CPI CORP - FORM 10-Q - December 22, 2010

Attached files

file	filename
EX-31.2 - CERTIFICATION BY CFO - CPI CORP	exh31_2.htm
EX-11.1 - COMPUTATION OF PER COMMON SHARE LOSS-DILUTED - CPI CORP	exh11_1.htm
EX-31.1 - CERTIFICATION BY CEO - CPI CORP	exh31_1.htm
EX-11.2 - COMPUTATION OF PER COMMON SHARES LOSS-BASIC - CPI CORP	exh11_2.htm
EX-10.51 - OFFICER'S LTIP AWARDS - CPI CORP	exh10_51.htm
EX-32.0 - CERTIFICATION BY CEO AND CFO - CPI CORP	exh32_0.htm

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 November 13, 2010 or

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 1-10204

CPI Corp.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

1706 Washington Ave., St. Louis, Missouri

(Address of principal executive offices)

43-1256674

(I.R.S. Employer Identification No.)

63103

(Zip Code)

Registrant’s telephone number, including area code: 314/231-1575

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Common Stock, par value $0.40 per share	Name of each exchange on which registered New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§299.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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:

Large accelerated filer o Non-accelerated filer o Accelerated filer x Smaller reporting company o

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

As of December 17, 2010, 7,312,865 shares of the registrant’s common stock were outstanding.

CPI CORP.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

16 AND 40 WEEKS ENDED NOVEMBER 13, 2010

PART I.	FINANCIAL INFORMATION		Page

	Item 1.	Financial Statements:

		Interim Consolidated Balance Sheets
		November 13, 2010 (Unaudited) and February 6, 2010	1

		Interim Consolidated Statements of Operations (Unaudited)
		16 and 40 Weeks Ended November 13, 2010 and November 14, 2009	3

		Interim Consolidated Statement of Changes in Stockholders'
		Equity (Unaudited) 40 Weeks Ended November 13, 2010	4

		Interim Consolidated Statements of Cash Flow (Unaudited)
		40 Weeks Ended November 13, 2010 and November 14, 2009	5

		Notes to Interim Consolidated Financial Statements (Unaudited)	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results
		of Operations	17

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

	Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION

	Item 6.	Exhibits	26

SIGNATURES			27

EXHIBIT INDEX			28

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

CPI CORP.

Interim Consolidated Balance Sheets - Assets

in thousands	November 13, 2010
	(Unaudited)		February 6, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	9,631	$	18,913
Accounts receivable:
Trade		9,334		5,960
Other		573		880
Inventories		8,957		7,465
Prepaid expenses and other current assets		7,897		5,396
Refundable income taxes		772		1,350
Deferred tax assets		7,859		7,253
Assets held for sale		1,066		6,338

Total current assets		46,089		53,555

Property and equipment:
Land		2,185		2,185
Buildings and building improvements		25,346		25,289
Leasehold improvements		4,832		4,491
Photographic, sales and manufacturing equipment		173,578		168,371
Property not in use (see Note 4)		2,983		-
Total		208,924		200,336
Less accumulated depreciation and amortization		172,775		166,167
Property and equipment, net		36,149		34,169

Prepaid debt fees		1,967		2,237
Goodwill		21,845		21,720
Intangible assets, net		37,521		38,660
Deferred tax assets		11,273		7,701
Other assets		9,484		8,549

TOTAL ASSETS	$	164,328	$	166,591

See accompanying footnotes to the interim consolidated financial statements.

CPI CORP.

Interim Consolidated Balance Sheets – Liabilities and Stockholders’ Equity

in thousands, except share and per share data	November 13, 2010
	(Unaudited)			February 6, 2010
LIABILITIES
Current liabilities:
Current maturities of long-term debt	$	-		$	19,686
Accounts payable		9,745			4,390
Accrued employment costs		10,875			9,878
Customer deposit liability		17,029			11,528
Sales taxes payable		3,874			3,929
Accrued advertising expenses		2,997			1,062
Accrued expenses and other liabilities		10,733			12,170

Total current liabilities		55,253			62,643

Long-term debt, less current maturities		68,000			57,855
Accrued pension plan obligations		17,396			17,724
Other liabilities		17,957			18,181

Total liabilities		158,606			156,403

CONTINGENCIES (see Note 11)

STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized; no shares outstanding		-			-
Preferred stock, Series A, no par value, 200,000 shares authorized; no shares outstanding		-			-
Common stock, $0.40 par value, 50,000,000 shares authorized; 9,446,431 and 9,184,081
shares outstanding at November 13, 2010, and February 6, 2010, respectively		3,779			3,674
Additional paid-in capital		30,804			29,017
Retained earnings		33,741			41,516
Accumulated other comprehensive loss		(14,551	)		(14,887	)
		53,773			59,320

Treasury stock - at cost, 2,133,566 and 2,175,591 shares at November 13, 2010,
and February 6, 2010, respectively		(48,051	)		(49,132	)

Total stockholders' equity		5,722			10,188

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	164,328		$	166,591

See accompanying footnotes to the interim consolidated financial statements.

CPI CORP.

