NITCHES INC - Quarter Report: 2008 May (Form 10-Q)

     Interest expense was $450,000 in the current period, an increase of $244,000 as compared to $206,000 for the three months ended May 31, 2007. This increase was due primarily to interest on the convertible debentures that were not outstanding in the prior period and related amortization charges that are also charged to interest expense.

Liquidity and Capital Resources

     Net cash used in operating activities for the nine month period ended May 31, 2008 was approximately $8.1 million. Cash was consumed in reducing our payables to suppliers, funding our loss from operations, an increase in trade receivables, and an increase in prepaid expenses, offset partially by a decrease in inventories.

     For the nine months ended May 31, 2008 net cash used by investing activities consisted of $198,000 in capital expenditures, principally invested in new equipment and fixtures related to Backwoods store openings.

     Cash provided by financing activities consisted of $8.2 million for the nine months ended May 31, 2008, comprised of advances from our factor and borrowings from a bank under a line of credit that we assumed through the acquisition of Backwoods.

     Working capital at May 31, 2008 was $4.8 million, a decrease of $2.4 million from $7.2 million at August 31, 2007. This decrease resulted from decreased inventory levels, and increased borrowings from our factor offset partially by increases in receivables and prepaid expenses. In addition, the assumption of a short term debt in the Backwoods acquisition, partially offset by an increase in inventories associated with the purchase transaction also reduced working capital. Our current ratio decreased slightly to 1.2 to 1.0 at May 31, 2008, down from 1.3 to 1.0 at August 31, 2007.

     Our principal external source of liquidity comes from our financing arrangement with CIT. That financing arrangement is established on a borrowing base that is determined by our levels of trade receivables and inventory.

     We sell substantially all of our trade receivables to CIT on a pre-approved, non-recourse basis. We attempt to make any recourse shipments on a cash-on-delivery basis or ensure that the customers’ payments are backed by a commercial or standby letter of credit issued by the customers’ bank. The amount of our outstanding receivables that were non-recourse at May 31, 2008 was $14.9 million. The amount of our receivables that were recourse and were not made on a COD basis or supported by commercial or standby letters of credit at May 31, 2008 was approximately $1.8 million of which approximately $1.0 million had been collected through March 31, 2008.

     Payment for non-recourse factored receivables is made at the time customers make payment to CIT or, if a customer is financially unable to make payment, within approximately 180 days of the invoice due date. Under the factoring agreement, we can request advances in anticipation of customer collections at the prime rate (5% at May 31, 2008) less one and one-half percent (1.5%). The amount of advances available to us is limited to eighty-five percent (85%) of non-recourse factored receivables and fifty percent (50%) of eligible finished goods inventory.

     We may issue import letters of credit through CIT for the purchase of inventory in the normal course of our operations. Letters of credit are subject to a $12.0 million aggregate limit. At May 31, 2008, we had outstanding letters of credit of approximately $632,000 for the purchase of finished goods, which had been opened through CIT.

     The factoring agreement does not contain any financial covenants to which we must adhere. Advances are collateralized by all of our assets as well as a personal guaranty of our chairman, who also serves as our chief executive officer. CIT can terminate the factoring agreement on 30 days written notice. We believe the factoring agreement with CIT, along with our expected cash flow from operating activities and our current levels of working capital are adequate to fulfill our liquidity needs for the foreseeable future.

     Our Backwoods subsidiary has a separate revolving line of credit assumed in the acquisition which enables it to borrow up to a maximum of $3.5 million. Advances under the line of credit bear interest at a rate equal to the bank’s prime lending rate, which was 5.0% as of May 31, 2008. The Backwoods line of credit expires by its terms in September 2008.

     We are currently reviewing options for replacing and increasing our Backwoods line of credit, commensurate with the anticipated working capital needs of expanding our retail operations. We have no arrangements or agreements in place for such financing at this time. We cannot provide any assurances about our ability to obtain additional credit for our Backwoods operations or the terms of any credit facility that we may obtain. Recent developments in the commercial credit market may impact the terms on which we can obtain credit.

