The information that follows should be read in conjunction with the Consolidated Financial Statements and Notes thereto that appear elsewhere in this Annual Report on Form 10-K. Fiscal year 2006 consisted of 53 weeks, while fiscal years 2007 and 2008 consisted of 52 weeks. Except as otherwise indicated, all comparisons between fiscal years 2006 and 2007 are 53-week versus 52-week results.
Overview
Net income in fiscal year 2008 increased 16.4% to approximately $58.4 million, as compared with approximately $50.2 million in fiscal year 2007. The increased earnings in fiscal year 2008 were primarily attributable to:
• 15.2% increase in net sales, driven by a 17.4% sales increase in the Stores segment, partially offset by a sales decline in the Direct Marketing Segment of 0.2%, with overall gross profit margins decreasing by 80 basis points;

• 8.9% increase in comparable store sales;

• a 30 basis point decrease in sales and marketing costs as a percentage of sales driven primarily by the leveraging of payroll costs and advertising and marketing costs;

• a 40 basis point decrease in general and administrative costs as a percentage of sales as the Company was able to leverage its costs during the year; and

• tax benefits realized of approximately $1.2 million or approximately $0.07 per diluted share due to the Company's ability to fully deduct employee compensation which was limited under Internal Revenue Code ("IRC") Section 162(m) in fiscal year 2007.

The Company had 460 stores as of the end of fiscal year 2008, which consisted of 441 Company-owned full-line stores, seven Company-owned outlet stores and 12 stores operated by franchisees. In the past seven years, the Company has continued to open new stores as infrastructure and performance have improved. As such, 25 new stores opened in fiscal year 2002, 50 new stores opened in fiscal year 2003, 60 new stores opened in fiscal year 2004, 56 new stores opened in fiscal year 2005, 52 new stores opened in fiscal year 2006, 48 new stores opened in fiscal year 2007 and 40 new stores opened in fiscal year 2008.
The Company plans to open approximately 10 to 15 stores in fiscal year 2009. The Company previously believed that it could grow the chain to 600 stores by the end of Fiscal Year 2012. However, due to the recent changes in economic conditions, including but not limited to a lack of quality real estate opportunities, the Company is reevaluating the timing of its expansion program beyond fiscal year 2009.
Capital expenditures are expected to be approximately $18 to $20 million in fiscal year 2009, primarily to fund the opening of approximately 10 to 15 new stores, the renovation and/or relocation of several stores and the implementation of various systems projects, including the replacement of the Company's existing Internet infrastructure. The capital expenditures include the cost of the construction of leasehold improvements for new stores and several stores to be renovated or relocated, of which $2 to $3 million is expected to be reimbursed through landlord contributions.
The Company expects inventories to increase in 2009 to support new store openings and to replenish certain core items that had higher than expected sales volumes in fiscal year 2008.
The Company ended fiscal year 2008 with $122.9 million in cash and cash equivalents, no revolving debt under its Amended and Restated Credit Agreement (the "Credit Agreement") and no term debt. The Company generated $73.5 million of cash from operating activities in fiscal year 2008, which was partly used to fund $35.l million in property, plant and equipment expenditures and included a $2.4 million increase in inventory levels and a $17.6 million reduction in accounts payable. The Credit Agreement has a maturity date of April 30, 2010 and currently allows the Company to borrow a maximum revolving amount of $100 million based on a borrowing base formula. After giving effect to all then outstanding obligations and other limitations under the Credit Agreement, the amount that the Company was entitled to borrow under the Credit Agreement ("Excess Availability") was $99.6 million at fiscal year-end 2008. The Company expects to negotiate an amended Credit Agreement prior to the expiration of the existing facility. The Company may choose to reduce the maximum borrowing amount of this facility based on its current and projected cash needs and market conditions. However, the Company can make no assurance that a facility will be in place beyond April 30, 2010.

