0 million related to store level asset impairments for stores which the company will continue to operate.  We also recorded a $0.8 million charge in the third quarter related to severance charges for field management and corporate office personnel who were terminated in October 2011 and for field associates who were terminated as a result of the store closures.

 

In the fourth quarter of the transition period, we recorded total restructuring charges of $9.0 million.  Approximately $8.3 million related to accrued lease termination costs associated with the 103 stores identified for closure.  The Company is in the process of negotiating termination agreements with these landlords and expects to settle these liabilities within the next twelve months.  The charge also included approximately $0.4 million of severance charges related to additional terminations at our corporate office and in our field organization and $0.3 million of other miscellaneous store closing costs.  The following table details information related to restructuring and impairment charges recorded during the transition period.

 

 

 

 

 

Lease

 

 

 

 

 

 

 

 

 

Severence

 

Termination

 

Asset

 

 

 

 

 

 

 

Accrual

 

Oligations

 

Impairment

 

Other

 

Total

 

Balance, February 26, 2011

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charge

 

 

 

11,445

 

 

11,445

 

Restructuring charge

 

1,168

 

8,225

 

 

345

 

9,738

 

Total charges

 

1,168

 

8,225

 

11,445

 

345

 

21,183

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash charges

 

 

 

(11,445

)

(106

)

(11,551

)

Deferred lease obligations on closed stores

 

 

3,587

 

 

 

3,587

 

Cash payments

 

(310

)

 

 

(239

)

(549

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 28, 2012

 

$

858

 

$

11,812

 

$

 

$

 

$

12,670

 

 

Real Estate

 

In addition to the store closing/restructuring initiative, we have reevaluated our overall real estate strategy, including converting and combining existing Christopher & Banks and C.J. Banks locations into dual stores and reducing the number of new dual and outlet store openings.  We began the transition period with 517 Christopher & Banks stores, 252 C.J. Banks stores, three dual stores and three Outlet stores.  During the year we opened nine new dual stores, 20 new outlet stores and one new Christopher & Banks store.  In addition to the nine new dual stores requiring a capital investment, we converted 22 dual stores where we combined a Christopher & Banks store and a C.J. Banks store into one of the existing locations.  We also created 29 additional dual stores by adding women’s plus size merchandise to existing Christopher & Banks stores.

 

In the eleven months ended January 28, 2012, we closed a total of 119 stores, including the 90 stores which were part of our store closing initiative.  In addition, we converted 22 dual stores in existing locations where a Christopher & Banks and a C.J. Banks store were converted into one location and, as mentioned above, we created 29 additional dual stores by adding women’s plus size merchandise to existing Christopher & Banks stores.  As a result, we ended the year with 402 Christopher & Banks stores, 199 C.J. Banks stores, 62 dual stores and 23 outlet stores.  For fiscal 2012, we intend to conserve cash by minimizing capital expenditures related to new store openings.  New store projects will be limited to a few strategic repositionings and combinations of existing Christopher & Banks and C.J. Banks stores.  We also intend to open outlet locations in markets where we deem it is strategically important to maintain a store location.

 

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Customer Experience

 

In an effort to drive overall productivity, we continue to strive to enhance our customer experience. We have focused our associates on strengthening our selling culture while providing more knowledgeable selling and personalized service to our customers.  In the transition period, we reintroduced a selling program that includes a significant focus on grass roots connections with our customers and improving our store associates’ product knowledge.  We also continue to strive to deliver exceptional personalized customer service in a warm and inviting store environment.

 

In addition, we continue to refine and add new visual merchandising elements to our stores to maximize merchandise displays to provide more compelling and clearer product messages.  This is intended to drive increased numbers of new and existing customers into our stores through a more organized presentation of merchandise and product outfitting options.

 

Marketing

 

In the transition period, we spent approximately 1.7% of sales on marketing-related efforts, up from approximately 1.5% of sales in fiscal 2011.  In fiscal 2012 we plan to spend slightly less on marketing as a percent of sales than in the transition period.  Our marketing efforts will continue to be focused on strengthening communications with our customers through e-mail and direct mail.  In the transition period, we delivered 10 direct mail pieces and we plan to execute approximately 10 direct mail campaigns again in fiscal 2012.  We utilize a customer relationship management system to track customer transactions and analyze strategic decisions for our e-mail and direct mail initiatives.  In the transition period, we also completed an initiative to develop a stronger brand presence to ensure consistency in the messages we are sending to our customers, including delivering a consistent look and feel across our stores and e-commerce web sites.

 

In fiscal 2011, we launched our Friendship Rewards loyalty program.  Friendship Rewards is a point-based program where members earn points based on purchases.  After reaching a certain level of accumulated points, members are rewarded with a certificate which may be applied towards purchases at our stores or web sites.  The program has helped us to build our customer database and we will continue to refine the program to encourage increased purchases by our Friendship Rewards members.

 

In April 2012, we plan to launch our Christopher & Banks/C.J. Banks private label credit card.  This program will work in conjunction with Friendship Rewards to provide our customers who place purchases on their card with special benefits and incentives.  In addition, we plan to utilize a number of direct mail and e-mail campaigns, along with in-store contests, to promote the new Christopher & Banks/C.J. Banks card.

 

e-Commerce

 

Over the past few years, we have experienced continued growth in our e-commerce sales.  We are focused on continuing to grow this business channel and increase its rate of growth.  During the transition period, we increased our promotional activity in the e-commerce channel to lift customer conversion and increase sales.  We continue to offer extended women’s sizes and petites, plus dresses and outerwear in this channel.

 

Key Performance Indicators

 

Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:

 

Same store sales

 

Our same store sales data is calculated based on the change in net sales for stores that have been open for more than 13 full months and includes stores, if any, that have been relocated within the same mall.  Stores where square footage has been changed by more than 25 percent are excluded from the same store sales calculation for 13 full months.  In addition, stores which are closed and converted to a different store concept resulting in a significant change in the product mix are also excluded from the calculation of same store sales for 13 full months.  Stores closed during the year are included in the same store sales calculation only for the full months of the year the stores were open. In addition, sales which are initiated in stores but fulfilled through our e-Commerce websites are included in the calculation of same store sales.