Interim Consolidated Statements of Operations

(Unaudited)

in thousands, except share and per share data	16 Weeks Ended						40 Weeks Ended
	November 13, 2010			November 14, 2009			November 13, 2010			November 14, 2009

Net sales	$	106,174		$	107,286		$	278,086		$	282,130

Cost and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)		7,516			8,032			19,882			21,643
Selling, general and administrative expenses		102,220			99,940			244,920			245,480
Depreciation and amortization		5,267			6,320			14,088			17,913
Other charges and impairments		3,645			1,144			2,889			3,751
		118,648			115,436			281,779			288,787

Loss from operations		(12,474	)		(8,150	)		(3,693	)		(6,657	)

Interest expense		892			2,479			3,225			5,694
Interest income		9			67			16			103
Other income, net		170			236			829			253

Loss before income tax benefit		(13,187	)		(10,326	)		(6,073	)		(11,995	)
Income tax benefit		(5,474	)		(3,524	)		(3,082	)		(4,094	)

NET LOSS	$	(7,713	)	$	(6,802	)	$	(2,991	)	$	(7,901	)

NET LOSS PER COMMON SHARE

Net loss per common share - diluted	$	(1.05	)	$	(0.97	)	$	(0.41	)	$	(1.13	)

Net loss per common share - basic	$	(1.05	)	$	(0.97	)	$	(0.41	)	$	(1.13	)

Weighted average number of common and common equivalent
shares outstanding - diluted		7,312,019			7,003,832			7,271,226			6,987,746

Weighted average number of common and common equivalent
shares outstanding - basic		7,312,019			7,003,832			7,271,226			6,987,746

See accompanying footnotes to the interim consolidated financial statements.

CPI CORP.

Interim Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

Forty weeks ended November 13, 2010

in thousands, except share and per share data									Accumulated
			Additional						other			Treasury
	Common		paid-in			Retained			comprehensive			stock,
	stock		capital			earnings			loss			at cost			Total

Balance at February 6, 2010	$	3,674	$	29,017		$	41,516		$	(14,887	)	$	(49,132	)	$	10,188

Net loss		-		-			(2,991	)		-			-			(2,991	)
Total other comprehensive income, net of tax effect
(consisting of foreign exchange impact)		-		-			-			336			-			336
Total comprehensive loss																(2,655	)
Surrender of employee shares for taxes		-		-			-			-			(183	)		(183	)
Issuance of common stock and restricted stock awards,
net of forfeitures (314,340 shares)		105		(507	)		-			-			1,264			862
Stock-based compensation recognized		-		2,274			-			-			-			2,274
Increased tax benefit related to stock-based compensation		-		20			-			-			-			20
Dividends ($0.66 per common share)		-		-			(4,784	)		-			-			(4,784	)

Balance at November 13, 2010	$	3,779	$	30,804		$	33,741		$	(14,551	)	$	(48,051	)	$	5,722

See accompanying footnotes to the interim consolidated financial statements.

CPI CORP.

Interim Consolidated Statements of Cash Flows

(Unaudited)

in thousands	40 Weeks Ended
	November 13, 2010			November 14, 2009
Reconciliation of net loss to cash flows provided by (used in) operating activities:

Net loss	$	(2,991	)	$	(7,901	)

Adjustments for items not requiring (providing) cash:
Depreciation and amortization		14,088			17,913
Amortization of prepaid debt fees		772			742
Loss from extinguishment of debt		1,052			-
Stock-based compensation expense		2,274			818
(Gain) loss on sale of assets held for sale		(1,655	)		59
Loss on disposition of property and equipment		122			917
Impairment of assets held for sale		1,871			300
Deferred income tax provision		(4,418	)		(4,451	)
Change in interest rate swap		(2,033	)		(878	)
Pension, supplemental retirement plan and profit sharing expense		1,527			680
Other		(9	)		39

Increase (decrease) in cash flow from operating assets and liabilities:
Accounts receivable		(3,006	)		(4,527	)
Inventories		(1,419	)		(1,097	)
Prepaid expenses and other current assets		(2,008	)		(6,212	)
Accounts payable		4,957			(163	)
Contribution to pension plan		(1,270	)		(1,245	)
Accrued expenses and other liabilities		2,739			(646	)
Income taxes payable		564			(98	)
Deferred revenues and related costs		5,033			6,078
Other		(242	)		(186	)

Cash flows provided by operating activities		15,948			142

See accompanying footnotes to the interim consolidated financial statements.

CPI CORP.

Interim Consolidated Statements of Cash Flows (continued)

(Unaudited)

in thousands	40 Weeks Ended
	November 13, 2010			November 14, 2009

Cash flows provided by operating activities		15,948			142

Cash flows used in financing activities:
Repayment of long-term debt		(77,541	)		(8,270	)
Borrowings under revolving credit facility		94,136			-
Repayments on revolving credit facility		(26,136	)		-
Payment of debt issuance costs		(1,554	)		(943	)
Cash dividends		(4,784	)		(3,337	)
Other		(35	)		(13	)

Cash flows used in financing activities		(15,914	)		(12,563	)

Cash flows (used in) provided by investing activities:
Additions to property and equipment		(12,128	)		(4,508	)
Proceeds from sale of assets held for sale		3,120			985
Other		72			471

Cash flows used in investing activities		(8,936	)		(3,052	)

Effect of exchange rate changes on cash and cash equivalents		(380	)		94

Net decrease in cash and cash equivalents		(9,282	)		(15,379	)

Cash and cash equivalents at beginning of period		18,913			23,665

Cash and cash equivalents at end of period	$	9,631		$	8,286

Supplemental cash flow information:
Interest paid	$	4,902		$	5,487

Income taxes paid, net	$	718		$	440

Supplemental non-cash financing activities:
Issuance of treasury stock under the Employee Profit Sharing Plan	$	733		$	594

Issuance of restricted stock and stock options to employees and directors	$	3,379		$	800

See accompanying footnotes to the interim consolidated financial statements.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

NOTE 1 -

DESCRIPTION OF BUSINESS AND INTERIM CONSOLIDATED FINANCIAL STATEMENTS

CPI Corp. 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 operates 3,077 (unaudited) professional portrait studios as of November 13, 2010, throughout the U.S., Canada, Mexico and Puerto Rico, principally under license agreements with Sears and Toys “R” Us and lease and license agreements with Walmart. The Company also operates websites which support and complement its Sears, Walmart 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.

