UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the transition period from                          to                         .

Commission File Number 001-31390

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

(763) 551-5000

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x   NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o   NO x

As of June 27, 2008, 35,414,825 shares of the registrant’s common stock were outstanding.

CHRISTOPHER & BANKS CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

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

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

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

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CHRISTOPHER & BANKS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

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

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CHRISTOPHER & BANKS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Christopher & Banks Corporation and subsidiaries (the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to such rules and regulations.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2008.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year.  In the opinion of management, the information contained herein reflects all adjustments necessary to present fairly the Company’s financial position as of May 31, 2008 and June 2, 2007, and its results of operations and cash flows for the three month periods ended May 31, 2008 and June 2, 2007.  All such adjustments are of a normal recurring nature.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements.” (“SFAS No. 157”).  SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.  This statement applies under other accounting pronouncements that require or permit fair value measurements.  In February 2008, the FASB issued Staff Positions (“FSPs”) No. 157-1 and No. 157-2, which, respectively, remove leasing transactions from the scope of SFAS No. 157 and defer its effective date for one year relative to certain nonfinancial assets and liabilities. As a result, the application of the definition of fair value and related disclosures of SFAS No. 157 (as impacted by these two FSPs) was effective for the Company beginning March 2, 2008 on a prospective basis with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. This adoption did not have a material impact on the Company’s consolidated results of operations or financial condition for the quarter ended May 31, 2008. The remaining aspects of SFAS No. 157 for which the effective date was deferred under FSP No. 157-2 are currently being evaluated by the Company.  Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.  The effects of these remaining aspects of SFAS No. 157 are to be applied by the Company to fair value measurements prospectively beginning March 1, 2009. The Company does not expect them to have a material impact on the Company’s consolidated results of operations or financial condition.  Please refer to Note 11 for disclosures related to our initial adoption of SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).  SFAS No. 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity reports unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  Upfront costs and fees related to items for which the fair value option is elected are recognized in earnings as incurred and not deferred.  SFAS No. 159 also established presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS No. 159 was effective for financial statements issued for fiscal years beginning after November 15, 2007 (March 2, 2008 for the Company).  At the effective date, an entity could elect the fair value option for eligible items that existed at that date.  The entity was required to report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company did not elect the fair value option for eligible items that existed as of March 2, 2008.

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In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS No. 141R”) which changes accounting for business acquisitions.  SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination.  Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. For the Company, SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after February 28, 2009.  The Company is currently evaluating the impacts and disclosures of this standard which would pertain to the Company only if it affected a future business combination.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (“SFAS No. 160”) which establishes new standards governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries.  Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance.  This standard also requires changes to certain presentation and disclosure requirements.  For the Company, SFAS No. 160 is effective beginning March 1, 2009.  The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented.  Based on the Company’s current operations, it does not expect that the adoption of SFAS No. 160 will have a material effect on its financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”) which will require increased disclosures about an entity’s strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Certain disclosures will also be required with respect to derivative features that are credit risk-related. SFAS No. 161 is effective for the Company beginning March 1, 2009 on a prospective basis.  Based on the Company’s current operations, the Company does not expect that the adoption of SFAS No. 161 will have a material effect on its financial position, results of operations or cash flows.

NOTE 2 – INVESTMENTS

The Company’s investments consisted of the following:

As of May 31, 2008, the Company had approximately $23.5 of short-term and long-term investments, which consisted solely of $24.5 million of auction rate securities (“ARS”) at cost, less a temporary valuation allowance of $1.0 million.  This allowance was based on an analysis of other-than-temporary impairment factors, resulting in management’s estimate of fair value, given the current lack of liquidity of these investments, while taking into account the current credit quality of the underlying securities.

