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Executives

Lorna Nagler - President and Chief Executive Officer

Andrew Moller – Executive Vice President, Chief Financial Officer

Monica Dahl – Executive Vice President, Chief Operating Officer

Analysts

Lyn Walther - Wachovia Securities

Christopher Kim - JPMorgan

Margaret Whitfield - Sterne, Agee & Leach

Howard Tubin - RBC Capital Markets

Robin Murchison - Suntrust Robinson Humphrey

Crystal Kallik - D. A. Davidson & Co.

Chris Krueger – Northland Securities

Brian Ronik – BLR Capital Partners

Christopher & Banks Corporation (CBK) F1Q09 Earnings Call June 26, 2008 5:00 PM ET

Operator

Welcome to Christopher & Banks Corporation’s first quarter fiscal 2009 earnings conference call. (Operator Instructions) Now I would like to turn the conference over to Jean Fontana of Integrated Corporate Relations.

Jean Fontana

Thank you for joining us to discuss Christopher & Banks first quarter fiscal 2009 earnings results. Joining us on our call are Lorna Nagler, President and Chief Executive Officer, Andrew Moller, Chief Financial Officer and Monica Dahl, Chief Operating Officer. After management has made their formal remarks we will open up the call to questions and answers.

Before we begin I would like to remind you that some of the comments made on the conference call during the prepared remarks or in response to your questions may constitute forward-looking statements that are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

These forward-looking statements may address the beliefs, plans, objectives, estimates or expectations of the company. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and in Christopher & Banks most recent annual report on Form 10-K, its recent 10-Q filings and the company’s filings on Form 8-K filed with the SEC.

Investors should not assume statements made during the conference call will remain operative at a later time. Christopher & Banks undertakes no obligation to update any information discussed in this conference call including its forward-looking statements even if actual results, future events or changes reflect that the projected results or expectations discussed in such forward-looking statements will not be realized.

Now I’d like to turn the call over to Lorna Nagler, President and Chief Executive Officer of Christopher & Banks.

Lorna Nagler

With me today are Monica Dahl, the company’s Chief Operating Officer and Andy Moller, the company’s Chief Financial Officer.

During today’s call I will be providing you with a brief overview of the company’s first quarter performance and some highlights of the business and our view of the current retail environment. Following that I will turn the call over to Andy for a more detailed review of our first quarter fiscal 20009 financial results and then Monica will provide an update on several of our business initiatives. Last I will make a few closing comments and then we will be happy to take your questions.

Turning to the first quarter results we delivered earnings per share of $0.32 on a diluted basis. Comparable store sales were flat and in line with our prior guidance. With a strong Friends and Family promotion offsetting double-digit declines in store traffic throughout much of the quarter as compared to last year. Despite the downturn in traffic, merchandise margins for the first quarter increased approximately 150 basis points as tight inventory controls allowed for more full-price selling and less of a need to mark down merchandise. Both average transaction value and units per transaction were up which we view as a positive reflection of our merchandise assortment.

When the customers are in the store they are spending more and buying more items than in the past. We anticipate this trend and average transaction value will continue in the second quarter. While we want to drive more traffic into the stores and retain market share we recognize the importance of preserving brand integrity and achieving improved merchandise margins in what we anticipate will be a highly promotional retail environment.

We ended the period with much planned inventory levels with inventory per store down approximately 35% versus a year ago. We were over inventoried last year and we are comfortable with our current inventory levels and content. We should note we should begin to cycle more normalized inventory levels in the second half of the year and therefore later this fiscal year inventory levels per store are expected to be closer to last year’s levels.

On the merchandising and marketing front there are a number of developments to note. Beginning with our spring offering our goal was to improve the freshness and color of our assortment. As we discussed on the last call we have changed our process of being quad driven where colors were featured for two consecutive months. Now we are doing refresher floor sets each month in between the more traditional larger monthly sets to ensure our customer sees fresh products every time she visits.

During the first quarter we continued to make strides in returning to our roots as a causal lifestyle brand reseller. Our strongest performance during the quarter was in our knits and woven tops categories including jackets and also in sweaters. In addition for spring we had positive response to the fabric, silhouettes, [inaudible] prints and textures. Customers also responded favorably to our fashion basics including our Find Your Fit program that we supported with in-store marketing.

During the quarter we struggled with our seasonal items such as sleeveless tops, tanks, shorts and Capri’s given the cooler weather. We would have liked to have seen better performance in our bottoms business, particularly skirts. However, we are moving in the right direction with changes underway to improve fabrication and styles for the fall season.

