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 September 1, 2007

 

 

 

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 No. 001-31390

 

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

06 - 1195422

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

2400 Xenium Lane North, Plymouth, Minnesota

(Address of principal executive offices)

 

55441

(Zip Code)

 

(763) 551-5000

(Registrant’s telephone number, including area code)

 


 

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer     x

 

Accelerated filer     o

 

Non-accelerated filer      o

 

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 October 5, 2007, 35,418,625 shares of the registrant’s common stock were outstanding.

 

 



 

CHRISTOPHER & BANKS CORPORATION
 

QUARTERLY REPORT ON FORM 10-Q

 

INDEX

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

Page

 

 

 

 

 

Item 1.

 

Unaudited Consolidated Condensed Financial Statements:

 

 

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheet
As of September 1, 2007, March 3, 2007 and August 26, 2006

 

3

 

 

 

 

 

 

 

Consolidated Condensed Statement of Income
For the Three Months Ended September 1, 2007 and August 26, 2006

 

4

 

 

 

 

 

 

 

Consolidated Condensed Statement of Income
For the Six Months Ended September 1, 2007 and August 26, 2006

 

5

 

 

 

 

 

 

 

Consolidated Condensed Statement of Cash Flows
For the Six Months Ended September 1, 2007 and August 26, 2006

 

6

 

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

13

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures
About Market Risk

 

19

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II

 

 

 

 

 

 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

20

 

 

 

 

 

Item 1A.

 

Risk Factors

 

20

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

21

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

21

 

 

 

 

 

Item 5.

 

Other Information

 

22

 

 

 

 

 

Item 6.

 

Exhibits

 

23

 

 

 

 

 

 

 

Signatures

 

24

 

 

 

 

 

 

 

Index to Exhibits

 

25

 

2



 

CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEET

(Unaudited)

 

 

 

September 1,

 

March 3,

 

August 26,

 

 

 

2007

 

2007

 

2006

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,421,468

 

$

53,991,398

 

$

82,423,025

 

Short-term investments

 

43,450,000

 

48,275,000

 

44,325,000

 

Accounts receivable

 

5,713,892

 

4,481,624

 

5,264,056

 

Merchandise inventories

 

50,164,552

 

52,354,944

 

44,427,051

 

Prepaid expenses

 

10,970,362

 

10,666,421

 

6,258,297

 

Other current assets

 

8,813,608

 

5,334,636

 

6,018,272

 

Total current assets

 

166,533,882

 

175,104,023

 

188,715,701

 

 

 

 

 

 

 

 

 

Property, equipment and improvements, net

 

132,583,350

 

127,776,442

 

124,592,473

 

Goodwill

 

3,587,052

 

3,587,052

 

3,587,052

 

Intangible assets

 

520,699

 

575,281

 

629,863

 

Other assets

 

2,544,876

 

280,299

 

280,488

 

 

 

 

 

 

 

 

 

Total assets

 

$

305,769,859

 

$

307,323,097

 

$

317,805,577

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

12,407,603

 

$

16,287,931

 

$

10,826,707

 

Accrued salaries, wages and related expenses

 

8,158,886

 

7,574,930

 

8,730,714

 

Other accrued liabilities

 

20,046,848

 

22,387,281

 

17,807,559

 

Total current liabilities

 

40,613,337

 

46,250,142

 

37,364,980

 

 

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

 

Deferred lease incentives

 

23,332,654

 

23,646,261

 

21,659,041

 

Deferred rent obligations

 

11,429,871

 

10,678,341

 

10,292,713

 

Other

 

3,607,544

 

983,137

 

1,710,605

 

Total non-current liabilities

 

38,370,069

 

35,307,739

 

33,662,359

 

 

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 

 

Common stock — $0.01 par value, 74,000,000 shares authorized, 44,950,343, 45,038,310 and 44,866,525 shares issued and 35,772,325, 36,521,451 and 38,037,789 shares outstanding at September 1, 2007, March 3, 2007 and August 26, 2006, respectively

 

449,503

 

450,383

 

448,665

 

Additional paid-in capital

 

107,812,881

 

106,806,885

 

101,511,980

 

Retained earnings

 

224,233,794

 

213,264,385

 

206,593,855

 

Common stock held in treasury, 9,178,018, 8,516,859 and 6,828,736 shares at cost at September 1, 2007, March 3, 2007 and August 26, 2006, respectively

 

(105,709,725

)

(94,756,437

)

(61,776,262

)

Total stockholders’ equity

 

226,786,453

 

225,765,216

 

246,778,238

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

305,769,859

 

$

307,323,097

 

$

317,805,577

 

 

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

 

3



 

CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 1,

 

August 26,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Net sales

 

$

141,127,615

 

$

131,553,342

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Merchandise, buying and occupancy, exclusive of depreciation and amortization

 

90,594,806

 

78,802,797

 

Selling, general and administrative

 

40,626,872

 

36,111,556

 

Depreciation and amortization

 

5,510,041

 

5,017,119

 

Total costs and expenses

 

136,731,719

 

119,931,472

 

 

 

 

 

 

 

Operating income

 

4,395,896

 

11,621,870

 

 

 

 

 

 

 

Interest income

 

1,160,228

 

1,325,425

 

 

 

 

 

 

 

Income before income taxes

 

5,556,124

 

12,947,295

 

 

 

 

 

 

 

Income tax provision

 

2,166,888

 

5,023,550

 

 

 

 

 

 

 

Net income

 

$

3,389,236

 

$

7,923,745

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.09

 

$

0.21

 

 

 

 

 

 

 

Basic shares outstanding

 

35,846,747

 

37,401,006

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.09

 

$

0.21

 

 

 

 

 

 

 

Diluted shares outstanding

 

35,948,514

 

38,049,065

 

 

 

 

 

 

 

Dividends per share

 

$

0.06

 

$

0.04

 

 

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

 

4



 

CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF INCOME

(Unaudited)

 

 

 

Six Months Ended

 

 

 

September 1,

 

August 26,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Net sales

 

$

290,498,949

 

$

274,083,631

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Merchandise, buying and occupancy, exclusive of depreciation and amortization

 

177,510,927

 

157,364,637

 

Selling, general and administrative

 

79,705,995

 

72,192,257

 

Depreciation and amortization

 

10,805,168

 

9,998,738

 

Total costs and expenses

 

268,022,090

 

239,555,632

 