 

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Management considers same-store sales to be an important indicator of our performance.  Same-store sales results are important in achieving leveraging of costs, including store payroll, store occupancy, depreciation and other general and administrative expenses.  Year-over-year increases in same-store sales contribute to greater leveraging of costs, while declining same-store sales contribute to deleveraging of costs.  Same-store sales results also have a direct impact on our total net sales, cash, cash equivalents, investments and working capital.

 

Merchandise, buying and occupancy costs

 

Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, measure whether we are appropriately optimizing the price of our merchandise.

 

Merchandise, buying and occupancy costs include the cost of merchandise, markdowns, shrink, freight, buyer and distribution center salaries, buyer travel, rent and other occupancy-related costs, various merchandise design and development costs, miscellaneous merchandise expenses and other costs related to our distribution network.

 

Operating income

 

Our management views operating income as a key indicator of our success.  The key drivers of operating income are same-store sales, merchandise, buying and occupancy costs and our ability to control our other operating costs.

 

Store productivity

 

Store productivity measures, including sales per square foot, average unit retail selling price, average number of transactions per store, number of units per transaction, average retail dollars per transaction, customer traffic and conversion rates are evaluated by management in assessing the operational performance of individual stores.

 

Inventory turnover

 

Our management evaluates inventory turnover as a measure of how productively inventory is bought and sold.  Inventory turnover is important as it can signal slow-moving inventory, which can be critical in determining the need to take markdowns on merchandise.  In addition, our Amended and Restated Revolving Credit Facility with Wells Fargo Bank, National Association, contains a financial covenant requiring the company to maintain minimum inventory turns of 2.50 to 1.00 as of the end of each of the four quarters in fiscal 2012 and to maintain minimum inventory turns of 2.70 to 1.00 as of the end of each quarter thereafter.

 

Cash flow and liquidity

 

Management evaluates cash flow from operations, investing activities and financing activities in determining the sufficiency of our cash position.  Cash flow from operations has historically been sufficient to provide for our uses of cash.  We expect to operate our business and execute our strategic initiatives principally with funds generated from operations and, if necessary, from our revolving Credit Facility, subject to compliance with the applicable financial covenants.

 

We experienced challenging sales and gross profit margin trends throughout the transition period and, as a result, our cash and investment balances decreased to $61.7 million as of January 28, 2012 from $105.6 million at February 26, 2011.  The gross profit margin trend is expected to continue at least through the first half of fiscal 2012.  We expect to see potential for margin improvement later in fiscal 2012 as a result of our recent merchandise and sourcing initiatives.  If these initiatives are realized, they also will improve our liquidity in the absence of continued deterioration in our business trends.  Our operating plan contemplates improvements in net sales, operating results and cash flows from operations during fiscal 2012.  The plan is dependent on our ability to consistently deliver merchandise that is appealing to our customer on a competitive and profitable basis and to effectively manage our costs to satisfy our working capital and other operating cash requirements.

 

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While our strategic initiatives for fiscal 2012 are designed to improve sales per-store and operating results overall, their effect has not yet been fully realized.  Given the recent addition of a new Chief Executive Officer and President and the recent addition of two Divisional General Merchandise Managers, we have been reevaluating and implementing changes in our merchandise and sourcing processes and procedures that are intended to improve gross margins.  However, if these initiatives fail to achieve the expected results and our sales, gross margins and operating results continue to fall short of our expectations, our cash flows may not be sufficient to meet our cash requirements at all times in fiscal 2012 and we may need to borrow under the Credit Facility and seek other sources of liquidity.  In order to provide the Company with greater financial flexibility, the Board approved the suspension of the payment of a quarterly dividend, which the Company announced on December 14, 2011.

 

We will continue to monitor our performance and liquidity.  If we believe it is appropriate or necessary to borrow under the Credit Facility or to obtain additional liquidity, we will take further steps intended to improve the Company’s financial position, which could include modifying our operating plan, seeking to further reduce costs, decrease cash spend and/or capital expenditures, or evaluating alternatives and opportunities to obtain additional sources of liquidity through the debt or equity markets. 

 

Results of Operations

 

The following table sets forth consolidated income statement data expressed as a percentage of net sales for the last three fiscal years and should be read in conjunction with “Selected Financial Data” in Item 6 of this Transition Report on Form 10-K.

 

 

 

Eleven Months Ended

 

Twelve Months Ended

 

 

 

January 28,

 

February 26,

 

February 27,

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

Merchandise, buying and occupancy costs

 

75.6

 

65.3

 

63.5

 

Selling, general and administrative expenses

 

31.8

 

31.8

 

30.5

 

Depreciation and amortization

 

4.9

 

5.5

 

5.7

 

Impairment & restrucuring charges

 

5.1

 

0.6

 

0.6

 

Operating loss

 

(17.4

)

(3.2

)

(0.3

)

Other income, net

 

0.1

 

0.1

 

0.1

 

 

 

 

 

 

 

 

 

Operating loss

 

(17.3

)

(3.1

)

(0.2

)

Income tax provision (benefit)

 

(0.1

)

1.8

 

(0.2

)

 

 

 

 

 

 

 

 

Net loss

 

(17.2

)

(4.9

)

(0.0

)

 

The Transition Period Compared to Fiscal 2011

 

The results below are for the 48-week period ended January 28, 2012, compared to the 52-week period ended February 26, 2011, as a result of our fiscal year-end change.  The transition period was an 11-month year and many of the differences on comparisons in the reported results are directly impacted by this one month difference.

 

Net Sales.  Net sales for the 48-week period ended January 28, 2012 were $412.8 million, a decrease of $35.3 million or 7.9%, from net sales of $448.1 million for the 52-week period ended February 26, 2011.  Approximately $22 million of the decrease was due to the change in our fiscal year, referred to above.  A 5% decrease in same store sales for the eleven months ended January 28, 2012 also contributed approximately $21 million of the decline in sales.

