fiscal year 2008. Our plan includes continued control over selling, general and administrative expenses. Our business plan for fiscal year 2009 reflects a significant improvement in cash flow over fiscal year 2008, but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales margin or cash flow contemplated in our business plan. Our Annual Report on Form 10-K provides additional detail about the risks of our liquidity situation and our ability to comply with our financial covenants. See also "Liquidity and Capital Resources" below.
We continue to face considerable liquidity constraints. Although we believe our business plan is achievable, should we not achieve the sales or gross margin levels we anticipate, not obtain payment terms from vendors and landlords more reflective of our seasonal cash flow patterns, or incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund our operations. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business.
Our independent registered public accounting firm's report issued in our Annual Report on Form 10-K for fiscal year 2008 included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern, including our recent losses and our potential inability to comply with financial covenants. See Note 2 to our financial statements. Our financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. We have taken several steps that we believe will be sufficient to allow us to continue as a going concern and to improve our liquidity, operating results and financial condition.
For comparison purposes, we classify our stores as comparable or non-comparable. A new store's sales are not included in comparable store sales until the thirteenth month of operation. Sales from remodeled stores are excluded from comparable store sales during the period of remodeling. We include our Internet and catalog sales ("Multi-Channel Sales") as one store in calculating our comparable store sales.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, 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. These differences could be material to the financial statements.
We believe that our application of accounting policies, and the estimates that are inherently required by these policies, are reasonable. We believe that the following significant accounting policies may involve a higher degree of judgment and complexity.
Merchandise inventories
Merchandise inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. Consideration received from vendors relating to inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying expenses after an agreement with the vendor is executed and when the related inventory is sold. We physically count all merchandise inventory on hand annually, generally during the month of January, and adjust the recorded balance to reflect the results of the physical count. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of merchandise sold, occupancy, and buying costs. Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. In determining permanent markdowns, we consider current and recently recorded sales prices, the length of time product is held in inventory, and quantities of various product styles contained in inventory, among other factors. The process of determining our expected adjustments to retail prices requires significant judgment by management. The ultimate amount realized from the sale of inventories could differ materially from our estimates. If market conditions are less favorable than those projected, additional inventory markdowns may be required. Store closing and impairment charges
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Disposal of Long-Lived Assets, long-lived assets to be "held and used" are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. We regularly analyze the operating results of our stores and assess the

viability of under-performing stores to determine whether they should be closed or whether their associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends, long-lived assets of stores indicated to be impaired are written down to fair value.
Stock-based compensation expense
In accordance with SFAS No. 123R, Share-Based Payment, (SFAS 123R), we recognize compensation expense for stock-based compensation based on the grant date fair value. Stock-based compensation expense is then recognized ratably over the service period related to each grant. We determine the fair value of stock-based compensation using the Black-Scholes option pricing model, which requires us to make assumptions regarding future dividends, expected volatility of our stock, and the expected lives of the options. Under SFAS 123R, we also make assumptions regarding the number of options, the number of performance shares and the number of shares of restricted stock that will ultimately vest. The assumptions and calculations required by SFAS 123R are complex and require a high degree of judgment. Assumptions regarding the vesting of grants are accounting estimates that must be updated as necessary with any resulting change recognized as an increase or decrease in compensation expense at the time the estimate is changed. SFAS 123R also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows and operating cash outflows.
Deferred income taxes
We calculate income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, (SFAS 109) which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between their carrying amounts for financial reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations.
In accordance with SFAS 109, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered from (a) reversals of deferred tax liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning strategies and (d) future taxable income. SFAS 109 places significant restrictions on the consideration of future taxable income in determining the realizability of deferred tax assets in situations where a company has experienced a cumulative loss in recent years. When sufficient negative evidence exists that indicates that full realization of deferred tax assets is no longer more likely than not, a valuation allowance is established as necessary against the deferred tax assets, increasing our income tax expense in the period that such conclusion is reached. Subsequently, the valuation allowance is adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the future, sufficient positive evidence, such as a sustained return to profitability, arises that would indicate that realization of deferred tax assets is once again more likely than not, any existing valuation allowance would be reversed as appropriate, decreasing our income tax expense in the period that such conclusion is reached.
Based on our analyses during fiscal year 2007 and fiscal year 2008, we concluded that the realizability of net deferred tax assets was no longer more likely than not, and established a valuation allowance against our net deferred tax assets. We have scheduled the reversals of our deferred tax assets and deferred tax liabilities and have concluded that based on the anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.
We anticipate that until we re-establish a pattern of continuing profitability, in accordance with SFAS 109, we will not recognize any material income tax benefit in our statement of operations for future periods, as pretax profits or losses will generate tax effects that will be offset by decreases or increases in the valuation allowance with no net effect on the statement of operations. If a pattern of continuing profitability is re-established and we conclude that it is more likely than not that deferred income tax assets are realizable, we will reverse any remaining valuation allowance which will result in the recognition of an income tax benefit in the period that it occurs.
In accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), we have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As of May 2, 2009, we have not recorded any unrecognized tax

