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 39 and 13-week periods ended September 26, 2009 and September 27, 2008, respectively, expressed as a percentage of net sales.

                                    39-Weeks Ended                    13-Weeks Ended
                            September 26,    September 27,    September 26,    September 27,
                                2009             2008             2009             2008
Sales                               100.0 %          100.0 %          100.0 %          100.0 %
Cost of sales                        60.4             55.9             68.4             55.9
Gross profit                         39.6             44.1             31.6             44.1
Store operating expenses             37.4             35.9             41.4             39.6
General and
administrative expenses               8.6              8.3              9.7              8.3
Store exit costs                      0.0              1.4              0.0              0.8
Employee separation
charge                                1.4              0.0              4.7              0.0
Operating loss                       (7.8 )           (1.5 )          (24.2 )           (4.6 )
Interest expense                     (0.1 )           (0.1 )           (0.1 )           (0.1 )
Interest income                       0.1              0.3              0.1              0.2
Loss before income taxes             (7.8 )           (1.3 )          (24.1 )           (4.5 )
Income tax benefit                   (2.9 )           (0.5 )           (9.0 )           (1.7 )
Net loss                             (4.9 )%          (0.8 )%         (15.1 )%          (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:

                                         39-Weeks Ended                            13-Weeks Ended
                                September 26,       September 27,      September 26,          September 27,
                                    2009                2008                2009                   2008
Total store count, at end
of period                                  289                 295                 289                     295
Net sales increase
(decrease)                               (22.5 )%              2.0 %             (22.7 )%                 (4.0 )%
Comparable store sales
increase (decrease)                      (21.8 )%              1.0 %             (21.7 )%                 (3.9 )%
Average sales per
transaction decrease                     (14.0 )%             (1.5 )%            (21.2 )%                 (1.2 )%
Average number of
transactions increase
(decrease)                                (9.1 )%              2.5 %              (0.7 )%                 (2.8 )%
Net sales per average
square foot                    $           250     $           319    $             74      $               93
Total square footage, at
end of period (in
thousands)                                 584                 596                 584                     596

Net sales

During the 39-week period ended September 26, 2009, net sales decreased to $154.8 million from $199.8 million, a decrease of $45.0 million, or 22.5%, as compared to the same 39-week period last year. This reflects $41.3 million of reduced net sales, as a result of a 21.8% decrease in comparable store sales, a decrease of $1.9 million of net sales from our Mary L. division, and a decrease of $1.9 million 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 9.1% decrease in sales transactions and a 14.0% decrease in average dollars per transaction.

During the 13-week period ended September 26, 2009, net sales decreased to $44.9 million from $58.1 million, a decrease of $13.2 million, or 22.7%, as compared to the same 13-week period last year. This reflects $12.1 million of reduced net sales, as a result of a 21.7% decrease in comparable store sales, a decrease of $174,000 of net sales from our Mary L. division, and a decrease of $1.0 million 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 0.7% decrease in sales transactions and a 21.2% decrease in average dollars per transaction.

Gross profit

During the 39-week period ended September 26, 2009, gross profit decreased to $61.2 million from $88.2 million, a decrease of $27.0 million, or 30.6%, as compared to the same 39-week period last year. This decrease was primarily due to lower net sales, as described above for the 39-week period for net sales. As a percentage of net sales, gross profit decreased to 39.6% from 44.2% for the fiscal 2009 39-week period, as compared to the prior year period. This decrease as a percentage of net sales was primarily driven by deleveraging of store occupancy costs resulting from lower sales. The decrease in net sales was partially offset by a decrease in production costs, primarily due to improved sourcing and lower freight costs and higher initial mark ups, as compared to the prior year.

During the 13-week period ended September 26, 2009, gross profit decreased to $14.2 million from $25.6 million, a decrease of $11.4 million, or 44.5%, as compared to the same 13-week period last year. This decrease was primarily due to lower net sales, as described

above for the 39-week period for net sales. As a percentage of net sales, gross profit decreased to 31.6% from 44.1% for the current 13-week period, as compared to the prior year period. This decrease as a percentage of net sales was primarily driven by 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 as compared to the prior year.

Store operating expenses

During the 39-week period ended September 26, 2009, store operating expenses decreased to $57.8 million from $71.7 million, a decrease of $13.9 million, or 19.4%, as compared to the same 39-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 ($6.3 million), advertising expense ($2.5 million), depreciation expense ($1.4 million), group and liability insurance expense ($1.4 million) and credit card fees ($950,000). Payroll expenses were lower primarily due to a reduction in hours worked by store employees. The decline in advertising expense was primarily due to a reduction in spending for direct mail and production costs related to printed materials. Depreciation expense decreased as a result of certain assets being fully depreciated prior to fiscal 2009, the closure of 16 underperforming stores, as indicated below, under "Store exit costs" and due to the Company's decision to reduce capital expenditures in fiscal 2009. 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. A reduction in credit card fees was noted due to a decrease in sales coupled with renegotiated contracts. As a percentage of net sales, store operating expenses increased to 37.4% from 35.9% for the fiscal 2009 39-week period as compared to the prior year period, due to the reduction in sales volume in fiscal 2009.

During the 13-week period ended September 27, 2009, store operating expenses decreased to $18.6 million from $23.0 million, a decrease of $4.4 million, or 19.3%, 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 ($1.9 million), advertising expense ($785,000), depreciation expense ($394,000), as well as, group and liability insurance ($706,000). The decreases in payroll, advertising, depreciation and insurance expenses were due to the reasons noted in the preceding paragraph. As a percentage of net sales, store operating expenses increased to 41.4% from 39.6% for the fiscal 2009 13-week period as compared to the prior year period, due to the reduction in sales volume in fiscal 2009.

General and administrative expenses

During the 39-week period ended September 26, 2009, general and administrative expenses decreased to $13.3 million from $16.7 million, a decrease of $3.4 million, or 20.0%, as compared to the same 39-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 $1.4 million, primarily due to the one time charges associated with management changes incurred during 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 $549,000, 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 $617,000 due to a reduction in travel by corporate and regional management, as well as, a decrease in professional fees for $537,000 due to reduced legal activity in fiscal 2009. As a percentage of net sales, general and administrative expenses increased to 8.6% from 8.3% in fiscal 2009, due to the reduction in sales volume in fiscal 2009.

During the 13-week period ended September 26, 2009, general and administrative expenses decreased to $4.4 million from $4.8million, a decrease of $448,000, or 9.3%, 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 $104,000, primarily due to a reduction of base salaries paid to several of the Company's officers combined with a reduction in headcount. Additional decreases in expenses were noted for travel expense of $115,000, due to a reduction in travel by corporate and regional management, as well as, a reduction in professional fees of $90,000. As a percentage of net sales, general and administrative expenses increased to 9.7% from 8.3% in fiscal 2009, due to the reduction in sales volume in fiscal 2009.

Store exit costs

The Company did not incur any store exit costs during fiscal 2009. During the 39-week period ended September 27, 2008, the Company recorded a pre-tax charge of $2.8 million ($1.7 million after tax or $0.13 per diluted share) for 16 underperforming stores, of which we closed six stores during fiscal 2008 and an additional five stores during the 39-week period ended September 26, 2009. The remaining stores will close over the balance of fiscal 2009. The Company does not expect to incur significant additional costs

upon the closing of these stores. Included in the exit costs is a write down of equipment and leasehold improvements, as well as, furniture and fixtures, in the amount of $2.3 million, severance accrual of $198,000 and lease termination costs for $990,000. These costs were offset by the reversal of $750,000 of deferred rents. Store exit costs of $449,000 were recorded during the 13-week period ended September 27, 2008, for additional store closure costs.

Employee separation charge

For the 39 and 13-week periods ended September 26, 2009, the Company incurred a pre-tax charge $2.1 million ($1.3 million after tax or $0.10 per diluted share). The charge resulted from separation agreements entered into with its then executives. The $2.1 million charge also includes a charge of $204,000 for the remaining net book value of the non-compete agreements contained in their employment agreements with the Company, which were terminated pursuant to the separation agreements. See Note 13 herein for additional information.

Other income/expense

During the 39-week period ended September 26, 2009, other income (expense) decreased to $32,000 from $423,000, a decrease of $391,000 or 92.4%, as compared to the same 39-week period last year. This decrease was due to a reduction in interest income of $434,000, primarily caused by lower interest rates in fiscal 2009.

During the 13-week period ended September 26, 2009, other income (expense) decreased to $4,000 from $67,000, a decrease of $63,000 or 94.0%, as compared to the same 13-week period last year. This decrease was due to a reduction in interest income of $73,000, primarily caused by lower interest rates, in fiscal 2009.

Income taxes

During the 39-week period ended September 26, 2009, income tax benefit increased to $4.5 million from $936,000, an increase of $3.6 million or 380.6%, as compared to the same 39-week period last year. During the 13-week period ended September 26, 2009, income tax benefit increased to $4.1 million from $967,000, an increase of $3.1 million or 320.6%, as compared to the same 13-week period last year. The income tax benefits recorded in fiscal year 2009 and 2008 were attributable to the carry back of operating losses incurred by the Company in both years, as discussed above. The estimated effective tax rate for fiscal 2009 is projected to be 37.4%, as compared to the fiscal 2008 estimate of 37.0%.

Net loss

As a result of the factors discussed above, net loss of $7.5 million and $6.8 million was recorded during the 39 and 13-week periods ended September 26, 2009, respectively. In fiscal 2008, net loss of $1.6 million was recorded during each of the 39 and 13-week periods ended September 27, 2008.

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 39-week period ended September 26, 2009, we generated $7.0 million of cash flow from operations, as compared to $343,000 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 September 26, 2009, we had working capital of $40.6 million, cash and marketable securities of $34.2 million and $3.5 million in third party debt outstanding related to the purchase of AVD, excluding the amounts due in connection with the employee separation charge recorded during the 13-week period ended September 26, 2009 (see Note 13). The cash and marketable securities at September 26, 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:

                                                                      39-Weeks Ended
                                                             September 26,      September 27,
                                                                 2009               2008
Net cash provided by (used in) operating activities         $     7,033,000    $      (343,000 )
Net cash provided by (used in) investing activities              (5,001,000 )       10,397,000
Net cash used in financing activities                            (1,538,000 )      (15,274,000 )
Net increase (decrease) in cash and equivalents             $       494,000    $    (5,220,000 )

During the 39-week period ended September 26, 2009, cash and equivalents increased by $494,000, primarily due to decreases in receivables and income tax receivables ($4.9 million), as a result of cash collected on the income tax receivable recorded during fiscal 2008. Decrease in inventories ($1.9 million) and an increase in accounts payable ($1.3 million) also contributed to the net increase in cash and equivalents. Inventories decreased primarily due to Company's efforts to better align the inventory to the decreased sales volumes at stores. These increases in cash were offset by net purchases of marketable securities ($2.2 million), certificates of deposit - restricted ($1.5 million) used as collateral for outstanding letters of credit, as well as, purchases of equipment and leasehold improvements ($1.3 million) for our new and remodeled stores. Decreases were also noted from repurchases of common stock ($586,000) and repayment of a note payable ($952,000) in connection with the acquisition of AVD.

During 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 $550,000 at September 26, 2009, December 27, 2008 and September 27, 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.

Ongoing macroeconomic conditions continue to affect the sales volume and profitability levels of our company. Furthermore, we believe that continuing limitations on the availability of consumer credit, especially of credit cards, continue to adversely affect customer demand for our products, which 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 continue to maintain stringent credit standards and terms. On November 1, 2009, certain CIT entities ("CIT") filed 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, the supplier may cease operations, 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

The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of our business, we enter into operating leases for store locations and utilize letters of credit principally for the importation of merchandise. Other than operating lease commitments and letters of credit 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"), which 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 September 26, 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 39-week period ended September 26, 2009, we recorded a reserve of approximately $560,000 and utilized $625,000, resulting in an aggregate reserve amount of $46,000 as of September 26, 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 17.3% of total inventory as of September 26, 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 . . .