 

 

 

 

 

 

Operating income

 

22,476,859

 

34,527,999

 

 

 

 

 

 

 

Interest income

 

2,219,251

 

2,286,956

 

 

 

 

 

 

 

Income before income taxes

 

24,696,110

 

36,814,955

 

 

 

 

 

 

 

Income tax provision

 

9,631,483

 

14,284,202

 

 

 

 

 

 

 

Net income

 

$

15,064,627

 

$

22,530,753

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.42

 

$

0.61

 

 

 

 

 

 

 

Basic shares outstanding

 

35,900,270

 

36,901,264

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.42

 

$

0.60

 

 

 

 

 

 

 

Diluted shares outstanding

 

36,010,301

 

37,573,303

 

 

 

 

 

 

 

Dividends per share

 

$

0.12

 

$

0.08

 

 

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

 

5



 

CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

 

 

 

September 1,

 

August 26,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

15,064,627

 

$

22,530,753

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

10,805,168

 

9,998,738

 

Deferred income taxes

 

(3,118,303

)

(1,762,585

)

Excess tax benefit related to stock-based compensation

 

(21,152

)

(5,283,450

)

Stock-based compensation expense

 

940,808

 

2,272,675

 

Loss on disposal of furniture, fixtures and equipment

 

114,707

 

89,386

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in merchandise inventories

 

2,190,392

 

(6,555,676

)

Increase in accounts receivable

 

(1,232,268

)

(510,753

)

(Increase) decrease in income taxes receivable

 

300,320

 

(6,258,297

)

Increase in other current assets

 

(303,941

)

(388,231

)

Increase in other assets

 

(60,353

)

(70,619

)

Increase (decrease) in accounts payable

 

(3,953,255

)

960,232

 

Increase (decrease) in accrued liabilities

 

(1,756,477

)

5,891,399

 

Decrease in deferred lease incentives

 

(313,607

)

(143,828

)

Increase in deferred rent obligations

 

751,530

 

682,714

 

 

 

 

 

 

 

Net cash provided by operating activities

 

19,408,196

 

21,452,458

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, equipment and improvements

 

(15,599,274

)

(16,271,343

)

Purchases of short-term investments

 

(61,100,000

)

(31,325,000

)

Redemptions of short-term investments

 

65,925,000

 

17,000,000

 

 

 

 

 

 

 

Net cash used in investing activities

 

(10,774,274

)

(30,596,343

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

43,073

 

28,033,502

 

Dividends paid

 

(4,314,790

)

(2,934,873

)

Excess tax benefit related to stock-based compensation

 

21,152

 

5,283,450

 

Acquisition of common stock held in treasury

 

(10,953,287

)

(1,200,168

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(15,203,852

)

29,181,911

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(6,569,930

)

20,038,026

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

53,991,398

 

62,384,999

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

47,421,468

 

$

82,423,025

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Income taxes paid

 

$

12,199,530

 

$

17,690,582

 

Purchases of equipment and improvements, accrued, not paid

 

$

72,927

 

$

13,130

 

 

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

 

6



 

CHRISTOPHER & BANKS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The unaudited consolidated condensed financial statements included in this Form 10-Q have been prepared by Christopher & Banks Corporation and subsidiaries (the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to such rules and regulations. These unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

 

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature.

 

NOTE 2 – CEO TRANSITION

 

On August 30, 2007, the Company announced that its Board of Directors had appointed Lorna Nagler as President and Chief Executive Officer effective August 31, 2007. Ms. Nagler was also elected as a member of the Company’s Board of Directors as of August 31, 2007. Ms. Nagler most recently served as President of Lane Bryant and has 29 years of experience in the women’s apparel retail industry.

 

Matthew P. Dillon resigned as President and Chief Executive Officer, and as a member of the Company’s Board of Directors, effective August 30, 2007. The Company incurred a pre-tax charge of approximately $2.1 million, or $0.04 per diluted share, related to the transition of the CEO position from Mr. Dillon to Ms. Nagler.

 

NOTE 3 – INCOME TAXES

 

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), on March 4, 2007. FIN No. 48 prescribes a minimum recognition threshold and measurement process for recording uncertain tax positions in the financial statements. Additionally, FIN No. 48 provides guidance on derecognition, classification, accounting and disclosure related to uncertain tax positions.

 

Implementation of FIN No. 48 resulted in an adjustment to the Company’s liability for unrecognized tax benefits of approximately $0.2 million with a corresponding increase to retained earnings. As of the date of adoption, the total amount of unrecognized tax benefits was $3.4 million. Of that amount, approximately $2.3 million represents the amount of unrecognized tax benefits that would, if recognized, favorably affect the Company’s effective income tax rate in future periods.

 

The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. At March 4, 2007, the Company had accrued $0.7 million for the potential payment of interest and penalties.

 

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. The Internal Revenue Service has completed their audit for tax years through fiscal 2006. The Company is not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2004.

 

7



 

NOTE 4 – SHORT-TERM INVESTMENTS

 

 Short-term investments consisted of the following:

 

 

 

September 1,

 

March 3,

 

August 26,

 

Description

 

2007

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Tax advantaged auction rate securities

 

$

43,450,000

 

$

48,275,000

 

$

37,325,000

 

U.S. Government debt securities

 

 

 

7,000,000

 

 

 

 

 

 

 

 

 

 

 

$

43,450,000

 

$

48,275,000

 

$

44,325,000

 

 

NOTE 5 – MERCHANDISE INVENTORIES

 

Merchandise inventories consisted of the following:

 

 

 

September 1,

 

March 3,

 

August 26,

 

Description

 

2007

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Merchandise - in store

 

$

41,205,114

 

$

41,099,342

 

$

34,993,547

 

Merchandise - in transit

 

10,005,014

 

11,888,367

 

10,250,650

 

Allowance for permanent markdowns

 

(1,045,576

)

(632,765

)

(817,146

)

 

 

 

 

 

 

 

 

 

 

$

50,164,552

 

$

52,354,944

 

$

44,427,051

 

 

The Company purchased approximately 14% and 13% of its merchandise from its largest overseas supplier during the first six months of fiscal 2008 and 2007, respectively.

