UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-K

 

(Mark One)

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2015

 

or

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period from  to

 

Commission File No. 001-31390

 

CHRISTOPHER & BANKS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code (763) 551-5000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐  YES ☒  NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ☐  YES  ☒  NO

 

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  ☐  NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒  YES  ☐  NO

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 Act).  ☐  YES  ☒  NO

 

The aggregate market value of the Common Stock, par value $0.01 per share, held by non-affiliates of the registrant as of August 1, 2014, was approximately $313.6 million based on the closing price of such stock as quoted on the New York Stock Exchange ($8.67) on such date.

 

The number of shares outstanding of the registrant’s Common Stock, par value $0.01 per share, was 36.9 million as of April 3, 2015 (excluding treasury shares of 9.8 million).

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held (the “Proxy Statement”) are incorporated by reference into Part III.

 

 

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CHRISTOPHER & BANKS CORPORATION

2014 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

 

 

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PART I

 

ITEM 1. BUSINESS

 

General

 

Christopher & Banks Corporation is a Minneapolis, Minnesota-based retailer of women’s apparel and accessories, which operates retail stores through its wholly owned subsidiaries, Christopher & Banks, Inc. and Christopher & Banks Company (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”). As of January 31, 2015, we operated 518 stores in 43 states, including 173 Christopher & Banks stores, 85 C.J. Banks stores, 216 Missy, Petite, Women ("MPW") stores and 44 outlet stores. We also operate an eCommerce web site for our brands at www.christopherandbanks.com which, in addition to offering the apparel and accessories found in our stores, also offers exclusive sizes and styles available only online.

 

The Company’s fiscal year is a 52- or 53-week year that ends on the Saturday closest to January 31.  This Annual Report on Form 10-K ("Annual Report") covers the following fiscal periods: the fifty-two weeks ended January 31, 2015 ("fiscal 2014"),  the fifty-two weeks ended February 1, 2014 ("fiscal 2013"), and the fifty-three weeks ended February 2, 2013 (“ fiscal 2012").

 

History

 

Christopher & Banks Corporation, a Delaware corporation, was incorporated in 1986 to acquire Braun’s Fashions, Inc., which had operated as a family-owned business since 1956. We became a publicly traded corporation in 1992 and, in July 2000, our stockholders approved a company name change from Braun’s Fashions Corporation to Christopher & Banks Corporation. Our women’s plus size C.J. Banks brand was developed internally and we opened our first C.J. Banks stores in August 2000. Our Christopher & Banks and C.J. Banks eCommerce websites began operating in February 2008 to further meet our customers’ needs for style, quality, value and convenience. During 2014, in keeping with our strategy to provide access to cross-shopping of brands and sizes, the two websites were combined into one, thereby providing a one-stop on-line shopping experience.

 

Christopher & Banks/C.J. Banks brands

 

Our Christopher & Banks brand offers unique and classic fashions featuring exclusively designed, coordinated assortments of women’s apparel and accessories in missy sizes 4 to 16 and petite sizes 4P to 16P in our Christopher & Banks stores.  Our C.J. Banks brand offers similar assortments of apparel and accessories in women’s sizes 14W to 26W in our C.J. Banks stores. Our MPW stores, our outlet stores and our eCommerce website all offer merchandise from both our Christopher & Banks and C.J. Banks brands and all three size ranges (missy, petite and women) within each location, resulting in a greater opportunity to service our customers, increase store productivity, and enhance operating efficiencies.

 

The lifestyle brand assortments sold by Christopher & Banks and C.J. Banks are typically suitable for both work and leisure activities and are offered at moderate price points. The target customer for Christopher & Banks and C.J. Banks generally ranges in age from 45 to 60, a portion of which represents the female baby-boomer demographic.

 

Segments

 

For details regarding the operating performance of our reportable segment, see Note 18 - Segment Reporting, to the consolidated financial statements in Item 8.

 

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Strategy

 

Our vision is to be our customer’s trusted brand by delivering style and value every day.  Our mission is to provide her with the style and versatility that reflects who she is, the lasting quality and affordable value that she expects, and the personalized attention that she deserves.

 

We strive to provide our customer with experiences that make her look and feel her best. Our overall strategy for our two brands, Christopher & Banks and C.J. Banks, is to offer a compelling, fashion relevant merchandise assortment through our stores and eCommerce web site in order to satisfy our customers’ expectations for style, quality, value, versatility and fit, while providing knowledgeable and personalized customer service.

 

Customer insights gathered in 2014 validated our opportunity to refine our merchandising and visual presentation.  While our loyal customers have great affinity for us, our opportunity is to strengthen our brand positioning and heighten our image to more closely mirror our merchandise assortment and to appeal to new customers.  We learned that prospective customers are generally surprised and delighted by what they find once they experience our brand; however, we are still perceived by many as too conservative and casual.   Therefore, creating an enhanced brand image will be an important focus for us in 2015.

 

We have positioned ourselves to offer merchandise assortments balancing unique, novelty apparel with more classic and basic core pieces, at affordable prices. To differentiate ourselves from our competitors, our buyers, working in conjunction with our internal design group, strive to create a merchandise assortment of coordinated outfits, the majority of which are manufactured exclusively for us under our proprietary Christopher & Banks® and C.J. Banks® brand names.

 

Merchandise

 

Our merchandise assortments include women’s apparel, generally consisting of knit tops, woven tops, jackets, sweaters, skirts, denim bottoms, bottoms made of other fabrics, leisure wear, and dresses in missy, petite and women sizes. We also offer a selection of jewelry and accessories in all stores and on our web site.

 

Our merchant team is currently focused on delivering increased sales and improved gross profit through executing the following initiatives:

 

Consistently deliver a balanced and compelling assortment designed to maximize sales and gross margin

 

The evolution of our merchandise strategy began in late fiscal 2012 and carried into fiscal 2013, through reducing the number of unique styles offered and increasing the depth provided in key merchandise categories. Our merchants focused on building assortments with fewer styles that are more balanced, by increasing the amount of "good" and "better" product offerings and decreasing the number of "best" offerings. More focus was placed on our core knit business and providing the appropriate balance of unique novelty styles. Our bottoms business concentrated on delivering consistent fit, versatility and comfort. We also continued to increase the penetration of vests and jackets in our assortments, balancing casual and wear-to-work styles at opening price points and more unique styles at "better" and "best" retail prices to maximize our price/value proposition.

 

In fiscal 2014, we continued to refine the merchandise assortment by balancing relevant fashion with core basic programs.  We had considerable success in developing businesses in several key categories, including denim, solution bottoms, essential tees and accessories.  In addition, we began to expand our assortment beyond casual wear, which we have been known for historically.  We also made strides to become a wear-to-work destination, including items such as sweater twin sets, wrinkle resistant shirts and career tops and bottoms.  We were pleased with the strong performance of our Relaxed Restyled; Leisure and Sport; and Easy Wear, Every Wear categories, which demonstrated that there is significant opportunity in these categories beyond our initial expectations.  Collectively, we provided our customers with easy, complete outfitting solutions and complementary accessories.

 

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We look forward to the launch of activewear, an additional component of our Relaxed Restyled line, as well as sleepwear, shapewear, and casual footwear, in the fall.  Our ultimate goal is for our customers to view Christopher & Banks as her go-to destination for all of her lifestyle wardrobe needs.

 

Optimize inventory productivity and margin performance

 

Another key goal for us at Christopher & Banks is to maximize inventory productivity through focused and timely markdown management, refined analysis of the appropriate merchandise receipt level required to drive sales and improved margins, and ongoing refinement of the appropriate timing and number of major merchandise deliveries.

 

Historically, we have developed and delivered a full, unique merchandise assortment to our stores on a monthly basis. In order to simplify and accelerate our product development process, beginning in September 2012, we reduced the number of major product deliveries to our stores by half. These deliveries reflect increased depth with a greater number of units of key styles.

 

Late in fiscal 2013 and throughout 2014, we increased our penetration of core merchandise to optimize margin performance.  Additionally, in fiscal 2014 we took initial steps to improve our business processes, enhance our technology and invest in new tools that will enable our planning and allocation team to manage inventory at the individual store level to better appeal to our customers’ preferences with a localized assortment.  In fiscal 2015 we will continue to evaluate and improve the amount and timing of product flow between major assortment deliveries with the goal of consistently providing ongoing fresh colors and styles to our stores, while being consistently in stock on basics.

 

Enhanced promotional strategy

 

While we anticipate that we will need to continue to be selectively promotional in order to be competitive, we have implemented more targeted, pre-planned promotions in an effort to improve merchandise margins and lessen our reliance on storewide promotional events. We have also developed product that supports specific promotional events and delivers improved margin performance. In addition to our direct mail program, we continue to update our store signage and messaging to drive incremental traffic. As we design our product assortments, we are developing enhanced marketing programs to communicate these improvements to the customer. In addition, we have adopted a more focused and timely approach to our markdown process that more quickly addresses underperforming styles on an individual basis in an effort to utilize our markdowns as efficiently as possible. We are also placing a greater emphasis on liquidating merchandise in-store and utilizing our growing outlet store base as a liquidation channel for older product deliveries rather than utilizing a third-party liquidator.

 

Sourcing

 

We have analyzed and continue to assess our product development and sourcing practices to identify opportunities to simplify and accelerate the process. We directly imported approximately 39%, 37% and 28% of our merchandise purchases in fiscal 2014, 2013 and 2012, respectively, from overseas manufacturers.  We are looking for opportunities to increase our direct penetration over the next several years as we believe this will add exclusivity and enhance our product margins. Going forward, we believe it is critical to continue to concentrate more of our merchandise purchases with fewer key suppliers to become more significant to our vendor base. We believe this will allow us to achieve better pricing by leveraging larger order quantities and receive faster delivery times from these key vendors. At the same time, we are working to ensure our vendor matrix is balanced to reduce the potential risks associated with reliance on limited resources. We also continue to leverage fabric purchases across our brands and product offerings to help minimize the cost of goods.

 

Our merchandise product costs, particularly the cost of cotton, moderated in fiscal 2012, declining to more historical levels in fiscal 2013 and 2014. We currently expect production costs to remain steady in fiscal 2015.

 

Labor issues at West Coast ports caused a disruption to our merchandise product flow in late fiscal 2014, continuing into fiscal 2015.  Following a proposed settlement of those issues in early 2015, we expect product flow to return to normalized levels by the end of the second fiscal quarter.

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Compelling and Easy-to-Shop Store Experience

 

In an effort to drive improved sales productivity, we continue to strive to enhance our customers’ experience. We have a highly loyal customer base largely attributable to our pleasant shopping environment and our engaged, knowledgeable store associates.  We have refined our selling program, including a significant focus on service through personal connections with our customers while improving our store associates' product knowledge through more frequent collaboration with our merchant team. In addition, we have added new visual merchandising elements to our stores to maximize merchandise displays, highlight outfitting options and provide more compelling window presentations, incorporating product and marketing messages in order to drive increased numbers of new and existing customers into our stores.  As we migrate stores to the MPW format, we have rebalanced fixtures, product placement and visual elements to assist customers of all sizes to quickly find the product they seek.

 

Customer/Marketing

 

Strengthen customer communication/customer relationship management/loyalty program

 

During 2014, in an effort to gain market share, we focused on increased retention and spend of existing customers while raising brand awareness to potential new customers.  We garnered insights from both qualitative and quantitative research done over the year, including a brand tracking study and focus groups held throughout the year. In addition, we invested in new public relations initiatives, including the launch of our Amazing Women campaign, as well as gaining exposure in magazines, targeted local television and radio placement.  We also expanded our presence on social media, increasing customer engagement and serving as a vehicle for customer acquisition.  Digital marketing continues to offer immense opportunity as a viable marketing tool for us.  During 2014, we gained efficiencies in our marketing investments through improved customer segmentation. 

 

As we look to 2015, we expect to use a number of tools to drive brand awareness, including making greater use of digital paid media to drive traffic to both stores and on-line. 

 

We continue to be focused on maximizing the benefits of our customer relationship management ("CRM") system database and Friendship Rewards Loyalty Program to strengthen engagement with our customers. Friendship Rewards is a point-based program where members earn points based on purchases. After reaching a certain level of accumulated points, members are rewarded with a certificate which may be applied towards purchases at our stores or web site. The program has helped us build our customer file in our database, allowing us to analyze purchasing behavior and to communicate with our customers.    Our goal is to design a more effective and personalized reward system that is differentiated by level of loyalty and provides enhanced benefits, which we plan to roll out in the second half of fiscal 2015.

 

Grow private label credit card program

 

During fiscal 2012, we launched a private label credit card ("PLCC") program with a sponsoring bank which provides for the issuance of credit cards bearing the Christopher & Banks and C.J. Banks brands. The sponsoring bank manages and extends credit to our customers and is the sole owner of the accounts receivable generated under the program. As part of the program, we received a signing bonus of $0.5 million from the sponsoring bank and earn revenue based on the PLCC usage by our customers. We are pleased with our customers' acceptance of the program and have seen the number of opened accounts grow from 281,000 at the end of fiscal 2012, to over 782,000 at the end of fiscal 2014. In addition to the credit aspect of the PLCC, the card is tied into our Friendship Rewards Loyalty Program. For purchases on the PLCC, customers earn 1.5 times the standard loyalty program points.  In fiscal 2014, approximately 31% of all sales were on the PLCC.  In addition to signing up active customers, the program has been successful in re-engaging lapsed customers and attracting new customers. Of the PLCC customers who purchased our products in fiscal 2014, approximately 10% represented new customers and 11.5% represented reactivated customers. Late in fiscal 2013, we added the convenience of in-store payment, giving her another reason to visit our store.

