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 August 26, 2006
		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)

 

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  o

Accelerated filer  x

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 September 22, 2006, 38,036,289 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 August 26, 2006, February 25, 2006 and August 27, 2005		3
		Consolidated Condensed Statement of Income
		For the Three Months Ended August 26, 2006 and August 27, 2005		4
		Consolidated Condensed Statement of Income
		For the Six Months Ended August 26, 2006 and August 27, 2005		5
		Consolidated Condensed Statement of Cash Flows
		For the Six Months Ended August 26, 2006 and August 27, 2005		6
		Notes to Consolidated Condensed Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.		Controls and Procedures		20

 

		PART II OTHER INFORMATION
Item 1.		Legal Proceedings		20
Item 1A.		Risk Factors		21
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		22
		Signatures		23
		Index to Exhibits		24

 

2

CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEET

(Unaudited)

		August 26,			February 25,			August 27,
		2006			2006			2005
ASSETS
Current assets:
Cash and cash equivalents		$	82,423,025		$	62,384,999		$	35,857,126
Short-term investments		44,325,000			30,000,000			26,875,646
Accounts receivable		5,264,056			4,753,303			3,455,262
Merchandise inventory		44,427,051			37,871,375			40,551,858
Income taxes receivable		6,258,297			—			3,333,860
Other current assets		6,018,272			5,630,709			5,276,147
Total current assets		188,715,701			140,640,386			115,349,899
Property, equipment and improvements, net		124,592,473			118,341,542			115,155,907
Other assets:
Goodwill		3,587,052			3,587,052			3,587,052
Intangible assets		629,863			684,445			739,028
Other		280,488			209,869			218,386
Total other assets		4,497,403			4,481,366			4,544,466
Total assets		$	317,805,577		$	263,463,294		$	235,050,272
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	10,826,707		$	9,853,345		$	8,727,536
Accrued salaries, wages and related expenses		8,730,714			5,449,508			4,979,527
Other accrued liabilities		17,807,559			20,480,816			10,895,668
Total current liabilities		37,364,980			35,783,669			24,602,731
Other liabilities:
Deferred lease incentives		21,659,041			21,802,869			19,863,914
Deferred rent obligations		10,292,713			9,609,999			8,922,579
Other		1,710,605			3,473,858			4,458,085
Total other liabilities		33,662,359			34,886,726			33,244,578
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, 44,866,525, 43,006,151 and 42,679,667 shares issued and 38,037,789, 36,221,415 and 35,894,931 shares outstanding at August 26, 2006, February 25, 2006 and August 27, 2005, respectively		448,665			430,062			426,777
Additional paid-in capital		101,511,980			65,940,956			62,886,485
Retained earnings		206,593,855			186,997,975			174,465,795
Common stock held in treasury, 6,828,736, 6,784,736 and 6,784,736 shares at cost at August 26, 2006, February 25, 2006 and August 27, 2005, respectively		(61,776,262		)	(60,576,094		)	(60,576,094		)
Total stockholders’ equity		246,778,238			192,792,899			177,202,963
Total liabilities and stockholders’ equity		$	317,805,577		$	263,463,294		$	235,050,272

 

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

3

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CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF INCOME

(Unaudited)

		Three Months Ended
		August 26,			August 27,
		2006			2005
Net sales		$	131,553,342		$	110,806,233
Costs and expenses:
Merchandise, buying and occupancy, exclusive of depreciation and amortization		78,802,797			66,781,596
Selling, general and administrative		36,111,556			30,665,760
Depreciation and amortization		5,017,119			4,545,577
Total costs and expenses		119,931,472			101,992,933
Operating income		11,621,870			8,813,300
Interest income		1,325,425			460,178
Income before income taxes		12,947,295			9,273,478
Income tax provision		5,023,550			3,579,562
Net income		$	7,923,745		$	5,693,916
Basic earnings per common share:
Net income		$	0.21		$	0.16
Basic shares outstanding		37,401,006			35,840,403
Diluted earnings per common share:
Net income		$	0.21		$	0.16
Diluted shares outstanding		38,049,065			36,212,321
Dividends per share		$	0.04		$	0.04