 

NOTE 6 – PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

 

Property, equipment and improvements, net consisted of the following:

 

 

 

Estimated

 

September 1,

 

March 3,

 

August 26,

 

Description

 

Useful Life

 

2007

 

2007

 

2006

 

Land

 

 

$

1,596,898

 

$

1,596,898

 

$

1,596,898

 

Corporate office, distribution center and related building improvements

 

25 years

 

11,823,129

 

11,663,704

 

11,412,094

 

Store leasehold improvements

 

Term of related lease, typically 10 years

 

90,623,054

 

87,288,395

 

78,958,448

 

Store furniture and fixtures

 

Three to 10 years

 

105,637,453

 

101,486,350

 

91,231,896

 

Point of sale hardware and software

 

Five years

 

8,946,617

 

8,625,579

 

8,266,314

 

Corporate office and distribution center furniture, fixtures and equipment

 

Seven years

 

2,868,716

 

2,751,805

 

2,615,705

 

Computer hardware and software

 

Three to five years

 

7,038,697

 

5,771,237

 

4,699,105

 

Construction in progress

 

 

10,410,235

 

5,429,824

 

11,397,597

 

 

 

 

 

238,944,799

 

224,613,792

 

210,178,057

 

Less accumulated depreciation and amortization

 

 

 

106,361,449

 

96,837,350

 

85,585,584

 

 

 

 

 

 

 

 

 

 

 

Net property, equipment and improvements

 

 

 

$

132,583,350

 

$

127,776,442

 

$

124,592,473

 

 

8



 

NOTE 7 – GOODWILL

 

The Company recognizes the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed as goodwill. Goodwill will be tested for impairment on an annual basis in the fourth quarter and between annual tests whenever impairment is indicated. Fair values are calculated based on an estimate of future cash flows, compared to the corresponding carrying value of the acquired entity, including goodwill. Impairment losses will be recognized whenever the implied fair value is less than the carrying value of the related asset. There were no impairments or other changes to the recorded amounts of goodwill for the periods presented.

 

NOTE 8 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

 

 

September 1,

 

March 3,

 

August 26,

 

 

 

2007

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Customer lists

 

$

830,000

 

$

830,000

 

$

830,000

 

Accumulated amortization

 

(309,301

)

(254,719

)

(200,137

)

 

 

$

520,699

 

$

575,281

 

$

629,863

 

 

Aggregate amortization expense for the six months ended September 1, 2007 was $54,582. Estimated aggregate amortization expense for fiscal 2008 and the next five fiscal years is as follows:

 

Fiscal 2008

 

$

100,278

 

Fiscal 2009

 

82,500

 

Fiscal 2010

 

82,500

 

Fiscal 2011

 

82,500

 

Fiscal 2012

 

82,500

 

Fiscal 2013

 

82,500

 

 

NOTE 9 – ACCRUED LIABILITIES

 

Other accrued liabilities consisted of the following:

 

 

 

September 1,

 

March 3,

 

August 26,

 

Description

 

2007

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Gift card, certificate and store credit liabilities

 

$

8,104,900

 

$

13,174,041

 

$

7,303,644

 

Accrued income, sales and other taxes payable

 

2,934,270

 

2,499,410

 

2,881,542

 

Accrued occupancy related expenses

 

1,219,971

 

640,985

 

887,466

 

Other accrued liabilities

 

7,787,707

 

6,072,845

 

6,734,907

 

 

 

 

 

 

 

 

 

 

 

$

20,046,848

 

$

22,387,281

 

$

17,807,559

 

 

NOTE 10 – STOCK-BASED COMPENSATION

 

The Company accounts for stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”), which was adopted February 26, 2006 using the modified prospective transition method. Under this transition method, stock-based compensation expense recognized for share-based awards includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of February 25, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based compensation awards granted subsequent to February 25, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

 

9



 

Total pre-tax compensation expense related to stock-based awards for the three months ended September 1, 2007 and August 26, 2006 was approximately $482,000 and $1.4 million, respectively. For the six months ended September 1, 2007 and August 26, 2006, pre-tax stock-based compensation expense totaled approximately $941,000 and $2.3 million, respectively. The decrease in stock-based compensation expense in the first six months of fiscal 2008 compared to the same period in fiscal 2007 was a result of lower expense associated with performance-based restricted stock, a reversal of expense related to forfeited stock options and restricted stock awards originally granted to the Company’s former CEO and the impact of awards granted in January 2004 which became fully vested by the end of fiscal 2007 and had no expense under SFAS 123R in fiscal 2008. Stock-based compensation expense was included in merchandise, buying and occupancy expenses for the Company’s buying and distribution employees and in selling, general and administrative expenses for all other employees.

 

Methodology Assumptions

 

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

 

The weighted average assumptions relating to the valuation of the Company’s stock option grants for the three and six month periods ended September 1, 2007 and August 26, 2006 were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 1,

 

August 26,

 

September 1,

 

August 26,

 

 

 

2007

 

2006

 

2007

 

2006

 

Expected divdend yield

 

1.43

%

0.86

%

1.35

%

0.80

%

Expected volatility

 

44.38

%

41.51

%

44.77

%

42.26

%

Risk-free interest rate

 

4.43

%

5.21

%

4.51

%

5.13

%

Expected term in years

 

4.07

 

3.53

 

4.17

 

3.66

 

 

Stock-Based Compensation Activity

 

The following table presents a summary of the Company’s stock option activity for the six months ended September 1, 2007:

 

 

 

Number
of
Shares

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

Weighted
Average
Fair Value

 

Weighted
Average
Remaining
Contractual
Life

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, beginning of period

 

2,072,876

 

$

19.44

 

$

721,549

 

$

6.85

 

 

 

Vested

 

1,765,038

 

19.30

 

721,549

 

6.69

 

 

 

Unvested

 

307,838

 

20.24

 

 

7.78

 

 

 

Granted

 

398,950

 

15.88

 

 

5.92

 

 

 

Exercised

 

(5,283

)

8.18

 

53,690

 

3.45

 

 

 

Canceled - Vested

 

(237,869

)

21.79

 

 

6.05

 

 

 

Canceled - Unvested (Forfeited)

 

(52,966

)

18.74

 

 

7.02

 

 

 

Outstanding, end of period

 

2,175,708

 

18.57

 

699,681

 

6.78

 

5.86

 

Vested

 

1,583,722

 

19.00

 

699,681

 

6.85

 

4.57

 

Unvested

 

591,986

 

17.44

 

 

6.58

 

9.32

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, end of period

 

1,583,722

 

19.00

 

699,681

 

6.85

 

4.57

 

 

10



 

The Company may also grant shares of restricted stock to its employees and non-employee members of its Board of Directors. Restricted stock awards are independent of option grants and are subject to forfeiture if employment or service terminates prior to the lapse of the restrictions. In addition, certain of the Company’s restricted stock awards are performance based and are subject to forfeiture if the defined performance conditions are not achieved. The Company values the restricted shares based on the closing price of the Company’s common stock on the date of grant. The resulting expense is recorded on a straight line basis over the vesting period of the restricted award.

