Table of Contents

 

 

 

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 July 28, 2012

 

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)

 

Delaware

 

06 - 1195422

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

2400 Xenium Lane North, Plymouth, Minnesota

 

55441

(Address of principal executive offices)

 

(Zip Code)

 

(763) 551-5000

(Registrant’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  x  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.

 

Large accelerated filer o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of August 17, 2012, 37,019,410 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I –

 

FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)
As of July 28, 2012 and January 28, 2012

3

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited)
For the Thirteen Weeks Ended July 28, 2012 and August 27, 2011

4

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited)
For the Twenty-six Weeks Ended July 28, 2012 and August 27, 2011

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Thirteen and Twenty-six Weeks Ended July 28, 2012 and August 27, 2011

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Twenty-six Weeks Ended July 28, 2012 and August 27, 2011

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures
About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II –

 

OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 3.

Defaults Upon Senior Securities

38

 

 

 

Item 4.

Mine Safety Disclosures

38

 

 

 

Item 5.

Other Information

38

 

 

 

Item 6.

Exhibits

39

 

 

 

 

Signatures

41

 

 

 

 

Index to Exhibits

42

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

July 28,

 

January 28,

 

 

 

2012

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

40,516

 

$

40,782

 

Short-term investments

 

 

7,660

 

Accounts receivable

 

3,903

 

3,649

 

Merchandise inventories

 

38,658

 

39,455

 

Prepaid expenses

 

3,624

 

3,289

 

Income taxes receivable

 

974

 

1,188

 

Other current assets

 

71

 

 

 

 

 

 

 

 

Total current assets

 

87,746

 

96,023

 

 

 

 

 

 

 

Property, equipment and improvements, net

 

48,881

 

56,443

 

Long-term investments

 

 

13,284

 

Other assets

 

432

 

266

 

 

 

 

 

 

 

Total assets

 

$

137,059

 

$

166,016

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

24,213

 

$

19,466

 

Accrued salaries, wages and related expenses

 

4,964

 

5,831

 

Other accrued liabilities

 

20,770

 

25,566

 

 

 

 

 

 

 

Total current liabilities

 

49,947

 

50,863

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Deferred lease incentives

 

6,865

 

10,546

 

Deferred rent obligations

 

3,502

 

5,294

 

Lease termination liabilities

 

185

 

8,032

 

Other non-current liabilities

 

1,926

 

1,919

 

 

 

 

 

 

 

Total non-current liabilities

 

12,478

 

25,791

 

 

 

 

 

 

 

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, 46,810 and 45,819 shares issued and 37,019 and 36,028 shares outstanding at July 28, 2012 and January 28, 2012, respectively

 

467

 

458

 

Additional paid-in capital

 

118,333

 

117,399

 

Retained earnings

 

68,545

 

84,154

 

Common stock held in treasury, 9,791 shares at cost at July 28, 2012 and January 28, 2012, respectively

 

(112,711

)

(112,711

)

Accumulated other comprehensive income

 

 

62

 

 

 

 

 

 

 

Total stockholders’ equity

 

74,634

 

89,362

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

137,059

 

$

166,016

 

 

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

 

3



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Thirteen Weeks Ended

 

 

 

July 28,

 

August 27,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net sales

 

$

103,436

 

$

96,230

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Merchandise, buying and occupancy

 

74,751

 

68,403

 

Selling, general and administrative

 

30,633

 

34,505

 

Depreciation and amortization

 

4,907

 

6,267

 

Restructuring and impairment

 

(4,696

)

 

 

 

 

 

 

 

Total costs and expenses

 

105,595

 

109,175

 

 

 

 

 

 

 

Operating loss

 

(2,159

)

(12,945

)

Other income

 

36

 

76

 

 

 

 

 

 

 

Loss before income taxes

 

(2,123

)

(12,869

)

 

 

 

 

 

 

Income tax provision

 

74

 

113

 

 

 

 

 

 

 

Net loss

 

$

(2,197

)

$

(12,982

)

 

 

 

 

 

 

Basic loss per share:

 

 

 

 

 

Net loss

 

$

(0.06

)

$

(0.37

)

 

 

 

 

 

 

Basic shares outstanding

 

35,631

 

35,520

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

Net loss

 

$

(0.06

)

$

(0.37

)

 

 

 

 

 

 

Diluted shares outstanding

 

35,631

 

35,520

 

 

 

 

 

 

 

Dividends per share

 

$

 

$

0.06

 

 

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

 

4



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Twenty-six Weeks Ended

 

 

 

July 28,

 

August 27,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net sales

 

$

197,058

 

$

220,062

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Merchandise, buying and occupancy

 

146,719

 

149,229

 

Selling, general and administrative

 

61,459

 

69,936

 

Depreciation and amortization

 

9,939

 

11,851

 

Restructuring and impairment

 

(5,494

)

 

 

 

 

 

 

 

Total costs and expenses

 

212,623

 

231,016

 

 

 

 

 

 

 

Operating loss

 

(15,565

)

(10,954

)

Other income

 

89

 

155

 

 

 

 

 

 

 

Loss before income taxes

 

(15,476

)

(10,799

)

 

 

 

 

 

 

Income tax provision

 

134

 

293

 

 

 

 

 

 

 

Net loss

 

$

(15,610

)

$

(11,092

)

 

 

 

 

 

 

Basic loss per share:

 

 

 

 

 

Net loss

 

$

(0.44

)

$

(0.31

)

 

 

 

 

 

 

Basic shares outstanding

 

35,616

 

35,512

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

Net loss

 

$

(0.44

)

$

(0.31

)

 

 

 

 

 

 

Diluted shares outstanding

 

35,616

 

35,512

 

 

 

 

 

 

 

Dividends per share

 

$

 

$

0.12

 

 

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

 

5



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Thirteen Weeks Ended

 

 

 

July 28, 2012

 

August 27, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

$

(2,197

)

 

 

 

 

$

(12,982

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities arising during period

 

$

 

 

 

 

 

$

113

 

 

 

 

 

Tax impact

 

 

$

 

 

 

44

 

$

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustment for gains included in net loss

 

(68

)

 

 

 

 

(33

)

 

 

 

 

Tax impact

 

(27

)

(41

)

 

 

(13

)

(20

)

 

 

Other comprehensive income (loss)

 

 

 

 

 

(41

)

 

 

 

 

49

 

Comprehensive loss

 

 

 

 

 

$

(2,238

)

 

 

 

 

$

(12,933

)

 

 

 

Twenty-six Weeks Ended

 

 

 

July 28, 2012

 

August 27, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

$

(15,610

)

 

 

 

 

$

(11,092

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities arising during period

 

$

(3

)

 

 

 

 

$

290

 

 

 

 

 

Tax impact

 

(1

)

$

(2

)

 

 

74

 

$

216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustment for gains included in net loss

 

(99

)

 

 

 

 

(47

)

 

 

 

 

Tax impact

 

(39

)

(60

)

 

 

(19

)

(28

)

 

 

Other comprehensive income (loss)

 

 

 

 

 

(62

)

 

 

 

 

188

 

Comprehensive loss

 

 

 

 

 

$

(15,672

)

 

 

 

 

$

(10,904

)

 

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

 

6



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Twenty-six Weeks Ended

 

 

 

July 28,

 

August 27,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(15,610

)

$

(11,092

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,939

 

11,851

 

Amortization of premium on investments

 

11

 

35

 

Deferred lease related liabilities

 

(2,058

)

(1,274

)

Stock-based compensation expense

 

966

 

1,631

 

Loss on disposal of assets

 

50

 

 

Impairment of store assets

 

139

 

 

Gain on investments, net

 

(531

)

(18

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable

 

(254

)

(1,971

)