 

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

4

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CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF INCOME

(Unaudited)

		Six Months Ended
		August 26,			August 27,
		2006			2005
Net sales		$	274,083,631		$	233,484,489
Costs and expenses:
Merchandise, buying and occupancy, exclusive of depreciation and amortization		157,364,637			138,854,805
Selling, general and administrative		72,192,257			61,958,036
Depreciation and amortization		9,998,738			9,022,051
Total costs and expenses		239,555,632			209,834,892
Operating income		34,527,999			23,649,597
Interest income		2,286,956			786,993
Income before income taxes		36,814,955			24,436,590
Income tax provision		14,284,202			9,432,524
Net income		$	22,530,753		$	15,004,066
Basic earnings per common share:
Net income		$	0.61		$	0.42
Basic shares outstanding		36,901,264			35,793,387
Diluted earnings per common share:
Net income		$	0.60		$	0.41
Diluted shares outstanding		37,573,303			36,157,669
Dividends per share		$	0.08		$	0.08

 

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

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CHRISTOPHER & BANKS CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(Unaudited)

		Six Months Ended
		August 26,			August 27,
		2006			2005
Cash flows from operating activities:
Net income		$	22,530,753		$	15,004,066
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,998,738			8,918,389
Deferred income taxes		(1,762,585		)	(1,662,800		)
Income tax benefit on exercise of stock options		(5,283,450		)	917,171
Stock-based compensation expense		2,272,675			66,624
Loss on disposal of furniture, fixtures and equipment		89,386			283,885
Changes in operating assets and liabilities, net of effects of acquisition:
Increase in merchandise inventory		(6,555,676		)	(26,850		)
(Increase) decrease in accounts receivable		(510,753		)	289,226
Increase in income taxes receivable		(6,258,297		)	(1,806,409		)
(Increase) decrease in other current assets		(388,231		)	836,487
Increase in other assets		(70,619		)	(67,543		)
Increase (decrease) in accounts payable		960,232			(4,155,463		)
Increase (decrease) in accrued liabilities		5,891,399			(2,857,343		)
Decrease in deferred lease incentives		(143,828		)	(784,128		)
Increase in deferred rent obligations		682,714			750,905
Net cash provided by operating activities		21,452,458			15,706,217
Cash flows from investing activities:
Purchases of property, equipment and improvements		(16,271,343		)	(11,791,388		)
Purchases of short-term investments		(31,325,000		)	(10,862,329		)
Redemptions of short-term investments		17,000,000			30,735,012
Net cash provided by (used in) investing activities		(30,596,343		)	8,081,295
Cash flows from financing activities:
Exercise of stock options		28,033,502			868,675
Dividends paid		(2,934,873		)	(2,862,439		)
Income tax benefit on exercise of stock options		5,283,450			—
Acquisition of common stock held in treasury		(1,200,168		)	—
Net cash provided by (used in) financing activities		29,181,911			(1,993,764		)
Net increase in cash and cash equivalents		20,038,026			21,793,748
Cash and cash equivalents at beginning of period		62,384,999			14,063,378
Cash and cash equivalents at end of period		$	82,423,025		$	35,857,126
Supplemental cash flow information:
Income taxes paid		$	17,690,582		$	11,686,120
Purchases of equipment and improvements, included in accounts payable at end of period		$	13,130		$	559,701

 

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 February 25, 2006.

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 – STOCK-BASED COMPENSATION

General

Effective February 26, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”) using the modified prospective transition method. Under this transition method, stock-based compensation expense recognized for share-based awards during the three and six month periods ended August 26, 2006 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. In accordance with the modified prospective transition method, results for the prior period have not been restated. Prior to the adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations, as permitted by SFAS 123.

