New Store Development

        We continually review potential new locations for our stores. We locate our new stores primarily in upscale shopping malls. When selecting a new mall site, we target high traffic locations with suitable demographics and favorable lease economics. When evaluating a new mall location, we also look at the principal and anchor stores in the mall, location of our store within the mall and other specialty stores located in the mall.

        We currently operate five street locations and one outlet store.

        Due to current economic conditions, we do not anticipate opening any new Cache stores during fiscal 2011, unless opportunities become available.

Marketing and Promotion

        Our marketing program currently consists of direct marketing through direct mail and email. Cache maintains a database of approximately 4.6 million names from customers that have provided their contact information. Based on this database, we send mailings during most months targeting various customer groups, in addition to multiple promotional email notifications. Our systems allow us to review how customers respond to various offers and from the customers' response we are able to adjust future offerings.

        Our brand is also supported by visual merchandising, which consists of window displays, front table layouts and various in-store promotions. Visual merchandising is an important component of our marketing and promotion strategy, since our mall locations provide us with significant foot traffic. We make decisions regarding store displays and signage at the corporate level, ensuring a consistent appearance throughout all our stores. In addition, we encourage store management to become involved in community affairs, such as participating in local charity fashion shows, to expand our brand recognition and meet potential customers.

        Our web-site, http://www.cache.com, allows customers to search for Cache store locations, purchase merchandise online, view currently available styles and sign up for email notifications. Over the past three years, web-site sales have increased from approximately $7.3 million in fiscal 2008 to approximately $8.9 million in fiscal 2010, after decreasing to $6.2 million in fiscal 2009.

        In fiscal 2011, we will launch a new enhanced web-site. The new web-site will provide the customers with a seamless shopping experience and the ability for us to showcase our product in a more enticing, desirable manner as well as offering enhanced on-line promotions.

Competition

        The market for women's sportswear, dresses and accessories is highly competitive. We compete primarily with specialty retailers of women's apparel and department stores located in the same mall or a nearby location. We believe our target customers choose to purchase apparel based on the following factors:

•

Trend-right style and fashion;



•

Fit and comfort;



•

Customer service;



•

Shopping convenience and environment; and



•

Value.

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Information Systems

        We have historically invested in information systems to improve sales, gain efficiencies and reduce operating costs. Our information systems integrate all major aspects of our business, including merchandise planning, purchasing, inventory control, distribution, sales and finance. Our POS system, which uses a wide area network allows us to add various functionalities, including the ability to process debit card transactions, centralize credit authorizations, enhance labor scheduling, centralize our customer database, manage our customer loyalty program, speed up customer transaction time and analyze real-time sales data.. During fiscal 2010, we selected a new e-commerce platform and fulfillment center, which will provide an enhanced web-site that will enrich customer shopping experience from mobile, e-commerce to social network features. It will enhance our online promotions, merchandise delivery and customer service. The new web-site is expected to be launched in mid 2011.

Trademarks and Service Marks

        We are the owner in the United States of the "Cache" trademark and service mark. The marks are registered with the United States Patent and Trademark Office. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal. Our rights to the aforementioned marks are a significant part of our business. Accordingly, we intend to maintain these marks and the related registration. We are currently unaware of any material claims of infringement or other challenges to our right to use our marks in the United States.

Employees

        As of January 1, 2011, we had approximately 2,204 employees, of whom approximately 1,026 were full-time employees and approximately 1,178 were part-time employees. As of January 1, 2011, we had approximately 2,029 store personnel and approximately 175 non-store personnel. None of these employees are represented by a labor union. We consider our employee relations to be satisfactory.

Available Information

        We make available on our web-site, http://www.cache.com, under "Investor Relations," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission ("SEC").

        Our Code of Business Conduct and Ethics, and Board of Directors' committee charters are also available on our web-site, under "Corporate Governance".

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ITEM 1A.    RISK FACTORS

         Macroeconomic conditions have adversely impacted our business and results of operations and may continue to do so.

        The retail sector is affected by macroeconomic factors, including changes in international, national, regional and local economic conditions, employment levels and consumer spending patterns. Furthermore, because our customer traffic and sales volume are largely derived from the volume of consumer traffic in the malls in which we operate, we are adversely affected by general declines in mall traffic. Since the slowdown that began in 2008, the overall economy, financial markets and the related reduction in consumer confidence in the economy have negatively affected results of operations throughout large segments of our industry, including our segment. Accordingly, macroeconomic conditions have adversely affected and continue to adversely affect our results of operations. Continued weakness in or a further worsening of the economy generally or in a number of our markets could adversely affect our financial position and results of operations, cause us to slow our re-modeling of existing locations or cause us to increase store closings.

         Our continued growth will depend on our ability to successfully open and operate new stores.

        Our continued growth depends on our ability to open and operate new stores on a profitable basis. Opening new stores is dependent on a variety of factors including our ability to:

•

Identify suitable markets and sites for store locations;



•

Negotiate acceptable lease terms;



•

Hire, train and retain competent store personnel;



•

Maintain a proportion of new stores to mature stores that does not harm existing sales or profitability;



•

Foster current relationships and develop new relationships with vendors that are capable of supplying an increasing volume of merchandise;



•

Manage inventory effectively to meet the needs of new and existing stores on a timely basis; and



•

Expand our infrastructure to accommodate growth.

        During fiscal 2011, we do not expect to open any new stores. As the economy improves, we intend to open new stores in future years and to remodel many of our existing stores as their leases come up for renewal. Continued expansion could place demands on our operational, managerial and administrative resources, which could have a material adverse effect on our ability to manage our business. As we open more stores, our resources may come under greater strain and may prove to be inadequate. If we are unable to open new stores or remodel our existing stores as planned, or if our new stores are unsuccessful, it could have a negative impact on our financial performance. Even if we are able to open new stores, some of our newly opened stores may not be commercially successful, possibly resulting in their closure at a significant cost to us or a material adverse effect on our financial condition or results of operations. During fiscal 2010, we closed eight stores and, to date, during fiscal 2011, we closed two stores and expect to close another two stores, in the normal course of business.

         Our expansion into new markets could adversely affect our financial condition and results of operations.

        During fiscal 2011, we do not expect to open any new stores and during fiscal 2010 we opened four new stores. We may open new stores in areas of the United States in which we currently have few or no stores. The expansion into new markets may present competitive, merchandising and administrative challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect our business, financial condition and results of

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operations. To the extent our new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those markets.

         Our ability to attract new customers to our stores depends heavily on the success of the shopping malls in which we are located.

        All but a few of our existing stores are located in shopping malls. Sales at these stores are derived in large part from the volume of consumer traffic in these malls. In addition, traffic in some of the malls in which we have stores has been adversely affected by store closures and bankruptcies by other tenants, including anchor or other large tenants. We cannot control vacancy rates in the malls in which we have stores, continued popularity of malls as shopping destinations, the solvency of landlords and the level of maintenance and upkeep that they perform or improvements that they make at the malls, development of new shopping malls or the availability or cost of appropriate locations within existing or new shopping malls. A decrease in shopping mall traffic is likely to adversely affect our results of operations.

