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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended May 30, 2009

 

or

 

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

 

For the transition period from              to             .

 

Commission File Number 001-31390

 

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(763) 551-5000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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.  YES  x  NO  o

 

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).  YES  o  NO  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.

 

 

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

 

As of June 26, 2009, 35,942,156 shares of the registrant’s common stock were outstanding.

 

 

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CHRISTOPHER & BANKS CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

		Page
PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheet (Unaudited) As of May 30, 2009, February 28, 2009 and May 31, 2008	3
	Condensed Consolidated Statement of Operations (Unaudited) For the Three Months Ended May 30, 2009 and May 31, 2008	4
	Condensed Consolidated Statement of Cash Flows (Unaudited) For the Three Months Ended May 30, 2009 and May 31, 2008	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
	Signatures	27
	Index to Exhibits	28

 

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PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)

(Unaudited)

 

		May 30,			February 28,			May 31,
		2009			2009			2008
ASSETS
Current assets:
Cash and cash equivalents		$	88,306		$	78,814		$	88,033
Short-term investments		—			—			5,000
Accounts receivable		4,371			3,921			6,699
Merchandise inventories		32,570			38,828			42,103
Prepaid expenses		2,608			1,938			11,901
Income taxes receivable		16,597			18,747			—
Current deferred tax asset		4,114			3,795			4,324
Total current assets		148,566			146,043			158,060
Property, equipment and improvements, net		114,759			120,347			135,225
Long-term investments		16,400			16,400			18,536
Deferred tax asset		5,206			4,328			5,784
Other assets		3,026			3,024			412
Total assets		$	287,957		$	290,142		$	318,017
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22,570		$	19,806		$	10,347
Accrued salaries, wages and related expenses		7,485			9,588			7,662
Other accrued liabilities		20,362			22,103			30,186
Other current liabilities		487			487			—
Total current liabilities		50,904			51,984			48,195
Non-current liabilities:
Deferred lease incentives		22,471			23,506			25,258
Deferred rent obligations		10,153			10,318			11,646
Other		4,162			4,110			4,260
Total non-current liabilities		36,786			37,934			41,164
Commitments		—			—			—
Stockholders’ equity:
Preferred stock — $0.01 par value, 1,000 shares authorized, none outstanding		—			—			—
Common stock — $0.01 par value, 74,000 shares authorized, 45,658, 45,258 and 45,219  shares issued and 35,867, 35,467 and 35,415 shares outstanding at May 30, 2009, February 28, 2009 and May 31, 2008, respectively		457			453			452
Additional paid-in capital		112,233			111,763			110,987
Retained earnings		200,289			200,720			231,092
Common stock held in treasury, 9,791 shares at cost at May 30, 2009 and February 28, 2009, and 9,804 shares at cost at May 31, 2008		(112,712		)	(112,712		)	(112,859		)
Accumulated other comprehensive income (loss)		—			—			(1,014		)
Total stockholders’ equity		200,267			200,224			228,658
Total liabilities and stockholders’ equity		$	287,957		$	290,142		$	318,017

 

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

 

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended
		May 30,			May 31,
		2009			2008
Net sales		$	120,367		$	155,395
Costs and expenses:
Merchandise, buying and occupancy		75,458			86,734
Selling, general and administrative		36,144			43,565
Depreciation and amortization		6,311			6,408
Total costs and expenses		117,913			136,707
Operating income		2,454			18,688
Interest income		115			827
Income from continuing operations before income taxes		2,569			19,515
Income tax provision		884			7,767
Income from continuing operations		1,685			11,748
Loss from discontinued operations, net of income tax		—			(475		)
Net income		$	1,685		$	11,273
Basic earnings (loss) per share:
Continuing operations		$	0.05		$	0.33
Discontinued operations		—			(0.01		)
Earnings per basic share		$	0.05		$	0.32
Basic shares outstanding		35,132			35,071
Diluted earnings (loss) per share:
Continuing operations		$	0.05		$	0.33
Discontinued operations		—			(0.01		)
Earnings per diluted share		$	0.05		$	0.32
Diluted shares outstanding		35,137			35,138
Dividends per share		$	0.06		$	0.06

 

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

 

