UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 30, 2004

OR

[   ]          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 000-21543

WILSONS THE LEATHER EXPERTS INC.
(Exact name of registrant as specified in its charter)

(763) 391-4000
(Registrant’s telephone number, including area code)

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 for 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.

Yes [X]          No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X]          No [   ]

As of December 2, 2004, there were 38,868,698 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.

WILSONS THE LEATHER EXPERTS INC.
INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

4

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES

1.	NATURE OF ORGANIZATION

      Wilsons The Leather Experts Inc. (“Wilsons Leather” or the “Company”), a Minnesota corporation, is the leading specialty retailer of quality leather outerwear, accessories and apparel in the United States. As of October 30, 2004, Wilsons Leather operated 453 permanent retail stores located in 45 states and the District of Columbia, including 328 mall stores, 109 outlet stores and 16 airport stores. The Company regularly supplements its permanent mall stores with seasonal stores during its peak selling season from October through January.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BASIS OF PRESENTATION

      The accompanying consolidated financial statements include those of the Company and all of its subsidiaries. All material intercompany balances and transactions between the entities have been eliminated in consolidation. At October 30, 2004, Wilsons Leather operated in one segment: selling leather outerwear, accessories and apparel. The Company’s chief operating decision-maker evaluates revenue and profitability performance on an enterprise basis to make operating and strategic decisions.

      As more fully described in Note 4, on January 22, 2004, the Company announced that it would liquidate up to 100 underperforming mall and outlet stores (subsequently revised to 111 stores) and eliminate approximately 950 store-related positions.

      The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in these interim statements pursuant to such rules and regulations. Although management believes that the accompanying disclosures are adequate so as not to make the information presented misleading, it is recommended that these interim consolidated financial statements be read in conjunction with the Company’s most recent audited consolidated financial statements and related notes included in its 2003 Annual Report on Form 10-K. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. The Company’s business is highly seasonal, and accordingly, interim operating results are not indicative of the results that may be expected for the fiscal year ending January 29, 2005.

      FISCAL YEAR

      Wilsons Leather’s fiscal year ends on the Saturday closest to January 31. The periods that will end or have ended January 29, 2005, and January 31, 2004, are referred to herein as 2004 and 2003, respectively.

      USE OF ESTIMATES

      The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Matters of significance in which management relies on these estimates relate primarily to the realizability of assets such as accounts receivable, property and equipment, and inventories, and the adequacy of certain accrued liabilities and reserves. Ultimate results could differ from those estimates.

      INVENTORIES

      The Company values its inventories, which consist primarily of finished goods held for sale that have been purchased from domestic and foreign vendors, at the lower of cost or market value, determined by the retail inventory method on the last-in, first-out (“LIFO”) basis. As of October 30, 2004, and January 31, 2004, the LIFO cost of inventories approximated the first-in, first-out cost of inventories. The inventory cost includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is

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performed in order to determine if the inventory value is properly stated at the lower of cost or market. Factors related to current inventories such as future consumer demand, fashion trends, current aging, current and anticipated retail markdowns, and class or type of inventory are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of the Company’s inventories and its reported operating results.

      STORE CLOSING AND IMPAIRMENT OF LONG-LIVED ASSETS

      The Company continually reviews its stores’ operating performance and assesses plans for store closures. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), losses related to the impairment of long-lived assets are recognized when expected future cash flows are less than the asset’s carrying value. When a store is closed or when a change in circumstances indicates the carrying value of an asset may not be recoverable, the Company evaluates the carrying value of the asset in relation to its expected future cash flows. If the carrying value is greater than the expected future cash flows, a provision is made for the impairment of the asset to write the asset down to estimated fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of return. These impairment charges are recorded as a component of selling, general and administrative expenses.

      When a store under a long-term lease is to be closed, the Company records a liability for any lease termination or broker fees at the time an agreement related to such closing is signed. At October 30, 2004, and January 31, 2004, the Company had $0.1 million and $0.5 million, respectively, accrued for store lease terminations.

      REVENUE RECOGNITION

      The Company recognizes sales upon customer receipt of the merchandise generally at the point of sale. Shipping and handling revenues are excluded from net sales as a contra-expense and the related costs are included in cost of goods sold, buying and occupancy costs. Revenue from sales of gift certificates, gift cards, reward cards and store credits is recognized at redemption. A reserve is provided at the time of sale for projected merchandise returns based upon historical experience. The Company recognizes revenue for on-line sales at the time goods are received by the customer. An allowance for on-line sales is recorded to cover in-transit shipments, as product is shipped to these customers Free on Board destination.

      INCOME TAXES

      Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. The Company’s deferred income tax assets include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes it is more likely than not that some portion or all of the deferred income tax asset will not be realized.

      LOSS PER SHARE

      Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options and warrants had been issued (calculated using the treasury stock method). The following table reconciles the number of shares utilized in the loss per share calculations (in thousands):

      STOCK-BASED COMPENSATION

      As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), the Company uses the intrinsic-value method for employee stock-based compensation pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized. The Company adopted the disclosure provisions for employee stock-based compensation and the fair-value method for non-employee stock-based compensation of SFAS No. 123. Had

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compensation cost for the stock option plans been determined consistent with SFAS No. 123, the Company’s net loss and basic and diluted loss per share would have been the following pro forma amounts (in thousands, except per share amounts):

(1)

For the year-to-date period ended October 30, 2004, $1,105 of pro forma expense is due to stock option acceleration from the private placement equity transaction which occurred in July 2004 (see Note 9. “Additional Financing”).

      The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 2004 and 2003:

3.	DISCONTINUED OPERATIONS

      In November 2002, the Company liquidated two companies it had previously acquired, El Portal Group, Inc. and Bentley’s Luggage Corp. (collectively the “Travel Subsidiaries”), which consisted of 135 stores, due to their large operating losses. In accordance with SFAS No. 144, the Travel Subsidiaries were presented as a discontinued operation effective November 19, 2002, and the consolidated financial statements were reclassified to segregate the assets, liabilities and operating results of the Travel Subsidiaries for all periods presented.

      The Travel Subsidiaries had current liabilities of $0.3 million and $0.4 million, respectively, as of October 30, 2004, and January 31, 2004. Due to the insignificance of these liabilities, a separate table is not being provided.