         Our comparable store sales and quarterly results of operations are affected by many factors that we cannot control.

        Our quarterly results of operations for our individual stores have fluctuated significantly in the past and will continue to fluctuate in the future. Since the beginning of fiscal 2008, our quarterly comparable sales at Cache stores have ranged from an increase of 5% to a decrease of 23%. Our comparable store sales and quarterly results of operations are affected by a variety of factors, most of which we cannot control, including:

•

General economic conditions, general mall traffic and consumer spending patterns;



•

Fashion trends;



•

Calendar shifts of holiday or seasonal periods;



•

The effectiveness of our inventory management;



•

Changes in our merchandise mix;



•

The timing of promotional events;



•

Weather conditions; and



•

Actions of competitors or events that affect other mall tenants.

         Our success depends in part on the efforts of our management team.

        Our success in managing our business and implementing our business and growth strategies depends on the abilities and experience of our management team. If we were to lose the services of one or more members of this team, and in particular the services of Thomas Reinckens, our Chairman and Chief Executive Officer, we may be unable to find a suitable replacement in a timely manner. This in turn could adversely affect our business, financial condition and results of operations.

         Our manufacturers may be unable to manufacture and deliver products in a timely manner or meet our quality standards, which could result in lost sales, cancellation charges or excessive markdowns.

        We direct source a large portion of our product directly from unaffiliated third party manufacturers. During fiscal 2010, we direct-sourced approximately 48% of the dollar volume of our merchandise. We cannot guarantee that direct-sourcing will continue to result in cost savings. In addition, we may not be able to effectively manage and cultivate direct relationships with manufacturers, which could result in additional costs and manufacturing delays. Furthermore, similar to

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most other specialty retailers, we have short selling seasons for much of our inventory. Factors outside of our control, such as manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns, all of which could have a material adverse effect on our business, financial condition and results of operations.

         We rely on a relatively small number of domestic vendors for a portion of our product, and our success depends in part on maintaining good relationships with these vendors.

        During fiscal 2010, Cache purchased approximately 52% of the dollar volume of its product directly from third party vendors or agents of which five vendors accounted for 23%. The terms of our relationships with our vendors generally are not contractual and do not assure adequate supply or pricing on a long-term basis. If one or more of these vendors ceased to sell to us or significantly alter the terms of our relationship, we may be unable to obtain merchandise in a timely manner, in the desired styles, fabrics or colors, or at the prices and volumes we wish to purchase. This could hurt our ability to respond to changing fashion trends and thus our sales and profitability. In addition, the continued increase in our direct-sourcing of merchandise from international vendors could cause our existing domestic vendors to reduce or eliminate their sales to us.

         Substantially all of the materials used to manufacture our merchandise are produced in foreign facilities. This subjects us to the risks of international trade and other risks generally associated with doing business in foreign markets.

        We and substantially all of our vendors utilize overseas production facilities. The failure of foreign manufacturers to ship materials or products to us in a timely manner could result in our stores lacking needed inventory. Any event causing a disruption of imports, including financial or political instability, currency fluctuations, terrorism or heightened security, trade restrictions in the form of tariffs or quotas or both, political or military conflict involving the United States, or the migration of manufacturers, could negatively affect our business, financial condition or results of operations. These adverse impacts may include an increased cost to us, reductions in the supply of merchandise or delays in our manufacturing lead time.

         We rely on our manufacturers to use acceptable ethical business practices, and if they fail to do so, the Cache brand name could suffer reputational harm and our sales could decline or our inventory supply could be interrupted.

        We do not control our manufacturers or their labor and other business practices. If one of our manufacturers violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, our reputation could be damaged and the shipment of finished products to us could be interrupted. Either of these events could have a material adverse effect on our revenues and, consequently, our results of operations.

         We rely on third parties to distribute our merchandise. If these third parties do not adequately perform this function, our business would be disrupted.

        The efficient operation of our business depends on the ability of the Company and its vendors to ship merchandise through third party carriers, such as United Parcel Service, directly to our individual stores. These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past. Due to our reliance on these parties for our shipments, interruptions in shipments could adversely affect our business, financial condition and results of operations. Increases in fuel prices may also increase our shipping costs, which could adversely affect our business, financial condition and results of operations.

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         The raw materials used to manufacture our products and our distribution and labor costs are subject to availability constraints and price volatility, which could result in increased costs.

        The raw materials used to manufacture our products are subject to availability constraints and price volatility caused by high demand for petroleum-based synthetic fabrics, weather, supply conditions, regulations, economic climate and other unpredictable factors. Increases in labor costs, especially in China, as well as a shortage of labor in certain areas of China, may also impact our sourcing costs. In addition, our transportation costs are subject to price volatility caused by the price of oil, regulations, economic climate and other unpredictable factors. Increases in demand for, or the price of, raw materials, distribution services and labor could have a material adverse effect on our business, financial condition and results of operations.

         Because our Cache brand is associated with all of our merchandise, our success depends heavily on the value associated with our brand. If the value associated with our brand were to diminish, our sales could decrease, causing losses or lower profits.

        Our success depends on our Cache brand and its value. The Cache brand could be adversely affected if our public image or reputation were to be tarnished, which could result in a material adverse effect on our business, financial condition and results of operations.

         We may be unable to protect our trademarks and other intellectual property rights.

        We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. There can be no assurance that the actions we have taken to establish and protect our trademarks and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks, service marks and proprietary rights of others. Also, others may assert rights in, or ownership of, our trademarks and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction.

         Any material disruption of our information systems could disrupt our business and adversely affect our results of operations.

        Our information systems integrate all major aspects of our business, including merchandise planning, purchasing, inventory control, distribution, sales and finance. Our POS system, which uses a wide area network allows us to add various functionalities, including the ability to process debit card transactions, centralize credit authorizations, enhance labor scheduling, centralize our customer database, manage our customer loyalty program, speed up customer transaction time and analyze real-time sales data. We are dependent on these information systems for the efficient operation of our business, including our web-site, and to facilitate the enhancement of our marketing efforts.

        We may experience operational problems with our information systems as a result of system failures, viruses, computer "hackers" or other causes. Any material disruption or slowdown of our systems, including a disruption or slowdown caused by any failure on our part to successfully maintain or perform additional upgrades to our systems, could cause information to be lost or delay our ability to process and make use of that information in our business, which may adversely affect our results of operations. In addition, if future changes in technology cause our information systems to become obsolete, or if our current information systems prove to be inadequate to support our growth, it could adversely affect our business and results of operations.

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         Our marketing efforts rely upon the effective use of customer information. Restrictions on the availability or use of customer information could adversely affect our marketing initiatives, which could adversely affect our business and results of operations.

        We use customer information to market to our customers. Any limitations imposed on the use of such consumer data, whether imposed by federal or state governments or business partners, could have an adverse effect on our future marketing activity. In addition, to the extent our security procedures and protection of customer information prove to be insufficient or inadequate, we may become subject to litigation, which could expose us to liability and cause damage to our reputation or brand.