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months Ended
		May 30,			May 31,
		2009			2008
Cash flows from operating activities:
Net income		$	1,685		$	11,273
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,311			6,458
Deferred income taxes		(1,197		)	128
Stock-based compensation expense		474			629
Loss on disposal of furniture, fixtures and equipment		77			170
Changes in operating assets and liabilities:
Increase in accounts receivable		(450		)	(1,475		)
Decrease in merchandise inventories		6,258			1,738
Increase in prepaid expenses		(670		)	(304		)
Decrease in prepaid income taxes		2,150			5,032
(Increase) decrease in other assets		(2		)	7
Increase (decrease) in accounts payable		3,813			(5,034		)
Increase (decrease) in accrued liabilities		(3,844		)	414
Increase (decrease) in deferred lease incentives		(1,035		)	403
Decrease in deferred rent obligations		(165		)	(75		)
Increase in other liabilities		52			538
Net cash provided by operating activities		13,457			19,902
Cash flows from investing activities:
Purchases of property, equipment and improvements		(1,849		)	(8,252		)
Net cash used in investing activities		(1,849		)	(8,252		)
Cash flows from financing activities:
Dividends paid		(2,116		)	(2,109		)
Net cash used in financing activities		(2,116		)	(2,109		)
Net increase in cash and cash equivalents		9,492			9,541
Cash and cash equivalents at beginning of period		78,814			78,492
Cash and cash equivalents at end of period		$	88,306		$	88,033
Supplemental cash flow information:
Income taxes paid, net of refunds received		$	87		$	353
Purchases of equipment and improvements, accrued, not paid		$	240		$	131

 

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

 

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CHRISTOPHER & BANKS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to such rules and regulations.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009.

 

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year.  In the opinion of management, the information contained herein reflects all adjustments, consisting of only normal adjustments except as otherwise stated in these notes, necessary to present fairly the Company’s financial position as of May 30, 2009 and May 31, 2008, and its results of operations and cash flows for the three month periods ended May 30, 2009 and May 31, 2008.

 

Recently Adopted Accounting Pronouncements

 

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP-EITF No. 03-6-1”).  Under FSP-EITF 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are considered participating securities and should be included in the two-class method of computing earnings per share.  FSP-EITF 03-6-1 was adopted by the Company effective March 1, 2009 and impacted the Company’s calculation of earnings per share beginning in the first quarter of the fiscal year ending February 27, 2010 (“Fiscal 2010”).  See Note 10 - Earnings per Share for further disclosure regarding the impact of the adoption of FSP-EITF 03-6-1.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which is a revision of SFAS No. 141, “Business Combinations”.  SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination.  This statement includes changes in the measurement of fair value of the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree as of the acquisition date, with limited exceptions.  This statement requires in general that transaction costs and costs to restructure the acquired company be expensed and contractual contingencies be recorded at their acquisition-date fair values.  The Company adopted SFAS No. 141(R) prospectively effective March 1, 2009.  The adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows as the Company did not execute any acquisitions or business combinations in the first quarter of fiscal 2010.

 

Recently Issued Accounting Pronouncements

 

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”).  FSP FAS 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements.  This FSP shall be applied prospectively with retrospective application not permitted.  This FSP shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company is currently in the process of evaluating this new FSP but does not believe it will have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”.  This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements.  Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS No. 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments.  This FSP shall be effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption.  In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption.  The Company is currently in the process of evaluating this new FSP but does not believe it will have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”).  SFAS No. 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the date through which an entity has evaluated subsequent events.   SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009.  The Company does not anticipate the adoption of the provisions of SFAS No. 165 will have a material impact on its financial position, results of operations or cash flows.

 

NOTE 2 — DISCONTINUED OPERATIONS

 

In July 2008, the Company announced its decision to exit its Acorn business when the Company concluded, after a comprehensive review and evaluation, that the concept had not demonstrated the potential to deliver an acceptable long-term return on the Company’s investment.  The Company closed all of its Acorn stores by December 31, 2008, allowing the Company to focus its resources on its two core brands, Christopher & Banks and C.J. Banks.

 

The operating results of all Acorn stores have been presented as discontinued operations, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), in the Condensed Consolidated Statement of Operations for the three month period ended May 31, 2008.  There was no activity relating to the Company’s discontinued Acorn operations during the three months ended May 30, 2009.

 

The operating results of the discontinued operations for the three months ended May 31, 2008 are summarized below (in thousands).

