DESCRIPTION OF BUSINESS

Description of Business

CPI Corp. ("CPI", the "Company" or "we") is a holding company engaged, through its wholly-owned subsidiaries and partnerships, in selling and manufacturing professional portrait photography of young children, individuals and families and offers other related products and services. The Company also offers wedding photography and videography services and products through its subsidiary, Bella Pictures Holdings, LLC ("Bella Pictures®" or "Bella®").

The Company operates 3,058 (unaudited) professional portrait studios as of February 4, 2012, throughout the U. S., Canada, Mexico and Puerto Rico, principally under lease and license agreements with Walmart and license agreements with Sears and Toys “R” Us. The Company also operates websites which support and complement its Walmart, Sears and Toys “R” Us studio operations. These websites serve as vehicles to archive, share portraits via email (after a portrait session) and order additional portraits and products. The Company also operates a website for Bella Pictures® which serves as a vehicle to reserve/book weddings, select specialized, unique product offerings and view/edit photographs and videos from the wedding day. In the third quarter of 2011, the Company also launched its FotoNet.com™ photography deals program which offers members special offers on studio and on-location photography and a range of other specialized services and products.

For purposes of this report, the Walmart studio operations are operating within CPI Corp. under the tradenames PictureMe Portrait Studio® in the U.S., Walmart Portrait Studios in Canada and Estudios Fotografia de Walmart in Mexico, collectively “PMPS” or the “PMPS brand”.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain items in prior years have been reclassified to conform with the current year presentation.

Fiscal Year

The Company's fiscal year ends on the first Saturday of February. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years.



Fiscal year	Ended	Weeks

2012	February 2, 2013	52
2011	February 4, 2012	52
2010	February 5, 2011	52
2009	February 6, 2010	52

Business Concentrations

Volume of business – The Company’s customers are not concentrated in any specific geographic region. Due to the widely dispersed nature of the Company’s retail business across a broad customer base, no single customer accounts for a significant amount of the Company’s sales.

Revenues – During 2011, 51%, 40% and 7% of the Company’s revenues were generated from sales at PMPS, Sears Portrait Studios (“SPS” or the “SPS brand”), and Kiddie Kandids Portrait Studios® (“KKPS” or the “KKPS brand”), respectively. In 2010, respective revenues were 52%, 43% and 5%. These studios operate under lease and license agreements with Walmart, Sears and Toys “R” Us in the U. S., Canada, Mexico and Puerto Rico that require the Company to pay fees to host companies based on total annual net sales. Revenues related to Bella Pictures® were 2% and 0% of the Company's total revenues in 2011 and 2010, respectively.

Sources of supply – The Company purchases photographic paper and processing chemistry from four major manufacturers. The Company utilizes the software for its U.S. studios from one vendor (under a fully paid perpetual license to use the software and source code) and also has internally developed software that is fully functional in its international studios in Canada, Mexico and Puerto Rico. The Company purchases other equipment and materials for its operations from a number of suppliers and is not solely dependent upon any supplier for any specific equipment or materials.

Foreign operations – Included in the Company’s Consolidated Balance Sheets at February 4, 2012, and February 5, 2011, are long-lived assets of $0.7 million and $5.5 million, respectively, utilized in the Company’s Canadian operations. Net sales related to the Canadian operations were $56.4 million, $57.6 million and $54.8 million in fiscal 2011, 2010 and 2009, respectively. Also included in the Company’s Consolidated Balance Sheets at February 4, 2012, and February 5, 2011, are long-lived assets of $215,000 and $518,000, respectively, utilized in the Company’s Mexican operations. Net sales related to the Company’s Mexican operations were $8.2 million, $8.7 million and $7.9 million in 2011, 2010 and 2009, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, insurance reserves; depreciation; recoverability of long-lived assets and goodwill; defined benefit retirement plan assumptions and income tax. Actual results could differ from those estimates.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.