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ARS are long-term debt instruments with interest rates that reset through scheduled auctions which occur every seven, 28 or 35 days.  Holders of ARS can either sell into the auction, bid based on a desired interest rate or hold and accept the reset rate.  If there are insufficient buyers, then the auction “fails” and holders are unable to liquidate their investment through the auction.  A failed auction is not a default of the debt instrument. The result of a failed auction is that the ARS continues to pay interest in accordance with its original terms. Liquidity, however, for holders is limited until there is a successful auction, until such time as another market for ARS develops or the ARS are called by the issuer. Auctions continue to be held as scheduled until the ARS matures or until the issue is called. All of the Company’s ARS are collateralized by student loans and currently have AAA (S&P) or Aaa (Moody’s) credit ratings.  As of May 31, 2008, the repayment of the student loans for approximately 85% of the ARS, which serve as collateral for the ARS held by the Company, is substantially backed by the United States government.  Until February 2008, the ARS market was liquid and auctions for ARS held by the Company did not fail. However, in February 2008, a substantial number of auctions failed, meaning there was not enough demand to sell the entire issue at auction.  Auctions for the Company’s ARS have continued to fail through the date of this report.

Based on current market conditions, management believes that it is likely that auctions related to the Company’s ARS will continue to be unsuccessful for the near term.  Unsuccessful auctions have limited the Company’s ability to access these funds.  Management anticipates the liquidity of the ARS will continue to be restricted until there is a successful auction or until such time as another market for the ARS develops or until the ARS are called by the issuer.  The Company reclassified the ARS to long-term investments at March 1, 2008 to reflect the lack of liquidity of these investments.  As of May 31, 2008, the Company had approximately $93.0 million of cash, cash equivalents and short-term investments.  Management believes the Company has sufficient balances of cash, cash equivalents and short-term investments to meet the Company’s working capital requirements and liquidity needs in fiscal 2009.

In June 2008, following the closing of the Company’s first quarter of fiscal 2009, the Company was notified by two of the ARS issuers that $5.0 million of the Company’s ARS in the aggregate would be called.  One ARS issue for $3.5 million was retired at par on July 1, 2008, and another ARS issue for $1.5 million was retired at par on July 9, 2008.  As a result, the Company reclassified $5.0 million of its ARS to short-term investments as of May 31, 2008 and reduced the ARS temporary valuation allowance by approximately $186,000 for the amount of the allowance relating to the called ARS issues.

The Company reviews impairments associated with its ARS in accordance with EITF 03-1 and FASB Staff Position SFAS Nos. 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,” to determine the classification of the impairment as “temporary” or “other-than-temporary.”  A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of stockholders’ equity.  Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary.  The Company’s management currently believes that all of the impairment related to its ARS is temporary.  The factors evaluated to differentiate between temporary and other-than-temporary include an assessment of the credit quality of the underlying collateral,  credit ratings actions and the recent call in July 2008 of $5.0 million of the Company’s investment in ARS at par plus accrued interest.  No tax benefit has been provided for this allowance as a loss, if any, would be capital in nature.

NOTE 3 – MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY

Merchandise inventories consisted of the following:

The Company does not have long-term purchase commitments or arrangements with any of its suppliers or agents.

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The Company purchased approximately 11% and 9% of its merchandise from its largest overseas supplier during the first three months of fiscal 2009 and 2008, respectively.  Although the Company has an established operating history with its largest vendor, 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 will be able to shift production to other suppliers so as to continue to secure the required volume of product.  Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on the Company’s financial position and results of operations.

In the first quarter of fiscal 2009, the Company purchased approximately 53% of its merchandise through one buying agent (the “Agent”).  The Company has begun the process of establishing relationships with additional primary suppliers, which are intended to reduce its reliance on the Agent.  The Agent also has informed the Company that it desires to cease serving as an intermediary with manufacturers on behalf of Christopher & Banks.  Therefore, the Company and the Agent have agreed that their current arrangement will be discontinued by the end of December 2008.  While management believes the actions it is taking to mitigate the risks of reliance on the Agent will be successful, any significant disruption in supply from vendors working through the Agent could have a material adverse impact on the Company’s financial position and results of operations.