         We are subject to numerous regulations that could adversely affect our operations. Changes in such regulations could impact the operation of our business through delayed shipments of our goods, fines or penalties that could affect our profitability.

        We are subject to customs, truth-in-advertising, truth-in-lending and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise, the use of proprietary credit cards and the operation of retail stores and distribution facilities. Although we undertake to monitor changes in these laws, if these laws change without our knowledge, or are violated by our employees, importers, buying agents, manufacturers or distributors, we could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could have a material adverse effect on our business, financial condition and results of operations.

         Our success depends on our ability to respond rapidly to ever-changing fashion trends and customer demands.

        Customer tastes and fashion trends change rapidly. Our success depends in large part on our ability to anticipate the fashion tastes of our customers, to respond to changing fashion tastes and consumer demands, and to translate market trends into fashionable merchandise on a timely basis. If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline and we may be faced with excess inventories. If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory. This could also cause us to miss opportunities. Both of the foregoing could have a material adverse effect on our business, financial condition and results of operations. In addition, if we misjudge fashion tastes and our customers come to believe that we are no longer able to offer fashions that appeal to them, our brand image may suffer.

         We may be adversely impacted at any time by a significant number of competitors.

        The women's apparel market is highly competitive, fragmented and characterized by low barriers to entry. We compete against a diverse group of retailers, including traditional department stores, national and local specialty retail stores, internet-based retailers and mail order retailers. Many of our competitors, particularly traditional department stores and national specialty retail stores, are larger and have greater resources to expend on marketing and advertising campaigns. In addition, many of these competitors are already established in markets that we have not yet penetrated and have greater name recognition in general. We cannot assure you that we will continue to be successful in competing against existing or future competitors. Our expansion into markets served by our competitors or entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition and results of operations.

        In addition, as a result of macroeconomic conditions, a substantial number of retailers have increased the frequency and duration of their discount sales and other promotions and have increased the level of merchandise discounts. This has resulted and is expected to continue to result in intense

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competition. Furthermore, in order to remain competitive, we have had to increase our use of discount sales, which has reduced our gross margins.

         Our sales fluctuate on a seasonal basis and are sensitive to economic conditions, consumer spending patterns and other events and conditions.

        Our net sales and net income are generally highest each year during our fourth fiscal quarter (October, November and December) and lowest in our third fiscal quarter (July, August and September). Sales during any period cannot be used as an accurate indicator of our annual results. Any significant decrease in sales during the fourth quarter in a given year would hurt our profitability. As a result of macroeconomic conditions, we experienced a significant decrease in sales and profitability during fiscal 2010.

        Our business is also sensitive to changes in macroeconomic conditions and consumer spending patterns, as discussed in the other Risk Factors contained herein. In addition, our business, financial condition and results of operations may be adversely affected by the timing of holidays and other local, regional, national or international events and conditions, including energy prices, climatological events such as hurricanes, strikes and other business disruptions, or the effects of war, terrorism or the threat of either of these events.

         If new legislation restricting the importation or increasing the cost of textiles and apparel produced abroad is enacted, our business could be adversely affected.

        Legislation that would restrict the importation or increase the cost of textiles and apparel produced abroad has been periodically introduced in Congress. The enactment of new legislation or international trade regulation, or executive action affecting international textile or trade agreements, could adversely affect our business. International trade agreements that can provide for tariffs and/or quotas can increase the cost and limit the amount of product that can be imported.

         Our share price has fluctuated significantly and could continue to fluctuate significantly.

        Between December 28, 2008 and January 1, 2011 (our fiscal years 2009 and 2010), the market price of our common stock has ranged from $1.43 to $7.25 per share. The stock market has, from time to time and especially since the fourth quarter of fiscal 2008, experienced extreme price and volume fluctuations. The market price for our common stock may change significantly in response to various factors, including:

•

Periodic variations in the actual or anticipated financial results of our business or other companies in the retail industry;



•

A shortfall in net sales or net income from that expected in securities analysts' estimates or from that expected by investors;



•

Changes in our liquidity and/or capital resources;



•

The timing of new store openings and net sales contributed by new stores;



•

Material announcements by or developments affecting us or our competitors;



•

Public sales or repurchases of a substantial number of common shares and



•

Adverse changes in general market conditions or economic trends.

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        In the past, companies that have experienced volatility in the market price of their shares have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of our management's attention and resources, thus harming our business.

         Provisions of our governing documents and Florida law could discourage acquisition proposals or delay a change in our control, and this may adversely affect the market price of our common stock or deny our stockholders a chance to realize a premium on their shares.

        Our articles of incorporation and by-laws contain anti-takeover provisions, including those listed below, that could make it more difficult for a third party to acquire control of us, even if that change in control would be beneficial to our stockholders:

•

our board of directors has the authority to issue common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without further stockholder approval; and



•

there are limitations on who can call special meetings of stockholders.

        In addition, provisions of Florida law and our stock option plans may also discourage, delay or prevent a change in control of our company or unsolicited acquisition proposals.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        All but a few of our 282 stores are located in shopping malls. The substantial majority of our stores contain between 1,500 and 2,500 square feet of space, with the typical store averaging 2,000 square feet. All of our stores are in leased facilities, and we typically negotiate our rental agreements based on our portfolio of store locations with a particular landlord rather than on an individual basis. Rental terms usually include a fixed minimum rent plus a percentage rent based on sales in excess of a specified amount. In addition, we generally are required to pay a charge for common area maintenance, utility consumption, promotional activities and/or advertising, insurance and real estate taxes. Many leases contain fixed escalation clauses. Most leases contain leasehold improvement reimbursements from landlords and/or rent holidays. In recognizing landlord incentives and minimum rent expenses, the Company amortizes the charges and incentives on a straight line basis over the lease term.

        Our leases expire at various dates through 2021. In most instances, we have renewal options at increased rents. The following table indicates the periods during which our leases expire.

        Our corporate office is a 20,000 square foot facility located at 1440 Broadway in New York City. We lease this space under a 10-year lease through 2014 at a rate of approximately $543,000 per year. In addition, we also lease a 14,500 square foot facility, which houses our design, production, sourcing and

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customer service departments, located at 260 West 39th Street in New York City, which runs through 2012 at a rate of approximately $345,000 per year.

ITEM 3.    LEGAL PROCEEDINGS

        On June 30, 2010, Chico's FAS, Inc. and White House--Black Market, Inc. (together referred to as "Chico's") filed a lawsuit against the Company in the Supreme Court of the State of New York, County of New York. Chico's alleged in its complaint, among other things, that two former Chico's employees who are now employed by Cache supplied the Company with confidential information and trade secrets, which Cache benefited from. The Company does not believe that this case will have a material adverse effect on its financial condition and results of operations.

ITEM 4.    RESERVED

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

a.

