General

We are a nationwide, mall-based specialty retailer of lifestyle sportswear and dresses targeting style-conscious women. Our merchandise offerings extend from elegant eveningwear to sophisticated casual and daytime sportswear, which encompasses a variety of tops, bottoms, dresses and accessories, all of which are sold under our Cache brand. We believe the appeal of our merchandise is enhanced through the intimate boutique-like environment we offer to our customers. This environment is achieved through a high level of customer service combined with our smaller store format, which averages approximately 2,000 square feet. As of December 27, 2008, we operated 296 Cache and Cache Luxe stores, primarily situated in central locations in high traffic, upscale malls, in 43 states, Puerto Rico and the U.S. Virgin Islands.

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

For the fiscal year ended December 27, 2008, sportswear accounted for 60.7%, dresses for 30.4% and accessories for 8.9% of Cache's net sales. Cache's price points range from $60 to $300 for sportswear, $125 to $450 for dresses and $30 to $150 for accessories.

Management Overview

Fiscal 2008 marked a year of economic instability in the U.S. and abroad. This instability in the U.S economy has negatively affected the entire retail sector, including Cache, Inc., which resulted in decreased sales and stock value of the Company for fiscal 2008. We were disappointed in our performance, as the economic crisis during 2008 resulted in lower than expected sales and higher than expected markdowns.

On January 2, 2008, the Board of Directors authorized an increase to its previously announced share repurchase program of 1,000,000 shares and subsequently authorized the repurchase of an additional 500,000 shares on February 5, 2008. These authorizations combined with the previously announced repurchase program of fiscal 2007, brought the total authorization to 3,500,000 shares. As of December 27, 2008, the Company had repurchased 3,372,000 shares. On January 8, 2009, the Board of Directors authorized the repurchase of an additional 1,000,000 shares, bringing the total authorization to 4,500,000 shares. The Company plans to execute this program either through the open market or in privately negotiated transactions in accordance with SEC requirements, in either case, at prevailing market prices. There is no expiration date governing the period over which the Company may repurchase shares.

On January 24, 2008, Mr. Brian Woolf, then Chairman and Chief Executive Officer, as well as the principal executive officer of Cache, Inc. resigned from the Company. On January 24, 2008, Mr. Thomas Reinckens, then Cache Inc.'s President, was appointed as the Company's Chairman and Chief Executive Officer, as well as the Company's principal executive officer. He also continued in his position as the Company's President, in addition to assuming these new roles.

During fiscal 2008, the Company recorded a pre-tax charge of $2.8 million, net of deferred rent, for asset write down and store closing costs for 16 underperforming stores.

During the 13-week period ended, December 27, 2008, the Company recorded an impairment charge of $1.1 million for 12 stores coupled with an impairment charge of approximately $1.0 million for goodwill.

The Company opened 13 Cache stores in fiscal 2008 and closed 14 stores. Operating cash flow funded all store openings. For the year ended December 27, 2008, the Company remodeled 11 stores, which resulted in approximately 82% of the chain now in new remodel format. In fiscal 2009, we intend to open approximately three to five new stores, also intended to be funded by operating cash flow.

During fiscal 2008, the Company made additional infrastructure investments in information technology. This included investing in in-house disaster recovery capabilities as well as customer service systems. The Company has also started a multi retail channel (in store and on-line) integration, which stores information on our customers and sales from both Cache stores and the Cache.com website in a central location. The multi retail channel project which is expected to be completed in first half of fiscal 2009 will give our customers a seamless, more convenient shopping experience.

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:

                       52 Weeks Ended         52 Weeks Ended         52 Weeks Ended
                      December 27, 2008      December 29, 2007      December 30, 2006
 Operating Results
 Total store
 count, at end of
 period                              296                    297                    296
 Net sales
 increase
 (decrease)                         (3.2 )%                (1.6 )%                 4.8 %
 Comparable store
 sales increase
 (decrease)                         (4.3 )%                (0.6 )%                 4.0 %
 Net sales per
 square foot            $            424       $            449        $           463
 Total square
 footage (in
 thousands)                          598                    601                    600

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.