(Increase) decrease in merchandise inventories

 

797

 

(14,455

)

Increase in prepaid expenses

 

(335

)

(1,367

)

Decrease in income taxes receivable

 

214

 

3,657

 

Increase in other current assets

 

(71

)

 

Decrease in other assets

 

184

 

36

 

Increase in accounts payable

 

4,747

 

21,201

 

Decrease in accrued liabilities

 

(9,078

)

(5,701

)

Decrease in lease termination liabilities

 

(7,847

)

 

Increase in other liabilities

 

7

 

132

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(18,730

)

2,665

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, equipment and improvements

 

(2,599

)

(8,213

)

Proceeds from sale of furniture, fixtures and equipment

 

33

 

 

Purchases of investments

 

 

(33,008

)

Sales of investments

 

21,403

 

35,994

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

18,837

 

(5,227

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Shares redeemed for payroll taxes

 

(23

)

(124

)

Deferred financing costs

 

(350

)

 

Dividends paid

 

 

(4,279

)

 

 

 

 

 

 

Net cash used in financing activities

 

(373

)

(4,403

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(266

)

(6,965

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

40,782

 

43,712

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

40,516

 

$

36,747

 

 

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

 

7



Table of Contents

 

CHRISTOPHER & BANKS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current 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 our Transition Report on Form 10-K for the eleven month transition period ended January 28, 2012.

 

In January 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January.  Prior to this change, our fiscal year ended at the close of business on that Saturday which fell closest to the last day of February.  In order to transition to our new fiscal calendar, our last fiscal year was shortened from twelve months to eleven months resulting in an eleven month transition period ended January 28, 2012 (the “transition period”).  In this Quarterly Report on Form 10-Q, our current fiscal year, the 53-week period ending February 2, 2013, is referred to as fiscal 2012.

 

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 only of normal adjustments, except as otherwise stated in these notes, necessary to present fairly our financial position as of July 28, 2012 and January 28, 2012, our results of operations for the thirteen and twenty-six-week periods ended July 28, 2012 and August 27, 2011 and our cash flows for the thirteen and twenty-six-week periods ended July 28, 2012 and August 27, 2011.

 

Private Label Credit Card Program

 

During the first quarter of fiscal 2012, we launched a private label credit card program with a sponsoring bank which provides for the issuance of credit cards bearing the Christopher & Banks and C.J. Banks brands.  The sponsoring bank manages and extends credit to our customers and is the sole owner of the accounts receivable generated under the program.  As part of the program, we received a signing bonus of $0.5 million from the sponsoring bank and also earn revenue based on card usage by our customers.  The deferred signing bonus is included in other liabilities and is being recognized in net sales ratably over the term of the contract and the other revenue based on customer usage of the card are recognized in net sales in the periods in which the related customer transaction occurs.  In addition, the sponsoring bank reimburses us for certain marketing expenditures related to the program subject to an annual cap on the amount of reimbursable expenses.  The amounts related to the private label credit card program pertaining to the thirteen and twenty-six weeks ended July 28, 2012 were not material to the consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS.”  ASU 2011-04 amends ASC 820, “Fair Value Measurement,” by expanding existing disclosure requirements for fair value measurements and modifying certain definitions in the guidance, which may change how the fair value measurement guidance of ASC 820 is applied.  The Company adopted ASU 2011-04 effective January 29, 2012.  The adoption of this pronouncement has not had a significant impact on our condensed consolidated financial statements and these changes are not expected to impact the consolidated financial statements in the future.

 

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Table of Contents

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.”  ASU 2011-05 amends Accounting Standards Codification (“ASC”) 220-10, “Comprehensive Income,” and requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements and also requires the presentation of reclassification adjustments on the face of the financial statements from other comprehensive income to net income.  The Company adopted ASU 2011-05 effective January 29, 2012.  This pronouncement requires changes in presentation only and thus did not have any impact on our financial position or results of operations.

 

Immaterial Correction of an Error

 

In connection with the preparation of our financial statements for the transition period, we determined that purchases and redemptions of available-for-sale securities, as presented within the investing activities section of our consolidated statement of cash flows, incorrectly included activity related to cash equivalents for the year-to-date periods ended May 28, 2011, August 27, 2011 and November 26, 2011.  We have revised our statement of cash flows for the twenty-six weeks ended August 27, 2011 presented within this quarterly report on Form 10-Q to accurately reflect purchases and redemptions of available-for-sale securities.  The effect of this revision was a decrease of purchases of available-for-sale securities by $43.4 million and a corresponding decrease of redemptions of available-for-sale securities by $43.4 million. There was no impact on net cash provided by investing activities or cash and cash equivalents or available-for-sale securities, as previously reported.  We have concluded this correction is immaterial to the financial statements taken as a whole.

 

Reclassifications

 

Certain prior year amounts included in other accrued liabilities on the consolidated balance sheets have been reclassified to accounts payable to conform to the current year presentation.  Corresponding reclassifications were made within the operating section of the consolidated statement of cash flows.  These reclassifications have no impact on previously reported net loss, current liabilities or net cash flows from operating activities.  We believe the changes related to merchandise deliveries received, but not yet invoiced, will provide enhanced transparency.

 

In addition, beginning in the second quarter of fiscal 2012, we have classified the change in certain deferred lease-related liabilities (deferred lease incentives and deferred rent obligations) as an adjustment to reconcile net loss to net cash provided by operating activities on the consolidated statement of cash flows.  Prior year amounts previously reported as a change in operating assets and liabilities within the operating activities section of the consolidated statement of cash flows have been reclassified to conform to the current year presentation.  The reclassification has no impact on previously reported net cash flows from operating activities.

 

NOTE 2 — CHANGE IN FISCAL YEAR-END

 

As referenced in Note 1, on January 6, 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January.  Prior to this change, our fiscal year ended at the close of business on that Saturday which fell closest to the last day of February.

 

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Table of Contents

 

The table below provides unaudited financial information for the comparable thirteen and twenty-six week periods ended July 28, 2012 and July 30, 2011, respectively.

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

July 28,

 

July 30,

 

July 28,

 

July 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

103,436

 

$

105,578

 

$

197,058

 

$

215,982

 

Operating loss

 

(2,159

)

(6,277

)

(15,565

)

(14,551

)

Income tax provision (benefit)

 

74

 

(7

)

134

 

(6

)

Net loss

 

$

(2,197

)

$

(6,202

)

$

(15,610

)

$

(14,382

)

 

 

 

 

 

 

 

 

 

 

Basic loss per share:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(0.06

)

$

(0.18

)

$

(0.44

)

$

(0.41

)

 

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

35,631

 

35,496

 

35,616

 

35,491

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(0.06

)

$

(0.18

)

$

(0.44

)

$

(0.41

)

 

 

 

 

 

 

 

 

 

 

Diluted shares outstanding

 

35,631

 

35,496

 

35,616

 

35,491

 

 

NOTE 3 — RESTRUCTURING AND IMPAIRMENT

 

In the third quarter of the transition period, we announced that, following an in-depth analysis of our store portfolio, the Board approved a plan to close approximately 100 stores, most of which were underperforming.  Ultimately, 103 stores were identified for closure.  This group of stores generated approximately $35 million of sales and store-level operating losses of approximately $11 million, which included approximately $7 million of non-cash impairment charges, on a trailing 12-month basis through January 28, 2012.

 

Ninety of the 103 stores identified for closure were closed in the transition period, with two closing in November 2011, seven closing in December 2011 and 81 closing in January 2012.  We closed five stores in February 2012 and six stores in March 2012 and we closed two additional stores in the second quarter of fiscal 2012, which effectively completes the store closures related to the restructuring initiative.