 

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The Company also operated fewer stores during the transition period compared to fiscal 2011.  The factors above were offset by a smaller increase in the liability related to points and reward certificates earned by customers in conjunction with our Friendship Rewards loyalty program during the transition period as compared to fiscal 2011.  In addition, the Company reported an approximate $6 million increase in e-Commerce revenues for the 11 months ended January 28, 2012, compared to the 12 months ended February 26, 2011.

 

The 5% decrease in same store sales was largely a result of a decrease in average transaction value as the number of transactions per store was essentially flat in the transition period, as compared to fiscal 2011.  Transaction values declined as customers purchased fewer units per transaction at a slightly lower average selling price per unit.  The Company operated 686 stores as of January 28, 2012, compared to 775 stores as of February 26, 2011.

 

Merchandise, Buying and Occupancy Costs.  Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $311.9 million, or 75.6% of net sales in the transition period, compared to $292.7 million, or 65.3% of net sales, in fiscal 2011, resulting in an approximate 1020 basis point decrease in our gross profit margin during the year, which was primarily a result of declines in our merchandise margins.

 

Merchandise margins declined approximately 1,040 basis points in the transition period primarily due to an 870 basis point increase in markdowns as a percentage of net sales.  Promotional activity was increased considerably as we took deeper markdowns to drive sales and clear through slower selling product due to poor customer acceptance of our merchandise at its full ticket or a slightly reduced retail price.  Our merchandise margins were also impacted in the transition period by year-over-year increases in product costs related to improvements in garment construction and enhanced styling elements, along with higher prices for cotton and synthetic fibers and increased production labor and transportation costs.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the fiscal year ended January 28, 2012 were $131.3 million, or 31.8% of net sales, compared to $142.5 million, or 31.8% of net sales, for the fiscal year ended February 26, 2011.

 

In addition to a reduction in costs directly related to our shortened eleven-month transition period, compared to our 12-month fiscal 2011, the following factors impacted selling general and administrative expenses for the transition period when compared to the previous fiscal year.  Approximately $1.5 million of severance expense related to the termination of our former CEO and CFO, who left the Company during fiscal 2011, were included in fiscal 2011 selling, general and administrative expenses.  Medical claims and workers compensation insurance expense were both lower as a percentage of sales for the 11-month period ended January 28, 2012, compared to the 12-month period ended February 26, 2011, due to a reduction in claims incurred and paid during fiscal 2012.  These savings were offset by higher store selling salaries and increased e-commerce related expenses which experienced deleverage with the 5% decrease in same store sales in the transition period compared to fiscal 2011.

 

Depreciation and Amortization.  Depreciation and amortization expense was $20.2 million, or 4.9% of net sales, in the transition period, compared to $24.7 million, or 5.5% of net sales, in fiscal 2011.  The decrease in the amount of depreciation and amortization expense primarily resulted from a reduction in our depreciable asset base related to asset impairment charges of $11.4 million and $2.8 million recorded in the transition period and fiscal 2011, respectively, as well as an approximate $1.7 million reduction in expense related to the shortened 11-month transition period.

 

Impairment and Restructuring.  In the transition period, we recorded approximately $21.2 million of expenses related to asset impairment and restructuring charges.  The charge included $11.4 million of asset impairment charges related to approximately 100 stores, most of which were underperforming, which were closed in the fourth quarter of the transition period or will be closed early in fiscal 2012.  We also recorded approximately $8.3 million related to lease termination accruals for stores which were closed during the fourth quarter of the transition period and severance charges of approximately $1.2 million related to positions which were eliminated in our corporate office and field management organization, as well as positions related to closed stores.

 

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In addition, we recorded approximately $0.3 million of other miscellaneous store closing costs in the fourth quarter of the transition period.  In fiscal 2011, we recorded non-cash asset impairment charges of $2.8 million in the fourth quarter.

 

Operating Loss.  As a result of the foregoing factors, we reported an operating loss of $71.7 million, or 17.4% of net sales, for the 48 weeks ended January 28, 2012, compared to an operating loss of $14.6 million, or 3.2% of net sales, for the 52 weeks ended February 26, 2011.

 

Other Income. Other income for the 11-month period ended January 28, 2012 included interest income of approximately $0.2 million and gain on investments of approximately $0.1 million.  For the fiscal year ended February 26, 2011, other income included interest income of approximately $0.4 million and gains on investments of approximately $40,000.

 

Income Taxes.  We recorded an income tax benefit of approximately $0.4 million, with an effective tax rate of 0.5%, for the 11-month period ended January 28, 2012.  We recorded income tax expense of $8.1 million, with an effective tax rate of (57.1) %, for the twelve-month period ended February 26, 2011.  Income tax expense for fiscal 2011 reflects a non-cash charge of $10.6 million to establish a full valuation allowance on our net deferred tax assets.  Our effective tax rate for the transition period reflects the ongoing impact of the full valuation allowance on our net deferred tax assets.

 

Net Loss.  As a result of the foregoing factors, we reported a net loss of $71.1 million, or 17.2% of net sales, for the eleven months ended January 28, 2012, compared to a net loss of $22.2 million, or 4.9% of net sales, for the 12-months ended February 26, 2011.

 

Fiscal 2011 Compared to Fiscal 2010

 

Net Sales.  Net sales for the 52-week period ended February 26, 2011 were $448.1 million, a decrease of $7.3 million or 1.6%, from net sales of $455.4 million for the 52-week period ended February 27, 2010.  The decrease in our net sales resulted from a 1% decrease in same store sales, combined with a decrease in the number of stores operated during fiscal 2011 as compared to fiscal 2010.  In addition, revenue declined by approximately $2.9 million due to a reduction in net sales related to accrued unearned revenue for points accumulated by customers and certificates issued in conjunction with the Company’s Friendship Rewards loyalty program, which was established in early fiscal 2011.  The decrease in net sales was partially offset by increases in revenues at our Christopher & Banks and C.J. Banks e-commerce web sites in fiscal 2011.