The principal market on which the Company's Common Stock is being traded is The NASDAQ Global Select Market. The stock symbol is CACH. The price range of the high and low sales prices for the Company's Common Stock during 2010 and 2009, by fiscal quarters, are as follows:

b.

As of February 28, 2011 there were approximately 260 registered holders of record of the Company's Common Stock.

c.

The Company has never paid cash dividends on its common stock. Payment of dividends is within the discretion of the Company's Board of Directors. On June 18, 2004, the Company paid a 3 for 2 stock dividend to holders of record.

d.

The following table summarizes our equity compensation plans as of January 1, 2011:

        The Company's two equity compensation plans have available a combined total of 398,671 shares of common stock for future issuances.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following Selected Consolidated Financial Data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto.

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

General

        We are a nationwide, mall-based specialty retailer of lifestyle sportswear and dresses targeting style-conscious women. Our merchandise offerings extend from elegant eveningwear to sophisticated casual and daytime sportswear, which encompasses a variety of tops, bottoms, dresses and accessories, all of which are sold under our Cache brand. We believe the appeal of our merchandise is enhanced through the intimate boutique-like environment we offer to our customers. This environment is achieved through a high level of customer service combined with our smaller store format, which averages approximately 2,000 square feet. As of January 1, 2011, we operated 282 stores, primarily situated in central locations in high traffic, upscale malls, in 43 states, Puerto Rico and the U.S. Virgin Islands.

        We target women between the ages of 25 and 45 through our differentiated merchandising mix. Our brand appeals to a woman who has a youthful attitude, is self-confident and fashion-conscious. Our sportswear embodies a mix of lifestyle separates for both day and evening. Our stores carry a range of diverse merchandise, which includes dresses for daytime and evening. We believe that we continue to be an important dress resource and destination for our target customers. Our accessories complement the seasonal themes and palettes of our sportswear and dresses.

        For the fiscal year ended January 1, 2011, sportswear accounted for 57.9%, dresses for 33.3% and accessories for 8.8% of Cache's net sales. Cache's price points generally range from $35 to $280 for sportswear, $75 to $420 for dresses and $5 to $100 for accessories.

Management Overview

        The Company continued to face a challenging retail environment in fiscal 2010, as the economic landscape remained unsettled and consumers remained cautious. Our business continued to be negatively affected, which resulted in decreased sales for the Company in fiscal 2010. We were disappointed in our operating results, as the macroeconomic environment impacted our results for fiscal 2010.

        We added key executives to the organization, in late 2009 and early 2010, within the design, merchandising and production areas. With these strategic changes to our organization, we intend to improve both our merchandise and overall performance, while placing Cache in a more competitive position with other specialty retailers.

        During the fourth quarter of fiscal 2010, the Company recorded a pre-tax impairment charge of approximately $9.1 million against the remaining carrying value of goodwill for its AVD reporting unit, coupled with an impairment charge of approximately $974,000 for 15 underperforming stores. See Notes 6 and 10 to the consolidated financial statements included herein for additional details.

        On April 22, 2010, the Company amended its one year credit facility with Bank of America (the "Bank"). Under this facility, the Company may direct the Bank to issue letters of credit up to a total of $2.5 million. Any outstanding letters of credit under this facility are collateralized by a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank, amounting to a total of $2.5 million. This one year credit facility will expire on May 1, 2011. The Company is currently reviewing its future requirements for a credit facility and plans to initiate discussion with its bankers to renew this credit line or negotiate a new credit facility.

        During 2010, the Company worked with its store design team to develop a new prototype store. The goal was to create a modern, feminine and inviting place for our customers to shop, while showcasing our merchandise in an appealing manner. Our new cash-wrap area combines both modern

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and traditional elements and our new fitting room design creates a more feminine and glamorous environment for our customers. The new prototype includes fixtures that allow for flexibility in displaying merchandise, as well as ease of shopping. We believe our new design creates an overall softer, warmer store environment that a woman feels comfortable in while enjoying her shopping experience. We will utilize this new prototype for future store openings, as well as for major remodeling to existing stores.

        We currently do not anticipate opening any new Cache stores in fiscal 2011 and plan to remodel approximately five stores. During fiscal 2010, we closed eight stores and, to date, during fiscal 2011, we closed two stores and expect to close another two stores, in the normal course of business.

        First Quarter Outlook.    We believe that our merchandising and design strategies, which were implemented during the past year, are beginning to positively impact our performance and will be reflected in the first quarter results. We expect our first quarter fiscal 2011 comparable store sales to increase approximately 7%, following a 6.8% decline in the first quarter of fiscal 2010. At the same time, we are expecting an increase in gross profit primarily due to higher sales and a decrease in markdowns. We expect to report a net loss in the range of $0.07 to $0.09 per diluted share compared to a net loss of $0.32 per diluted share in the first quarter of fiscal 2010.

        We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:

        Net sales.    Net sales consist of sales from comparable stores and non-comparable stores. A store is not included in comparable store sales until the first day of the fiscal month following the twelfth full month of sales. Non-comparable store sales include sales generated at new stores prior to the period when they are considered comparable stores and sales generated from stores that we have since closed. Comparable stores sales percentages shown in the chart above are calculated based upon the number of weeks in the respective fiscal year.

        The Company's co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract. During fiscal 2010, 2009 and 2008, the Company received $780,000, $1.1 million and $1.4 million, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards in fiscal 2010, 2009 and 2008 was $678,000, $456,000 and $218,000, respectively.

        The Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program the sales royalties earned in connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. The amount of sales royalty income recorded was

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$373,000 in fiscal 2010, as compared to $328,000 and $248,000 in fiscal 2009 and fiscal 2008, respectively.

        Shipping and handling.    Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred for shipping and handling are included in cost of sales.

        Cost of sales.    Cost of sales includes the cost of merchandise, costs incurred for shipping and handling, payroll for our buying, merchandising, design, production and sourcing personnel and store occupancy costs.

        Store operating expenses.    Store operating expenses include payroll, payroll taxes, health benefits, insurance, credit card processing fees, depreciation, licenses and taxes, marketing and advertising expenses, as well as other store level expenses.

        General and administrative expenses.    General and administrative expenses include district and regional manager payroll, other corporate personnel payroll and employee benefits, employment taxes, insurance, legal and other professional fees, as well as other corporate level expenses. Corporate level expenses are primarily attributable to our corporate headquarters in New York.

Critical Accounting Policies and Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

        Our accounting policies are more fully described in Note 1 to the consolidated financial statements, located elsewhere in this document. We have identified certain critical accounting policies and estimates which are described below.

        Inventories.    Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any significant change in our markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation, which results in a carrying value at the lower of cost or market. Inventories other than finished goods at retail stores, called production inventory, primarily consists of piece goods, trim and work-in-process. It is the Company's policy to value the production inventory, which makes up approximately 20% of Company's total inventory, at lower of cost or market value using first-in-first-out valuation method. The Company reviews the inventory for factors such as age, obsolescence, potential use, or other factors that may indicate a decline in its value. The Company records a reserve against the cost of the production inventory to account for any decline in its value.