NOTE 4 – PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

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

NOTE 5 – ACCRUED LIABILITIES

Other accrued liabilities consisted of the following:

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NOTE 6 – CREDIT FACILITY

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

On May 23, 2008, the Company and Wells Fargo entered into a Second Amendment to the Credit Facility (the “Second Amendment”).  The Second Amendment extended the maturity date of the Credit Facility by three years from June 30, 2008 to June 30, 2011.  In addition, the Second Amendment reduced the interest rate under the Credit Facility from the prime rate plus 0.25% to the prime rate minus 0.25%.  As of May 31, 2008, Wells Fargo’s prime rate was 5.0%.  The Second Amendment also provided the Company with the ability to borrow under the Credit Facility at an interest rate tied to the London Interbank Market Offered Rate (LIBOR).

Interest under the Credit Facility is payable monthly in arrears.  The Credit Facility carries a facility fee of 0.25%, based on the unused portion as defined in the agreement, and a collateral monitoring fee.  For the three months ended May 31, 2008, fees related to the Credit Facility totaled $2,147.  Borrowings under the Credit Facility are collateralized by the Company’s equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights.

The Company had no revolving credit loan borrowings under the Credit Facility during the first three months of fiscal 2009.  Historically, the Credit Facility has been utilized by the Company only to open letters of credit to facilitate the import of merchandise.  The borrowing base at May 31, 2008 was $34.7 million.  As of May 31, 2008, the Company had outstanding letters of credit in the amount of $17.4 million.  Accordingly, the availability of revolving credit loans under the Credit Facility was $17.3 million at May 31, 2008.

The Credit Facility contains certain restrictive covenants, including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants.  As of May 31, 2008, the most recent measurement date, the Company was in compliance with all of these restrictive covenants under the Credit Facility.

NOTE 7 – STOCKHOLDERS’ EQUITY

In fiscal 2008, the Company’s Board of Directors authorized and subsequently announced a one-year stock repurchase program enabling the Company to purchase up to $20 million of its common stock, subject to market conditions.  No repurchases were executed under the program in the first quarter of fiscal 2009.  As of May 24, 2008, the expiration date of the repurchase program, the Company had repurchased 948,800 shares of its common stock under the program for a total cost, including commissions, of approximately $12.1 million.

NOTE 8 – STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”).  Under this 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.

Total pre-tax compensation expense related to stock-based awards for the three months ended May 31, 2008 and June 2, 2007 was approximately $629,000 and $459,000, respectively.  Stock-based compensation expense is 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.

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Methodology Assumptions

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

The weighted average assumptions relating to the valuation of the Company’s stock option grants for the three month periods ended May 31, 2008 and June 2, 2007 were as follows:

Stock-Based Compensation Activity

The following table presents a summary of the Company’s stock option activity for the three months ended May 31, 2008:

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 generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions.  In addition, certain of the Company’s restricted stock awards have performance-based vesting provisions and are subject to forfeiture if these performance conditions are not achieved.  The Company assesses, on an ongoing basis, the probability of whether the performance criteria are projected to be achieved and, if it is deemed probable, recognizes compensation expense over the relevant performance period.  For those awards not subject to performance criteria, the Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period.  The fair market value of the Company’s restricted stock is determined based on the closing price of the Company’s common stock on the grant date.

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The following table presents a summary of the Company’s restricted stock activity for the three months ended May 31, 2008:

NOTE 9 – INCOME TAXES

The Company adopted the provisions of 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.

As of May 31, 2008, the Company’s liability for unrecognized tax benefits associated with uncertain tax positions was approximately $4.3 million and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2.5 million.  The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.  At May 31, 2008 the Company had accrued approximately $0.8 million for the potential payment of interest and penalties.

