3. Recent Events and Management’s Plans

The Company’s results for the thirty-nine weeks ended October 29, 2011 reflect difficulties in improving net sales and the impact of aggressive promotional activity on gross profit margins. These difficulties have challenged the Company’s profitability and capital resources; and as a result, the Company has begun to implement certain additional measures, aimed at improving profitability and maintaining flexibility in capital resources.

Management expects to operate the business and execute its strategic initiatives principally with funds generated from operations and the Company’s external sources of credit under its revolving credit facility and credit extended from its vendors and sourcing agent. See Note 13, Debt, and Trade Payables Arrangement. While management expects to see a continuation of challenging net sales and gross profit margin trends throughout the remainder of the fiscal year, the Company’s operating plan for fiscal 2012 contemplates improvements in its net sales, operating results and cash flows from operations, when compared to the results for fiscal 2011, as management progresses with the implementation of its cost reduction and other strategic initiatives. The ability to achieve the Company’s operating plan is based on a number of assumptions which involve significant judgment and estimate of future performance. While the Company’s strategic initiatives are designed to improve sales and operating results, they are still in their early stages, and the Company’s overall operating results have fluctuated significantly. As a result, the Company’s cash flows and other sources of liquidity may not at all times be sufficient for the Company’s cash requirements. Management will continue to monitor the Company’s performance and liquidity, and if management believes operating results will be below its expectations or if management determines at any time that it is appropriate or necessary to obtain additional liquidity, management will take further steps intended to improve the Company’s financial position, such as by modifying the operating plan, seeking to further reduce costs and adjust cash spend or evaluating alternatives and opportunities to obtain additional sources of liquidity. Management cannot assure that any of these actions would be sufficient or available or, if available, available on favorable terms.

Cost Reduction Initiative

In December 2011, the Company announced a cost reduction initiative with a goal of reducing annual costs and expenses by approximately $50.0 million across all areas of the business by the end of fiscal 2012. With this initiative, the Company will seek to continue to improve its financial and capital flexibility, while focusing strategic reinvestment in those areas of the business that are expected to generate meaningful returns. Key components of this initiative include:

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Lowering levels of marketing spend, including the suspension of national advertising and television campaigns in the near-term;

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Exploring and implementing process efficiencies and structural streamlining across all areas of the business, including reducing corporate headcount by approximately 9.0% in December 2011 and

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Implementing a store payroll rationalization program whereby the Company will seek to adjust the composition of its store workforce and reduce store payroll hours by managing to improved productivity standards, aided by the implementation of a workforce management system.

In conjunction with these direct cost reductions, the Company announced a decrease in the level of planned capital expenditures for fiscal 2012 and is planning reductions in the level of merchandise inventory commitments in fiscal 2012 which should also contribute to lower levels of logistics, handling and shipping costs.

The Company expects to incur approximately $3.5 million in restructuring charges related to the corporate headcount reduction component of its cost reduction initiative and is still evaluating the expected costs of any additional components of this initiative, if any. The Company anticipates that it will realize savings related to actions taken under this initiative beginning in the next fiscal year.

In addition to the components of the cost reduction initiative, in fiscal 2011 the Company began executing on its store rationalization plan, a program designed to increase the productivity of the Company’s store square footage by evaluating the Company’s store portfolio on a market-by-market basis and closing, consolidating or downsizing certain selected locations. See Note 5, Restructuring, for further information including key components of this plan and progress to-date.

Trade Payables Arrangement

On September 1, 2011, the Company entered into an arrangement with its exclusive global apparel sourcing agent, whereby the Company is able to extend payment terms for merchandise purchases sourced by its exclusive agent. Under this arrangement, the Company’s sourcing agent settles the Company’s merchandise accounts payable with the vendors organized under the buying agency agreement as they become due and extends the Company’s payment obligation up to an additional 30 days, at which time the Company is obligated to reimburse its sourcing agent the full amount of merchandise accounts payable due plus pay accrued fees and interest. The amount of payables due under this arrangement is not to exceed $50.0 million at any time.

Fees are calculated and payable monthly on amounts outstanding under this arrangement at a rate of 1.0% per month. Additional fees may be charged on amounts overdue under this arrangement at a rate of 2.0% per month, calculated on a daily basis. This arrangement became effective for amounts that are or became due beginning on September 1, 2011 and continues until February 29, 2012, with an option to renew for an additional six month period upon the mutual agreement of the Company and its sourcing agent. This arrangement is subject to suspension or earlier termination as provided in the arrangement, including any termination by the Company’s sourcing agent upon 28 days notice at any time. In addition, the Company’s sourcing agent agreed to extend letters of credit, on behalf and at the request of the Company, to vendors organized under the buying agency agreement for certain merchandise purchases, which may be suspended at the discretion of the sourcing agent. As of October 29, 2011, $39.4 million of the Company’s accounts payable were extended under this arrangement, included as trade payables financing in the Company’s condensed consolidated balance sheet, and the Company had outstanding letters of credit issued by its sourcing agent of $3.8 million. During the thirteen and thirty-nine weeks ended October 29, 2011, the Company recorded $0.6 million of fees and interest under these arrangements included in interest expense in the statement of operations. No amounts were overdue under this arrangement during the quarter.

Stockholder Rights Plan

Effective August 1, 2011, the Company’s Board of Directors unanimously voted to adopt a stockholder rights plan, dated August 1, 2011, between the Company and Computershare Trust Company, N.A., as rights agent, (the “Rights Plan”) and directed the issuance and declared a dividend of one common share purchase right (a “Right” and collectively, the “Rights”) for each outstanding share of common stock, par value of $0.01 per share, of the Company outstanding as of the close of business on August 12, 2011. Initially, no separate certificate representing the Rights will be issued.

Under the Rights Plan, the Rights would be distributed upon the earlier to occur of (i) the tenth business day following a public announcement indicating that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 10.0% or more of the Company’s outstanding common stock or such earlier date as a majority of the Board of Directors becomes aware of such acquisition or (ii) the tenth business day (or such later date as the Board of Directors may determine prior to such time as any person or group becomes an Acquiring Person) following the commencement of, or first public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in a person or group becoming the beneficial owner of 10.0% or more of the then outstanding common stock (the “Distribution Date”). The Rights are not exercisable until the Distribution Date. After the Distribution Date, each Right will entitle the holder to purchase from the Company one share of common stock at a purchase price of $24.00 per common share (the “Purchase Price”), subject to adjustment. Following the existence of an Acquiring Person, all Rights that are or were beneficially owned by any Acquiring Person will be null and void.

If a person or group becomes an Acquiring Person (with certain limited exceptions), each holder of a Right will thereafter have the right to receive, upon exercise, common stock (or, in certain circumstances, other securities of the Company, cash or assets of the Company) having a value equal to two times the Purchase Price. Also, in the event at any time after a person becomes an Acquiring Person, if the Company consolidates or merges with any other person or engages in other specified transactions, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50.0% or more of the outstanding common stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one share of common stock per Right (subject to adjustment).

On August 1, 2021, the Rights Plan will terminate automatically and the Rights will expire, unless this date is amended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described in the agreement. The foregoing is a general summary and is qualified in its entirety by reference to the detailed terms and conditions set forth in the Rights Plan.

Until the Rights become exercisable, they will not have any impact on the Company’s outstanding shares.