 

Net sales		$	4,247
Loss before income tax benefit		$	(789	)
Income tax benefit		(314		)
Loss from discontinued operations		$	(475	)

 

Income taxes have been allocated to continuing and discontinued operations based on the methodology required by Financial Accounting Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN No. 18”).  Income taxes allocated to the results of discontinued operations are determined on the basis of a computation of taxes with and without the impact of results from discontinued operations with the difference in taxes between these computations allocated to discontinued operations.

 

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NOTE 3 — MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY

 

Merchandise inventories consisted of the following (in thousands):

 

		May 30,			February 28,			May 31,
Description		2009			2009			2008
Merchandise - in store		$	31,140		$	35,280		$	36,684
Merchandise - in transit		1,430			3,548			5,419
		$	32,570		$	38,828		$	42,103

 

The Company does not have long-term purchase commitments or arrangements with any of its suppliers or agents.  During the quarter ended May 30, 2009, one of the Company’s vendors supplied approximately 25% of the Company’s merchandise purchases and a second vendor supplied approximately 14% of the Company’s merchandise purchases.  The Company did not purchase significant amounts of goods from these two vendors during the three months ended May 31, 2008.  In addition, the Company purchased approximately 5% and 11% of its merchandise from another supplier during the three months ended May 30, 2009 and May 31, 2008, respectively.

 

Although the Company has strong partnerships with these vendors, there can be no assurance that these relationships can be maintained in the future or that the vendors will continue to supply merchandise to the Company.  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 the Company’s financial position or results of operations.

 

In the first quarter of fiscal 2009, the Company purchased approximately 53% of its merchandise through one buying agent (the “Agent”).  The Company and the Agent terminated their sourcing arrangement effective as of the end of December 2008.  As a result, the Company did not purchase any merchandise through the Agent in the first quarter of fiscal 2010.

 

NOTE 4 — PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

 

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

 

		Estimated		May 30,			February 28,			May 31,
Description		Useful Life		2009			2009			2008
Land		—		$	1,597		$	1,597		$	1,597
Corporate office, distribution center and related building improvements		25 years		12,005			12,020			12,015
Store leasehold improvements		Term of related lease,
		typically 10 years		94,994			95,251			98,952
Store furniture and fixtures		Three to 10 years		113,497			113,697			115,465
Point of sale hardware and software		Five years		15,162			15,173			10,924
Computer hardware and software		Three to five years		21,328			21,123			12,159
Corporate office and distribution center furniture, fixtures and equipment		Seven years		3,587			3,634			3,089
Construction in progress		—		1,940			1,432			12,301
				264,110			263,927			266,502
Less accumulated depreciation and amortization				149,351			143,580			131,277
Net property, equipment and improvements				$	114,759		$	120,347		$	135,225

 

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As of May 30, 2009 and February 28, 2009, construction in progress consisted primarily of store-related information technology system projects in progress.  As of May 31, 2008, construction in progress consisted primarily of capital expenditures related to new stores which opened in the second and third quarters of fiscal 2009.

 

The Company reviews long-lived assets with definite lives at least annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with SFAS No. 144.  The Company recorded no impairments of long-lived assets in the three month period ended May 30, 2009, however, the general economic uncertainty affecting the retail industry makes it reasonably possible that long-lived asset impairments may be identified and recorded in future periods.

 

NOTE 5 — LONG-TERM INVESTMENTS

 

As of May 30, 2009, the Company had approximately $16.4 million of long-term investments, which consisted solely of $19.5 million of auction rate securities (“ARS”) at cost, less a fair value adjustment of approximately $3.1 million.  The fair value of the ARS was determined utilizing a discounted cash flow method based on market rates and an estimated period of time the ARS are expected to be held.

 

Substantially all of the Company’s ARS are collateralized by student loans and a majority have AAA (S&P), Aaa (Moody’s), or Fitch (AAA) credit ratings as of May 30, 2009.  As of May 30, 2009, the repayment of approximately 80% of the student loans, which serve as collateral for the ARS held by the Company, was substantially backed by the United States Government.  Until February 2008, the ARS market was liquid and auctions for ARS held by the Company did not fail. However, beginning in February 2008, auctions for the ARS held by the Company began to fail and have continued to fail up to and as of the date of this report.