Earlier this year we hired a new VP of technical design who is making a number of improvements to our technical design and fits across product categories, in particular the fit of our bottoms which is of critical importance in building brand loyalty. We are pleased with the results of our Petites offerings currently in 95 Christopher & Banks stores. We are excited about the potential of this collection as a point of differentiation and expect continued benefits as we expand our Petites collection into about 300 Christopher & Banks stores by September.

From a marketing perspective we continue to build our customer database and expand our email based customer concept. In addition to these activities we also have one direct mail piece planned in July. In the second half of the year we also have planned a variety of pre-planned promotions and in-store events scheduled which we believe can drive home our value proposition, increase awareness of our brand and enhance our relationship with our customers.

Other highlights from the quarter. Both of our e-commerce site performance exceeded our expectations in the first quarter and we remain enthusiastic about the growth opportunities in this channel. The sites offer a great marketing tool for us and bring convenience to our customer which further solidifies her relationship with Christopher & Banks and C.J. Banks.

As I mentioned during the first quarter we held our second Friends and Family event in the month of April. We were once again extremely pleased with the customer response. We believe that this promotion when used strategically is a great tool in driving traffic and introducing our brand to new customers. In addition we believe this promotion enhances loyalty among our existing customers.

Let’s look at some operational initiatives.

We continue to build our sourcing team and have added new vendors in our mix of suppliers which will help us to achieve greater expertise along category lines. With an experienced sourcing team our merchants will be able to spend the bulk of their time on product development. We are on track with the installation of our new planning and allocation modules which will help us to execute on our merchandise strategies and Monica will provide the further updates. As we said on our previous conference call we expect to see benefits from this initiative beginning in late fiscal 2009 and to a larger degree in fiscal 2010.

During the first quarter we completed the installation of our new point of sale registers in 550 of our stores and will install further enhancements in the second quarter. In addition to implementing more up-to-date technology, these systems will improve efficiencies as well as improve our ability to communicate with our stores on a more timely basis.

Given the current environment we will be very selective in our real estate site selection and length and terms and Monica will provide a more in depth real estate update later in the call.

In summary, weak traffic patterns we saw in much of the first quarter have persisted into June and we expect them to continue for the rest of the second quarter. Last year during the second quarter we moved a lot of units at very reduced prices which while not healthy for the long-term value of the brand did add to our overall sales. As we anniversary last year’s second quarter and focus on running a cleaner and less promotional business we will give up sales and de-leverage our fixed costs although we will work diligently to control our inventory levels and expenses.

As a result, based on recent traffic trends and our assumption that the macro environment will not improve in the short-term, we expect comparable store sales to decline in the high single-digit range during the second quarter. When traffic levels eventually normalize we expect to be a much stronger company due to the investments we are making in the business.

I would now like to turn the call over to Andy to discuss our financial results.

Andrew Moller

For the quarter total sales increased 7% to $159.6 million. Same store sales for the quarter were flat with last year. During the quarter we had a decline of approximately 11% in the number of transactions per average store. This was a reflection of reduced store traffic. In contrast we had an increase of approximately 11% in the average transaction dollars. The increase was primarily attributable to higher units per transaction and slightly higher AUR’s.

From a geographic standpoint approximately half our comp stores are located across the eight states that touch the Great Lakes and Iowa. Same store sales for this group of stores were flat. We had relatively similar comp sale performance among the states located in this region. Comp sales for the combination of stores located in all other stores was also flat. There was slightly softer performance in many of the western states and slightly better performance in some of the southeastern states.

Merchandise buying and occupancy costs were $95 million or 56.7% of sales this year. We gained approximately 150 basis points of improvement over last year. The improvement was primarily due to higher merchandise margins resulting from lower mark downs.

SG&A expense in the first quarter was $44.8 million, up approximately 15% from last year when SG&A expense was $39.1 million. In the first quarter we had approximately 190 basis points of negative leverage. Larger components of negative leverage related to performance based bonus and incentives of approximately 50 basis points, marketing approximately 50 basis points and self-insured medical claims approximately 30 basis points. In addition to flat same store sales there was general de-leveraging of other SG&A expenses.

Depreciation was $6.5 million in the first quarter compared to $5.3 million last year. Operating income was $17.9 million or 11.2% of sales. This compares to $18.1 million or 12.1% of sales last year. Net income was $11.3 million and diluted earnings per share were flat with last year at $0.32 per share.

Turning to the balance sheet we had approximately $88 million in cash. We also had $3.5 million of short-term investments which related to auction rate securities with a July 1 call date. In addition we have approximately $20 million of long-term investments consistent with other auction rate securities. We had approximately $8 million of capital expenditures during the quarter. We currently forecast $20-22 million in total capital expenditures for the year.