      In May 2003, the Company sold its Miami, Florida, distribution center for net proceeds of $2.5 million. This facility was an asset acquired in the Bentley’s Luggage Corp. acquisition. The net proceeds from the sale decreased cash used by discontinued operations for the year-to-date period ended November 1, 2003.

      The following summarizes the Travel Subsidiaries’ disposal reserve activity during the year-to-date period ended October 30, 2004 (in thousands):

      Discontinued operations reserves:

(1)

Primarily includes vendor chargebacks and other miscellaneous liabilities associated with the liquidation of the Travel Subsidiaries.

4.	RESTRUCTURING AND PARTIAL STORE LIQUIDATION

      On January 22, 2004, the Company announced that it would liquidate up to 100 underperforming mall and outlet stores (subsequently revised to 111 stores — the “liquidation stores”) and eliminate approximately 950 store-related positions. The Company entered into an Agency Agreement with a joint venture comprised of Hilco Merchant Resources, LLC, Gordon Brothers Retail Partners, LLC and Hilco Real Estate, LLC (the “Hilco/Gordon Brothers Joint Venture”) to liquidate the inventory in the liquidation stores and assist in the discussions with landlords regarding lease terminations in approximately 94 of these stores. Pursuant to the Agency Agreement, the Hilco/Gordon Brothers Joint Venture was required to pay the Company a guaranteed amount of 84.0% of the cost value of the inventory, subject to certain adjustments. The Hilco/Gordon Brothers Joint Venture was responsible for all expenses related to the sale. The liquidation stores were selected based on strategic criteria, including negative sales and earnings trends, projected real estate costs, location and financial conditions within the market. In addition, the Company announced that it would eliminate approximately 70 positions at its corporate headquarters in Brooklyn Park, Minnesota and its distribution center in Las Vegas, Nevada, close its distribution center in Las Vegas, Nevada, and write-off essentially all remaining assets located at its distribution centers in Maple Grove, Minnesota and Las Vegas, Nevada.

      The Company recorded expenses related to the restructuring and partial store liquidation of $25.1 million in the year-to-date period ended October 30, 2004, primarily related to the transfer of inventory to an independent liquidator in conjunction with the closing of the liquidation stores, lease termination costs, accelerated depreciation, asset write-offs related to store closings, severance, including payments under the Company’s agreements with David L. Rogers and Joel N. Waller, and other restructuring costs. A total of $15.1 million and $11.3 million of these charges were recorded in selling, general and administrative expenses and depreciation and

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amortization, respectively, as partially offset by $1.3 million of gross margin earned on the liquidation sales. The liquidation sales were completed in April 2004, and as of May 1, 2004, all the liquidation stores had been closed. As of October 30, 2004, the Company had successfully negotiated all of its lease terminations. The overall net cash outlay for the restructuring costs is anticipated to be zero to slightly negative.

      On October 28, 2004, the Company announced that its Chief Executive Officer, Joel N. Waller, intended to resign his position with the Company by January 31, 2005. The Company has entered into an agreement with Mr. Waller that provides for severance payments and stock option modifications related to certain performance and time-based criteria. An aggregate of 711,500 options with exercise prices ranging from $4.00 to $20.69 are subject to mark-to-market accounting using the intrinsic value method as a result of the option modifications. The Company has recorded a $0.3 million increase to additional paid-in-capital and deferred compensation for the in-the-money value of modified stock options at October 29, 2004. This amount will be amortized as compensation expense during the fourth quarter of 2004.

5.	OTHER COMPREHENSIVE INCOME

      The Company reports accumulated other comprehensive income as a separate item in the shareholders’ equity section of the consolidated balance sheet. Other comprehensive income consists of foreign currency translation adjustments. For the quarters and year-to-date periods ending October 30, 2004, and November 1, 2003, the amounts were not significant.

6.	LONG-TERM AND SHORT-TERM DEBT

      Long-term debt at October 30, 2004, and January 31, 2004, consisted of the following (in thousands):

      SENIOR NOTES

      The Company issued $75.0 million of 11¼% Senior Notes due August 15, 2004 (the “11¼% Senior Notes”). Interest on the 11¼% Senior Notes was payable semiannually in arrears on February 15 and August 15 of each year. At January 31, 2004, the 11¼% Senior Notes had a balance of $30.6 million and were classified as a current liability. The Company repurchased an aggregate of $44.4 million of the 11¼% Senior Notes in fiscal 1998, 1999 and 2000. In addition, during July 2004, the Company repurchased an additional $22.0 million of the 11¼% Senior Notes. The Company repaid the remaining $8.6 million principal balance on the 11¼% Senior Notes at maturity.

      REVOLVING CREDIT AGREEMENT AND TERM B PROMISSORY NOTE

      General Electric Capital Corporation and a syndicate of banks have provided the Company with a senior credit facility, which was amended on November 1, 2002, January 31, 2003, April 11, 2003, January 21, 2004, April 15, 2004, and April 27, 2004, that provides for borrowings of up to $150.0 million in aggregate principal amount, including a $25.0 million Term B promissory note and a $75.0 million letter of credit subfacility. With the completion of the sale of capital stock (described below in Note 9. “Additional Financing”), and the subsequent repayment of the 11¼% Senior Notes in full at maturity, the senior credit facility expiration date was extended to June 28, 2008, at which time all borrowings, including the Term B promissory note, will become due and payable.

      The senior credit facility contains certain restrictions and covenants, which, among other things, restrict the Company’s ability to make capital expenditures; acquire or merge with another entity; make investments, loans or guarantees; incur additional indebtedness; create liens or other encumbrances; or pay cash dividends or make other distributions. At October 30, 2004, the Company was in compliance with all covenants related to the senior credit facility.

      At October 30, 2004, and January 31, 2004, there were $18.0 million and no borrowings, respectively, under the revolving portion of the credit facility. At October 30, 2004, and January 31, 2004, there were $24.5 million and $6.7 million, respectively, in letters of credit outstanding. The Term B promissory note had a balance of $25.0 million on October 30, 2004, and January 31, 2004.

7.	LEGAL PROCEEDINGS

      In January 2003, a class action was brought on behalf of current and former store managers of the Company in California regarding their classification as exempt from overtime pay. In July 2003, the Company reached a confidential settlement of the class action through mediation. A charge of $1.9 million related to this settlement was taken during the second quarter of 2003. The court granted final approval of the settlement on January 30, 2004. The Company paid the entire settlement during the first quarter of 2004.