In the first quarter of 2010, the Company entered into a license agreement with Toys “R” Us – Delaware, Inc. (“TRU”) which grants the Company an exclusive license to operate photo studios in certain Babies “R” Us stores under the Kiddie Kandids name. The term of the agreement expires on January 31, 2016. See Note 2 for further discussion. Separately, in the first quarter of 2010, the Company also acquired certain assets of Kiddie Kandids, LLC in an auction approved by the United States Bankruptcy Court for the District of Utah (the “Kiddie Kandids, LLC asset acquisition”). The Company evaluated the asset purchase under the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” and determined the purchase was an asset acquisition rather than a business combination. Accordingly, the purchase of such assets has been classified as an asset acquisition in the accompanying interim consolidated financial statements.

The Interim Consolidated Balance Sheet as of November 13, 2010, the related Interim Consolidated Statements of Operations for the 40 weeks ended November 13, 2010, and November 14, 2009, the Interim Consolidated Statement of Changes in Stockholders’ Equity for the 40 weeks ended November 13, 2010, and the Interim Consolidated Statements of Cash Flows for the 40 weeks ended November 13, 2010, and November 14, 2009, are unaudited. The interim consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the CPI Corp. 2009 Annual Report on Form 10-K for its fiscal year ended February 6, 2010. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

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.

Certain reclassifications have been made to the 2009 financial statements to conform with the current year presentation.

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.

NOTE 2 -

NEW LICENSE AGREEMENT

CPI entered into a license agreement, effective as of April 20, 2010, with Toys “R” Us (“TRU”) which grants CPI an exclusive license to operate photo studios in certain Babies “R” Us stores under the Kiddie Kandids name. The term of the agreement expires on January 31, 2016. The agreement allows CPI significant operating flexibility and collaborative marketing opportunities and provides for the opening of additional locations over the next two years. The agreement contains certain termination rights for both the Company and TRU. The fees paid to TRU under the agreement are based upon the Gross Sales of the Studios operated under the agreement.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

NOTE 3 -

INVENTORIES

Inventories consist of:

in thousands	November 13, 2010		February 6, 2010

Raw materials - film, paper and chemicals	$	2,309	$	2,181
Portraits in process		1,572		1,138
Finished portraits pending delivery		155		91
Frames and accessories		286		258
Studio supplies		3,448		2,840
Equipment repair parts and supplies		718		650
Other		469		307

Total	$	8,957	$	7,465

These balances are net of obsolescence reserves totaling $30,000 and $177,000 at November 13, 2010, and February 6, 2010, respectively.

NOTE 4 -

ASSETS HELD FOR SALE

In connection with the Company’s June 8, 2007, acquisition of substantially all of the assets of Portrait Corporation of America (“PCA”) and certain of its affiliates and assumption of certain liabilities of PCA (the “PCA Acquisition”), the Company acquired a manufacturing facility located in Matthews, North Carolina, and excess parcels of land located in Charlotte, North Carolina. In the third and fourth quarters of 2008, the Company ceased use of the excess parcels of land and the manufacturing facility, respectively, and committed to a plan to sell such assets as they were no longer required by the business. In the third quarter of 2009, the Company also ceased use of and committed to a plan to sell its film production facility located in Brampton, Ontario, as the facility is no longer required due to the elimination of film production. In connection with the Kiddie Kandids, LLC asset acquisition in the first quarter of 2010, the Company acquired certain assets, including a building in Sandy, Utah, and various furniture and equipment that it does not intend to use.

The Company determined these assets meet the criteria for “held for sale accounting” under ASC Topic 360, and has presented the respective group of assets separately on the face of the Consolidated Balance Sheet as of November 13, 2010, with the exception of the Brampton, Ontario facility that was sold in the second quarter of 2010, certain equipment acquired in connection with the Kiddie Kandids, LLC asset acquisition that was sold in the first three quarters of 2010 and the Matthews facility which was reclassified from Assets held for sale to Property and equipment (“Property not in use”) in the balance sheet as of November 13, 2010; see discussion below. The sale of the Brampton, Ontario facility resulted in net proceeds to the Company of $2.5 million, which was used to pay down outstanding long-term debt in connection with certain mandatory prepayment requirements, and resulted in a net gain of $1.5 million, which was recorded in Other charges and impairments in the second quarter of 2010. The sale of certain of the Kiddie Kandids equipment resulted in net proceeds to the Company of $571,000 in the first three quarters of 2010, and resulted in net gains of $171,000, which were recorded in Other charges and impairments in the first three quarters of 2010.

At the time an asset qualifies for “held for sale accounting”, the asset is evaluated to determine whether or not the carrying value exceeds its fair value less cost to sell. Any loss as a result of the carrying value being in excess of fair value less cost to sell is recorded in the period the asset meets “held for sale accounting”. Management judgment is required to assess the criteria required to meet “held for sale accounting” and estimate the expected net amount recoverable upon sale. As of November 13, 2010, the carrying values of the respective assets classified as held for sale did not exceed their fair value less costs to sell. The Company expects the sales of these assets will be completed within approximately a one year time period.