Total inventory was $42.1 million this year compared to $58.8 million last year. Excluding e-commerce, inventory per store was approximately $48,000 this year compared to $73,000 last year. The aging of inventory was current at less than 2% of inventory was more than 120 days old.

Turning to guidance, for the second quarter we anticipate earnings of $0.00 to $0.03 per diluted share. This assumes a high single-digit decline in same store sales due to reduced store traffic and the difficult retail environment. During the second quarter we expect a significant improvement in merchandise margins given cleaner inventory levels compared to last year. However, with our expectation for a high single-digit comp decline we expect this to be partially offset by de-leveraging of occupancy, buying and distribution costs. We are forecasting a high single-digit increase in SG&A dollar growth for the second quarter compared to the second quarter last year.

Looking ahead to the second half of the year, a high single-digit percentage increase in SG&A dollar growth is also expected compared to last year for the third and fourth quarter combined period.

Finally, in the second quarter we expect a mid single-digit increase in the dollar amount of depreciation expense as compared to this year’s first quarter when depreciation was $6.5 million.

Now I’ll turn the call over to Monica.

Monica Dahl

As many of you are aware we successfully launched the Christopher & Banks and C.J. Banks e-commerce businesses this past February. Our customers and store associates alike continue to respond favorably to our websites. The strong start to both e-commerce sites continued as we completed our first quarter and sales continue to exceed our expectations with all metrics favorable.

At this juncture we are continuing to refine our forecast and are adjusting inventory levels to match the anticipated demand by division and by product category. We believe these sites are a great way to offer convenience and product research for our customers as well as gain effective exposure to potential new customers.

In addition we began the roll out of our online marketing efforts with Paid Search and Affiliate Marketing. We believe these marketing efforts will over the long-term help build our brand awareness, contribute to the growth of our e-commerce sales and drive traffic to our stores. We are confident that making the move to an integrated, multi-channel retailer will have a positive impact on our sales and we look forward to updating you on our continued progress throughout our first year.

On the planning and allocation front our focus on disciplined inventory management continued through the first quarter. As Lorna mentioned we ended the quarter with inventory on a per store basis down approximately 35%. As a reminder that result was compared against inventory levels that had grown too high last spring. While the decrease at the end of the first quarter as compared to last year was substantial it returns us to more historical averages of inventory levels as we progress through the balance of spring.

Looking forward to the second half of the year we continue to take a conservative approach in our inventory planning. We anticipate inventory levels per store will begin to build to levels more comparable to last year’s fall and holiday season. However, we continue to evaluate selling trends and remain committed to adjusting receipt of goods as needed to respond to business trends in order to maximize full price selling.

As to our planning and allocation system, our teams continue to fine tune the utilization of the new allocation model which gives us increased flexibility in product distribution. Using allocation methods and variables now available to us we can more easily manage store groupings for volume, climate and size authority. With the new financial planning modules our planning teams have begun to provide additional support to our merchandise teams on a more in-depth product level than we were previously able to achieve. Additionally, for the first time we have been able to supplement our planning of inventory dollars with inventory units for improved in-season forecasting of sales, merchandise margins and inventory.

These new capabilities will play a part in contributing to the initiatives around our increased product flow; continued management of SKU’s and improved store unit capacity. As previously discussed an implementation of this magnitude is a long-term project and we expect to gain benefits from the new planning and allocation system later this year but more fully as we begin planning for next fiscal year in 2010.

Now, turning to real estate. During the first quarter we opened 17 new stores and closed 4. This brings our total store count to 850 at the end of the fiscal year this year as compared to 801 last year. For all of fiscal 2009 we anticipate opening 28 new stores and closing approximately 10 for a net increase of 18 stores of 2%. We anticipate six openings during the second quarter and five openings during the third quarter. Approximately half of the new stores will be C.J. Banks and half will be Christopher & Banks. No Acorn store openings are planned.

Given the uncertain environment we continue to proceed slowly in planning for new stores. Long term while we believe there are opportunities for additional stores we are taking this time as an opportunity to evaluate and fine tune our real estate growth strategies. The selection of new stores continues to be done with great scrutiny, working to make sure we are making investments that will be optimal for the short and long-term health of our business. Any deal presented for consideration has to be extremely compelling for us to approve at this time.

In terms of location type the off-mall strategy continues to be a focus for us with approximately 80% of our fiscal 2009 openings planned to be off-mall. While we operated more of a destination in these venues the generally favorable lease economics of these deals is often very compelling. We completed the first comprehensive review of our entire real estate portfolio in late May of this year. The evaluation allowed us to begin the development of a longer term road map on our existing locations in terms of future renewals, expected remodels, expected lease kick outs and potential occupancy reductions.