 

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Focus on Omni-Channel/Customer First initiative

 

In February 2008, we launched separate eCommerce web sites for our Christopher & Banks and C.J. Banks brands at www.christopherandbanks.com and www.cjbanks.com.  In keeping with our strategy to provide easier access to cross-shopping of brands and sizes by our customers, during 2014 the two websites were combined into one at www.christopherandbanks.com, providing a one-stop on-line shopping experience. Today, the site generally offers the entire assortment of merchandise carried at our retail stores in addition to extended sizes and lengths, as well as some exclusive styles unique to eCommerce. Inventory and order fulfillment for our eCommerce operations are handled by a third-party provider.  Returns can be made by our customers either by sending the product back to the third-party provider or by returning the product to one of our stores.

 

During 2014, several other visual upgrades and site enhancements were made to the website to improve the customers’ experience, aid in navigation, and simplify the check-out process.  We believe we have further opportunities to leverage our eCommerce platform to gain brand awareness and improve our customers’ shopping experience.

 

Our increased focus on the customer during 2014 was the catalyst for our Omni-Channel, or “Customer First”, initiative.  This program is 100% about offering our customers a seamless and fully integrated shopping experience – wherever, however, and whenever she interacts with our brand.  By having an enhanced single view of the customer and inventory, we will be able to optimize her experience across all touch points.

 

The website referenced above and elsewhere in this Annual Report is for textual reference only and such references are not intended to incorporate our web site into this Annual Report.

 

Restructuring/Store Closing Initiative

 

Prior to fiscal 2012, the Board approved a plan to close approximately 100 stores, most of which were underperforming. Ultimately, 103 stores were identified for closure, and the occupancy costs for approximately half of our remaining stores were restructured.

 

Prior to fiscal 2012, we recorded approximately $21.2 million of restructuring and impairment charges related to this initiative. During fiscal 2012, we recorded a net benefit of $5.2 million related to stores where the amount recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords. There were no restructuring charges relating to the store closing initiative in fiscal 2013 or fiscal 2014. For further details, please refer to Note 2 - Restructuring in the consolidated financial statements.

 

Growth/MPW

 

After completing our store closing/restructuring initiative in fiscal 2012, we focused on increasing the number of MPW and outlet stores in fiscal 2013. We began fiscal 2014 with a total of 560 stores: 333 Christopher & Banks stores, 135 C.J. Banks stores, 61 MPW stores and 31 outlet stores. During fiscal 2014, we opened 10 new MPW stores and 13 outlet stores. In addition, we converted 190 existing Christopher & Banks and C.J. Banks stores into 146 MPW stores. During fiscal 2014 we also closed an additional 21 stores, substantially all of which were underperforming.

 

We ended the fiscal year with a total of 518 stores: 173 Christopher & Banks stores, 85 C.J. Banks stores, 216 MPW stores and 44 outlet stores. Approximately 66% of our leases expire within the next three fiscal years, which we believe will offer us significant flexibility to convert additional Christopher & Banks ("CB") and C.J. Banks ("CJ") stores into the MPW format.

 

Store count by format is as shown in the following graph:

 

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Existing stores are primarily converted into MPW stores in the following ways:

We continue to be very pleased with the performance of our MPW stores, which generate higher productivity per square foot, higher gross margin and higher operating margin than either our CB or CJ stores.  We will continue to migrate existing stores to the MPW format by evaluating our portfolio of stores by location, lease and market data in order to determine the best way to leverage our square footage in terms of collapse and combine versus CJ adds.

 

Our new store growth strategy will primarily be focused on outlets.  To-date, outlet store sales and profitability levels have exceeded our expectations.  These stores enable us to expand our customer reach to new geographies and heighten brand awareness.  We continue to see opportunity to further enhance the sales and operating margins of our outlets as we increase the percentage of made-for-outlet product in these stores, as well as more efficiently clearing our excess inventory through these stores.  We see significant growth opportunity in the outlet business and believe we can successfully operate at least 100 outlet locations. 

 

We plan to end fiscal 2015 with approximately 530 stores in total, of which approximately 337 will be in the MPW format.   We plan to open 10 to 12 MPW stores and 25 to 30 outlets. Our real estate actions, collectively, are expected to result in a 5% increase in our total square footage in fiscal 2015.

 

 

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Store Operations

 

We manage our store organization in a manner that encourages participation by our field associates in the execution of our business and operational strategies. Our store operations are organized geographically into districts and regions. Each district is managed by a district manager, who typically supervises an average of approximately 13 stores. We have several regional managers who supervise our district managers.

 

Information Technology

 

We see meaningful opportunity to further improve upon store productivity and operating margin as we focus on developing processes and upgrading systems that will enable us to better manage inventory by store.  With these new and upgraded systems our teams will be able to better analyze data at the store level, and procure and allocate merchandise by geography, size, demographic and store type.  We had previously been managing our business with legacy systems and by taking these steps to enhance our technology and leverage new tools, our team can get the right product into the right stores, leading to improved assortments, higher average unit retail (“AUR”), and better sell-through, which we expect to translate into higher merchandise margins.

 

Competition

 

The women’s retail apparel business is highly competitive. Our competitors include a broad range of national and regional retail chains that sell similar merchandise, including department stores, specialty stores, discount stores, mass merchandisers and Internet-based retailers. Many of these competitors are larger and have greater financial resources than we do, allowing them to engage in significant marketing campaigns and aggressive promotions. We believe that the principal basis upon which we compete is by providing fashionable, versatile, quality merchandise assortments at a great value and with a consistent fit. We also believe our visual merchandise presentation, personalized customer service and store locations help to differentiate us from our competition.

 

Employees 

 

As of February 28, 2015, we had approximately 1,330 full-time and 3,275 part-time associates. The number of part-time associates typically increases during November and December in connection with the holiday selling season and during our semi-annual Friends & Family events. Approximately 225 of our associates are employed at our corporate office and distribution center facility, with the remaining associates employed in our store field organization. Our employees are not represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and consider our relationship with our employees to be good.

 

Seasonality

 

Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, shifts in the timing of certain holidays and shifts in the timing of promotional events. 

 

Trademarks and Service Marks

 

Our wholly owned subsidiary, Christopher & Banks Company, is the owner of the federally registered trademarks and service marks “christopher & banks®,” which is our predominant private brand, and “cj banks®,” our private brand for women sizes 14W to 26W. Management believes these primary marks are important to our business and are recognized in the women’s retail apparel industry. Accordingly, we intend to maintain these marks and the related registrations. U.S. trademark registrations are for a term of ten years and are renewable every ten years as long as the trademarks are used in the regular course of trade. Management is not aware of any challenges to our right to use either of these marks.

 

 

 

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Available Information

 

We make available, on or through our web site, located at www.christopherandbanks.com under the heading “Company - For Investors”, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

 

 

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a variety of risks and thus an investment in our stock is also subject to risk. The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements that are contained in this Annual Report on Form 10-K, as well as certain of our other filings with the SEC. Any of the following risks and uncertainties could materially adversely affect our business, financial condition, results of operations, cash flow, the trading price of our stock and the outcome of matters to which forward-looking statements are made in this Report. The risk factors described below should not be construed as an exhaustive list of all the risks we face. There may be other risk factors not identified in this Report, that are either not presently known to us or that we currently believe to be immaterial, that could cause materially adverse effects.

 

All of our stores are located within the United States, making us highly susceptible to macroeconomic conditions and consumer confidence in the United States, and both of these factors may have a significant impact on consumer demand for our apparel and accessories.

 

Our performance is subject to worldwide economic conditions, but is particularly impacted by those in the United States, and how those conditions in turn influence consumer spending levels.  Apparel retailing is a cyclical industry that is highly dependent upon the overall level of consumer spending. Purchases of specialty apparel and related goods tend to be highly correlated with the cycles of the levels of disposable income for consumers and overall consumer confidence.

 

Consumer purchases of discretionary items generally decline during recessionary periods and other periods when disposable income is adversely affected. Any downturn in the U.S. economy may affect consumer purchases of our merchandise and have an adverse impact on our sales, results of operations and cash flows. Because apparel generally is a discretionary purchase, declines in consumer spending may have a more negative effect on apparel retailers than on other retailers. We may not be profitable if there is a decline in consumer spending.

 

In addition, economic conditions could negatively impact the Company's retail landlords and their ability to maintain their shopping centers in a first-class condition and otherwise perform their obligations, which in turn could negatively impact our sales, results of operations and cash flows.

 

The geographic concentration of our stores makes us particularly susceptible to economic conditions in a small number of states.

 

A significant portion of our total sales is derived from stores located in ten states:  Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Ohio, New York, Pennsylvania and Wisconsin. Therefore, we are particularly dependent on local economic conditions in these states. An economic downturn in any of these states that leads to decreased consumer spending could have a disproportionate negative impact on our sales, results of operations and cash flows.

 

The ability to attract customers to our stores that are located in regional malls and other shopping centers depends heavily on the success of the malls and the centers in which our stores are located, and any decrease in customer traffic to these malls and centers could cause our sales to be less than expected, which could adversely  affect our results of operations and cash flow.

 

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The majority of our current stores are located in shopping malls and other retail centers. Sales at these stores are derived in considerable part from the volume of traffic generated in those malls or retail centers and surrounding areas. To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations where competition for suitable store locations is strong. Our stores benefit from the ability of nearby tenants to generate consumer traffic near our stores, and the continuing popularity of the regional malls and outlet, lifestyle and power centers where our stores are located. Customer traffic and, in turn, our sales volume may be adversely affected by a wide variety of factors. A reduction in customer traffic could result in lower sales and leave us with excess inventory. In such circumstances, we may have to respond by increasing markdowns or initiating marketing promotions to reduce excess inventory, which could adversely impact our merchandise margins and operating income.

 

Continuing to improve our store productivity will be largely dependent upon our success in converting stores to the missy, petite and women’s format (“MPW stores”) and the performance of our outlet stores, as well as in maintaining or increasing customer traffic in our stores and converting that traffic into sales.

 

Improving the profitability of our existing stores and optimizing store productivity is critical to our future growth and profitability. Our ability to increase the productivity of our stores will be largely dependent upon our ability to continue to rationalize our existing store portfolio, primarily through store conversions and new outlets, as well as our ability to generate customer traffic to our stores and to convert that traffic into sales.

 

Over the past several years, the Company has opened a number of outlet stores and either opened or converted existing stores into MPW stores. We expect that the continued conversion of stores to the MPW format and the opening of additional outlet stores will increase our store productivity by eliminating overlap in certain markets and allow management to focus its resources, such as store merchandise inventories and capital expenditures, on a more streamlined and more productive store base. If the improvements in store productivity are not at the level that we expect, our revenues, margins, liquidity and results of operations could be adversely affected.

 

We are subject to risks associated with leasing all of our store locations.

 

We currently lease all of our store locations. Our leases range from month-to-month to approximately ten years in length. A number of our leases have early termination provisions that apply if we do not achieve specified sales levels after an initial term and, in some cases, allow us to pay rent based on a percent of sales if we fail to achieve certain specified sales levels. The leases for approximately 33% of our store base expire between February  1, 2015 and January 30, 2016. We believe that, over the last few years, we have generally been able to negotiate favorable rental rates and extend leases due, in part, to the state of the economy and higher than usual vacancy rates. It is possible this trend may not continue and that we may not be able to renew our leases on as favorable terms, or in certain circumstances, at all. As a result, we may need to pay higher occupancy costs or close stores, which could adversely impact our financial performance, results of operations and ability to generate positive cash flow.

 

Our growth plan is dependent upon our ability to successfully implement our strategic and tactical initiatives.

 

The Company has implemented a growth plan that contemplates sales per store to grow at a low-single digit rate; improved selling, general and administrative expense leverage; and gross margin expansion intended to result in operating income as a percentage of net sales in the high single digits over the long term. Our ability to achieve our growth plan depends upon a variety of factors, including a number of factors that are beyond our control. If we are unable to successfully implement and execute the strategic and tactical initiatives underlying our growth plan, our results of operations could be adversely affected.

 

If we are unable to sustain an acceptable level of gross margins, it could have a material adverse impact on our business, profitability and liquidity.

 

The Company’s gross margins have improved over the past several fiscal years. However, our ability to maintain or improve these margins is subject to a variety of challenges. The apparel industry is subject to significant pricing pressure caused by many factors. These factors may cause us to reduce our sales prices to consumers, which could cause our gross margins to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions

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with comparable reductions in our operating costs or cost of goods. If our sales prices decline and we fail to sufficiently reduce our product costs or operating expenses, it will adversely impact our operating income. This could have a material adverse effect on our results of operations, liquidity and financial condition.

 

Our sales and results of operations could be adversely affected if we fail to retain our current leadership team and to attract, develop and retain qualified employees.