 

The following table presents a summary of the Company’s restricted stock activity for the six months ended September 1, 2007:

 

 

 

Number

 

Aggregate

 

Weighted

 

 

 

of

 

Intrinsic

 

Average

 

 

 

Shares

 

Value

 

Fair Value

 

 

 

 

 

 

 

 

 

Unvested, beginning of period

 

53,717

 

$

648,901

 

$

20.04

 

Granted

 

119,800

 

1,447,184

 

15.38

 

Vested

 

(8,417

)

101,677

 

19.46

 

Canceled - Unvested (Forfeited)

 

(15,150

)

183,012

 

18.66

 

Unvested, end of period

 

149,950

 

1,811,396

 

16.49

 

 

NOTE 11 – LONG-TERM DEBT

 

The Company maintains an Amended and Restated Revolving Credit Facility with Wells Fargo Bank, National Association (the “Wells Fargo Revolver”) which expires on June 30, 2008. The Wells Fargo Revolver provides the Company with revolving credit loans and letters of credit of up to $50.0 million, subject to a borrowing base formula based on inventory levels.

 

Loans under the Wells Fargo Revolver bear interest at Wells Fargo’s floating rate, 8.25% as of September 1, 2007, plus 0.25%. Interest is payable monthly in arrears. The Wells Fargo Revolver carries a facility fee of 0.25% based on the unused portion as defined in the agreement. Facility fees totaled $3,882 for the six months ended September 1, 2007. The credit facility is collateralized by the Company’s equipment, general intangibles, inventory, inventory letters of credit and letter of credit rights. The Company had no revolving credit loan borrowings under the Wells Fargo Revolver during the first six months of fiscal 2008. Historically, the Wells Fargo Revolver has been utilized by the Company only to open letters of credit to facilitate the import of merchandise. The borrowing base at September 1, 2007 was $44.7 million. As of September 1, 2007, the Company had outstanding letters of credit in the amount of $24.0 million. Accordingly, the availability of revolving credit loans under the Wells Fargo Revolver was $20.7 million at September 1, 2007.

 

The Wells Fargo Revolver contains certain restrictive covenants including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants. As of September 1, 2007, the most recent measurement date, the Company was in compliance with all covenants of the Wells Fargo Revolver.

 

NOTE 12 – STOCKHOLDERS’ EQUITY

 

In fiscal 2007, the Company’s Board of Directors authorized a stock repurchase program enabling the Company to purchase up to $40.0 million of its common stock, subject to market conditions. During fiscal 2007, the Company repurchased 1,732,123 shares at a total cost, including commissions, of approximately $34.2 million. In March 2007, the Company completed the repurchase program by purchasing an additional 325,059 shares of its common stock for a total cost, including commissions, of $5.8 million, bringing the total number of shares repurchased under this program to 2,057,182 at a total cost, including commissions, of approximately $40.0 million.

 

11



 

In May 2007, the Company’s Board of Directors authorized another stock repurchase program enabling the company to purchase up to $20 million of its common stock, subject to market conditions. As of October 5, 2007, the Company had repurchased 486,100 shares of its common stock for a total cost, including commissions, of approximately $7.0 million. Of the 486,100 shares that were repurchased, 336,100 shares were repurchased through September 1, 2007 at a total cost, including commissions, of approximately $5.1 million.

 

The common stock repurchased under these programs is being held in treasury and has reduced the number of shares of the Company’s common stock outstanding by approximately 6%. All of the Company’s share repurchases were executed in the open market and no shares were repurchased from related parties. In addition, all of the Company’s share repurchases were executed in accordance with the safe harbor provision of Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

 

In fiscal 2007, the Company’s Board of Directors authorized an increase in the Company’s quarterly cash dividend to $0.06 per share of common stock, effective beginning with the October 2006 dividend payment. The dividend rate was previously $0.04 per share of common stock. The Company has declared and paid a dividend each quarter since its first declaration in fiscal 2004.

 

NOTE 13 – NET INCOME PER SHARE

 

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the applicable periods, while diluted EPS is computed based on the weighted average number of common and common equivalent shares (dilutive stock options) outstanding. The Company’s reconciliation of earnings per share includes the individual share effects of all securities affecting earnings per share which consist solely of the effects of dilution from awards granted under the Company’s stock-based compensation plans.

 

The following is a reconciliation of the number of shares and per share amounts used in the basic and diluted EPS computations:

 

 

 

Three Months Ended

 

 

 

September 1, 2007

 

August 26, 2006

 

 

 

 

 

Net

 

 

 

Net

 

 

 

 

 

Income

 

 

 

Income

 

 

 

Shares

 

Per Share

 

Shares

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

35,846,747

 

$

0.09

 

37,401,006

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Effect of dilution from stock-based compensation plans

 

101,767

 

 

648,059

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

35,948,514

 

$

0.09

 

38,049,065

 

$

0.21

 

 

 

 

Six Months Ended

 

 

 

September 1, 2007

 

August 26, 2006

 

 

 

 

 

Net

 

 

 

Net

 

 

 

 

 

Income

 

 

 

Income

 

 

 

Shares

 

Per Share

 

Shares

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

35,900,270

 

$

0.42

 

36,901,264

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

Effect of dilution from stock-based compensation plans

 

110,031

 

 

672,039

 

0.01

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

36,010,301

 

$

0.42

 

37,573,303

 

$

0.60

 

 

12



 

Stock options of 1,711,179 and 1,639,179 were excluded from the shares used in the computation of diluted EPS for the three and six months ended September 1, 2007 as they were anti-dilutive. Stock options of 4,175 and 26,185 were excluded from the shares used in the computation of diluted EPS for the three and six months ended August 26, 2006, respectively, as they were anti-dilutive.