Additionally, store operations and real estate personnel were able to share their individual perspectives on future expansion opportunities. We will begin using the findings from this comprehensive review in conjunction with an outside service provider to build the predictive modeling application for our future expansion plans.

In summary our focus continues to be on maximizing productivity and achieving increased returns in all of our real estate investments.

With that I will now turn the call back to Lorna.

Lorna Nagler

While there is considerable uncertainty as to when improvement in the macro environment will occur we remain focused on our strategic initiatives in merchandising, marketing, sourcing and technology. We believe we are implementing the strategies and making the prudent investments that will position our company for long-term success.

We will now be happy to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Lyn Walther - Wachovia Securities.

Lyn Walther - Wachovia Securities

For Andy, could you help us understand the SG&A dollar growth? I think you said up high single-digits in the back half of the year. With most of your store openings, you did 17 in Q1 with square footage up 2%; I’m just trying to understand what is driving that. Is it increased marketing? Is it entirely de-leveraging? Could you give us a little more color there?

Andrew Moller

Probably without giving specific numbers the biggest component really marketing is one of them. The other thing to keep in mind that will become a bigger piece of it is e-commerce which we didn’t have an e-commerce business last year and so with e-commerce certainly we are getting extra sales but along with that do come costs.

We do have an increase in administrative payroll. We have added staff to support the initiatives we have put in place and we have had wage increases over last year. Store payroll there will still be some increases there as we will have more stores than last year and then probably one of the other areas is just in terms of medical costs. In the first quarter we did see an increase and we do have a higher degree of employee participation in our plan so those are some of the combined things that do work together to show the increase in SG&A expense over what we had in last year’s quarters.

Lyn Walther - Wachovia Securities

Maybe just on the environment, I’m trying to understand your comp guidance. You did a flat comp this quarter you are guiding to a high single-digit decline. You did have that Friends and Family event in there. Could you give us a sense for what that run rate was maybe without that? I’m trying to get a sense about that things have gotten actually worse in June.

Lorna Nagler

I would say that certainly we started to see reduced traffic in May and certainly I think some of the colder weather, not that I want to be a weatherman, certainly impacted some of our summer-type categories such as tanks, shorts, etc. and that has really continued into June so we really think we have to really be cautious based on the highly volatile nature of the current environment and based on our recent traffic patterns we believe that the guidance is reasonable and prudent.

Operator

Your next question comes from Roxanne Meyer – Oppenheimer.

Roxanne Meyer - Oppenheimer

You sound preliminary in terms of your real estate finding and all the work you are doing there but do you have an idea at this point or something you can share about what percentage of your lease could be repositioned and relocated to perhaps the off-mall?

Monica Dahl

At this juncture really when we are talking about looking at our real estate and our future growth being concentrated in the ability to be off-mall we are not necessarily talking about repositioning our existing deals. Obviously part of the comprehensive review was as deals were coming up for renewal considerations understanding the total market we are in and what the other potential opportunities might be would allow us to make a better decision as opposed to just renewing. So at this point it is premature to talk about what percentage of our existing portfolio but again we do believe that as we grow new stores and open new stores that are a viable economic choice for us.

Roxanne Meyer – Oppenheimer

In terms of marketing obviously it is a tough balance between wanting to get out there and really roll out a marketing program but also managing the weak traffic environment. I’m just wondering if you could elaborate a little bit on your marketing strategy and to what extent are you playing defense versus offense?

Monica Dahl

Certainly we really are still wrapping up marketing as really a core competency at Christopher & Banks. Part of our support of marketing certainly goes to support our new e-commerce sites which we are very pleased with. Certainly one of the things we have spent money on is how do we position ourselves so that we have a fine library for in-store marketing which really allows us to be more readily able to react to business.

We also continue to test and try direct mail pieces. We have really been slow in wrapping this up. We will have a direct mail piece which is an addition for this July time period that we think will do a good job of hopefully mitigating, as we said in the call, heavily clearance period we have inventory that we liquidated. We think that direct mail piece can hopefully mitigate some of that business we did against all of the clearance we drove through the store last year.

Roxanne Meyer - Oppenheimer

As you look to the back half of the year besides continuing to expand the Petites business is there any other new categories, tests or new initiatives that you can talk to on the merchandising side?

Monica Dahl

In addition to Petites we have mentioned before that the accessory business is one that really we don’t play at all. We just delivered in the last week or so to about 100 CB stores and about 50 CJ stores jewelry which we think is the great outfit completer and we have only a couple of weeks under our belt but that would be the first category.