During the third quarter of 2010, the Company reevaluated the carrying value of the Matthews facility as a result of the continuing difficult real estate environment in the Matthews and surrounding areas, evidenced by a continuing increase in supply of properties for sale in the market, recent sales activity at lower average selling prices and the increasing length of time the property has been marketed for sale. The Company valued the Matthews facility using the “market value approach” valuation technique which used a sales comparison approach in which prices for similarly situated properties were considered. Based on this analysis, the Company determined the fair value of the Matthews facility had declined in the third quarter, and its carrying value exceeded the revised estimate of the facility’s fair value less cost to sell by approximately $1.9 million. As such, the Company recorded a $1.9 million impairment charge in Other charges and impairments in the third quarter of 2010. The Company also reevaluated the “held for sale accounting” classification criteria during the third quarter of 2010, and determined, based on an analysis of the current asking price relative to the adjusted carrying value of the facility, and in consideration of the increased uncertainty surrounding the expected timing of the sale deriving from the factors discussed above, that the Company is unable to predict the probability that the sale of the facility will be completed within the next twelve months. Accordingly, the Matthews facility no longer meets the criteria for classification as “held for sale accounting”, and it has been reclassified to Property and equipment (“Property not in use”) as of November 13, 2010. The Company will commence depreciation on the facility in the fourth quarter of 2010, and will continue to monitor the facility for impairment in excess of depreciation expense due to declines in fair value. Notwithstanding, the Company plans to continue to actively market the facility for sale.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

The major classes of assets included in Assets held for sale in the Consolidated Balance Sheet are as follows:

in thousands	November 13, 2010		February 6, 2010

Land	$	417	$	2,203
Buildings and building improvements		641		4,135
Photographic, sales and manufacturing equipment		8		-

Assets held for sale	$	1,066	$	6,338

NOTE 5 -

GOODWILL AND INTANGIBLE ASSETS

In connection with the PCA Acquisition, the Company recorded goodwill in the excess of the purchase price over the fair value of assets acquired and liabilities assumed in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). Under SFAS No. 141, goodwill is not amortized and instead is periodically evaluated for impairment. The goodwill is expected to be fully deductible for tax purposes over 15 years. The following table summarizes the Company’s goodwill:

in thousands	November 13, 2010		February 6, 2010

PCA acquisition	$	21,227	$	21,227

Goodwill from prior acquisitions		512		512

Translation impact on foreign balances		106		(19	)
	$	21,845	$	21,720

The Company accounts for goodwill under ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC Topic 350”), which requires the Company to test goodwill for impairment on an annual basis, and between annual tests whenever events or changes in circumstances indicate the carrying amount may not be recoverable. ASC Topic 350 prescribes a two-step process for impairment testing of goodwill. The first step is a screen for impairment, which compares the reporting unit’s estimated fair value to its carrying value. If the carrying value exceeds the estimated fair value in the first step, the second step is performed in which the Company’s goodwill is written down to its implied fair value, which the Company would determine based upon a number of factors, including operating results, business plans and anticipated future cash flows.

The Company performs its annual impairment test at the end of its second quarter, or more frequently if circumstances indicate the potential for impairment. As of July 24, 2010, the end of the Company’s 2010 second quarter, the Company completed its annual impairment test and concluded that the estimated fair value of its reporting unit substantially exceeded its carrying value, and therefore, no impairment was indicated. As of November 13, 2010, the end of the Company’s 2010 third quarter, the Company considered possible impairment triggering events since the July 24, 2010 impairment test date, including its market capitalization relative to the carrying value of its net assets, as well as other relevant factors, and concluded that no goodwill impairment was indicated at that date. The Company has one goodwill reporting unit, which is currently not at risk of failing the step-one impairment test.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

In connection with the PCA Acquisition, the Company also acquired intangible assets related to the host agreement with Walmart and the customer list. These assets were recorded in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The host agreement with Walmart and the customer list are being amortized over their useful lives of 21.5 years using the straight-line method and 6 years using an accelerated method, respectively. In connection with the Kiddie Kandids asset acquisition in the first quarter of 2010, the Company also acquired a customer list. This asset was recorded in accordance with ASC Topic 350. This customer list is being amortized over its useful life of 5.5 years using an accelerated method. The following table summarizes the Company’s amortized intangible assets as of November 13, 2010.

in thousands	Net Balance							Translation		Net Balance
	at Beginning				Accumulated			Impact of		at End of
	of Period		Acquisition		Amortization			Foreign Balances		Period

Acquired host agreement	$	38,238	$	-	$	(1,574	)	$	385	$	37,049
Acquired customer lists		422		257		(218	)		11		472
	$	38,660	$	257	$	(1,792	)	$	396	$	37,521

The Company reviews its intangible assets with definite useful lives, consisting primarily of the Walmart host agreement, under ASC Topic 360, which requires the Company to review for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of intangible assets with definite useful lives is measured by a comparison of the carrying amount of the asset to the estimated future undiscounted cash flows expected to be generated by such assets. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, which is determined on the basis of discounted cash flows.

As of November 13, 2010, the Company considered possible impairment triggering events, including projected cash flow data, as well as other relevant factors, and concluded that no impairment was indicated at that date. It is possible that changes in circumstances, assumptions or estimates, including historical and projected cash flow data, utilized by the Company in its evaluation of the recoverability of its intangible assets with definite useful lives, could require the Company to write-down its intangible assets and record a non-cash impairment charge, which could be significant, and would adversely affect the Company’s financial position and results of operations.

NOTE 6 -

OTHER ASSETS AND OTHER LIABILITIES

Included in Accrued expenses and other liabilities as of November 13, 2010, and February 6, 2010, is $4.1 million and $3.4 million, respectively, in accrued host commissions and $3.9 million and $3.6 million, respectively, related to accrued worker’s compensation. Also included in Accrued expenses and other liabilities as of February 6, 2010, is $2.0 million related to the Company’s interest rate swap agreement. This swap agreement expired on September 17, 2010.

