Except for the historical information contained in this Form 10-Q, the matters addressed herein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectation or belief concerning future events. Without limiting the foregoing, the words "believes," "thinks," "anticipates," "estimates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that forward-looking statements are subject to risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially, or otherwise, from those expressed or implied in the forward-looking statements, including, without limitation, macroeconomic factors that have affected the retail sector, including changes in national, regional and local economic conditions, employment levels and consumer spending patterns, and the other risks detailed from time to time in the Company's most recent Form 10-K, Forms 10-Q and other reports filed with the Securities and Exchange Commission. Continued weakness in or a further worsening of the economy generally or in a number of our markets could adversely affect our financial position and results of operations, cause us to reduce the number and frequency of new store openings, slow our re-modeling of existing locations or cause us to increase store closings. Other unknown or unpredictable factors also could harm the Company's business, financial condition and results. Consequently, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws.

RESULTS OF OPERATIONS



The following table sets forth our results of operations for the 26-week periods
ended June 27, 2009 and June 28, 2008, respectively, expressed as a percentage
of net sales.



                                         26-Weeks Ended        13-Weeks Ended
                                      June 27,    June 28,   June 27,   June 28,
                                        2009        2008       2009       2008
Sales                                    100.0 %     100.0 %    100.0 %    100.0 %
Cost of sales                             57.2        55.8       55.6       53.8
Gross profit                              42.8        44.2       44.4       46.2
Store operating expenses                  35.7        34.4       34.6       33.5
General and administrative expenses        8.2         8.4        7.5        8.4
Store exit costs                           0.0         1.6        0.0        0.0
Operating income (loss)                   (1.1 )      (0.2 )      2.3        4.3
Interest expense                          (0.1 )      (0.1 )     (0.1 )     (0.1 )
Interest income                            0.1         0.3        0.1        0.3
Income (loss) before income taxes         (1.1 )       0.0        2.3        4.5
Income tax provision (benefit)            (0.4 )       0.0        0.8        1.7
Net income (loss)                         (0.7 )%      0.0 %      1.5 %      2.8 %

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:

                                           26-Weeks Ended                  13-Weeks Ended
                                      June 27,        June 28,        June 27,         June 28,
                                        2009            2008            2009             2008
Total store count, at end of
period                                       291             297             291              297
Net sales increase (decrease)              (22.5 )%          4.7 %         (23.1 )%           4.1 %
Comparable store sales increase
(decrease)                                 (21.9 )%          3.0 %         (23.0 )%           3.1 %
Average sales per transaction
decrease                                   (11.2 )%         (1.7 )%         (9.0 )%          (0.5 )%
Average number of transactions
increase (decrease)                        (12.0 )%          5.0 %         (15.5 )%           3.5 %
Net sales per average square
foot                                $        177     $       223    $         91      $       117
Total square footage, at end of
period (in thousands)                        586             601             586              601

Net sales

During the 26-week period ended June 27, 2009, net sales decreased to $109.9 million from $141.7 million, a decrease of $31.8 million, or 22.5%, as compared to the same 26-week period last year. This reflects $29.2 million of reduced net sales, as a result of a 21.9% decrease in comparable store sales, a decrease of $1.8 million of net sales from our Mary L. division, and a decrease of $919,000 from our non-comparable store sales, which was offset by a small increase in income recognized from our co-branded credit card. The decrease in net sales is due primarily to the ongoing economic crisis, which resulted in a dramatic reduction in mall traffic where Cache stores are primarily located. The decrease in net sales in fiscal 2009 at Cache stores reflected a 12.0% decrease in sales transactions and an 11.2% decrease in average dollars per transactions.

During the 13-week period ended June 27, 2009, net sales decreased to $56.9 million from $74.0 million, a decrease of $17.1 million, or 23.1%, as compared to the same 13-week period last year. This reflects $16.1 million of reduced net sales, as a result of a 23.0% decrease in comparable store sales, a decrease of $550,000 of net sales from our Mary L. division, and a decrease of $528,000 from our non-comparable store sales, which was offset by a small increase in income recognized from our co-branded credit card. The decrease in net sales for the fiscal 2009 13-week period was due to the same reasons stated above. The decrease in net sales in the quarter at Cache stores reflected a 15.5% decrease in sales transactions and a 9.0% decrease in average dollars per transactions.

Gross profit

During the 26-week period ended June 27, 2009, gross profit decreased to $47.0 million from $62.6 million, a decrease of $15.6 million, or 24.9%, as compared to the same 26-week period last year. This decrease was primarily due to lower net sales, as described above for the 26-week period for net sales. As a percentage of net sales, gross profit decreased to 42.8% from 44.2% for the fiscal 2009 26-week period, as compared to the prior year period. This decrease as a percentage of net sales was primarily driven by the deleveraging of store occupancy costs resulting from lower sales. The decrease in net sales was partially offset by a decrease in production costs and higher initial mark ups, primarily due to improved sourcing and lower freight costs, as compared to the prior year.

During the 13-week period ended June 27, 2009, gross profit decreased to $25.2 million from $34.2 million, a decrease of $9.0 million, or 26.2%, as compared to the same 13-week period last year. This decrease was primarily due to lower net sales, as described above for the 26-week period for net sales. As a percentage of net sales, gross profit decreased to 44.4% from 46.2% for the fiscal 2009 13-week period as compared to the prior year period. This decrease as a percentage of net sales was primarily driven by the deleveraging of store occupancy costs resulting from lower sales. The decrease in net sales was partially offset by lower freight costs and higher initial mark ups, primarily due to improved sourcing, as compared to the prior year.

Store operating expenses

During the 26-week period ended June 27, 2009, store operating expenses decreased to $39.3 million from $48.7 million, a decrease of $9.4 million, or 19.4%, as compared to the same 26-week period last year. Store operating expenses decreased primarily due to the Company's initiatives to reduce costs and preserve cash. Due to these initiatives, the Company achieved reductions primarily in payroll expenses ($4.3 million), advertising expense ($1.8 million), depreciation expense ($1.0 million) and group and liability insurance expense ($658,000). Payroll expenses were lower primarily due to a reduction in store hours allotted to employees. The decline in advertising expense was due to a reduction in spending for postcards, direct mail and photography. Depreciation expense decreased as a result of certain assets being fully depreciated as of fiscal 2008, the closure of 16 underperforming stores, as indicated below, under "Store exit costs" and due to the Company's decision to reduce capital expenditures on new stores, store renovations and new equipment. Group and liability insurance expense decreased due to changes in the Company's medical plan coupled with reduction in premiums for liability insurance resulting from renegotiated contracts. As a percentage of net sales, store operating expenses increased to 35.7% from 34.4% for the fiscal 2009 26-week period as compared to the prior year period.

During the 13-week period ended June 27, 2009, store operating expenses decreased to $19.7 million from $24.8 million, a decrease of $5.1 million, or 20.7%, as compared to the same 13-week period last year. Store operating expenses decreased primarily due to the Company's initiatives to reduce costs and preserve cash. Due to these initiatives, the Company achieved reductions primarily in payroll expenses ($2.3 million), advertising expense ($866,000), depreciation expense ($430,000) and group and liability insurance ($580,000). The decrease in payroll expense was primarily due to a reduction in store hours allotted to employees and the decrease in advertising expense was due to a reduction in spending for postcards, direct mail and photography. Depreciation expense decreased as a result of certain assets being fully depreciated as of fiscal 2008. Group and liability insurance expense decreased due to changes in the Company's medical plan coupled with reduction in premiums for liability insurance resulting from renegotiated contracts. As a

percentage of net sales, store operating expenses increased to 34.6% from 33.5% for the fiscal 2009 13-week period as compared to the prior year period.

General and administrative expenses

During the 26-week period ended June 27, 2009, general and administrative expenses decreased to $9.0 million from $11.9 million, a decrease of $2.9 million, or 24.3%, as compared to the same 26-week period last year. The decrease in general and administrative expenses was primarily due to the Company's initiatives to reduce costs and preserve cash. In total, payroll expenses decreased by $1.1 million, primarily due to the one time charges associated with management changes incurred during the first quarter of fiscal 2008 in the amount of $616,000, combined with a reduction of base salaries paid to several of the Company's officers and a reduction in headcount. In addition, shipping and commission expenses paid in connection with our Mary L. division decreased by $519,000, due to a decrease in Mary L. sales and also due to a discontinuation of outsourced shipping services for Mary L. products, which are now being shipped through the Company's primary carrier. Travel expense decreased by $503,000 due to a reduction in travel by corporate and regional management. As a percentage of net sales, general and administrative expenses decreased to 8.2% from 8.4% in fiscal 2009.

During the 13-week period ended June 27, 2009, general and administrative expenses decreased to $4.2 million from $6.2 million, a decrease of $2.0 million, or 31.5%, as compared to the same 13-week period last year. The decrease in general and administrative expenses was primarily due to the Company's initiatives to reduce costs and preserve cash. In total, payroll expenses decreased by $469,000, primarily due to a reduction of base salaries paid to several of the Company's officers combined with a reduction in headcount. In addition, shipping and commission expenses paid in connection with our Mary L. division decreased by $596,000, due to a decrease in Mary L. sales and also due to a discontinuation of outsourced shipping services for Mary L. products, which are now being shipped through the Company's primary carrier. Additional decreases in expenses were noted for travel expense of $249,000, due to a reduction in travel by corporate and regional management and also in professional fees of $414,000. As a percentage of net sales, general and administrative expenses decreased to 7.5% from 8.4% in fiscal 2009.

Store exit costs

There were no exit costs incurred during fiscal 2009. During the 26-week period ended June 28, 2008, the Company recorded a pre-tax charge of $2.3 million ($1.5 million after tax or $0.11 per diluted share) for 14 underperforming stores, of which we closed six stores during fiscal 2008 and an additional five stores during the 26-week period ended June 27, 2009. The remaining stores will close over the balance of fiscal 2009. Included in the exit costs is a write down of equipment and leasehold improvements and furniture and fixtures in the amount of $2.1 million, severance accrual of $198,000 and lease termination costs for $665,000. These costs were offset by the reversal of $626,000 of deferred rents.

Other income/expense

During the 26-week period ended June 27, 2009, other income (expense) decreased to $29,000 from $356,000, a decrease of $327,000 or 91.9%, as compared to the same 26-week period last year. This decrease was due to a reduction in interest

income of $360,000, caused by lower interest rates and lower average cash and marketable securities balances. The reduction in average cash balances was primarily due to repurchases of the Company's common stock.

During the 13-week period ended June 27, 2009, other income (expense) decreased to $13,000 from $134,000, a decrease of $121,000 or 90.3%, as compared to the same 13-week period last year. This decrease was due to a reduction in interest income of $137,000, primarily caused by lower interest rates.

Income taxes

During the 26-week period ended June 27, 2009, an income tax benefit of $432,000 was recorded as compared to an income tax provision of $31,000 recorded in the same 26-week period last year. During the 13-week period ended June 27, 2009, the income tax provision decreased to $486,000 from $1.2 million, a decrease of $750,000 or 60.7%, as compared to the same 13-week period last year. The estimated effective tax rate for fiscal 2009 is projected to be 36.5%, as compared to the fiscal 2008 estimate of 37.0%.

Net income (loss)

As a result of the factors discussed above, net loss of $751,000 and net income of $845,000 was recorded during the 26 and 13-week periods ended June 27, 2009, respectively. In fiscal 2008, net income of $52,000 and $2.1 million was recorded during the 26 and 13-week periods ended June 28, 2008, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash requirements are primarily for working capital, inventory for new stores, construction of new stores, remodeling of existing stores and to improve and enhance our information technology systems. We have historically satisfied our cash requirements principally through cash flow from operations. During the 26-week period ended June 27, 2009, we generated $7.0 million of cash flow from operations, as compared to $1.7 million used for the same period in fiscal 2008. We expect to continue to meet our operating cash requirements primarily through cash flows from operating activities, existing cash and equivalents, and short-term investments. At June 27, 2009, we had working capital of $45.7 million, cash and marketable securities of $34.8 million and $3.8 million in third party debt outstanding related to the purchase of AVD. The cash and marketable securities at June 27, 2009 included certificates of deposit of $1.5 million that have been placed by the Company as collateral against a one year credit facility.

The following table sets forth our cash flows for the periods indicated:

                                                            26-Weeks Ended
                                                        June 27,       June 28,
                                                          2009           2008
Net cash provided by (used in) operating activities   $  6,994,000   $ (1,658,000 )
Net cash provided by (used in) investing activities     (7,779,000 )   10,539,000
Net cash used in financing activities                   (1,235,000 )  (15,079,000 )
Net decrease in cash and equivalents                  $ (2,020,000 ) $ (6,198,000 )

During the 26 -week period ended June 27, 2009, cash and equivalents decreased by $2.0 million, primarily due to net purchases of marketable securities ($5.4 million), certificates of deposit - restricted ($1.5 million) used as collateral for outstanding letters of credit and purchases of equipment and leasehold improvements ($919,000) for our new and remodeled stores. The decreases in the various areas mentioned above was offset by a decrease in receivables and income tax receivables ($6.6 million), primarily due to collection of an income tax receivable recorded during fiscal 2008. Decreases were also due to the repurchases of common stock ($586,000) and repayment of a note payable ($649,000) in connection with the acquisition of AVD.

During the 26-week period ended June 27, 2009, the Company opened two new stores and is scheduled to open an additional store during the fourth quarter of fiscal 2009. No new stores were opened during the 13-week period ended June 27, 2009. We spent approximately $919,000 through June 27, 2009, and expect to spend an additional $1.0 million to $1.5 million during the balance of fiscal 2009, for new store openings and existing remodelings. We announced the closure of 16 underperforming stores throughout fiscal 2008, of which we have closed 11 stores as of June 27, 2009 and expect to close the remaining stores over the balance of fiscal 2009. The Company accrued for the cost of closing these stores during fiscal 2008, as noted under note 12 of our condensed consolidated financial statements included herein. We have closed three additional stores in the normal course of business during the 26-week period ended June 27, 2009.

During the first half of fiscal 2009, the Company had repurchased in the open market a total of 310,199 shares at a cost of $586,000, or an average of $1.89 per share. This brings the total repurchase, since inception of the buyback program in 2007, to 3,682,000 shares, at a cost of $39.8 million or an average of $10.81 per share.

On May 27, 2009, the Company entered into a one year credit facility with Bank of America (the "Bank"). Under this facility, the Company may direct the Bank to issue letters of credit up to a total of $1,425,000. Any outstanding letters of credit under this facility are collateralized by granting to the bank a security interest in various Certificates of Deposit held by the Company and its subsidiaries with the Bank amounting to a total of $1,500,000. This one year credit facility will expire on May 1, 2010.

The Company had outstanding letters of credit of $1.1 million, $585,000 and $569,000 at June 27, 2009, December 27, 2008 and June 28, 2008, respectively.

Inflation / Recession

The Company does not believe that its sales revenue or operating results have been materially impacted by inflation during the past two fiscal years. There can be no assurance, however, that our sales revenue or operating results will not be impacted by inflation in the future.

Recent economic events have affected, and continued economic weakness in the United States is likely to continue to affect, the sales volume and profitability levels of our company. Furthermore, a further reduction in the availability of consumer credit, especially of credit cards, is likely to adversely affect customer demand for our products, which could result in a decrease in our net sales, which could adversely affect our business, financial condition and results of operations.

Many of our suppliers rely on working capital financing to fund their operations. As a result of current economic conditions, lenders have over the last several months generally tightened credit standards and terms. Recently, there have been several news articles in the financial media about the possibility of CIT filing for bankruptcy protection. CIT provides financing and collection services to several of the Company's suppliers. A CIT bankruptcy may create financing or other challenges to our suppliers. To the extent that any of our suppliers are unable to obtain adequate credit or their borrowing costs increase, we may experience delays in obtaining products, the suppliers may increase their wholesale prices to us or they may modify payment terms in a manner that is unfavorable to us. Any of the foregoing could adversely affect our net sales or gross margins, which could adversely affect our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

On July 3, 2007, the Company acquired certain assets of Adrienne Victoria Designs, Inc. ("AVD"), our largest vendor. Under the terms of the agreement, the Company is obligated to make contingent payments, not to exceed $5.5 million, based upon an earn-out to be paid over 5 years, if certain conditions are met. During the first and second quarters of fiscal 2009 and 2008, the earn-out threshold was not achieved; therefore, the Company was not obligated to make any cash payments. Other than operating lease commitments and potential payment obligations pursuant to the AVD earn-out, we are not a party to any material off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in our fiscal 2008 Form 10-K. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results will differ from these under different assumptions or conditions.

The Company's management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Certificates of deposit - restricted. From time to time, the Company directs Bank of America (the "Bank") to issue letters of credit under its one year credit facility with the bank. These letters of credit are secured against Certificates of Deposit held by the Company at the Bank. Any Certificates of Deposit used to secure the Letters of Credit are reported as Restricted Funds. As of June 27, 2009, the Company had $1.5 million of Certificates of deposit securing all outstanding letters of credit. These Certificates of Deposit are reported as Current when the underlying Letters of Credit expire within one year from the end of the reporting period, or as Non-Current when the underlying Letters of Credit expire after one year from the end of the reporting period.

Allowance for doubtful accounts. The allowance for doubtful accounts, which is regularly reviewed, is an estimate 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 26-week period ended June 27, 2009, we recorded a reserve of approximately $502,000 and utilized $547,000, resulting in an aggregate reserve amount of $66,000 as of June 27, 2009. As of December 27, 2008, the Company reported a reserve balance of $111,000.

Inventories. The Company's 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 that results in a carrying value at the lower of cost or market. For our AVD division, which made up approximately 15.3% of total inventory as of June 27, 2009, 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:

. . .