Under various plans, the Company may grant options to purchase common stock to employees and non-employee members of its Board of Directors at a price not less than 100% of the fair market value of the Company’s common stock on the option grant date.  In general, options granted to employees vest over two to five years and are exercisable up to ten years from the date of grant.  In prior fiscal years, options granted to Directors vested immediately upon grant and were exercisable up to five years from the date of grant.  Beginning in fiscal 2007, options granted to Directors vest immediately and are exercisable up to ten years from the grant date.

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 performance conditions are not met.  The Company holds the certificates for such shares in safekeeping during the vesting period and the grantee cannot transfer the shares before the respective shares vest.  Shares of nonvested restricted stock have the same voting rights as common stock and are considered to be currently issued and outstanding.  Restricted stock grants to employees vest over three to seven years, while restricted grants to Directors fully vest after six months.  The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the period during which the restrictions lapse.  For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

The total compensation expense related to stock-based awards for the three and six month periods ended August 26, 2006, reflecting the impact of the implementation of the modified prospective transition method in accordance with SFAS 123R, was $1.4 million and $2.3 million, respectively.  Stock-based compensation expense in the second quarter and first half of fiscal 2007 was included in merchandise, buying and occupancy expenses for the Company’s buying and distribution employees and in selling, general and administrative expense for all other employees.

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Effective February 26, 2006 the Company began recognizing stock-based compensation costs net of a forfeiture rate for only those shares expected to vest on a straight-line basis over the requisite service period of the award.  The Company estimated the forfeiture rate for the second quarter and first half of fiscal 2007 based on its historical experience.

As a result of adopting SFAS 123R, the impact to the consolidated statement of income for the three and six month periods ended August 26, 2006 was a reduction in income before income taxes of $823,000 and $1.5 million, respectively, and a reduction in net income of $504,000 and $941,000, respectively, from what would have been presented if the Company had continued to account for stock-based compensation awards under APB 25.  The impact on basic and diluted earnings per share was $0.01 and $0.01, respectively, for the three months ended August 26, 2006, and $0.03 and $0.03, respectively, for the six months ended August 26, 2006, from what would have been reported under APB 25.

Prior to the adoption of SFAS 123R, the Company presented all tax benefits related to deductions resulting from the exercise of stock options as cash flows from operating activities in the consolidated statement of cash flows.  SFAS 123R requires that cash flows resulting from tax benefits attributable to tax deductions in excess of the compensation expense recognized for those options (excess tax benefits) be classified as financing cash flows.  As a result, the Company classified approximately $5.3 million of excess tax benefits as financing cash flows for the six months ended August 26, 2006.

The pro forma table below illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” to all stock-based employee compensation for the three and six month periods ended August 27, 2005:

 

Methodology Assumptions

As part of its SFAS 123R adoption, the Company examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns attributable to certain optionees.  From this analysis, the Company identified two distinct populations of optionees, employees and non-employee directors.  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.

8

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The expected term of stock option awards granted is derived from historical exercise experience for the Company’s employees and non-employee directors under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding for each of the two identified populations.  The expected term assumption incorporates the contractual term of an option grant, which for previously issued grants is ten years for employees and five or ten years for non-employee directors, as well as the vesting period of an award, which is most commonly pro-rata vesting over three years for employees and immediate vesting for non-employee directors.  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 options for the three and six months ended August 26, 2006 and August 27, 2005 were as follows:

 

Stock-Based Compensation Activity

The following table presents a summary of the Company’s stock option activity for the six months ended August 26, 2006:

													Weighted
				Weighted									Average
		Number		Average			Aggregate			Weighted			Remaining
		of		Exercise			Intrinsic			Average			Contractual
		Shares		Price			Value			Fair Value			Life
Outstanding, beginning of period		3,745,166		$	18.40		$	24,794,900		$	6.75
Vested		3,076,666		18.39			20,401,994			6.65
Unvested		668,500		18.43			4,392,906			7.18
Granted		105,200		26.39			5,600			9.46
Exercised		(1,571,924	)	17.83			14,707,640			6.83
Canceled - Vested		(5,000	)	18.33			33,350			7.57
Canceled - Unvested (Forfeited)		(53,100	)	18.08			367,227			7.24
Outstanding, end of period		2,220,342		$	19.19		$	13,132,070		$	6.81		5.96
Vested		1,546,242		$	18.96		$	9,418,751		$	6.51		4.88
Unvested		674,100		$	19.72		$	3,713,319		$	7.49		8.42
Exercisable, end of period		1,546,242		$	18.96		$	9,418,751		$	6.51		4.88

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on August 26, 2006.