 

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measures” (“SFAS No. 157”), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands fair value measurement disclosures. The Company is currently evaluating the impact of adopting SFAS No. 157, but does not anticipate it will have a material effect on its financial position, results of operations or cash flows.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to measure many financial instrument and certain other assets and liabilities at fair value on an instrument-by-instrument basis under a fair value option. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year. The Company is currently evaluating the impact of adopting SFAS No. 159, but does not anticipate it will have a material effect on its financial position, results of operations or cash flows.

 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

 

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.

 

Executive Summary - Key Performance Indicators

 

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

 

Same-store sales

 

The Company’s same-store sales data is calculated based on the change in net sales for stores that have been open for more than 13 full months and includes stores, if any, that have been relocated within the same mall, though the Company typically does not expand or relocate stores within a mall. Stores where square footage has been changed by more than 25% are excluded from the same-store sales calculation. Stores closed during the year are included in the same-store sales calculation only for the full months of the year the stores were open.

 

Management considers same-store sales to be an important indicator of the Company’s performance. Same-store sales results are important in achieving leveraging of costs, including store payroll, store occupancy, depreciation and other general and administrative expenses. Positive same-store sales above a certain level contribute to greater leveraging of costs while negative same-store sales contribute to deleveraging of costs. Same-store sales also have a direct impact on the Company’s total net sales, cash and cash equivalents and working capital.

 

13



 

Merchandise, buying and occupancy costs, exclusive of depreciation and amortization

 

Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, measure whether the Company is appropriately optimizing the price of its merchandise. Merchandise, buying and occupancy costs include the cost of merchandise, markdowns, shrink, freight into and out from the Company’s distribution center, buyer and distribution center salaries, buyer travel, rent and other occupancy related costs, various merchandise design and development costs, miscellaneous merchandise expenses and other costs related to the Company’s distribution network. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s markdowns could have an adverse effect on the Company’s results of operations. In addition, an inability to locate suitable store sites or to negotiate favorable lease terms could also negatively impact the Company’s results of operations.

 

Operating income

 

The Company’s management views operating income as a key indicator of the Company’s success. The key drivers of operating income are same-store sales, merchandise, buying and occupancy costs and the Company’s ability to control operating costs.

 

Store productivity

 

Store productivity, including sales per square foot, average unit retail price, number of transactions per store and number of units per transaction, is evaluated by management in assessing the operational performance of the Company.

 

Inventory turnover

 

The Company’s management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Inventory turnover is important as it can signal slow moving inventory, which can be critical in determining the need to take markdowns on merchandise.

 

Cash flow and liquidity

 

Management evaluates cash flow from operations, investing activities and financing activities in determining the sufficiency of the Company’s cash position. Cash flow from operations has historically been sufficient to cover the Company’s requirements for liquidity.

 

Executive Overview

 

Christopher & Banks Corporation is a Minneapolis-based retailer of women’s specialty apparel, which operates stores through its wholly-owned subsidiaries:  Christopher & Banks, Inc., Christopher & Banks Company and Christopher & Banks Services Company, collectively referred to as the “Company.”  As of September 1, 2007, the Company operated 807 stores in 45 states, including 531 Christopher & Banks stores, 239 C.J. Banks stores and 37 Acorn stores. The Company’s Christopher & Banks stores offer distinctive fashions featuring exclusively designed, coordinated assortments of sportswear and sweaters in sizes four to 16. The Company’s C.J. Banks stores offer similar assortments of women’s specialty apparel in sizes 14W and up. The Company’s Acorn stores offer upscale women’s fashions along with complementary jewelry and accessories under private and branded labels.

 

In the first six months of fiscal 2008, the Company opened nine new Christopher & Banks stores, 21 new C.J. Banks stores and two new Acorn stores. The Company closed two Christopher & Banks stores and one Acorn store during the first half of fiscal 2008. In the third quarter of fiscal 2008, the Company anticipates it will open approximately 39 additional stores, for a total of approximately 71 new store openings in fiscal 2008.

 

On August 30, 2007, the Company announced that its Board of Directors had appointed Lorna Nagler as President and Chief Executive Officer effective August 31, 2007. Ms. Nagler was also elected as a member of the Company’s Board of Directors as of August 31, 2007. Ms. Nagler most recently served as President of Lane Bryant and has 29 years of experience in the women’s apparel retail industry.

 

Matthew P. Dillon resigned as President and Chief Executive Officer, and as a member of the Company’s Board of Directors, effective August 30, 2007. The Company incurred a pre-tax charge of approximately $2.1 million, or $0.04 per diluted share, related to the transition of the CEO position from Mr. Dillon to Ms. Nagler.

 

14



 

On June 18, 2007, the Company announced that Susan Connell would join the Company as Executive Vice President and Chief Merchandise Officer effective July 9, 2007. Ms. Connell is responsible for overseeing product development, sourcing and other merchandising activities for the Company’s three retail concepts. Prior to joining the Company, Ms. Connell was Senior Vice President – General Merchandising Manager with Lane Bryant.

 

On May 25, 2007, the Company’s Board of Directors authorized a one-year stock repurchase program enabling the Company to repurchase up to $20 million of its common stock, subject to market conditions. As of October 5, 2007, the Company had repurchased 486,100 shares of its common stock for a total cost, including commissions, of approximately $7.0 million.

 

Critical Accounting Policies and Estimates

 

The Company’s critical accounting policies are more fully described in Note 1 of the notes to consolidated financial statements contained within the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2007. Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

On an ongoing basis, the Company evaluates its estimates, including those related to customer product returns, inventories, income taxes, medical and workers’ compensation claims and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There has been no material changes in the Company’s critical accounting policies during the six months ended September 1, 2007.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain items from the Company’s consolidated condensed statement of income expressed as a percentage of net sales:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 1,

 

August 26,

 

September 1,

 

August 26,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

Merchandise, buying and occupancy costs, exclusive of depreciation and amortization

 

64.2

 

59.9

 

61.1

 

57.4

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

28.8

 

27.5

 

27.5

 

26.3

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3.9

 

3.8

 

3.7

 

3.7

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

3.1

 

8.8

 

7.7

 

12.6

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

0.8

 

1.0

 

0.8

 

0.8

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

3.9

 

9.8

 

8.5

 

13.4

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

1.5

 

3.8

 

3.3

 

5.2

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2.4

%

6.0

%

5.2

%

8.2

%

 

15



 

Three Months Ended September 1, 2007 Compared to Three Months Ended August 26, 2006