 

Our business requires disciplined execution at all levels of our organization in order to timely deliver and display fashionable, quality merchandise in appropriate quantities in our stores. This execution requires experienced and talented management. Our continued success will also depend to a significant extent on the continued services of our executive officers and senior personnel. There can be no assurance that we will be able to retain their services.

 

There is considerable competition for personnel in the retail industry. Like most retailers, we experience significant employee turnover rates, particularly among store sales associates and store managers. We therefore must continually attract, hire and train new personnel to meet our staffing needs. If we are unable to maintain or lower our turnover rate or attract, train, assimilate and retain other skilled personnel in the future, we may not be able to service our customers as effectively, which could impair our ability to increase sales and could otherwise harm our business.

 

We operate in a highly competitive retail apparel industry. The size and resources of some of our competitors may allow them to compete more effectively than we can, which could reduce our revenues and gross margins.

 

The women's specialty retail apparel business is highly competitive. We believe we compete primarily with department stores, specialty stores, discount stores, mass merchandisers, business to consumer websites, off-price retailers and direct marketers that sell women's apparel. Because a number of our competitors are companies with greater financial, distribution, marketing and other resources available to them, and may offer a broader selection of merchandise than we do or maintain comparatively lower costs of operations, we may lack the resources to effectively compete with them. They may be able to adapt to changes in customer preferences more quickly, devote greater resources to the marketing and sale of their products, generate greater national brand recognition or adopt more aggressive pricing policies than we can. Given greater financial resources and larger staff, our competitors may be better able to prioritize and manage large or complex projects, as well as respond more quickly to economic, operational, regulatory or organizational changes. Further, we do not typically advertise using television or radio media and thus do not reach customers through methods some of our competitors may use. In addition to competing for sales, we compete for favorable store locations, lease terms and qualified associates. Increased competition in any of these areas may result in higher costs, which could reduce our revenue and gross margins.

 

Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.

 

Our future success and growth is dependent on both retaining existing customers and acquiring new customers in order to gain sales momentum in our stores and drive traffic to our website. Successful marketing efforts require the ability to reach customers through various methods of communication. A number of our marketing programs are planned well in advance of the date the related product is available for sale. Our inability to accurately predict our customers’ preferences, to utilize their desired mode of communication, or to ensure availability of advertised products could adversely affect our business and operating results.

 

Our ability to anticipate or react to changing consumer preferences in a timely and accurate manner and offer a compelling product at an attractive price impacts our sales, gross margins and results of operations.

 

Our success largely depends on our ability to consistently gauge and respond on a timely basis to fashion trends and provide a balanced assortment of merchandise that satisfies changing fashion tastes and customer demands for style, fit, quality and price. Forecasting consumer demand for our merchandise is challenging. In addition, our merchandise assortment differs from season to season and, at any given time, our assortment may not resonate with our customers in terms of style, fit, quality or price. Generally, we begin the design process for apparel six to nine months before the merchandise is available to customers, and we typically begin to make purchase commitments several months in advance of delivery to stores. These lead times can make it difficult for us to respond quickly to changes in the demand for our

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products or to adjust the cost of the product in response to customers' fashion or price preferences. Any missteps may affect merchandise desirability and gross margins, and result in excess inventory levels, which could impair our profitability.

 

If we miscalculate the market for our merchandise, our customers' tastes or purchasing habits or the demand for our products, we may have fewer sales at an acceptable mark-up over cost. As a result, we may be required to sell a significant amount of unsold inventory at below-average markups over cost, or below cost, which would have an adverse effect on our margins and results of operations. On the other hand, if we underestimate demand for our merchandise, we may experience inventory shortages, resulting in missed sales opportunities and lost revenues.

 

There are risks associated with our eCommerce business.

 

We sell merchandise over the internet through our web site, www.christopherandbanks.com, which represents a modest percentage of our overall net sales. Our eCommerce operations are subject to numerous risks, including:

 

If we do not successfully manage these operations, we may not realize the full benefits of our Omni-Channel business model, which could adversely affect our results of operations. There also can be no assurance that our eCommerce operations will meet our sales and profitability plans, and the failure to do so could negatively impact our revenues and earnings.

 

Costs of raw materials, commodities, transportation or labor may rise resulting in an increase in component and delivery costs, and overall product costs, all of which could erode margins and impact our profitability.

 

The raw materials and labor used to manufacture our products and our transportation and contract manufacturing labor costs are subject to availability constraints and price volatility. The results of our business operations could suffer due to significant increases or volatility in the prices of certain commodities, including but not limited to cotton, polyester and other items used in the production of fabric and accessories, as well as fuel, oil and natural gas. Price increases of these items or other inflationary pressures may result in significant cost increases for our raw materials, product components and finished products, as well as increases in the cost of distributing merchandise to our retail locations. Consequently, higher product costs as a result of one or more of these factors could have a negative effect on our gross profits, as we may not be able to pass such costs on to our customers.

 

Our reliance on foreign sources of production poses various risks.

 

For the last fiscal year, we directly imported approximately 39% of our merchandise, and much of the merchandise we purchase domestically is made overseas. Substantially all of our directly imported merchandise is manufactured in Asia.

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Because a significant portion of our merchandise is produced overseas, we are subject to the various risks of doing business in foreign markets and importing merchandise from abroad, such as:

 

 

 

Any of the foregoing factors, or a combination of them, could increase our costs or result in our inability to obtain sufficient quantities of merchandise, thereby negatively impacting sales, gross profit and operating income.

 

It is also possible that the inability of our suppliers to access credit may cause them to extend less favorable terms to us, which could adversely affect our cash flows, margins and financial condition. Additionally, delays by our vendors in supplying our inventory needs could cause us to incur more expensive transportation charges, which may adversely affect our margins.

 

Our reliance on a few suppliers means that our business could suffer if we needed to replace them.

 

We do not own or operate any manufacturing facilities. Instead we depend on independent third parties to manufacture our merchandise. For the most recently completed fiscal year, our ten largest suppliers accounted for approximately 70% of the merchandise we purchased, and we purchased 27.6% and 9.5% of our goods respectively from our two largest suppliers.

 

We generally maintain non-exclusive relationships with the suppliers that manufacture our merchandise, and we compete with other companies for production facilities. As a result, we have no contractual assurances of continued supply or pricing, and any supplier, including our key suppliers, could discontinue selling to us at any time. Moreover, a key supplier may not be able to supply our inventory needs due to capacity constraints, financial instability or other factors beyond our control, or we could decide to stop using a supplier due to quality or other performance or cost issues. If we determined to cease doing business with one or more of our key suppliers or if a key supplier were unable to supply desired merchandise in sufficient quantities on acceptable terms, we could experience delays in receipt of inventory until

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alternative supply arrangements were secured; such delays could result in lost sales and adversely effect our results of operations and cash flow.

 

If third parties with whom we do business do not adequately perform their functions, we might experience disruptions in our business, resulting in decreased profits, or losses, and damage to our reputation.

 

We depend upon independent third parties, both domestic and foreign, for the manufacture of all of the goods that we sell. The inability of a manufacturer to ship orders in a timely manner or to meet our standards could have a material adverse impact on our business.

 

We also use third parties in various aspects of our business to support our operations. We have a long-term contract with a third party to manage most of our eCommerce operations, including order management, order fulfillment and customer service. We rely on third parties to inspect the factories where our products are made for compliance with our vendor code of conduct. From time-to-time we may rely on a third party for assistance with the implementation and/or management of certain aspects of our information technology infrastructure. We also rely on third parties to transport merchandise and deliver it to our distribution center, as well as to ship merchandise to our stores and to our third-party eCommerce fulfillment center.

 

Failure by any of these third parties to perform these functions effectively and properly, or any disruption in our business relationships with any of these third parties, could negatively impact our operations, profitability and reputation.

 

Our business could suffer if one or more of our suppliers fails to comply with applicable laws or to follow acceptable labor practices, or is accused of such non-compliance.

 

We expect the manufacturers of the goods that we sell to operate in compliance with applicable laws and regulations and comply with our social compliance program. Although each of our purchase orders requires adherence to accepted labor practices, applicable laws and compliance with our vendor code of conduct, we do not supervise or control our suppliers or the manufacturers that produce the merchandise we sell. Our staff and the staff of third-party auditing services periodically visit to inspect the operations of a number of our independent manufacturers to, among other things, assess compliance with our vendor code of conduct. Nonetheless, we cannot ensure that these manufacturers will conduct their businesses using ethical or legal labor practices, and the violation of any labor or other laws, or the divergence from ethical labor practices, by any of our suppliers or their U.S. or non-U.S. factories could damage our reputation, interrupt or disrupt shipment of products, result in a decrease in customer traffic to our stores or website and adversely affect our sales and net income. Because manufacturers act in their own interests, they may act in a manner which results in negative public perceptions of us. Moreover, apparel companies can, in some cases, be held jointly liable for the wrongdoings of the manufacturers of their products. Therefore, in certain circumstances, we may be subject to liability or negative publicity which could adversely affect our brand and our business as a result of actions or a lack of actions taken by these manufacturers.

 

Our business could suffer if parties with whom the Company does business become insolvent or otherwise become unable or unwilling to perform their obligations to the Company.

 

We are party to contracts, transactions and business relationships with various third parties, including vendors, suppliers, service providers and lenders, pursuant to which such third parties have performance, payment and other obligations to us. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, our rights and benefits pursuant to these contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to us, or otherwise impaired. We cannot make any assurance that we would be able to arrange alternate or replacement contracts, transactions or business relationships with other third parties on terms as favorable as our existing contracts, transactions or business relationships, if at all. Any inability on our part to do so could negatively affect our cash flows, financial condition and business.

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There are risks relating to the transportation of our merchandise to our distribution center, to our stores, and to our eCommerce customers.

 

We currently rely upon independent third-party transportation providers for substantially all of our merchandise shipments, including shipments to our distribution center, our stores, our eCommerce fulfillment center and our eCommerce customers. Our use of outside delivery services for shipments is subject to a variety of risks which may impact a shipper's ability to provide delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such a change. Moreover, we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use, which would increase our costs.

 

In addition, because the vast majority of our products are shipped by ocean from overseas, there are risks associated with a disruption in the operation of ports through which our products are imported. If a disruption occurs, we are likely to experience delays in the receipt of products, and we or our suppliers may have to find alternative shipping methods, possibly at greater expense, increased lead times and increased costs of our goods, which could have a material adverse effect on our results of operations and cash flows. As a large part of our merchandise is produced in Asia, it is largely shipped to us through the ports on the West Coast. The lengthy and contentious contract negotiations with respect to longshore labor agreements on the West Coast have resulted in port slowdowns and port congestion, which in turn has led to the delayed receipt of merchandise and adjustments in our marketing promotions as a result. These delays may result in lost sales and lower gross margins due to the lack of seasonality of the product at time of receipt, and thus adversely affect our results of operations, gross profit and cash flows.

 

We depend on a single facility to conduct our operations and distribute our merchandise. Our business could suffer a material adverse effect if this facility were shut down or its operations severely disrupted.

 

Our corporate headquarters and our only distribution facility are located in one facility in Plymouth, Minnesota. Our distribution facility supplies merchandise to our retail stores and our third party eCommerce provider. Any serious disruption to our distribution facility or a shut down for any reason, could delay shipments to stores and our eCommerce fulfillment center and result in inventory shortages which could negatively impact our sales and results of operations. In addition, much of our computer equipment and all of our senior management, including critical resources dedicated to merchandising, finance and administrative functions, are located at our corporate headquarters. In the event of a disaster or other calamity impacting our corporate facility, our management and staff would have to find and operate out of other suitable locations. We have little experience operating essential functions away from our main corporate offices and are uncertain what effect operating such satellite facilities might have on business, personnel and results of operations.

 

Although we maintain business interruption and property insurance, we cannot be assured that our insurance coverage will be sufficient or that any insurance proceeds will be timely paid to us if our distribution center or corporate offices were shut down for any unplanned reason.

 

If our long-lived assets become impaired, we may need to record significant non-cash impairment charges.

 

Periodically, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets (such as store relocations or closures) may result in impairment charges. Any such impairment charges, if significant, would adversely affect our financial position and results of operations.

 

Adverse and/or unseasonable weather conditions in the United States could have a disproportionate effect on our business, financial condition and results of operations.

 

Adverse weather conditions in the areas in which our stores are located could have an adverse effect on our business, financial condition and results of operation. For example, inclement weather conditions can make it difficult for our customers to travel to our stores and/or result in temporary store closures or reduced hours of operation. This will likely

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result in reduced traffic in our stores and a corresponding reduction in sales and gross margin dollars. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our merchandise offerings incompatible with those unseasonable conditions in the affected areas. Such unseasonable weather conditions could have an adverse effect on our business, financial condition and results of operations.

 

Natural disasters, acts of war or other catastrophes could adversely affect our financial performance.

 

The occurrence of one or more natural disasters, pandemic outbreaks, terrorist acts, disruptive global political events, or similar catastrophes could adversely affect our operations and financial performance. To the extent these events result in the closure of our distribution center, corporate headquarters, or a significant number of our stores, or impact one or more of our key third-party providers of services or goods, our operations and financial performance could be adversely affected. These events also could have indirect consequences, such as loss of property or other damage which may or may not be covered by insurance.

