Bakers Footwear (BKRS) 10-Q 2010 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended May 2, 2009

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                    to                    

Commission File Number: 000-50563

BAKERS FOOTWEAR GROUP, INC.

(Exact name of registrant as specified in its charter)

Missouri	43-0577980
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

2815 Scott Avenue,
St. Louis, Missouri	63103
(Address of principal executive offices)	(Zip Code)

(314) 621-0699
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso No .þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.0001 per share, 7,382,856 shares issued and outstanding as of June 3, 2009.

BAKERS FOOTWEAR GROUP, INC.

INDEX TO FORM 10-Q

	Page
Part I Financial Information	3
Item 1. Financial Statements (Unaudited)	3
Condensed Balance Sheets	3
Condensed Statements of Operations	4
Condensed Statement of Shareholders’ Equity	5
Condensed Statements of Cash Flows	6
Notes to Condensed Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
Part II Other Information	26
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 4. Submission of Matters to a Vote of Security Holders	26
Item 6. Exhibits	26
Signatures	27
Exhibit Index	28
EX-31.1 Certification by Chief Executive Officer
EX-31.2 Certification by Chief Financial Officer
EX-32.1 906 Certifications

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAKERS FOOTWEAR GROUP, INC.

CONDENSED BALANCE SHEETS

	May 3, 2008			January 31, 2009			May 2, 2009
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	161,861		$	134,676		$	140,689
Accounts receivable		1,502,960			1,330,289			1,599,852
Other receivables		269,557			43,090			109,567
Inventories		23,611,088			20,976,352			22,610,030
Prepaid expenses and other current assets		906,986			908,796			1,147,374
Prepaid income taxes		1,954,011			118,799			131,490
Total current assets		28,406,463			23,512,002			25,739,002
Property and equipment, net		41,861,317			34,029,666			32,167,120
Other assets		1,211,561			966,524			1,011,933
Total assets	$	71,479,341		$	58,508,192		$	58,918,055
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	8,926,272		$	7,556,984		$	8,771,260
Accrued expenses		8,956,848			8,175,564			8,190,144
Subordinated secured term loan		5,770,633			4,817,282			4,281,389
Subordinated convertible debentures		4,000,000			4,000,000			4,000,000
Sales tax payable		694,532			1,032,584			814,469
Deferred income		1,356,373			1,218,687			1,358,234
Revolving credit facility		11,510,954			11,482,862			13,835,294
Current maturities of capital lease obligations		29,928			—			—
Total current liabilities		41,245,540			38,283,963			41,250,790
Accrued rent liabilities		10,196,677			9,774,829			9,666,818
Shareholders’ equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares outstanding		—			—			—
Common Stock, $0.0001 par value; 40,000,000 shares authorized, 7,005,856 shares outstanding at May 3, 2008, 7,055,856 shares outstanding at January 31, 2009 and 7,382,856 shares outstanding at May 2, 2009		700			705			738
Additional paid-in capital		37,972,980			38,506,784			38,826,466
Accumulated deficit		(17,936,556	)		(28,058,089	)		(30,826,757	)
Total shareholders’ equity		20,037,124			10,449,400			8,000,447
Total liabilities and shareholders’ equity	$	71,479,341		$	58,508,192		$	58,918,055

See accompanying notes.

3

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

	Thirteen			Thirteen
	Weeks Ended			Weeks Ended
	May 3, 2008			May 2, 2009
Net sales	$	43,537,503		$	44,976,621
Cost of merchandise sold, occupancy, and buying expenses		32,287,530			32,280,181
Gross profit		11,249,973			12,696,440
Operating expenses:
Selling		10,711,973			9,975,823
General and administrative		4,385,266			4,339,640
Loss on disposal of property and equipment		221,860			284,581
Operating loss		(4,069,126	)		(1,903,604	)
Other income (expense):
Interest expense		(806,748	)		(886,580	)
Other, net		1,806			21,516
Loss before income taxes		(4,874,068	)		(2,768,668	)
Benefit from income taxes		—			—
Net loss	$	(4,874,068	)	$	(2,768,668	)
Net loss per common share	$	(0.70	)	$	(0.39	)

See accompanying notes.

4

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

	Common Stock
	Shares				Additional
	Issued and				Paid-In		Accumulated
	Outstanding		Amount		Capital		Deficit			Total
Balance at January 31, 2009		7,055,856	$	705	$	38,506,784	$	(28,058,089	)	$	10,449,400
Stock-based compensation expense		—		—		127,207		—			127,207
Issuance of common stock		250,000		25		192,475		—			192,500
Issuance of restricted stock, net of cancellations		77,000		8		—		—			8
Net loss		��		—		—		(2,768,668	)		(2,768,668	)
Balance at May 2, 2009		7,382,856	$	738	$	38,826,466	$	(30,826,757	)	$	8,000,447

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

	Thirteen			Thirteen
	Weeks Ended			Weeks Ended
	May 3, 2008			May 2, 2009
Operating activities
Net loss	$	(4,874,068	)	$	(2,768,668	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,041,125			1,733,344
Accretion of debt discount		199,380			151,607
Stock-based compensation expense		156,092			127,207
Interest expense recognized for issuing common stock related to amending the subordinated secured term loan		—			192,500
Loss on disposal of property and equipment		221,860			284,581
Changes in operating assets and liabilities:
Accounts receivable and other receivables		(396,844	)		(336,032	)
Inventories		(5,549,147	)		(1,633,678	)
Prepaid expenses and other current assets		(209,812	)		(238,578	)
Prepaid income taxes		33,610			(12,691	)
Other assets		466,329			(45,409	)
Accounts payable		1,844,058			1,214,276
Accrued expenses and deferred income		(15,881	)		(63,988	)
Accrued rent liabilities		25,916			(108,011	)
Net cash used in operating activities		(6,057,382	)		(1,503,540	)
Investing activities
Purchase of property and equipment		(313,886	)		(155,379	)
Proceeds from disposition of property and equipment		360			—
Net cash used in investing activities		(313,526	)		(155,379	)
Financing activities
Net advances under revolving credit facility		326,575			2,352,432
Proceeds from the issuance of subordinated secured term loan and common stock		7,025,000			—
Costs of issuing subordinated term loan and common stock		(325,542	)		—
Principal payments on subordinated secured term loan		(625,000	)		(687,500	)
Principal payments under capital lease obligations		(27,935	)		—
Net cash provided by financing activities		6,373,098			1,664,932
Net increase (decrease) in cash and cash equivalents		2,190			6,013
Cash and cash equivalents at beginning of period		159,671			134,676
Cash and cash equivalents at end of period	$	161,861		$	140,689
Supplemental disclosures of cash flow information
Cash paid for interest	$	455,593		$	380,835

See accompanying notes.

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BAKERS FOOTWEAR GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited

1. Basis of Presentation

     The accompanying unaudited condensed financial statements contain all adjustments that management believes are necessary to present fairly Bakers Footwear Group, Inc.’s (the Company’s) financial position, results of operations and cash flows for the periods presented. Such adjustments consist of normal recurring accruals. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The Company’s operations are subject to seasonal fluctuations and, consequently, operating results for interim periods are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

2. Liquidity

     The Company’s cash requirements are primarily for working capital, principal and interest payments on debt obligations and capital expenditures. Historically, these cash needs have been met by cash flows from operations, borrowings under the Company’s revolving credit facility and sales of securities. The balance on the revolving credit facility fluctuates throughout the year as a result of seasonal working capital requirements and other uses of cash.

     The Company’s losses in the first quarter of fiscal year 2009 and recent years had a significant negative impact on the Company’s financial position and liquidity. As of May 2, 2009, the Company had negative working capital of $15.5 million, unused borrowing capacity under its revolving credit facility of $0.3 million, and shareholders’ equity had declined to $8.0 million. In fiscal year 2008, the Company obtained net proceeds of $6.7 million from the entry into a $7.5 million subordinated secured term loan and the issuance of 350,000 shares of common stock. On May 9, 2008, the Company amended the subordinated secured term loan, as described in Note 3, to reduce the financial covenant for minimum adjusted EBITDA for the first quarter of fiscal year 2008 in order to maintain compliance at May 3, 2008 and to defer principal payments until September 1, 2008. As consideration for the amendment, the Company issued an additional 50,000 shares of common stock.

     On April 9, 2009, the Company 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, the Company amended its 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, the Company 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.

     The Company’s 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 its vendors and landlords to arrange payment terms that are more reflective of the Company’s seasonal cash flow patterns in order to manage availability. Fiscal year 2009 comparable store sales through May 30, 2009 have increased 4.4%, slightly below the planned increase for the period. The Company expects to achieve its planned sales and maintain adequate levels of liquidity for the remainder of fiscal year 2009. The business plan also reflects continued focus on inventory management and on timely promotional activity. The Company believes that this focus on inventory should improve overall gross margin performance compared to fiscal year 2008. The plan also includes continued control over selling, general and administrative expenses. The business plan for the remainder of fiscal year 2009 reflects a significant

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improvement in cash flow over fiscal year 2008, but does not indicate a return to profitability. However, there is no assurance that the Company will achieve the sales, margin or cash flow contemplated in its business plan.

     The Company continues to face considerable liquidity constraints. Although the Company believes its business plan is achievable, should the Company not achieve the sales or gross margin levels anticipated, not obtain payment terms from vendors and landlords more reflective of its seasonal cash flow patterns, or if incur significant unplanned cash outlays, it would become necessary for the Company to obtain additional sources of liquidity or make further cost cuts to fund operations. However, there is no assurance that the Company 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 it to operate its business.

     The Company’s subordinated secured term loan includes certain financial covenants which require the Company 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 Company’s business plan for the remainder of fiscal year 2009, the Company believes that it will be able to comply with the financial covenants. However, given the inherent volatility in the Company’s sales performance, there is no assurance that the Company will be able to do so. In addition, in light of the Company’s historical sales volatility and the current state of the economy, the Company believes that there is a reasonable possibility that the Company may not be able to comply with the financial covenants. Failure to comply would be a default under the terms of the Company’s term loan and could result in the acceleration of the term loan, and possibly all of the Company’s debt obligations. If the Company is unable to comply with its financial covenants, it will be required to seek one or more amendments or waivers from its lenders. The Company believes that it would be able to obtain any required amendments or waivers, but can give no assurance that it would be able to do so on favorable terms, if at all. If the Company is unable to obtain any required amendments or waivers, the Company’s lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against the Company. If such acceleration occurred, the Company currently has insufficient cash to pay the amounts owed and would be forced to obtain alternative financing as discussed above. As a result of these uncertainties, the Company’s long-term debt obligations have been classified as current liabilities.

     The Company’s independent registered public accounting firm’s report issued in the Company’s Annual Report on Form 10-K for fiscal year 2008 included an explanatory paragraph describing the existence of conditions that raise substantial doubt about the Company’s ability to continue as a going concern, including recent losses and the potential inability to comply with financial covenants. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.

3. Subordinated Secured Term Loan

     Effective February 4, 2008, the Company consummated a $7.5 million three-year subordinated secured term loan (the Loan) and issued 350,000 shares of the Company’s common stock as additional consideration. The Loan matures on February 1, 2011, and requires 36 monthly payments of principal and interest at an interest rate of 15% per annum. Net proceeds to the Company after transaction costs were approximately $6.7 million. The Company used the net proceeds initially to repay amounts owed under its senior revolving credit facility and for working capital purposes. The Loan is secured by substantially all of the Company’s assets and is subordinate to the Company’s revolving credit facility but has priority over the Company’s subordinated convertible debentures. As a result of the uncertainties described in Note 2 above, the Loan has been classified as a current liability.

     Under the Loan agreement, the Company is permitted to prepay the Loan, subject to prepayment penalties which range between 2% and 1% of the aggregate principal balance of the Loan. The Company is also required to make prepayments, subject to a senior subordination agreement (Senior Subordination Agreement) related to the Company’s senior revolving credit facility, on the Loan in certain circumstances, including generally if the Company sells property and assets outside the ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales of securities.

     The Loan agreement contains financial covenants which require the Company to maintain specified levels of tangible net worth and adjusted EBITDA, both as defined in the loan agreement, each fiscal quarter and annual limits on capital expenditures, as defined in the loan agreement, of no more than $1.0 million each for fiscal years 2009 and 2010.

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     Upon the occurrence of an event of default as defined in the Loan Agreement, the Lender will be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the Senior Subordination Agreement, with the interest rate increasing to 17.5% per annum.

     The Company allocated the net proceeds received in connection with this loan and the related issuance of common stock based on the relative fair values of the debt and equity components of the transaction. The fair value of the 350,000 shares of common stock issued was estimated based on the actual market value of the Company’s common stock at the time of the transaction net of a discount to reflect that unregistered shares were issued and could not be sold on the open market unless and until the related registration statement, discussed below, covering these shares was declared effective by the SEC. The fair value of the $7.5 million of debt was estimated based on publicly available data regarding the valuation of debt of companies with comparable credit ratings. The relative fair values of the debt and equity components were then pro rated into the net proceeds received by the Company to determine the actual amounts to be allocated to debt and to equity. Other expenses incurred by the Company relative to this transaction were allocated either to debt issuance costs or as a reduction of additional paid-in capital based on either specific identification of the particular expenses or on a pro rata basis. Based on this analysis, the Company allocated $6,150,000 to the initial value of the subordinated secured term loan and allocated $715,000 to the value of the 350,000 shares of common stock. The Company is accreting the initial value of the debt to the nominal value of the debt over the term of the loan using the effective interest method and recognizes such accretion as a component of interest expense. Likewise, the Company is amortizing the related debt issuance costs using the effective interest method and recognizes this amortization as a component of interest expense.

     The Company also entered into a registration rights agreement in respect of the shares issued. The Company timely complied with its obligations to file a registration statement relating to the shares and have the registration statement declared effective by the SEC. If the registration statement ceases to be effective for more than 60 days per year or more than 30 consecutive calendar days or if the Company’s common stock ceases to be traded on an eligible market as required, then the Company must generally pay liquidated damages in an amount equal to 2% of the value of the registrable shares remaining. The Company is required to use its reasonable best efforts to keep the registration statement continuously effective, subject to certain exceptions, until the earlier of all of the registrable securities being sold or ceasing to be registrable under the agreement, or February 1, 2010. The Company is required to pay all costs of preparing, filing and maintaining the effectiveness of the registration statement. The Company also has certain other ongoing obligations, including providing specified notices and certain information, indemnifying the investor for certain liabilities and using reasonable best efforts to timely file all required filings with the SEC and make and keep current public information about the Company.

     On May 9, 2008, the Company entered into an amendment to the subordinated secured term loan which modified the first quarter 2008 minimum adjusted EBITDA financial covenant, deferred principal payments until September 1, 2008 and re-amortized the remaining principal payments. As consideration for the amendment, the Company issued 50,000 additional shares of common stock. The fair value of the 50,000 shares of common stock issued was estimated based on the actual market value of the Company’s common stock at the time of the transaction net of a discount to reflect that unregistered shares were issued and could not be sold on the open market unless and until the related registration statement, discussed above, covering these shares was declared effective by the SEC. Based on this analysis, the Company allocated $85,000 to the value of the 50,000 shares of common stock. The amendment also modified the terms of the registration rights agreement by adding the 50,000 additional shares to the registration obligations, changing the date on which the Company was required to file the registration statement, to May 12, 2008, and increasing the specified aggregate value on which liquidated damages would initially be computed to $1,096,000 from the initial specified value of $959,000. Based on the updated specified value, as of May 2, 2009, the maximum amount of liquidated damages that the Company could be required to pay is $197,280, which represents 9 potential monthly payments of $21,920. The Company has not recorded a liability in connection with the registration rights agreement because, in accordance with SFAS No. 5,Accounting for Contingencies, management has concluded that it is not probable that the Company will make any payments under the liquidated damages provisions of the registration rights agreement.

     On April 9, 2009, the Company 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 at 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.

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     Scheduled principal payments, net of debt discount applied on the effective interest method are $1,724,944 for the remainder of fiscal year 2009 subsequent to May 2, 2009 and $2,556,445 for fiscal year 2010.

4. Revolving Credit Facility

     The Company has a revolving credit facility with a commercial bank (Bank). This agreement, as amended in April 2009, calls for a maximum line of credit of $30,000,000 ($40,000,000 pre-amendment) subject to the calculated borrowing base as defined in the agreement, which is based primarily on the Company’s inventory level. The agreement matures on January 31, 2011 (August 31, 2010 pre-amendment), and is secured by substantially all assets of the Company. The revolving credit agreement is senior to the subordinated secured term loan and the subordinated convertible debentures. Interest is payable monthly at the bank’s base rate plus 2.5% (base rate only pre-amendment), which was 3.25% per annum at May 2, 2009 and January 31, 2009, or at the Company’s option, based on LIBOR (London Interbank Offered Rate, as defined in the agreement) plus 2.25% to 3.0% (1.5% to 2.25% pre-amendment). An unused line fee of 0.50% (0.25% pre-amendment) per annum is payable monthly based on the difference between the maximum line and the average loan balance. The Company had approximately $2,500,000, $700,000, and $345,000 of unused borrowing capacity under the revolving credit facility based upon the Company’s borrowing base calculation as of May 3, 2008, January 31, 2009, and May 2, 2009, respectively. The agreement has certain restrictive financial and other covenants, including a requirement that the Company maintain a minimum availability. As of May 2, 2009, the Company was in compliance with all of its financial and other covenants and expects to remain in compliance throughout fiscal year 2009 based on the expected execution of its business plan, as discussed in Note 2.

5. Subordinated Convertible Debentures

     The Company completed a private placement of $4,000,000 in aggregate principal amount of subordinated convertible debentures on June 26, 2007. The Company received net proceeds of approximately $3.6 million. The debentures bear interest at a rate of 9.5% per annum, payable semi-annually. The principal balance of $4,000,000 is payable in full on June 30, 2012. The initial conversion price of the debentures was $9.00 per share. The conversion price is subject to anti-dilution and other adjustments, including a weighted average conversion price adjustment for certain future issuances or deemed issuances of common stock at a lower price, subject to limitations as required under rules of the Nasdaq Stock Market. The Company can redeem the unpaid principal balance of the debentures if the closing price of the Company’s common stock is at least $16.00 per share, subject to the adjustments and conditions in the debentures.

     The debentures contain a weighted average conversion price adjustment that is triggered by issuances or deemed issuances of the Company’s common stock. As a result of the issuance of the shares described in Note 3, effective February 4, 2008, the weighted average conversion price of the debentures decreased from $9.00 to $8.64 and on May 9, 2008, the weighted average conversion price of the debentures decreased from $8.64 to $8.59. As a result of the issuance of the shares on April 9, 2009, the weighted average conversion price of the debentures decreased from $8.59 to $8.31.

     On February 1, 2009, the Company adopted the FASB Emerging Issues Task Force (EITF) No. 07-5,Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock(EITF 07-5) and establishes a two-step process for making such determination. Under EITF 07-5, the Company will account separately for the fair value of the conversion feature of the convertible debentures beginning February 1, 2009. As of February 1, 2009 and May 2, 2009, the Company determined that the fair value of the conversion feature was de minimis. There was no significant financial impact to the Company as a result of adopting EITF 07-5. Significant future increases in the value of the Company’s common stock would result in an increase in the fair value of the conversion feature which would result in expense recognition in future periods.

6. Income Taxes

     In accordance with FASB Statement No. 109, Accounting for Income Taxes (SFAS 109), the Company regularly assesses available positive and negative evidence to determine whether it is more likely than not that its 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 the Company’s income tax expense in the

10

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 the Company’s income tax expense in the period that such conclusion is reached.

     Based on the Company’s analyses during fiscal 2007 and 2008, management concluded that the realizability of net deferred tax assets was no longer more likely than not and therefore established a valuation allowance against its net deferred tax assets. As of May 2, 2009, the Company increased the valuation allowance to $13,954,736. The Company has scheduled the reversals of its deferred tax assets and deferred tax liabilities and has concluded that based on the anticipated reversals a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

     The balance of prepaid income taxes at May 2, 2009, consists of required state estimated income tax payments. As of May 2, 2009, the Company has approximately $20.6 million of net operating loss carryforwards that expire in 2022 available to offset future taxable income.

     Significant components of the provision for (benefit from) income tax expense are as follows:

	Thirteen			Thirteen
	Weeks Ended			Weeks Ended
	May 3, 2008			May 2, 2009
Current:
Federal	$	(1,330,381	)	$	(578,513	)
State and local		(287,145	)		(130,876	)
Total current		(1,617,526	)		(709,389	)
Deferred:
Federal		(209,447	)		(295,596	)
State and local		(38,081	)		(53,745	)
Total deferred		(247,528	)		(349,341	)
Valuation allowance		1,865,054			1,058,730
Total provision for (benefit from) income taxes	$	—		$	—

     The differences between income tax expense calculated at the statutory U.S. federal income tax rate of 35% and the amount reported in the statements of operations are as follows:

	Thirteen			Thirteen
	Weeks Ended			Weeks Ended
	May 3, 2008			May 2, 2009
Federal income tax at statutory rate	$	(1,705,924	)	$	(969,034	)
Impact of graduated Federal rates		48,741			27,687
State and local taxes, net of federal income taxes		(215,547	)		(122,441	)
Change in valuation allowance		1,865,054			1,058,730
Permanent differences		7,676			5,058
Total provision for (benefit from) income taxes	$	—		$	—

     Deferred income taxes arise from temporary differences in the recognition of income and expense for income tax purposes. Deferred income taxes were computed using the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes.

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Components of the Company’s deferred tax assets and liabilities are as follows:

	May 3, 2008			January 31, 2009			May 2, 2009
Deferred tax assets:
Net operating loss carryforward	$	4,665,766		$	7,332,648		$	8,042,038
Vacation accrual		398,844			384,696			389,376
Inventory		1,627,809			1,187,969			1,271,896
Stock-based compensation		711,249			888,235			937,845
Accrued rent		4,001,531			3,812,183			3,770,059
Total deferred tax assets		11,405,199			13,605,731			14,411,214
Deferred tax liabilities:
Property and equipment		2,115,010			550,008			224,513
Prepaid expenses		238,746			159,717			231,965
Total deferred tax liabilities		2,353,756			709,725			456,478
Valuation allowance		(9,051,443	)		(12,896,006	)		(13,954,736	)
Net deferred tax assets	$	—		$	—		$	—

     The Company’s federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of May 2, 2009, the Company has not recorded any unrecognized tax benefits. The Company’s policy, if it had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

7. Stock-Based Compensation

     During the thirteen weeks ended May 2, 2009, the Company issued 72,000 nonqualified stock options with a weighted average exercise price of $0.33. These options are exercisable in equal annual installments of 20% on or after each of the first five years from the date of grant and expire ten years from the date of grant. The Company uses the Black-Scholes option pricing model to determine the fair value of stock-based compensation.

     The number of stock options granted, their grant-date weighted-average fair value, and the significant assumptions used to determine fair-value during the thirteen weeks ended May 3, 2008 and May 2, 2009 are as follows:

	Thirteen			Thirteen
	Weeks Ended			Weeks Ended
	May 3, 2008			May 2, 2009
Options granted		216,500			72,000
Weighted-average fair value of options granted	$	0.93		$	0.33
Assumptions
Dividends		0	%		0	%
Risk-free interest rate		2.8	%		2.2	%
Expected volatility		46	%		54	%
Expected option life	6 years			6 years

     During the thirteen weeks ended May 2, 2009, the Company also issued 84,000 shares of restricted common stock and cancelled 7,000 previously issued shares of restricted stock. Shares of restricted stock cliff vest on the five year anniversary of the grant date. The value of the Company’s common stock on the date the restricted shares were issued was $0.32.

8. Earnings Per Share

     Basic earnings (loss) per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares and potential dilutive securities that were outstanding during the period. Potential dilutive securities consist of outstanding stock options and warrants and shares underlying the subordinated convertible debentures.

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     The following table sets forth the components of the computation of basic and diluted earnings (loss) per share for the periods indicated.

	Thirteen			Thirteen
	Weeks Ended			Weeks Ended
	May 3, 2008			May 2, 2009
Numerator:
Net loss	$	(4,874,068	)	$	(2,768,668	)
Numerator for loss per share		(4,874,068	)		(2,768,668	)
Interest expense related to convertible debentures		—			—
Numerator for diluted loss per share	$	(4,874,068	)	$	(2,768,668	)
Denominator:
Denominator for basic earnings per share — weighted average shares		7,005,856			7,163,779
Effect of dilutive securities Stock options		—			—
Stock purchase warrants		—			—
Convertible debentures		—			—
Denominator for diluted earnings (loss) per share — adjusted weighted average shares and assumed conversions		7,005,856			7,163,779

     The diluted earnings per share calculation for the thirteen weeks ended May 2, 2009 excludes 4,765 incremental shares related to outstanding stock options and 469,623 incremental shares underlying convertible debentures because they are antidilutive. The diluted earnings per share calculation for the thirteen weeks ended May 3, 2008 excludes 4,696 incremental shares related to outstanding stock options and 462,962 incremental shares underlying convertible debentures because they are antidilutive.

     During the first quarter of 2009, the Company adopted EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(FSP EITF 03-6-1). EITF 03-6-1 addresses whether instruments granted in share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents before vesting should be considered participating securities and need to be included in the earnings allocation in computing EPS under the “two-class method”. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. FSP EITF Issue Number 03-6-1 requires all prior period EPS data to be adjusted retrospectively. Because the Company’s restricted share awards do not contractually participate in its losses, the Company has not used the two-class method to calculate basic and diluted EPS.

9. Fair Value Measurements

     SFAS 157,Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. The initial adoption and continued application of SFAS 157 has not significantly impacted the Company’s financial statements.

10. Commitments and Contingencies

     The Company has certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business. Management believes the probable resolution of such contingencies will not materially affect the financial position or results of operations of the Company. The Company, in the ordinary course of store construction and remodeling, is subject to mechanic’s liens on the unpaid balances of the individual construction contracts. The Company obtains lien waivers from all contractors and subcontractors prior to or concurrent with making final payments on such projects.

     The Company was served with a lawsuit filed in federal court in the state of California by two former store managers. The two former managers claimed they should have been classified as non-exempt employees under both the California Labor Code and the Fair Labor Standards Act and they filed the case as a class action on behalf of California based store managers. In December 2008, the parties in the lawsuit agreed to a cash settlement which the court approved on May 14, 2009. The settlement did not have a material adverse effect on the Company.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the Company’s unaudited condensed financial statements and notes thereto provided herein and the Company’s audited financial statements and notes thereto in our annual report onForm 10-K. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The factors that might cause such a difference also include, but are not limited to, those discussed in our annual report onForm 10-K under “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and under “Item 1. Business — Risk Factors” and those discussed elsewhere in our Annual Report on Form 10-K and related notes thereto and elsewhere in this quarterly report.

Overview

     We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We feature private label and national brand dress, casual and sport shoes, boots, sandals and accessories. As of May 2, 2009, we operated 239 stores, including 219 Bakers stores and 20 Wild Pair stores located in 37 states.

     We reduced our net loss in the first quarter of 2009 by $2.1 million to $2.8 million down from $4.9 million in the first quarter of fiscal year 2008. During the first quarter of 2009, our net sales increased 3.3% compared to the first quarter of 2008, and our comparable store sales increased 4.8%. During the quarter, sales were driven by open-toe footwear across each of the styles offered. Gross profit percentage increased to 28.2% of sales in the first quarter of 2009 compared to 25.8% in the first quarter of 2008. Our selling expenses decreased 6.9% and our general and administrative expenses decreased 1.0%. Comparable store sales for the first four weeks of the second quarter increased 3.1%.

     We incurred net losses of $15.0 million and $17.7 in fiscal years 2008 and 2007, but continue to make significant progress in focusing our inventory lines and maintaining cost control. Since June 2008, we have achieved positive comparable store sales each month through May 2009. Our losses in the first quarter of fiscal year 2009 and in fiscal years 2008 and 2007 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 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 2, 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 at January 31, 2009. As consideration for the amendment, we 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 the senior lender’s consent to the amendment of the subordinated secured term loan. The amendment also increased our interest rate from the bank’s prime rate to prime plus 2.5%, increased our 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 our revolving line of credit was $9.5 million and our 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 manage availability. Fiscal year 2009 comparable store sales through May 30, 2009 are up 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 this focus on inventory should improve our overall gross margin performance compared to

14

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

15

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

16

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.

17

     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.

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     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 are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of our debt obligations and taking collection actions. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to obtain alternative financing as discussed above. As a result of these uncertainties, our long-term debt obligations have been classified as current liabilities. Please see “— Subordinated Secured Term Loan” herein and “Item 1. Business — Risk Factors — The terms of our subordinated secured term loan contain certain financial covenants with respect to our performance and other covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness and subject us to a cross-default under our credit facility.” in our Annual Report on Form 10-K for additional information.

     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 recent losses and the potential inability to comply with financial covenants. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. Please see “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2008 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” in our Annual Report on Form 10-K for additional information.

     The following table summarizes certain key liquidity measurements:

	May 3, 2008			January 31, 2009			May 2, 2009
Cash	$	161,861		$	134,676		$	140,689
Inventories		23,611,088			20,976,352			22,610,030
Total current assets		28,406,463			23,512,002			25,739,002
Property and equipment, net		41,861,317			34,029,666			32,167,120
Total assets		71,479,341			58,508,192			58,918,055
Revolving credit facility		11,510,954			11,482,862			13,835,294
Subordinated convertible debentures		4,000,000			4,000,000			4,000,000
Subordinated secured term loan		5,770,633			4,817,282			4,281,389
Total current liabilities		41,245,540			38,283,963			41,250,790
Total shareholders’ equity		20,037,124			10,449,400			8,000,447
Net working capital		(12,839,077	)		(14,771,961	)		(15,511,788	)
Unused borrowing capacity*		2,459,244			736,030			346,891

* as calculated under the terms of our revolving credit facility

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Operating activities

     Cash used in operating activities was $1.5 million in the first quarter of 2009 compared to $6.1 million in the first quarter of 2008. Besides our net loss of $2.8 million, the most significant use of cash in operating activities in the first quarter of 2009 relates to a $1.6 million seasonal increase in inventory from the beginning of the year, offset by a $1.2 million increase in accounts payable. The most significant uses of cash in operating activities in the first quarter of 2008, relate to a net loss of $4.9 million, a $5.5 million seasonal increase in inventory, offset by a $1.8 million increase in accounts payable.

     Inventories at May 2, 2009 were $1.6 million higher than at January 31, 2009, but were $1.0 million, or 4.2%, lower than at May 3, 2008. The decrease from May 3, 2008 reflects a net decrease in stores operated. Although we believe that at May 2, 2009, inventory levels and valuations are appropriate given current and anticipated sales trends, there is always the possibility that fashion trends could change suddenly. We monitor our inventory levels closely and will take appropriate actions, including taking additional markdowns, as necessary, to maintain the freshness of our inventory.

Investing activities

     Cash used in investing activities was $0.2 million in the first quarter of 2009 compared to $0.3 million for the first quarter of 2008. During each quarter, cash used in investing activities substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements.

     Our future capital expenditures will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. We continuously evaluate our future capital expenditure plans and adjust planned expenditures, as necessary, based on business conditions. As of June 3, 2009, we have opened two new stores and closed two stores in fiscal year 2009. We currently anticipate that our capital expenditures in fiscal year 2009, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $1.0 million.

Financing activities

     Cash provided by financing activities was $1.7 million in the first quarter of 2009 compared to $6.4 million for the first quarter of 2008. The principal source of cash in the first quarter of 2009 was the net draws of $2.4 million on our revolving line of credit offset by the principal payments on the subordinated secured term loan. In the first quarter of fiscal year 2008, the principal source of cash was the $6.7 million of net proceeds received from the entry into the subordinated secured term loan and the related issuance of 350,000 shares of common stock.

Revolving Credit Facility

     We have a senior secured revolving credit facility with Bank of America, N.A. (successor-by-merger to Fleet Retail Finance Inc.). In order to obtain the bank’s consent to an amendment to our subordinated secured term loan, on April 9, 2009 we amended our credit facility to extend the maturity from August 31, 2010 to January 31, 2011, reduce the credit ceiling from $40 million to $30 million, generally increase the interest rate from the bank’s prime rate to the prime rate plus 2.5%, eliminate a grace period for failing to maintain a minimum availability and implement other amendments to the agreement, including increasing certain fees. Amounts borrowed under the facility bear interest at a rate equal to the base rate (as defined in the agreement) plus a margin amount. Under the amendment, the base rate was revised so that it equals the greater of the bank’s prime rate, the federal funds rate plus 0.50% or the Libor rate plus 1.0% (all as defined in the agreement). Also under the amendment, the base rate margin was changed from 0% to up to 2.5%.

     The revolving credit facility also allows us to apply an interest rate based on Libor (as defined in the agreement) plus a margin amount to a designated portion of the outstanding balance as set forth in the agreement. Under the amendment, the Libor margin (as defined in the agreement) was increased by 75 basis points from a range of 1.75%-2.25% to 2.50%-3.0%. Following the occurrence of any event of default, the Bank may increase the rate by an additional two percentage points.

     The amendment also increases our unused line fee from 0.25% per annum to 0.50% per annum. The unused line fee is payable monthly based on the difference between the revolving credit ceiling and the average loan balance under the agreement. The aggregate

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amount that we may borrow under the agreement at any time is further limited by a formula, which is based substantially on our inventory level but cannot be greater than the revolving credit ceiling of $30 million. The Credit Facility Amendment reduces our borrowing base (as defined in the credit facility) for the periods from October 1 to December 15 of each year and decreases the amount of permitted acquisitions (as defined in the agreement) per year from $2,000,000 to $250,000.

     As additional consideration for the amendment and the extension of the maturity date of the facility, we paid $125,000 in fees. Amounts borrowed under the credit facility continue to be secured by substantially all of our assets. In connection with the administration of the agreement, we are required to pay a facility fee of $2,000 per month. If contingencies related to early termination of the revolving credit facility were to occur, or if we request and receive an accommodation from the lender in connection with the facility, we may be required to pay additional fees.

     The credit facility includes financial, reporting and other covenants relating to, among other things, use of funds under the facility in accordance with our business plan, prohibiting a change of control, including any person or group acquiring beneficial ownership of 40% or more of our common stock or our combined voting power (as defined in the credit facility), maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase of our stock, and restricting certain acquisitions. In the event that we violate any of these covenants, or if other indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or more of our leases could be terminated (other than solely as a result of certain sales of our common stock), the lender would have the right to accelerate repayment of all amounts outstanding under the agreement, or to commence foreclosure proceedings on our assets. We were in compliance with these covenants as of May 2, 2009 and expect to remain in compliance throughout fiscal year 2009 based on the expected execution of our business plan.

     We had balances under our revolving credit facility of $13.8 million, $11.5 million and $11.5 million as of May 2, 2009, January 31, 2009, and May 3, 2008, respectively. We had approximately $0.3 million, $0.7 million and $2.5 million in unused borrowing capacity calculated under the provisions of our revolving credit facility as of May 2, 2009, January 31, 2009, and May 3, 2008, respectively. During the first quarters of fiscal years 2009 and 2008, the highest outstanding balances on our revolving credit facility were $15.7 million and $13.3 million, respectively. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.

Subordinated Secured Term Loan

     On April 9, 2009 we amended our $7.5 million subordinated secured term loan to modify the financial covenant for minimum adjusted EBITDA for the fourth quarter of fiscal year 2008 in order to maintain compliance with that covenant. The amendment also tightened certain other financial covenants relating to our tangible net worth (as defined in the loan agreement) and minimum adjusted EBITDA in future periods and reduced the allowable amount of our capital expenditures for fiscal years 2009 and 2010 to $1,000,000 per year. As consideration for this amendment, we paid a fee of $250,000 and issued an additional 250,000 shares of our common stock.

     We also amended the subordinated secured term loan in May 2008 to modify our first quarter 2008 minimum adjusted EBITDA financial covenant and to defer principal payments until September 1, 2008, with the remaining principal payments under the loan re-amortized over the original term.

     We initially entered into the subordinated secured term loan with Private Equity Management Group, Inc. (PEM), as arranger and administrative agent on behalf of the lender, and an affiliate of PEM, as the lender, and pursuant to a certain Second Lien Credit Agreement on February 4, 2008. The loan matures on February 1, 2011, with interest and principal installments required to be repaid over 36 months at an interest rate of 15% per annum. As consideration for the initial loan and the May 2008 amendment thereto, PEM received 400,000 shares of our common stock, an advisory fee of $300,000 and PEM’s costs and expenses.

     We received aggregate gross proceeds of $7.5 million and net proceeds of approximately $6.7 million from the term loan. We used the net proceeds initially to repay amounts owed under our senior credit facility and for working capital purposes. We have broad obligations to indemnify, and pay the fees and expenses of PEM and the Lender in connection with the loan agreement.

     Under the loan agreement, we may prepay the Loan, subject to prepayment penalties which now range between 2% and 1% of the aggregate principal balance of the Loan. We are also required to make prepayments, subject to our senior subordination agreement

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with PEM and our senior lender, on the term loan in certain circumstances, including generally if we sell property and assets outside the ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales of securities.

     The loan agreement contains financial covenants which require us to maintain specified levels of tangible net worth and adjusted EBITDA (both as defined in the loan agreement) each fiscal quarter and annual limits on capital expenditures. The loan agreement also contains certain other restrictive covenants, including covenants that restrict our ability to use the proceeds of the Loan, to incur additional indebtedness, to pre-pay other indebtedness, to dispose of assets, to effect certain corporate transactions, including specified mergers and sales of all or substantially all of our assets, to change the nature of our business, to pay dividends (other than in the form of common stock dividends), as well as covenants that limit transactions with affiliates and prohibit a change of control. For this purpose, a change of control is generally defined as, among other things, a person or entity acquiring beneficial ownership of more than 50% of our common stock, specified changes to our Board of Directors, sale of all or substantially all of our assets or certain recapitalizations. The loan agreement also contains customary representations and warranties and other affirmative covenants.

     Upon the occurrence of an event of default under the loan agreement, the Lender will be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the senior subordination agreement, with the interest rate increasing to 17.5% per annum. The loan agreement generally provides for customary events of default, including default in the payment of principal or interest or other required payments, failure to observe or perform covenants or agreements contained in the transaction documents (excluding the registration rights agreement), materially breaching our credit facility with our senior lender or the terms of our subordinated convertible debentures, generally failure to pay when due debt obligations (broadly defined, subject to certain exceptions) in excess of $1 million, specified events of bankruptcy or specified judgments against us.

     The loan is secured by substantially all of our assets. The loan is subordinate to our senior secured credit facility with Bank of America, N.A., our senior lender, but it is senior to our $4 million in aggregate principal amount of subordinated convertible debentures due 2012.

     We have granted certain registration rights to PEM with respect to the initial 400,000 shares described above. We were required to file a registration statement relating to the shares, and have that registration statement declared effective with the SEC, within certain time periods. We filed the registration statement and the SEC declared the registration statement effective within the required time periods. If we did not meet these deadlines, or if the registration statement ceases to be effective for more than 60 days per year or more than 30 consecutive calendar days or if our common stock ceases to be traded on an eligible market as required, then we must generally pay PEM liquidated damages in an amount equal to 2% of the value of the registrable shares remaining (based on an aggregate value of $1,096,000) for each 30 day period (prorated for partial periods). We are required to use our reasonable best efforts to keep the registration statement continuously effective, subject to certain exceptions, until the earlier of all of the registrable securities being sold or ceasing to be registrable under the agreement, or February 1, 2010. We are required to pay all costs of preparing, filing and maintaining the effectiveness of the registration statement. We also have certain other ongoing obligations, including providing PEM specified notices and certain information, indemnifying PEM for certain liabilities and using reasonable best efforts to timely file all required filings with the SEC and make and keep current public information about us. We did not grant PEM any registration rights with respect to the 250,000 additional shares issued in connection with the April 2009 amendment to the term loan.

     Based on the specified value of the 400,000 shares described above, as of May 2, 2009, the maximum amount of liquidated damages that we could be required to pay would have been $197, 280, which represents 9 potential monthly payments of $21,920. We have not recorded a liability in connection with the registration rights agreement because, in accordance with SFAS No. 5, Accounting for Contingencies, we have concluded that it is not probable that we will make any payments under the liquidated damages provisions of the registration rights agreement.

Subordinated Convertible Debentures

     On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated convertible debentures (the “Debentures”) to seven accredited investors in a private placement generating net proceeds of approximately $3.6 million, which were used to repay amounts owed under our revolving credit facility. The Debentures are nonamortizing, bear interest at a rate of 9.5% per annum, payable semi-annually on each June 30 and December 31, and mature on June 30, 2012. Investors included corporate directors Andrew N. Baur and Scott C. Schnuck, an entity affiliated with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison.

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     The Debentures are convertible into shares of common stock at any time. The initial conversion price was $9.00 per share. The conversion price, and thus the number of shares into which the Debentures are convertible, is subject to anti-dilution and other adjustments. If we distribute any assets (other than ordinary cash dividends), then generally each holder is entitled to receive a like amount of such distributed property. In the event of a merger, consolidation, sale of substantially all of our assets, or reclassification or compulsory share exchange, then upon any subsequent conversion each holder will have the right to either the same property as it would have otherwise been entitled or cash in an amount equal to 100% principal amount of the Debenture, plus interest and any other amounts owed. The Debentures also contain a weighted average conversion price adjustment generally for future issuances, at prices less than the then current conversion price, of common stock or securities convertible into, or options to purchase, shares of common stock, excluding generally currently outstanding options, warrants or performance shares and any future issuances or deemed issuances pursuant to any properly authorized equity compensation plans. In accordance with rules of the Nasdaq, the Debentures contain limitations on the number of shares issuable pursuant to the Debentures regardless of how low the conversion price may be, including limitations generally requiring that the conversion price not be less than $8.10 per share for Debentures issued to advisory directors, corporate directors or the entity affiliated with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock in the transaction or such that following conversion, the total number of shares beneficially owned by each holder does not exceed 19.999% of our common stock. These limitations may be removed with shareholder approval.

     As a result of the issuance of 650,000 shares of common stock in connection with our subordinated secured term loan, the conversion price of the Debentures decreased from $9.00 to $8.31, making the Debentures convertible into 481,347 shares of our common stock.

     The Debentures generally provide for customary events of default, which could result in acceleration of all amounts owed, including default in required payments, failure to pay when due, or the acceleration of, other monetary obligations for indebtedness (broadly defined) in excess of $1 million (subject to certain exceptions), failure to observe or perform covenants or agreements contained in the transaction documents, including covenants relating to using the net proceeds, maintaining legal existence, prohibiting the sale of material assets outside of the ordinary course, prohibiting cash dividends and distributions, share repurchases, and certain payments to our officers and directors. We generally have the right, but not the obligation, to redeem the unpaid principal balance of the Debentures at any time prior to conversion if the closing price of our common stock (as adjusted for stock dividends, subdivisions or combinations) is equal to or above $16.00 per share for each of 20 consecutive trading days and certain other conditions are met. We have also agreed to provide certain piggyback and demand registration rights, until two years after the Debentures cease to be outstanding, to the holders under the Securities Act of 1933 relating to the shares of common stock issuable upon conversion of the Debentures.

2005 Private Placement of Common Stock and Warrants

     In connection with our 2005 private placement of common stock and warrants, we sold warrants to purchase 250,000 shares of common stock, subject to anti-dilution and other adjustments. The warrants have an exercise price of $10.18 per share and, subject to certain conditions, expire on April 8, 2010. We also issued warrants to purchase 125,000 shares of common stock at an exercise price of $10.18 through April 8, 2010 to the placement agent. In certain circumstances, a cashless exercise provision becomes operative for the warrants issued to the investors. In the event that the closing bid price of a share of our stock equals or exceeds $25.00 per share for 20 consecutive trading days, we have the ability to call the warrants, effectively forcing their exercise into common stock. The warrants issued to the placement agent generally have the same terms and conditions, except that the cashless exercise provision is more generally available and the warrants are not subject to a call provision. Through January 31, 2009, warrants underlying 112,500 shares of common stock had been exercised, generating net proceeds to us of $1,145,250. No warrants were exercised during the thirteen weeks ended May 2, 2009.

     In connection with our 2005 private placement, we entered into a registration rights agreement wherein we agreed to make the requisite SEC filings to achieve and subsequently maintain the effectiveness of a registration statement covering the common stock sold and the common stock issuable upon exercise of the investor warrants and the placement agent warrants issued in connection with the private placement generally through April 8, 2008 and agreed to pay liquidated damages in certain circumstances. Our potential liability for liquidated damages with respect to this registration statement ended on April 8, 2008.

     We estimated the grant date fair value of the 375,000 stock purchase warrants, including the placement agent warrants, issued in connection with the private placement to be $2,160,000 using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 3.5%, expected volatility of 64%, and expected warrant life of five years. Because the warrants were issued in connection with

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the sale of common stock and we have no obligation to settle the warrants by any means other than through the issuance of shares of our common stock we have included the fair value of the warrants as a component of shareholders’ equity.

IPO Warrants

     In connection with our 2004 initial public offering, we sold to the representatives of the underwriters and their designees warrants to purchase up to an aggregate of 216,000 shares of common stock at an exercise price equal to $12.7875 per share. Through May 2, 2009, warrants underlying 94,500 shares of common stock were tendered in cashless exercise transactions under which we issued 35,762 shares of common stock. On February 10, 2009, all unexercised warrants expired.

Off-Balance Sheet Arrangements

     At May 2, 2009, January 31, 2009, and May 3, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could otherwise have arisen if we had engaged in such relationships.

Contractual Obligations

     The following table summarizes our contractual obligations as of May 2, 2009:

	Payments due by Period
			Less than						More than
Contractual Obligations	Total		1 Year		1 - 3 Years		3 -5 Years		5 Years
Long-term debt obligations(1)	$	10,833,335	$	3,676,493	$	2,964,731	$	4,192,111	$	—
Operating lease obligations (2)		150,329,568		25,624,140		45,796,586		38,829,146		40,079,696
Purchase obligations (3)		21,054,964		20,892,964		162,000		—		—
Total	$	182,217,867	$	50,193,597	$	48,923,317	$	43,021,257	$	40,079,696

(1)	Includes principal and interest payments on our subordinated convertible debentures and our subordinated secured term loan. As discussed in Note 2 to the financial statements, these instruments are classified as current liabilities on our balance sheet.
(2)	Includes minimum payment obligations related to our store leases.
(3)	Includes merchandise on order and payment obligations relating to store construction and miscellaneous service contracts.

Recent Accounting Pronouncements

     None.

Impact of Inflation

     Overall, we do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. We cannot give assurance, however, that our business will not be affected by inflation in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not required.

ITEM 4. CONTROLS AND PROCEDURES

     Disclosure Controls and Procedures.The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of

24

the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in accumulating and communicating such information to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     Internal Control Over Financial Reporting.The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s first fiscal quarter ended May 2, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the Company’s first quarter of fiscal year 2009.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     As described in our Annual Report on Form 10-K, on June 2, 2008 the Company was served with a class action lawsuit filed in the United States District Court for the Central District of California by two former store managers. The store managers alleged that they should have been classified as non-exempt employees under both the California Labor Code and the Fair Labor Standards Act and sought an unspecified amount of damages. The store managers filed the lawsuit on behalf of California based store managers. In December 2008, the parties agreed to a cash settlement which the court has preliminary approved. On May 14, 2009 the court granted approval of the proposed settlement. The settlement did not have a material adverse effect on the Company.

     From time to time, the Company is involved in ordinary routine litigation common to companies engaged in the Company’s line of business. Currently, the Company is not involved in any material pending legal proceedings.

ITEM 1A. RISK FACTORS

     There are no material changes to the risk factors disclosed in our Annual Report on Form 10-K for fiscal year 2008.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

     The Company does not have any programs to repurchase shares of its common stock and no such repurchases were made during the thirteen weeks ended May 2, 2009.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6. EXHIBITS

See Exhibit Index herein

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed, on its behalf by the undersigned thereunto duly authorized.

Date: June 8, 2009

BAKERS FOOTWEAR GROUP, INC. (Registrant)
By:	/s/ Peter A. Edison
	Peter A. Edison
	Chairman of the Board, Chief Executive Officer And President (Principal Executive Officer) Bakers Footwear Group, Inc. (On behalf of the Registrant)
By:	/s/ Charles R. Daniel, III
	Charles R. Daniel, III
	Executive Vice President and Chief Financial Officer, Controller, Treasurer, and Secretary (Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
3.2	Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
4.1	Second Lien Credit Agreement dated February 1, 2008 (“Loan Agreement”) by and among the Company, and Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.2	Note evidencing amounts borrowed by the Company under the Loan Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.3	Security Agreement dated February 1, 2008 by and among the Company, Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.4	Subordination Agreement dated February 1, 2008 by and among the Company, Bank of America, N.A. and Private Equity Management Group, Inc., in its capacity as administrative agent for the Lender named therein (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.5	Subordination Agreement dated February 1, 2008 by and among the Company, Private Equity Management Group, Inc., in its capacity as administrative agent for the Lender named therein, and the subordinated creditors named therein (incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.6	Registration Rights Agreement dated February 1, 2008 by and among the Company and Private Equity Management Group, Inc. (incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.7	Fee Letter dated February 1, 2008 between Private Equity Management Group, Inc. and the Company (incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
4.8	Amendment Number 1 to Loan Documents dated May 9, 2008 by and among the Company, Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.8 to the Company’s Quarterly Report on Form 10-Q for the quarter year ended May 3, 2008 filed on June 17, 2008 (File No. 000-50563)).
4.9	Letter of Consent delivered to the Company and Private Equity Management Group, Inc. by Bank of America, N.A. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on May 9, 2008 (File No. 000-50563)).
4.10	Amendment Number 2 to Loan Documents dated April 9, 2009 by and among the Company, Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.10 to the Company’s Current Report on Form 8-K filed on April 15, 2009 (File No. 000-50563)).
10.1	Summary of March 12, 2009 restricted stock awards for the executive officers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 18, 2009 (File No. 000-50563)).

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Exhibit No.	Description
10.2	Letter to Peter Edison outlining 2009 bonus levels (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 18, 2009 (File No. 000-50563)).
10.3	Letter to Mark Ianni outlining 2009 bonus levels (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on March 18, 2009 (File No. 000-50563)).
10.4	Letter to Joe Vander Pluym outlining 2009 bonus levels (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on March 18, 2009 (File No. 000-50563)).
10.5	Letter to Stan Tusman outlining 2009 bonus levels (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on March 18, 2009 (File No. 000-50563)).
10.6	Letter to Charlie Daniel outlining 2009 bonus levels (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on March 18, 2009 (File No. 000-50563)).
10.7	Second Amended and Restated Loan and Security Agreement dated as of August 31, 2006 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)).
10.8	Amended and Restated Revolving Credit Note dated as of August 31, 2006 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)).
10.9	Waiver and Consent Agreement dated as of April 18, 2007 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.14.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007 filed on April 24, 2007 (File No. 000-50563)).
10.10	First Amendment to Second Amended and Restated Loan and Security Agreement dated as of May 17, 2007 by and between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 18, 2007 (File No. 000-50563)).
10.11	Extension Agreement dated June 26, 2007 between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).
10.12	Second Amendment to Second Amended and Restated Loan and Security Agreement dated February 1, 2008 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
10.13	Third Amendment to Second Amended and Restated Loan and Security Agreement dated February 1, 2008 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 15, 2009 (File No. 000-50563)).
11.1	Statement regarding computation of per share earnings (incorporated by reference from Note 8 to the unaudited interim financial statements included herein).
31.1	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).
31.2	Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer).
32.1	Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer and the Chief Financial Officer).

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