benefits. Our policy, if we had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively. Our federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. Results of Operations
The following table sets forth our operating results, expressed as a percentage of sales, for the periods indicated.

                                                                    Thirteen              Thirteen
                                                                   Weeks Ended           Weeks Ended
                                                                   May 3, 2008           May 2, 2009
Net sales                                                                 100.0 %               100.0 %
Cost of merchandise sold, occupancy and buying expense                     74.2                  71.8

Gross profit                                                               25.8                  28.2
Selling expense                                                            24.6                  22.2
General and administrative expense                                         10.1                   9.7
Loss on disposal of property and equipment                                  0.5                   0.6

Operating loss                                                             (9.4 )                (4.2 )
Other income, net                                                             -                     -
Interest expense                                                           (1.8 )                (2.0 )

Loss before income taxes                                                  (11.2 )                (6.2 )
Benefit from income taxes                                                     -                     -

Net loss                                                                  (11.2 )%               (6.2 )%

The following table sets forth our number of stores at the beginning and end of each period indicated and the number of stores opened and closed during each period indicated.

                                                  Thirteen          Thirteen
                                                 Weeks Ended       Weeks Ended
                                                 May 3, 2008       May 2, 2009
      Number of stores at beginning of period             249               239
      Stores opened during period                           1                 1
      Stores closed during period                          (1 )              (1 )

      Number of stores at end of period                   249               239

Thirteen Weeks Ended May 2, 2009 Compared to Thirteen Weeks Ended May 3, 2008 Net sales. Net sales increased to $45.0 million for the thirteen weeks ended May 2, 2009 (first quarter 2009) from $43.5 million for the thirteen weeks ended May 3, 2008 (first quarter 2008), an increase of $1.5 million or 3.3%. During the quarter, sales were driven by open-toe footwear across each of the styles offered. Our comparable store sales for the first quarter of 2009, including multi-channel sales, increased by 4.8% compared to an 11.1% decrease in comparable store sales in the first quarter of 2008. Our unit sales increased 4.4% and our average unit selling prices decreased 0.1% compared to the first quarter of 2008. Our multi-channel sales increased 7.1% to $2.6 million.
Gross profit. Gross profit increased to $12.7 million in the first quarter of 2009 from $11.2 million in the first quarter of 2008, an increase of $1.5 million or 12.9%. As a percentage of sales, gross profit increased to 28.2% in the first quarter of 2009 from 25.8% in the first quarter of 2008 primarily as a result of strong regular price sales in open-toe footwear. We attribute the increase in gross profit to the following components: an increase of $1.1 million from improved gross margin percentage, an increase of $0.6 million from higher comparable store sales, partially offset by a decrease of $0.2 million from net store closings. Total markdown costs were $5.6 million in the first quarter of 2009 compared to $5.8 million in the first quarter of 2008.
Selling expense. Selling expense decreased to $10.0 million in the first quarter of 2009 from $10.7 million in the first quarter of 2008, a decrease of $0.7 million or 6.9%, and decreased as a percentage of sales to 22.2% from 24.6%. This decrease was primarily the result of $0.3 million in lower advertising and marketing expenses, $0.2 million decrease in store depreciation expense, due to a reduction in store count, $0.1 million decrease in store payroll expenses and $0.1 million decrease in other expenses.