In connection with the acquisition of AVD in fiscal 2007, the Company also acquired the rights to the "Mary L." trademark. Mary L. products are sold in upper tier department stores and as a result, Mary L sales are included under net sales. Mary L. sales are recorded net of any returns, chargebacks, discounts and allowances.

During the second quarter of fiscal 2007, Cache introduced a co-branded customer credit card program. Under this program, the Company receives from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract. In addition, the Company receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by the cardholder at Cache or other businesses. Sales royalties earned are also recorded under net sales. The amount of fee income recorded in connection with activated credit cards was insignificant in fiscal 2007. In fiscal 2008, fee income recorded in connection with activated credit cards totaled $218,000.

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. In fiscal 2008, costs of $363,000 for the shipping and handling of Mary L. products were included in general and administrative expenses.

Cost of sales. Cost of sales includes the cost of merchandise, costs incurred for shipping and handling, payroll for our buying and merchandising personnel, costs related to our AVD subsidiary and store occupancy costs.

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

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

Recent Developments

The Company's credit line with Bank of America, N.A. of $17.5 million, which was due to expire on November 30, 2008, was extended to January 29, 2009. On January 27, 2009, the Company and Bank of America N.A. agreed to extend the line of credit until March 2, 2009, with a reduced credit line of $10.0 million. After consideration, given the Company's current strong liquidity position and expected liquidity needs, coupled with the onerous terms currently being offered by banks on credit facilities due to the ongoing credit crisis, the Company decided not to enter in to a new credit facility at the present time and as such, the existing credit line expired on March 2, 2009. There were no outstanding loans due to Bank of America, N.A., as of the expired date of the revised credit line.

Critical Accounting Policies and Estimates

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

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

Allowance for Doubtful Accounts. The allowance for doubtful accounts, which is regularly reviewed, is an estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is determined based on historical write-off experience and the current retailer environment. Balances over 90 days past due and over a specified amount are reviewed individually for collectability; other balances are considered on an aggregate basis considering the aging of balances. Account balances are written off against the allowance when it is probable the receivable will not be recovered. There is no off-balance sheet credit exposure related to our customers. Management believes that the risk associated with trade accounts receivable is adequately provided for in the allowance for doubtful accounts. During the 52 week period ended December 27, 2008, the Company recorded reserves of approximately $1.5 million, of which it utilized $1.6 million, resulting in an aggregate reserve amount of $111,000, as of December 27, 2008. The Company reserved $234,000 for such items as of December 29, 2007. This amount is included as part of the sales allowance reserve, which is provided in supplemental schedules on page F-36.

Inventories. Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any significant change in our markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation, which results in a carrying value at the lower of cost or market. For our AVD division, which makes up approximately 18% of total inventory, the raw materials, work in process and finished goods inventories are valued at the lower of cost or market value, using the first-in-first-out valuation method. The Company ensures that the raw materials, work in process and finished goods are properly valued by taking into account any obsolescence and recording a reserve in accordance with our established policy.

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

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

º •
º significant negative industry or economic trends;

º •
º store closings; or

º •
º underperforming business trends.

The Company evaluates finite-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No.144, "Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS No. 144"). Finite-lived assets are evaluated for recoverability in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates. The Company evaluated its finite-lived assets during fiscal 2008 and 2007 and as a result, recorded an impairment charge of $1.1 million for 12 stores and $73,000 for one store, respectively. The store impaired during fiscal 2007 was closed in fiscal 2008.

Goodwill and Intangible Assets. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") on December 30, 2001. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment. During fiscal 2007, in connection with the acquisition of AVD, the Company recorded goodwill and other intangible assets. The Company performs impairment testing of its subsidiary-AVD, which considers the Company's fair value to determine whether an impairment charge related to the carrying value of the Company's recorded goodwill and other intangible assets is necessary. This is reevaluated annually during the fourth quarter, or more frequently if necessary. The Company considers many factors in evaluating whether the carrying value of the recorded goodwill will be recoverable. Factors used to determine this primarily include declines in stock price and the market capitalization in relation to the book value of the Company, discounted projected cash flows of the reporting unit and valuation of companies comparable to the reporting unit. During the fourth quarter of fiscal 2008, the instability of the U.S. economy resulted in the Company experiencing significant decreased sales. In addition, the capital markets volatility resulted in the Company stock price declining substantially, causing the Company's book value to exceed the market capitalization plus a reasonable control premium. The Company's impairment testing resulted in a fair value that was less than the carrying value of its subsidiary-AVD. As a result, Cache recorded an impairment charge of approximately $1.0 million against the carrying value of AVD's goodwill for the fiscal year ended December 27, 2008.