 

We are heavily dependent on our information technology systems and our ability to maintain and upgrade these systems from time-to-time and operate them in a secure manner. Any failure, interruption or compromise of these systems could have a material adverse effect on our business, results of operation and cash flows.

 

The efficient operation of our business is heavily dependent on our information technology systems (“IT systems”). In particular, we rely on point-of-sale terminals, which provide information to our host analysis systems used to track sales and inventory, and we rely on our eCommerce website through which we sell merchandise to our customers. The host systems help integrate our design, third-party manufacturing, distribution and financial functions, and we integrate with our reporting structure to provide daily financial and sales information. Although our data is backed up and securely stored off-site, our main data center is located at our headquarters in Plymouth, Minnesota. The data center and our operations are vulnerable to damage or interruption from:

 

 

Any disruption in the operation of our IT systems, the loss of key employees knowledgeable about such systems or our failure to continue to effectively enhance such systems could interrupt our operations or interfere with our ability to sell goods in-store, which could result in reduced sales and affect our operations and financial performance. In addition, any interruption in the operation of our Internet website could cause us to lose sales due to the temporary inability of customers to purchase merchandise through our website.

 

From time-to-time, we improve and upgrade our IT systems and the functionality of our Internet website in an effort to ensure they meet our evolving business and security needs and are adequate to handle business growth. The cost of any such system upgrades or enhancements can be significant.  We are currently in the process of implementing our Customer First initiative which involves an upgrade to, and greater integration among, our customer relationship management system, our order management system and our eCommerce and brick and mortar stores. If we are unable to maintain and upgrade our operating systems or Internet website, or effectively integrate new and updated systems, software or changes to our operating systems or our Internet website in an efficient, timely and secure manner, our business, financial condition and results of operations could be materially and adversely affected. While we believe that we are diligent in selecting vendors, systems and third party providers to assist us in maintaining the integrity of our information technology systems, we realize that there are risks and that no guarantee can be made that future disruptions, service outages and failures or unauthorized intrusions will not occur.

 

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We are subject to cyber security risks and may incur additional expenses in order to mitigate such risks or in response to unauthorized access to our data. In addition, an incident in which we fail to protect our customers' information against a security breach could result in costly government enforcement actions and monetary damages against us from private litigation and could otherwise damage our reputation, harm our business and adversely impact our results of operations.

 

The Company and our third-party service providers that manage portions of the Company’s data are subject to cyber security risk. The nature of our business involves the receipt and transmission, and in some cases storage, of customers’ personal information, shopping preferences and credit and debit card information, in addition to employee information and the Company’s financial and strategic data. The protection of our customers’ data, as well as internal Company data is vitally important to the Company. The Company and its third-party service providers employ systems and/or websites that are intended to provide secure storage and/or transmission of proprietary or confidential information by us and these third-party service providers. While the Company has implemented measures to prevent and detect security breaches and cyber incidents, any failure of these measures and any failure of third parties that assist the Company in managing its data could adversely affect the Company's business, financial condition and results of operations.

 

Although the Company expects our third-party service providers to implement and use reasonable security measures to protect the proprietary and confidential information once it is received, we cannot control these service providers and cannot guarantee that a security breach will not occur in the future either at their location or within their systems. Because the techniques used to obtain unauthorized access to data, disable or degrade storage service, or sabotage systems change frequently and may be difficult to detect, we and the service providers may be unable to anticipate these techniques or implement adequate preventive measures. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties acting on our behalf, through fraud, trickery or other forms of deceiving our employees or those of our third-party providers. Despite our preventative efforts and those of our third-party service providers, we may be vulnerable to targeted or random security breaches, privacy attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events which could expose us and our third-party service providers to a risk of loss or misuse of proprietary and confidential information, litigation and potential liability. Cyber security attacks may be targeted at us, our third-party service providers, or our customers. Actual or anticipated attacks may cause us to incur significant additional expense, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Any cyber security or security breaches, including any breaches that result in theft, transfer or unauthorized disclosure of customer, employee or company information, or our lack of compliance with information security and privacy laws and regulations, may result in a violation of applicable privacy and other laws, significant legal and financial exposure, including claims for unauthorized purchases with stolen credit card information, impersonation or other similar fraud claims, and considerable other additional expenses.  Some or all of these costs may not be adequately covered by our insurance, and could result in a loss of confidence in our security measures, any or all of which could have an adverse effect on our brand, business and reputation.

 

Consumer awareness and sensitivity to privacy breaches and cyber security threats is very prevalent. Any misappropriation of confidential or personally identifiable information gathered, stored or used by us or our service providers, be it intentional or accidental, could have a material impact on the operation of our business, including severely damaging our reputation and our relationships with our customers, employees and investors. Should customers lose confidence in our ability to protect their information, they may discontinue shopping in our stores or on our website.

 

State and federal laws on privacy continue to evolve and further limits on how we collect or use customer information could adversely affect our business.

 

We collect and store customer information primarily for marketing purposes.  Some of this information is subject to federal and state privacy laws. These laws and the judicial interpretation of such laws are evolving on a frequent basis. If we fail to comply with these laws, we may be subject to fines or penalties, which could impact our business, financial condition and results of operations. In addition, any compromise of customer information could subject us to customer, third-party or government litigation and harm our reputation, which could adversely affect our business and financial condition. Any limitations imposed on the use of such customer information, whether imposed by federal or state governments or business partners, could have an adverse effect on our future marketing activities. Governmental focus on data security and/or privacy may lead to additional legislative action, and the increased emphasis on information

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security may lead customers to request that we take additional measures to enhance security. As a result, we may have to modify our business with the goal of further improving data security, which would result in increased expenses and operating complexity.

 

A failure to comply with the Payment Card Industry Data Security Standards could adversely affect our business, financial condition and results of operations.

 

We are highly dependent on the use of credit and debit cards to complete sale transactions in our stores and through our website, and because of such use are subject to the Payment Card Industry Data Security Standards (“PCI Standards”). If we fail to comply with the PCI Standards, we may become subject to fines or limitations on our ability to accept credit or debit cards, which could adversely affect our sales and operating income. Also, any changes we may be required to make to our private label credit card program in the future could adversely affect the promotional financing arrangements available to our credit card customers and therefore our operating results.

 

The sufficiency and availability of our sources of liquidity may be affected by a variety of factors.

 

The sufficiency and availability of our sources of liquidity may be affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which are impacted by consumer acceptance of our merchandise, general economic conditions and the level of consumer discretionary spending; and (ii) our ability to maintain borrowing availability and to comply with applicable covenants contained in our Credit Facility.

 

Our ability to continue to be profitable and to generate positive cash flows is dependent upon many factors, including favorable economic conditions and consumer confidence and our continued successful ability to execute our financial plan and strategic and tactical initiatives. There can be no assurance that our cash flows from operations will be sufficient at all times to support our Company without additional financing or credit availability. An inability to generate sufficient cash flow could have important consequences. For example, it could:

 

 

Should we be unable in the future to borrow under the Credit Facility, it is possible, depending on the cause of our inability to borrow, that we may not have sufficient cash resources for our operations. If that were to occur, our liquidity would be significantly impaired, which could have a material adverse effect on our business, financial condition and results of operations.

 

Access to additional financing from the capital markets may be limited.

 

While we have availability under our Credit Facility to bolster our liquidity, we may need additional capital to fund our operations, particularly if our operating results and cash flows from operating activities were to decrease or if the Credit Facility were unavailable. The sale of additional equity securities or convertible debt securities in order to improve our liquidity could result in additional dilution to our stockholders. If we borrow under our Credit Facility or incur other debt, our expenses will increase and we could be subject to additional restrictions that may limit our operating flexibility. Newly issued securities may have rights, preferences and privileges that are senior or otherwise superior to those of our common stock. There is no assurance that equity or debt financing will be available in amounts or on terms acceptable to us. Without sufficient liquidity, we will be more vulnerable to any future downturns in our business or the general economy. Future increases in interest rates or other tightening of the credit markets, or future turmoil in the financial markets, could make it more difficult for us to access funds, to refinance our indebtedness (if necessary), to enter into agreements for new indebtedness, or to obtain funding through the issuance of our securities.

 

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New regulations related to conflict minerals could adversely impact our business.

 

The SEC has promulgated final rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, included in components of products either manufactured by public companies or for which public companies have contracted to manufacture. These rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. The first conflict minerals report required by the rules was filed as required by June 2, 2014 and is due annually thereafter. While we do not manufacture products, we may be deemed to contract to manufacture products. There will be costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in any products we are deemed to contract to manufacture. In addition, by Executive Order in July 2014, the President expanded the sanctions criteria against United States companies to include the direct or indirect support of entities that engage in the illicit trade of the natural resources of the DRC. Complying with these rules and sanctions could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face reputational challenges and potential fines or penalties if we fail to comply with these rules and sanctions.

 

Our ability to maintain the value of our brands and our trademarks impacts our business and financial performance.

 

The Christopher & Banks and C.J. Banks brand names are integral to our business. Maintaining, promoting, positioning and growing our brands will depend largely on the success of our design, merchandising and marketing efforts and on our ability to provide a consistent and positive customer experience. Also, our success depends on our ability to retain existing customers and attract new customers to shop our brand. Our business could be adversely affected if we fail to achieve these objectives for our brands. In addition, our public image and reputation could be tarnished by negative publicity. Any of these events could negatively impact sales.

 

We also believe that our “christopher & banks”, “cj banks” and related trademarks are important to our success and we register a number of our trademarks in the United States in an effort to protect them. Even though we take actions to establish, register and protect our trademarks and other proprietary rights, we cannot be sure that we will be successful or that others will not imitate or infringe upon our intellectual property rights. In addition, we cannot assure that others will not seek to block the sale of our products as infringements of their trademark and proprietary rights. If we cannot adequately protect our existing and future trademarks or prevent infringement of them, our business and financial performance could suffer. In addition, others may assert rights in, or ownership of, trademarks and other intellectual property rights or in marks that are similar to ours, and we may not be able to successfully resolve these types of conflicts to our satisfaction. Our inability to protect our trademarks could adversely affect our business.

 

We may be subject to adverse outcomes in current or future litigation matters or regulatory proceedings which could result in the unexpected expenditure of time and resources.

 

From time-to-time, we may be involved in litigation, regulatory actions and other claims against our business. There are also other types of claims that could be asserted against us based on litigation that has been asserted against others, particularly in the retail industry. These matters typically arise in the ordinary course of business but, in some cases, could also raise complex factual and legal issues requiring significant management time and, if determined adversely to the Company, could subject the Company to material liabilities.

 

In recent years, there has been increasing activity by companies which have acquired intellectual property rights, but do not practice those rights (sometimes referred to as “patent trolls”), to engage in very broad licensing programs aimed at a large number of companies in a wide variety of businesses, or at retail companies specifically. These efforts typically involve proposing licenses in exchange for a payment of money and may also include the threat or actual initiation of litigation for that purpose. Any such litigation can be costly to defend, even if unsubstantiated or invalid. We may also receive communications, from time-to-time, from patent trolls relating to their intellectual property and, in some cases, to proposed licenses. It is not possible to predict the impact, if any, of such claims on our business and operations.

 

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An unfavorable outcome in any future litigation or regulatory proceedings could have a material adverse impact on our business, financial condition and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings can be expensive and require that we devote substantial resources and executive time to defend, thereby diverting management’s attention and resources that are needed to successfully run our business.

 

Changes in accounting rules and regulations, or failures in our internal controls may cause us to inaccurately report our financial results or to fail to prevent fraud which could adversely affect our results of operations.    

 

Changes to and varying interpretations of existing accounting rules and regulations may occur in the future, as well as new accounting rules or regulations. Such changes could adversely affect our results of operations and financial position.

 

In addition, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we maintain a documented system of internal controls which is reviewed and monitored by management, who meet regularly with our Audit Committee of the Board of Directors. We devote significant resources to document, test, monitor and improve our internal controls and will continue to do so; however, we cannot be certain that these measures will ensure that our controls are adequate in the future or that adequate controls will be effective in preventing fraud.  As of January 31, 2015, the Company concluded that a material weakness existed in its internal control over financial reporting as described in Item 9A – Controls and Procedures.  Due to the material weakness, management performed additional analysis and procedures to ensure that our consolidated financial statements included in this Annual Report were presented fairly in conformity with generally accepted accounting principles and fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.  Any failures in the effectiveness of our internal controls or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse effect on our financial condition or operating results or cause us to fail to meet reporting obligations.

 

Provisions in our charter documents and Delaware law may inhibit a takeover. We are entitled to certain other protective provisions under Delaware law.

 

We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third-party to acquire control of the Company, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and by-laws contain provisions that may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable by, among other things:

 

 

We may be subject to increased labor costs.

 

Our retail store operations are subject to federal and state laws governing such matters as minimum wages, working conditions and overtime pay. If federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. Similarly, if federal overtime regulations change, more of our employees may be entitled to overtime pay, which could also increase our labor costs.  Wage actions by other retailers may require us to increase wage rates in order to attract and retain talented employees.  Labor shortages and increased employee turnover could also increase our labor costs. This in turn could lead us to increase prices which could impact our sales. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline.