As of August 26, 2006, there was approximately $3.2 million of total unrecognized compensation expense related to unvested stock options granted under the Company’s share-based compensation plans.  That expense is expected to be recognized over a weighted average period of approximately one year.

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The following table presents a summary of the Company’s restricted stock activity for the six months ended August 26, 2006:

		Number		Aggregate			Weighted
		of		Intrinsic			Average
		Shares		Value			Fair Value
Unvested, beginning of period		54,867		$	1,371,675		$	18.35
Granted		289,300		7,232,500			27.70
Vested		(7,833	)	198,931			15.89
Canceled - Unvested (Forfeited)		(850	)	21,250			19.45
Unvested, end of period		335,484		$	8,387,100		$	26.47

 

The total fair value of shares of restricted stock that vested during the six months ended August 26, 2006 was $198,931.  As of August 26, 2006, there was approximately $8.2 million of unrecognized stock-based compensation expense related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of approximately two years.

NOTE 3 – SHORT-TERM INVESTMENTS

Short-term investments consisted of the following:

		August 26,			February 25,			August 27,
Description		2006			2006			2005
Corporate debt securities		$	—		$	—		$	9,875,646
Auction rate securities		37,325,000			13,000,000			—
U.S. Government debt securities		7,000,000			17,000,000			17,000,000
		$	44,325,000		$	30,000,000		$	26,875,646

 

NOTE 4 – MERCHANDISE INVENTORY

Merchandise inventory consisted of the following:

		August 26,			February 25,			August 27,
Description		2006			2006			2005
Merchandise - in store		$	34,993,547		$	30,397,530		$	30,713,038
Merchandise - in transit		10,250,650			7,857,968			10,378,127
Allowance for permanent markdowns		(817,146		)	(384,123		)	(539,307		)
		$	44,427,051		$	37,871,375		$	40,551,858

 

The Company purchased approximately 13% and 24% of its merchandise from its largest overseas supplier during the first six months of fiscal 2007 and 2006, respectively.

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NOTE 5 – PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

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

		Estimated		August 26,			February 25,			August 27,
Description		Useful Life		2006			2006			2005
Land		—		$	1,596,898		$	1,596,898		$	1,596,898
Corporate office, distribution center and related building improvements		25 years		11,412,094			11,412,094			10,952,136
Store leasehold improvements		Term of related lease, typically 10 years		78,958,448			75,854,008			69,257,852
Store furniture and fixtures		Three to 10 years		91,231,896			87,073,269			79,382,123
Point of sale hardware and software		Five years		8,266,314			7,615,806			7,326,445
Corporate office and distribution center furniture, fixtures and equipment		Seven years		2,615,705			2,506,908			2,368,085
Computer hardware and software		Three to five years		4,699,105			4,248,354			4,302,751
Construction in progress		—		11,397,597			4,733,032			7,827,387
				210,178,057			195,040,369			183,013,677
Less accumulated depreciation and amortization				85,585,584			76,698,827			67,857,770
Net property, equipment and improvements				$	124,592,473		$	118,341,542		$	115,155,907

 

NOTE 6 – 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 7 – INTANGIBLES

Intangible assets consisted of the following:

		August 26,			February 25,			August 27,
		2006			2006			2005
Customer lists		$	830,000		$	830,000		$	830,000
Accumulated amortization		(200,137		)	(145,555		)	(90,972		)
		$	629,863		$	684,445		$	739,028