The Company and its subsidiaries are subject to U.S. federal income tax and the income tax of various state and local jurisdictions.  The Internal Revenue Service has completed its audit for tax years through fiscal 2006.  The Company is not subject to state income tax examination by taxing authorities for taxable years prior to fiscal 2004.  At May 31, 2008, the Company did not expect its liability for unrecognized tax benefits to significantly increase or decrease over the next year.

NOTE 10 – 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 shares of common stock and common equivalent shares outstanding.  The Company’s reconciliation of EPS includes the individual share effects of all securities affecting EPS 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:

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Stock options of 1,898,852 and 1,686,198 were excluded from the shares used in the computation of diluted EPS for the three months ended May 31, 2008 and June 2, 2007, respectively, as they were anti-dilutive.

NOTE 11 — FAIR VALUE MEASUREMENTS

As discussed in Note 1, the Company adopted SFAS No. 157, “Fair Value Measurements,” (as impacted by FSP Nos. 157-1 and 157-2) effective March 1, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

Under SFAS No. 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.  SFAS No. 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.  The hierarchy is broken down into three levels.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs for the asset or liability.   Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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

For the Company, effective March 1, 2008, fair value under SFAS No. 157 (as impacted by FSP Nos. 157-1 and 157-2) principally applied to financial asset and liabilities such as available-for-sale investments (included in short and long-term investments in the Consolidated Balance Sheet).  These items were previously and will continue to be marked-to-market at each reporting period; however, the definition of fair value used for these mark-to-markets is now applied using SFAS No. 157.  The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities.  Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis subsequent to the effective date of SFAS No. 157 (as impacted by FSP Nos. 157-1 and 157-2).

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

Available-for-sale investment securities — auction rate securities (“ARS”):

As discussed in Note 2, auctions for ARS held by the Company failed beginning in February 2008 and have continued to fail through the date of this report.  As a result, investments in ARS are valued to reflect the current lack of liquidity of these investments while taking into account the credit quality of the underlying securities.

The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No. 157, on a recurring basis.

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The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

The Company reports other comprehensive income (loss) in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).  SFAS No. 130 established standards for the reporting and disclosure of Comprehensive Income.  In the first quarter of fiscal 2009, other comprehensive income (loss) included unrealized gains or losses associated with investments classified as available for sale.  Total comprehensive income for the quarter ended May 31, 2008 was $11.5 million, which is the sum of the Company’s net income of $11.3 million plus the $186,000 adjustment to the Company’s allowance for the temporary impairment of long-term investments.

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

During the quarter ended May 31, 2008, the Company had no measurements of assets or liabilities at fair value (as defined in SFAS No. 157) on a nonrecurring basis subsequent to their initial recognition.  As indicated in Note 1, the aspects of SFAS No. 157 for which the effective date for the Company was deferred under FSP No. 157-2 until March 1, 2009 relate to nonfinancial assets and liabilities that are measured at fair value but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business.  Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, any such liability is not expected to have a material adverse impact on the Company’s financial position or results of operations.

NOTE 13 – SEGMENT REPORTING

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

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

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Segment Reporting:

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

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q.

Executive Overview

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

As of May 31, 2008, the Company operated 850 stores in 46 states, including 551 Christopher & Banks stores, 263 C.J. Banks stores and 36 Acorn stores.  The Company also operated two e-commerce enabled websites at www.christopherandbanks.com and www.cjbanks.com.  The Company’s Christopher & Banks brand offers distinctive fashions featuring exclusively designed, coordinated assortments of women’s apparel in sizes 4 to 16. The Company’s C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 24W.  Its Acorn stores offer upscale women’s fashions, along with accessories, including jewelry, handbags and other gift items under private and branded labels.