 

Based on current market conditions, management believes that it is likely that auctions related to the Company’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited the Company’s ability to access these funds.  Management anticipates the liquidity of the ARS will continue to be restricted until there is a successful auction, until such time as another market for the ARS develops, until the ARS are called by the issuer or until they are redeemed as described below.

 

All of the ARS owned by the Company were purchased through UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”) and are held, for the benefit of the Company, by UBS.  In November 2008, the Company accepted a settlement offer from UBS to restore liquidity to its clients who hold ARS.  The settlement offer grants the Company certain ARS rights.  These ARS rights provide the Company the ability to redeem its ARS at par during a two-year time period beginning June 30, 2010.  During this time, the Company may choose to continue to hold some or all of its ARS and earn interest or sell some or all of them to UBS at par plus accrued interest.  The ARS rights are not transferable, tradable, or marginable and will not be listed or quoted on any securities or exchange or any electronic communications network.

 

Upon acceptance of the settlement offer, the Company classified the ARS as trading securities and elected, pursuant to SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), to record the ARS rights at fair value on a recurring basis utilizing significant unobservable inputs in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).

 

The fair value of the ARS rights was estimated utilizing the Black-Scholes option pricing model and the forward contract method.  As of May 30, 2009, the fair value of the ARS rights was determined to be approximately $2.7 million.  The ARS rights are recorded as a non-current asset on the consolidated financial statements.

 

Prior to acceptance of the UBS settlement offer, the Company classified its ARS as available-for-sale securities.  As of May 31, 2008, the Company had approximately $18.5 million of long-term investments consisting solely of $19.5 million of ARS, less a valuation allowance of $1.0 million, which reflected management’s estimate of fair value given the current lack of liquidity of these investments while taking into account the current credit quality of the underlying securities.  Additionally, the Company had $5.0 million in ARS which were classified as short-term investments as of May 31, 2008 as they were called by the issuers and redeemed for par value in July 2008.

 

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NOTE 6 — ACCRUED LIABILITIES

 

Other accrued liabilities consisted of the following (in thousands):

 

		May 30,			February 28,			May 31,
Description		2009			2009			2008
Gift card, certificate and store credit liabilities		$	8,991		$	11,434		$	10,094
Accrued un-invoiced merchandise inventory receipts		3,781			3,008			7,541
Accrued income, sales and other taxes payable		2,357			1,877			4,440
Accrued workers compensation self-insurance liability		1,184			1,601			2,378
Accrued occupancy-related expenses		841			693			1,946
Other		3,208			3,490			3,787
		$	20,362		$	22,103		$	30,186

 

NOTE 7 — CREDIT FACILITY

 

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

 

Loans under the Credit Facility bear interest at the prime rate minus 0.25%.  As of May 30, 2009 the prime rate was 3.25%.  The Credit Facility also provides the Company with the ability to borrow under the Credit Facility at an interest rate tied to the London Interbank Market Offered Rate (“LIBOR”).  Advances under the LIBOR option would be tied to the one, three, or six month LIBOR rate based on the length of time the corresponding advance is outstanding.

 

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, and a collateral monitoring fee.  For the three months ended May 30, 2009, fees related to the Credit Facility totaled $12,933.  Borrowings under the Credit Facility are collateralized by the Company’s equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights.  The Company had no revolving credit loan borrowings under the Credit Facility during the first three months of fiscal 2010.  Historically, the Credit Facility has been utilized by the Company only to open letters of credit to facilitate the import of merchandise.  The borrowing base at May 30, 2009 was $20.6 million.  As of May 30, 2009, the Company had outstanding letters of credit in the amount of $0.2 million.  Accordingly, the availability of revolving credit loans under the Credit Facility was $20.4 million at May 30, 2009.

 

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 May 30, 2009, the most recent measurement date, the Company was in compliance with all of the restrictive covenants under the Credit Facility.

 

NOTE 8 — STOCK-BASED COMPENSATION

 

The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”).  Under this method, stock-based compensation expense recognized for share-based awards includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, February 25, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based compensation awards granted subsequent to February 25, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

 

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Total pre-tax compensation expense related to stock-based awards for the three months ended May 30, 2009 and May 31, 2008 was approximately $474,000 and $629,000, respectively.  Stock-based compensation expense was included in merchandise, buying and occupancy expenses for the Company’s buying and distribution employees and in selling, general and administrative expenses for all other employees.