 

Aggregate amortization expense for the six months ended August 26, 2006 was $54,582.  Estimated aggregate amortization expense for fiscal 2007 and the next five fiscal years is as follows:

 

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NOTE 8 – ACCRUED LIABILITIES

Other accrued liabilities consisted of the following:

		August 26,			February 25,			August 27,
Description		2006			2006			2005
Gift card, certificate and store credit liability		$	7,303,644		$	11,090,927		$	5,477,016
Accrued income, sales and other taxes payable		2,881,542			3,231,408			2,268,980
Accrued occupancy related expenses		887,466			1,066,279			1,096,613
Other accrued liabilities		6,734,907			5,092,202			2,053,059
		$	17,807,559		$	20,480,816		$	10,895,668

 

NOTE 9 – 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 August 26, 2006, 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 $2,364 for the six months ended August 26, 2006.  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 2007.  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 August 26, 2006 was $36.5 million.  As of August 26, 2006, the Company had outstanding letters of credit in the amount of $17.4 million.  Accordingly, the availability of revolving credit loans under the Wells Fargo Revolver was $19.1 million at August 26, 2006.

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 August 26, 2006, the most recent measurement date, the Company was in compliance with all covenants of the Wells Fargo Revolver.

NOTE 10 – STOCKHOLDERS’ EQUITY

In July 2006, the Company’s Board of Directors authorized a two-year stock repurchase program enabling the Company to purchase up to $20 million of the Company’s common stock, subject to market conditions.  As of August 26, 2006, the Company had repurchased 44,000 shares of its common stock for a total cost of approximately $1.2 million.

The common stock repurchased under the Company’s most recent authorization is being held in treasury.  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 July 2006, the Company’s Board of Directors also authorized an increase in the Company’s quarterly cash dividend.  Beginning in October 2006, the Company will pay a quarterly dividend of $0.06 per share of common stock.  The dividend rate was previously $0.04 per share of common stock.

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NOTE 11 – 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 following is a reconciliation of the number of shares and per share amounts used in the basic and diluted EPS computations:

		Three Months Ended
		August 26, 2006					August 27, 2005
				Net					Net
				Income					Income
		Shares		Per Share			Shares		Per Share
Basic		37,401,006		$	0.21		35,840,403		$	0.16
Effect of dilution from stock-based compensation plans		648,059		—			371,918		—
Diluted		38,049,065		$	0.21		36,212,321		$	0.16

 

		Six Months Ended
		August 26, 2006					August 27, 2005
				Net					Net
				Income					Income
		Shares		Per Share			Shares		Per Share
Basic		36,901,264		$	0.61		35,793,387		$	0.42
Effect of dilution from stock-based compensation plans		672,039		0.01			364,282		0.01
Diluted		37,573,303		$	0.60		36,157,669		$	0.41

 

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, as they were anti-dilutive.  Stock options of 1,607,249 were excluded from the shares used in the computation of diluted EPS for both the three and six month periods ended August 27, 2005, as they were anti-dilutive.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN No. 48”), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  Additionally, FIN 48 provides guidance on derecognition, classification, interest, penalties, accounting in interim periods and disclosure related to uncertain income tax positions.  FIN No. 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact of adopting FIN No. 48, but does not anticipate that it will have a material effect on its financial position, results of operations or cash flows.

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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.  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 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.

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.

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, number of units per transaction and average retail 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 uses of cash.  The Company expects its cash and short-term investments, combined with cash flows from operations, to be sufficient to fund anticipated capital expenditures, working capital and other requirements for liquidity for the foreseeable future.

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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 August 26, 2006, the Company operated 753 stores in 45 states, including 518 Christopher & Banks stores, 205 C.J. Banks stores and 30 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 2007, the Company opened 15 new Christopher & Banks stores, 27 new C.J. Banks stores and nine new Acorn stores.  The Company closed three stores during the first half of the fiscal year.  In the second half of fiscal 2007, the Company anticipates it will open approximately 27 additional stores, substantially all of which will open in the third quarter, for a total of approximately 78 new store openings in fiscal 2007.  The Company currently plans to grow its store base by approximately 85 to 100 new stores in fiscal 2008.