 

The number of average transactions per store was essentially flat in the first and second quarters of fiscal 2011, compared to the first two quarters of fiscal 2010, as declines in customer traffic were offset by increases in the rate of customer conversion.  The number of average transactions per store decreased approximately 7% in the third quarter of fiscal 2011 and increased approximately 4% in the fourth quarter of fiscal 2011, when compared to corresponding periods in fiscal 2010.  Average transaction values were higher in the first and second quarters, flat in the third quarter and lower in the fourth quarter of fiscal 2011, as compared to the same periods in fiscal 2010.  Average selling prices declined throughout the year.  Improved selling at full price in the first quarter gave way to sequentially increased promotional activity during the year and a reduced average selling price per unit in the second, third and fourth quarters as customers did not respond favorably to the Company’s fall, holiday and spring merchandise assortments.

 

The Company operated 775 stores as of February 26, 2011, compared to 806 stores as of February 27, 2010.

 

Merchandise, Buying and Occupancy Costs.  Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $292.7 million, or 65.3% of net sales, in fiscal 2011, compared to $289.1 million, or 63.5% of net sales, in fiscal 2010, resulting in an approximate 180 basis point decrease in our gross profit margin during the year.

 

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Our merchandise margins decreased by approximately 310 basis points in fiscal 2011 as lower markdown levels in the first quarter were replaced by significantly increased markdowns and promotional activity in the second, third and fourth quarters while we worked to increase net sales and clear less desirable fall, holiday and spring product assortments.  Inventory per store was up approximately 4%, excluding e-commerce inventory, at the end of fiscal 2011 as compared to the end of fiscal 2010.  The decline in merchandise margin was partially offset by approximately 130 basis points of positive leverage of buying and occupancy costs driven mainly by lower rent expense.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the fiscal year ended February 26, 2011 were $142.5 million, or 31.8% of net sales, compared to $138.7 million, or 30.5% of net sales, for the fiscal year ended February 27, 2010, resulting in a 130 basis point increase as a percent of net sales in fiscal 2011, as compared to fiscal 2010.

 

The increase in selling, general and administrative expenses during fiscal 2011 was largely due to higher severance costs as we recorded total charges of approximately $1.5 million related to our former Chief Executive Officer and Chief Financial Officer.  In addition, increases in the amount of medical claims and marketing expenditures were partially offset by decreased store payroll and bonus expense. Selling, general and administrative expenses in the second quarter of fiscal 2010 included pre-tax, non-recurring benefits of approximately $1.2 million related largely to legal and contract settlements.

 

Depreciation and Amortization.  Depreciation and amortization was $24.7 million, or 5.5% of net sales, in fiscal 2011, compared to $26.0 million, or 5.7% of net sales, in fiscal 2010.  The decrease in the amount of depreciation and amortization expense primarily resulted from a reduction in our depreciable asset base related to asset impairment charges of $2.8 million and $2.9 million recognized in fiscal 2011 and fiscal 2010, respectively.

 

Impairment of Store Assets.  In the fourth quarter of fiscal 2011, we recorded long-lived store-level asset impairment charges of $2.8 million related to underperforming Christopher & Banks and C.J. Banks stores, compared to $2.9 million of store-level asset impairment charges in fiscal 2010.  A portion of the asset impairment charges recognized in fiscal 2011 and fiscal 2010 related to accelerated depreciation on the remaining book value of underperforming stores to be closed in the first half of the transition period and fiscal 2011, respectively.

 

Operating Loss.  As a result of the foregoing factors, we reported an operating loss of $14.6 million, or 3.2% of net sales, for the 52 weeks ended February 26, 2011, compared to an operating loss of $1.4 million, or 0.3% of net sales, for the 52 weeks ended February 27, 2010.

 

Other Income.  For the fiscal year ended February 26, 2011, other income included interest income of approximately $0.4 million and gains on investments of approximately $40,000.  For the fiscal year ended February 27, 2010, other income included interest income of approximately $0.4 million and gains on investments of approximately $0.3 million.

 

Income Taxes.  We recorded income tax expense of $8.1 million, with an effective tax rate of (57.1) %, in fiscal 2011, compared to an income tax benefit of $0.8 million, with an effective tax rate of 124.7%, in fiscal 2010.  Income tax expense for fiscal 2011 reflects the establishment of a full valuation allowance on our net deferred tax assets.  During fiscal 2011, we evaluated all of the positive and negative evidence related to our ability to utilize our deferred tax assets.  Based on a lack of positive evidence to offset the negative evidence provided by our three year cumulative operating loss, we recorded a non-cash valuation allowance of $14 million.  Our effective tax rate in fiscal 2011 was significantly impacted by the recognition of the full valuation allowance on our net deferred tax assets, while small discrete tax items and state tax considerations had a significant impact on our annual effective tax rate in fiscal 2010 due to our near break-even operating results.

 

Net Income (Loss).  As a result of the foregoing factors, we reported a net loss of $22.2 million, or 4.9% of net sales, for the twelve months ended February 26, 2011, compared to net income of $0.2 million, or 0.0% of net sales, for the twelve months ended February 27, 2010.

 

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Liquidity and Capital Resources

 

Our operating losses in our transition period have begun to challenge our capital resources, with net cash used in operating activities for the eleven months ended January 28, 2012 totaling $25.9 million, compared to net cash provided by operating activities of $7.8 million for the twelve months ended February 26, 2011.  Management evaluates cash flow from operations, investing activities and financing activities in determining the sufficiency of our cash position.  Cash flow from operations has historically been sufficient to provide for our uses of cash.  We expect to operate our business and execute our strategic initiatives principally with funds generated from operations and, if necessary, from our revolving Credit Facility, subject to compliance with the applicable financial covenants.  While we expect to see a continuation of challenging sales and gross profit margin trends into fiscal 2012, our operating plan contemplates improvements in net sales, operating results and cash flows from operations.  The operating plan is dependent on our ability to consistently deliver merchandise that is appealing to our customer on a competitive and profitable basis and to effectively manage our costs to satisfy our working capital and other operating cash requirements.

 

The ability to achieve our operating plan is based on a number of assumptions which involve significant judgment and estimates of future performance.  While our strategic initiatives are designed to improve sales and operating results, they are still in their early stages, and our overall operating results have fluctuated significantly.  Our cash flows and other sources of liquidity may not be sufficient to meet our cash requirements at all times in fiscal 2012 if we fail to complete these objectives or achieve our estimated levels of performance.