Critical Accounting Policies and Estimates In preparing the consolidated financial statements, a number of assumptions and estimates are made that, in the judgment of management, are proper in light of existing general economic and company-specific circumstances. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Consolidated Financial Statements in this Annual Report on Form 10-K. Inventory. The Company records inventory at the lower of cost or market ("LCM"). Cost is determined using the first-in, first-out method. The estimated market value is based on assumptions for future demand and related pricing. The Company reduces the carrying value of inventory to net realizable value where cost exceeds estimated selling price less costs of disposal.
Management's sales assumptions regarding sales below cost are based on the Company's experience that most of the Company's inventory is sold through the Company's primary sales channels with virtually no inventory being liquidated through bulk sales to third parties. The Company's LCM reserve estimates for inventory that have been made in the past have been very reliable as a significant portion of its sales (over two-thirds in fiscal year 2008) are of classic traditional products that are on-going programs and that bear low risk of write-down. These products include items such as navy and gray suits, navy blazers and white and blue button-down shirts, etc. All product categories are monitored closely to ensure that aging goals are achieved to limit the need to sell significant amounts of product below cost. In addition, the Company's strong gross profit margins enable the Company to sell substantially all of its products at levels above cost.
To calculate the estimated market value of its inventory, the Company periodically performs a detailed review of all of its major inventory classes and stock-keeping units and performs an analytical evaluation of aged inventory on a quarterly basis. Semi-annually, the Company compares the on-hand units and season-to-date unit sales (including actual selling prices) to the sales trend and estimated prices required to sell the units in the future, which enables the Company to estimate the amount which may have to be sold below cost. The units sold below cost are sold in the Company's outlet stores, through the Internet website or on clearance at the retail stores, typically within 24 months of purchase. The Company's costs in excess of selling price for units sold below cost totaled $1.3 million, $1.9 million and $1.4 million in fiscal years 2006, 2007 and 2008, respectively. The Company reduces the carrying amount of its current inventory value for product that may be sold below its cost. If the amount of inventory which is sold below its cost differs from the estimate, the Company's inventory valuation adjustment could change.
Asset Valuation. Long-lived assets, such as property, plant and equipment subject to depreciation, are reviewed for impairment to determine whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset, which is based on the discounted cash flows. The asset valuation estimate is principally dependent on the Company's ability to generate profits at both the Company and store levels. These levels are principally driven by the sales and gross profit trends that are closely monitored by the Company. While the Company performs a quarterly review of its long-lived assets to determine if an impairment exists, the fourth quarter is typically the most significant quarter to make such a determination since it provides the best indication of performance trends in the individual stores. During fiscal years 2006, 2007 and 2008, the Company recognized impairment charges of $0, $0.8 million and $1.2 million, respectively, relating to several stores within its Stores segment. These stores were impaired as our reviews indicated their carrying values exceeded their estimated fair values. The charges were included in "Sales and marketing" in the Consolidated Statements of Income.
Lease Accounting. The Company uses a consistent lease period (generally, the initial non-cancelable lease term plus renewal option periods provided for in the lease that can be reasonably assured) when calculating depreciation of leasehold improvements and in determining straight-line rent expense and classification of its leases as either an operating lease or a capital lease. The lease term and straight-line rent expense commences on the date when the Company takes possession and has the right to control use of the leased premises. Funds received from the lessor intended to reimburse the Company for the costs of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and amortized over the lease term as a reduction to rent expense.

While the Company has taken reasonable care in preparing these estimates and making these judgments, actual results could and probably will differ from the estimates. Management believes any difference in the actual results from the estimates will not have a material effect upon the Company's financial position or results of operations. These estimates, among other things, were discussed by management with the Company's Audit Committee.
Recently Issued Accounting Standards - In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement was effective beginning in fiscal year 2008, except as it relates to nonfinancial assets and liabilities, for which the statement is effective for fiscal year 2009. With respect to financial assets and liabilities, this statement did not have an impact on the Company's consolidated financial statements. With respect to its nonfinancial assets and liabilities, the Company is currently evaluating the impact SFAS 157 will have on its consolidated financial statements.
In October 2008, the FASB issued Staff Position 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP 157-3"), which clarifies the application of SFAS 157 and provides an example of determining fair value when the market for a financial asset is not active. FSP 157-3 was effective for the Company upon issuance and did not have an impact on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115," ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). SFAS 159 became effective beginning in fiscal year 2008. The Company adopted SFAS 159 on February 3, 2008 and elected not to apply fair value accounting on its existing financial assets and liabilities. Therefore, this statement did not have an impact on the Company's consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133," ("SFAS 161"). SFAS 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and its related interpretations; and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS 161, is effective for the first quarter of fiscal year 2009 and is not expected to have an impact on the Company's consolidated financial statements.