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        Finite long-lived assets.    The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable and exceeds the fair market value. Factors we consider important which could trigger an impairment review include the following:

•

significant changes in the manner of our use of assets or the strategy for our overall business;



•

significant negative industry or economic trends;



•

store closings; or



•

underperforming business trends.

        The Company evaluates finite-lived assets in accordance with "Impairment or Disposal of Long-Lived Assets" under Topic 360 "Property, Plant and Equipment" of the Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC"). Finite-lived assets are evaluated for recoverability in accordance with Topic 360 of the FASB ASC whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates. The Company evaluated its finite-lived assets during fiscal 2010, 2009 and 2008 and as a result, recorded an impairment charge of $974,000 for 15 underperforming stores, $1.9 million for 23 underperforming stores and $1.1 million for 12 underperforming stores, respectively.

        Goodwill and Intangible Assets.    The Company evaluates its goodwill and intangible assets in accordance with "Intangibles—Goodwill and Other", Topic 350 of the FASB ASC. This guidance requires ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment. The Company performs impairment testing, which considers the Company's fair value to determine whether an impairment charge related to the carrying value of the Company's recorded goodwill and other intangible assets, associated with its AVD reporting unit, is necessary. This is reevaluated annually during the fourth quarter, or more frequently if necessary. The Company considers many factors in evaluating whether the carrying value of the recorded goodwill will be recoverable. Factors used to make this determination primarily include declines in stock price and the market capitalization in relation to the book value of the Company, discounted projected cash flows of the reporting unit and valuation of companies comparable to the reporting unit. As a result of this testing, an impairment charge of $9.1 million was recorded against the remaining carrying value of goodwill during fiscal 2010. Comparatively, during fiscal 2009, the Company did not incur an impairment charge against the carrying value of goodwill. An impairment charge of $891,000 was recorded against the carrying value of intangible assets associated with its wholesale division—Mary L., during the fourth quarter of fiscal 2009, related to the discontinuance of Mary L. In addition, pursuant to the employee separation agreements entered into with two of the Company's then officers, the Company recorded a pre-tax charge of $204,000 during the third fiscal quarter of 2009 for the remaining net book value of the non-compete agreements contained in their employment agreements. An impairment charge of $1.0 million was recorded against the carrying value of goodwill during the fourth quarter of fiscal 2008.

        Self Insurance.    We are self-insured for losses and liabilities related primarily to employee health and welfare claims up to certain thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance

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industry and based on Company experience. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for fiscal 2010, 2009 and 2008. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. We maintain stop loss insurance coverage which covers us for benefits paid in excess of limits as defined in the plan.

        Gift Cards, Gift Certificates and Credits.    The Company sells gift cards and gift certificates ("Gift Cards") and issues credits to its customers when merchandise is returned ("Merchandise Credit"), which do not expire. The Company recognizes sales from Gift Cards when they are redeemed by the customer and income when the likelihood of the Gift Card and Merchandise Credit being redeemed by the customer is remote ("Gift Card breakage"), since the Company has determined that it does not have a legal obligation to remit the unredeemed value to the relevant jurisdiction as abandoned property. The Company determines Gift Card breakage income based upon historical redemption patterns and the remaining unredeemed percentage at the end of our historical data of 3.5 years. Historical redemptions of Merchandise Credits ranged from 64% in the first quarter to 0.03% in the fourteenth quarter subsequent to the issue date, resulting in an average of approximately 95% redeemed or 5% unredeemed Merchandise Credits over the historical data of 3.5 years. We have determined that redemption would be remote based on the fact that, by the fourteenth quarter since issue date, the redemption rate approximated 0%, indicating that the probability of such cards being redeemed is remote. As such, we have recorded breakage income based upon this 5%, which is reviewed on a quarterly basis for propriety. Breakage income represents the balance of Gift Cards and Merchandise Credit, for which the Company believes the likelihood of redemption by the customer, is remote. At that time, the Company will recognize breakage income for those Gift Cards and Merchandise Credit.

        The Company recorded breakage income of $196,000, $229,000 and $287,000 during fiscal year ended 2010, 2009 and 2008, respectively.

        Revenue Recognition.    Sales are recognized at the "point of sale," which occurs when merchandise is sold in an "over-the-counter" transaction or upon receipt by a customer. Sales of merchandise via our web-site are recognized at the expected time of delivery to the customer. Our customers have the right to return merchandise. Sales are reported net of actual and estimated returns. We maintain a reserve for potential product returns and record, as a reduction to sales, a provision for estimated product returns, which is determined based on historical experience. Charges/(credits) to earnings resulting from revisions to estimates on our sales return provision were approximately $77,000, ($80,000) and ($202,000) for fiscal 2010, 2009 and 2008, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred at our stores for shipping and handling is included in cost of sales. The Company records revenues net of applicable sales tax.

        The Company's co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract. During fiscal 2010, 2009 and 2008, the Company received $780,000, $1.1 million and $1.4 million, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards in fiscal 2010, 2009 and 2008 was $678,000, $456,000 and $218,000, respectively.

        The Company also offers its credit card holders a program whereby points can be earned on net purchases made with the co-branded credit card. Five reward points are awarded for each dollar spent at Cache and one reward point is awarded for each dollar spent at non-Cache businesses. Cardholders whose credit card account is not delinquent, in default or closed will be automatically eligible to receive

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a $25 Cache gift card upon accrual of 2,500 reward points. The issuing bank bears the cost of the reward program and is responsible for the administration and management of the program.

        The Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program the sales royalties earned in connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. The amount of sales royalty income recorded was $373,000 in fiscal 2010, as compared to $328,000 and $248,000 in fiscal 2009 and fiscal 2008, respectively.

        Income Taxes.    The Company accounts for income taxes in accordance with "Income Taxes", Topic 740 of the FASB ASC. This statement requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using applicable tax rates for the years in which the differences are expected to reverse. When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company's best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of January 1, 2011, the Company had recorded a $271,000 reserve, net of federal benefit for potential tax contingencies. Comparatively, the Company had recorded reserves of $301,000 and $331,000, net of federal benefit for potential tax contingencies, for fiscal periods ended January 2, 2010 and December 27, 2008, respectively.

        During fiscal 2010, 2009 and 2008, the Company generated federal net operating losses of approximately $16.6 million, $9.0 million and $9.2 million, respectively. At January 1, 2011, the Company had a Federal net operating loss ("NOL") carry-forward of $16.6 million available, for carry-forward for the next 20 years, through 2030. The losses generated in both fiscal 2009 and 2008 were carried back to offset taxable income generated in fiscal 2006 and 2005.

        In assessing the realization of our deferred tax assets, we consider all available evidence to determine whether it is more likely than not that some portion or all of the net deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, during the periods in which those temporary differences become realizable. We consider the scheduled reversal of deferred tax assets (including the impact of available carry-back and carry-forward periods), and projected taxable income in assessing the realization of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. The Company's current or previous losses are given more weight than its projected future performance. Consequently, based on our evaluation of all available evidence, in particular our recent operating losses, we established a federal valuation allowance of $5.1 million at January 1, 2011. For state income tax purposes, the Company has established a valuation allowance in the amount of $68,000 in fiscal 2009, primarily to reserve for the possible non-utilization of state NOL carry-forwards, which may not be realized in future periods before the NOLs expire. The Company increased the state valuation allowance at January 1, 2011 to $650,000. The Company's state NOLs expire from 2013 through 2030.