 

Net Sales. Net sales for the three months ended September 1, 2007 were $141.1 million, an increase of $9.5 million or 7%, from $131.6 million for the three months ended August 26, 2006. The increase in net sales resulted from an increase in the number of stores operated by the Company combined with a 3% increase in same-store sales. The Company operated 807 stores at September 1, 2007, compared to 753 stores at August 26, 2006. The Company’s same-store sales were calculated by comparing the 13-week period ended September 1, 2007 to the 13-week period ended September 2, 2006. The resulting 3% increase in same-store sales was attributable to an approximate 5% increase in the average number of transactions per store, partially offset by a decrease in the average value per transaction. Sales during the second quarter were driven in part by an increased level of markdowns to clear excess inventory in June and July. In the second quarter, same-store sales for the Company’s stores opened in fiscal 2005, 2006 and 2007 increased 5%, while the mature base of stores, opened in fiscal 2004 and earlier, posted a 2% increase in same-store sales.

 

Merchandise, Buying and Occupancy Costs, exclusive of depreciation and amortization. Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $90.6 million, or 64.2% of net sales, during the second quarter of fiscal 2008, compared to $78.8 million, or 59.9% of net sales, during the same period in fiscal 2007. Merchandise, buying and occupancy costs as a percent of net sales had approximately 430 basis points of negative leverage. This negative leverage was substantially due to lower merchandise margins resulting from higher markdowns taken to clear excess inventory in June and July. In addition, increased occupancy costs contributed approximately 20 basis points of negative leverage.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 1, 2007 were $40.6 million, or 28.8% of net sales, compared to $36.1 million, or 27.5% of net sales, for the three months ended August 26, 2006, resulting in approximately 130 basis points of negative leverage. Major components of the negative leverage included approximately $2.1 million of CEO transition expenses and a combination of increased professional fees, expenses related to new systems installations, increased marketing-related expenses and an increase in staff at the Company’s corporate headquarters. This was partially offset by positive leverage gained from decreases in stock-based compensation and bonus expense during the quarter.

 

Depreciation and Amortization. Depreciation and amortization was $5.5 million, or 3.9% of net sales, in the second quarter of fiscal 2008, compared to $5.0 million, or 3.8% of net sales, in the second quarter of fiscal 2007. The increase in the amount of depreciation and amortization expense was a result of capital expenditures made by the Company over the past year. The Company opened 32 new stores in the first six months of fiscal 2008 and 78 new stores in all of fiscal 2007.

 

Operating Income. As a result of the foregoing factors, operating income for the three months ended September 1, 2007 was $4.4 million, or 3.1% of net sales, compared to operating income of $11.6 million, or 8.8% of net sales, for the three months ended August 26, 2006.

 

Interest Income. For the quarter ended September 1, 2007, interest income decreased to $1.2 million from $1.3 million for the quarter ended August 26, 2006. The decrease resulted from a lower average balance of cash equivalents and short term investments during the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.

 

Income Taxes. Income tax expense in the second quarter of fiscal 2008 was $2.2 million, with an effective tax rate of 39.0%, compared to $5.0 million, with an effective tax rate of 38.8%, in the second quarter of fiscal 2007.

 

Net Income. As a result of the foregoing factors, net income for the three months ended September 1, 2007 was $3.4 million, or 2.4% of net sales, and $0.09 per diluted share, compared to net income of $7.9 million, or 6.0% of net sales, and $0.21 per diluted share, for the three months ended August 26, 2006.

 

16


 


 

Six Months Ended September 1, 2007 Compared to Six Months Ended August 26, 2006

 

Net Sales. Net sales for the six months ended September 1, 2007 were $290.5 million, an increase of $16.4 million or 6%, from $274.1 million for the six months ended August 26, 2006. The increase in net sales was due to an increase in the number of stores operated by the Company, offset by a 1% decrease in same-store sales. The Company operated 807 stores at September 1, 2007, compared to 753 stores at August 26, 2006. Management believes that sales were negatively impacted in the first quarter by adverse weather conditions in a significant portion of the Company’s comparative-store base in April. Sales during the second quarter were driven in part by increased promotional activity to clear excess inventory in June and July. Management believes sales in both quarters were negatively affected by the generally challenging women’s specialty apparel retail environment.

 

Merchandise, Buying and Occupancy Costs, exclusive of depreciation and amortization. Merchandise, buying expenses and occupancy costs, exclusive of depreciation and amortization, were $177.5 million, or 61.1% of net sales, during the first six months of fiscal 2008, compared to $157.4 million, or 57.4% of net sales, during the same period in fiscal 2007. Merchandise, buying and occupancy costs as a percent of net sales had approximately 370 basis points of negative leverage. This negative leverage was substantially due to lower merchandise margins resulting from higher markdowns taken to clear excess inventory. In addition, increased occupancy costs contributed approximately 50 basis points of negative leverage.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended September 1, 2007 were $79.7 million, or 27.5% of net sales, compared to $72.2 million, or 26.3% of net sales, for the six months ended August 26, 2006, resulting in approximately 120 basis points of negative leverage. Major components of the negative leverage included approximately $2.1 million of CEO transition expenses and a combination of increased professional fees, expenses related to new systems installations, increased marketing-related expenses, store level payroll expenses and an increase in staff at the Company’s corporate headquarters which could not be leveraged with a 1% decline in same-store sales. This was partially offset by positive leverage gained from decreases in stock-based compensation and bonus expense during the first half of fiscal 2008.

 

Depreciation and Amortization. Depreciation and amortization was $10.8 million, or 3.7% of net sales, in the first half of fiscal 2008, compared to $10.0 million, or 3.7% of net sales, in the first half of fiscal 2007. The increase in the amount of depreciation and amortization expense was a result of capital expenditures made during the past year. The Company opened 32 new stores in the first six months of fiscal 2008 and 78 new stores in all of fiscal 2007.

 

Operating Income. As a result of the foregoing factors, operating income for the six months ended September 1, 2007 was $22.5 million, or 7.7% of net sales, compared to operating income of $34.5 million, or 12.6% of net sales, for the six months ended August 26, 2006.

 

Interest Income. For the six months ended September 1, 2007, interest income decreased to approximately $2.2 million from $2.3 million for the six months ended August 26, 2006. The decrease resulted from a lower average balance of cash equivalents and short term investments during the first half of fiscal 2008 compared to the first half of fiscal 2007.