Results of Operations
The following table is derived from the Company's Consolidated Statements of Income and sets forth, for the periods indicated, certain items included in the Consolidated Statements of Income expressed as a percentage of net sales.

                                                      Percentage of Net Sales
                                                            Fiscal Year
                                                    2006        2007        2008
       Net sales                                     100.0 %     100.0 %     100.0 %
       Cost of goods sold                             38.1        37.3        38.1
       Gross profit                                   61.9        62.7        61.9
       Sales and marketing expenses                   39.0        40.2        39.9
       General and administrative expenses             9.6         8.8         8.4
       Total operating expenses                       48.6        49.0        48.2
       Operating income                               13.4        13.7        13.7
       Total other income (expense)                   (0.2 )       0.3         0.1
       Income before provision for income taxes       13.2        14.0        13.8
       Provision for income taxes                      5.3         5.7         5.4

       Net income                                      7.9 %       8.3 %       8.4 %

Fiscal Year 2008 Compared to Fiscal Year 2007 Net Sales- Net sales increased 15.2% to $695.9 million in fiscal year 2008 compared with $604.0 million in fiscal year 2007. The Stores segment sales increased 17.4% in fiscal year 2008 due primarily to an 8.9% increase in comparable store sales and the opening of 40 new stores (and the closing of 2 stores) as shown below. Comparable store sales include merchandise sales generated in all full-line stores that have been open for at least thirteen full months. The 8.9% increase in comparable store sales in fiscal year 2008 was led by increased traffic (as measured by number of transactions), higher items per transaction and higher dollar amounts per transaction. Comparing fiscal year 2008 to fiscal year 2007, Direct Marketing sales decreased 0.2%, which was primarily driven by the continued decline of catalog sales, partially offset by an increase in sales in the Internet channel which continues to represent the major portion of this reportable segment.
The following table provides information regarding the number of stores opened and closed during fiscal years 2007 and 2008:

                                               Fiscal Year 2007          Fiscal Year 2008
                                                           Square                    Square
                                             Stores         Feet*      Stores         Feet*
  Stores open at the beginning of the year       376         1,745         422         1,935
  Stores opened                                   48           206          40           164
  Stores closed                                   (2 )         (16 )        (2 )          (8 )

  Stores open at the end of the year             422         1,935         460         2,091

* Square feet are presented in thousands and exclude the square footage of the Company's franchise stores. Square feet include a net increase of 6 square feet in fiscal year 2007 due to relocations or renovations in several stores.

All major product categories generated net sales increases in fiscal year 2008, led by sales of suits followed by sales of other tailored clothing and sportswear. Sales of the more luxurious Signature and Signature Gold suits, which together represented over 40% of suit sales in fiscal year 2008, increased approximately 38% over fiscal year 2007 sales. For fiscal years 2007 and 2008, suits represented approximately 25% and 28% of total merchandise sales, respectively. Merchandise sales exclude tailoring and franchise fee revenue.