        The Company accounts for Uncertainty in Income Taxes in accordance with Topic 740 of the FASB ASC, which prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The provision also states that a tax benefit from an uncertain tax position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has greater than

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a 50% likelihood of being realized upon the ultimate settlement with a taxing authority having full knowledge of all relevant information.

        The cumulative effect of this adoption did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

        Included in the above ending balance are tax positions of $271,000, which, if recognized, would favorably affect the effective tax rate.

        The Company's continuing practice is to include estimated interest and penalties, if any, in computing the amount that is recognized within income tax expense relating to uncertain income tax positions. As of January 1, 2011, the Company had accrued $151,000 of interest and penalties related to uncertain tax positions, which is included in the $411,000 tax contingency noted above.

        Although the Company believes that it has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company's accrued position. Accordingly, the Company's provisions on federal, state and local tax-related matters to be recorded in the future may change, as revised estimates are made or the underlying matters are settled or otherwise resolved. As of January 1, 2011, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

        The Company and certain of its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and local jurisdictions.

        The Company had previously reached agreement with the IRS and closed the audit of fiscal year 2005, with no change to the tax return. The Internal Revenue Service is currently examining the carry-back claims (Form 1139) for the losses incurred in fiscal 2009 and 2008, which were carried back against taxable income recorded in fiscal 2007 and 2006. The examination is under the auspices of the Joint Committee on Taxation due to the size of the tax refund. The Company does not expect that any adjustments shall be made to the tax refunds received.

        As for state and local income taxes, with few exceptions, the Company is subject to state and local income tax examinations by taxing authorities for years after 2005.

        Stock-based compensation.    Stock-based compensation expense for all stock-based awards program, including grants of stock options, is recorded in accordance with "Compensation—Stock Compensation", Topic 718 of the FASB ASC. The grant date fair value for stock options is calculated using the Black-Scholes option valuation model. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. All employee stock options were granted at or above the grant date market price. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. In accordance with the stated guidance, if actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted. The Company recognized $461,000, $400,000 and $299,000 in share-based compensation expense during fiscal 2010, 2009 and 2008, respectively.

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Results of Operations

        The following table sets forth our operating results, expressed as a percentage of net sales:

52 Weeks Ended January 1, 2011 (Fiscal 2010) Compared to 53 Weeks Ended January 2, 2010 (Fiscal 2009)

        Net sales.    Net sales decreased to $206.5 million from $219.8 million, a decrease of $13.3 million, or 6.0%, below the prior fiscal year. This reflected $4.6 million of decreased net sales, as a result of a 2.3% decrease in comparable store sales for the fifty-two week period. Fiscal 2009 net sales included a fifty-third week, which represented $4.7 million in net sales. Net sales for our non-comparable stores decreased $3.2 million as compared to fiscal 2009. Included in fiscal 2009 net sales were $1.1 million from our Mary L. division, which the Company discontinued during the first quarter of fiscal 2010. These are the primary factors that resulted in the decrease in net sales during fiscal 2010. The decrease in sales also reflected continuing macroeconomic uncertainty and a shift in consumer spending patterns that favored lower priced or discounted merchandise. The decrease in net sales during fiscal 2010 reflected a 2.5% decrease in average dollars per transaction offset by a small increase of 0.3% in the number of sales transactions.

        Gross profit.    Gross profit decreased to $78.9 million from $87.8 million, a decrease of $8.9 million, or 10.1%, as compared to the prior fiscal year. Fiscal 2009 gross profit for the fifty-third week was approximately $2.7 million. Therefore, excluding the fifty-third week from fiscal 2009 results, the gross profit for fiscal 2010 would have decreased approximately $6.2 million or 7.2%. The decrease in fiscal 2010 was principally due to lower net sales, as described above and to a lesser extent, an increase in markdowns as a percent of sales and an increase in operational costs related to our design, production and sourcing departments. As a percentage of net sales, gross profit decreased to 38.2% from 39.9%, as compared to the prior year period.

        Store operating expenses.    Store operating expenses decreased to $75.9 million from $79.2 million, a decrease of $3.3 million, or 4.2%, below the prior fiscal year. As a percentage of net sales, store operating expenses increased to 36.8% from 36.0%, primarily due to the decrease in net sales. Store operating expenses decreased primarily due to reductions in payroll ($2.0 million), store property and real estate taxes ($707,000) and depreciation expense ($1.9 million), which was offset by an increase in

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advertising expense ($1.3 million). Payroll expenses decreased in fiscal 2010, as a result of a reduction in store level employees and hours of store coverage. The decrease in store property and real estate taxes were primarily due to a decrease in the number of stores in operation during fiscal 2010, as compared to fiscal 2009. Depreciation expense decreased as a result of certain assets being fully depreciated prior to fiscal 2010, coupled with an impairment charge of $1.9 million for 23 underperforming stores during the fourth quarter of 2009. An increase in advertising expense was primarily due to an increase in spending for direct mail and costs associated with printed materials. Fiscal 2009 store expenses for the fifty-third week were approximately $1.1 million. Therefore, excluding the fifty-third week from fiscal 2009, store operating expenses for fiscal 2010 would have decreased approximately $2.2 million, or 2.8%.

        General and administrative expenses.    General and administrative expenses increased to $20.0 million from $18.3 million, an increase of $1.7 million or 9.3%, over the prior fiscal year. As a percentage of net sales, general and administrative expenses increased to 9.7% from 8.3%. The increase in general and administrative expense was primarily due to an increase in legal fees primarily associated with the Chico's lawsuit; see Item 3 herein for additional details. Fiscal 2009 general and administrative expenses for the fifty-third week were approximately $431,000. Therefore, excluding the fifty-third week from fiscal 2009 results, general and administrative expenses for fiscal 2010 would have increased approximately $2.1 million, or 11.6%.

        Impairment charges.    The Company recorded a pre-tax impairment charge of approximately $9.1 million ($7.5 million after tax or $0.59 per diluted share) against the remaining carrying value of the Company's goodwill associated with its AVD reporting unit and a pre-tax impairment charge of approximately $974,000 associated with 15 underperforming stores ($806,000 after tax or $0.06 per diluted share) during the fourth quarter of fiscal 2010. Comparatively, a pre-tax impairment charge of $1.9 million ($1.1 million after tax or $0.09 per diluted share) associated with 23 underperforming stores was recorded during fiscal 2009. In addition, the Company also recorded a pre-tax impairment charge of approximately $891,000 ($540,000 after tax or $0.04 per diluted share) against the carrying value of its intangible assets associated with its wholesale division—Mary L. during fiscal 2009.