As well, we added a category of business, if any of you are familiar with the Spanx brand, we have just launched in a select group of stores their version called Assets by Spanx which is a lower priced product and we think again as a solution for our customer we think that is a nice new addition. So we are focusing beginning with some jewelry and we will continue to wrap up some other tests but right now those are the ones that we are focusing on.

Operator

Your next question comes from Christopher Kim - JPMorgan.

Christopher Kim - JPMorgan

So it sounds like it is pretty tough getting the consumer to respond to anything. What do you have in store this quarter in terms of the promotional perspective whether it is like Bogo or broader based promotions. What is the customer responding to right now?

Monica Dahl

Certainly as we said we are having a tougher time on the traffic standpoint although we feel good that she is spending more when she is in the store. So one of the things knowing that we weren’t going to be anniversarying this big mountain of inventory we had last year, we did set up some of our key categories in Knits, tees and tanks and really positioned those as nice drivers with two-for multiples. We do see the customer, whether it be Bogo or two-fors, will buy multiple units and that has helped us with our units per transaction. Those are the things we are thinking about and then as I mentioned we do have a plus direct mail piece in July that we think can help drive some traffic.

Christopher Kim - JPMorgan

As a follow-up to Roxanne’s question, in terms of merchandise categories did you mention sports and what are your thoughts on travel and any plans to bring that back?

Monica Dahl

First of all just to highlight what is selling we continue to see the tops across all categories are leading the way and certainly knits are playing an even more dominant role. I think we have done a nice job of balancing novelty and fashion basics but I also think that is a very friendly price point for the consumer to add to her wardrobe. The sport category we really are disbanding from a collection standpoint.

However one of the things we were learning is a lot of the key categories that worked in sports really have been put back into our core businesses like knits which have comfort whites features. The Pampered Sport she was really picking all the top categories whether it be hoodies, printed tees, some of our solution based fabrics like wicking properties but she was not responding to really what I call matching-matching, head to toe outfits. So we really took the best of what we learned from our sports and integrated them into our categories in tops.

Christopher Kim - JPMorgan

Any thoughts on a travel collection?

Monica Dahl

We have not been in the travel business. Certainly it is something we would consider testing and the e-commerce site gives us a perfect opportunity to test some of those issues. We do believe though that easy care and other things are important to our consumer but right now we do not have plans for a traveler’s collection but we are always looking and testing new ideas.

Operator

Your next question comes from Margaret Whitfield - Sterne, Agee & Leach.

Margaret Whitfield - Sterne, Agee & Leach

The top line in Q1 looks quite strong relative to a flat comp. Was that because of e-commerce plus the new store openings in the period? Can you isolate e-commerce and tell us how much that represented in Q1?

Andrew Moller

The e-commerce certainly did help. We aren’t going to report it all separately though but that was one of the things that did help the top line for the quarter and we expect that to help out later in the year as well and that is why we also comped to the SG&A related to that because there are costs also associated with it.

Margaret Whitfield - Sterne, Agee & Leach

When did you kick in these affiliate programs? Would you expect whatever happened in Q1 to accelerate in the Q2 and keep going from there?

Monica Dahl

Absolutely Margaret. The real beginning of any of the marketing initiatives where we were driving our customer to the site through the affiliate marketing or the search piece of it really didn’t begin until late May so the first quarter doesn’t have really a lot of benefit baked into that. Obviously as we are learning and testing the anticipation is that business will continue to ramp up along with just the general seasonality that happens on an e-commerce business as we approach the back half of the year.

Margaret Whitfield - Sterne, Agee & Leach

So might you have some gift-giving items in the back half for the e-commerce in particular?

Monica Dahl

There are all sorts of discussions and plans in place for how to maximize the e-commerce business from a product standpoint, how to maximize the business from a marketing standpoint and in many cases it will be similar to what are going on in stores and fully complementary to that and then in some cases there will be e-commerce alone. But we are just finalizing those specific plans.

Margaret Whitfield - Sterne, Agee & Leach

Would you say the balance is between CJ and CB or are you getting a lot of new customers shopping online?

Monica Dahl

Interestingly enough we had planned for Christopher & Banks to be slightly larger than C.J. Banks and that is one of the learning we are having both from a category standpoint how the customers are responding differently and how they are responding to different marketing messages and promotional efforts. It is a week-by-week learning and that is what we are doing is adjusting our forecasting as we go forward so we can maximize both of those businesses appropriately for the rest of the year.

Margaret Whitfield - Sterne, Agee & Leach

I also heard you might be moving your corporate offices to Eden Prairie preserving the space in Plymouth. Is that because of your plans for the growth in e-commerce?