 

We recorded total restructuring and asset impairment charges of approximately $21.2 million in the second half of the transition period, consisting primarily of $11.4 million of non-cash asset impairment charges, $8.2 million of net expense related to lease termination liabilities, partially offset by the reduction of deferred obligations related to closed stores, and approximately $1.5 million of severance and miscellaneous other store closing costs.  The lease termination liabilities consisted primarily of the costs of future contractual obligations related to closed store locations.  Discounted liabilities for future lease costs and management’s estimated fair value of assumed subleases of closed locations were recorded when the stores were closed and these amounts have been subject to adjustments as liabilities are settled.  In addition, management has also been negotiating with landlords to mitigate the amount of lease termination liabilities.  As a result, actual settlements have varied substantially from recorded obligations.

 

In the first quarter of fiscal 2012, we recognized a net benefit of approximately $0.8 million related to restructuring and impairment costs.  We recorded a non-cash benefit of approximately $1.4 million related to 18 stores where the amounts recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords.  We recorded approximately $0.5 million of additional lease termination liabilities related to three stores closed in the first quarter of fiscal 2012.  In addition, we recorded approximately $0.1 million of non-cash asset impairment charges related to five stores we plan to continue to operate.

 

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In the second quarter of fiscal 2012, we recognized a net benefit of approximately $4.7 million related to restructuring and impairment costs.  We recorded a non-cash benefit of approximately $4.9 million related to 35 stores where the amounts recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords for a total non-cash benefit of $6.3 million for the twenty-six-week period ended July 28, 2012.  We recorded a nominal amount of additional lease termination liabilities related to stores closed in the second quarter of fiscal 2012.  In addition, we recognized approximately $0.2 million of professional services in the second quarter related to the restructuring initiative.

 

The following table details restructuring activity for the first half of fiscal 2012 and the transition period.

 

 

 

 

 

Lease

 

 

 

 

 

 

 

 

 

Severance

 

Termination

 

Asset

 

 

 

 

 

 

 

Accrual

 

Obligations

 

Impairment

 

Other

 

Total

 

Balance, February 26, 2011

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charge

 

 

 

11,445

 

 

11,445

 

Restructuring charge

 

1,168

 

8,225

 

 

345

 

9,738

 

Total charges

 

1,168

 

8,225

 

11,445

 

345

 

21,183

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash charges

 

 

 

(11,445

)

(106

)

(11,551

)

Deferred lease obligations on closed stores

 

 

3,587

 

 

 

3,587

 

Cash payments

 

(310

)

 

 

(239

)

(549

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 28, 2012

 

858

 

11,812

 

 

 

12,670

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charge

 

 

 

139

 

 

139

 

Non-cash adjustments

 

 

(6,289

)

 

 

(6,289

)

Restructuring charge

 

 

314

 

 

342

 

656

 

Total charges (credits)

 

 

(5,975

)

139

 

342

 

(5,494

)

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash charges

 

 

 

(139

)

 

(139

)

Deferred lease obligations on closed stores

 

 

213

 

 

 

213

 

Cash payments

 

(858

)

(5,548

)

 

(342

)

(6,748

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 28, 2012

 

$

 

$

502

 

$

 

$

 

$

502

 

 

NOTE 4— INVESTMENTS

 

The Company had no investments as of July 28, 2012.  Investments consisted of the following (in thousands) as of January 28, 2012:

 

 

 

Jan 28, 2012

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

Description

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

5,643

 

$

19

 

$

2

 

$

5,660

 

U.S. Agency securities

 

2,000

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

7,643

 

19

 

2

 

7,660

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

13,200

 

84

 

 

13,284

 

 

 

 

 

 

 

 

 

 

 

Total long-term investments

 

13,200

 

84

 

 

13,284

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$

20,843

 

$

103

 

$

2

 

$

20,944

 

 

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Table of Contents

 

We account for our investments in accordance with ASC 320-10, “Investments — Debt and Equity Securities.”  As of January 28, 2012, our available-for-sale investment securities consisted of municipal bonds.  These securities were classified as available-for-sale as we did not enter into these investments for speculative purposes or intend to actively buy and sell the securities in order to generate profits on differences in price.  Our primary investment objective is preservation of principal.  During the first half of fiscal 2012, there were no purchases of available-for-sale securities and proceeds from the sale of available-for-sale securities were approximately $21.4 million.  Gross realized gains and losses on the sale of available-for-sale securities during the thirteen weeks ended July 28, 2012 were not material.

 

Our available-for-sale securities are reviewed for possible impairment at least quarterly, or more frequently if circumstances arise which, in our estimation, may indicate impairment.  When the fair value of the securities declines below the amortized cost basis, impairment is indicated and it must be determined whether it is other-than-temporary.  Impairment is considered to be other-than-temporary if we (i) intend to sell the security, (ii) will more likely than not be forced to sell the security before recovering its cost, or (iii) do not expect to recover the securities’ amortized cost basis.  If the decline in fair value is considered other-than-temporary, the cost basis of the security is adjusted to its fair market value and the realized loss is reported in earnings.  Subsequent increases or decreases in fair value considered other-than-temporary are reported in equity as other comprehensive income (loss).  There were no other-than-temporary impairments of our available-for-sale securities during the thirteen and twenty six weeks ended July 28, 2012.

 

NOTE 5 — MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY

 

Our merchandise inventories consisted of the following (in thousands):

 

 

 

July 28,

 

January 28,

 

Description

 

2012

 

2012

 

 

 

 

 

 

Merchandise - in store/e-Commerce

 

$

30,038

 

$

32,599

 

Merchandise - in transit

 

8,620

 

6,856

 

 

 

 

 

 

 

 

 

$

38,658

 

$

39,455

 

 

We do not have long-term purchase commitments or arrangements with any of our suppliers or agents.  During the quarter ended July 28, 2012, one of our vendors supplied approximately 21% of our merchandise purchases.  For the quarter ended August 27, 2011, this vendor supplied 19% of our merchandise purchases and another vendor supplied 17% of our merchandise purchases.  No other vendor supplied greater than 10% of our merchandise purchases for the quarter ended July 28, 2012.

 

Although we have strong relationships 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 us.  If there should be any significant disruption in the supply of merchandise from these vendors, we believe that we will be able to shift production to other suppliers so as to continue to secure the required volume of product.  Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on our financial position or results of operations.

 

The Company changed its payment terms from net 30 days to net 45 days from receipt of goods in its distribution center for vendors representing approximately 60% of its merchandise purchases beginning with its August merchandise assortment.

 

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Table of Contents

 

NOTE 6 — PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

 

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

 

 

 

Estimated

 

July 28,

 

January 28,

 

Description

 

Useful Life

 

2012

 

2012

 

 

 

 

 

 

 

 

 

Land

 

 

$

1,597

 

$

1,597

 

Corporate office, distribution center and related building improvements

 

25 years

 

12,319

 

12,319

 

Store leasehold improvements

 

Term of related lease, typically 10 years

 

60,933

 

62,961

 

Store furniture and fixtures

 

3-10 years

 

77,343

 

79,793

 

Corporate office and distribution center furniture, fixtures and equipment

 

7 years

 

5,547

 

5,562

 

Computer and point of sale hardware and software

 

 

 

34,082

 

34,039

 

Construction in progress

 

 

 

1,849

 

518

 

 

 

 

 

 

 

 

 

 

 

 

 

193,670

 

196,789

 

Less accumulated depreciation and amortization

 

 

 

(144,789

)

(140,346

)

 

 

 

 

 

 

 

 

Net property, equipment and improvements

 

 

 

$

48,881

 

$

56,443

 

 

We review 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. We recorded $0.1 million for long-lived asset impairment in the quarter ended April, 28, 2012 and no asset impairment charges were recorded in the quarter ended July 28, 2012. The current challenging economic environment and general economic uncertainty affecting the retail industry make it reasonably possible that long-lived asset impairments could be identified and recorded in future periods.