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Continued changes in the health care regulatory environment could cause us to incur additional expense, and our failure to comply with related legal requirements could have a material adverse effect on our business.

 

In 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the United States. This legislation expands health care coverage to many uninsured individuals and expands coverage of those already insured. The changes required by this legislation could cause us to incur additional health care and other costs, but we do not expect any material short-term impact on our financial results as a result of the legislation. However, the costs and other effects of any new legal requirements cannot be determined with certainty.

 

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

There are no matters which are required to be reported under Item 1B.

 

 

 

ITEM 2. PROPERTIES

 

Store Locations

 

Our stores are located primarily in shopping malls and retail centers in smaller to mid-sized cities and suburban areas. Approximately 76% of our stores are located in enclosed malls that typically have numerous specialty stores and two or more general merchandise chains or department stores as anchor tenants. The remainder of our Christopher & Banks, C.J. Banks and MPW stores are located in power, strip and lifestyle shopping centers. We opened our first outlet stores in fiscal 2011 and operated stores in 44 outlet centers as of January 31, 2015.

 

At January 31, 2015 Christopher & Banks, C.J. Banks, MPW and outlet stores averaged approximately 3,300, 3,600, 4,000 and 4,100 square feet, respectively. Approximately 83% of the total aggregate store square footage is allocated to selling space.

 

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At January 31, 2015, we operated 518 stores in 43 states as follows:

 

 

 

Store Leases

 

All of our store locations are leased. Lease terms typically include a rental period of 10 years and may contain a renewal option. Leases generally require payments of fixed minimum rent and/or contingent percentage rent, calculated based on a percent of sales in excess of a specified threshold, as well as other typical charges such as common area maintenance, media/marketing funds, real estate taxes and insurance.  Most of our leases allow the Company to exercise a sales volume kick-out prior to the end of the lease if certain sales thresholds are not achieved.

 

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The following table, which covers all of the stores operated by us at January 31, 2015, indicates the number of leases expiring during the periods indicated and the number of such leases with renewal options. The number of stores with leases expiring in less than 12 months includes those stores which currently are operating on month-to-month terms.

 

 

 

For leases that expire in a given period, we plan to evaluate the projected future performance of each store location prior to lease expiration to determine if we will seek to negotiate a new lease for that particular location.

 

Corporate Office and Distribution Center Facility

 

In fiscal 2002, we purchased our 210,000 square foot corporate office and distribution center facility, located in Plymouth, Minnesota. We utilize the entire facility for our corporate office and distribution center requirements and receive and distribute all of our merchandise for all of our stores through this facility. Management believes our corporate office and distribution center facility space is sufficient to meet our requirements for the next fiscal year.

 

eCommerce Website

 

In keeping with our MPW strategy, during 2014 we combined our previously separate eCommerce web sites for our Christopher & Banks and C.J. Banks brands at www.christopherandbanks.com.  Website hosting, order taking, customer service and order fulfillment related to our eCommerce operations are outsourced to a third-party provider.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. Although the amount of any liability that could arise with respect to any current proceedings cannot, in management’s opinion, be accurately predicted, any such liability is not expected to have a material adverse impact on our financial position, results of operations or liquidity.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following table sets forth certain information regarding our executive officers as of February 28, 2015:

 

 

 

LuAnn Via has served as President and Chief Executive Officer and a director since November 2012. Ms. Via has over 30 years of retail experience in a variety of channels, including extensive executive, merchandise and product development responsibilities. From July 2008 until October 2012, Ms. Via served as President and Chief Executive Officer of Payless ShoeSource, Inc., a subsidiary of Collective Brands, Inc. Ms. Via also has specialty retail women's experience, having served at Charming Shoppes, Inc. as a Group Divisional President for both the Lane Bryant and Cacique brands from June 2007 to July 2008 and as President of Catherines Stores, Inc., a Charming Shoppes subsidiary, from January 2006 to June 2007. Ms. Via was at Sears Holding Company from 2003 to 2006 as a Vice President, General Merchandise Manager and, from 1998 to 2003, she was Senior Vice President, General Merchandise Manager of Product Development at Saks, Inc. She also has a variety of other executive, merchandising and product development experience, having previously worked at Federated Department Stores, The Shoebox/Shoe Gallery and Trade AM International, among others. Ms. Via currently serves on the board of MELA Sciences, Inc.

 

Peter G. Michielutti has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer since July 2014.  From April 2012, when he joined the Company, until August 2014, he was Senior Vice President, Chief Financial Officer.  Mr. Michielutti has more than 20 years of financial leadership experience with an extensive retail background.  Prior to joining the Company, Mr. Michielutti was Senior Vice President and Chief Financial Officer at CSM Corporation, a commercial real estate company, from September 2009 through April 2012. He held the Chief Financial Officer position at Whitehall Jewelers from 2007 to 2009. In June 2008, Whitehall Jewelers filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. He was also the Chief Financial Officer and Chief Operating Officer at Wilsons Leather from 2001 to 2006 and the Chief Financial Officer and Chief Operating Officer at Fingerhut from 1995 to 1998, in addition to serving as a retail consultant at Prentice Capital from 2006 to 2007.

 

Monica L. Dahl has served as Senior Vice President, Marketing, Omni-Channel and Public Relations since November 2014.  She was elected the Company’s Senior Vice President, Marketing effective April 1, 2013. From November 2011 to April 2013, she served as Senior Vice President, Multi-Channel Marketing, Investor Relations and Business Strategy. From July 2010 through November 2011, Ms. Dahl served as Senior Vice President, eCommerce, Planning & Allocation, and Strategy. From August 2008 to July 2010, Ms. Dahl served as Senior Vice President, Planning & Allocation and eCommerce.  From December 2005 to July 2008, she was Executive Vice President and Chief Operating Officer. Ms. Dahl served as Vice President of Business Development from November 2004 to December 2005. Upon joining the Company in May 2004, Ms. Dahl was Director of Business Development. From January 1993 to April 2004, Ms. Dahl held various positions with Wilsons Leather, including Director of Sourcing; Divisional Merchandise Manager - Women's Apparel; Director of Merchandise Planning; and several positions in the Finance Department. Ms. Dahl was with Arthur Andersen LLP from December 1987 to December 1992.

Lynn C. Derry has served as Senior Vice President, General Merchandise Manager since July 2014. From 2013 to July 2014, she served as Senior Vice President, General Merchandise Manager at National Stores, Inc., a chain of retail clothing stores. From 2011 to 2013, she served as Senior Vice President, General Merchandise Manager at Sears Canada.

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She was Vice President, Divisional Merchandise Manager at Dollar General, Inc. from 2009 to 2011, and served as Senior Vice President, General Merchandise Manager at Charming Shoppes, Inc. from 2006 to 2009.  Prior to that, Ms. Derry held various merchandising positions at Bon-Ton Stores, Inc. from 1994 to 2006, most recently as Senior Vice President, General Merchandise Manager, Center Core and Kids, and from 1973 to 1994 at Adam, Meldrum and Anderson Co., Inc., most recently as Vice President, General Merchandise Manager.

Luke R. Komarek has served as Senior Vice President, General Counsel since May 2007. He was named Corporate Secretary in August 2007. Prior to joining the Company, Mr. Komarek served as General Counsel, Chief Compliance Officer and Secretary at PNA Holdings, an office imaging and parts supplier, from March 2004 to May 2007. Previously, Mr. Komarek served as Vice President of Legal Affairs and Compliance at Centerpulse Spine-Tech Inc. from February 2003 to March 2004. Mr. Komarek was employed by FSI International, Inc., a semiconductor equipment company, from 1995 to 2002, most recently serving as Vice President, General Counsel and Corporate Secretary.

 

Michelle L. Rice has served as Senior Vice President, Store Operations since January 2012. From February 2011 through January 2012 she was Vice President, Store Operations. From July 2010 until February 2011, Ms. Rice was Vice President, Stores and from August 2008, when she joined the Company, until July 2010 she was a Regional Vice President. Ms. Rice has approximately 20 years of retail industry experience. She was a Regional Sales Director at Fashion Bug, a division of Charming Shoppes, a fashion retailer of missy and plus size apparel, from November 2006 to August 2008 and was a District Operations Manager at TJX Corporation from 2003 to November 2006.

 

Cindy J. Stemper was elected the Company's Senior Vice President, Human Resources effective April 1, 2013. From October 2010 to April 2013, she served as the Company’s Vice President, Human Resources. Prior to joining the Company, Ms. Stemper worked at MoneyGram International for approximately 25 years in a variety of Human Resources roles, most recently as Executive Vice President, Human Resources and Corporate Services from 2005 to 2009.

 

Belinda D. Meier has served as Vice President, Controller since November 2013. From November 2012 until November 2013, she was Vice President, Internal Audit at Nash Finch Company and was its Director of Internal Audit from March 2011 until November 2012. Prior to that, she was at Prime Therapeutics LLC, serving as Chief Internal Auditor from August 2009 until March 2011 and as Senior Director of Finance from December 2007 to August 2009. From May 2007 to December 2007, she was an Account Executive with Robert Half Management Resources. She was at Best Buy Co., Inc. from July 2001 until May 2007, serving in a variety of financial positions, most recently as Finance Director - Performance Management. Prior to Best Buy, Ms. Meier held a variety of financial or accounting positions with Target, having begun her career with Arthur Andersen & Co., where she worked from 1992 to 1994.

 

 

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol “CBK”. The quarterly high and low closing stock sales price information for our common stock for fiscal 2014 and fiscal 2013 is included in the table below.

 

 

 

As of February 27, 2015,  there were 138 holders of record of our common stock. The last reported sales price on the NYSE of our common stock on February 27, 2015 was $5.00.

 

The following table sets forth information concerning purchases of our common stock for the quarter ended January 31, 2015.

 

 

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Comparative Stock Performance

 

The graph below compares the cumulative total stockholder return on our common stock (“CBK”) from February 27, 2010 to January 31, 2015 to the cumulative total stockholder return of the S&P 500 Index and the S&P Apparel Retail Index. The comparisons assume $100 was invested on February 27, 2010 in our common stock, the S&P 500 Index and the S&P Apparel Retail Index and also assumes that any dividends are reinvested.

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following selected financial data has been derived from our audited consolidated financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K and the consolidated financial statements and related notes appearing in Item 8 of this Annual Report on Form 10-K.  On January 6, 2012, our Board of Directors (the “Board”) amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday in January or February which falls closest to the last day of January.  Prior to this change, our fiscal year ended at the close of business on that Saturday in February or March which fell closest to the last day of February.  In order to transition to the new fiscal calendar, our 2011 fiscal year was shortened from twelve months to eleven months.  As reported below, fiscal 2012 ended February 2, 2013, consisted of fifty-three weeks and fiscal 2011 ended January 28, 2012, consisted of forty-eight weeks. All other years presented consisted of fifty-two weeks.

 

 

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.

 

Executive Overview

 

Christopher & Banks Corporation, a Delaware corporation, is a Minneapolis, Minnesota-based retailer of women’s apparel and accessories, which operates retail stores through its wholly owned subsidiaries.  Our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January. This Annual Report on Form 10-K ("Annual Report") covers the following fiscal periods: the fifty-two weeks ended January 31, 2015 ("fiscal 2014"), the fifty-two weeks ended February 1, 2014 ("fiscal 2013"), and the fifty-three weeks ended February 2, 2013 (“fiscal 2012”).

 

As of January 31, 2015, we operated 518 stores in 43 states, including 173 Christopher & Banks stores, 85 C.J. Banks stores, 216 Missy, Petite, Women ("MPW") concept stores and 44 outlet stores. Our Christopher & Banks brand offers unique fashions and accessories featuring exclusively designed, coordinated assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our MPW concept and outlet stores offer an assortment of both Christopher & Banks and C.J. Banks apparel servicing the missy, petite and women sized customer in one location. We also operate an eCommerce web site for our two brands at www.christopherandbanks.com which, in addition to offering the apparel and accessories found in our stores, also offers exclusive sizes and styles available only online.

 

We believe we have a unique opportunity to address the needs of our customer by embracing her demographic and focusing on the small and mid-size markets. Our overall strategy for our two brands, Christopher & Banks and C.J. Banks, is to offer a compelling, versatile, reasonably priced assortment of unique and classic apparel through our stores and eCommerce web site in order to satisfy the expectations of women of all sizes for style, quality, value and fit, while providing exceptional, personalized customer service.

 

During fiscal 2014 we made significant progress toward achieving our long-term strategic and operational objectives:

 

 

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We were able to successfully execute on these initiatives, resulting in 52 of our stores reaching or exceeding sales of $1 million in fiscal 2014.  This compares to 31 stores in fiscal 2013 and 21 stores in fiscal 2012 achieving $1 million or more in sales.

 

Key Performance Indicators

 

Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:

 

Same-store sales

 

Management considers same-store sales  (“SSS”) to be an indicator of our performance. Same-store sales results are important in leveraging 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 our total net sales, cash, cash equivalents, investments and working capital.