Included in both Other assets and Other liabilities is $8.5 million and $7.7 million, as of November 13, 2010, and February 6, 2010, respectively, related to worker’s compensation insurance claims that exceed the deductible of the Company and that will be paid by the insurance carrier. Since the Company is not released as primary obligor of the liability, it is included in both Other assets as a receivable from the insurance company and in Other liabilities as an insurance liability.

NOTE 7 -

BORROWINGS

On August 30, 2010, the Company entered into the Credit Agreement (the “Agreement”) with the financial institutions that are or may from time to time become parties thereto and Bank of America, N.A., as administrative agent for the lenders, and as swing line lender and issuing lender. The Agreement makes available to the Company a revolving credit facility which includes letters of credit and replaces the Company’s former facility.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

The Credit Agreement is a new four-year revolving credit facility in an amount of up to $105 million, with a sub−facility for letters of credit in an amount not to exceed $25 million. In addition, the Company, at its option, may choose to increase the revolving commitment up to an additional $20 million. The new credit facility provides the Company greater flexibility to pursue financial and strategic opportunities to enhance shareholder value. The obligations of the Company under the Agreement are secured by (i) a guaranty from certain material direct and indirect domestic subsidiaries of the Company, and (ii) a lien on substantially all of the assets of the Company and such subsidiaries.

The revolving loans under the Agreement bear interest, at the Company’s option, at either the London Interbank Offered Rate (“LIBOR”) plus a spread ranging from 2.25% to 3.0%, or an alternative base rate plus a spread ranging from 1.25% to 2.0%. The alternative base rate is the greater of Bank of America, N.A. prime rate, the Federal Funds rate plus 0.5% or the one month British Bankers’ Association LIBOR plus 1.0% (the “Base Rate”). The Company is also required to pay a non−use fee of 0.4% to 0.5% per annum on the unused portion of the revolving loans and letter of credit fees of 2.25% to 3.0% per annum. The interest rate spread in the case of LIBOR and Base Rate loans and the payment of the non−use and letter of credit fees is dependent on the Company’s Total Funded Debt to EBITDA ratio, as defined in the Agreement. Interest on each Base Rate loan is payable quarterly in arrears and at maturity. Interest on each LIBOR loan is payable on the last day of each Interest Period, as defined in the Agreement, relating to such loan, upon a repayment of such loan and at maturity.

The Agreement and other ancillary loan documents contain terms and provisions (including representations, covenants and conditions) customary for transactions of this type. The financial covenants include a leverage ratio test (as defined, Total Funded Debt to EBITDA) and an interest coverage ratio test (as defined, EBITDA minus capital expenditures to interest expense). Other covenants include limitations on lines of business, additional indebtedness, liens and negative pledge agreements, incorporation of other debt covenants, guarantees, investments and advances, cancellation of indebtedness, restricted payments, modification of certain agreements and instruments, inconsistent agreements, leases, consolidations, mergers and acquisitions, sale of assets, subsidiary dividends, and transactions with affiliates.

The Agreement also contains customary events of default, including nonpayment of the principal of any loan or letter of credit obligation, interest, fees or other amounts; inaccuracy of representations and warranties; violation of covenants; certain bankruptcy events; cross−defaults to other material obligations and other indebtedness (if any); change of control of events; material judgments; certain ERISA−related events; and the invalidity of the loan documents (including the collateral documents). If an event of default occurs and is continuing under the Agreement, the lenders may terminate their obligations thereunder and may accelerate the payment by the Company and the subsidiary guarantors of all of the obligations due under the Agreement and the other loan documents.

The proceeds of the revolving loans may be used for working capital purposes and general business purposes, for acquisitions permitted under the Credit Agreement, for capital expenditures (including retail store expansions and conversion to digital photography), for refinancing existing debt and to pay dividends and distributions on the Company’s capital securities to the extent permitted thereunder, and to make purchases or redemptions of the Company’s capital securities to the extent permitted thereunder.

As of November 13, 2010, the Company had $68.0 million outstanding under its new credit facility. The Company used the proceeds from the new credit facility to pay down the remaining debt on the former facility. The Company incurred approximately $1.6 million in issuance costs in the third quarter of 2010 associated with the new credit facility. These fees are being amortized on a straight-line basis over the life of the revolving commitment since there are no borrowings or repayments scheduled. The Company wrote off $1.1 million in unamortized debt fees in the third quarter of 2010 related to the former facility. This charge was recorded in Other charges and impairments in the third quarter of 2010.

The Company was in compliance with all the financial covenants under its Credit Agreement as of November 13, 2010.

As part of the Company’s former credit facility, the Company had entered into an interest rate swap agreement to manage the interest rate risk on a portion of its term loan. This swap agreement expired on September 17, 2010. The fixed rate gain related to this agreement was $2.0 million and $878,000 for the first three quarters of fiscal year 2010 and 2009, respectively, which is included in Interest expense for those respective periods.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

NOTE 8 -

STOCK-BASED COMPENSATION PLANS

At November 13, 2010, the Company had outstanding awards under various stock-based employee compensation plans, which are described more fully in Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2009 Annual Report on Form 10-K.

On July 17, 2008, the stockholders approved the CPI Corp. Omnibus Incentive Plan (the "Plan"). The Plan replaced the CPI Corp. Stock Option Plan, as amended and restated on December 16, 1997, and the CPI Corp. Restricted Stock Plan, as amended and restated on April 14, 2005 (collectively the "Predecessor Plans") that were previously approved by the Board of Directors, and no further shares will be issued under the Predecessor Plans. Total shares of common stock available for delivery pursuant to awards under the Plan as approved on July 17, 2008, were 800,000 shares. On August 11, 2010, the stockholders approved an additional 300,000 shares for delivery pursuant to awards under the Plan. The Company has reserved these shares under its authorized, unissued shares. At November 13, 2010, 552,611 of these shares remained available for future grants.