 

We will continue to monitor our performance and liquidity and, if we believe it is appropriate or necessary to obtain additional liquidity, we will take further steps intended to improve the Company’s financial position, such as by modifying our operating plan, seeking to further reduce costs, decreasing cash spend and/or capital expenditures and evaluating alternatives and opportunities to obtain additional sources of liquidity through the debt or equity markets.  We cannot be assured that any of these actions would be sufficient or available or, if available, available on terms acceptable to us.

 

The following summarizes our cash flows from each of the past three fiscal years (in thousands):

 

 

 

Eleven

 

Twelve

 

 

 

Months Ended

 

Months Ended

 

 

 

January 28,

 

February 26,

 

February 27,

 

 

 

2012

 

2011

 

2010

 

Net cash (used in) provided by operating activities

 

$

(25,880

)

$

7,793

 

$

31,346

 

Net cash (used in) provided by investing activities

 

29,515

 

7,107

 

(64,571

)

Net cash (used in) provided by financing activities

 

(6,565

)

(8,261

)

(8,516

)

Net increase (decrease) in cash and cash equivalents

 

$

(2,930

)

$

6,639

 

$

(41,741

)

 

Net cash provided by (used in) operating activities

 

Net cash used in operating activities totaled $25.9 million in the transition period, a decrease of $33.7 million from cash provided by operating activities of $7.8 million in fiscal 2011.  The decrease was largely due to the increase in net loss between the transition period and fiscal 2011.  We reported a net loss of $71.1 million for the eleven months ended January 28, 2012, compared to a net loss of $22.2 million for the year ended February 27, 2011.

 

Significant fluctuations in our working capital accounts in the transition period included a $5.1 million decrease in income taxes receivable, a $4.4 million decrease in deferred lease incentives, a $4.7 million increase in accrued liabilities and an $8.0 million increase in total accrued lease termination fees.  The decrease in income taxes receivable resulted from the receipt of income tax refunds in the transition period related to overpayments made in fiscal 2011.  Lease termination fees accrued liabilities increased as a result of recording an $11.8 million accrual related to lease termination accruals on stores which were closed in the fourth quarter of the transition period.  Additionally, accrued salaries, wages and related expenses decreased due to a $1.5 million decrease in the accrued vacation liability.  The decrease in deferred lease incentives relates to the write-off of unamortized tenant allowances associated with stores closed during the transition period, as well as amortization of tenant allowances on stores continuing to operate.

 

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The remainder of the change in cash provided by operating activities in the transition period was substantially the result of the net loss of $71.1 million, after adjusting for non-cash charges, including depreciation and amortization expense, store-level asset impairment charges, adjustments to deferred income taxes, stock-based compensation expense, loss on the disposal of furniture, fixtures and equipment and losses on investments, combined with various changes in our other operating assets and liabilities.

 

Net cash provided by investing activities

 

Net cash provided by investing activities in the transition period was $29.5 million, an increase of $22.4 million from $7.1 million in fiscal 2011.  Activity for the eleven months ended January 28, 2012 included approximately $41.1 million of net redemptions of investments, offset by $11.7 million of capital expenditures.  We opened 30 new stores during the transition period and also made technology-related and other investments in our stores, corporate office and distribution center facility during the transition period ended January 28, 2012.

 

We expect to fund approximately $6 million of capital expenditures in our next fiscal year to open approximately seven new stores, to invest in product displays and fixtures at all stores to enhance the visual presentation of our merchandise and to make other investments in our stores, corporate office and distribution center and information technology infrastructure.

 

Net cash used in financing activities

 

Net cash of $6.6 million was used in financing activities in the transition period, a decrease of $1.7 million from fiscal 2011.  In the transition period, we declared and paid three quarterly cash dividends of $0.06 per share and paid approximately $0.1 million in payroll taxes related to shares which were surrendered to the Company by stock plan participants in order to satisfy withholding tax obligations related to the vesting of restricted stock awards.  On December 14, 2011, we announced that the Board of Directors suspended the payment of a quarterly cash dividend.

 

Credit facility

 

We maintain an Amended and Restated Revolving Credit Facility (the “Credit Facility” or “Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”).  The Credit Facility provides us with revolving credit loans and letters of credit of up to $50 million, in the aggregate, subject to a borrowing base formula based on inventory levels.

 

On June 29, 2011, we entered into the Sixth Amendment to the Credit Facility (the “Sixth Amendment”) with Wells Fargo.  The Sixth Amendment extended the maturity date of the Credit Facility by three years from June 30, 2011 to June 30, 2014.  In addition, the Sixth Amendment changed the interest calculation under the Credit Facility.  Previously, interest was calculated based on either the prime rate minus 0.25% or the one, three or six month London Interbank Market Offered Rate (“LIBOR”) based on the length of time the corresponding advance was outstanding.  Under the Sixth Amendment, interest is calculated based on the three month LIBOR plus 2.0%, reset daily.

 

We entered into the Seventh Amendment to the Credit Facility (the “Seventh Amendment”) with Wells Fargo on January 25, 2012.  Under the Seventh Amendment Wells Fargo consented to our change in fiscal year end to the Saturday closest to January 31 as approved by our Board of Directors on January 6, 2012 and effective with the transition period ending January 28, 2012.

 

On March 22, 2012, we entered into the Eighth Amendment to the Credit Facility (the “Eighth Amendment”) with Wells Fargo.  The Eighth Amendment addressed certain terms and financial covenants of the Credit Facility, including reducing the minimum required inventory turns ratio from 2.70 to 1.00, to 2.50 to 1.00 for each quarter during fiscal 2012.  The minimum required inventory turns ratio then reverts back to 2.70 to 1.00 for each fiscal quarter ending after February 2, 2013.