 

Income Taxes. Income tax expense in the first half of fiscal 2008 was $9.6 million, with an effective tax rate of 39.0%, compared to $14.3 million, with an effective tax rate of 38.8%, in the first half of fiscal 2007.

 

Net Income. As a result of the foregoing factors, net income for the six months ended September 1, 2007 was $15.1 million, or 5.2% of net sales, and $0.42 per diluted share, compared to net income of $22.5 million, or 8.2% of net sales, and $0.60 per diluted share, for the six months ended August 26, 2006.

 

17



 

Stock-Based Compensation Expense

 

Total pre-tax compensation expense related to stock-based awards for the three months ended September 1, 2007 and August 26, 2006 was approximately $482,000 and $1.4 million, respectively. For the six months ended September 1, 2007 and August 26, 2006, pre-tax stock-based compensation expense totaled approximately $941,000 and $2.3 million, respectively. The decrease in stock-based compensation expense in the first six months of fiscal 2008 compared to the same period in fiscal 2007 was a result of lower expense associated with performance-based restricted stock, a reversal of expense related to forfeited stock options and restricted stock awards originally granted to the Company’s former CEO and the impact of awards granted in January 2004 which became fully vested by the end of fiscal 2007 and had no expense under SFAS 123R in fiscal 2008. Stock-based compensation expense was included in merchandise, buying and occupancy expenses for the Company’s buying and distribution employees and in selling, general and administrative expenses for all other employees.

 

Liquidity and Capital Resources

 

The Company’s principal on-going cash requirements are to finance the construction of new stores and the remodeling of certain existing stores, to make other capital expenditures, to purchase merchandise inventories and to fund other working capital requirements. Merchandise purchases vary on a seasonal basis, peaking in the fall. As a result, the Company’s cash requirements historically reach their peak in October or November. Conversely, cash balances reach their peak in January after the holiday season is completed.

 

Net cash provided by operating activities totaled $19.4 million for the first six months of fiscal 2008, a decrease of $2.1 million from $21.5 million for the first six months of fiscal 2007. Significant fluctuations in the Company’s working capital accounts included a $4.0 million decrease in accounts payable and a $2.2 million decrease in merchandise inventories. The declines in inventory and accounts payable were both a result of the Company’s efforts to reduce inventories in the first half of fiscal 2008, which resulted in an 8% decline in total inventory per store during the six months ended September 1, 2007.

 

Net cash used in investing activities included $15.6 million of capital expenditures, partially offset by net redemptions of short-term investments of approximately $4.8 million. The Company opened 32 new stores and completed three major store remodels during the six months ended September 1, 2007. Net cash of $15.2 million was used in financing activities during the first half of fiscal 2008 as the Company paid two quarterly cash dividends together totaling approximately $4.3 million and repurchased approximately $11.0 million of its common stock.

 

The Company plans to fund approximately $16 million of capital expenditures during the second half of fiscal 2008 to open approximately 39 additional new stores, to complete an upgrade to its point of sale register equipment and to make various capital investments at its corporate headquarters. A portion of the capital expenditures will also be incurred for stores scheduled to open in the first quarter of fiscal 2009. The Company expects its cash and short-term investments, combined with cash flows from operations, to be sufficient to meet its capital expenditure, working capital and other requirements for liquidity during the remainder of fiscal 2008.

 

The Company maintains an Amended and Restated Revolving Credit Facility with Wells Fargo Bank, National Association (the “Wells Fargo Revolver”) which expires on June 30, 2008. The Wells Fargo Revolver provides the Company with revolving credit loans and letters of credit of up to $50.0 million, subject to a borrowing base formula based on inventory levels.

 

Loans under the Wells Fargo Revolver bear interest at Wells Fargo’s floating rate, 8.25% as of September 1, 2007, plus 0.25%. Interest is payable monthly in arrears. The Wells Fargo Revolver carries a facility fee of 0.25% based on the unused portion as defined in the agreement. Facility fees totaled $3,882 for the six months ended September 1, 2007. The credit facility is collateralized by the Company’s equipment, general intangibles, inventory, inventory letters of credit and letter of credit rights. The Company had no revolving credit loan borrowings under the Wells Fargo Revolver during the first six months of fiscal 2008. Historically, the Wells Fargo Revolver has been utilized by the Company only to open letters of credit to facilitate the import of merchandise. The borrowing base at September 1, 2007 was $44.7 million. As of September 1, 2007, the Company had outstanding letters of credit in the amount of $24.0 million. Accordingly, the availability of revolving credit loans under the Wells Fargo Revolver was $20.7 million at September 1, 2007.

 

18



 

The Wells Fargo Revolver contains certain restrictive covenants including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants. As of September 1, 2007, the most recent measurement date, the Company was in compliance with all covenants of the Wells Fargo Revolver.

 

Merchandise Sourcing

 

The Company directly imported approximately 82% of its total merchandise purchases in the first half of fiscal 2008. Substantially all of its remaining merchandise purchases were made from domestic importers. This reliance on sourcing from foreign countries may cause the Company to be exposed to certain risks.

 

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

 

A substantial portion of the Company’s directly imported merchandise is manufactured in Southeast Asia. The majority of these goods are produced in China, Hong Kong, Indonesia and Singapore. The Company is not currently importing merchandise produced in the Middle East.

 

The Company purchased approximately 14% and 13% of its merchandise from its largest overseas supplier during the first six months of fiscal 2008 and 2007, respectively. Although the Company believes that its relationship with this particular vendor is good, there can be no assurance that this relationship can be maintained in the future or that the vendor will continue to supply merchandise to the Company. If there should be any significant disruption in the supply of merchandise from this vendor, management believes that it can shift production to other suppliers so as to continue to secure the required volume of product. Nevertheless, there is some potential that any such disruption in supply could have a material adverse impact on the Company’s financial position and results of operations.

 

Quarterly Results and Seasonality

 

The Company’s quarterly results may fluctuate significantly depending on a number of factors including timing of new store openings, adverse weather conditions, shifts in the timing of certain holidays and customer response to the Company’s seasonal merchandise mix.

 

Inflation

 

Although the operations of the Company are influenced by general economic conditions, the Company does not believe that inflation had a material effect on the results of operations during the quarters and six month periods ended September 1, 2007 and August 26, 2006.