Monica Dahl

Our e-commerce growth, as you are aware we use an outside provider to fulfill and we will continue to use an outside provider for the foreseeable future in fulfilling e-commerce. That is just not something we believe to be our core competency in the first couple of years of that business.

Margaret Whitfield - Sterne, Agee & Leach

But are you moving offices to Eden Prairie?

Monica Dahl

We have nothing to relate enough at this point. I don’t know where you are getting your information.

Margaret Whitfield - Sterne, Agee & Leach

The local press in your fair city.

Monica Dahl

We have no comment at this point. We have said for a number of years that the space we are in is very cramped so it is not surprising we are besides e-commerce…we are in a very small space here.

Margaret Whitfield - Sterne, Agee & Leach

Finally you commented on accessory tests and Petites. Anything you can say regarding this year’s fall line, how it may differ from last years?

Monica Dahl

One of the things I think we will see, we are really seeing the customer is really evolving. This modern boomer is really gravitating to newness in silhouettes, things like knit jackets, and newness in fabrication like ITY so it is very exciting to see her appetite for newness is there. Certainly as we go outside of Q2 I think just as we have done how we match our color is appropriate or the seasons.

Last year at this time in our store we already looked like we were fall. I think we are very appropriate in wearing our colors and I think you will see that continuing as we go forward. I think the novelty piece of our business she continues to have an appetite for novelty but her choice of novelty is evolving and it is less what we call thematic and more solid print, pattern and texture. We are continuing to learn and she is responding to the newness which we are very excited about.

Operator

Your next question comes from Howard Tubin - RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Just one more question on marketing. Have you thought about maybe doing something more broad based in scope like some national print advertising or cable TV advertising? Anything like that to help drive traffic to the stores?

Lorna Nagler

That is a great question and it is a very expensive proposition and I think where we are we are really focused on we would love to evolve to that some day. I think right now as we are building our foundation I think it is important to build our database and we are especially focused on our email capture and I think that is where we are going to focus our efforts and we hope to one day evolve to that but no plans right now to do any print or media such as that.

Howard Tubin - RBC Capital Markets

Could you update us on your plans for share repurchase or maybe how much you have left on your plan?

Andrew Moller

The program we had in place actually did expire during May so there is no current authorization and really in this very difficult, uncertain environment we are happy to have a good cash balance and we certainly want to maintain that to be in a good position given how tough things are and not having a lot of visibility in when improvement may occur.

Operator

Your next question comes from Robin Murchison - Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

What I wanted to see if you would comment on was [inaudible] and also I noticed during the quarter, I walked into a store and they told me all dresses were 50% off. So I’m wondering what’s going on with that category. Then do you see the bottoms business was more a function of the weather?

Monica Dahl

Why don’t I take the merchandise questions and start with that. Certainly dresses was a category that was not in all of our stores. It certainly was on the disappointment list. Hence the driving the business at 50% off. It certainly was a category that was trending and popular in the industry but our customer was not voting yes on dresses. Hence the more aggressive promotions.

From a bottoms standpoint that has been a general category where we haven’t been as placed with bottoms. I could blame the weather but I think a good merchant will tell you we could have done some things better. Number one the skirt category, which is a very important category particularly in the first quarter is one that I don’t think we made it new enough. I think we didn’t work as hard to really make a great, compelling outfit. So skirts was certainly a disappointment.

From a bottoms standpoint I think our lack of diversification of fabrication, lack of maybe enough core black in our bottoms…I think there are plenty of things we could have done better despite of the weather to drive that bottoms business. We are working really hard on newness in fabrics and silhouettes and really working on the fit which we are very excited about evolving our fit. I do think having a good fitting bottom is a very important way to really build that brand loyalty.

Andrew Moller

And on the [flat] as we looked they probably affected us maybe less than 50 locations. There has really only been a few stores that have actually been closed so we really don’t believe that it has really had a significant impact on our total sales. The impact that had occurred is reflected in our June sales and obviously we have based our guidance for the second quarter on what has happened in June so if the impact does continue it is taken into account in our guidance.

Robin Murchison - Suntrust Robinson Humphrey

You said the cadence of business throughout the first quarter May was a fairly weak and I’m just wondering how the quarter started and then evolved. I assume it got weaker as it went on. Is that fair?

Lorna Nagler

That would be a correct assessment.

Robin Murchison - Suntrust Robinson Humphrey

So today’s guidance on the second quarter it sounds like June is similar to May?

Lorna Nagler

Yes. June is really continuing the trend we saw in May compounded by the fact that the end of May last year and throughout June and July we started really taking aggressive, aggressive mark downs so we’ve got those two factors working against each other.