General and administrative expense. General and administrative expense decreased to $4.3 million in the first quarter of 2009 from $4.4 million in the first quarter of 2008, a decrease of $0.1 million or 1.0%, and decreased as a percentage of sales to 9.7% from 10.1%.
Interest expense. Interest expense increased to $0.9 million in the first quarter of 2009 from $0.8 million in the first quarter of 2008.
Net loss. We had a net loss of $2.8 million, 6.2% of net sales, in the first quarter of 2009 compared to a net loss of $4.9 million, 11.2% of net sales, in the first quarter of 2008.
Seasonality and Quarterly Fluctuations
Our operating results are subject to significant seasonal variations. Our quarterly results of operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of these seasonal variances, in particular our principal selling seasons. We have five principal selling seasons:
transition (post-holiday), Easter, back-to-school, fall and holiday. Sales and operating results in our third quarter are typically much weaker than in our other quarters. Quarterly comparisons may also be affected by the timing of sales promotions and costs associated with remodeling stores, opening new stores, or acquiring stores.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, principal and interest payments on our debt, and capital expenditures. Historically, these cash needs have been met by cash flows from operations, borrowings under our revolving credit facility and sales of securities. As discussed below in "Financing Activities" the balance on our revolving credit facility fluctuates throughout the year as a result of our seasonal working capital requirements and our other uses of cash.
Our losses in the first quarter of fiscal year 2009 and recent years have had a significant negative impact on our financial position and liquidity. As of May 2, 2009, we had negative working capital of $15.5 million, unused borrowing capacity under our revolving credit facility of $0.3 million, and our shareholders' equity had declined to $8.0 million. In order to address our liquidity, in fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan and the issuance of 350,000 shares of common stock. On May 9, 2008, we amended the subordinated secured term loan to reduce the financial covenant for minimum adjusted EBITDA for the first quarter of fiscal year 2008 to maintain compliance as of May 3, 2008 and to defer principal payments until September 1, 2008. As consideration for the amendment, we issued an additional 50,000 shares of common stock.
On April 9, 2009, we again amended the subordinated secured term loan to reduce the financial covenant for minimum adjusted EBITDA for the fourth quarter of fiscal year 2008 in order to maintain compliance as of January 31, 2009. As consideration for the amendment, the Company paid a fee of $250,000 and issued an additional 250,000 shares of common stock. The amendment also tightened the minimum adjusted EBITDA covenants and tangible net worth covenants and reduced the capital expenditure covenants for fiscal years 2009 and 2010. In addition, on April 9, 2009, we amended our revolving credit agreement extending the expiration date to January 2011 from August 2010 and obtaining consent to the amendment of the subordinated secured term loan. The amendment increased the interest rate from the bank's prime rate to prime plus 2.5%, increased the unused line fee from 0.25% to 0.5%, reduced the overall facility from $40 million to $30 million, eliminated the grace period for failing to maintain minimum availability levels, and reduced the advance rate during the fourth quarter. In connection with this amendment, we paid $125,000 in fees. As of June 3, 2009, the balance on the revolving credit facility was $9.5 million and unused borrowing capacity was $0.9 million.
Our business plan for the remainder of fiscal year 2009 is based on a continuation of the mid-single digit increases in comparable store sales which began in the second quarter of fiscal year 2008 and working with our vendors and landlords to arrange payment terms that are more reflective of our seasonal cash flow patterns in order to best manage our availability. Fiscal year 2009 comparable store sales through May 30, 2009 have increased 4.4%, slightly below the planned increase for the period. We expect to achieve our planned sales and maintain adequate levels of liquidity for the remainder of fiscal year 2009. Our business plan also reflects continued focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance compared to fiscal year 2008. Our plan includes continued control over selling, general and administrative expenses. Our business plan for the remainder of fiscal year 2009 reflects a significant improvement in cash flow over fiscal year 2008, but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in the business plan.

We continue to face considerable liquidity constraints. Although we believe our business plan is achievable, should we not achieve the sales or gross margin levels we anticipate, not obtain payment terms from vendors and landlords more reflective of our seasonal cash flow patterns or incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund operations. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. See "Item 1. Business - Risk Factors - If our current positive sales trends are not maintained, we could fail to maintain a liquidity position adequate to support our ongoing operations" in our Annual Report on Form 10-K.
Our subordinated secured term loan includes certain financial covenants which require us to maintain specified levels of adjusted EBITDA and tangible net worth each fiscal quarter and provides for annual limits on capital expenditures (all as calculated in accordance with the loan agreement). Based on the business plan for the remainder of the year and other actions, we believe that we will be able to comply with our financial covenants. However, given the inherent volatility in our sales performance, there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility and the current state of the economy, we believe there is a reasonable possibility that we may not be able to comply with the financial covenants. Failure to comply would be a default under the terms of our term loan and could result in the acceleration of the term loan, and possibly all of our debt obligations. If we are unable to comply with our financial covenants, we will be required to seek one or more amendments or waivers from our lenders. We believe that we would be able to obtain any additional required amendments or waivers, but there is no assurance that we would be able to do so on favorable terms, if at all. If we . . .