 

Methodology Assumptions

The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for grants to its employees and non-employee directors.  Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant.  The fair value of the Company’s stock option awards, which are generally subject to pro-rata vesting, is expensed on a straight-line basis over the vesting period of the stock options.  The expected volatility assumption is based on the historical volatility of the Company’s stock over a term equal to the expected term of the option granted.  The expected term of stock option awards granted is derived from historical exercise experience.  The expected term assumption incorporates the contractual term of an option grant, as well as the vesting period of an award.  The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.

 

The weighted average assumptions relating to the valuation of the Company’s stock option grants for the three month periods ended May 30, 2009 and May 31, 2008 were as follows:

 

		Three Months Ended
		May 30,		May 31,
		2009		2008
Expected dividend yield		5.5	%	2.3	%
Expected volatility		66.2	%	48.3	%
Risk-free interest rate		1.8	%	2.6	%
Expected term in years		5.0		4.7

 

Stock-Based Compensation Activity

The following table presents a summary of the Company’s stock option activity for the three months ended May 30, 2009:

 

													Weighted
				Weighted			Aggregate						Average
		Number		Average			Intrinsic			Weighted			Remaining
		of		Exercise			Value			Average			Contractual
		Shares		Price			(in thousands)			Fair Value			Life
Outstanding, beginning of period		1,587,345		$	16.31		$	3		$	5.90
Vested		1,145,968		17.84			—			6.36
Unvested		441,377		12.32			3			4.70
Granted		312,500		4.18			313			1.58
Exercised		—		—			—			—
Canceled - Vested		(31,985	)	21.30			—			8.50
Canceled - Unvested (Forfeited)		(27,267	)	15.85			—			6.50
Outstanding, end of period		1,840,593		14.21			321			5.13			6.32
Vested		1,205,750		17.42			—			6.21			4.78
Unvested		634,843		8.12			321			3.09			9.23
Exercisable, end of period		1,205,750		17.42			—			6.21			4.78

 

The Company may also grant shares of restricted stock to its employees and non-employee directors.  Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’s restricted stock awards have performance-based vesting provisions and are subject to forfeiture if these performance conditions are not achieved.

 

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The Company assesses, on an ongoing basis, the probability of whether the performance criteria are projected to be achieved and, if it is deemed probable, recognizes compensation expense over the relevant performance period.  For those awards not subject to performance criteria, the Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period.  The fair market value of the Company’s restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

 

The following table presents a summary of the Company’s restricted stock activity for the three months ended May 30, 2009:

 

				Aggregate
		Number		Intrinsic			Weighted
		of		Value			Average
		Shares		(in thousands)			Fair Value
Unvested, beginning of period		282,418		$	1,099		$	10.54
Granted		553,750		2,868			4.18
Vested		(44,000	)	228			10.79
Canceled - Unvested (Forfeited)		(111,600	)	578			10.04
Unvested, end of period		680,568		3,525			5.43

 

NOTE 9 — INCOME TAXES

 

As of May 30, 2009, the Company’s liability for unrecognized tax benefits associated with uncertain tax positions was approximately $3.5 million and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2.1 million.  The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.  At May 30, 2009, the Company had accrued approximately $0.8 million for the potential payment of interest and penalties.

 

The Company and its subsidiaries are subject to U.S. federal income tax and the income tax of various state and local jurisdictions.  The Internal Revenue Service has completed its audit for tax years through fiscal 2006.  The Company is not subject to state income tax examination by taxing authorities for taxable years prior to fiscal 2004.  At May 30, 2009, the Company has ongoing audits in various jurisdictions in which it expects settlements by the end of fiscal 2010, but it does not expect its liability for unrecognized tax benefits to significantly increase or decrease in the next nine months.

 

As of May 30, 2009, the Company has net deferred tax assets of $9.3 million.  Deferred income tax assets represent potential future income tax benefits.  Realization of these assets is ultimately dependent upon future taxable income.  No valuation allowance has been provided for deferred tax assets because management believes realization of the full amount of net deferred tax assets is more likely than not.  While the Company has a history of profits, its profitability has declined over the last three years and the Company recorded a net loss in fiscal 2009.  Therefore, earnings results in fiscal 2010 will be a significant factor in determining the Company’s ability to continue to carry these deferred tax assets.  The Company’s accounting for deferred taxes represents its best estimate of future events.  If future results from the Company’s operations are less than projected, a valuation allowance may be required to reduce deferred tax assets, which could have a material impact on the Company’s results of operations in the period in which it is recorded.  Significant negative events, including losses in future periods, would make it reasonably possible that valuation allowances against deferred tax assets would be required in future periods.