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Contractual Obligations and Commercial Commitments

     As of May 31, 2008, we had no off-balance sheet arrangements. The following summarizes our contractual obligations at May 31, 2008 and the effect those obligations are expected to have on our liquidity and cash flow in future periods:

			Payments due/Commitments expiring per period
			Total Amounts			Less than									Over
			Committed			1 year			1-3 years			4-5 years			5 years
	Operating leases			15,295,000		$	2,338,000		$	4,454,000		$	3,539,000		$	4,964,000
	Letters of credit			632,000			632,000			-			-			-
	Employment agreements			823,000			340,000			483,000						-
	Bank debt and vehicle loan			3,444,000			3,149,000			295,000
	Convertible Debentures			3,150,000			-			3,150,000			-			-
	Total obligations and commitments		$	23,344,000		$	6,459,000		$	8,382,000		$	3,539,000		$	4,964,000

Inventory

     Our inventory decreased 11.3% to $12.5 million at May 31, 2008, from $14.1 million at August 31, 2007. Compared to inventories of $6.9 million at May 31, 2007 current period ending inventory increased 81.2%. This increase is reflective of the inclusion of inventories for our recently acquired Backwoods business, as well as inventories on hand for shipment against a higher volume of orders for June 2008 as compared to June 2007. We believe that our current inventory mix and unit levels are appropriate to respond to anticipated market demand.

     In our ordinary course of operations, we generally make some sales below normal selling prices or below cost. Based on prior experience, our management believes this will be true for some inventory held on or acquired after May 31, 2008. The amount of such off-price sales depends on several factors, including general economic conditions, market conditions within the apparel industry, the desirability of the styles held in inventory and competitive pressures from other garment suppliers.

     We have established an inventory markdown reserve as of May 31, 2008, which our management believes will be sufficient for current inventory that is expected to sell below cost in the future. There can be no assurance that we will realize our expected selling prices, or that the inventory markdown reserve will be adequate, for items in inventory as of May 31, 2008 for which customer sales orders have not yet been received, or are delayed or cancelled. The inventory markdown reserve is calculated based on specific identification of aged goods and styles that are slow-moving or selling off-price.

Backlog

     As of May 31, 2008, we had on-hand unfilled customer orders of $31.1 million as compared to $45.2 million at May 31, 2007, with such orders generally scheduled for delivery by November 2008 and November 2007, respectively. The decrease in backlog is due to a reduction in orders from retailers for our women’s sleepwear and men’s and women’s sportswear product lines. We believe that the decrease in backlog is attributable primarily to the weakening U.S. economy as retailers limit their commitments for future purchases.

     Backlog amounts include both confirmed and unconfirmed orders that we believe, based on industry practice and past experience, will be confirmed. While cancellations, rejections and returns have generally not been material in the past, there can be no assurance that cancellations, rejections and returns will not reduce the amount of sales realized from the backlog of orders at May 31, 2008. Because of our reliance upon a few major accounts, any deteriorating financial performance by one or more of these customers could lead to the cancellation of existing orders and/or an inability to secure future orders, which would have a material adverse financial effect on our operating results.

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Impact of Exchange Rates

     While we purchase over 98% of our products from foreign manufacturers, all of our purchases are denominated in United States dollars. Because our products are sold primarily in the United States, in United States dollar denominated transactions, we do not engage in hedging or other arbitrage to reduce currency risk. An increase in the value of the United States dollar versus foreign currencies could enhance our purchasing power for new purchase orders and reduce our cost of goods sold. Conversely, a decrease in the value of the United States dollar relative to foreign currencies could result in an increase in both our cost of manufacturing for new purchase orders and costs of goods sold.

Impact of Inflation and Deflation

     Our management does not believe that inflation has had any material impact upon our revenues or income from operations in the current period. Our management believes that the apparel sector in which we operate has been in a period of deflation, contrary to the modest inflation experienced in the economy in general. The persistence of the consumer to buy “on sale” merchandise has put pressure on retail gross margins, which in turn has led to downward pressure from retailers on wholesale gross margins, in the form of selling cost adjustments taken as deductions against invoices issued by us. In the apparel industry, these are commonly referred to as markdown allowances or chargebacks. Without a corresponding decrease in fabric and labor prices, these markdown allowances have led to a decline in wholesale gross margins. Our management believes these modest deflationary pressures will persist into the foreseeable future.