 

NOTE 7 — ACCRUED LIABILITIES

 

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

 

 

 

July 28,

 

January 28,

 

Description

 

2012

 

2012

 

 

 

 

 

 

 

Gift card and store credit liabilities

 

$

6,197

 

$

9,922

 

Accrued Friendship Rewards Program loyalty liability

 

3,525

 

3,376

 

Accrued income, sales and other taxes payable

 

2,134

 

2,097

 

Accrued occupancy-related expenses

 

1,126

 

4,549

 

Other

 

7,788

 

5,622

 

 

 

 

 

 

 

 

 

$

20,770

 

$

25,566

 

 

NOTE 8 — CREDIT FACILITY

 

On July 12, 2012, Christopher & Banks Corporation and its two subsidiaries, Christopher & Banks, Inc. and Christopher & Banks Company (collectively the “Borrowers”), entered into a Credit Agreement (the “New Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”) as Lender.  The New Credit Facility replaced our prior credit facility with Wells Fargo.  The New Credit Facility provides us with revolving credit loans and of up to $50.0 million in the aggregate, subject to a borrowing base formula based primarily on eligible credit card receivables, inventory and real estate, as defined in the New Credit Facility, and up to $10.0 million of which may be drawn in the form of standby and documentary letters of credit. The New Credit Facility expires in July 2017.

 

We recorded approximately $0.4 million of deferred financing costs in connection with the New Credit Facility.  The deferred financing costs have been recorded as an other asset on the consolidated balance sheet and will be amortized as interest expense over the related term of the New Credit Facility.

 

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Table of Contents

 

Borrowings under the New Credit Facility will generally accrue interest at a rate ranging from 2.0% to 2.5% over the London Interbank Offered Rate (“LIBOR”) or 1.0% to 1.5% over Wells Fargo’s prime rate, based on the amount of excess availability as such term is defined in the New Credit Facility.  Letters of credit fees range from 1.5% to 2.5%, depending upon excess availability.

 

The New Credit Facility contains certain affirmative and negative covenants.  The affirmative covenants include certain reporting requirements, maintenance of properties, payment of taxes and insurance, compliance with laws, environmental compliance and other provisions customary in such agreements.  Negative covenants limit or restrict, among other things, secured and unsecured indebtedness, fundamental changes in the business, investments, liens and encumbrances, transactions with affiliates and other matters customarily restricted in such agreements.  The sole financial covenant contained in the New Credit Facility requires us to maintain availability at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million.

 

The New Credit Facility contains events of default that include failure to pay principal or interest when due, failure to comply with the covenants set forth in the New Credit Facility, bankruptcy events, cross-defaults and the occurrence of a change of control, subject to the grace periods, qualifications and thresholds as specified in the New Credit Facility.  If an event of default under the New Credit Facility occurs and is continuing, the loan commitments may be terminated and the principal amount outstanding, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable.

 

Our obligations under the New Credit Facility are secured by the assets of the Company and its subsidiaries pursuant to a Security Agreement, dated July 12, 2012 (the “Security Agreement”).  Pursuant to the Security Agreement, we pledged substantially all of our assets as collateral security for the loans to be made pursuant to the New Credit Facility, including accounts owed to us, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company’s subsidiaries.

 

We had no revolving credit loan borrowings under our previous or New Credit Facility during the first half of fiscal 2012 or the entire transition period.  Historically, we have utilized our credit facility only to open letters of credit.  The total borrowing base at July 28, 2012 was $26.4 million.  As of July 28, 2012, we had open on-demand letters of credit of $3.7 million.  Accordingly, after reducing the borrowing base for the open letters of credit and the required minimum availability of $3.0 million, or 10% of the borrowing base, the net availability of revolving credit loans under the New Credit Facility was $19.7 million at July 28, 2012.

 

NOTE 9 — STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Dividends

 

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

 

Stockholder Rights Plan

 

On July 5, 2012, we adopted a stockholder rights plan (the “Rights Plan”).  The Rights Plan is embodied in the Rights Agreement dated as of July 5, 2012 (the “Rights Agreement”), between the Company and Wells Fargo Bank, National Association (the “Rights Agent”).  On July 5, 2012, the Board of Directors of the Company also authorized the issuance, and declared a dividend, of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, par value $0.01 per share (the “Common Shares”), outstanding at the close of business on July 16, 2012.

 

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Table of Contents

 

Initially, no separate certificates representing the Rights will be issued. Under the Rights Plan, the Rights would be distributed upon the earlier to occur of (i) the tenth day after the first date of public announcement by the Company or an Acquiring Person (an Acquiring Person generally is a person that, together with its affiliates and associates, is the beneficial owner of 15% or more of the outstanding Common Shares) (including, without limitation, pursuant to a report filed or amended pursuant to Section 13(d) of the Exchange Act) that a person has become an Acquiring Person, or such earlier date as a majority of the Board of Directors of the Company shall become aware of the existence of an Acquiring Person (the “Shares Acquisition Date”) or (ii) the tenth day (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any person becomes an Acquiring Person) after the date of the commencement by any person (other than certain persons, including the Company, any subsidiary of the Company, and Company benefit plan related holders) of a tender or exchange offer upon the successful consummation of which such person, or any affiliate or associate of such person, would be an Acquiring Person (including any such date which is after the date of the Rights Agreement and prior to the issuance of the Rights) (the earlier of such dates, the “Distribution Date”).  Each Right entitles the registered holder to purchase from the Company one one-thousandth (1/1000th) of a share of Series A Junior Participating Preferred Stock, $0.01 par value (the “Preferred Shares”), of the Company at a price of $8.25 (the “Purchase Price”), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement between the Company and the Rights Agent.

 

In the event any person becomes an Acquiring Person, then each holder of a Right, other than Rights beneficially owned by the Acquiring Person and its affiliates and associates (which will thereafter be null and void for all purposes of the Rights Agreement and the holder thereof shall thereafter have no rights with respect to such Rights, whether under the Rights Agreement or otherwise), will thereafter have the right to receive upon exercise, in lieu of Preferred Shares, that number of Common Shares having a market value of two times the Purchase Price. Under some circumstances, upon payment of the Purchase Price, the Company may substitute other equity and debt securities, property, cash or combinations thereof, including combinations with Common Shares, of equal value to the number of Common Shares for which the Right is exercisable.

 

The Rights will expire at 5:00 p.m. (Eastern time) on July 5, 2014 (the “Expiration Date”), unless the Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described in the Rights Agreement.  Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. The foregoing is a summary of the Rights Plan, as filed with the Securities and Exchange Commission in our Form 8-K filing, and is qualified in its entirety by reference to the detailed terms and conditions as set forth in the Rights Plan.

 

Stock-Based Compensation

 

We account for stock-based compensation in accordance with the provisions of ASC 718-10, “Stock Compensation.” Under various plans, we may grant options to purchase common stock to employees and non-employee members of our Board of Directors at a price not less than 100% of the fair market value of our common stock on the option grant date.  In general, options granted to employees vest over three years and are exercisable up to ten years from the date of grant, and options granted to Directors typically vest over a thirty-month period and are exercisable up to ten years from the grant date.

 

We may also grant shares of restricted stock to our employees and non-employee members of our Board of Directors.  The grantee cannot transfer the shares before the respective shares vest.  Shares of nonvested restricted stock are considered to be currently issued and outstanding.  Restricted stock grants to employees generally have original vesting schedules of one to three years, while restricted grants to Directors typically vest over six months.