 

Historically, our same store sales data has been 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. Stores that are converted to the MPW format, regardless of whether they are relocated, are excluded from the same-store sales calculation for 13 full months following the conversion to MPW.  Stores where square footage has been changed by more than 25 percent are excluded from the same-store sales calculation for 13 full months following the change. Stores closed during the fiscal year are included in the same-store sales calculation only for the full months of the fiscal year the stores were open.  In addition, sales which are initiated in stores but fulfilled through our eCommerce website are included in the calculation of same-store sales.

 

As we continue to implement our strategy of converting many of our existing stores to MPW stores, those converted stores are dropping out of our comparable store base for 13 months. As shown in the table below, at the end of fiscal 2014 only 64% of our total store count was included in the same-store sales calculation; this compares to 94% at the end of fiscal 2013. Same store sales decreased 2.9% for fiscal 2014 as compared to the prior year.    

 

 

 

 

As a result, we are also monitoring changes in net sales per store, net sales per square foot, gross margin per store, and gross margin per square foot for the entire store base.  During the fiscal year, net sales per store increased 3.5%, net sales per square foot increased by 0.8%, gross margin per store increased 7.4%, and gross margin per square foot increased 4.6% as compared to the prior fiscal year.

 

Merchandise, buying and occupancy costs

 

Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, measure whether we are appropriately optimizing the price of our merchandise and markdown utilization.

 

Merchandise, buying and occupancy costs include the cost of merchandise, markdowns, shrink, freight, 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 our distribution network.

 

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Operating income

 

Our management views operating income as a key indicator of our success. The key drivers of operating income are net sales per store, eCommerce sales, merchandise, buying and occupancy costs and our ability to control our other operating costs.

 

Cash flow and liquidity

 

We evaluate cash flow from operations, investing activities and financing activities in determining the sufficiency of our cash position. Cash flow from operations has historically been sufficient to provide for our uses of cash. We expect to operate our business and execute our strategic initiatives principally with funds generated from operations and, if necessary, from our Credit Facility, subject to compliance with the financial covenant and its other terms and provisions.

 

Based on our current plans for fiscal 2015, we believe cash flows from operating activities and working capital will be sufficient to meet our operating and capital expenditures requirements for the fiscal year. We do not anticipate the need to utilize our Credit Facility for any liquidity needs in fiscal 2015, other than to maintain and open letters of credit in the normal course of business. Our operating plan for fiscal 2015 anticipates improvements to net sales per store and merchandise margins when compared to fiscal 2014. The plan is dependent on our ability to consistently deliver merchandise that is appealing to our customers at a profitable price and to manage our costs effectively in order to satisfy our working capital and other operating cash requirements. Our operating plan is based on a number of assumptions which involve significant judgment and estimates of future performance. If our net sales, gross margins and operating results fall short of our expectations, we may be required to access some, if not all, of our Credit Facility, and potentially require other sources of financing to fund our operations.

 

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

 

 

Results of Operations

 

The following tables set forth consolidated income statement data for fiscal 2014, fiscal 2013 and fiscal 2012 and should be read in conjunction with “Selected Financial Data” in Item 6 of this Annual Report on Form 10-K.

 

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Fiscal 2014 Compared to Fiscal 2013

 

The results below are for the fifty-two week period ended January 31, 2015 (fiscal 2014) compared to the fifty-two week period ended February 1, 2014 (fiscal 2013).

 

 

 

*calculated result is not meaningful

 

Net Sales.  Net sales for fiscal 2014 were $418.6 million, a decrease of $17.2 million or 3.9%, from net sales of $435.8 million for fiscal 2013.  In addition to operating an average of 8.3% fewer stores, the decrease in net sales was driven by a same store sales decrease of 2.9%.  New stores and converted MPWs are excluded from the SSS calculation for the first thirteen months of operation.  As a result, nearly 36% of our store base is currently excluded from this calculation.  To gain a better sense of our sales performance, we also monitor sales per store and sales per square foot for our entire store base.  Overall, sales per store increased 3.5%, and sales per square foot increased 0.8%.

 

Continued positive acceptance of our revamped merchandise assortment by our customers was evidenced by a 61 basis point, or 1.8%, increase in customer conversion. In addition, higher units per transaction and increased average selling price resulted in a 5.1% increase in average dollar sale. These increases were offset by a decline in customer traffic levels in malls in general, as well as a decline specific to Christopher & Banks.

 

eCommerce sales during fiscal 2014 were $47.8 million, an increase of 5.6% from $45.3 million for fiscal 2013. Despite the growth in total sales, eCommerce results were negatively impacted by lower sales initiated in stores due to reduced store count and traffic levels.  eCommerce sales generated through digital sources were up 5.4% in fiscal 2014.  Our newly-launched MPW website showed encouraging momentum in continuing the strategy of offering a combination of CB and CJ product at one location.   On a two-year basis, eCommerce sales were up 9.2%.

 

The following table presents net sales information regarding our retail stores and eCommerce sales for the fifty-two week periods ended January 31, 2015 and February 1, 2014.

 

 

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Merchandise, Buying and Occupancy Costs.  Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $270.8 million, or 64.7% of net sales in fiscal 2014, compared to $284.7 million, or 65.3% of net

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sales, in the 2013.  This resulted in a 65 basis point increase in our gross profit margin, driven primarily by improved merchandise margins.

 

The decline in merchandise, buying and occupancy costs as a percent of sales can be attributed to a number of factors. The biggest improvements came from benefits in our initial mark-up,  taking fewer permanent markdowns and promoting more items at specific price points, offset by deleveraging of our occupancy costs by 114 basis points.  The deleveraging of occupancy costs were mitigated by our MPW strategy which resulted in an increase in sales per square foot.

 

In connection with the preparation of our consolidated financial statements for the fiscal year ended January 31, 2015, we determined that our calculation of deferred rent expense was incorrect.  We corrected the error in the fourth quarter of fiscal 2014, which resulted in a cumulative increase to rent expense of approximately $3.6 million, and a reduction of net income of approximately $2.2 million.  There was no impact to net cash provided by operating activities.  We have concluded that this correction is immaterial to the related consolidated financial statements as a whole.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses, exclusive of depreciation and amortization, for fiscal 2014 were $126.4 million, or 30.2% of net sales, compared to $128.8 million, or 29.6% of net sales in fiscal 2013.

 

Store-level expense declines can be attributed to operating, on average, 8.3% fewer stores in fiscal 2014 compared to fiscal 2013, as well as reduced payroll-related costs due to declines in store traffic.  Other store expense reductions include lower charge card fees, due to lower sales and higher PLCC usage, along with savings in store supplies.    Marketing spend increased $0.5 million as we invested in new PR initiatives to increase brand awareness to potential new customers.  Corporate related expense savings include no accrual for the annual incentive plan as certain projections were not met, lower recruiting and training fees, and credits received on sales and use tax and workers compensation audits.

Depreciation and Amortization.  Depreciation and amortization expense was $11.8 million, or 2.8% of net sales, in fiscal 2014, compared to $13.2 million, or 3.0% of net sales, in fiscal 2013. The decrease in the amount of depreciation and amortization expense primarily resulted from operating approximately 8.3% fewer stores in fiscal 2014 compared to fiscal 2013. Also contributing to the decline were delays in IT-related projects, partially offset by accelerating depreciation on store closings.

 

Operating Income.  As a result of the foregoing factors, we reported operating income of $9.4 million, or 2.2% of net sales, for fiscal 2014, compared to operating income of $8.9 million, or 2.0% of net sales, for fiscal 2013.

 

Other Expense.  Other expense of $0.2 million for fiscal 2014 included interest expense of $0.3 million, partially offset by interest and other income of $0.1 million. For fiscal 2013, other expense included interest expense of $0.3 million, partially offset by a gain on investments of $0.1 million.

 

Income Tax Benefit.  We recorded an income tax benefit of $37.9 million due to the reversal of the valuation allowance on our deferred tax assets in fiscal 2014.  In the fourth quarter of fiscal 2014, the Company released the vast majority of the valuation allowance based on two consecutive years of profitability, three years of cumulative positive earnings achieved in the fourth quarter of fiscal 2014 and the Company’s forecast of continued profitability in fiscal 2015.  A small valuation allowance has been retained for state net operating loss carryforwards that may expire before they are utilized.  The release of the valuation allowance resulted in a $41.3 million benefit to the income tax provision in fiscal 2014. For fiscal 2013, we recorded an income tax benefit of $5 thousand, with an effective tax rate of (0.06)%.  See Note 11 – Income Taxes for a complete discussion on the reversal of our valuation allowance.

 

Net Income.  As a result of the foregoing factors, we reported net income of $47.1 million, or 11.3% of net sales, and $1.24 per diluted share for fiscal 2014, compared to net income of $8.7 million, or 2.0% of net sales, and income per diluted share of $0.23 for fiscal 2013.

 

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Fiscal 2013 Compared to Fiscal 2012

 

The results below are for the fifty-two week period ended February 1, 2014 (fiscal 2013) compared to the fifty-three week period ended February 2, 2013 (fiscal 2012).

 

 

 

* calculated result is not meaningful

 

Net Sales.  Net sales for fiscal 2013 were $435.8 million, an increase of $5.5 million or 1.3%, from net sales of $430.3 million for fiscal 2012. The increase in net sales was driven by a same-store sales increase of 8.1% and a $2.0 million, or 5.5% increase, in non-store initiated eCommerce sales.  We operated, on average, 8.5% fewer stores in fiscal 2013 compared to fiscal 2012, and the loss of the fifty-third week negatively impacted fiscal 2013 net sales by $5.1 million.

 

eCommerce sales during fiscal 2013 were $45.3 million, an increase of 3.4% from $43.8 million for fiscal 2012.  eCommerce sales generated through digital sources were up 8.2% in fiscal 2013 as compared to fiscal 2012, partially offset by lower sales initiated in stores due to reduced store count and traffic levels. 

 

The following table presents net sales information regarding our retail stores and eCommerce sales for the fifty-two and fifty-three week periods ended February 1, 2014 and February 2, 2013, respectively.

 

 

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The same-store sales increase was driven by continued positive acceptance of our revamped merchandise assortment by our customers as evidenced by a 295 basis point, or 9.8%, increase in customer conversion. In addition, higher units per transaction and increased average selling price resulted in a 6.7% increase in average dollar sale. These increases were partially offset by a decline in customer traffic levels in malls in general, as well as a decline specific to Christopher & Banks.

 

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Merchandise, Buying and Occupancy Costs.  Merchandise, buying and occupancy costs, exclusive of depreciation and amortization, were $284.7 million, or 65.3% of net sales in fiscal 2013, compared to $303.7 million, or 70.6% of net sales, in the 2012.  This resulted in a 530 basis point increase in our gross profit margin, driven primarily by improved merchandise margins.

 

The decline in merchandise, buying and occupancy costs as a percent of sales can be attributed to a number of factors. The biggest improvement came from lower markdowns as our customers positively reacted to the changes in our assortment and improved price/value equation. In addition, we saw benefits in our initial mark-up and positive leverage of our occupancy and buying costs as a result of the increase in same-store sales and the closing of underperforming stores.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses, exclusive of depreciation and amortization, for fiscal 2013 were $128.8 million, or 29.6% of net sales, compared to $129.2 million, or 30.0% of net sales in fiscal 2012.   Total selling, general and administrative expenses declined by 0.2% or 40 basis points as a percent of net sales. On an absolute dollar basis,  selling, general and administrative expenses benefited by approximately $2.0 million as a result of fiscal 2013 being a fifty-two week year and fiscal 2012 having fifty-three weeks.

 

Store-level expense declines can be attributed to operating, on average, 8.5% fewer stores in fiscal 2013 compared to fiscal 2012. In addition to the decline in the absolute dollar amount of store-level expenses, we achieved 187 basis points of positive leverage due to an increase in sales productivity.  Offsetting the decline in store-level expenses was an increase in marketing spend, both in direct mail and online spending. In total, marketing spend increased $3.1 million dollars as we increased our direct mail pieces by 135% in fiscal 2013 compared to fiscal 2012.  As a percent of net sales, total marketing spend increased to 2.4% in fiscal 2013 from 1.7% in fiscal 2012. The increase in direct mail and online spending is intended to drive traffic and mitigate the traffic declines malls have been experiencing the past several years.  Also offsetting the decline in administrative expenses was an accrual for incentive pay based upon the Company achieving various financial goals in fiscal 2013.

Depreciation and Amortization.  Depreciation and amortization expense was $13.2 million, or 3.0% of net sales, in fiscal 2013, compared to $18.6 million, or 4.3% of net sales, in fiscal 2012. The decrease in the amount of depreciation and amortization expense primarily resulted from operating approximately 8.5% fewer stores in fiscal 2013 compared to fiscal 2012. Contributing to the decline was a continued, planned low level of new capital expenditures, as well as more fully depreciated assets as our store base matures.

 

Operating Income (Loss).  As a result of the foregoing factors, we reported operating income of $8.9 million, or 2.0% of net sales, for fiscal 2013, compared to an operating loss of $16.0 million, or 3.7% of net sales, for fiscal 2012.

 

Other Income (Expense).  Other expense of $0.2 million for fiscal 2013 included interest expense of $0.3 million, partially offset by interest and other income of $0.1 million. For fiscal 2012, other expense included interest expense of $0.1 million, partially offset by a gain on investments of $0.1 million.