Future Operating Results

     Business conditions in the apparel sector continue to be characterized by limited consumer demand and persistent discounting of merchandise by retailers. The propensity of consumers to seek “on sale” merchandise has sustained the use of significant discounting by most retailers to stimulate sales. In general, retailers have to sell more units in order to achieve sales equal to last year. We do not expect significant improvement in business conditions in the apparel sector in which we operate. Furthermore, we expect to incur significant expense related to internal controls documentation, testing and remediation requirements as mandated by Sarbanes-Oxley legislation with which we must be in compliance by August 31, 2008. In view of the market uncertainties and economic pressures facing us, our management remains conservative in its approach to the remainder of fiscal 2008 and planning for fiscal 2009.

Forward Looking Information and Factors that May Affect Future Results

     Our disclosure and analysis in this report contains forward-looking information about our financial results and estimates, business prospects that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance, new products and product categories, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:

• our ability to:
   
  
  • achieve solid, sustainable revenue growth;
     
  • maintain and enhance our product line;
     
  • successfully introduce new products and product categories;
     
  • successfully integrate acquisitions, including the acquisition of Backwoods;
     
  • cost effectively acquire and retain customers;
     
  • compete against existing and new competitors;
     
  • manage expenses associated with necessary general and administrative investments;
     
  • cost efficiently manage inventories; and
     
  • grow our revenues and leverage our operating infrastructure to enhance profitability;

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• general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of our products; and
   
• competition from existing and potential new competitors, including pricing pressures and other competitive forces.

     We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.

     We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports filed with the SEC. Our Annual Report on Form 10-K filing for the fiscal year ended August 31, 2007 listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item 1A, of that filing under the heading “Risk Factors.” We incorporate that section of that Form 10-K in this filing and investors should refer to it. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

     Market risk represents the potential impact to our financial position, results of operations or cash flows due to adverse changes in the financial markets. We are exposed to market risk from changes in the base interest rate of our variable interest rate debt, including advances under our factoring agreement and borrowings under Backwoods’ revolving line of credit. Interest rates may fluctuate over time based on economic conditions and we could be subject to increased interest payments if interest rates rise. As of May 31, 2008, a one percent change in interest rates would increase or decrease our annual interest expense by approximately $107,000. We do not use derivative instruments to manage our interest rate risk.

     There have been no material changes in market risk exposures from those disclosed in our Annual Report on Form 10-K for the year ended August 31, 2007.

ITEM 4. Controls and Procedures

     (a) Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

     Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls is based in part upon a cost-benefit analysis and certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. While our management does not believe that our controls will prevent all errors or all instances of fraud, our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives.

     As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2008, the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that certain control deficiencies as described below existed in our internal control over financial reporting. As a result of these deficiencies our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of May 31, 2008.

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     In connection with its audit of the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2007, J.H. Cohn advised the Company’s management and the audit committee of the board of directors of the Company that the Company did not have the internal controls necessary to timely prepare and file reliable financial statements. We have continued to implement, but did not complete steps to remedy this deficiency by the period ended May 31, 2008.

     In our Annual Report on Form 10-K we reported that we lacked sufficient experienced senior accounting staff to enable us to timely process, summarize and report financial information. Our lack of sufficient staff has resulted in our late filing of our Annual Report on Form 10-K for the fiscal year ended August 31, 2007 and an extension of time for us to file our Quarterly Reports on Form 10-Q for the quarters ended November 30, 2007 and February 29, 2008.

     We are implementing additional internal controls and procedures designed to assure the timely and accurate preparation of our financial statements, including the centralization and standardization of accounting systems among our operating subsidiaries, integration of the accounting and reporting functions for our recently acquired Backwoods business, and the recruitment and training accounting staff on the accounting issues relevant to our business operations. These controls and procedures were not fully implemented by May 31, 2008.

     While we continue to implement controls and procedures to improve the quality and timeliness of our processing information, we have completed our internal control procedures for the period ended May 31, 2008. Accordingly, our management has concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

     (b) Changes in Internal Controls over Financial Reporting. We made changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter, and subsequent to that period, that have materially affected, or are likely to materially affect, our internal control over financial reporting. During the quarter ended May 31, 2008 we have taken the following actions each of which are expected to have a material impact on our internal controls over financial reporting:

• Implementation of Controls and Procedures. In connection with our obligations under Section 404(b) of the Sarbanes Oxley Act of 2002, we are required to design and implement a system of internal controls over financial reporting and test our controls against a standardized framework in connection with our upcoming annual report for the fiscal year ending August 31, 2008. During the quarter ended May 31, 2008 we continued the design and implementation of additional internal controls, including the implementation of additional procedures for segregating accounting functions, standardizing and automating reporting formats and documenting the audit and control procedures.
   