 

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In addition, the Eighth Amendment adjusted the minimum required cash on hand to $20.0 million at the end of the first and second quarters of fiscal 2012 and $25.0 million at the end of each quarter thereafter.  The Eighth Amendment also adjusted the maximum line amount available between December 1 and August 31 of each calendar year of the Facility to the lesser of 85% of the net orderly liquidation value of eligible inventory, as defined in the Facility, or 70% of eligible inventory and between September 1 and November 30 of each calendar year of the Facility to the lesser of 90% of the net orderly liquidation value of eligible inventory or 80% of eligible inventory.

 

Interest under the Credit Facility is payable monthly in arrears.  The Credit Facility carries a facility fee of 0.25%, based on the unused portion as defined in the agreement, a collateral monitoring fee and a guaranteed service charge.  Borrowings under the Credit Facility are collateralized by our equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights.  We had no revolving credit loan borrowings under the Credit Facility during the transition period or fiscal 2011.  Historically, we have utilized the Credit Facility only to open letters of credit.  The borrowing base at January 28, 2012 was $13.1 million.  As of January 28, 2012, we had open on-demand letters of credit in the amount of $3.5 million.  Accordingly, the availability of revolving credit loans under the Credit Facility was $9.6 million at January 28, 2012.

 

The Credit Facility contains certain restrictive covenants, including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants.  As of January 28, 2012, the most recent measurement date, we were in compliance with all financial covenants under the Credit Facility and, based on the provisions of the Eighth Amendment, we anticipate we will be in compliance with all financial covenants of the Credit Facility at the end of each quarter in fiscal 2012.  While we do not currently anticipate the need to borrow against our Credit Facility in fiscal 2012, failure to remain in compliance with the financial covenants could constrain our operating flexibility and our ability to fund our business operations through use of the Credit Facility.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at January 28, 2012 (in thousands):

 

 

 

 

 

Payments Due In

 

 

 

 

 

Less Than

 

 

 

 

 

More Than

 

Contractual Obligations

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital lease obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

153,024

 

40,043

 

59,496

 

30,937

 

22,548

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

153,024

 

$

40,043

 

$

59,496

 

$

30,937

 

$

22,548

 

 

The table above does not include possible payments for uncertain tax positions.  Our reserve for uncertain tax positions, excluding interest and penalties, was approximately $0.9 million at January 28, 2012.  Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of cash payments that may be required to settle these liabilities.

 

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Our contractual obligations include operating leases for each of our retail store locations and vehicles.  The amount for operating leases reflected in the table above includes future minimum rental commitments only and excludes common area maintenance charges, real estate taxes and other costs associated with operating leases.  These types of costs, which are not fixed and determinable, totaled $25.0 million, $29.6 million and $33.7 million in the transition period, 2011 and 2010, respectively.  The Company has recorded liabilities of $3.8 million within current liabilities and $8.0 million within long-term liabilities related to future lease payments, net of assumed sublease rentals, related to stores which the Company closed in the fourth quarter of the transition period.  Future minimum lease payments on these leases are included in the table above.  The Company is in the process of negotiating termination agreements with these landlords and expects to settle these liabilities within the next twelve months.

 

At January 28, 2012, we had no other contractual obligations relating to short or long-term debt, capital leases or non-cancelable purchase obligations.  In addition, we had no contractual obligations relating to the other liabilities recorded in our balance sheet under accounting principles generally accepted in the United States of America.  As of January 28, 2012, our other liabilities consisted solely of deferred rent, deferred lease incentives and deferred income taxes.

 

Off-Balance Sheet Obligations

 

We do not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Related Party Transactions

 

The Company or its subsidiaries have for the past several years purchased goods from G-III Apparel Group Ltd. (“G-III”) or its related entities.  On January 3, 2011, Morris Goldfarb, the Chairman of the Board and Chief Executive Officer of G-III, became a director of the Company.  In the transition period and fiscal 2011, the purchases made by the Company and its subsidiaries from G-III and its related entities aggregated approximately $2.5 million and $0.3 million, respectively.  As of January 28, 2012, the Company had a balance due to G-III or its related entities of approximately $27,000.

 

Other than the relationship noted above, related party transactions are limited to employment or other agreements with certain of our current and former officers, all of which have been previously disclosed.

 

Sourcing

 

We directly imported approximately 16% of our merchandise purchases in the transition period compared to approximately 12% in both fiscal 2011 and fiscal 2010.  A significant amount of our merchandise was manufactured overseas in each of these fiscal years, primarily in China and Indonesia.  In the transition period and fiscal 2011, approximately 7% and 12% of our merchandise was manufactured in the United States.  This reliance on sourcing from foreign countries may cause us to be exposed to certain risks as indicated below and in Part I, “Item 1A. Risk Factors” in this Transition Report on Form 10-K.

 

Import restrictions, including tariffs and quotas, and changes in such restrictions, could affect the importation of apparel and might result in increased costs, delays in merchandise receipts or reduced supplies of apparel available to us, and could have an adverse effect on our financial conditions, results of operations and liquidity.  Our merchandise flow could also be adversely affected by political instability in any of the countries where our merchandise is manufactured or by changes in the United States government’s policies toward such foreign countries.  In addition, merchandise receipts could be delayed due to interruptions in air, ocean and ground shipments.

 

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We do not have long-term purchase commitments or arrangements with any of our suppliers or agents.  Our ten largest vendors represented approximately 55%, 77% and 74% of our total merchandise purchases in the transition period, 2011 and 2010, respectively.  Purchases from one of our suppliers accounted for approximately 19% of our purchases during the transition period and no other vendor provided greater than 10% of our merchandise purchases for the eleven-month period ended January 28, 2012. The same vendor supplied us with approximately 27% of our merchandise purchases during fiscal 2011 and two additional vendors supplied us with 15% and 12% of our merchandise, respectively, during fiscal 2011.  During the fiscal year ended February 27, 2010, our three largest vendors supplied us with 27%, 15% and 12% of our purchases, respectively.  These vendors produce the majority of the goods sold to us in China and Indonesia, consistent with our overall vendor base.  Although we have strong relationships with these vendors, there can be no assurance that these relationships can be maintained in the future or that these vendors will continue to supply merchandise to us.  If there should be any significant disruption in the supply of merchandise from these vendors, management believes that it will be able to shift production to other suppliers so as to continue to secure the required volume of product.  Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on our financial position or results of operations.