The Company accounts for stock-based compensation plans in accordance with ASC Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”) which requires companies to recognize the cost of awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.

The following table summarizes the changes in stock options during the first three quarters ended November 13, 2010.

						Weighted-Average
				Weighted-Average		Remaining Contractual
	Shares			Exercise Price		Life (Years)
Options outstanding, beginning of period		217,500		$	13.04
Forfeited		(25,000	)		12.21

Options outstanding, end of period		192,500		$	13.15		6.23

No stock options were exercisable at November 13, 2010.

As of November 13, 2010, the aggregate intrinsic value for the outstanding options (the difference between the Company’s closing stock price on the last trading day of the 2010 third quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on November 13, 2010, is $2.7 million. This amount changes based on the quoted market price of the Company’s stock.

The Company estimates the fair value of its stock options with market-based performance conditions under the Plan using Monte Carlo simulations. Weighted-average assumptions used in calculating the fair value of these stock options are included in Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2009 Annual Report on Form 10-K.

The Company recognized stock-based compensation expense of $129,000, resulting in a deferred tax benefit of $49,000, for the 40 weeks ended November 13, 2010, based on the grant-date fair values of stock options previously granted and the derived service periods. As of November 13, 2010, total unrecognized compensation cost related to nonvested stock options granted under the Plan was $217,000. This unrecognized compensation cost will be recognized over a weighted-average period of 1.9 years.

The Company also had a previous amended and restated nonqualified stock option plan under which certain officers and key employees could receive options to acquire shares of the Company’s common stock. As of February 7, 2010, 15,046 stock options were issued and outstanding under this previous plan. During the 40-week period ended November 13, 2010, 5,000 of these stock options expired and the remaining 10,046 were exercised at a price of $12.96.

Prior to adoption of the new Plan, effective May 29, 2008, the Company had an amended and restated restricted stock plan for which 550,000 shares of common stock had been reserved for issuance to key employees and members of the Board of Directors. All nonvested stock is valued based on the fair market value of the Company’s common stock on the grant date and the value is recognized as compensation expense over the service period.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

Issuances of nonvested stock in the first three quarters of 2010 are summarized below:

Award Recipient	Compensation	Shares Awarded	Grant Date	Vesting Date

Board of Directors Members	Director Annual Retainers	16,017	2/12/2010	2/5/2011
Chairman of the Board	Retention - Q1	3,823	2/19/2010	5/1/2010
Executive Management	Retention - Long-term Incentive Plan	67,000	3/12/2010	(1)
Certain Management Members	Retention - Long-term Incentive Plan	22,000	3/29/2010	(1)
Executive Management and Certain Employees	2009 Performance	88,806	3/29/2010	2/5/2011
Board of Directors Members	Director Annual Retainers	21,356	4/15/2010	2/5/2011
Executive Chairman of the Board	Retention - Long-term Incentive Plan	17,162	4/19/2010	(2)
Senior Vice President, Operations	Retention - Long-term Incentive Plan	4,000	11/01/2010	(3)

(1)	Vest in 25% increments on the last day of the fiscal year over a four-year period commencing on February 5, 2011.
(2)	Vest in 25% increments on the last day of the fiscal year over a four-year period commencing on February 5, 2011, or earlier upon certain acceleration events.
(3)	Vest in 25% increments on the last day of the fiscal year over a four-year period commencing on February 4, 2012.

Changes in nonvested stock are as follows:

	40 Weeks Ended November 13, 2010
				Weighted-Average
	Shares			Grant-Date Value
Nonvested stock, beginning of period		528		$	18.95
Granted		240,164			14.07
Vested		(3,823	)		14.05
Forfeited		(15,263	)		13.49
Nonvested stock, end of period		221,606		$	14.08

Stock-based compensation expense related
to nonvested stock	$	1,764,306

As of November 13, 2010, total unrecognized compensation cost related to nonvested stock was $1.6 million. This unrecognized compensation cost will be recognized over a weighted-average remaining period of 0.9 years.

On August 25, 2010, the Company’s Board of Directors authorized a 1.0 million share open market repurchase program. Purchases under the share repurchase program may be made at the Company's discretion, subject to market conditions, in the open market, in privately-negotiated transactions or otherwise. The Company has made no share repurchases under this program to date; however, has a plan in place to make such purchases when certain conditions are optimal.

On November 15, 2010, the Company declared a fourth quarter cash dividend of 25 cents per share which was paid on December 6, 2010, in the amount of $1.8 million, to shareholders of record as of November 29, 2010.

NOTE 9 -

EMPLOYEE BENEFIT PLANS

The Company maintains a qualified, noncontributory pension plan that covers all full-time United States employees meeting certain age and service requirements. The plan provides pension benefits based on an employee’s length of service and the average compensation earned from the later of the hire date or January 1, 1998, to the retirement date. On February 3, 2004, the Company amended its pension plan to implement a freeze of future benefit accruals under the plan, except for those employees with ten years of service and who had attained age 50 at April 1, 2004, who were grandfathered and whose benefits continued to accrue. Effective February 20, 2009, the Company amended its pension plan to implement a freeze of future benefit accruals for the remaining grandfathered participants. The Company’s funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than is tax deductible. Plan assets consist primarily of cash and cash equivalents, fixed income securities, domestic and international equity securities and exchange traded index funds.