• Accounting and Information Systems. In 2006 we acquired the business of Designer Intimates. Since that time, we have operated separate accounting systems for our west coast based business operations and the Designer Intimates business that operates primarily in New York and New Jersey. In connection with the appointment of new Chief Financial Officer and Chief Accounting Officer in the second quarter of the year, we began centralizing accounting and information functions and systems under the direction of our Chief Accounting Officer.
   
• Integration of Backwoods and Related Reporting. On February 2, 2008 we acquired all of the outstanding common stock of Back Woods Equipment Company. The quarter ended May 31, 2008 was our first full quarter of operations of the Backwoods retail stores. Consequently, we have implemented new accounting policies and have been required to review accounting issues related to those retail operations.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

     From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any such litigation which we believe would have a material adverse effect on us.

ITEM 1A. Risk Factors

     See our discussion of risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended August 31, 2007. In addition to those risk factors, below are additional risks and uncertainties that we have identified at this time, though there may be additional risks not currently known to us or that we currently believe are immaterial.

     General economic conditions, including continued weakening of the economy, may affect consumer purchases of discretionary items, which could adversely affect our sales.

     The industries in which we operate have historically been subject to cyclical variations, recessions in the general economy and future economic outlook. Our results are dependent on a number of factors impacting consumer spending including general economic and business conditions; consumer confidence; wages and employment levels; the housing market; consumer debt levels; availability of consumer credit; credit and interest rates; fuel and energy costs; energy shortages; taxes; general political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping and selling environments.

     Consumer purchases of discretionary items, including our products, may decline during recessionary periods and at other times when disposable income is lower. A downturn or an uncertain outlook in the economy may materially adversely affect our business and our revenues and profits.

     Weakness in the financial condition of retailers could harm our wholesale business.

     Our wholesale apparel and home décor business depends on retailers to sell our products. In recent years, the retail industry has experienced economic weakness. The current economic downturn has negatively influenced customer spending, increasing the financial pressure on retailers. As a result, some retailers are delaying or curtailing their purchase orders for goods. Some retailers have filed for voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. A decline in the financial condition of retail customers of our wholesale business may cause our factor to refuse to finance receivables to those customers, result in a delay of payment on our accounts, cause a retailer to reduce their advance orders or the level of business they conduct with us, or change the purchase terms on which they are willing to do business with us.

     Apparel industry practices regarding chargebacks and allowances may increase volatility in our results of operations.

     The retail apparel industry has traditionally employed a system of chargebacks and allowances on its suppliers, seeking credits or discounts on product which they cannot sell or sell at prices that are discounted below their expected selling price. In certain of our agreements with our retail customers we provide assurances of cooperation with the retailer to help them try to achieve gross margin targets, but we do not provide gross margin guarantees or purchase price protection. We have historically worked with our retail customers, including the acceptance of chargebacks and allowances where we believe that the product sale or customer relationship merit such cooperation.

     In connection with the preparation of our financial statements, we establish a reserve against sales, accruing for anticipated retailer chargebacks and allowances. Management establishes this reserve based on the terms of purchase agreements and our historical experience. In difficult economic times, retailers have additional incentive to improve their operating margins by increasing the amount of chargebacks or allowances. The consolidation in the retail industry has also increased retailers’ leverage in negotiations with their suppliers. As a result, we are aware of increasingly aggressive chargeback practices among certain retailers. This trend has resulted in lawsuits that have been filed against certain department store retailers claiming that those retailers fraudulently deducted chargebacks against invoices owing to suppliers.

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     Uncertainty related to possible chargebacks and allowances makes it more difficult for our management to accurately estimate reserves and therefore increases the potential for significant changes in revenues and gross margin from one reporting period to the next. Disagreements with any retailer over their chargeback and allowance practices may impact our ongoing business relationship with that retailer.

     Our international operations, including manufacturing, are subject to a variety of legal, regulatory, political and economic risks, including risks relating to the importation and exportation of product.