 

As of May 30, 2009, the Company has state net operating loss carry forwards which will result in state tax benefits of approximately $0.5 million.  These state net loss carry forwards will expire in fiscal 2014 and beyond.  Additionally, the Company has charitable contribution carry forwards that will expire in fiscal 2014.

 

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NOTE 10 — EARNINGS PER SHARE

 

On March 1, 2009, the Company adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP No. EITF 03-6-1”), which clarified that unvested share-based payment awards that contain nonforfeitable rights to receive dividends or divided equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”).  Participating securities under this statement include the Company’s unvested employee restricted stock awards with time-based vesting, which receive nonforfeitable dividend payments.  The calculation of EPS for common stock shown below excludes the income attributable to these unvested employee restricted stock awards from the numerator and excludes the dilutive impact of these shares from the denominator.  All prior period EPS data presented has been adjusted retrospectively.

 

		Three Months Ended
		May 30,			May 31,
		2009			2008
Numerator (in thousands):
Net income attributable to Christopher & Banks Corporation		$	1,685		$	11,273
Income allocated to participating securities		(9		)	(43		)
Net income available to common shareholders		$	1,676		$	11,230
Denominator (in thousands):
Weighted average common shares outstanding - basic		35,132			35,071
Dilutive shares		5			67
Weighted average common and common equivalent shares outstanding - diluted		35,137			35,138
Net income per common share:
Basic		$	0.05		$	0.32
Diluted		$	0.05		$	0.32

 

There was no material impact on the previously reported fiscal 2009 EPS due to the adoption of FSP No. EITF 03-6-1.

 

Stock options of 2,161,543 and 1,898,852 were excluded from the shares used in the computation of diluted earnings per share for the three month periods ended May 30, 2009 and May 31, 2008, respectively, as they were anti-dilutive.

 

NOTE 11 — FAIR VALUE MEASUREMENTS

 

The Company adopted SFAS No. 157, “Fair Value Measurements,” effective March 1, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

 

Under SFAS No. 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.  SFAS No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.  The hierarchy is broken down into three levels.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

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Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs for the asset or liability.   Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

For the three month periods ended May 30, 2009 and May 31, 2008, fair value under SFAS No. 157 applied to the Company’s ARS and ARS rights.  These financial assets are carried at fair value following the requirements of SFAS No. 157.

 

As discussed in Note 5, auctions for ARS held by the Company failed beginning in February 2008, and have continued to fail through the date of this report.  As a result, investments in ARS are valued to reflect the current lack of liquidity of these investments while taking into account the credit quality of the underlying securities.  As also discussed in Note 5, on November 7, 2008, the Company accepted UBS’s ARS settlement offer.  This resulted in the Company receiving ARS rights, which the Company has elected to account for at fair value.

 

The following tables provide information by level for assets and liabilities that are measured at fair value, as defined by SFAS No. 157, on a recurring basis (in thousands).

 

					Fair Value Measurements
		Fair Value at			Using Inputs Considered as
Description		May 30, 2009			Level 1			Level 2			Level 3
Assets:
ARS		$	16,400		$	—		$	—		$	16,400
ARS rights		$	2,700		$	—		$	—		$	2,700
Liabilities:		$	—		$	—		$	—		$	—

 

 

There was no change in the fair value of the Company’s ARS or ARS rights based on significant unobservable inputs (Level 3) in the first quarter of fiscal 2010.

 

					Fair Value Measurements
		Fair Value at			Using Inputs Considered as
Description		May 31, 2008			Level 1			Level 2			Level 3
Assets:
ARS		$	23,536		$	—		$	—		$	23,536
ARS rights		$	—		$	—		$	—		$	—
Liabilities:		$	—		$	—		$	—		$	—

 

There was no change in the fair value of the Company’s ARS based on significant unobservable inputs (Level 3) in the first quarter of fiscal 2009.