Robin Murchison - Suntrust Robinson Humphrey

So then in light of the release you saw yesterday from JCPenney, is there anything you think differently about managing the second half of the year? You have cut down CapEx, you have cut down on sports, the number of expansions. I’m just wondering if there are any other levers you can pull if you needed to preserve some integrity for the second half?

Lorna Nagler

Obviously I think we all concur that it is really prudent to be conservative at how we are spending our money. You can see the inventory control we have really placed since the fourth quarter. We are looking at expenses.

But at the same time we have to balance the needs we have to really position ourselves because the traffic will normalize and so we have to make sure we are balancing on supporting some of the initiatives that really make us a better company as we go forward. So it is always that balance but we certainly believe that it is prudent for us to be conservative and that is how we are approaching every day at every decision.

Operator

Your next question comes from Crystal Kallik - D. A. Davidson & Co.

Crystal Kallik - D. A. Davidson & Co.

I know you are taking a lot of questions on this and I might take another stab on this one. The Q1 you just reported was very strong, the second highest EPS you have ever done and Q2 you are guiding for the lowest EPS you have ever done in that quarter. What has really changed in your mindset to turn a strong Q1 into what you are guiding for, basically the weakest Q2 you would have done in your company’s history.

Lorna Nagler

I can just echo a little bit on that Q2 piece, again we are up against the last year where we drove an incredible amount of top line sales on clearance so when you look at what we said is really today we are still driving high quality sales and we are seeing increased margin and higher average sales but we are up against with our inventory levels down where they are, which is an appropriate level, we are up against an awful lot of units that we drove out in the second quarter. So it is a tale of two cities because of the inventory levels and the liquidation we are up against from last year.

Andrew Moller

Q1 has always been in recent times our strongest quarter and it is our best margin quarter so that helps out Q1. Certainly Q2 has practically two clearance months and then August is a much lower sales volume for us so it does make it much harder in Q2 for us.

Crystal Kallik - D. A. Davidson & Co.

Andy, it sounds like you are thinking second half inventory is about flattish? Or around that? Is that correct?

Monica Dahl

Again because we were so heavily inventoried last year in the first half of the year we obviously approached the first half of the year’s receipts differently than the second half. So as we prepared for fall beginning in August as well as then go forward we do begin to return to higher levels of receipt on a per store basis which will get us to more normalized levels of inventory.

Crystal Kallik - D. A. Davidson & Co.

So we’ll start to see some mild increases on a per store basis starting in the second half?

Monica Dahl

Again, comparable to last year. In some cases we’ll be slightly lower and in some cases we’ll be slightly higher. It is dependent on our flow and what our floor says. But definitely more normalized.

Crystal Kallik - D. A. Davidson & Co.

Andy are you still thinking about the environment and how you are addressing your expenses is the comp lever point for this current fiscal year still about 4% comp to lever expenses? Is that correct?

Andrew Moller

Yes we would probably say 3-4%, some of it I think when we originally said 4% that probably included performance based compensation, bonuses and certainly the environment is tougher and results don’t happen then that piece of it isn’t thriving. So it is probably somewhere in between the 3-4% at this point.

Crystal Kallik - D. A. Davidson & Co.

Would that change meaningfully for next year?

Andrew Moller

It is probably a little too early for us to be talking about next year. We’re trying to take it one quarter at a time.

Crystal Kallik - D. A. Davidson & Co.

Understood. I’m just wondering if you had started looking at your CapEx, etc. is there in your minds eye are there any low hanging fruit you are working on that might change where you profitability hurdles are over the next couple of years?

Andrew Moller

This year we aren’t expanding the store base. We haven’t said what we are doing for store openings. I think Lorna and Monica alluded to wanting to be conservative next year as we look at stores. We certainly haven’t finalized our plans but the new store piece of it there are start up costs associated with that and stores that aren’t as strong out of the box as the existing base so that does come into play a little bit but it is probably a little too early for us to start throwing out percents for next year.

Crystal Kallik - D. A. Davidson & Co.

Any commentary on the impact of Acorn in the quarter?

Andrew Moller

Acorn we have now reported separately in the 10Q so that will get filed by July 10 so we will have operating income from store levels and store events.

Operator

Your next question comes from Chris Krueger – Northland Securities.

Chris Krueger – Northland Securities

Your Friends and Family event sounds like it was very successful in the quarter. Can you analyze at all the trend following that? Did those particular good customers tend to have a lag before they come back to the stores or is there any insight you can provide on that?