     We source most of our products outside the U.S. through arrangements with independent manufacturers in China. There are a number of risks associated with importing our products, including but not limited to the following:

• Quotas imposed by bilateral textile agreements with China and non-WTO countries. These agreements limit the amount and type of goods that may be imported annually from these countries;
   
• Changes in social, political, legal and economic conditions or terrorist acts that could result in the disruption of trade from the countries in which our manufacturers or suppliers are located;
   
• The imposition of additional regulations relating to imports or exports;
   
• The imposition of additional duties, taxes and other charges on imports or exports;
   
• Risks of increased sourcing costs, including costs for materials and labor, including as a result of the elimination of quota on apparel products;
   
• Our ability to adapt to and compete effectively in the current quota environment, including changes in sourcing patterns resulting from the elimination of quota on apparel products, as well as lowered barriers to entry;
   
• Significant delays in the delivery of cargo due to security considerations;
   
• The imposition of antidumping or countervailing duty proceedings resulting in the potential assessment of special antidumping or countervailing duties; and
   
• The enactment of new legislation or the administration of current international trade regulations, or executive action affecting international textile agreements, including the United States’ reevaluation of the trading status of certain countries and/or retaliatory duties, quotas or other trade sanctions, which, if enacted, would increase the cost of products purchased from suppliers in such countries.

     Any one of these factors could have a material adverse effect on our financial condition, results of operations and current business practices.

     Recent changes in China’s wage and tax laws may increase the costs of goods sourced in China and decrease our profitability.

     China has developed as a world leader in the manufacturing and production of apparel and other products. China has recently eliminated tax rebates for certain goods exported from that country, including apparel. In addition, changes in China’s labor minimum wage and hour laws have increased the cost of labor for goods produced in that country. Following the implementation of these regulatory changes, we have seen increases in quoted prices for goods manufactured in China.

     We continually work with our Chinese manufacturers as well as manufacturers in other countries to minimize our costs of goods sold. Our Chinese manufacturers are also evaluating options to reduce their costs under the new regulatory scheme. If Chinese manufacturers increase their prices as a result of changes in tax and wage laws, our cost of goods may increase, putting pressure on our gross margin and net income.

     If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory markdowns and lower margins.

     Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty. These preferences are also subject to change. Our success depends upon our ability to anticipate and respond in a timely manner to trends in outdoor lifestyle goods merchandise and consumers’ participation in outdoor activities. If we fail to identify and respond to these changes, our net sales may decline. In addition, because we often make commitments to purchase products from our vendors up to 6 months in advance of the proposed delivery, if we misjudge the market for our merchandise, we may over-stock unpopular products and be forced to take inventory markdowns that could have a negative impact on profitability.

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     Changes in the credit market or the financial position of the providers of our credit facilities may impact our ability to borrow money or our interest expense.

     We have historically relied on credit facilities and factoring agreements to provide working capital to support the operations of business. With respect to our wholesale business, we have a credit arrangement with our principal lender under which we factor our receivables and borrow against our inventory. Our retail business also has a line of credit under which allows us to borrow against inventory. Commercial banks and lenders have faced challenges recently related to nonperforming loans, including principally subprime based real estate loans. The impact of losses in the subprime mortgage industry has broadly affected the availability of commercial loans. We have received nonbinding assurances from the lender of our wholesale business that they do not intend to change or terminate our credit facility. We regularly evaluate alternative financing sources; however we have no other agreements or arrangement in place at this time. Further changes in the commercial credit market or in the financial stability of our creditors may impact the ability of our creditors to provide additional financing. In addition, the financial condition of our credit facility providers, which is beyond our control, may adversely change. Any decrease in our access to borrowings under our credit facilities, tightening of lending standards and other changes to our sources of liquidity could adversely impact our ability to obtain the financing we need to continue operating the business in our current manner or impact our cost of capital.

     Our hardware and software systems are vulnerable to damage that could harm our business.

     Our success, in particular our ability to successfully manage inventory levels, largely depends upon the efficient operation of our computer hardware and software systems. We use management information systems to track inventory information at the store level, communicate customer information and aggregate daily sales information. These systems and our operations are vulnerable to damage or interruption from:

• earthquake, fire, flood and other natural disasters;
   
• power loss, computer systems failures, Internet and telecommunications or data network failure, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data, security breaches, misappropriation, data theft and similar events;and
   
• computer viruses, worms, Trojan horses, intrusions, or other external threats.

     Any failure that causes an interruption in our operations or a decrease in inventory tracking could result in reduced net sales and profitability.

     Intense competition in the outdoor lifestyle goods industry could limit the growth of our retail business and reduce our profitability.