Self Insurance. We are self-insured for losses and liabilities related primarily to employee health and welfare claims up to certain thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. Adjustments to earnings resulting from changes in historical loss trends have been insignificant for fiscal 2008, 2007 and 2006. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. We maintain stop loss insurance coverage which covers us for benefits paid in excess of limits as defined in the plan.

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

The Company recorded breakage income of $287,000, $293,000 and $2.5 million during fiscal year ended 2008, 2007 and 2006, respectively.

Revenue Recognition. Sales are recognized at the "point of sale," which occurs when merchandise is sold in an "over-the-counter" transaction or upon receipt by a customer. Sales of merchandise via our 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/(credits) to earnings resulting from revisions to estimates on our sales return provision were approximately ($202,000), ($93,000) and $42,000 for fiscal 2008, 2007 and 2006, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred at our stores for shipping and handling is included in cost of sales and costs of $363,000 incurred for the shipping and handling of our Mary L. products is included in general and administrative expenses. The Company records revenues net of applicable sales tax.

In connection with the acquisition of AVD in fiscal 2007, the Company also acquired the rights to the "Mary L." trademark. Mary L. products are sold in upper tier department stores and as a result, Mary L. sales are included under net sales when the merchandise is shipped to the department stores. Mary L. sales are recorded net of any returns, chargebacks, discounts and allowances. We also maintain a reserve as a reduction to sales for potential returns, chargebacks, discounts and allowances. During the 52 week period ended December 27, 2008, the Company recorded reserves of approximately $1.5 million, of which it utilized $1.6 million, resulting in an aggregate reserve amount of $111,000, as of December 27, 2008. The Company reserved $234,000 for such items as of December 29, 2007.

During the second quarter of fiscal 2007, Cache introduced a co-branded customer credit card program. Under this program, the Company receives from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract. During fiscal 2008 and 2007, the Company received $1.4 million and $585,000, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards was $218,000 in fiscal 2008 and insignificant in fiscal 2007.

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

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

The Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program the sales royalties earned in connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. The amount of sales royalty income recorded was insignificant in fiscal 2008 and 2007.

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 macroeconomics conditions, the timing of new store openings, fashion trends and shifts in timing of certain holidays. Our business is subject to seasonal influences, characterized in years other than fiscal 2008 by highest sales during the fourth quarter (October, November and December) and lowest sales during the third quarter (July, August and September). We believe that historical quarterly trends were disrupted in fiscal 2008 by macroeconomic conditions during the second half of the fiscal year.

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. When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company's best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of December 27, 2008, the Company has recorded a $331,000 reserve, net of federal benefit for potential tax contingencies. No such reserves were recorded as of December 29, 2007.

Effective December 31, 2006, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority having full knowledge of all relevant information.

The cumulative effect of adoption of FIN 48 did not result in any adjustment in the Company's liability for unrecognized income tax benefits.

              Balance at December 29, 2007                $       -
              Additions based on tax positions related
              to the current year                                 -
              Additions for tax positions for prior
              years                                         331,000
              Reductions for tax positions for prior
              years due to lapse of applicable statute
              of limitations                                      -
              Settlements                                         -

              Balance at December 27, 2008                $ 331,000

Included in the above ending balance are tax positions of $331,000, which, if recognized, would favorably affect the effective tax rate.

The Company's continuing practice is to include estimated interest and penalties, if any, in computing the amount that is recognized within income tax expense relating to uncertain income tax positions. As of December 27, 2008, the Company had accrued $182,000 of interest and penalties related to uncertain tax positions, which is included in the $331,000 tax contingency noted above.

Although the Company believes that it has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company's accrued position. Accordingly, the Company's provisions on federal, . . .