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      The Company is involved in various other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position and results of operations.

8.	SUPPLEMENTAL BALANCE SHEET INFORMATION

9.	ADDITIONAL FINANCING

      On April 25, 2004, the Company entered into an agreement to issue 17,948,718 shares of the Company’s common stock (the “Equity Financing”) to three institutional investors at a price of $1.95 per share. The transaction closed on July 2, 2004, with gross proceeds before offering expenses of $35.0 million. As additional consideration for the investors’ commitment, on April 25, 2004, the Company issued two million warrants exercisable for five years to the investors upon signing the Equity Financing agreement, and at closing, issued an additional two million warrants exercisable for five years, each at an exercise price of $3.00 per share of common stock. On July 9, 2004, the Company repurchased $22.0 million of the 11¼% Senior Notes with proceeds from the Equity Financing. The Company used $8.6 million of the proceeds from the Equity Financing to repay the balance of the 11¼% Senior Notes at maturity. The balance of the proceeds have been used for general working capital purposes.

      The relative fair value of the warrants and common stock sold, determined using the Black-Scholes model, was allocated within additional paid-in capital at closing. The Equity Financing qualified as a “change in control” pursuant to the Company’s equity compensation plans. As such, vesting was accelerated on all outstanding unvested stock options and restricted stock as of July 2, 2004.

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

     The following discussion of the financial condition and results of operations of Wilsons The Leather Experts Inc. and wholly owned subsidiaries should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our 2003 Annual Report on Form 10-K. When we refer to “we,” “our,” “us” or “Wilsons Leather,” we mean Wilsons The Leather Experts Inc. and its subsidiaries, including its predecessor companies.

     OVERVIEW

     We are the leading specialty retailer of quality leather outerwear, accessories and apparel in the United States. Our multiple store formats are designed to target a broad customer base with a superior level of customer service. Through our worldwide leather sourcing network and in-house design capabilities, we are able to consistently provide our customers quality, fashionable merchandise at attractive prices. Our business structure results in shorter lead times than our competition, allowing us to react quickly to popular and emerging fashion trends and customer preferences, rapidly replenish fast-selling merchandise and minimize fashion risk.

     As of October 30, 2004, we operated a total of 453 permanent retail stores located in 45 states and the District of Columbia, including 328 mall stores, 109 outlet stores and 16 airport stores. Each year we supplement our permanent stores with seasonal stores during our peak selling season. During 2004, we plan to operate 102 seasonal stores compared to 229 in the prior year.

     Our mall stores average approximately 2,600 total leased square feet and feature a large assortment of both classic and contemporary leather outerwear, accessories and apparel. Our outlet stores are operated primarily under the Wilsons Leather Outlet™ name, average approximately 4,000 total leased square feet, and offer a combination of clearance merchandise from our mall stores, special outlet-only merchandise and key in-season goods. Our airport stores average approximately 700 total leased square feet, feature travel-related products as well as leather accessories and provide us the opportunity to showcase our products and the Wilsons Leather brand to millions of potential customers each year in some of the world’s busiest airports. Our e-commerce site, www.wilsonsleather.com, offers an extension of our store experience and is intended to increase brand awareness, strengthen the relationship with our customers, make our merchandise more accessible to our customers and facilitate cross-marketing with our stores. Our proprietary labels, including M. Julian^®, Maxima^®, Pelle Studio^® and Wilsons Leather™, are positioned to appeal to identified customer lifestyle segments.

     In evaluating our financial performance and operating trends, management considers information concerning our operating loss, net loss, basic and diluted loss per share and certain other information before liquidation and restructuring costs that are not calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”). See Note 4. “Restructuring and Partial Store Liquidation.” A reconciliation of these non-GAAP financial measures to GAAP numbers for the three month and year-to-date periods ending October 30, 2004, is included in the tables below. We believe that the non-GAAP numbers calculated before liquidation and restructuring costs provide a useful analysis of our ongoing operating trends and in comparing operating performance period to period. We evaluate these non-GAAP numbers calculated before liquidation and restructuring costs on a quarterly basis in order to measure and understand our ongoing operating trends.

Reconciliation of GAAP Consolidated Statement of Operations to
Adjusted Statement of Operations for the three months ended October 30, 2004:
(In thousands, except per share amounts)
(Unaudited)

(1)

Includes $2.7 million related to lease termination costs, severance and other restructuring charges.

Reconciliation of GAAP Consolidated Statement of Operations to
Adjusted Statement of Operations for the year-to-date period ended October 30, 2004
(In thousands, except per share amounts)
(Unaudited)

(1)

Includes $25.1 million related to the transfer of inventory to an independent liquidator in conjunction with the closing of approximately 111 stores, lease termination costs, accelerated depreciation, asset write-offs related to store closings, severance and other restructuring charges.

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     We measure performance using key operating statistics such as comparable store sales, sales per square foot, gross margin percentage and store operating expenses, with a focus on labor, as a percentage of sales. These results translate into store operating contribution and store cash flow, which we use to evaluate overall performance on an individual store basis. Store operating contribution is calculated by deducting a store’s operating expenses from its gross margin and is measured as a percentage of sales. Store operating contribution gives us an overall measure as to whether or not individual locations and markets are meeting our financial objectives.

     In addition, general and administrative expenses are monitored in absolute amounts, as well as on a percentage of sales basis. We continue to monitor product costs and promotional activity, which allows us to generally maintain acceptable margin levels. Our gross margins are influenced by the mix of merchandise between outerwear and accessories in our total sales.

     We also measure and evaluate investments in our retail locations, including inventory and property and equipment. Inventory performance is primarily measured by inventory turns, or the number of times store inventory turns over in a given period, and amounts of owned inventory at various times based on payment terms from our vendors. The most significant investments in property and equipment are made at the time we open a store.

     Comparable store sales increased 7.2% in the three months ended October 30, 2004, and increased 4.7% in the year-to-date period ended October 30, 2004, compared to a 9.0% decrease and a 4.9% decrease in comparable store sales in the same periods of the prior year, respectively. A store is included in the comparable store sales calculation after it has been opened and operated by us for more than 52 weeks. The liquidation stores are not included in the comparable store sales calculation. The percentage change is computed by comparing total net sales for comparable stores as thus defined at the end of the applicable reporting period with total net sales from comparable stores for the same period in the prior year.