Fiscal 2009 First Quarter Summary

The Company recorded net income of $0.32 per diluted share in the first quarter of fiscal 2009, compared to net income of $0.32 per diluted share in the first quarter of fiscal 2008.  Same-store sales for the first quarter were flat.  Strong customer response to the Company’s second “Friends and Family” promotional event in April offset the effect of double-digit declines in store traffic encountered throughout much of the quarter.  Despite the downturn in customer traffic, merchandise margins for the first quarter increased approximately 150 basis points over last year as tight inventory controls allowed for more selling at full price and a reduced need to mark down merchandise.  Inventory levels at the end of the quarter were down approximately 35% on a per-store basis over the prior year.  Both the Company’s average transaction value and average units per transaction increased in the first quarter, which management believes was reflective of customers’ acceptance of the Company’s merchandise assortment.

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In the first quarter, one of the Company’s goals regarding its merchandise was to improve the freshness and color of its product assortment.  The Company moved away from the practice of featuring colors for two consecutive months.  Major in-store remerchandising floor sets (“floor sets”) are now being executed on a monthly basis at all of the Company’s stores.  Beginning in the first quarter of fiscal 2009, refresher floor sets are completed each month between the more traditional, larger floor sets, to ensure that fresh product is featured more frequently in the Company’s stores.

In the first quarter, the Company opened nine new Christopher & Banks stores and eight new C.J. Banks stores.  The Company also closed one Christopher & Banks store, two C.J. Banks stores and one Acorn store during the quarter.  In addition, the Company completed the installation of new point-of-sale registers in 550 of its stores.  The new registers provide the Company with updated point-of-sale technology.  Management anticipates these new registers will help improve operating efficiencies and provide enhanced communication abilities with its stores.

Fiscal 2009 Outlook

In the first quarter of fiscal 2009, the Company’s results were impacted by the extremely challenging domestic macro-economic environment.  Higher gasoline and food costs have placed increasing pressure on consumers’ spending patterns.  Weak customer traffic encountered in the first quarter has continued into June and early July and the Company anticipates that this weak traffic trend, and corresponding negative impact on sales, will persist throughout the second quarter and into the second half of fiscal 2009.

The Company is approaching its real estate growth strategy more cautiously given the uncertain economic environment.  The Company plans to open six new stores in the second quarter, five new stores in the third quarter and no new stores in the fourth quarter of fiscal 2009.  Five of the additional new stores are planned to be Christopher & Banks stores and six are planned to be C.J. Banks locations.  The Company is not planning to open any Acorn stores during fiscal 2009.  Going forward, the Company will proceed cautiously with new store growth.  New store opportunities will be analyzed closely and only those with compelling lease economics will be approved.

Management plans to continue its focus on managing inventory conservatively in the remainder of fiscal 2009.  Management plans to build inventory levels, which were down 35% on a per store basis at the end of the first quarter, on a per store basis in the second quarter.  In the second half of the year, management expects inventory levels per store to build to levels comparable to those present in the fall and holiday season of fiscal 2008.  As the year progresses, management will evaluate selling trends and make appropriate adjustments to inventory levels in order to maximize full-priced sales.

During the first quarter of fiscal 2009, the Company continued to make progress related to several key business initiatives as described below.

The Company launched two separate e-commerce websites in February 2008 for its Christopher & Banks and C.J. Banks brands.  These websites give customers the ability to view and purchase the Company’s merchandise online at www.christopherandbanks.com and www.cjbanks.com.  The Company currently sells essentially the same selection of merchandise on its websites that it features in its Christopher & Banks and C.J. Banks stores.  The Company’s customers responded favorably to its e-commerce sites in the first quarter of fiscal 2009.  At this time, the Company is adjusting inventory levels for its online businesses to match anticipated demand for the remainder of fiscal 2009.  Beginning in the second half of fiscal 2009, the Company is planning to offer a greater size selection through its e-commerce websites.  Management believes that its websites provide the Company with an opportunity to generate incremental sales and offer convenience and product research capabilities to its customers.  The Company does not have an e-commerce enabled website for its Acorn brand and does not currently plan to launch an e-commerce website for Acorn.