 

We are analyzing all aspects of our product development and sourcing practices to identify opportunities to simplify and accelerate the process.  Improving speed to market is one of our critical initiatives in fiscal 2012 to help increase sales and gross profit by allowing us to react more quickly to current selling trends in-season.  We imported approximately 16% of our merchandise purchases directly from overseas manufacturers during the transition period, which resulted in longer product lead times.  Going forward we anticipate we will be working with a number of domestically-based apparel importers and manufacturers who can typically address and fill orders faster than overseas manufacturers.  In addition, we intend to concentrate more of our merchandise purchases with fewer key suppliers in our next fiscal year to become more significant to our vendor base.  We believe this will allow us to achieve better pricing by leveraging larger order quantities and receive faster delivery times from these key vendors.  We also plan to continue to streamline and reduce costs related to our inbound supply chain including renegotiating contracts and consolidating service providers for ocean freight, customs brokerage services and truck and rail transportation.

 

Our merchandise costs throughout the transition period were impacted by higher prices for cotton and synthetic fibers, along with increased production labor and transportation costs.  Although we passed some of these price increases on to our customers in the transition period, there was resistance to the higher prices.  As a result, we intend to increase our efforts to provide quality merchandise to our customers at an attractive price, which will likely result in continued pressure on merchandise margins in fiscal 2012.  While product costs remain elevated in the beginning of fiscal 2012, we currently expect product costs to begin to decline in the second quarter of fiscal 2012, as compared to the second quarter of the transition period, and to continue to trend below transition period levels during the remainder of fiscal 2012.

 

Seasonality

 

Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, and shifts in the timing of certain holidays and shifts in the timing of promotional events.

 

Inflation

 

Our merchandise costs throughout the transition period were impacted by higher prices for cotton and synthetic fibers, along with increased production labor and transportation costs.  Although we passed some of these price increases on to our customers in the transition period, there was resistance to higher prices.  As a result, we intend to increase our efforts to provide quality merchandise to our customers at an attractive price, which will likely result in continued pressure on merchandise margins.  Management does not believe that inflation had a material effect on our results of operations in fiscal 2010 or fiscal 2011.

 

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Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements and related Notes, which have been prepared in accordance with generally accepted accounting principles used in the United States of America.  The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during a reporting period.  Management bases its estimates on historical experience and various other assumptions that we believe to be reasonable.  As a result, actual results could differ because of the use of these estimates and assumptions.

 

Our significant accounting policies can be found in Note 1 to the consolidated financial statements contained in Item 8 of this Transition Report on Form 10-K.  We believe the following accounting policies, which rely upon making certain estimates and assumptions, are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

 

Inventory valuation

 

Our merchandise inventories are stated at the lower of cost or market utilizing the retail inventory method.  We manage our inventory levels and use markdowns to clear merchandise.  We base the decision to mark down merchandise on a number of factors including the current rate of sale, quantity on hand, and age of the inventory.  We estimate and record a reserve for future markdowns necessary to liquidate aged inventory.  We regularly compare actual markdowns taken against previous estimates and factor these results into future estimates.

 

Long-lived assets

 

We review long-lived assets with definite lives annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This review includes the evaluation of individual under-performing stores and assessing the recoverability of the carrying value of the assets related to the store.  Future cash flows are projected for the remaining lease life considering such factors as future sales levels, operating income, changes in occupancy expenses other than base rent and other expenses, as well as the overall operating environment specific to that store.  If the estimated undiscounted future cash flows are less than the carrying value of the assets, we record an impairment charge equal to the difference between the assets’ fair value and carrying value.

 

Fair value is determined by a discounted cash flow analysis.  In determining future cash flows, we use our best estimate of future operating results and utilize market participant based assumptions.  In the transition period, consistent with our operating plans, we assumed gradual sales improvements in each of the next three fiscal years.  Future growth in same-store sales beyond three years was based on our historical same-store sales growth rates.  In situations where estimated future undiscounted store cash flows were less than the carrying value of store assets, fair value was determined using discounted cash flows.

 

As the projection of future cash flows involves the use of significant estimates and assumptions, including estimated sales and expense levels and selection of an appropriate discount rate, differences in circumstances or estimates could produce different results.  The current challenging economic environment, combined with the continued instability in the housing market, higher levels of unemployment and continued general economic uncertainty affecting the retail industry, make it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.

 

We recorded long-lived store-level asset impairment charges of approximately $11.4 million, $2.8 million and $2.9 million in the transition period, 2011 and 2010, respectively, related to underperforming Christopher & Banks and C.J. Banks store locations.

 

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Customer loyalty program

 

During the first quarter of fiscal 2011, we launched our Friendship Rewards loyalty program. Under the program, customers accumulate points based on purchase activity.  Once a Friendship Rewards member achieves a certain point level, the member earns awards certificates that may be redeemed for merchandise.  Points are accrued as unearned revenue and recorded as a reduction of net sales and a current liability as they are accumulated by members and certificates are earned.  A liability of $3.4 million as of January 28, 2012 and $2.9 million as of February 26, 2011 is included in other accrued liabilities on our consolidated balance sheet and is recorded net of estimated breakage based on redemption patterns and trends.  Revenue and the related cost of sales are recognized upon redemption of the reward certificates, which expire approximately six weeks after issuance.

 

Lease termination costs

 

Discounted liabilities for future lease costs and the fair value of related subleases of closed locations are recorded when the stores are closed prior to the expiration of the lease or execution of a lease termination agreement.  In assessing the discounted liabilities for future costs of obligations related to closed stores, the Company made assumptions regarding amounts of future subleases.  Liabilities related to these costs of $3.8 million are included in other accrued liabilities and liabilities of $8.0 million are included in non-current liabilities on our consolidated balance sheet as of January 28, 2012.  If these assumptions or their related estimates change in the future, the Company may be required to record additional exit costs or reduce exit costs previously accrued.  Actual settlements may vary substantially from recorded obligations.