        Other income/expense.    Other income decreased to $26,000 from $32,000, a decrease of $6,000, or 18.8%, as compared to last year. This decrease was due to a reduction in interest income of $75,000, primarily caused by lower average cash balances during fiscal 2010 as well as lower interest rates in fiscal 2010.

        Income taxes.    During fiscal 2010, income tax benefit decreased to $4.6 million from $5.7 million a decrease of $1.1 million or 19.3%, as compared to the same period last year. The income tax benefit was attributable to the operating loss incurred by the Company during fiscal 2010, as discussed above. During fiscal 2010, we evaluated our assumptions regarding the recoverability of our deferred tax assets. Based on all available evidence we determined that the recoverability of our deferred tax assets was limited. Accordingly, in fiscal 2010 we recognized a non-cash provision of $5.7 million to increase the valuation allowance against our deferred tax assets. As a result of recording the increase in the valuation allowance, the Company's effective income tax rate decreased to 17.2% in fiscal 2010, from 39.4% in fiscal 2009.

        Net income (loss).    As a result of the factors discussed above, net loss of $22.4 million was recorded during fiscal 2010 as compared to a net loss of $8.7 million in the same period last year, an increase of $13.7 million.

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53 Weeks Ended January 2, 2010 (Fiscal 2009) Compared to 52 Weeks Ended December 27, 2008 (Fiscal 2008)

        Net sales.    Net sales decreased to $219.8 million from $265.7 million, a decrease of $45.9 million, or 17.3%, below the prior fiscal year. This reflected $46.1 million of decreased net sales, as a result of an 18.0% decrease in comparable store sales, a decrease of $3.5 million of net sales from our wholesale division, partially offset by an increase of $3.4 million from our non-comparable store sales. The decrease in sales was primarily due to ongoing macroeconomic events, which resulted in a dramatic reduction in mall traffic where Cache stores are located, coupled with a shift in consumer spending pattern that favored lower priced or discounted merchandise. The decrease in net sales during fiscal 2009 reflected a 4.6% decrease in the number of sales transactions coupled with a 14.0% decrease in average dollars per transaction, which we believe primarily resulted from macroeconomic conditions as well.

        Gross profit.    Gross profit decreased to $87.8 million from $109.7 million, a decrease of $21.9 million, or 20.0%, below the prior fiscal year. This decrease was the combined result of lower net sales, as described above and decreased gross profit margins. As a percentage of net sales, gross profit decreased to 39.9% from 41.3%. This decrease as a percentage of net sales was primarily driven by deleveraging of store occupancy costs, resulting from lower sales; an increase in markdowns (as a percentage of net sales) and to a lesser extent, an increase in operational costs related to our design, production and sourcing departments. This decrease was partially offset by an increase in cost savings from a new shipping initiative to stores, which was implemented during the fourth quarter of fiscal 2008. The increase in markdowns was due to the significant deterioration in the United States economic environment.

        Store operating expenses.    Store operating expenses decreased to $79.2 million from $95.3 million, a decrease of $16.2 million, or 17.0%, below the prior fiscal year. As a percentage of net sales, store operating expenses increased to 36.0% from 35.9%. Store operating expenses decreased primarily due to the Company's initiatives to reduce costs. Due to these initiatives, the Company achieved reductions principally in payroll ($6.3 million) and marketing ($3.8 million) expenses. Payroll expenses decreased primarily due to lower headcount and a reduction in hours worked by store employees. The decline in advertising expense was primarily due to a reduction in spending for direct mail and production costs, related to printed materials. Group and liability insurance ($1.7 million) expense decreased due to changes in the Company's medical plan, coupled with a reduction in premiums for liability insurance resulting from renegotiated contracts. Depreciation expense ($1.6 million) decreased as a result of certain assets being fully depreciated prior to fiscal 2009, the write-off of the remaining net book value of 16 underperforming stores, as indicated below, under "Exit costs" and also due to the Company's decision to reduce capital expenditures in fiscal 2009. In addition, credit card fees ($1.2 million) were lower due to a decrease in sales coupled with renegotiated contracts. The Company also had reductions in sales supplies ($541,000) and repair and maintenance expense ($469,000), due to the Company's cost savings initiatives.

        General and administrative expenses.    General and administrative expenses decreased to $18.3 million from $21.3 million, a decrease of $3.0 million or 13.9%, below the prior fiscal year. As a percentage of net sales, general and administrative expenses increased to 8.3% from 8.0%. The reduction in general and administrative expenses was primarily due to the Company's initiatives to reduce costs. Decreases in general and administrative expenses were primarily in professional fees ($764,000) and travel expense ($679,000). Professional fees were reduced due to reduced legal activity in fiscal 2009 and travel expense reduced due to a reduction in travel by corporate and regional management. Shipping expense ($598,000) decreased due to the discontinuation of outsourced shipping services for our wholesale products, which were shipped through the Company's primary carrier, coupled with decreased volume of wholesale products. Payroll expense ($252,000) decreased principally

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due to a reduction of base salaries paid to several of the Company's officers and a reduction in average headcount during fiscal 2009.

        Exit costs.    During fiscal 2009, the Company reversed approximately $65,000 of severance and lease termination costs recorded during fiscal 2008. This reversal was primarily due to the Company's decision to keep open one of the 16 stores that the Company had planned to close. Of the remaining 15 stores, 14 were closed prior to January 2, 2010, and one subsequent to that date. This amount was net of severance and other costs for discontinuing its wholesale division—Mary L., which was determined during the fourth quarter of fiscal 2009. During fiscal 2008, the Company recorded a pre-tax charge of $2.8 million ($1.7 million after tax or $0.13 per diluted share) for 16 underperforming stores. Included in the store exit costs was a write down of equipment and leasehold improvements and furniture and fixtures in the amount of $2.3 million, severance accrual of $198,000 and lease termination costs of $990,000. These costs were offset by the reversal of $750,000 of deferred rent accruals. Of the 16 underperforming stores, the Company closed eight during fiscal 2009 and six during fiscal 2008.

        Impairment charges.    The Company recorded a pre-tax impairment charge of approximately $1.9 million associated with 23 underperforming stores ($1.1 million after tax or $0.09 per diluted share) during fiscal 2009 and a pre-tax impairment charge of $1.1 million ($715,000 after tax or $0.05 per diluted share) associated with 12 underperforming stores during fiscal 2008.

        In addition, the Company also recorded a pre-tax impairment charge of approximately $891,000 ($540,000 after tax or $0.04 per diluted share) against the carrying value of its intangible assets associated with its wholesale division—Mary L. during fiscal 2009 and a pre-tax impairment charge of approximately $1.0 million ($624,000 after tax or $0.05 per diluted share) against the carrying value of its goodwill for its AVD reporting unit during fiscal 2008.

        Employee separation charge.    During fiscal 2009, the Company recorded a pre-tax employee separation charge of approximately $2.0 million ($1.2 million after tax or $0.09 per diluted share) in connection with separation agreements entered into with two of its then executive officers. The $2.0 million charge also included a charge of $204,000 for the remaining net book value of the non-compete agreements contained in their employment agreements with the Company, which were terminated pursuant to the separation agreements. See Note 11 to the consolidated financial statements included herein for additional information.