     On April 25, 2004, we entered into an agreement to issue 17,948,718 shares of our common stock (the “Equity Financing”) to three institutional investors at a price of $1.95 per share. The transaction closed on July 2, 2004, with gross proceeds before offering expenses of $35.0 million. As additional consideration for the investors’ commitment, on April 25, 2004, we issued two million warrants exercisable for five years to the investors upon signing the Equity Financing agreement, and at closing, issued an additional two million warrants exercisable for five years, each at an exercise price of $3.00 per share of common stock. On July 9, 2004, we repurchased $22.0 million of our 11¼% Senior Notes due August 15, 2004 (the “11¼% Senior Notes”) with proceeds from the Equity Financing. We repaid the remaining $8.6 million of the 11¼% Senior Notes at maturity with proceeds from the Equity Financing and have used the balance of these proceeds for general working capital purposes.

     CRITICAL ACCOUNTING POLICIES

     We consider our critical accounting policies to be those related to inventories and property and equipment impairment as discussed in the section with this title in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that begins on page 24 of our 2003 Annual Report on Form 10-K. No material changes occurred to these policies in the periods covered by this quarterly report.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 30, 2004,
COMPARED TO THE THREE MONTHS ENDED NOVEMBER 1, 2003

     Net Sales. Net sales decreased 10.2% to $87.9 million in the three months ended October 30, 2004, from $97.9 million in the comparable period last year. The sales decrease during the quarter is the result of having, on average, 154 fewer stores as a result of the liquidation and natural lease terminations, for an approximate decrease in the number of stores of 25.4% for the three months ended October 30, 2004. The effect of the decreased store count was partially offset by an improvement in comparable store sales. Comparable store sales for the three months ended October 30, 2004, increased 7.2% compared to a decrease of 9.0% in comparable store sales for the same period last year. This comparable store sales increase was primarily driven by special accessory promotions in the third quarter, the “wear now” assortment of value-priced product and improved marketing efforts to drive customers into our stores in 2004. Comparable store sales for 2004 do not include sales for the liquidation stores.

     We opened one store and closed one store in the three months ended October 30, 2004, compared to opening eight stores and closing eight stores in the comparable period last year. As of October 30, 2004, we operated 453 stores compared to 607 stores (including the liquidation stores closed in 2004) at November 1, 2003. We regularly supplement our permanent mall stores with seasonal stores during our peak selling season from October to January.

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     Cost of Goods Sold, Buying and Occupancy Costs. Cost of goods sold, buying and occupancy costs decreased $12.2 million, or 16.2%, in the three months ended October 30, 2004, compared to the comparable period last year. This resulted in a $2.2 million increase in gross margin in the three months ended October 30, 2004, compared to the corresponding period in 2003. The gross margin percentage increased to 28.5% in the three months ended October 30, 2004, compared to 23.4% in the comparable period last year. The increase in gross margin was largely due to an improvement in buying and occupancy costs of $6.7 million driven by: (1) an improvement of $6.2 million in occupancy costs due to fewer stores open in 2004 compared to 2003, (2) a $0.3 million decrease in distribution center costs due to the closure of the Las Vegas, Nevada distribution center in January 2004, and (3) $0.2 million in cost savings in our merchandise department. This gross margin improvement was also driven by the favorable leverage of the 7.2% third quarter comparable store sales increase, which contributed to increased product margins compared to the prior year. The restructuring activities did not have a material impact on our cost of goods sold, buying and occupancy costs or on our gross margin in the three months ended October 30, 2004.

     Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses decreased to $28.9 million in 2004 from $35.1 million in 2003, and decreased as a percentage of net sales to 32.8% from 35.9%. The $6.3 million decrease was primarily due to: (1) a $4.2 million decrease in store selling expenses primarily due to a 25.4% reduction in store count for the three months ended October 30, 2004 and tighter cost control, (2) a $1.5 million decrease in sales promotion expenses due to less direct advertising as compared to the prior year, (3) a $1.6 million decrease in other store and field sales management expenses also due to a lower average store count, (4) a $0.8 million decrease over the prior year for general administrative expenses, (5) a $0.2 million lower loss on asset disposal compared to the prior year, and (6) a $0.8 million reduction in various other departmental expenses due to a reduced head count and tighter expense control. These expenses were largely offset by a $2.8 million increase over the prior year for restructuring costs primarily related to lease termination costs, severance and other restructuring charges.

     SG&A expenses as a percentage of net sales, excluding restructuring costs (which totaled $2.8 million in 2004), decreased to 29.6% compared to 35.9% for the third quarter of last year. This reduction is a result of continued improvement in controlling store-related expenses, the closing of 25.4% of the store base and the overhead reductions implemented in January 2004, all discussed above.

     Depreciation and Amortization. Depreciation and amortization decreased to $3.3 million in the three months ended October 30, 2004, from $4.2 million in the comparable period last year, and decreased as a percentage of net sales to 3.8% from 4.3%. The decrease of $0.9 million was primarily the result of $0.3 million in decreased administrative depreciation as a result of headcount and related asset reductions at our headquarters and closures of two distribution centers in the fourth quarter of 2003 and $0.6 million in lower store depreciation due to 25.4% fewer stores for the three months ended October 30, 2004 compared to 2003.

     Operating Loss. As a result of the above, the operating loss was $7.1 million in the three months ended October 30, 2004, compared to a $16.5 million loss for the comparable period last year, or 8.1% of net sales in 2004 as compared to 16.8% of net sales in 2003. This improvement was largely due to restructuring costs of $2.7 million in 2004, offset by: (1) $9.1 million in lower SG&A expenses in 2004 compared to 2003, (2) $2.1 million in improved gross margin as compared to the prior year, and (3) $0.9 million in favorable depreciation expense in 2004 due to a lower asset base.

     Excluding the restructuring charges, the operating loss for the quarter was $4.4 million, a 73.4% improvement over the $16.5 million operating loss in the comparable period of 2003. This improvement reflects the results of the restructuring and store closing initiatives, as well as the impact of improved product margins and increases in comparable store sales.