 

Income Tax (Benefit) Provision.  We recorded an income tax benefit of $5 thousand, with an effective tax rate of (0.06)% for fiscal 2013. For fiscal 2012, we recorded income tax expense of $0.1 million, with an effective tax rate of 0.6%.  Our effective tax rates for fiscal 2013 and fiscal 2012 reflect the ongoing impact of the valuation allowance on our deferred tax assets.

 

Net Income (Loss).  As a result of the foregoing factors, we reported net income of $8.7 million, or 2.0% of net sales and $0.23 per diluted share, for fiscal 2013, compared to a net loss of $16.1 million, or 3.7% of net sales and a loss per share of $(0.45) for fiscal 2012.

 

 

 

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Fiscal 2015 Outlook

 

First Quarter Outlook

 

We anticipate sales for the first quarter to be approximately $90 million to $94 million as compared to net sales of $103.4 million in the first quarter of fiscal 2014.    Our expectations for first quarter sales reflect the effect of the West Coast port slowdown in late fiscal 2014 continuing into the first quarter of fiscal 2015, coupled with severe weather during February in many of our store locations.    We are adjusting our promotional cadence by moving our Friends & Family event into March and our Fashion Show into April to mitigate the delays of merchandise  flowing through the ports we have experienced.    As we continue our MPW conversion strategy, during the quarter we expect to operate, on average, 6% fewer stores than in the first quarter last year.    

 

We expect gross margin to decline by 140 to 160 basis points in the first quarter of fiscal 2015, as compared to the first quarter of fiscal 2014, driven by improved merchandise margins offset by the deleveraging of buying and occupancy and other cost of goods sold.  We expect selling, general and administrative expense dollars for the first quarter of fiscal 2015 to be between $32.5 million and $33.0 million compared to $32.2 million for the first quarter of fiscal 2014.   The majority of the increase will come from additional corporate staffing aimed at strengthening our team, as well as an expected increase in incentive compensation accruals.

 

We expect on-hand inventory levels in the first quarter of fiscal 2015 to be lower, on average, during the quarter than the prior year due to the late receipts related to the port disruption,  but inventory should end the quarter approximately 4% higher compared to the first quarter of fiscal 2014.

 

We anticipate opening three new MPW stores and seven new outlet stores in the first quarter of 2015.   We also plan to close 15 CB and 10 CJ stores and convert them to 15 MPW stores; and to close 70 CB stores, replacing them with 70 new MPW stores in the first quarter.  All MPW conversion stores come out of the same-store sales base for 13 months.  We anticipate that at the end of the first quarter, of the projected 518 stores open, approximately 51% will be in the SSS base.

 

Full Year Outlook

 

We anticipate sales to be between $422 million and $432 million for fiscal 2015, an increase of 0.8% to 3.2% as compared to fiscal 2014.  We expect gross margin to be between 30 and 80 basis points higher than fiscal 2014, and selling, general and administrative expense to be between $132.5 million and $135.5 million.

 

We expect to have a significant amount of store activity in fiscal 2015.    We expect average store count to decrease approximately 3.1% for fiscal 2015 and average square footage to increase by approximately 0.6% as compared to fiscal 2014.  During the year we plan to: i) close 38 CB and CJ stores, and convert them into 19 MPW stores in the existing space; ii) close 14 CB and CJ stores and relocate to seven new MPW stores; iii) close six CB stores and replace each with an MPW store in a new location; and iv) add CJ product to 72 CB stores, converting them to 72 MPW stores. In addition, we have identified sites for between 10 to 12 new MPW stores and between 25 to 30 new outlet stores.  We expect to end the fiscal year with approximately  530 stores in total, resulting in a 5% increase in total square footage as compared to the end of fiscal 2014.  Of the total stores expected at the end of fiscal 2015, approximately 337, or 64%, are expected to be in the MPW format.

 

As we convert stores to the MPW format, they are considered "new" stores and therefore drop out of the comparable store base for a period of 13 months.   Depending on the type of MPW store conversion executed (see discussion in "Growth/MPW" section of Item 1 of this Annual Report on Form 10-K), the impact on sales will vary.  We anticipate a sales increase in stores where we introduce CJ product for the first time. The collapsed and combined stores are generally modeled to have an overall drop in sales, but higher sales per square foot and four-wall profitability.  Relocations are generally modeled for improved sales productivity with no initial meaningful change in store volume.

 

We plan to invest between approximately $8 million and $10 million over the next 15 to 18 months in executing our Customer First strategy.  This is intended to elevate our customers’ experience across all touch points.  We will be

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affecting customer-facing systems, including an upgrade of our CRM and POS platforms, as well as our eCommerce platform.  The implementation will be completed in phases beginning in mid-2015, however the full extent of these changes will not be complete until early fiscal 2016.

 

As our Customer First strategy continues to mature, it becomes increasingly difficult to distinguish between store sales and eCommerce sales.  Because we no longer have a clear distinction between store sales and eCommerce sales, we will no longer be separately reporting eCommerce sales, but we will begin including eCommerce sales in our same store sales results in fiscal 2015.

 

Depreciation and amortization for the year is expected to be between $13.0 million and $13.5 million.    Capital expenditures are expected to be approximately $33 million to $35 million, reflecting new store openings, MPW relocations and continued investments in our Customer First strategy.

 

The effective tax rate for the year is expected to be approximately 40%.

 

Future Outlook

 

We have made significant progress in executing on our strategic initiatives and believe there is considerable opportunity ahead.  We see multiple growth drivers that we believe will enable us to achieve increased sales and profitability as we continue to move forward with our strategic plan while prudently managing our business.

 

Our long-term financial goals are to deliver:

 

 

 

 

Liquidity and Capital Resources

 

Cash flow and liquidity

 

We evaluate cash flow from operations, investing activities and financing activities in determining the sufficiency of our cash position. Cash flow from operations has historically been sufficient to provide for our uses of cash. We expect to operate our business and execute our strategic initiatives principally with funds generated from operations and, if necessary, from our Credit Facility, subject to compliance with the financial covenant and its other terms and provisions.

 

Based on our current plans for fiscal 2015, we believe cash flows from operating activities and working capital will be sufficient to meet our operating and capital expenditures requirements for the fiscal year. We do not anticipate the need to utilize our Credit Facility for any liquidity needs in fiscal 2015, other than to maintain and open letters of credit in the normal course of business. Our operating plan for fiscal 2015 contemplates positive same store sales and improvements in merchandise margins, as well as growth in sales per square foot and total net sales, when compared to fiscal 2014. The plan is dependent on our ability to consistently deliver merchandise that is appealing to our customers at a profitable price and to manage our costs effectively in order to satisfy our working capital and other operating cash requirements. Our operating plan is based on a number of assumptions which involve significant judgment and estimates of future performance. If our net sales, gross margins and operating results fall short of our expectations, we may be required to access some, if not all, of our Credit Facility, and potentially require other sources of financing to fund our operations.

 

We will continue to monitor our performance and liquidity and, if we believe it is appropriate or necessary to borrow under the Credit Facility or obtain additional liquidity, we would first consider taking further steps intended to improve our financial position. Steps we may consider include: modifying our operating plan, seeking to reduce costs, decreasing

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our cash spend and/or capital expenditures, as well as evaluating alternatives and opportunities to obtain additional sources of liquidity through the debt or equity markets. It is possible these actions may not be sufficient or available or, if available, available on terms acceptable to us.

 

The following table summarizes our cash flows for the fifty-two week periods ended January 31, 2015 and February 1, 2014, and the fifty-three week period ended February 2, 2013 (in thousands):

 

 

 

Net cash provided by operating activities - Fiscal 2014

 

Net cash provided by operating activities in fiscal 2014 totaled $19.0 million, a reduction of $6.1 million from cash provided by operating activities of $25.1 million in fiscal 2013.  Significant fluctuations in our working capital accounts in fiscal 2014 included a $5.1 million decrease in accounts payable, a $1.6 million increase in accounts receivable, and a $3.8 million decrease in accrued liabilities, offset by a $37.9 million increase in deferred income taxes as a result of releasing our valuation allowance on deferred tax assets.  See Note 11 – Income Taxes for a complete discussion on the reversal of our valuation allowance.  The decrease in accounts payable is due to higher receipt levels in January 2014 as compared to January 2015 as we built our core inventory in late fiscal 2013 to early fiscal 2014.  The increase in accounts receivable is due to increased tenant allowances on new store leases.  The decrease in accrued liabilities resulted from the absence of an accrual of incentive compensation in fiscal 2014, as well as a decrease in accrued occupancy expenses as fewer stores were surpassing their sales breakpoint.

 

Net cash provided by operating activities - Fiscal 2013

 

Net cash provided by operating activities in fiscal 2013 totaled $25.1 million, an improvement of $42.5 million from net cash used in operating activities of $17.4 million in fiscal 2012.  Significant fluctuations in our working capital accounts in fiscal 2013 included a  $2.2 million increase in merchandise inventories, a $1.2 million decrease in accounts receivable, and a $3.2 million increase in accrued liabilities.  The increase in merchandise inventories is due to our investment in core merchandise programs such as denim, signature slimming bottoms, wrinkle resistant shirts, and wear-to-work items.   The decrease in accounts receivable is due to lower sales at the end of January compared to the prior year, the result of unseasonably cold weather and snow.  The increase in accrued liabilities resulted from an increase in incentive compensation based upon the Company achieving various financial goals in fiscal 2013 and an increase in accrued occupancy expenses as more stores were surpassing their sales breakpoint.

 

Net cash used in investing activities - Fiscal 2014

 

Net cash used in investing activities in fiscal 2014 totaled $22.2 million, a decrease of $2.5 million from net cash used in investing activities of $24.7 million during fiscal 2013. Net cash used in investing activities in fiscal 2014 consisted of investments of $20.3 million in capital expenditures, including in our MPW and Customer First strategies, as compared to capital expenditures of $8.5 million in fiscal 2013. We also invested in the purchase of available-for-sale investments, partially offset by the sale of available-for-sale investments as they matured.  

 

Net cash used in investing activities - Fiscal 2013

 

Net cash used by investing activities in fiscal 2013 totaled $24.7 million, a decrease of $42.5 million from net cash provided by investing activities of $17.8 million during fiscal 2012. Net cash used by investing activities in fiscal 2013 consisted of the purchase of available-for-sale investments and investment in new stores and other capital expenditures.

 

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Net cash used in financing activities - Fiscal 2014

 

Net cash used in financing activities in fiscal 2014 totaled approximately $0.6 million, an increase of $0.6 million from $3 thousand provided by financing activities in fiscal 2013.  No dividends were paid by the Company in fiscal 2014.

 

Net cash provided by financing activities - Fiscal 2013

 

Net cash provided by financing activities in fiscal 2013 totaled approximately $0.0 million, a decrease of $0.4 million from $0.4 million in fiscal 2012.  No dividends were paid by the Company in fiscal 2013.

 

Credit facility 

 

On September 8, 2014, the Company entered into an amendment (the  ”Amendment”) to its existing Credit Agreement (the "Credit Facility") with Wells Fargo Bank, National Association ("Wells Fargo") as Lender. The Amendment, among other changes, (i) extended the term of the Credit Facility to September 8, 2019; (ii) reduced the rates at which borrowings will generally accrue interest and reduced the commitment fee rate; (iii) modified the calculation of the Borrowing Base to provide for potential additional capacity; the Borrowing Base serves as a limit on the overall amount of revolving loans and letters of credit that may be outstanding at any one time under the Credit Facility; (iv) excluded from the limitation on store closings the consolidation of Christopher & Banks stores and CJ Banks stores into MPW stores; and (v) modified the definition of Payment Conditions.  The Credit Facility provides the Company with revolving credit loans of up to $50.0 million in the aggregate, subject to a borrowing base formula based primarily on eligible credit card receivables, inventory and real estate, as such terms are defined in the Credit Facility, and up to $10.0 million of which may be drawn in the form of standby and documentary letters of credit.

 

We recorded approximately $0.1 million of deferred financing costs in the third quarter of fiscal 2014 in connection with the Amendment. The deferred financing costs have been combined with the balance of the deferred financing costs remaining from the Credit Facility dated July 12, 2012, and all are recorded within other assets on the consolidated balance sheet and are being amortized as interest expense over the related term of the Amendment. 

 

Borrowings under the Credit Facility will generally accrue interest at a rate ranging from 1.50% to 1.75% over the London Interbank Offered Rate ("LIBOR") or 0.50% to 0.75% over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such term is defined in the Credit Facility. Letters of credit fees range from 1.00% to 1.75%, depending upon the Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date. 

 

The Credit Facility contains certain affirmative and negative covenants. The affirmative covenants include certain reporting requirements, maintenance of properties, payment of taxes and insurance, compliance with laws, environmental compliance and other provisions customary in such agreements. Negative covenants limit or restrict, among other things, secured and unsecured indebtedness, fundamental changes in the business, investments, liens and encumbrances, transactions with affiliates and other matters customarily restricted in such agreements. The sole financial covenant contained in the Credit Facility requires us to maintain Availability at least equal to the greater of (a) ten percent (10%) of the Borrowing Base or (b) $3.0 million.  In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met.  We were in compliance with all covenants and other financial provisions as of January 31, 2015.