 

Our restricted stock awards are generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions.  In addition, certain of our restricted stock awards have performance-based vesting provisions and are subject to forfeiture, in whole or in part, if these performance conditions are not achieved.  We assess, on an ongoing basis, the probability of whether the performance criteria will be achieved and, once it is deemed probable, we begin recognizing compensation expense over the relevant performance period.  For those awards not subject to performance criteria, we expense 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.

 

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Table of Contents

 

The fair market value of our restricted stock is determined based on the closing price of our common stock on the grant date.  Time-based grants, but not performance-based grants, of restricted stock participated in dividend payments to the extent dividends were declared and paid prior to vesting.  Total pre-tax compensation expense related to stock-based awards for the thirteen weeks ended July 28, 2012 and August 27, 2011 was approximately $0.5 million and $0.6 million, respectively.

 

Methodology Assumptions

 

We use the Black-Scholes option-pricing model to value our stock options for grants to our 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 and is expensed on a straight-line basis over the vesting period, as the stock options are subject to pro-rata vesting.  The expected volatility assumption is based on the historical volatility of our stock over a term equal to the expected term of the option granted.  The expected term of stock option awards granted is derived from our historical exercise experience and represents the period of time that awards are expected to be outstanding.  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 our stock options granted during the thirteen and twenty-six week periods ended July 28, 2012 and August 27, 2011 were as follows:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

July 28,

 

August 27,

 

July 28,

 

August 27,

 

 

 

2012

 

2011

 

2012

 

2011

 

Expected dividend yield

 

0.0

%

3.9

%

0.0

%

3.9

%

Expected volatility

 

74.9

%

71.0

%

73.6

%

71.0

%

Risk-free interest rate

 

0.7

%

1.5

%

1.0

%

2.1

%

Expected term in years

 

5.0

 

5.0

 

4.9

 

5.0

 

 

Stock-Based Compensation Activity

 

The following table presents a summary of our stock option activity for the twenty-six weeks ended July 28, 2012:

 

 

 

 

 

 

 

 

 

 

 

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

 

2,826,949

 

$

7.48

 

$

 

$

3.19

 

 

 

Vested

 

1,207,311

 

9.91

 

 

4.01

 

 

 

Unvested

 

1,619,638

 

5.67

 

 

2.58

 

 

 

Granted

 

601,617

 

1.89

 

124

 

1.13

 

 

 

Exercised

 

 

 

 

 

 

 

Canceled - vested (expired)

 

(681,951

)

7.14

 

 

2.97

 

 

 

Canceled - unvested (forfeited)

 

(977,680

)

5.64

 

4

 

2.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, end of period

 

1,768,935

 

6.73

 

120

 

2.94

 

7.90

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

683,666

 

12.02

 

 

 

4.87

 

5.76

 

Unvested

 

1,085,269

 

3.40

 

120

 

1.72

 

9.24

 

Exercisable, end of period

 

683,666

 

12.02

 

 

4.87

 

5.76

 

 

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options as of the last trading day of the quarter) that would have been received by the option holders had all option holders exercised their options on July 28, 2012.

 

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Table of Contents

 

The following table presents a summary of our restricted stock activity for the twenty-six weeks ended July 28, 2012:

 

 

 

Number

 

Weighted

 

 

 

of

 

Average

 

 

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Unvested, beginning of period

 

446,904

 

$

5.03

 

Granted

 

1,063,547

 

1.66

 

Vested

 

(62,558

)

6.59

 

Canceled - unvested (forfeited)

 

(70,505

)

4.28

 

 

 

 

 

 

 

Unvested, end of period

 

1,377,388

 

$

2.39

 

 

The total fair value of shares of restricted stock that vested during the twenty-six weeks ended July 28, 2012 and August 27, 2011 was approximately $0.4 million and $0.4 million, respectively.  As of July 28, 2012, there was approximately $2.1 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of approximately 1.5 years.

 

NOTE 10 — INCOME TAXES

 

As of July 28, 2012, our liability for unrecognized tax benefits associated with uncertain tax positions was approximately $0.9 million and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.7 million.  We recognize interest and penalties related to unrecognized tax benefits as components of income tax expense.  At July 28, 2012, we had accrued approximately $0.5 million for the potential payment of interest and penalties.

 

We are subject to U.S. federal income tax and the income tax of various state and local jurisdictions.  Fiscal years 2009 through the transition period remain subject to examination by the Internal Revenue Service. With few exceptions, we are not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2007.  At July 28, 2012, we had ongoing audits in various state jurisdictions.  We do not believe that the resolution of these examinations will have a significant impact on our liability for unrecognized tax benefits.

 

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

 

As of July 28, 2012, we had federal and state net operating loss carryforwards which may reduce future taxable income.  Approximately $20.9 million in federal tax benefits are available from these loss carryforwards and an additional $0.6 million is available in tax credit carryforwards.  The state loss carryforwards may result in state tax benefits of approximately $1.9 million.  The federal net loss carryforwards expire in November 2031 and beyond.  The state net loss carryforwards will expire beginning in November 2014 and beyond.  Additionally, we have charitable contribution carryforwards that will expire in 2014.

 

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NOTE 11 — EARNINGS PER SHARE

 

We calculate earnings per share under the guidance in ASC 260-10, “Earnings per Share,” which clarifies that unvested share-based payment awards that contain nonforfeitable rights to receive dividends or dividend equivalents (whether paid or unpaid) are considered participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”).  Participating securities under this statement include our 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.

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

July 28,

 

August 27,

 

July 28,

 

August 27,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator (in thousands):

 

 

 

 

 

 

 

 

 

Net loss attributable to Christopher & Banks Corporation

 

$

(2,197

)

$

(12,982

)

$

(15,610

)

$

(11,092

)

Income allocated to participating securities

 

 

(14

)

 

(24

)

 

 

 

 

 

 

 

 

 

 

Net loss available to common shareholders

 

$

(2,197

)

$

(12,996

)

$

(15,610

)

$

(11,116

)

 

 

 

 

 

 

 

 

 

 

Denominator (in thousands):

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

35,631

 

35,520

 

35,616

 

35,512

 

Dilutive shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding - diluted

 

35,631

 

35,520

 

35,616

 

35,512

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

$

(0.37

)

$

(0.44

)

$

(0.31

)

Diluted

 

$

(0.06

)

$

(0.37

)

$

(0.44

)

$

(0.31

)

 

Total stock options and restricted shares of 1.9 million and 2.9 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen and twenty-six-week periods ended July 28, 2012 and August 27, 2011, respectively, as they were anti-dilutive.

 

NOTE 12 — FAIR VALUE MEASUREMENTS

 

Under ASC 820-10, “Fair Value Measurements and Disclosures,” 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.  ASC 820-10 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 and are developed based on market data obtained from sources independent of us.  Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability that are 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.  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.

 

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

 

Historically, fair value under ASC 820-10 has applied to our available-for-sale securities.  We had no available-for-sale securities at July 28, 2012.  We did have approximately $20.9 million of available-for-sale securities at January 28, 2012.  These financial assets were carried at fair value following the requirements of ASC 820-10.

 

The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):

 

 

 

 

 

Fair Value Measurements

 

 

 

Fair Value at

 

Using Inputs Considered as

 

Description

 

January 28, 2012

 

Level 1

 

Level 2

 

Level 3

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

5,660

 

$

 

$

5,660

 

$

 

U.S. Agency securities

 

2,000

 

 

2,000

 

 

Total current assets

 

7,660

 

 

7,660

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

13,284

 

 

13,284

 

 

Total non-current assets

 

13,284

 

 

13,284

 

 

Total assets

 

$

20,944

 

$

 

$

20,944

 

$

 

 

Following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value:

 

Available-for-sale securities:  Our available-for-sale securities were valued based on quoted prices for similar assets in active markets or quoted prices for identical or similar assets in markets in which there were fewer transactions.

 

Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis:

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

 

Twenty-six

 

 

 

 

 

 

 

Gains (Losses)

 

 

 

Weeks Ended

 

Fair Value Measurements

 

Twenty-six

 

 

 

July 28,

 

Using Inputs Considered as

 

Weeks Ended

 

Description

 

2012

 

Level 1

 

Level 2

 

Level 3

 

July 28, 2012

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held and used

 

$

34

 

$

 

$

 

$

34

 

$

(139

)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

$

 

$

 

$

 

$

 

$

 

 

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification Subtopic 360-10, long-lived assets held and used with a carrying amount of $172,000 were written down to their fair value of $34,000, during the first quarter of fiscal 2012, resulting in an impairment charge of $139,000 which was included in earnings for the twenty-six weeks ended July 28, 2012.

 

Our assessment of the recoverability of the carrying value of our assets involves the projection of future cash flows, which requires the use of significant estimates and assumptions.  Differences in circumstances or estimates could produce significantly different results.  The current challenging economic environment which affects the retail industry makes it possible that additional long-lived asset impairments could be identified and recorded in future periods.

 

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NOTE 13 — LEGAL PROCEEDINGS

 

We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business.  Although the amount of any liability that could arise with respect to any current proceedings cannot, in our opinion, be accurately predicted, the range of reasonably possible losses on these matters, individually and in the aggregate, is not expected to have a material adverse impact on our financial position, results of operations or liquidity.

 

NOTE 14 — SEGMENT REPORTING

 

We operate in the retail apparel industry in which we primarily design, source and sell women’s apparel catering to customers generally ranging in age from 45 to 55 who are typically part of a segment of the female baby boomer demographic.  We have identified two operating segments (Christopher & Banks and C.J. Banks) as defined by ASC 820 “Disclosures about Segments of an Enterprise and Related Information.” Our 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 operating segments.

 

In the table below, the “Christopher & Banks/C.J. Banks” reportable segment includes activity generated by our Christopher & Banks and C.J. Banks operations.  The “Corporate/Administrative” column, which primarily represents operating activity at our corporate office and distribution center facility, is presented to allow for reconciliation of segment-level net sales, operating income (loss) and total assets to our 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.

 

For the twenty-six weeks ended July 28, 2012, the Christopher & Banks/C.J. Banks operating income included store-level asset impairment charges of approximately $0.1 million.  No store-level asset impairment charges were recorded in the twenty-six weeks ended August 27, 2011.

 

 

 

 

 

 

 

 

 

 

 

Christopher & Banks/

 

Corporate/

 

 

 

Segment Reporting (in thousands):

 

C.J. Banks

 

Administrative

 

Consolidated

 

Thirteen Weeks Ended July 28, 2012

 

 

 

 

 

 

 

Net sales

 

$

103,436

 

$

 

$

103,436

 

Operating income (loss)

 

8,946

 

(11,105

)

(2,159

)

Total assets

 

90,264

 

46,795

 

137,059

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended August 27, 2011

 

 

 

 

 

 

 

Net sales

 

$

96,230

 

$

 

$

96,230

 

Operating income (loss)

 

333

 

(13,278

)

(12,945

)

Total assets

 

131,723

 

103,056

 

234,779

 

 

 

 

 

 

 

 

 

 

 

 

Christopher & Banks/

 

Corporate/

 

 

 

Segment Reporting (in thousands):

 

C.J. Banks

 

Administrative

 

Consolidated

 

Twenty-six Weeks Ended July 28, 2012

 

 

 

 

 

 

 

Net sales

 

$

197,058

 

$

 

$

197,058

 

Operating income (loss)

 

7,006

 

(22,571

)

(15,565

)

Total assets

 

90,264

 

46,795

 

137,059

 

 

 

 

 

 

 

 

 

Twenty-six Weeks Ended August 27, 2011

 

 

 

 

 

 

 

Net sales

 

$

220,062

 

$

 

$

220,062

 

Operating income (loss)

 

15,375

 

(26,329

)

(10,954

)

Total assets

 

131,723

 

103,056

 

234,779

 

 

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NOTE 15 — RELATED PARTY TRANSACTIONS

 

The Company or its subsidiaries have for the past several years made payments to G-III Apparel Group Ltd. (“G-III”) or its related entities.  On January 3, 2011, Morris Goldfarb, the Chairman of the Board and Chief Executive Officer of G-III, became a director of the Company.  In the twenty-six weeks ended July 28, 2012 and August 27, 2011, we paid G-III and its related entities approximately $0.5 million and $0.1 million, respectively.  As of July 28, 2012, the Company had a balance due to G-III of approximately $40,000.

 

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

 

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 our Transition Report on Form 10-K for the transition period ended January 28, 2012.

 

Executive Overview

 

Christopher & Banks Corporation, a Delaware corporation, is a Minneapolis-based retailer of women’s apparel and accessories, which operates retail stores through its wholly-owned subsidiaries.  In January 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January.  Prior to this change, our fiscal year ended at the close of business on that Saturday which fell closest to the last day of February.  In order to transition to our new fiscal calendar, our last fiscal year was shortened from 12 months to 11 months, resulting in an 11-month transition period ended January 28, 2012 (the “transition period”).  In this Quarterly Report on Form 10-Q, our current fiscal year, the 53-week period ending February 2, 2013, is referred to as fiscal 2012.

 

As of July 28, 2012, we operated 649 stores in 44 states, including 384 Christopher & Banks stores, 175 C.J. Banks stores, 65 dual concept stores and 25 outlet stores.  Our Christopher & Banks brand offers unique fashions and accessories featuring exclusively designed, coordinated assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P.  Our C.J. Banks brand offers similar assortments of plus size women’s apparel in sizes 14W to 26W.  Our dual concept and outlet stores offer an assortment of both Christopher & Banks and C.J. Banks apparel servicing the petite, missy and women-size customer in one location.  We also operate e-Commerce web sites for our two brands at www.christopherandbanks.com and www.cjbanks.com which, in addition to offering the apparel and accessories found in our stores, also offer exclusive sizes and styles available only online.

 

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

 

Fiscal 2012 Second Quarter Summary

 

We made progress on our strategic initiatives, which are more fully described below, in the second quarter of fiscal 2012.  Same store sales increased 5.5% during the quarter, a sequential improvement from the 14.6% decline reported in the first quarter.  The improvement in comparable store sales accelerated during the second quarter beginning with essentially flat same store sales in May, a 7% increase in comparable store sales in June and a 10% increase in same store sales in July.  Increased customer traffic levels was the main driver of the increase in same store sales as enhanced promotional signage drew more customers into our stores.  In addition, we experienced accelerated rates of product sell through in the second quarter with each subsequent merchandise delivery.

 

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While gross margins declined when compared to the same period last year, we reported a 460 basis point improvement in gross margin over the first quarter of fiscal 2012.  Markdown rates were higher than in the comparable prior year period as we continued to clear through less desirable product from older deliveries that continued to make up a significant portion of our assortment.  Along with rates of product sell through, merchandise margins improved with each subsequent product delivery in the second quarter as the penetration of product purchased under our new merchandise strategy increased with each delivery.  In May, we were able to impact the styling and balance of only a small amount of our assortment.  By July, our new merchant team was able to impact the pricing, number of unique styles offered, order quantities and promotional strategy on approximately half of our merchandise offerings.

 

We ended the second quarter with cash and cash equivalents of $40.5 million, up $6.8 million from $33.7 million of cash, cash equivalents and short and long-term investments at the end of the first quarter.  Total inventory was $38.7 million at July 28, 2012, compared to $44.5 million at the end of the first quarter and $39.5 million at January 28, 2012.  While in-store inventory per store was up approximately 3% at the end of the second quarter compared to the same prior year period, it was essentially flat compared to the balance as of January 28, 2012 and down 24% as compared to the end of the first quarter.  Our inventory balance at July 28, 2012 was current with approximately 70% of product from more recent deliveries, including July and August merchandise assortments and core product received in July.

 

Other Developments

 

Effective February 17, 2012, we announced that our Board of Directors had elected Joel N. Waller as our President and Chief Executive Officer.  Mr. Waller joined Christopher & Banks on December 14, 2011 as President for a one-year term.  Mr. Waller replaced Larry C. Barenbaum, our former Chief Executive Officer, who resigned all positions with the Company, including the position of Director, effective February 17, 2012. Mr. Waller brings extensive retail experience to Christopher & Banks, having served as Chief Executive Officer for Wilsons Leather and The Wet Seal, Inc.  While his initial focus has been on product development, sourcing and merchandising, Mr. Waller also brings significant management and operational experience to our organization that we believe has and will assist us in revitalizing our business in our efforts to return to profitability.

 

We incurred a pre-tax severance charge of approximately $0.3 million in the first quarter of fiscal 2012 in connection with Mr. Barenbaum’s resignation.  At the same time, we also announced that our Board of Directors had formed a committee to commence a search for a permanent Chief Executive Officer.

 

On April 17, 2012, we announced that Peter Michielutti would be joining the Company as Senior Vice President, Chief Financial Officer effective April 23, 2012.  Mr. Michielutti brings more than 20 years of financial leadership experience to Christopher & Banks.  Most recently he served as Senior Vice President and Chief Financial Officer at CSM Corporation, a commercial real estate company. He also has an extensive retail background, having held the chief financial officer position at Whitehall Jewelers, Wilsons Leather and Fingerhut, in addition to serving as a retail consultant at Prentice Capital.  Mr. Michielutti replaced Michael Lyftogt, who returned to his prior position with the Company as Chief Accounting Officer.

 

Effective May 3, 2012, we announced that David A. Levin, William F. Sharpe, III and Patricia A. Stensrud had been elected to its Board of Directors.  The election of these three individuals increased the number of Board members to ten, all of whom are independent directors.

 

David A. Levin, 60, is President and Chief Executive Officer of Casual Male Retail Group (“CMRG”), the largest specialty retailer of big and tall men’s apparel, a position he has held since April 2000.  He has more than 30 years of retail experience, having also served as Executive Vice President of eOutlet.com and as President of Camp Coleman, a division of the Coleman Company; of Prestige Fragrance and Cosmetics, a division of Revlon, Inc.; and of Parade of Shoes, a division of J. Baker, Inc. Mr. Levin is also a director of CMRG.

 

William F. Sharpe, III, 49, serves as a Partner and Managing Director of Quetico Partners, LLC, a boutique investment banking firm, a position he has held since September 2009.  From July 2007 to August 2009 he was Chief Operating Officer and a Managing Director of Lazard Middle Market, following Lazard, Freres & Company’s acquisition of Goldsmith Agio Helms & Lynner, LLC, where he worked in several investment banking roles from February 1998 until its acquisition by Lazard in July 2007.

 

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Patricia A. Stensrud, 64, is the President of A&H Manufacturing, a worldwide package design and manufacturing company with operations in the United States, China and the United Kingdom, a position she has held since May 2011.  Ms. Stensrud has prior women’s apparel experience, having served as President of the Women’s Sportswear Division of Tommy Hilfiger and as Chief Executive Officer of the Victoria + Co division of Jones Apparel Group.  She is also the founder and managing partner of Hudson Rivers Partners, LLC, a private real estate investment and advisory due diligence firm.  Ms. Stensrud also serves on the board of Crown Crafts, Inc.

 

Effective June 28, 2012, the Company’s Board of Directors decreased from ten independent members to eight independent members as James J. Fuld, Jr. and Martin L. Bassett did not stand for re-election to the Company’s Board of Directors at the Company’s Annual Meeting of Stockholders.

 

On July 5, 2012, we adopted a stockholder rights plan (the “Rights Plan”).  The Rights Plan is embodied in the Rights Agreement dated as of July 5, 2012 (the “Rights Agreement”), between the Company and Wells Fargo Bank, National Association (the “Rights Agent”).  In conjunction with the adoption of the Rights Plan, on July 5, 2012, the Board of Directors of the Company also authorized the issuance, and declared a dividend, of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, par value $0.01 per share (the “Common Shares”), outstanding at the close of business on July 16, 2012.  Please see Note 9 — Stockholders’ Equity and Stock-Based Compensation —in Part 1, Item 1, of this Report on Form 10-Q for more information regarding the Rights Plan.

 

On July 12, 2012, we announced that we entered into a new $50 million revolving credit facility with Wells Fargo Bank expiring in July 2017.  The New Credit Facility, which replaced our prior facility with Wells Fargo, is described in more detail in Note 8 - Credit Facility - in Part 1, Item 1, of this Report on Form 10-Q and in the Liquidity section found later in this MD&A.

 

Fiscal 2012 Outlook

 

Our results of operations for the quarter ended July 28, 2012 reflect some early benefits of our new strategic initiatives, including sequentially improved same store sales and margin improvement over the first quarter of fiscal 2012.  While we anticipate the current heavily promotional environment to continue throughout the second half of fiscal 2012, we expect to experience positive same store sales in the third and fourth quarters of this fiscal year. Merchandise margins are anticipated to exceed prior year levels in the second half of fiscal 2012.

 

As a result of store closings and rent restructurings, we expect approximately 200 to 300 basis points of positive leverage of occupancy expense for the 12 months ending February 2, 2013 when compared to the 12 months ended January 28, 2012.  We expect selling, general and administrative expenses to be in the range of $35 million to $36 million in the third quarter, which includes 13 weeks, and between $36 million and $37 million in the fourth quarter of fiscal 2012, which includes 14 weeks. Approximately $1.9 million of expense is associated with the 14th week in the fourth quarter.  We expect marketing expenditures for the second half of fiscal 2012 to be greater than in the first half of the year, but less than in the comparable period last year.  We will continue to focus on driving customer traffic through direct mail and e-mail campaigns and in-store promotional signage.

 

We expect to control inventories in the second half of fiscal 2012, while we will ensure levels are sufficient to support continued increases in same store sales.  We plan to conserve cash by minimizing capital expenditures associated with a limited number of store openings.  Depreciation and amortization is expected to be roughly $18 million and capital expenditures are planned at approximately $6 million for the full fiscal year.

 

Based on our current plans for fiscal 2012, we believe cash flows from operating activities and working capital will be sufficient to meet our operating and capital expenditure requirements for the remainder of the fiscal year.  We do not anticipate the need to utilize our New Credit Facility for any liquidity needs in the second half of fiscal 2012, other than to maintain and open letters of credit.  Our operating plan for the last six months of fiscal 2012 contemplates positive same store sales and improvements in merchandise margins when compared to the comparable prior-year period.  The plan is dependent on our ability consistently to deliver merchandise that is appealing to our customers at a profitable price and effectively to manage our costs in order to satisfy our working capital and other operating cash requirements.  The ability to achieve our operating plan is based on a number of assumptions which involve significant judgments and estimates of future performance.  If our net sales, gross margins and operating results fall short of our expectations, we may be required to access some, if not all, of our New Credit Facility and potentially require other sources of financing to fund our operations.

 

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We will continue to monitor our performance and liquidity and, if we believe it is appropriate or necessary to borrow under the New Credit Facility or obtain additional liquidity, we would first consider taking further steps intended to improve our financial position, such as modifying our operating plan, seeking to reduce costs further, decreasing our cash spend and/or capital expenditures, as well as evaluating alternatives and opportunities to obtain additional sources of liquidity through the debt or equity markets.  It is possible these actions may not be sufficient or available or, if available, available on terms acceptable to us.