 

Income taxes

 

As of January 28, 2012, we had a full valuation allowance against our net deferred tax assets.  Deferred income tax assets represent potential future income tax benefits.  Realization of these assets is ultimately dependent upon future taxable income.  We have incurred a net cumulative loss as measured by the results of the prior three years.  ASC 740 “Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some or all of the recorded deferred tax assets will not be realized in a future period.  Forming a conclusion that a valuation allowance is not needed is difficult when negative evidence such as cumulative losses exists.  As a result of our evaluation, we have concluded that there is insufficient positive evidence to overcome the negative evidence related to our cumulative losses.  Accordingly, we have maintained the full valuation allowance against our net deferred tax assets established in the third quarter of fiscal 2011.  Recording the valuation allowance does not prevent us from using the deferred tax assets in the future when profits are realized.  Our valuation allowance against deferred tax assets totaled $41.3 million and $14.0 million at January 28, 2012 and February 26, 2011, respectively.

 

Recently Issued Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS.”  ASU 2011-04 amends ASC 820, “Fair Value Measurement,” by expanding existing disclosure requirements for fair value measurements and modifying certain definitions in the guidance, which may change how the fair value measurement guidance of ASC 820 is applied.  ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and must be applied prospectively.  We are in the process of evaluating ASU 2011-04 and its impact on our consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.”  ASU 2011-05 amends Accounting Standards Codification (“ASC”) 220-10, “Comprehensive Income,” and requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and also requires the presentation of reclassification adjustments on the face of the financial statements from other comprehensive income to net income.  ASU 2011-05 is effective for the first interim or annual reporting period beginning on or after December 15, 2011. Early adoption is permitted. We are in the process of evaluating ASU 2011-05 and its impact on the presentation of our consolidated financial statements.  We do not expect these changes to impact the consolidated financial statements other than the change in presentation.

 

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Forward-Looking Statements

 

We may make forward-looking statements reflecting our current views with respect to future events and financial performance.  These forward-looking statements, which may be included in reports filed under the Exchange Act, in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A of this Transition Report on Form 10-K, which could cause actual results to differ materially from historical results or those anticipated.

 

The words or phrases “will likely result,” “are expected to,” “estimate,” “project,” “believe,” “expect,” “should,” “anticipate,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  In particular we desire to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Transition Report on Form 10-K.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made.  In addition, we wish to advise readers that the factors listed in Item 1A of this Transition Report on Form 10-K, as well as other factors, could affect our performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

 

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates.  We are potentially exposed to market risk from changes in interest rates relating to our Credit Facility with Wells Fargo Bank.  Loans under the Credit Facility bear interest at the three month LIBOR rate plus 2.0%, reset daily.

 

We enter into certain purchase obligations outside the United States, which are denominated and settled in U.S. dollars.  Therefore, we have only minimal exposure to foreign currency exchange risks.  We do not hedge against foreign currency risks and believe that our foreign currency exchange risk is immaterial.  We do not have any derivative financial instruments and do not hold any derivative financial instruments for trading purposes.

 

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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Page

 

 

Financial Statements:

 

 

 

Reports of Independent Registered Public Accounting Firms

45

 

 

Consolidated Balance Sheets at January 28, 2012 and February 26, 2011

48

 

 

Consolidated Statements of Operations for the eleven months ended January 28, 2012 and the twelve months ended February 26, 2011 and February 27, 2010

49

 

 

Consolidated Statements of Stockholders’ Equity for the eleven months ended January 28, 2012 and the twelve months ended February 26, 2011 and February 27, 2010

50

 

 

Consolidated Statements of Cash Flows for the eleven months ended January 28, 2012 and the twelve months ended February 26, 2011 and February 27, 2010

51

 

 

Notes to Consolidated Financial Statements

52

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Christopher & Banks Corporation:

 

We have audited the accompanying consolidated balance sheet of Christopher & Banks Corporation and subsidiaries (the Company) as of January 28, 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the transition period ended January 28, 2012.  In connection with our audit of the consolidated financial statements, we also have audited the accompanying financial statement schedule as of and for the transition period ended January 28, 2012 as listed in the index under Item 15(a). We also have audited the Company’s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting, based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Christopher & Banks Corporation and subsidiaries as of January 28, 2012, and the results of their operations and their cash flows for the transition period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set for therein as of and for the transition period ended January 28, 2012.  Furthermore, in our opinion, Christopher & Banks Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ KPMG LLP

 

 

 

Minneapolis, Minnesota

 

April 12, 2012

 

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

of Christopher & Banks Corporation

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Christopher & Banks Corporation and its subsidiaries at February 26, 2011, and the results of their operations and their cash flows for each of the two years in the period ended February 26, 2011 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the period ended February 26, 2011 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

 

 

 

Minneapolis, Minnesota

 

May 12, 2011

 

 

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CHRISTOPHER & BANKS CORPORATION
CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

January 28,

 

February 26,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

40,782

 

$

43,712

 

Short-term investments

 

7,660

 

33,060

 

Accounts receivable

 

3,649

 

3,967

 

Merchandise inventories

 

39,455

 

39,211

 

Prepaid expenses

 

3,289

 

1,989

 

Income taxes receivable

 

1,188

 

6,439

 

Total current assets

 

96,023

 

128,378

 

 

 

 

 

 

 

Property, equipment and improvements, net

 

56,443

 

76,647

 

Long-term investments

 

13,284

 

28,824

 

Other assets

 

266

 

314

 

 

 

 

 

 

 

Total assets

 

$

166,016

 

$

234,163

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

18,355

 

$

15,149

 

Accrued salaries, wages and related expenses

 

5,831

 

7,883

 

Other accrued liabilities

 

26,677

 

21,931

 

Total current liabilities

 

50,863

 

44,963

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Deferred lease incentives

 

10,546

 

14,982

 

Deferred rent obligations

 

5,294

 

7,457

 

Lease termination fees

 

8,032

 

 

Other non-current liabilities

 

1,919

 

2,532

 

Total non-current liabilities

 

25,791

 

24,971

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock — $0.01 par value, 1,000 shares authorized, none outstanding