     Interest Expense. Net interest expense decreased to $1.4 million in 2004 from $2.9 million in 2003, primarily due to the early repurchase of $22.0 million of the 11¼% Senior Notes in the second quarter of 2004, the repayment of $8.6 million of the 11¼% Senior Notes in the third quarter of 2004, reduced levels of revolver borrowings and reduced amortization of debt issuance costs. The restructuring activities did not impact interest expense.

     Income Tax Benefit. There was no income tax benefit in 2004 compared to $7.7 million in 2003 due to sustained losses, which currently require the recording of a valuation allowance in 2004 against potentially unrealizable net operating losses in future periods. As a result, the effective rate was reduced from 40.0% in 2003 to 0.0% in 2004. The ability to utilize net operating loss carryforwards may be limited under various provisions of the Internal Revenue Code. We performed a preliminary calculation to determine if such limitations are applicable and will complete the study by fiscal year end.

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     Net Loss. As a result of the above, the net loss for the three months ended October 30, 2004, was $8.5 million compared to a net loss of $11.6 million in the comparable period last year. The $3.1 million decrease in net loss over the prior year is primarily due to the $5.8 million decrease in net loss (including a $7.7 million tax benefit recorded in the third quarter of 2003 and no tax benefit recorded in the third quarter of 2004), offset by the $2.7 million of charges related to restructuring activities. Excluding the restructuring charges, the net loss for the third quarter of 2004 was $5.8 million compared to $11.6 million in the comparable period of 2003.

RESULTS OF OPERATIONS FOR THE YEAR-TO-DATE PERIOD ENDED OCTOBER 30, 2004,
COMPARED TO THE YEAR-TO-DATE PERIOD ENDED NOVEMBER 1, 2003

     Net Sales. Net sales decreased 4.7% to $241.0 million in the year-to-date period ended October 30, 2004, from $252.9 million in the comparable period last year. Included in 2004 sales was approximately $20.8 million in liquidation sales resulting from the liquidation of 111 stores that began in the fourth quarter of 2003 and ended in April of 2004. See Note 4. “Restructuring and Partial Store Liquidation.”

     Comparable store sales for the year-to-date period ended October 30, 2004, increased 4.7% compared to a 4.9% decrease in comparable store sales for the same period last year. This comparable store sales increase was primarily driven by special clearance and promotional sales in the second and third quarters, offset by competition from the liquidation stores in the first quarter. Comparable store sales for 2004 do not include sales for the liquidation stores. Excluding the $20.8 million in liquidation sales, net sales decreased 12.9% to $220.2 million, reflecting the 25.3% average store count decline for the year-to-date period ended October 30, 2004 as partially offset by the improvement in comparable store sales.

     We opened five stores and closed 12 stores in the year-to-date period ended October 30, 2004 (excluding the liquidation stores), compared to opening 16 stores and closing 27 stores in the comparable period last year. As of October 30, 2004, we operated 453 stores compared to 607 stores (including the liquidation stores closed in 2004) at November 1, 2003. We regularly supplement our permanent mall stores with seasonal stores during our peak selling season from October to January.

     Cost of Goods Sold, Buying and Occupancy Costs. Cost of goods sold, buying and occupancy costs decreased $21.3 million, or 10.2%, in the year-to-date period ended October 30, 2004, compared to the comparable period last year. This resulted in a $9.4 million increase in gross margin in the current period compared to the corresponding period in 2003. The gross margin percentage also increased to 22.1% in the year-to-date period ended October 30, 2004, compared to 17.4% in the comparable period last year. The increased gross margin was due primarily to $20.1 million in decreased buying and occupancy costs. The improvement in buying and occupancy costs was largely driven by: (1) an improvement of $18.6 million in occupancy costs as a result of an average of 25.3% fewer stores open in the year-to-date period ended October 30, 2004 compared to 2003, (2) a $1.1 million decrease in distribution center costs due to the closure of the Las Vegas, Nevada distribution center in late January 2004, and (3) a $0.4 million decrease in other merchandising costs. This improvement was also driven by reduced delivery costs of $0.7 million due to fewer stores open, and a lower level of clearance goods as a result of the liquidation process as well as positive sell-through of new receipts.

     Gross margin as a percentage of net sales, excluding liquidation and restructuring charges (which totaled $1.3 million in 2004, or 6.2% of net liquidation sales) increased to 23.6% in 2004 compared to 17.4% in the prior year. This increase is primarily a result of improvements in buying and occupancy costs as described above.

     Selling, General and Administrative Expenses. SG&A expenses decreased to $90.6 million in 2004 from $100.4 million in 2003, and decreased as a percentage of net sales to 37.6% from 39.7%. The $9.8 million decrease was primarily due to: (1) a $13.1 million decrease in store selling expenses primarily due to tighter cost control and a 25.3% reduction in store count, (2) a $3.9 million decrease in other store and field sales management expenses also due to a lower average store count, (3) a $0.9 million decrease in e-commerce expenses due to fewer functionality improvements over the prior year and lower sales promotion expenses due to the preparation for outsourcing e-commerce operations in the third quarter of 2004, (4) a $2.0 million decrease in legal expenses related to a charge of $1.9 million taken in the second quarter of 2003 in connection with a class action lawsuit, (5) a $2.1 million decrease in other administration costs related to a reduced store count and cost-saving initiatives, and (6) a $2.9 million decrease in sales promotion expense due to deferral of spending until the fourth quarter of 2004 and less spending on direct advertising as compared to the prior year. These expense reductions were offset by a $15.1 million increase over the prior year for liquidation and restructuring costs related primarily to lease termination costs, asset write-offs related to store closings, severance, and other restructuring charges.

     SG&A expenses as a percentage of net sales, excluding liquidation and restructuring charges (which totaled $15.1 million in 2004, or 72.8% of net liquidation sales) decreased to 34.3% compared to 39.7% for the first three quarters of last year. This reduction is a result of continued improvement in controlling store-related expenses, the closing of underperforming stores and the overhead reductions implemented in January 2004, all discussed above.

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     Depreciation and Amortization. Depreciation and amortization increased to $22.4 million in the year-to-date period ended October 30, 2004, from $12.5 million in the comparable period last year, and increased as a percentage of net sales to 9.3% from 5.0%. The increase of $9.8 million was primarily the result of $11.3 million in accelerated depreciation recorded in 2004 for the liquidation stores, offset by $1.4 million in decreased administrative and store depreciation as a result of headcount and related asset reductions at our headquarters and closures of two distribution centers in the fourth quarter of 2003 and a lower level of store assets related to a reduced store count.