 

Strategic Initiatives

 

Merchandising

 

In the third quarter of the transition period, we reestablished the position of Divisional General Merchandise Manager in our merchandise area.  We added two Divisional General Merchandise Managers, one for the Christopher & Banks division and one for the C.J. Banks division.  One of the Divisional General Merchandise Managers was promoted internally, while the other was a new hire.  Both individuals bring strong retail experience and merchandising disciplines to our merchant team.

 

Our merchant team is currently focused on delivering increased net sales and improved gross profit through executing our strategic initiatives described below.  Although these initiatives began in the third and fourth quarters of our transition period, only a minimal amount of our product assortment was impacted in the first quarter of fiscal 2012.  In May, we were able to impact the styling and balance of only a small amount of our assortment.  By July, our new merchant team was able to impact the pricing, number of unique styles offered, order quantities and promotional strategy on approximately half of our merchandise offerings.  Going forward, we expect substantially all of our new merchandise assortments to reflect the following initiatives described below:

 

-Provide a balanced merchandise assortment

 

In the third and fourth quarters of the transition period, and the first quarter of fiscal 2012, the majority of our merchandise assortments consisted of styles that were too updated, priced too high and lacking in key product categories.  We provided our customer with too many upscale choices at full-retail prices our customers were unwilling to pay.  As a result, we had significant increase in markdown levels required to compel our customers to purchase our merchandise and allow us to clear-through slow-selling styles.

 

Our merchants were able to begin impacting a portion of our summer fiscal 2012 product deliveries. This included editing the number of styles offered, reducing retail ticket prices to levels more in-line with our traditional offerings and provide styles that better align with our customers’ fashion taste.  Going forward, our merchants are focusing on building assortments with fewer styles that are more balanced by increasing the amount of ‘good’ and ‘better’ product offerings and decreasing the number of ‘best’ styles.  This involves increasing the penetration of core product in our deliveries, including basic knit layering pieces and classic bottoms, increasing the representation of mid-priced ‘better’ selections, such as printed tees and novelty jackets and sweaters, while reducing the number of higher priced ‘best’ styles.  Our goal is to reduce the overall number of unique styles we carry, which will allow us to present a more focused and compelling product assortment with fewer, more relevant selections.  We expect these efforts will be fully reflected in our September in-store product offerings, with approximately 25% fewer unique styles contained in our fall 2012 merchandise assortment than compared to the same period last year.

 

-Reduction and simplification of price points

 

We increased our retail ticket prices in the transition period and our customers did not respond positively.  The price increases resulted from elevated commodities costs and providing more intricately constructed styles.  Our customers were highly resistant to the increased price points.  As we move forward, our goal is to mitigate markdown levels by offering more attractive opening price points and simplifying the number of price points offered to our customers.

 

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The change in our approach to pricing is intended to support our ‘good, better, best’ product initiative.  As we increase the penetration of core product offerings in our assortments, we expect to be able to drive sales volume by offering more styles at attractive opening price points that we believe our customers will accept without steep discounting or mark-downs.  In addition, we are reducing the number of price points across all categories to simplify the shopping experience.

 

Last, we are committed to offering our customers value.  All styles, including those falling into our ‘better’ and ‘best’ classifications, will be priced at levels that are intended to be more attractive to our customers.  We expect retail ticket prices for our fall 2012 product deliveries to be approximately 20% lower than in the comparable period last year.  We believe that this will result in improved net sales, reduced markdowns and increased gross profit.

 

-Improve inventory flow, speed to market and reduce lead times

 

Historically, we have developed and delivered a full, unique merchandise assortment to our stores on a monthly basis.  In order to simplify and accelerate our product development process, we will reduce the number of major product deliveries by half, to six times annually, beginning in September 2012.  These deliveries will reflect increased depth with a greater number of units of key styles.  In order to maintain product freshness, we intend to supplement the major deliveries with smaller deliveries of select new colors and styles to all stores on an ongoing basis.  We also intend to incorporate more robust product testing efforts into our development process.  At the same time, we continue to work with current and new suppliers to identify opportunities to shorten product lead times, increase efficiencies in merchandise flow and enhance our ability to react more quickly to current selling trends in-season.

 

-Implement a more targeted promotional cadence and markdown strategy

 

We are analyzing our promotional cadence and adjusting our markdown strategy in an effort to minimize and reverse the significant merchandise margin erosion we experienced in the transition period and the first quarter of fiscal 2012.  While we anticipate that, in order to be competitive, we will need to continue to be promotional in fiscal 2012, we are testing and implementing more targeted, unique promotions in an effort to improve merchandise margins and lessen our reliance on storewide promotional events.  In addition, we have adopted a more focused and timely approach to our markdown process that quickly addresses underperforming styles on a unique basis in an effort to utilize our markdowns as efficiently as possible.  We are also placing a greater emphasis on liquidating merchandise in-store and utilizing our Outlet stores as a liquidation channel for older product deliveries rather than selling these goods to a jobber.

 

Restructuring/Store Closing Initiative

 

In the third quarter of the transition period, we announced that, following an in-depth analysis of our store portfolio, the Board approved a plan to close approximately 100 stores, most of which were underperforming.  Ultimately, 103 stores were identified for closure.  This group of stores generated approximately $35 million of net sales and store-level operating losses of approximately $11 million, which included approximately $7 million of non-cash impairment charges, on a trailing 12-month basis through January 28, 2012.  As of July 28, 2012, all 103 of the stores identified in the restructuring initiative had been closed, with two closing in the second quarter of fiscal 2012.

 

We recorded total restructuring and asset impairment charges of approximately $21.2 million in the second half of the transition period, primarily consisting of $11.4 million of non-cash asset impairment charges, $8.2 million of net expense related to lease termination liabilities partially offset by the reduction of deferred obligations related to closed stores and approximately $1.5 million of severance and miscellaneous other store closing costs.  The lease termination liabilities consisted primarily of the costs of future contractual obligations related to closed store locations.  Discounted liabilities for future lease costs and management’s estimated fair value of assumed subleases of closed locations were recorded when the stores were closed and these amounts have been subject to adjustments as liabilities are settled. In addition, we have also been negotiating with landlords to mitigate the amount of lease termination liabilities.  As a result, actual settlements have varied substantially from recorded obligations.

 

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In the first quarter of fiscal 2012, we recognized a net benefit of approximately $0.8 million related to restructuring and impairment costs.  We recorded a credit of approximately $1.4 million related to 18 stores where the amounts recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords.  We recorded approximately $0.5 million of additional lease termination liabilities related to three stores closed in the first quarter of fiscal 2012.  In addition, we recognized approximately $0.1 million of non-cash asset impairment charges related to five stores we plan to continue to operate.

 

In the second quarter of fiscal 2012, we recognized a net benefit of approximately $4.7 million related to restructuring and impairment costs.  We recorded a non-cash benefit of approximately $4.9 million related to 35 stores where the amounts recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords.  The total non-cash benefit recognized in the twenty-six weeks ended July 28, 2012 related to restructuring totaled approximately $6.3 million.  We recorded a nominal amount of additional lease termination liabilities related to stores closed in the second quarter of fiscal 2012.  In addition, we recognized approximately $0.2 million of professional services in the second quarter related to the restructuring initiative. The following table details restructuring activity for the first half of fiscal 2012 and the transition period.

 

 

 

 

 

Lease

 

 

 

 

 

 

 

 

 

Severance

 

Termination

 

Asset

 

 

 

 

 

 

 

Accrual

 

Obligations

 

Impairment

 

Other

 

Total

 

Balance, February 26, 2011