     The retail market for outdoor lifestyle goods is highly fragmented and intensely competitive. Our Backwoods retail stores compete directly or indirectly with the following categories of companies:

• large format full-line sporting goods and outdoor lifestyle goods retailers;
   
• traditional sporting goods stores and chains;
   
• specialty outdoor lifestyle goods retailers and pro shops;
   
• mass merchandisers, warehouse clubs, discount stores and department stores; and
   
• catalog and internet-based sporting goods and outdoor lifestyle goods retailers.

     Some of our competitors have a larger number of stores and greater financial, distribution, marketing and other resources than we have. If our competitors reduce their prices, it may be difficult for us to reach our net sales goals without reducing our prices. As a result of this competition, we may also need to spend more on advertising and promotion than we anticipate. If we are unable to compete successfully, our operating results will suffer.

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     Because our Backwoods stores are concentrated in four states, we are subject to regional risks.

     Our Backwoods stores are located in four states - Kansas, Nebraska, Oklahoma and Texas. Because of this, we are subject to regional risks, such as the economy, weather conditions, power outages, electricity costs and natural disasters specific to the states in which we operate. State and local regulatory compliance also can impact our financial results. If the region were to suffer an economic downturn or other adverse regional event, our net sales and profitability and our ability to implement our planned operations could suffer. Several of our competitors operate stores across the United States and thus are not as vulnerable to these regional risks.

     If we lose key management or are unable to attract and retain the talent required for our retail business, our operating results could suffer.

     The future success of Backwoods depends to a significant degree on the skills, experience and efforts of Jennifer Mull, the president and chief executive officer of Backwoods, and other key personnel who are not obligated to stay with us. The loss of the services of any of these individuals could harm our business and operations. In addition, as our Backwoods business and lifestyle clothing collection grows, we will need to attract and retain additional qualified personnel in a timely manner and develop, train and manage an increasing number of management-level sales associates and other employees. Competition for qualified employees could require us to pay higher wages and benefits to attract a sufficient number of employees, and increases in the minimum wage or other employee benefits costs could increase our operating expenses. If we are unable to attract and retain personnel as needed in the future, our net sales growth and operating results may suffer.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None.

ITEM 3. Defaults Upon Senior Securities

     None.

ITEM 4. Submission of Matters to a Vote of Security Holders

     We held our annual meeting of shareholders on March 26, 2008. The matters submitted for shareholder vote at the meeting were to: (1) elect a board of five directors; (2) vote on the proposed reincorporation from California to Nevada; and (3) vote upon a proposal to increase the number of shares of common stock subject to the Nitches, Inc. 2006 Equity Incentive Plan. See our Definitive Proxy Statement on Schedule 14A filed with the SEC on February 19, 2008, for further description of each matter submitted for shareholder vote at our annual meeting.

     Each of the five nominees for director nominated by our board of directors was elected to office. The following table sets forth the number of votes cast for, against or withheld for each nominee:

Nominee			For		Against		Withheld
Steven P. Wyandt			4,917,801		0		361,571
Paul M. Wyandt			4,905,629		0		373,743
Eugene B. Price II			4,813,418		0		465,954
Michael D. Sholtis			4,906,229		0		373,143
T. Jefferson Straub			4,825,941		0		453,431

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     Our shareholders approved both of the other two proposals submitted to a vote at the annual meeting: (i) the proposed reincorporation from California to Nevada and (ii) the proposal to increase the number of shares of common stock subject to the Nitches, Inc. 2006 Equity Incentive Plan. The following table sets forth the number votes cast for, against or abstained with respect to each of those proposals:

Proposal			For		Against		Abstained
Reincorporation			3,163,884		244,046		1,871,442
Equity Incentive Plan Amendment			3,091,373		308,988		1,879,011

ITEM 5. Other Information

     None.

ITEM 6. Exhibits

     See the exhibit index immediately following the signature page to this report.

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SIGNATURES

     Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

				NITCHES, INC.
			(Registrant)
July 15, 2008		By:	/s/ Paul M. Wyandt
			Paul M. Wyandt
			As Principal Financial Officer and on behalf of
			the Registrant

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EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, by Chief Executive Officer
31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, by Chief Financial Officer
32.1		Certification pursuant to 18 U.S.C. §1350 by Chief Executive Officer
32.2		Certification pursuant to 18 U.S.C. §1350 by Chief Financial Officer

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