Gross Profit-Gross profit (net sales less cost of goods sold) totaled $431.0 million or 61.9% of net sales in fiscal year 2008, as compared with $378.6 million or 62.7% of net sales in fiscal year 2007, an increase in absolute dollars of $52.3 million and a decrease in the gross profit margin (gross profit as a percent of net sales) of 80 basis points. As stated in this Annual Report on Form 10-K, the Company is subject to certain risks that may affect its gross profit, including risks of doing business on an international basis, increased costs of raw materials and other resources and changes in economic conditions. The Company experienced certain of these risks during fiscal year 2008, particularly a weaker economic environment, which resulted in lower merchandise gross margins due primarily to increased promotional activity to drive higher sales and gross profit dollars, especially in the fourth quarter where the gross profit margin declined 180 basis points to 60.5%, partially offset by higher initial mark-ups. In addition, during the earlier part of fiscal year 2008, the Company's gross profit margin was negatively impacted by increased freight costs, but through certain operational changes, the Company was able to stabilize these costs and for the full year of fiscal year 2008, freight costs as a percentage of sales were relatively comparable to the prior year. The Company expects to continue to be subject to gross profit risks in the future. Gross profit margins declined across all major product categories, except the suits category, due primarily to the higher promotional activity. The Company's gross profit represents net sales less cost of goods sold which primarily includes the cost of merchandise, the cost of tailoring and freight from vendors to the distribution center and from the distribution center to the stores. This gross profit classification may not be comparable to the classification used by certain other entities. Some entities include distribution (including depreciation), store occupancy, buying and other costs in cost of goods sold. Other entities (including the Company) exclude such costs from gross profit, including them instead in general and administrative and/or sales and marketing expenses.
Sales and Marketing Expenses-Sales and marketing expenses, which consist primarily of a) full-line store, outlet store and direct marketing occupancy, payroll, selling and other variable costs and b) total Company advertising and marketing expenses, increased to $277.4 million in fiscal year 2008 from $242.7 million in fiscal year 2007. As a percent of net sales, sales and marketing expenses decreased to 39.9% in fiscal year 2008, as compared with 40.2% in fiscal year 2007. The $34.7 million increase in sales and marketing expenses relates primarily to expenses supporting the opening of the 40 new stores in fiscal year 2008, a full year of costs from the 48 new stores opened in fiscal year 2007, and expanded advertising programs. The cost increases include a) $13.3 million of occupancy costs, b) $10.5 million of payroll, benefits and related costs, c) $6.3 million of media advertising, catalog and other marketing costs, and d) $4.6 million of credit card and other variable selling costs. The Company expects sales and marketing expenses to increase in fiscal year 2009, although possibly by a lower amount than recent years, primarily as a result of opening new stores (10 to 15 stores) in fiscal year 2009, the full year operation of stores that were opened during fiscal year 2008, an increase in advertising expenditures, and anticipated increases in postage used in the mailing of catalogs and direct mail advertising pieces. General and Administrative Expenses-General and administrative expenses ("G&A"), which consist primarily of corporate and distribution center costs, increased $4.9 million in fiscal year 2008, as compared with fiscal year 2007. As a percent of net sales, G&A expenses decreased to 8.4% in fiscal year 2008, as compared with 8.8% in fiscal year 2007. Total corporate costs, including payroll, all company incentive compensation, taxes and other corporate overhead costs, increased $4.5 million. The net increase in corporate costs was primarily driven by a) higher payroll and incentive compensation costs of $3.7 million, b) higher travel costs of $0.3 million, c) higher other overhead costs of $1.1 million due partly to a benefit of $0.5 million recognized in fiscal year 2007 related to a state grant, d) lower occupancy costs of $0.4 million, and e) lower benefits costs of $0.2 million primarily related to the Company's group healthcare costs. Continued growth in the Stores and Direct Marketing segments may result in further increases in G&A.
Distribution center costs increased $0.4 million in fiscal year 2008, primarily due to a) higher benefits costs of $0.2 million, and b) higher occupancy, supplies, postage and other miscellaneous costs of $0.2 million. The Company expects distribution center costs to increase in fiscal year 2009 as it expects to process an increasing amount of inventory units to support future growth in the Stores segment and to replenish certain core items that had higher than expected sales volumes in fiscal year 2008.
Other Income (Expense)-Other income (expense) was $0.5 million in fiscal year 2008 compared to $1.6 million in fiscal year 2007, a decrease of $1.1 million. The decrease in fiscal year 2008 was due primarily to lower interest income which resulted from lower average market interest rates as compared to fiscal year 2007, partially offset by higher average cash and cash equivalents balances during the year.