     Depreciation and amortization, excluding liquidation and restructuring effects (which totaled $11.3 million in 2004, or 54.3% of net liquidation sales), decreased to $11.1 million, or 5.0% of net sales, compared to $12.5 million, or 5.0% of net sales, in the first three quarters of last year. This decrease is due to a lower level of administrative and store assets.

     Operating Loss. As a result of the above, the operating loss was $59.6 million in the year-to-date period ended October 30, 2004, compared to a $69.0 million operating loss for the comparable period last year, or 24.7% of net sales in 2004 as compared to 27.3% of net sales in 2003. This was largely due to liquidation and restructuring costs of $25.1 million in 2004, offset by: (1) $24.9 million in lower SG&A expenses in 2004 compared to 2003, (2) $8.1 million in improved gross margin as compared to the prior year, and (3) $1.4 million in favorable depreciation expense in 2004 due to a lower asset base.

     Excluding the liquidation and restructuring charges, the operating loss for the first three quarters was $34.5 million, a 49.9% improvement over the $69.0 million operating loss in the first three quarters of 2003. This improvement reflects the restructuring and store closing initiatives as well as the impact of improved product margins.

     Interest Expense. Year-to-date net interest expense decreased to $6.1 million in 2004 compared to $7.6 million in the corresponding period of 2003. This improvement was primarily due to a $0.5 million write-off of debt issuance costs related to the amended senior credit facility, which reduced our revolving line of credit borrowing capacity from $180.0 million to $125.0 million, offset by: (1) interest savings from the repurchase of $22.0 million of the 11¼% Senior Notes in the second quarter of 2004 and repayment of $8.6 million of the 11¼% Senior Notes in the third quarter of 2004, (2) reduced levels of revolver borrowings and (3) reduced amortization of debt issuance costs. The liquidation and restructuring activities did not impact interest expense.

     Income Tax Benefit. There was no income tax benefit in 2004 compared to $30.6 million in 2003 due to sustained losses, which currently require the recording of a valuation allowance in 2004 against potentially unrealizable net operating losses in future periods. As a result, the effective rate was reduced from 40.0% in 2003 to 0.0% in 2004. The ability to utilize net operating loss carryforwards may be limited under various provisions of the Internal Revenue Code. We performed a preliminary calculation to determine if such limitations are applicable and will complete the study by fiscal year end.

     Net Loss. As a result of the above, the net loss for the year-to-date period ended October 30, 2004, was $65.7 million compared to a net loss of $46.0 million in the comparable period last year. The $19.8 million increase in net loss over the prior year is primarily due to the $25.1 million of charges related to liquidation and restructuring activities (offset by the improved gross margin and reduced costs excluding liquidation and restructuring costs discussed above), a $30.6 million prior-year tax benefit and no tax benefit recorded during the year-to-date period ended October 30, 2004. Excluding the liquidation and restructuring charges, the net loss for the year-to-date period ended October 30, 2004 was $40.6 million.

     LIQUIDITY AND CAPITAL RESOURCES

     Our capital requirements are primarily driven by our seasonal working capital needs, investments in new stores, remodeling existing stores, enhancing information systems and increasing capacity for our distribution center. Our peak working capital needs typically occur during the period from August through early December as inventory levels are increased in advance of our peak selling season from October through January.

     Our future capital requirements depend on the sustained demand for our leather products. Many factors affect the level of consumer spending on our products, including, among others, general business conditions, interest rates, the availability of consumer credit, weather, the outbreak of war, acts of terrorism or the threat of either, other significant national and international events, taxation and consumer confidence in future economic conditions. Consumer purchases of discretionary items, such as our leather products, tend to decline during recessionary periods when disposable income is lower. The uncertain outlook in the United States’ economy has shifted consumer spending habits toward large discount retailers, which has decreased mall traffic, resulting in lower net sales on a quarterly and annual basis.

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     Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to general economic conditions and financial, business and other factors affecting our operations. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt or to obtain additional financing. There can be no assurance that any such refinancing or additional financing would be possible or could be obtained on terms that are favorable to us.

     General Electric Capital Corporation and a syndicate of banks have provided us with a senior credit facility, which was amended on April 15, 2004, and April 27, 2004 (the “senior credit facility” or the “credit agreement”), that provides for borrowings of up to $150.0 million in aggregate principal amount, including a $25.0 million Term B promissory note and a $75.0 million letter of credit subfacility. The maximum amount available under the revolving credit portion of the senior credit facility is limited to:

	•		85% of net inventories, provided that such percentage at no time may exceed 85% of the then applicable discount rate applied in appraising such inventories to reflect their value as if sold in an orderly liquidation, except that the discount rate is gradually increased from August 17 to October 1 of each year and gradually decreased from December 17 to February 1 of each year, and except that such amount is reduced by the amount of certain in-transit inventory to the extent such in-transit inventory reflects a disproportionate amount of our total inventory;
	•		plus 85% of outstanding and undrawn trade letters of credit, provided that such percentage at no time may exceed 85% of the discount rate applied in appraising the future inventories related to such letters of credit to reflect their value as if sold in an orderly liquidation;
	•		plus 85% of credit card receivables; and
	•		minus a $10.0 million reserve.

     In addition, borrowings under the senior credit facility are subject to the further limitations that:

	•		the revolving credit portion of such borrowings cannot exceed the sum of 85% of credit card receivables, plus 85% of the appraised value of inventory (including inventory subject to trade letters of credit) as if sold on a going-out-of-business basis;
	•		the total borrowings (i.e., the revolving credit portion of the facility and the Term B promissory note) cannot exceed the sum of 85% of the book value of credit card receivables, plus 95% (100% during August, September and October) of the appraised value of inventory (including inventory subject to trade letters of credit) as if sold on a going-out-of-business basis; and
	•		from December 31 of each year through March 31 of the following year, we must have no borrowings under the revolving credit portion of the facility and outstanding letters of credit must be no greater than $20.0 million.

     Peak borrowings typically occur from October through December and outstanding letters of credit typically peak from August through September. As of October 30, 2004, we had $18.0 million outstanding under the revolving portion of the credit facility, $25.0 million under the Term B promissory note and $24.5 million in outstanding letters of credit.

     Except as noted in the next sentence, interest is payable on revolving credit borrowings at variable rates determined by LIBOR plus 3.25%, or the “prime” rate plus 2.0% (commercial paper rate plus 3.25% if the loan is made under the “swing line” portion of the revolver). If we meet certain financial tests for our fiscal year ending January 29, 2005, these rates will be reduced by 0.50% per annum thereafter. Interest is payable on the $25.0 million Term B promissory note at a variable rate equal to the “prime” rate plus 4%, plus an additional 5% payable pursuant to a separate letter agreement with General Electric Capital Corporation. We pay monthly fees on the unused portion of the senior credit facility and on the average daily amount of letters of credit outstanding during each month. With the completion of the sale of capital stock (described above under Note 9. “Additional Financing”) and subsequent repurchase and repayment of the 11¼% Senior Notes, the senior credit facility will expire on June 28, 2008, at which time all borrowings, including the Term B promissory note, become due and payable. Prepayment of the Term B promissory note is subject to a 1% prepayment fee. The revolving credit portion of the facility is subject to a 1% prepayment fee under most circumstances. The Term B promissory note is prepayable only with the consent of the senior lenders under the senior credit facility.

     The senior credit facility contains certain restrictions and covenants, which, among other things, restrict our ability to make capital expenditures; acquire or merge with another entity; make investments, loans or guarantees; incur additional indebtedness; create liens or other encumbrances; or pay cash dividends or make other distributions.

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     We plan to use the senior credit facility for our immediate and future working capital needs. We are dependent on the senior credit facility to fund working capital and letter of credit needs. We believe that borrowing capacity under the senior credit facility, together with cash on hand, current and anticipated cash flow from operations, cost reductions associated with the lower store count from the liquidation stores and natural lease terminations and the proceeds from the Equity Financing discussed below, will be adequate to meet our working capital and capital expenditure requirements through the next twelve months.

     On August 18, 1997, we completed a private offering of $75.0 million of our 11¼% Senior Notes to certain institutional buyers. The 11¼% Senior Notes matured on August 15, 2004. During fiscal 2000 and fiscal 1999, we repurchased $13.3 million and $26.1 million, respectively, of our 11¼% Senior Notes. On July 9, 2004, the Company repurchased $22.0 million of the 11¼% Senior Notes with proceeds from the Equity Financing. We repaid the remaining $8.6 million balance of the 11¼% Senior Notes at maturity.

     On April 25, 2004, we entered into an agreement to issue 17,948,718 shares of our common stock to three institutional investors at a price of $1.95 per share. The Equity Financing closed on July 2, 2004, with gross proceeds of $35.0 million before offering costs. As additional consideration for the investors’ commitment, on April 25, 2004, we issued two million warrants exercisable for five years to the investors upon signing the Equity Financing agreement, and at closing issued an additional two million warrants exercisable for five years, each at an exercise price of $3.00 per share of common stock. The proceeds of the offering were used to repay the 11¼% Senior Notes described above. The remaining balance of these funds was used for general working capital purposes.

     CASH FLOW ANALYSIS

     Operating Activities. Operating activities for the year-to-date period ended October 30, 2004, resulted in cash used of $59.9 million compared to cash used of $74.9 million in the corresponding period of 2003.

     The $59.9 million of cash used by operating activities in 2004 was comprised of sources of cash including: (1) a $19.2 million increase in accounts payable and accrued expenses due to an increase in accounts payable of $24.9 million due to the volume of merchandise purchased in preparation for the holiday selling season as offset by a $5.7 million decrease in accrued expenses due primarily to lower headcount as a result of our restructuring activities, (2) $25.6 million in non-cash adjustments for depreciation, amortization, asset write-offs, and restricted stock compensation expense, of which $13.2 million was related to the liquidation stores and restructuring activities, and (3) a $1.7 million decrease in accounts receivable primarily due to lower credit card receivables as a result of a lower store count.

     These sources of cash were offset by: (1) a net loss from operations of $65.7 million (of which $25.1 million related to charges for the liquidation and restructuring activities), (2) a $35.5 million increase in inventories in preparation for the holiday selling season, (3) a $4.0 million increase in prepaid expenses due primarily to $3.9 million in higher prepaid rent due to the timing of rent payments, and (4) a $1.2 million decrease in income taxes payable and other liabilities primarily due to $1.6 million in reductions in straight-line rent due to the store liquidation event and amortization of deferred gain on the sale/leaseback of our headquarters facility, offset by a $0.4 million increase in miscellaneous income tax liability accounts.

     The $74.9 million of cash used by operating activities in 2003 was comprised of: (1) a $27.0 million increase in accounts payable and accrued expenses, (2) a $14.1 million non-cash adjustment for depreciation, amortization, asset write-offs, and restricted stock compensation expense, (3) a $3.1 million decrease in refundable income taxes and (4) a $2.1 million increase in income taxes payable and other liabilities.

     These sources of cash in 2003 were primarily offset by: (1) a $46.0 million net loss from operations, (2) a $55.8 million increase in inventories, (3) a $5.3 million increase in prepaids due to timing of rent payments, (4) a $1.1 million increase in accounts receivable, and (5) a $13.0 million increase in net deferred income tax assets and liabilities.

     Investing Activities. Investing activities for the year-to-date period ended October 30, 2004, were comprised of $4.2 million in capital expenditures primarily for the renovation of and improvements to existing stores, offset by $0.2 million in proceeds on the sale of property and equipment. For 2004, capital expenditures are capped by the senior credit facility at $6.0 million.

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     Investing activities for the year-to-date period ended November 1, 2003, were comprised primarily of $6.3 million in capital expenditures used primarily for the construction of new stores and the renovation of and improvements to existing stores.

     Financing Activities. Cash provided by financing activities for the year-to-date period ended October 30, 2004, was $21.6 million and was comprised primarily of: (1) $32.4 million in net proceeds from the Equity Financing, (2) $18.0 million in revolver borrowings, and (3) $3.6 million provided by checks written in excess of cash balance, offset by (4) $30.6 million used for payment of the 11¼% Senior Notes, (5) $0.6 million in reduced other borrowings, and (6) $1.2 million used for debt acquisition costs related to amendments to our senior credit facility in April 2004.

     Cash provided by financing activities for the year-to-date period ended November 1, 2003, was $61.5 million, which was comprised primarily of $56.8 million provided by revolver financing and $4.8 million provided by checks written in excess of cash balances, and $0.9 million from the issuance of common stock and exercise of stock options, partially offset by $1.0 million used for debt acquisition costs.

     OFF-BALANCE SHEET ARRANGEMENTS

     We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

     CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     We have standby and documentary letters of credit outstanding at October 30, 2004, amounting to $24.5 million. We also have a Term B Promissory Note for $25.0 million and $18.0 million outstanding on the revolving portion of our credit facility at October 30, 2004. These commitments are further discussed in the Liquidity and Capital Resources section of this Form 10-Q. We repaid the remaining balance of $8.6 million of the 11¼% Senior Notes at maturity in the third quarter of 2004. Otherwise, there are no known material commitments, other than store operating leases that we have committed to in the ordinary course of business.

     SEASONALITY AND INFLATION

     A majority of our net sales and operating profit is generated in the peak selling period from October through January, which includes the holiday selling season. As a result, our annual operating results have been, and will continue to be, heavily dependent on the results of our peak selling period. Net sales are generally lowest during the period from April through July, and we typically do not become profitable, if at all, until the fourth quarter of a given year. Most of our stores are unprofitable during the first three quarters. Conversely, in a typical year nearly all of our stores are profitable during the fourth quarter, even those that may be unprofitable for the full year. Historically, we have opened most of our stores during the last half of the year. As a result, new mall stores opened just prior to the fourth quarter produce profits in excess of their annualized profits since the stores typically generate losses in the first nine months of the year.

     We do not believe that inflation has had a material effect on the results of operations during the past three years; however, there can be no assurance that our business will not be affected by inflation in the future.

     FORWARD-LOOKING STATEMENTS

     Except for historical information, matters discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve risks and uncertainties, and actual results may be materially different. Because actual results may differ, readers are cautioned not to place undue reliance on forward-looking statements. Such statements are based on information available to management as of the time of such statements, and relate to, among other things, our results of operations, expected restructuring charges and expected demand for our products. Factors that could cause actual results to differ include: changes in customer shopping patterns; competition in our markets; economic uncertainty; change in consumer preferences and fashion trends away from leather; failure of results of operations to meet expectations of research analysts; reductions in our comparable store sales and operating results over the past three years; risks associated with our debt covenant compliance; our inability to grow the business as planned; decreased availability and increased cost of leather; risks associated with foreign sourcing and international business; risks associated with estimates made in our critical accounting policies;

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seasonality of the business; loss of key members of our management team; reliance on third parties for maintaining our management information systems; concentration of our common stock; volatility of the price of our common stock; war, acts of terrorism or the threat of either; interruption in the operation of corporate offices and distribution centers; and public sale of common stock by existing shareholders. For a further description of our risk factors, please see our Form 10-Q filing for our second fiscal quarter ended July 31, 2004, Exhibit 99.1 “Risk Factors Related to Forward Looking Statements.”

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our senior credit facility carries interest rate risk that is generally related to LIBOR, the commercial paper rate or the “prime” rate. If any of those rates were to change while we were borrowing under the senior credit facility, interest expense would increase or decrease accordingly. As of October 30, 2004, we had $18.0 million outstanding under the revolving portion of the credit facility, $25.0 million under the Term B promissory note, and $24.5 million in outstanding letters of credit.

ITEM 4.	CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

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

     See Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” contained herein for a description of working capital restrictions and limitations upon the payment of dividends. We did not repurchase any shares of our common stock during the third quarter of 2004.

ITEM 6.	EXHIBITS

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1.		Incorporated by reference to the same numbered exhibit to the Company’s Report on Form 10-Q for the quarter ended May 4, 2002 (File No. 000-21543).
2.		Incorporated by reference to the same numbered exhibit to the Company’s Report on Form 10-K for the year ended January 31, 2004 (File No. 000-21543).
3.		Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-l (333-13967) filed with the Commission on December 24, 1996.
4.		Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarter ended August 2, 1997, filed with the Commission.
5.		Incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-l (333-13967) filed with the Commission on October 11, 1996.
6.		Incorporated by reference to Exhibit 4.5 to the Company’s Report on Form 10-K for the fiscal year ended January 29, 2000, filed with the Commission (File No. 000-21543).

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7.		Incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed with the Commission on April 27, 2004.
8.		Incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed with the Commission on April 27, 2004.
9.		Incorporated by reference to Exhibit 4.3 to the Company’s Report on Form 8-K filed with the Commission on April 27, 2004.
10.		Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed with the Commission on November 3, 2004.
11.		Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed with the Commission on November 24, 2004.
12.		Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed with the Commission on November 24, 2004.
13.		Incorporated by reference to Exhibit 99.1 to the Company’s Report on Form 10-Q for the quarter ended July 31, 2004, filed with the Commission.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS

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1.		Incorporated by reference to the same numbered exhibit to the Company’s Report on Form 10-Q for the quarter ended May 4, 2002 (File No. 000-21543).
2.		Incorporated by reference to the same numbered exhibit to the Company’s Report on Form 10-K for the year ended January 31, 2004 (File No. 000-21543).
3.		Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-l (333-13967) filed with the Commission on December 24, 1996.
4.		Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q for the quarter ended August 2, 1997, filed with the Commission.
5.		Incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-l (333-13967) filed with the Commission on October 11, 1996.
6.		Incorporated by reference to Exhibit 4.5 to the Company’s Report on Form 10-K for the fiscal year ended January 29, 2000, filed with the Commission (File No. 000-21543).
7.		Incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed with the Commission on April 27, 2004.
8.		Incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed with the Commission on April 27, 2004.
9.		Incorporated by reference to Exhibit 4.3 to the Company’s Report on Form 8-K filed with the Commission on April 27, 2004.
10.		Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed with the Commission on November 3, 2004.
11.		Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed with the Commission on November 24, 2004.
12.		Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed with the Commission on November 24, 2004.
13.		Incorporated by reference to Exhibit 99.1 to the Company’s Report on Form 10-Q for the quarter ended July 31, 2004, filed with the Commission.

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