On October 3, 2006, the Company announced the election of Mark A. Cohn to its Board of Directors effective October 2, 2006.  Mr. Cohn will serve as an additional Class 3 director.  The election of Mr. Cohn increases the number of seats on the Company’s Board of Directors to eight and the number of independent Directors to seven.

In July 2006, the Company’s Board of Directors authorized a two-year stock repurchase program enabling the Company to purchase up to $20 million of the Company’s common stock, subject to market conditions.  As of August 26, 2006, the Company had repurchased 44,000 shares of its common stock for a total cost of approximately $1.2 million under this program.

The common stock repurchased under the Company’s most recent authorization is being held in treasury.  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 July 2006, the Company’s Board of Directors also authorized an increase in the Company’s quarterly cash dividend.  Beginning in October 2006, the Company will pay a quarterly dividend of $0.06 per share of common stock.  The dividend rate was previously $0.04 per share of common stock.

On June 12, 2006, the Company entered into an employment agreement with Matthew P. Dillon, President and Chief Merchandising Officer, under which he will be named President and Chief Executive Officer effective March 1, 2007.  Mr. Dillon will also be appointed to the Company’s Board of Directors concurrently with his promotion to Chief Executive Officer.

On April 5, 2006, the Company and Joseph E. Pennington entered into Amendment No. 2 to Mr. Pennington’s Amended and Restated Executive Agreement which extended the term of his employment as Chief Executive Officer through February 28, 2007.  Mr. Pennington and the Company also entered into an Amendment to Mr. Pennington’s Employment Continuation Agreement which provides that after February 28, 2007, Mr. Pennington will continue to be employed by the Company as a non-officer, part-time employee in an advisory role through August 31, 2008.

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.  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 August 26, 2006.

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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 August 26, 2006 Compared to Three Months Ended August 27, 2005

Net Sales.  Net sales for the three months ended August 26, 2006 were $131.6 million, an increase of $20.8 million or 19%, from $110.8 million for the three months ended August 27, 2005.  The increase in net sales was due to an increase in the number of stores operated by the Company combined with an 8% increase in same-store sales.  The Company operated 753 stores at August 26, 2006, compared to 674 stores at August 27, 2005.  The 8% increase in same-store sales resulted from strong customer acceptance of the Company’s merchandise assortment in the second quarter of fiscal 2007.  Same-store sales increased by 14% for stores opened by the Company in fiscal 2004, 2005 and 2006, while the mature base of stores, opened in fiscal 2003 and earlier, reported a 6% increase in 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 percent 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.

Merchandise, Buying and Occupancy Costs, exclusive of depreciation and amortization.  Merchandise, buying expenses and occupancy costs, exclusive of depreciation and amortization, were $78.8 million, or 59.9% of net sales, during the second quarter of fiscal 2007, compared to $66.8 million, or 60.3% of net sales, during the same period in fiscal 2006.  The decline in merchandising, buying and occupancy costs as a percent of net sales was mainly attributable to improved full price selling resulting in a decreased level of markdowns as customers reacted strongly to the Company’s second quarter merchandise assortment.  In addition, 50 basis points of positive leverage of occupancy costs was offset by increased merchandise department salary, bonus and other compensation related costs.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the three months ended August 26, 2006 were $36.1 million, or 27.5% of net sales, compared to $30.7 million, or 27.7% of net sales, for the three months ended August 27, 2005, resulting in 20 basis points of positive leverage.  The Company gained positive leverage from controlling store level costs.  In addition, a lower level of self-insured medical claims also contributed to achieving positive leverage.  These gains were substantially offset by bonus and stock-based compensation expense, which accounted for approximately 170 more basis points of selling, general and administrative expenses in the second quarter of fiscal 2007 than in the second quarter of fiscal 2006.

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