 

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

 

Our obligations under the Credit Facility are secured by our assets and those of our subsidiaries pursuant to a Security Agreement, dated July 12, 2012 (the “Security Agreement”). Pursuant to the Security Agreement, we pledged 

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substantially all of our assets as collateral security for the loans to be made pursuant to the Credit Facility, including accounts owed to us, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all our subsidiaries.

 

We had no revolving credit loan borrowings under the Credit Facility during fiscal 2014 or fiscal 2013 or under our previous credit facility in fiscal 2012. Historically, we have utilized our credit facility only to open letters of credit. The total Borrowing Base at January 31, 2015 was approximately $29.3 million.   As of January 31, 2015, we had open on-demand letters of credit of approximately $0.9 million.  Accordingly, after reducing the Borrowing Base for the open letters of credit and the required minimum availability of $3.0 million, or 10.0% of the Borrowing Base, the net availability of revolving credit loans under the Credit Facility was approximately $25.4 million at January 31, 2015.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at January 31, 2015 (in thousands):

 

 

 

The table above does not include possible payments for uncertain tax positions.  The amounts included above for operating leases reflect store locations where the Company has a defined occupancy date.  The Company has approximately $7.2 million of additional commitments for locations where an occupancy date has not yet been established with the landlord. Our reserve for uncertain tax positions, excluding interest and penalties, was approximately $0.9 million at January 31, 2015.  Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of cash payments that may be required to settle these tax liabilities.

 

Our contractual obligations include operating leases for each of our retail store locations and vehicles. The amount for operating leases reflected in the table above includes future minimum rental commitments only and excludes common area maintenance charges, real estate taxes and other costs associated with operating leases. These types of costs, which are not fixed and determinable, totaled $17.6 million, $17.8 million and $20.7 million in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.

 

At January 31, 2015, we had no other contractual obligations relating to short or long-term debt, capital leases or non-cancelable purchase obligations. In addition, we had no contractual obligations relating to the other liabilities recorded in our balance sheet under accounting principles generally accepted in the United States.

 

Off-Balance Sheet Obligations

 

We do not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Related Party Transactions  

 

We, or our subsidiaries, have for the past several years purchased goods from or through G-III Apparel Group Ltd. (“G-III”) or its related entities. On January 3, 2011, Morris Goldfarb, the Chairman of the Board and Chief Executive Officer of G-III, became a director of the Company. On June 27, 2013, Mr. Goldfarb ceased to be a member of the Board as he did not stand for re-election at the Company's annual meeting of stockholders in June 2013. In fiscal 2014, fiscal 2013, and fiscal 2012, payments made by us and our subsidiaries to G-III and its related entities aggregated approximately $1.1 million, $1.2 million and $1.4 million, respectively. As of January 31, 2015 and February 1, 2014, we had a balance due

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to G-III or its related entities of approximately $12 thousand and $0.1 million, respectively. We have evaluated the terms and considerations for such related party transactions and have determined the terms are comparable to amounts that would have to be paid to, or received from, independent third-parties.

 

Sourcing 

 

We directly imported approximately 39% of our merchandise purchases in fiscal 2014, compared to approximately 37% and 28% in fiscal 2013 and fiscal 2012, respectively. A significant amount of our merchandise was manufactured overseas in each of these fiscal years, primarily in China and Indonesia. In fiscal 2014, fiscal 2013, and fiscal 2012, approximately 2%, 5% and 6%, respectively, of our merchandise was manufactured in the United States. This reliance on sourcing from foreign countries may cause us to be exposed to certain risks as indicated in Item 1A. Risk Factors in this Annual Report on Form 10-K.

 

We do not have long-term purchase commitments or arrangements with any of our suppliers or agents. Our ten largest vendors represented approximately 70%, 70% and 56% of our total merchandise purchases in fiscal 2014, fiscal 2013, and fiscal 2012, respectively. One of our suppliers accounted for approximately 28%, 19%, and 18% of our purchases during fiscal 2014, fiscal 2013, and fiscal 2012, respectively. Another supplier accounted for approximately 10% of our purchases during fiscal 2014, 11% of our purchases during fiscal 2013, 12% of our purchases in fiscal 2012. Our vendors produce the majority of the goods sold to us in China and Indonesia. Although we have strong relationships with our vendors, there can be no assurance that these relationships can be maintained in the future or that these vendors will continue to supply merchandise to us. If there should be any significant disruption in the supply of merchandise from these vendors, management believes that it will be able to shift production to other suppliers to continue to secure the required volume of product. Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on our financial position or results of operations.

 

We currently expect production costs to remain stable in fiscal 2015.

 

Seasonality

 

Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, and shifts in the timing of certain holidays and shifts in the timing of promotional events.

 

Inflation

 

We do not believe that inflation had a material effect on our results of operations in fiscal 2014, fiscal 2013 or fiscal 2012.  

 

Internal Control Over Financial Reporting

 

We conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2015. Disclosure controls and procedures (as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

The evaluation of our disclosure controls and procedures included a review of the control objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Annual Report. In conducting this evaluation, our CEO and CFO concluded there is a material weakness in the design and operating effectiveness of our internal control over financial reporting, as described below. As a result of such evaluation and this

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conclusion, our CEO and CFO also have concluded that our disclosure controls and procedures were not effective as of January 31, 2015.

 

We had a material weakness in our internal control over financial reporting as of January 31, 2015 because we concluded that we did not adequately design our controls to communicate all significant terms for lease amendments and review the terms of new or modified store leases.  This led to the Company’s use of inaccurate lease information in the accounting for rent expense, analysis of potential impairment of long-lived assets and in the calculation of certain deferred tax assets. 

 

The material weakness resulted in misstatements in rent expense that were corrected in the fourth quarter of fiscal 2014, prior to the issuance of the Company’s consolidated financial statements.  Furthermore, a reasonable possibility exists that a material misstatement in the Company’s consolidated financial statements would not be prevented or detected on a timely basis.

 

Due to the material weakness reported as of January 31, 2015, management performed additional analysis and procedures to ensure that our consolidated financial statements included in this Annual Report were presented fairly in conformity with generally accepted accounting principles and fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.  See Item 9A. Controls and Procedures, for additional information regarding the material weakness.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements and related notes, which have been prepared in accordance with generally accepted accounting principles used in the United States. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during a reporting period. Management bases its estimates on historical experience and various other assumptions that we believe to be reasonable. As a result, actual results could differ because of the use of these estimates and assumptions.

 

Our significant accounting policies can be found in Note 1 - Nature of Business and Significant Accounting Policies, to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K. We believe the following accounting policies, which rely upon making certain estimates and assumptions, are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

 

Inventory valuation

 

Merchandise inventories are stated at the lower of cost or market utilizing the retail inventory method. We manage our inventory levels and use markdowns to clear merchandise. Decisions to mark down merchandise are based on a number of factors, including the current rate of sale, quantity on hand, and age of the inventory. We estimate and record markdowns when necessary to liquidate aged inventory. Actual markdowns taken are regularly compared against previous estimates and factored into future estimates.

 

Long-lived assets

 

We review long-lived assets with definite lives annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with Accounting Standards Codification (“ASC”) 360, Accounting for the Impairment or Disposal of Long-Lived Assets.   This review includes the evaluation of individual under-performing stores and assessing the recoverability of the carrying value of the assets related to the store. Future cash flows are projected for the remaining lease life considering such factors as future sales levels, operating income, changes in occupancy expenses other than base rent and other expenses, as well as the overall operating environment specific to that store. If the estimated undiscounted future cash flows are less than the carrying value of the assets, we record an impairment charge equal to the difference between the assets’ fair value and carrying value.

 

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Fair value is determined by a discounted cash flow analysis. In determining future cash flows, we use our best estimate of future operating results and utilize market participant-based assumptions. In fiscal 2014, consistent with our operating plans, we assumed a small decrease in same-store sales for one year followed by gradual sales improvements in succeeding years.  Future growth in same-store sales beyond three years was based on our historical same-store sales growth rates. In situations where estimated future undiscounted store cash flows were less than the carrying value of store assets, fair value was determined using discounted cash flows.

 

As the projection of future cash flows involves the use of significant estimates and assumptions, including estimated sales and expense levels and selection of an appropriate discount rate, differences in circumstances or estimates could produce different results. The challenging economic environment, combined with the instability in the housing market, generally high levels of unemployment and continued general economic uncertainty affecting the retail industry make it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.

 

Included in the review is the assessment of the recoverability of the carrying value of the assets related to the corporate office and distribution center. As these assets do not have identifiable cash flows that are largely independent of store cash flows, we utilize a residual approach where the carrying value of the corporate and distribution center assets are compared with the estimated undiscounted future cash flows available from the stores remaining after any impairment losses. If the estimated undiscounted future cash flows are less than the carrying value of the assets related to the corporate office and distribution center, an impairment charge is recorded for the difference between the assets’ fair value and carrying value.

 

We recorded long-lived store-level asset impairment charges of approximately $0.2 million, $0.1 million and $0.4 million in fiscal 2014, fiscal 2013, and fiscal 2012, respectively, related to underperforming Christopher & Banks and C.J. Banks store locations.

 

Customer loyalty program

 

During the first quarter of fiscal 2011, we launched our Friendship Rewards Loyalty Program. Under the program, customers accumulate points based on purchase activity. Once a Friendship Rewards member achieves a certain point level, the member earns award certificates that may be redeemed toward merchandise purchases. Points are accrued as unearned revenue and recorded as a reduction of net sales and a current liability as they are accumulated by members and certificates are earned. A liability of $3.7 million as of January 31, 2015, and $4.0 million as of February 1, 2014, is included in other accrued liabilities on our consolidated balance sheet and is recorded net of estimated breakage based on redemption patterns and trends. Revenue and the related cost of sales are recognized upon redemption of the reward certificates, which expire approximately six weeks after issuance.

 

Income taxes   

 

In the fourth quarter of fiscal 2014, we released the valuation allowance against our net deferred tax assets.  Deferred income tax assets represent potential future income tax benefits. Realization of these assets is ultimately dependent upon future taxable income.  ASC 740 Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some or all of the recorded deferred tax assets will not be realized in a future period. Forming a conclusion that a valuation allowance is not needed is difficult when negative evidence such as cumulative losses exists. As a result of our evaluation, we concluded that the positive evidence of two consecutive years of profitability, three years of cumulative positive earnings achieved in the fourth quarter of fiscal 2014, and  our forecast of continued profitability in fiscal 2015 overcomes any negative evidence.  Accordingly, we have released the valuation allowance against our net deferred tax assets established in the third quarter of fiscal 2011.  A small valuation allowance has been retained for state net operating loss carryforwards that may expire before they are utilized.  The release of the valuation allowance resulted in a $41.3 million benefit to the income tax provision in fiscal 2014.  Our valuation allowance against deferred tax assets totaled $42.2 million at February 1, 2014.  We have analyzed equity ownership changes and determined our net operating losses will not be limited under IRC Section 382.  

 

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Recently Issued Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40).  The amendments in this ASU provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  An entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued, when applicable).  ASU 2014-15 is effective for the Company beginning with the annual reporting for fiscal 2016, and reports for interim and annual periods thereafter.  Early adoption is permitted.  The Company is evaluating the impact of adoption of this ASU, but does not expect the adoption to have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition”, as well as various other sections of the ASC, such as, but not limited to, ASC 340-20 Other Assets and Deferred Costs-Capitalized Advertising Costs.  The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 is effective for the Company beginning with the annual reporting for fiscal 2017, including interim periods within that year, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet).  Early adoption is not permitted.  The Company is in the process of evaluating the impact of ASU 2014-09, including the choice of application method upon adoption, on its consolidated financial statements.

 

Forward-Looking Statements

 

We may make forward-looking statements reflecting our current views with respect to future events and financial performance.  These forward-looking statements, which may be included in reports filed under the Exchange Act, in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A of this Annual Report on Form 10-K, which could cause actual results to differ materially from historical results or those anticipated.

 

The words or phrases “will likely result,” “are expected to,” “estimate,” “project,” “believe,” “expect,” “should,” “anticipate,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular, we desire to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Annual Report on Form 10-K.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, we wish to advise readers that the factors listed in Item 1A of this Annual Report on Form 10-K, as well as other factors, could affect our performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. We are potentially exposed to market risk from changes in interest rates relating to our Credit Facility with Wells Fargo Bank. Loans under the Credit Facility bear interest at a rate ranging from 1.50% to 1.75% over the LIBOR or 0.50% to 0.75% over the Wells Fargo Prime Rate, based on the amount of Average Daily Availability as such terms are defined in the Credit Facility.

 

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We enter into certain purchase obligations outside the U.S., which are denominated and settled in U.S. dollars. Therefore, we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks and believe that our foreign currency exchange risk is immaterial. We do not have any derivative financial instruments and do not hold any derivative financial instruments for trading purposes.

 

We are exposed to limited market risk from changes in interest rates relating to our investments.  The potential immediate loss to us that would result from a hypothetical 1% change in interest rates would not be expected to have  a material impact on our earnings or cash flows.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA