UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-10345

CACHE, INC.
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:   (212) 575-3200

Securities registered pursuant to Section 12(b) of the Act: none

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

Common Stock $.01 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.   Yes o   No x

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 o   No x

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 filing requirements for the past 90 days. Yes x     No o

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 the 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o   No x

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $218 million as of July 1, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of $17.02 of the registrant’s Common Stock as reported on the Nasdaq National Market on such date. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.

As of February 28, 2006, 15,770,553 common shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information included in the Registrant’s Proxy Statement to be filed in connection with its 2006 Annual Meeting of Stockholders has been incorporated by reference into Part III (Items 10, 11, 12, 13, 14 and 15) of this report on Form 10-K.

CACHE, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED
DECEMBER 31, 2005

TABLE OF CONTENTS

STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Except for the historical information and current statements contained in this Annual Report, certain matters discussed herein, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Actual results and timing of certain events could differ materially from those projected in or contemplated by forward-looking statements due to a number of factors including, without limitation, industry trends, merchandise and fashion trends, competition, changes in general economic conditions and consumer spending patterns, vendor procurement issues and the ability to obtain financing, any of which could cause actual results to differ materially.

PART I

ITEM 1.                BUSINESS

GENERAL

We are a specialty retailer of social occasion sportswear and dresses targeting style-conscious women. We own and operate two separate store concepts, Cache and Lillie Rubin, each of which carries its own distinctive branded merchandise. Cache targets women between the ages of 25 and 45 while Lillie Rubin stores offer a more sophisticated line of social occasion apparel targeting women between the ages of 35 and 55.

Both store concepts focus on social occasion dressing designed for contemporary women. Our Cache and Lillie Rubin lines extend from elegant eveningwear to our distinctive day-into-evening sportswear, which encompasses a variety of tops, bottoms and dresses versatile enough to be worn during the day or evening. We operate 267 Cache and 39 Lillie Rubin stores (as of December 31, 2005) primarily situated in central locations in high traffic, upscale malls throughout the United States.

Merchandising

Our merchandising focuses on providing a selection of sportswear and dresses extending from elegant eveningwear to day-into-evening sportswear. As a result of our short lead time of four weeks to 12 weeks, we are able to employ a constant process of test-and-ordering that allows us to restock popular items during the same season. We also maintain a key item strategy, providing some popular and core items for longer periods to meet ongoing customer demand. New merchandise typically arrives on a weekly basis at each of our stores, giving our customers a reason to visit our stores frequently. We introduce new floor sets into each of our stores approximately every six weeks. These new floor sets allow exciting changes in visual merchandising within both our stores and our window presentations.

Merchandise

We design and market three general categories of merchandise:

Sportswear.   Sportswear consists of related tops and bottoms, versatile enough to be worn during the day or out for evening affairs.

Dresses.   Dresses range from special occasion long dresses to shorter lengths for cocktail and day-into-evening wear.

Accessories.   Accessories consist primarily of jewelry, belts and handbags intended to complement our sportswear and dress selections.

These categories of merchandise differ in style depending on whether they are offered in our Cache or Lillie Rubin stores.

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Cache.   Cache’s average price points for sportswear range from $60 to $300, dresses range from $125 to $450 and accessories range from $30 to $150. The following table indicates the percentage of Cache’s net sales by merchandise category for each of the last three fiscal years:

Lillie Rubin.   Price points at Lillie Rubin are approximately 25% to 30% higher than at Cache. The following table indicates the percentage of Lillie Rubin’s net sales by merchandise category for each of the last three fiscal years:

The percentage of sales represented by dresses is typically higher in the first half of the year for both Cache and Lillie Rubin due to buying for the Easter, wedding and prom seasons. The percentage of Lillie Rubin sales represented by sportswear is expected to increase again in fiscal 2006, as a result of the increased presentation of our day-into-evening sportswear collection in all of our Lillie Rubin stores.

Design

Our apparel design and merchandising are organized around the spring and fall seasons. Our internal design and merchandising team is comprised of a designer, buyers who specialize in particular fashion classifications and executive management personnel. Following the end of a season, our design team reviews data from that season’s results as well as market research, retail trends, trade shows and other resources. Based on this information, our team develops seasonal themes, which will influence our exclusive designs for the following year.

Approximately nine to twelve weeks prior to a season, we begin to coordinate with external designers at our vendors to select specific styles that reflect seasonal themes. In collaboration with our vendors, Cache’s merchants adjust test garments for color and style to ensure offerings reflect the appropriate balance between fashion content and marketability. The team then works with its technical department, in-house fit model and manufacturers to guarantee its missy fit and high-comfort standards are met. The Company’s strong relationship with its vendor facilitates a seamless design cycle that enables us to create innovative, exclusive styles and test merchandise in select stores before full-store roll-outs.

Accessories are designed and manufactured for Cache, by third party vendors, a process which allows our design and merchandising team to focus on its core apparel offerings. The Company maintains close relationships with these vendors, and accessories offerings are designed to complement seasonal themes and palettes.

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Planning

We conduct our planning process based on our historical point-of-sale data, economic trends, seasonality and anticipated demand based on market tests. We determine at a corporate level the total number of stock keeping units and the composition by product, print, color, style and size. Our vendors are then able to negotiate bulk material purchase with their suppliers, which we believe enables us to obtain better pricing.

Our merchandising and planning teams determine the appropriate level and type of merchandise per store and communicate that information to our vendors who drop ship the merchandise to each store. Following receipt at our stores the merchandising staff obtains daily sales information and store-level inventory generated by our point-of-sale computer system. Based upon this data management teams make decisions with respect to re-orders, store transfers and markdowns.

In addition to introducing new merchandise, we employ a key item strategy whereby we maintain an inventory of core items in every store. This provides customers with a level of certainty that these items will be in stock when they visit, rather than rotating out of the store with merchandise changes. In certain situations, a store that is experiencing particularly strong sell-throughs relays the information to our management team and buyers, who in turn may add or adjust new merchandise in response to this feedback.

Sourcing and Distribution

We employ a sourcing and distribution strategy that enhances our speed to market, allows us to respond quickly to fashion preferences and demand, and reduces inventory risk. We purchase the vast majority of our merchandise from domestic vendors. Sourcing from domestic vendors provides us with short lead times ranging from 4 to 12 weeks from order to shipment, compared with typically much longer periods for sourcing from foreign vendors. Our five largest vendors accounted for approximately 37% of our purchases in fiscal 2005, and our largest vendor accounted for 21% of our purchases during this period.

Nearly all of our merchandise is drop shipped directly by our vendors to our individual stores rather than sent to a warehouse or distribution center. Drop shipping significantly decreases our distribution expenses and reduces the time required to deliver merchandise to our stores. If a customer requests an item out of stock at a specific store, we can ship the merchandise from another store to the customer by overnight or common carrier, the cost of which typically is borne by the customer.

Store Operations

Store Design and Environment

Most of our stores range in size from approximately 1,500 to 2,500 square feet, with our typical store averaging approximately 2,000 square feet. We believe that our relatively smaller store size enables us to create a boutique-like atmosphere by providing a more intimate shopping environment and a higher level of customer service than department stores. Most of our stores are open during the same hours as the malls in which they are located, typically seven days and six nights a week.

We continue to implement our new store designs and layouts for both our Cache and Lillie Rubin stores to enhance their appeal to the customer, increase access to merchandise, facilitate movement throughout the store and improve our displays. Our new store design emphasizes a modern, sophisticated and well-lit atmosphere with streamlined exteriors and sleek interiors. In addition, at Cache we have moved the dressing rooms from the middle of the store to the rear, and check-out locations from the front of the store to the side. This eliminates barriers to movement throughout the store and permits greater flexibility in merchandise displays, allowing us to more effectively market our clothing.

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We began to remodel existing stores using this new design during late fiscal 2001. We remodeled 20 Cache and two Lillie Rubin stores in fiscal 2005 and expect to remodel approximately 25 stores in fiscal 2006 and 30 stores in fiscal 2007, as leases come up for renewal. Most store remodels take from four to six weeks. During this period, we typically utilize temporary locations in the mall near the existing location so that customers can continue to shop for our merchandise.

Store Management and Training

We organize our stores into regions and districts, which are overseen by four regional vice presidents and 34 district managers, with each of our district managers typically responsible for eight to 12 stores. We typically staff our stores with two opening employees, three mid-day employees and two closing employees.

We seek to provide our customers with superior customer service. To promote this part of our strategy, store managers and co-managers receive both salaries and performance-based bonuses. We pay sales associates and assistant managers on an hourly basis as well as performance incentives. From time to time, we offer additional incentives, such as sales contests, to both management and sales associates. Additionally, we place special emphasis on the recruitment of fashion-conscious and career-oriented sales personnel. We train most new store managers in designated training stores and train most other new store sales personnel on the job.

Existing Store Locations

As of December 31, 2005 we operated 306 stores located in 43 states, as well as in Puerto Rico and the U.S. Virgin Islands. Of these 267 were Cache stores and 39 were Lillie Rubin stores. The following tables indicate our stores by location:

Cache stores:

Lillie Rubin stores:

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The following table indicates the number of stores opened and closed over the past five fiscal years:

New Store Development

We continually review potential new locations for Cache and Lillie Rubin stores. We locate our new stores primarily in upscale shopping malls. When selecting a new site, we target high traffic locations with suitable demographics and favorable lease economics. When evaluating a new site, 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 recently expanded to a number of street and lifestyle locations. We believe these stores can enhance our potential store base. These stores have generated faster sales growth and higher profitability. We plan to expand this program in fiscal 2006.

During fiscal 2005, we opened 17 Cache stores and 2 Lillie Rubin stores and closed 4 Cache stores. In fiscal 2006, we intend to open approximately 25 stores consisting of 20 Cache and 5 Lillie Rubin stores. In January 2006, we closed 5 Cache stores and 1 Lillie Rubin store, as part of our ongoing efforts to enhance store productivity. In fiscal 2007, we intend to open approximately 30 stores, consisting of 20 Cache and 10 Lillie Rubin stores. Currently 36 of our Lillie Rubin stores are located in malls that also contain Cache stores, and we intend to locate the substantial majority of our new Lillie Rubin stores in malls containing Cache stores.

Marketing and Promotion

Historically, we conducted limited marketing and advertising, relying on our individual store displays, mall locations and word-of-mouth to attract customers. During fiscal 2004 and 2005, we used a variety of media to promote our Cache brand and increase sales, consisting primarily of advertisements in magazines such as Harper’s Bazaar, Latina, Lucky, People and Vogue. We also selectively advertise in targeted markets, employing various media, such as outdoor billboards and buses, including a large campaign in Grand Central Station in New York. We expect to continue to increase our Cache advertising and marketing expenditures. In fiscal 2003, we launched a first-time advertising and marketing campaign for the Lillie Rubin brand. These increased marketing efforts for both Cache and Lillie Rubin continued in fiscal 2005 and are intended to attract new customers and increase sales to existing customers.

We use direct mail campaigns to both potential and existing Cache customers. Over the past several years, we have built a database of over 3.1 million preferred Cache customers from our point-of-sale information system and mail 10 to 12 promotions per year to our targeted customers. We have continued to rapidly expand the Lillie Rubin Preferred Customer database over the past year. Our preferred customer tracking system enables us to identify and target specific merchandise promotions targeted at individual customers. We also send e-mail notices to customers and intend to increase our use of e-mail promotions in the future.

Our Cache and Lillie Rubin brands are supported by visual merchandising, which consists of window displays, front table layouts and various promotions. This type of marketing is an important component of

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our marketing and promotion strategies since our mall locations provide significant foot traffic. We make decisions regarding store displays and advertising at the corporate level, ensuring a consistent appearance and message 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 enhance brand recognition and meet potential customers.

We expect to launch our enhanced customer loyalty program during the second half of fiscal 2006, with the assistance of our new marketing agency and will gradually roll out the program to all our locations. The completion of our store POS system upgrade will allow us the ability to introduce this program to all our stores. The program will be marketed in-store, as well as online and in targeted advertising media.

We have operated a Cache website, www.cache.com, since August 1999. We continue to enhance features on this website, which allows customers to purchase merchandise online, view currently available styles and schedule private fittings of merchandise at any Cache store. We have seen an increase in sales at the website over the past three years, as website sales have increased from $1.3 million in fiscal 2003 to $1.9 million in fiscal 2004 and $2.4 million in fiscal 2005.

Competition

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

·       Style and fashion,

·       Fit and comfort,

·       Customer service,

·       Shopping convenience and environment and

·       Value.

We believe that our Cache and Lillie Rubin stores and merchandise have advantages over our competitors in meeting these needs.

Information Systems

Cache has made an investment in technology to improve sales, gain efficiencies and reduce operating costs. Our information systems integrate all major aspects of our business, including sales, finance, distribution, purchasing, inventory control and merchandise planning. Our stores utilize a point-of-sale (“POS”) system with price look-up capabilities for both inventory and sales transactions. In addition, the rollout of a new POS system to all of our stores, with many enhanced features, was begun in the first quarter of fiscal 2006. We are also installing a wide area network as part of this upgrade. This new system will allow us to add functionality to our POS system with the ability to capture debit card transactions, centralize credit authorizations, centralize our customer database, improve promotion transactions handling, and speed up customer transaction time. In addition, we will begin to sell gift cards and use merchandise credit cards in early fiscal 2006.

Trademarks and Service Marks

We are the owner in the United States of the Cache and Lillie Rubin trademarks and service marks. These 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 “Cache” mark and “Lillie Rubin” mark are a significant part of our business. Accordingly, we intend to maintain these marks and the related registrations. We are unaware of any material claims of infringement or other

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challenges to our right to use our marks in the United States, although we have successfully brought infringement claims against third parties in the past.

Employees

As of December 31, 2005, we had approximately 2,700 employees, of whom approximately 1,225 were full-time employees and 1,475 were part time employees. None of these employees is represented by a labor union. We consider our employee relations to be satisfactory.

Available Information

We make available on our website, www.cache.com, under “Investor Relations,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, currents 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 website, under “Corporate Governance”.

ITEM 1A.   RISK FACTORS

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 miscalculate 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.

Our growth will depend on our ability to successfully open and operate new stores. This may strain our ability to manage our business.

Our growth strategy depends on our ability to open and operate new stores on a profitable basis. Opening new stores is dependant 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,

·       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 in a timely basis and

·       Expand our infrastructure to accommodate growth.

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We opened 24 new stores in fiscal 2003, 40 new stores in fiscal 2004 and 19 new stores during fiscal 2005. Additionally, we plan to open approximately 25 new stores during fiscal 2006 and approximately 30 new stores in fiscal 2007. We intend to continue to open a significant number of new stores in future years and to remodel many of our existing stores as their leases come up for renewal. Our proposed expansion will place demands on our operational, managerial and administrative resources. These increased demands 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. In addition, even if we are able to open new stores as planned, 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.

In addition, some of our new stores will be opened 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 in 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.

We recently made changes to our business strategy that, if not successful, could hurt our profitability.

We have embarked on a number of strategic initiatives intended to improve our business and profitability. These initiatives include hiring new members of senior management, significantly increasing our advertising and promotional activities, transitioning to exclusively Cache and Lillie Rubin branded lines of apparel, increasing the number of store openings, remodeling existing stores and reducing the number of items carried in our stores and vendors from which we source. These initiatives have costs associated with them, and we cannot assure you that they ultimately will prove successful or result in an increase to our sales or profitability.

Fluctuations in comparable store sales and quarterly results of operations could cause the price of our common stock to decline substantially.

Our quarterly results of operations for our individual stores have fluctuated in the past and will continue to fluctuate in the future. Since the beginning of fiscal 2000, our quarterly comparable store sales have ranged from an increase of 13% to a decrease of 5%. We cannot assure you that we will be able to increase comparable store sales in the future over any given period. Our comparable store sales and quarterly results of operations are affected by a variety of factors, including:

·       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,

·       Changes in general economic conditions and consumer spending patterns and

·       Actions of competitors or mall anchor tenants.

If our future comparable store sales fail to meet the expectations of research analysts, then the market price of our common stock could decline substantially.

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Our success depends in part on the efforts of our management team, several of whom are relatively new to our company.

Our success in 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 Brian Woolf, our Chief Executive Officer, we may be unable to find a suitable replacement on a timely basis. This in turn could adversely affect our business, financial condition and results of operations.

Additionally, some members of our management team recently joined us and have been working together for a relatively short amount of time. It is possible that we will be unable to integrate the new members of our management to effectively and efficiently run our business. If we are unable to do so, it could frustrate the execution of our business strategy and hurt our profitability.

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, may 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 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.

Our sales fluctuate on a seasonal basis and are sensitive to economic conditions and consumer spending patterns, leaving our operating results particularly susceptible to changes in shopping patterns.

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.

Our business is also sensitive to changes in overall economic conditions and consumer spending patterns. Our growth, sales and profitability may be adversely affected by unfavorable local, regional, national or international economic conditions, including the effects of war, terrorism or the threat of these events.

We rely on a relatively small number of vendors, and our success depends on maintaining good relationships with these vendors to source our products.

For fiscal 2005, we purchased approximately 37% of our merchandise from our top five vendors, with approximately 21% being purchased from one vendor. 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 altered 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 need. This could hurt our sales and our ability to respond to changing fashion trends. In addition, we have been reducing the number of vendors with which we do business and anticipate continuing this process. As we continue to do so, the risks associated with a vendor ceasing to sell to us may increase.

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Some of our merchandise purchased from domestic vendors is produced in foreign facilities. This subjects us to the risks of international trade.

Many of our domestic vendors utilize overseas production facilities. To the extent that our domestic vendors rely on overseas sources for a significant portion of their materials or products, any event causing a disruption of imports, including financial or political instability or trade restrictions in the form of tariffs or quotas or both, could negatively affect our business. 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 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 our 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 the ability of our vendors to ship our merchandise or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations.

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. We cannot control the development of new shopping malls, the availability or cost of appropriate locations within existing or new shopping malls, or the success of individual shopping malls. A significant decrease in shopping mall traffic would have a material adverse effect on our 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.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None.

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Executive Officers, Directors and Key Employees

The following table sets forth information concerning our executive officers, directors and key employees:

Executive Officers and Directors

Brian Woolf has served as Chief Executive Officer and Chairman of the Board since October 2000. From March 1999 to October 2000, Mr. Woolf served as Vice President and General Merchandise Manager for The Limited. From 1995 to March 1999, Mr. Woolf served as Senior Vice President and General Merchandise Manager for Caldor. Mr. Woolf has held various management positions within the retail industry over the last 30 years.

Thomas E. Reinckens has served as President and Chief Operating Officer since October 2000. Mr. Reinckens joined our company in February 1987 and has held various positions throughout his tenure, most recently serving as Chief Financial Officer from November 1989 to October 2000 and Executive Vice President from September 1995 to October 2000. Mr. Reinckens has over 20 years of retail experience.

Margaret Feeney has served as Executive Vice President of Finance and Chief Financial Officer since May 2005. Ms. Feeney was promoted to Vice President of Finance in July 2001. Ms. Feeney has served in a variety of financial and operational capacities with us since 1992. Prior to joining us, Ms. Feeney served as Manager of Financial Analysis and Budgeting for Toys “R” Us and in various financial positions at Brooks Fashion Stores, a junior specialty chain. Ms. Feeney has 20 years of retail experience.

Arthur S. Mintz has served as one of our directors since September 2002. Mr. Mintz has served as the President of Bees & Jam, Inc., an apparel manufacturer, since 1971.

Andrew M. Saul has served as one of our directors since 1986. Mr. Saul also served as our Chairman of the Board from February 1993 to October 2000. Mr. Saul is a partner in Saul Partners, an investment partnership, a position he has held since 1986.

Morton J. Schrader has served as one of our directors since 1989. Mr. Schrader was the President of Abe Schrader Corp., a manufacturer of women’s apparel, from 1968 through March 1989. Since 1989, he has been active as a real estate broker and is a principal of PBS Realty Advisors.

Gene G. Gage has served as one of our directors since September 2004. Mr. Gage is currently the President and Chief Executive Officer of Gage Associates, a firm which provides financial planning and

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services to individuals and businesses. He is a certified public accountant, as well as a certified financial planner. He has over 30 years of financial experience.

Other Key Employees

Victor Coster has served as Secretary since July 1991 and as our Treasurer since July 2001. Mr. Coster is responsible for all treasury and tax matters. Mr. Coster joined us in February 1991, and has held various positions, most recently as Controller from February 1997 to July 2001. Mr. Coster has over 25 years of experience in finance and accounting and has been a Certified Public Accountant since 1981.

Lisa Decker has served as Vice President of Marketing and Advertising since 1998 and was our Director of Marketing from 1991 until 1998. She has over 20 years of experience in marketing, advertising, sales promotion and visual merchandising within the retail industry.

Clifford Gray has served as Vice President of Construction since 1999 and was our Operations Manager from 1991 to 1999. Prior to joining us, Mr. Gray served as Operations Manager with Kids “R” Us.

Joanne Marselle has served as Vice President of Planning and Distribution since 2000 and was our Director of Planning from 1990 to 2000. Prior to joining us, Ms. Marselle served at various times as a Planning and Distribution Analyst and a Merchandise Coordinator for both Country Road Australia and Ann Taylor. Ms. Marselle has over 20 years experience in the areas of planning and distribution.

Caryl Paez has served as Director of Information Technologies since he rejoined our company in 1999. From 1996 to 1999, he was Director of Information Technologies for Louis Vuitton Americas. From 1992 to 1996, he served as our Director of Management Systems and from 1989 to 1992, as our Manager of Point of Sales Systems.

ITEM 2.                PROPERTIES

All but a few of our 306 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 on a straight line basis over the lease term.

Our leases expire at various dates through 2019. The following table indicates the periods during which our leases expire.

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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 2013 at a rate of approximately $543,000 per year.

We contract for space in a warehouse in New York on an as-needed basis to serve as a staging area for new store inventories and fixtures.

ITEM 3.                LEGAL PROCEEDINGS

We are party to various lawsuits arising in the ordinary course of our business. Management does not believe it is reasonably possible that resolution of these matters will result in a material loss.

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

Cache, Inc. held its annual meeting of shareholders at its headquarters in New York, New York on November 10, 2005. Of the 15,752,553 shares outstanding as of the record date, 15,250,454 shares were represented by proxy at the meeting. Proxies were solicited by Cache pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. At the meeting, Cache’s shareholders voted on the following matters:

(1)         Proposal to elect five directors to hold office for a one-year term and until their successors are elected and qualified.

(2)         Proposal to ratify the appointment of Deloitte and Touche LLP as the Company’s independent auditors for the fiscal year ended December 31, 2005.

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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 traded is the NASDAQ National Market System. The stock symbol is “CACH”. The price range of the high and low bid information for the Company’s Common Stock during 2004 and 2005, by fiscal quarters, are as follows:

Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

b.                 As of February 28, 2006, there were approximately 315 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.

d.                 The following table summarizes our equity compensation plans as of December 31, 2005:

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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.

(1)     Other income in fiscal 2001 included $1,518,000 from the settlement of a trademark litigation claim undertaken against a third party, net of professional fees related to the lawsuit. Other income generally consists of interest income.

(2)     Diluted weighted average shares for the fiscal years ended December 29, 2001, December 28, 2002, December 27, 2003, January 1, 2005 and December 31, 2005 include 207,000, 798,000, 465,000, 415,000 and 424,000, shares respectively, due to the potential exercise of stock options that were outstanding and exercisable during those years.

(3)     Average sales per square foot are calculated by dividing net sales by the weighted average store square footage available.

(4)     Comparable store sales data is calculated based on the net sales of stores open at least 12 full months at the beginning of the period for which the data are presented.

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

General

We are a specialty retailer of social occasion sportswear and dresses targeting style-conscious women. We own and operate two separate store concepts, Cache and Lillie Rubin, each of which carries its own distinctive branded merchandise. Cache targets women between the ages of 25 and 45 while Lillie Rubin stores offer a more sophisticated line of social occasion apparel targeting women between the ages of 35 and 55.

Both store concepts focus on social occasion dressing designed for contemporary women. Our Cache and Lillie Rubin lines extend from elegant eveningwear to our distinctive day-into-evening sportswear, which encompasses a variety of tops, bottoms and dresses versatile enough to be worn during the day or evening. We operate 267 Cache and 39 Lillie Rubin stores (as of December 31, 2005), primarily situated in central locations in high traffic, upscale malls throughout the United States.

Management Overview

Fiscal 2005 represents the company’s fifteenth consecutive profitable year.

The overall success of fiscal 2005 was not without challenges. The first half of fiscal 2005 was a pivotal period for the Company. We expanded our casual fashion assortments, while reducing our key item and dress business. These repositioning efforts created lower gross margins for the first half, gross profits as a percentage of net sales in the first half decreased to 44.3% from 46.0% in fiscal 2004. During the second half of fiscal 2005, our consumer responded well to the increased penetration of casual fashions versus basics. Also, we reduced the quantity per style being offered, which we believe created a greater sense of urgency for the customer. The second half gross profit margin increased to 46.8% in fiscal 2005 from 44.3% in fiscal 2004.

In fiscal 2006, the Company will focus on its sourcing strategy and has already hired an Executive Vice President of Production and Sourcing to lead this initiative. The merchandising team had in the past also been responsible for sourcing. We believe that having a separate area responsible for this integral process will enhance consistent flow and quality of product.

The company opened 19 stores in fiscal 2005, 17 Cache and 2 Lillie Rubin stores and closed 4 Cache stores. Operating cash flow funded all store openings. In fiscal 2006, we intend to open approximately 25 stores consisting of 20 Cache and 5 Lillie Rubin stores, also intended to be funded by operating cash flow. In fiscal 2005, the company remodeled 18 Cache stores and 2 Lillie Rubin, approximately 60% of the chain is now in the new format.

In Spring 2006, the Company intends to roll-out a new POS system to all locations. The new systems will allow the Company to then go forward with a customer loyalty program in late 2006, which will link to the Company’s direct marketing.

The Company is optimistic about its opportunity for success in fiscal 2006. Management will continue to offer the consumer the most current fashion trends in a boutique setting with high levels of customer service.

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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.

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, cost of freight from vendors, costs incurred for shipping and handling, payroll for our design, buying and merchandising personnel and store occupancy costs. Store occupancy costs include rent, contingent rents, common area maintenance and real estate taxes.

Store operating expenses.   Store operating expenses include payroll, payroll taxes, health benefits, insurance, credit card processing fees, depreciation, licenses and taxes as well as marketing and advertising 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 and 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 requires 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 financial statements, located elsewhere in this document. We have identified certain critical accounting policies which are described below.

Inventories.   Our inventories are valued at lower of cost or market using the retail inventory method. Under the retail 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 had been 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

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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.

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. 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.

In the evaluation of the fair value and future benefits of finite long-lived assets, we perform an analysis by store of the anticipated undiscounted future net cash flows of the related finite long-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value. 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. No impairment charges were incurred in fiscal 2003, 2004 and 2005, respectively.

Self Insurance.   We are self-insured for losses and liabilities related primarily to employee health and welfare claims. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for fiscal 2003, 2004 and 2005. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings.

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 website 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 or credits to earnings resulting from revisions to estimates on our sales return provision were approximately $66,000, $20,000 and $(29,000) for fiscal 2003, 2004 and 2005, respectively. 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.

Income Taxes.   The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.”  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. The Company reserves for tax contingencies when it is probable that a liability has been incurred and the

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contingent amount is reasonably estimable. These reserves are 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. Due to the complexity of these examination issues, $325,000 has been accrued to date.

Seasonality.   We experience seasonal and quarterly fluctuations in net sales and operating income. 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 by highest sales during the fourth quarter (October, November and December) and lowest sales during the third quarter (July, August and September).

Results of Operations

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

52 Weeks Ended December 31, 2005 (Fiscal 2005) Compared to 53 Weeks Ended January 1, 2005 (Fiscal 2004)

Net sales.   Net sales increased to $266.3 million from $247.3 million, an increase of $19.0 million, or 7.7%, over the prior fiscal year. Fiscal 2004 net sales included a fifty-third week; on a comparable basis, assuming a fifty-two week year in both periods, total sales would have risen by approximately 10.0% in fiscal 2005. The actual increase in fiscal 2005 net sales as compared to fiscal 2004 reflects $10.1 million of additional net sales primarily due to a 4% increase in comparable store sales. Comparable store sales were higher in the second half of fiscal 2005, rising 5.4%, as compared to a 3.1% increase during the first half of fiscal 2005. This improvement resulted from a change in the merchandise assortment in the second half of fiscal 2005, to reflect a greater proportion of fashion-forward merchandise. The increase in full year fiscal 2005 sales was also partially attributable to the increase in accessory sales, which increased to 9.6% of total sales for Cache stores in fiscal 2005, from 8.6% of sales in fiscal 2004. The remainder of the increase in sales was the result of additional net sales from non-comparable stores and new stores. We believe our new store expansion, planned at approximately 25 new stores in fiscal 2006, will help to increase sales during the next fiscal year.

Gross profit.   Gross profit increased to $121.4 million from $111.6 million, an increase of $9.8 million, or 8.8%, over the prior fiscal year. As a percentage of net sales, gross profit increased to 45.6% from 45.1%. This increase in gross profit was the combined result of higher net sales and an increase in gross profit margins, due to improved inventory management, which led to an increase in initial markup as compared to fiscal 2004. Partially offsetting the increase in gross margins was an increase in occupancy costs, which rose an additional 0.6% of sales in fiscal 2005 as compared to fiscal 2004, primarily due to the

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increase in new stores opened in late 2004 and during 2005. We believe it generally takes three years for new stores to reach maturity levels, which provide positive leverage for occupancy costs. We estimate that excluding the fifty-third week from fiscal 2004 results, gross profit would have risen by an additional approximately 0.8% in fiscal 2005.

We will seek to increase gross margin rates in fiscal 2006 and beyond by establishing our own in-house production department. To that end, in March 2006 we hired a Vice President of Production and Sourcing, to assist in this effort.

Store operating expenses.   Store operating expenses increased to $85.5 million from $76.5 million, an increase of $9.0 million, or 11.8%, over the prior fiscal year. This was due primarily to an increase in the total number of new stores open. As a percentage of net sales, store operating expenses increased to 32.1% from 30.9%, primarily due to an increase in payroll expense of $3.3 million, an increase in licenses and taxes of $1.0 million (rising to 1.7% of net sales in fiscal 2005, as compared to 1.4% in fiscal 2004)  and an increase in depreciation expense of $2.8 million (rising to 3.5% of net sales in fiscal 2005, as compared to 2.6% in fiscal 2004). The increases in depreciation and taxes were partially attributable to the increase in new stores, as well as an increase in store remodels. Excluding the fifty-third week from fiscal 2004 results, we estimate that store operating expenses would have risen by approximately 1.5% in fiscal 2005. We anticipate that store operating expenses will decrease, as a percent of net sales in future years, as comparable store sales rise in our newer locations.

General and administrative expenses.   General and administrative expenses increased to $15.8 million from $14.2 million, an increase of $1.6 million or 11.3% from the prior fiscal year. As a percentage of net sales, general and administrative expenses increased to 5.9% from 5.8%. This increase was primarily attributable to increase in corporate level payroll of $520,000, as well as an increase in incentive compensation expense of $680,000 (rising to 0.5% of net sales in fiscal 2005 as compared to 0.2% in fiscal 2004) and was partially offset by a reduction in travel expense of $297,000 (decreasing to 0.7% of net sales in fiscal 2005 as compared to 0.8% in fiscal 2004). Excluding the fifty-third week from fiscal 2004 results, we estimate that general and administrative expenses would have been 5.7% of net sales.

Other income.   Other income increased to $1.1 million from $459,000, primarily attributable to higher average cash balances and higher interest rates in fiscal 2005, as compared to fiscal 2004. Other income generally consists of interest income. We expect interest income to grow in the future due to stronger cash flows from operations.

Income taxes.   Income taxes decreased to $7.7 million from $8.0 million, a decrease of $355,000, below the same period last year. The overall effective tax rate decreased to 36.4% in fiscal 2005 from 37.7% in fiscal 2004. The decrease in the overall effective income tax rate is primarily attributable to a reversal of overaccrued state income taxes. An increase in tax-free interest from municipal bond investments in the first half of fiscal 2005 also contributed to the reduction in effective rate during fiscal 2005. Refer to Note 9 to the Consolidated Financial Statements for additional details of the income tax provision.

Net income.   As a result of the foregoing, net increased to $13.4 million from $13.3 million, as compared to the same period last year.

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53 Weeks Ended January 1, 2005 (Fiscal 2004) Compared to 52 Weeks Ended December 27, 2003 (Fiscal 2003)

Net sales.   The results of the Company for fiscal 2004 were favorably impacted by the extra reporting week. Net sales increased to $247.3 million from $216.3 million, an increase of $31.0 million, or 14.3%, over the prior fiscal year, for the 53 week period ended January 1, 2005 as compared to the 52 week period in Fiscal 2003. The one week of additional sales in Fiscal 2004 was approximately 2.7% of the total sales increase. The sales increase reflects $10.1 million of additional net sales as a result of a 5% increase in comparable store sales. The remainder of the increase was the result of additional net sales from non-comparable stores.

Gross profit.   Gross profit increased to $111.6 million from $95.5 million, an increase of $16.1 million, or 16.9%, over the prior fiscal year. This increase was the combined result of higher net sales, partially due to the additional one week of sales in the Fiscal 2004 period and increased gross profit margins. As a percentage of net sales, gross profit increased to 45.1% from 44.2%. This increase as a percentage of net sales was primarily due to higher initial margins resulting from sourcing improvements.

Store operating expenses.   Store operating expenses increased to $76.5 million from $63.5 million, an increase of $13.0 million, or 20.5%, over the prior fiscal year. As a percentage of net sales, store operating expenses increased to 30.9% from 29.4%, primarily due to the increase in stores opened over the past two years and an increase in marketing and advertising expenses of $1.8 million. Store operating expenses in Fiscal 2004 were also higher than Fiscal 2003, due to the additional one week period included in Fiscal 2004 results.

General and administrative expenses.   General and administrative expenses increased to $14.2 million from $14.1 million, an increase of $147,000 or 1.0%, above the prior fiscal year. As a percentage of net sales, general and administrative expenses decreased to 5.8% from 6.5%, primarily due to lower incentive compensation expense in Fiscal 2004 costs. General and administrative expenses in Fiscal 2004 were also slightly higher than Fiscal 2003, due the additional one week period included in Fiscal 2004 results.

Other income.   Other income increased to $459,000 from $273,000, in the prior fiscal year, primarily attributable to higher average cash balances and higher interest rates during fiscal 2004, as compared to fiscal 2003.

Income taxes.   Income taxes increased to $8.0 million from $7.1 million, an increase of $941,000, over the prior fiscal year. This increase was attributable to higher taxable income, and was partially offset by a decrease in the effective tax rate from 39.0% in fiscal 2003 to 37.7% in fiscal 2004. The decrease in the overall effective income tax rate is primarily attributable to a reversal of state income tax over accrued in prior fiscal years.

Net income.   As a result of the foregoing, net income increased to $13.3 million from $11.1 million, an increase of $2.2 million or 19.8%, over the same period last year.

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 by highest sales during our 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 December 31, 2005. We derived this data from our unaudited quarterly consolidated financial statements. We believe that we have prepared this information on the

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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.