Income Taxes- The fiscal year 2008 effective income tax rate decreased to 39.1%, as compared with 40.5% in fiscal year 2007. The effective rate was favorably impacted by the Company's leadership succession plan, approved during the third quarter, which enabled the Company to fully deduct all employee compensation expense incurred by the Company in fiscal year 2008. In fiscal year 2007, a portion of the employee compensation expense deduction was limited under IRC
162(m). The benefit of this change was approximately $1.2 million of lower tax expense. The Internal Revenue Service ("IRS") has audited tax returns through fiscal year 2005, including its examination of the tax return for fiscal year 2005 in the third quarter of fiscal year 2008. No significant adjustments were required to the fiscal year 2005 tax return as a result of the examination by the IRS. The majority of the Company's state and local tax returns are no longer subject to examinations by taxing authorities for the years before fiscal year 2004.
Fiscal Year 2007 Compared to Fiscal Year 2006 Net Sales- Net sales increased 10.5% to $604.0 million in fiscal year 2007 compared with $546.4 million in fiscal year 2006. The Stores segment sales increased 10.7% in fiscal year 2007 due primarily to a 3.8% increase in comparable store sales and the opening of 48 new stores (and the closing of 2 stores) as shown below. The comparable store sales increase is based on a comparison of the 52 weeks of fiscal year 2007 with the first 52 weeks of fiscal year 2006. The 3.8% increase in comparable store sales in fiscal year 2007 was led by increased traffic, while items per transaction and dollars per transaction decreased. Comparing fiscal year 2007 to fiscal year 2006, Direct Marketing sales increased 11.1%, primarily driven by an increase in Internet sales offset by a decline in catalog sales.
The following table provides information regarding the number of stores opened and closed during fiscal years 2006 and 2007:

                                               Fiscal Year 2006          Fiscal Year 2007
                                                           Square                    Square
                                             Stores         Feet*      Stores         Feet*
  Stores open at the beginning of the year       324         1,543         376         1,745
  Stores opened                                   52           202          48           206
  Stores closed                                    -             -          (2 )         (16 )

  Stores open at the end of the year             376         1,745         422         1,935

* Square feet are presented in thousands and exclude the square footage of the Company's franchise stores. Square feet include a net decrease of 8 square feet in fiscal year 2006 and a net increase of 6 square feet in fiscal year 2007 due to relocations or renovations in several stores.

All major product categories generated net sales increases in fiscal year 2007, led by sales of suits followed by sales of dress shirts and sportswear. Sales of the more luxurious Signature and Signature Gold suits, which together represented over 40% of suit sales in fiscal year 2007, increased approximately 16% over fiscal year 2006 sales. For fiscal years 2006 and 2007, suits represented approximately 24% and 25% of total merchandise sales, respectively. Merchandise sales exclude tailoring and franchise fee revenue.
Gross Profit-Gross profit in fiscal year 2007 increased over the prior year both in absolute dollars and as a percentage of sales, increasing to $378.6 million or 62.7% of net sales in fiscal year 2007 from $338.4 million or 61.9% of net sales in fiscal year 2006. The 80 basis point improvement in gross profit margin was driven primarily by lower costs resulting from vendor sourcing shifts. In addition, gross profit margin improvements were realized across all major product categories, except the sportswear category which was impacted by clearance activity and holiday promotions.
Sales and Marketing Expenses-Sales and marketing expenses increased to $242.7 million in fiscal year 2007 from $212.9 million in fiscal year 2006. As a percent of net sales, sales and marketing expenses increased to 40.2% in fiscal year 2007, as compared with 39.0% in fiscal year 2006. The $29.8 million increase in sales and marketing expenses relates primarily to expenses supporting the opening of the 48 new stores in fiscal year 2007, a full year of . . .