 

NOTE 12 — COMPREHENSIVE INCOME

 

Comprehensive income consisted of the following:

 

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		Three Months Ended
		May 30,			May 31,
		2009			2008
Net income		$	1,685		$	11,273
Unrealized losses on investments reclassified to earnings		—			186
Total comprehensive income		$	1,685		$	11,459

 

NOTE 13 — COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

The Company is 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 our opinion, be accurately predicted, any such liability is not expected to have a material adverse impact on the Company’s financial position, results of operations or liquidity.

 

NOTE 14 — SEGMENT REPORTING

 

The Company operates in the retail apparel industry in which it primarily designs, sources and sells women’s apparel catering to customers generally ranging in age from 40 to 60 who are typically part of a segment of the female baby boomer demographic.  The Company has identified two operating segments (Christopher & Banks and C.J. Banks) as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”).  The Company’s Christopher & Banks and C.J. Banks operating segments have been aggregated into one reportable segment based on the similar nature of products sold, methods of sourcing, merchandising and distribution processes involved, target customers, and economic characteristics of the two brands.  The Company previously reported the results of its Acorn stores as a separate reportable segment.  Beginning in the third quarter of fiscal 2009, the results of all Acorn stores have been removed from continuing operations and are presented as discontinued operations.

 

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

 

Segment Reporting:

 

		Christopher & Banks/			Corporate/
		C.J. Banks			Administrative			Consolidated
Three Months Ended May 30, 2009:
Net sales		$	120,367		$	—		$	120,367
Operating income (loss)		$	16,009		$	(13,555	)	$	2,454
Total assets		$	163,054		$	124,903		$	287,957
Three Months Ended May 31, 2008:
Net sales		$	155,395		$	—		$	155,395
Operating income (loss)		$	35,622		$	(16,934	)	$	18,688
Total assets		$	180,700		$	134,465		$	318,017

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Executive Overview

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

 

As of May 30, 2009, the Company operated 816 stores in 46 states, including 546 Christopher & Banks stores and 270 C.J. Banks stores.  The Company’s Christopher & Banks brand offers distinctive fashions featuring exclusively designed, coordinated assortments of women’s apparel in sizes four to 16. The Company’s C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 24W.  The Company also operates e-commerce web sites for its two brands at www.christopherandbanks.com and www.cjbanks.com.

 

The Company strives to provide its customers quality apparel at a great value with a perfect fit.  The Company’s overall strategy for its two brands, Christopher & Banks and C.J. Banks, is to consistently offer a fashionable apparel assortment through its stores and e-commerce web sites in order to satisfy its target customers’ expectations for style, quality, value and fit, while providing exceptional, personalized customer service.

 

The Company has competitively positioned itself to offer merchandise assortments reflecting current fashion, balanced between classic and trend right apparel, at affordable prices.  To differentiate itself from its competitors, the Company’s buyers, working in conjunction with the Company’s internal design group, create a merchandise assortment of coordinated outfits which is manufactured exclusively for the Company under its proprietary Christopher & Banks and C.J. Banks brand names.

 

Fiscal 2010 First Quarter Summary

The Company’s results of operations for the first quarter of fiscal 2010 continued to be impacted by the challenging macro-economic environment.  Continued instability in the housing and financial markets, combined with general economic uncertainty, have impacted consumer spending patterns, particularly for discretionary retail purchases.  Same-store sales declined 24% during the quarter.  Approximately two-thirds of the decline was related to a decrease in the number of transactions per average store, while roughly one-third of the decline was a result of a decrease in the average transaction value.

 

Despite the pressure on sales, the Company generated positive cash flow, reduced inventory levels, and made significant reductions in selling, general and administrative (“SG&A”) expenses.  The Company increased its combined cash and long-term investment balance from $95.2 million at February 28, 2009 to $104.7 million as of May 30, 2009.  Total inventory decreased from $42.1 million at the end of last year’s first quarter to $32.6 million at the end of the first quarter of fiscal 2010, which represents a 22% year-over-year reduction in inventory on a per-store basis, which excludes e-commerce inventory.  The reduction in inventory levels resulted in a sequential improvement in merchandise margins throughout the quarter.  SG&A expenses decreased from $43.6 million during the first quarter of fiscal 2009, to $36.1 million during the first quarter of fiscal 2010.  As a result, the Company achieved approximately $7.5 million in SG&A savings in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.