The Company also maintains a noncontributory defined benefit plan providing supplemental retirement benefits for certain current and former key executives. The cost of providing these benefits is accrued over the remaining expected service lives of the active plan participants. The supplemental retirement plan is unfunded and as such does not have a specific investment policy or long-term rate of return assumption. However, certain assets will be used to finance these future obligations and consist of investments in a Rabbi Trust.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

The following tables set forth the components of net periodic benefit cost for the defined benefit plans:

in thousands	16 Weeks Ended						16 Weeks Ended
	Pension Plan						Supplemental Retirement Plan
	November 13, 2010			November 14, 2009			November 13, 2010			November 14, 2009
Components of net periodic benefit costs:
Service cost	$	-		$	-		$	-		$	-
Interest cost		954			951			24			26
Expected return on plan assets		(953	)		(967	)		-			-
Amortization of prior service cost		-			-			-			-
Amortization of net loss (gain)		376			78			(24	)		(47	)

Net periodic benefit cost	$	377		$	62		$	-		$	(21	)

in thousands	40 Weeks Ended						40 Weeks Ended
	Pension Plan						Supplemental Retirement Plan
	November 13, 2010			November 14, 2009			November 13, 2010			November 14, 2009
Components of net periodic benefit costs:
Service cost	$	-		$	-		$	-		$	-
Interest cost		2,384			2,378			61			65
Expected return on plan assets		(2,383	)		(2,418	)		-			-
Amortization of prior service cost		-			-			-			-
Amortization of net loss (gain)		941			196			(60	)		(116	)

Net periodic benefit cost	$	942		$	156		$	1		$	(51	)

The Company contributed $1.3 million to its pension plan in the first three quarters of 2010 and estimates it will contribute a further $350,000 in fiscal year 2010. Future contributions to the pension plan will be dependent upon legislation, future changes in discount rates and the earnings performance of plan assets.

NOTE 10 -

INCOME TAXES

In accordance with ASC Topic 740, “Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements, the following required information is provided:

·	Unrecognized tax benefits were approximately $2.2 million and $2.7 million at November 13, 2010, and February 6, 2010, respectively. The decrease in unrecognized tax benefits of approximately $500,000 results from the recognition of certain tax benefits due to statute closure. Within the next 12 months, the Company anticipates the recognition of substantially all remaining uncertain tax benefits due to additional statute closure. Recognition of these uncertain tax benefits will affect the tax rate.
·	The Company recognizes interest expense and penalties related to the above-unrecognized tax benefits within income tax expense. Due to the nature of the unrecognized tax benefits, the Company had $29,000 and $21,000 accrued interest and penalties as of November 13, 2010, and February 6, 2010, respectively.
·	The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, many states, and Mexican and Canadian jurisdictions. The Company is generally no longer subject to U.S. federal income tax examination for the years prior to 2005 and 2006. The tax years 2005 and 2008 are currently under examination. There are currently no ongoing examinations by state taxing authorities.

During the third quarter of 2010, the Company determined that certain undistributed earnings of one foreign wholly-owned subsidiary would be remitted to the U.S. in the foreseeable future. These earnings were previously considered permanently reinvested in the business and a deferred tax liability related to undistributed earnings was not recognized. The tax effect of the remittance to be made in the foreseeable future has been fully offset by the reduction of a valuation allowance previously recognized against certain deferred tax assets that can be utilized when the remittance is made.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

NOTE 11 -

COMMITMENTS AND CONTINGENCIES

Standby Letters of Credit

As of November 13, 2010, the Company had standby letters of credit outstanding in the principal amount of $16.8 million primarily used in conjunction with the Company’s various large deductible insurance programs.

Settlement Commitment

The Company is obligated to remit Sears additional payments as stipulated in the settlement of the previous license agreement. Under the terms of this settlement, the Company is obligated to pay Sears $150,000 due on December 31st in each of 5 successive years. These amounts have been accrued in the Interim Consolidated Balance Sheet as of November 13, 2010.

CPI CORP.

Notes to Interim Consolidated Financial Statements

(Unaudited)

Legal Proceedings

The Company and two of its subsidiaries are defendants in a lawsuit entitled Shannon Paige, et al. v. Consumer Programs, Inc., filed March 8, 2007, in the Superior Court of the State of California for the County of Los Angeles, Case No. BC367546. The case was subsequently removed to the United States District Court for the Central District of California, Case No. CV 07-2498-FMC (RCx). The Plaintiff alleges that the Company failed to pay him and other hourly associates for “off the clock” work and that the Company failed to provide meal and rest breaks as required by law. The Plaintiff is seeking damages and injunctive relief for himself and others similarly situated. On October 6, 2008, the Court denied the Plaintiffs’ motion for class certification but allowed Plaintiffs to attempt to certify a smaller class, thus reducing the size of the potential class to approximately 200. Plaintiffs filed a motion seeking certification of the smaller class on November 14, 2008. The Company filed its opposition on December 8, 2008. In January 2009, the Court denied Plaintiffs' motion for class certification as to their claims that they worked "off the clock". The Court also deferred ruling on Plaintiff's motion for class certification as to their missed break claims and stayed the action until the California Supreme Court rules on a pending case on the issue of whether an employer must merely provide an opportunity for employees to take a lunch break or whether an employer must actively ensure that its employees take the break. The Company believes the claims are without merit and continues its vigorous defense on behalf of itself and its subsidiaries against these claims, however, an adverse ruling in this case could require the Company to pay damages, penalties, interest and fines.

The Company and two of its subsidiaries are defendants in a lawsuit entitled Chrissy Larkin, et al. v. CPI Corporation, Consumer Programs, Inc., d/b/a Sears Portrait Studios and CPI Images, LLC, d/b/a Sears Portrait Studios, filed August 12, 2010, in the United States District Court for the Western District of Wisconsin, Civil No. 3:10-cv-00411-wmc. The Plaintiffs allege that the defendants failed to pay them for all compensable time worked to provide rest and meal periods under applicable laws and to reimburse them for business related expenses. The Plaintiffs’ actions are based on alleged violations of the laws of a number of states and the Fair Labor Standards Act. The Plaintiffs are seeking damages, declaratory and injunctive relief and statutory penalties for themselves and others similarly situated. The Company and its subsidiaries filed an answer on September 27, 2010. The parties are in the early stages of discovery. The Company will contest collective action and class certification. Because of the very early stage of the litigation, the Company is unable to predict or otherwise assess the outcome of these proceedings.