 

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The market risk inherent in the Company’s financial instruments and in its financial position represents the potential loss arising from adverse changes in interest rates. The Company’s results of operations could be negatively impacted by decreases in interest rates on its short-term investments.

 

19



 

The Company is potentially exposed to market risk from changes in interest rates relating to its Wells Fargo Revolver. Loans under the Wells Fargo Revolver bear interest at Wells Fargo’s floating rate, 8.25% as of September 1, 2007, plus 0.25%. However, the Company had no revolving credit loan borrowings under the Wells Fargo Revolver during the first six months of fiscal 2008 and, given its existing liquidity position, does not expect to utilize the Wells Fargo Revolver in the near future except for its continuing use of the import letter of credit facility.

 

All of the Company’s purchase obligations placed with foreign suppliers are denominated in U.S. dollars. Therefore, the Company has minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that its foreign currency exchange risk is not significant.

 

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

 

ITEM 4.
CONTROLS AND PROCEDURES

 

(a)       Evaluation of Disclosure Controls and Procedures.

 

Under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, the Company’s management has evaluated the effectiveness and design of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in the Company’s periodic reports to the Securities and Exchange Commission under the Exchange Act.

 

(b)       Internal Controls Over Financial Reporting.

 

There have not been any changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 1, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

PART II.

 

ITEM 1.
LEGAL PROCEEDINGS

 

There are no material legal proceedings pending against the Company.

 

ITEM 1A.
RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 3, 2007 should be carefully considered as they could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may also materially adversely affect the Company’s future business, financial condition and/or results of operations.

 

20



 

ITEM 2.
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS

 

In fiscal 2007, the Company’s Board of Directors authorized a stock repurchase program enabling the Company to purchase up to $40.0 million of its common stock, subject to market conditions. During fiscal 2007, the Company repurchased 1,732,123 shares at a total cost, including commissions, of approximately $34.2 million. In March 2007, the Company completed the repurchase program by purchasing an additional 325,059 shares of its common stock for a total cost, including commissions, of approximately $5.8 million, bringing the total number of shares repurchased under this program to 2,057,182 at a total cost, including commissions, of approximately $40.0 million.

 

On May 25, 2007, the Company’s Board of Directors authorized a one-year stock repurchase program enabling the Company to repurchase up to $20.0 million of its common stock, subject to market conditions. The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated:

 

 

 

 

 

 

 

Total Number

 

Approximate

 

 

 

 

 

 

 

of Shares

 

Dollar Value

 

 

 

Total Number

 

Average

 

Purchased as

 

of Shares that May

 

 

 

of Shares

 

Price Paid

 

Part of a Publicly

 

Yet be Purchased

 

Period

 

Purchased

 

per Share

 

Announced Program

 

Under the Program

 

 

 

 

 

 

 

 

 

 

 

Fiscal July:

 

 

 

 

 

 

 

 

 

July 1, 2007- August 4, 2007

 

186,100

 

$

16.12

 

186,100

 

$

17,000,000

 

 

 

 

 

 

 

 

 

 

 

Fiscal August:

 

 

 

 

 

 

 

 

 

August 5, 2007- September 1, 2007

 

150,000

 

$

14.24

 

336,100

 

$

14,865,000

 

 

All of the Company’s share repurchases were executed in accordance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

 

ITEM 3.
DEFAULTS UPON
SENIOR SECURITIES

 

There has been no default with respect to any indebtedness of the Company.

 

ITEM 4.
SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS

 

The Company held its annual meeting of shareholders on August 1, 2007, in Minneapolis, Minnesota. The Company solicited proxies and filed definitive proxy statements with the United States Securities and Exchange Commission pursuant to Regulation 14A. Holders of 34,427,204 shares of the Company’s common stock were present in person, or by proxy, representing 94.96% of the Company’s 36,255,905 shares outstanding on the record date. The matters voted up and the votes cast at the meeting were as follows:

 

21



 

Item 1.    Election of two Class I directors (for a term of three years expiring July 2010):

 

Vote

 

Director

 

For

 

Witheld

 

Anne L. Jones

 

30,922,002

 

3,505,202

 

Robert Ezrilov

 

30,984,122

 

3,443,082

 

 

Other individuals whose term of office as Director continued after the Company’s annual meeting included Larry C. Barenbaum, Donald D. Beeler, James J. Fuld, Jr., Mark A. Cohn and Matthew P. Dillon.

 

Item 2.    Approval of an amendment to the Company’s 2006 Senior Executive Incentive Plan:

 

Vote

 

 

 

 

 

 

 

Broker

 

For

 

Against

 

Abstain

 

Non-Vote

 

30,265,336

 

545,151

 

13,376

 

3,603,341

 

 

Item 3.    Approval of an increase in shares under the 2005 Stock Incentive Plan from 800,000 to 1,800,000 shares:

 

Vote

 

 

 

 

 

 

 

Broker

 

For

 

Against

 

Abstain

 

Non-Vote

 

25,675,219

 

5,138,351

 

10,293

 

3,603,341

 

 

Item 4.    Ratification and approval of PricewaterhouseCoopers LLP as the Company’s independent registered public  accounting firm for the fiscal year ending March 1, 2007:

 

Vote

 

 

 

 

 

 

 

Broker

 

For

 

Against

 

Abstain

 

Non-Vote

 

34,329,810

 

89,026

 

8,368

 

 

 

ITEM 5.
OTHER INFORMATION

 

None.

 

22



 

ITEM 6.
EXHIBITS

 

(a)           The following exhibits are filed with this report:

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

23



 

SIGNATURES

 

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

 

 

CHRISTOPHER & BANKS CORPORATION

 

 

Dated:  October 11, 2007

By

 

/S/ LORNA NAGLER

 

 

 

 

 

 

 

 

Lorna Nagler

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Signing on behalf of the

 

 

 

Registrant as principal

 

 

 

executive officer.

 

 

 

 

 

 

 

 

Dated:  October 11, 2007

By

 

/S/ ANDREW K. MOLLER

 

 

 

 

 

 

 

 

Andrew K. Moller

 

 

 

Executive Vice President

 

 

 

and Chief Financial Officer

 

 

 

 

 

 

 

Signing on behalf of the

 

 

 

Registrant as principal

 

 

 

financial officer.

 

24



 

CHRISTOPHER & BANKS CORPORATION

QUARTERLY REPORT ON FORM 10-Q

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

25