Lorna Nagler

Our Friends and Family Event we think is a great way to reward our loyal customers and get new customers in the store. Certainly it is a great grass roots event. Certainly how we manage our inventory and sell units before and after the sale is a big way to increase…I can’t give you any statistics that tells me that the loyal customer when she came back but we really do believe it is a good strong event for our business when done strategically.

Chris Krueger – Northland Securities

Is there one on the schedule for the second quarter or is it probably going to be more of a fall thing again?

Lorna Nagler

It would be a fall thing.

Chris Krueger – Northland Securities

Any, and I know this is going to be a tough one to answer as well but any insight or feedback from your store managers on customer comments on the tax stimulus check and if that is really impacting business at all?

Lorna Nagler

I think we really haven’t heard much about it. I think we are not counting there is going to be a big boost to that. If it comes that is great but we are not counting it in any of our projections.

Chris Krueger – Northland Securities

What was your CapEx for the quarter?

Andrew Moller

We were about $8 million in capital for the quarter and we would expect to be $20-22 million for the year.

Operator

Your next question comes from Brian Ronik – BLR Capital.

Brian Ronik – BLR Capital Partners

Andy you had mentioned depreciation and amortization for Q2 being up mid single-digits is that correct?

Andrew Moller

From what we had in the first quarter. For the first quarter we were $6.5 million and so the mid single-digit increase referred to an increase over the first quarter amount.

Brian Ronik – BLR Capital Partners

In the full year you expect to be….

Andrew Moller

We would probably stabilize in the back half of the year similar to what we would see in the second quarter.

Brian Ronik – BLR Capital Partners

So just a bit of a quick calculation you are looking at $6.8 million for Q2, Q3 and Q4?

Andrew Moller

That is very much in the ballpark.

Brian Ronik – BLR Capital Partners

Plus the $6.5 million already is about $27 million. You have mentioned service provider for real estate, I think? Can you elaborate?

Monica Dahl

Absolutely. We have made the determination that in order to help us on a long-term strategic approach we could use the help of a provider who will actually take our existing locations, model our demographic information and help with what will turn more of a predictive modeling. It is actually a software application that gets built with input from our existing store base along with their scientific models and input from our real estate department that will help create more of a long-term view just from a market standpoint.

Brian Ronik – BLR Capital Partners

If I got this right you are getting an outside service provider you are paying to look at the demographics of the market you exist in currently and what they expect of those markets in the future?

Monica Dahl

It is a little more complicated than that. It is a combination of data yes that is out of our existing portfolio combined with data on a more generalized basis including demographic along with other statistical real estate market information and what it will help to do is build more of a comprehensive model.

Brian Ronik – BLR Capital Partners

The cost of something like that?

Monica Dahl

Again it is not a significant investment relative to our IT investment. It is a software application and we are not prepared to talk about the exact costs but it is not substantial relative to our total investment.

Brian Ronik – BLR Capital Partners

When you talked about marketing in late May I missed that. Is that something you just started marketing for e-commerce in late May of this quarter?

Monica Dahl

There are a couple of different things. When we launched our e-commerce site we really brought those sites up without any supporting affiliate marketing. In other words we launched them and converted our exiting website address to what then became an e-commerce site. We did include some communication from our stores meaning bounce back on the stores customers were shopping. We gave them notification we were launching but we had not at the time we brought our sites up engaged in any paid search or search optimization or affiliated marketing initiatives.

So we had all along intended to engage in different venues that would help us get our brand awareness to a broader audience than just happening upon it through our website address or finding out about it through our stores. So those are natural e-commerce initiatives or components of doing e-commerce business and the point we were making is we had not begun those in February or March. We began those a little later in the first quarter.

Brian Ronik – BLR Capital Partners

So you expect those to continue throughout the rest of the year?

Monica Dahl

Yes and they are variable expenses or costs so obviously we are measuring the return on investment on those and we will shift dollars accordingly in order to maximize those different marketing venues.

Operator

Your next question is a follow-up from Crystal Kallik - D. A. Davidson & Co.

Crystal Kallik - D. A. Davidson & Co.

Andy I just wanted to clarify real quick on your response to the last question with Brian about the depreciation. When you guided for the SG&A dollar growth to be up high single-digits percentage wise I am assuming that is over last year? That is not sequential? I just want to make sure.

Andrew Moller

Right. That was over last year. The depreciation was the only thing that I said it would be a mid single-digit increase from the $6.5 million that we had in the first quarter but the SG&A is year-over-year compared.

Operator

That concludes today’s question-and-answer session.

Lorna Nagler

We just want to thank everybody for their time on the call. We look forward to our next call together. Thanks everyone.

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Source: Christopher & Banks Corporation F1Q09 (Quarter End 05/31/08) Earnings Call Transcript
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