Management plans to continue to make upgrades to certain of its information systems.  The Company plans to complete the installation of its new planning and allocation system in the second quarter of fiscal 2009.  The system allows enhanced product allocation models which give the Company increased flexibility regarding product distribution by store sales volume, climate and customer size and fashion preferences.  In addition, the financial planning modules of this system have begun to provide the Company more in-depth product analysis capabilities.  Management expects to realize financial benefits from this system beginning in late fiscal 2009 with  additional benefits expected to be realized in fiscal 2010.  The Company also plans to complete the implementation of a new suite of financial software in the second quarter of fiscal 2009.

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In the first quarter of fiscal 2009, the Company purchased approximately 53% of its merchandise through one buying agent.  The Company has begun the process of establishing relationships with additional primary suppliers, which are intended to reduce its reliance on the Agent.  The Agent also has informed the Company that it desires to cease serving as an intermediary with manufacturers on behalf of Christopher & Banks.  Therefore, the Company and the Agent have agreed that their current arrangement will be discontinued by the end of December 2008.  While management believes the actions it is taking to mitigate the risks of reliance on the Agent will be successful, any significant disruption in supply from vendors working through the Agent could have a material adverse impact on the Company’s financial position and results of operations.

In order to increase awareness of its brands, the Company plans to expand its marketing efforts in fiscal 2009.  The Company plans to spend slightly more than 1.5% of its net sales on marketing-related expenditures in fiscal 2009, compared to approximately 1.0% of sales in fiscal 2008.  In fiscal 2009, the Company plans to continue its efforts to expand its customer relationship management database and, in particular, focus on increasing its number of customer e-mail contacts.  In the second half of fiscal 2009, the Company has planned promotions and in-store events in an attempt to drive more customer traffic to its stores.

While the Company believes the retail and macro-economic environments will remain challenging for the foreseeable future, it also believes that it is taking actions to position the Company for stronger operating performance when economic conditions become more favorable.

Other Developments

On May 2, 2008, the Company announced that Martin Bassett had been named to its Board of Directors, effective May 20, 2008.  The election of Mr. Bassett increased the number of directors to eight and the number of independent directors to seven.

On May 23, 2008, the Company and Wells Fargo Bank, National Association (“Wells Fargo”) entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Revolving Credit Facility (the “Credit Facility”).  The Second Amendment extended the maturity date of the Credit Facility by three years, from June 30, 2008 to June 30, 2011.  In addition, the Second Amendment reduced the interest rate under the Credit Facility from the prime rate plus 0.25% to the prime rate minus 0.25%.  As of May 31, 2008, Wells Fargo’s prime rate was 5.0%.  The Second Amendment also provided the Company with the ability to borrow under the Credit Facility at an interest rate tied to the London Interbank Market Offered Rate (LIBOR).

The Company owns its 210,000 square foot corporate office and distribution center facility, located in Plymouth, Minnesota.  The Company utilizes the entire facility for its corporate office and distribution center requirements.  The portion of the Company’s headquarters devoted to office space is at capacity.  As such, the Company is seeking to locate new or additional office space to accommodate its future staffing requirements.

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 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.

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.  Year-over-year increases in same-store sales contribute to greater leveraging of costs, while declining same-store sales contribute to deleveraging of costs.  Same-store sales results also have a direct impact on the Company’s total net sales, cash and cash equivalents and working capital.

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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.

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 its other operating costs.

Store productivity

Store productivity measures, including sales per square foot, average unit retail selling price, number of transactions per store, number of units per transaction, average retail dollars per transaction, customer traffic and conversion rates (the percentage of customers who enter the Company’s stores and make a purchase) are evaluated by management in assessing the operational performance of individual stores and 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 cash equivalents, combined with cash flows from operations, to be sufficient to fund anticipated capital expenditures, working capital and other requirements for liquidity during fiscal 2009.

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 1, 2008.  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 it believes 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 have been no material changes in the Company’s critical accounting policies or estimates in the three months ended May 31, 2008.

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Results of Operations

The following table sets forth consolidated income statement data expressed as a percentage of net sales for the periods indicated.