 

The Company recorded net income from continuing operations of $1.7 million, or $0.05 per diluted share, in the first quarter of fiscal 2010, as compared to net income from continuing operations of $11.7 million, or $0.33 per diluted share, for the first quarter of fiscal 2009.   In the first quarter, the Company opened two new C.J. Banks stores, closed one Christopher & Banks store and converted one Christopher & Banks store to a C.J. Banks store.

 

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Fiscal 2010 Outlook

Given the uncertain economic environment, the Company is approaching the balance of fiscal 2010 with a continued focus on operating effectiveness, expense controls, disciplined inventory management and conservative capital spending.  The Company anticipates inventory per-store will continue to decline to levels modestly below fiscal 2009 for the remainder of the fiscal year.  Going forward, the Company plans to proceed cautiously with new store growth.  The Company currently plans to open two additional new stores in fiscal 2010 including one dual store concept.

 

Key Business Initiatives

The Company will continue to execute its cost-savings initiative in fiscal 2010.  SG&A savings, primarily store-related expenses, marketing expenditures and travel costs, of approximately $7.5 million were realized in the first quarter of fiscal 2010.  The Company expects to save an additional $7.5 million of SG&A expenses in the aggregate in the second, third and fourth quarters of fiscal 2010.  It is anticipated that this will result in at least $15.0 million of total SG&A savings for the year.  The Company will also continue to focus on reducing occupancy costs through aggressive lease renegotiations and diligently exercising rent reductions related to sales volume and co-tenancy lease violations.  Total fiscal 2010 capital expenditures are planned to range from $8 million to $9 million, down approximately 50% from the $18.4 million of capital expenditures in fiscal 2009.

 

The Company will also continue to employ strict inventory controls in fiscal 2010, targeting continued inventory reductions in the first half of the year.  During the year, the Company will continue to enhance inventory productivity through SKU rationalization and improved store assorting based on sales volume, climate, size and fashion preferences.

 

The Company will continue to strengthen its Customer Relationship Management (“CRM”) programs throughout fiscal 2010.  The Company plans to migrate to a new CRM application in the second half of fiscal 2010 which will provide more robust data collection and analysis capabilities.  In addition, the Company will continue to accumulate and incorporate customer data into its existing and new CRM program to drive additional customer traffic to its stores and web sites, encourage cross shopping between its stores and online sites and increase overall brand awareness.  CRM efforts will focus primarily on email communication, which the Company believes is the most cost-effective and efficient method of communicating with customers.  In addition, the Company is tailoring its email messages to segmented groups of customers in an effort to provide more relevant and compelling offers and to drive stronger response rates from its messages.

 

The Company is increasing its focus on the smaller markets that have traditionally been the foundation of the Company’s success.  Approximately 50% of the Company’s stores are located in small, rural and captive markets.  While same-store sales have declined in these markets, the declines have been slightly less than in the remainder of the Company’s stores.  In addition to adjusting the merchandise mix in these areas, the Company plans to further develop its grass roots marketing efforts to increase communication and connections with customers in these markets.  Stores located in the smaller, rural markets generally have higher productivity and lower occupancy costs, resulting in higher operating margins.

 

The Company will continue to place additional focus on growth opportunities with its plus size brand, C.J. Banks.  The Company plans to open its first dual store concept during the second quarter.  This will give it the opportunity to offer both of its brands, Christopher & Banks and C.J. Banks, and all three size ranges, missy, petite and plus, within one store, resulting in greater productivity and operating efficiencies.  In addition, in the fall of 2009, the Company intends to introduce edited assortments of its C.J. Banks plus size merchandise in a select test group of approximately 30 Christopher & Banks stores to further capitalize on increasing its plus size market share.

 

The Company plans to continue to grow its Christopher & Banks and C.J. Banks e-commerce businesses.  The Company plans to enhance web site visual presentation and to expand merchandise offerings to include exclusive online-only merchandise categories, styles, sizes and lengths.  In an effort to drive additional traffic to its web sites, the Company intends to continue to increase its online marketing efforts and leverage its online associate ordering system, which allows the Company’s store associates the opportunity to service customers through direct access to the Company’s e-commerce sites.

 

While the Company’s management believes the retail and macro-economic environments will remain challenging throughout the remainder of fiscal 2010, it also believes that it is taking actions to position the Company for stronger operating performance when economic conditions become more favorable.

 

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