        Other income/expense.    Other income decreased to $32,000 from $463,000, a decrease of $431,000, or 93.1%, as compared to last year. This decrease was due to a reduction in interest income of $488,000, primarily caused by lower interest rates in fiscal 2009.

        Income taxes.    During fiscal 2009, income tax benefit increased to $5.7 million from $4.3 million an increase of $1.4 million or 33.2%, as compared to the same period last year. The income tax benefit was attributable to the operating loss incurred by the Company during fiscal 2009, as discussed above. The effective rate increased to 39.4% in fiscal 2009 from 37.4% in fiscal 2008.

        Net income (loss).    As a result of the factors discussed above, net loss of $8.7 million was recorded during fiscal 2009 as compared to a net loss of $7.1 million in the same period last year, an increase of $1.6 million.

Quarterly Results and Seasonality

        We experience seasonal and quarterly fluctuations in our net sales and operating income. Our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of new store openings, fashion trends and shifts in timing of certain holidays. Our business is subject to seasonal influences, characterized in years other than fiscal 2010 by highest sales during our

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fourth fiscal quarter (October, November and December) and lowest sales during our third fiscal quarter (July, August and September).

        The following table includes our unaudited quarterly results of operations data for each of the eight quarters during the two-year period ended January 1, 2011. We derived this data from our unaudited quarterly consolidated financial statements. We believe that we have prepared this information on the same basis as our audited consolidated financial statements and that we have included all necessary adjustments, consisting only of normal recurring adjustments, to present fairly the selected quarterly information when read in conjunction with our audited annual consolidated financial statements and the notes to those statements included elsewhere in this document. The operating results for any particular quarter are not necessarily indicative of the operating results for any future period.

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Liquidity and Capital Resources

        Our cash requirements are primarily for the construction of new stores and inventory for new stores, as well as the remodeling of existing stores. We have historically satisfied our cash requirements principally through cash flow from operations.

        As of January 1, 2011, we had working capital of $28.3 million, which included cash and marketable securities of $28.0 million. The cash and marketable securities at January 1, 2011 included certificates of deposit of $2.5 million, which have been placed by the Company as collateral against a one year credit facility.

        The following table sets forth our cash flows for the period indicated:

        During fiscal 2010, $4.6 million of cash used in operating activities was primarily due to the operating loss incurred during fiscal 2010, deferred income taxes of $4.7 million and amortization of deferred rent of $2.5 million. These decreases were offset by an increase in impairment charges of $10.1 million, which consisted of $9.1 million for the remaining carrying value of goodwill and $974,000 for assets related to 15 underperforming stores, depreciation and amortization charge of $9.4 million, decrease in receivables and income tax receivables of $4.0 million, primarily due to $3.3 million collected for income tax receivable recorded in fiscal 2009 and decrease in inventories of $769,000 due to Company's efforts to better align inventory to the decreased sales volumes at stores.

        During fiscal 2009, $11.2 million in cash provided by operating activities was primarily due to depreciation and amortization of $11.9 million, an impairment charge of $2.7 million against the carrying value of the Company's intangible assets and assets related to 23 underperforming stores, write-off of the non-compete agreement in connection with employee separation charge of $204,000 for separation agreements with two of its former executive officers, decrease in income tax receivable of $3.0 million and $5.7 million due to decrease in inventories, which are offset by amortization of deferred rent of $2.1 million, deferred taxes of $2.6 million and net loss of $8.7 million. Inventories decreased due to Company's efforts to better align inventory to the decreased sales volumes at stores. Income tax receivable decreased due to receipt of $3.0 million from federal and state governments. These decreases were offset by an increase in prepaid expenses and other current assets of $3.3 million, principally due to prepayment of January 2010 rent for the Company's stores.

        During fiscal 2008, $6.4 million in cash provided by operating activities was primarily due to depreciation and amortization of $12.8 million, a write-down of equipment and leasehold improvements, net of deferred rent of $1.6 million for 16 underperforming stores, impairment charge of $2.1 million for goodwill and assets related to 12 stores and amortization of deferred rent for $2.0 million. The following also contributed to the $6.4 million generated in cash from operating activities; a decrease in inventories of $8.2 million, due to the Company's conscious efforts to not maintain excess inventory due to the current economic crisis, offset by increases in receivables of $4.0 million and decreases in accounts payable of $4.1 million. The increase in receivables was primarily due to an income tax receivable of $5.9 million, due to the Company's fiscal 2008 net loss, coupled with estimated tax payments made during fiscal 2008 and 2007.

        Investing activities generated $4.7 million during fiscal 2010, used $8.3 million during fiscal 2009 and generated $7.1 million during fiscal 2008. Cash provided by investing activities during fiscal 2010

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was due to the net maturities of marketable securities, which generated approximately $9.1 million of cash flows as a result of the Company's investments. The purchase of equipment and leasehold improvements of approximately $3.4 million for new and remodeled stores, coupled with an increase in restricted certificates of deposit of $1.0 million offset the cash generated from the Company's investments. Our capital requirements depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. Projected capital expenditures for fiscal 2011 to fund remodelings are approximately $1 to $2 million.

        Based on our experience with new store openings, we estimate that the average net investment to open new stores is approximately $225,000 to $375,000, which includes new store opening expenses and initial inventory, net of landlord contributions. We estimate that the average net investment to remodel an existing store is approximately $200,000 to $300,000, net of landlord contributions.

        Cash used by financing activities during fiscal 2010, 2009 and 2008 was $1.0 million, $2.2 million and $15.9 million, respectively. The usage of cash by financing activities during fiscal 2010 and 2009 was primarily for the repayment of the Company's note payable of $1.0 million and $1.6 million, respectively. Cash usage during fiscal 2008 was principally for the repurchase of our common stock in the amount of $15.0 million.

        On April 22, 2010, the Company amended its one year credit facility with Bank of America (the "Bank"). Under this facility, the Company may direct the Bank to issue letters of credit up to a total of $2.5 million. Any outstanding letters of credit under this facility are collateralized by a security interest in various certificates of deposit held by the Company and its subsidiaries with the Bank amounting to a total of $2.5 million. This one year credit facility will expire on May 1, 2011. The Company is currently reviewing its future requirements for a credit facility and plans to initiate discussion with its bankers to renew this credit line or negotiate a new credit facility.

        The Company had outstanding letters of credit of approximately $1.5 million and $660,000 at January 1, 2011 and January 2, 2010, respectively.

        We believe that cash flow from operations and our current available cash will be sufficient to meet our working capital needs for at least the next 12 months. If our cash flow from operations should decline significantly or if we should accelerate our store expansion or remodeling program, it may be necessary for us to seek additional sources of capital in the future.

Contractual Obligations and Commercial Commitments

        The following tables summarize our minimum contractual obligations and commercial commitments as of January 1, 2011:

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