The Company is also a defendant in other routine litigation, but does not believe these lawsuits, individually or in combination with the cases described above, will have a material adverse effect on its financial condition. The Company cannot, however, give assurances that these legal proceedings will not have a material adverse effect on its business or financial condition.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on the Company’s results of operations, financial position and liquidity, significant accounting policies and critical estimates, and the future impact of accounting standards that have been issued but are not yet effective. Management’s Discussion and Analysis is presented in the following sections: Executive Overview; Results of Operations; Liquidity and Capital Resources; and Accounting Pronouncements and Policies. The reader should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the interim consolidated financial statements and related notes thereto contained elsewhere in this document.

All references to earnings per share relate to diluted earnings per common share unless otherwise noted.

EXECUTIVE OVERVIEW

The Company’s Operations

CPI Corp. is a long-standing leader, based on sittings, number of locations and related revenues, in the professional portrait photography of young children, individuals and families. From a single studio opened by our predecessor company in 1942, we have grown to 3,077 studios throughout the U.S., Canada, Mexico and Puerto Rico, principally under license agreements with Sears and Toys “R” Us and lease and license agreements with Walmart. The Company has provided professional portrait photography for Sears’ customers since 1959 and has been the only Sears portrait studio operator since 1986. CPI is the sole operator of portrait studios in Walmart Stores and Supercenters in all 50 states in the U.S., Canada, Mexico and Puerto Rico.

CPI entered into a license agreement, effective as of April 20, 2010, with Toys “R” Us (“TRU”) which grants CPI an exclusive license to operate photo studios in certain Babies “R” Us stores under the Kiddie Kandids name. The term of the agreement expires on January 31, 2016. The agreement allows CPI significant operating flexibility and collaborative marketing opportunities and provides for the opening of additional locations through October of 2011. The agreement contains certain termination rights for both the Company and TRU. The fees paid to TRU under the agreement are based upon the Gross Sales of the Studios operated under the agreement.

Management has determined the Company operates as a single reporting segment offering similar products and services in all locations.

As of the end of the third quarter in fiscal years 2010 and 2009, the Company’s studio counts were:

		November 13, 2010	November 14, 2009
Within Sears stores:
	United States and Puerto Rico	862	873
	Canada	110	110

Within Walmart stores:
	United States and Puerto Rico	1,535	1,552
	Canada	259	259
	Mexico	104	115

Within Babies "R" Us stores in the United States		150	-

Locations not within above host stores		57	29

Total		3,077	2,938

Locations not within Sears, Walmart or Babies “R” Us stores include 22 free-standing SPS studio locations, 15 Shooting Star locations (located within Buy Buy Baby stores) and 20 Kiddie Kandids mall locations.

RESULTS OF OPERATIONS

A summary of consolidated results of operations and key statistics follows:

in thousands, except share and per share data	16 Weeks Ended						40 Weeks Ended
	November 13, 2010			November 14, 2009			November 13, 2010			November 14, 2009

Net sales	$	106,174		$	107,286		$	278,086		$	282,130

Cost and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)		7,516			8,032			19,882			21,643
Selling, general and administrative expenses		102,220			99,940			244,920			245,480
Depreciation and amortization		5,267			6,320			14,088			17,913
Other charges and impairments		3,645			1,144			2,889			3,751
		118,648			115,436			281,779			288,787

Loss from operations		(12,474	)		(8,150	)		(3,693	)		(6,657	)

Interest expense		892			2,479			3,225			5,694
Interest income		9			67			16			103
Other income, net		170			236			829			253

Loss before income tax benefit		(13,187	)		(10,326	)		(6,073	)		(11,995	)
Income tax benefit		(5,474	)		(3,524	)		(3,082	)		(4,094	)

NET LOSS	$	(7,713	)	$	(6,802	)	$	(2,991	)	$	(7,901	)

NET LOSS PER COMMON SHARE

Net loss per common share - diluted	$	(1.05	)	$	(0.97	)	$	(0.41	)	$	(1.13	)

Net loss per common share - basic	$	(1.05	)	$	(0.97	)	$	(0.41	)	$	(1.13	)

Weighted average number of common and common equivalent
shares outstanding - diluted		7,312,019			7,003,832			7,271,226			6,987,746

Weighted average number of common and common equivalent
shares outstanding - basic		7,312,019			7,003,832			7,271,226			6,987,746

16 weeks ended November 13, 2010 compared to 16 weeks ended November 14, 2009

The Company reported a net loss of ($7.7 million) and ($6.8 million), or ($1.05) and ($0.97) per diluted share, for the 16-week third quarters ended November 13, 2010, and November 14, 2009, respectively. Excluding other charges and impairments in each period, the loss per share was down in the third quarter of 2010 at ($0.75) versus ($0.87) in the prior year comparable period. Earnings in the period were significantly affected by comparable store sales declines, a special commission adjustment, and increased employee insurance and workers’ compensation expense, offset by lower production, labor and advertising costs as well as lower interest expense and depreciation. Foreign currency translation effects and the Kiddie Kandids studio operations did not have a material impact on the Company’s net earnings in the third quarter of 2010.

Net sales totaled $106.2 and $107.3 million in the third quarters of fiscal 2010 and 2009, respectively.

●

Net sales for the third quarter of fiscal 2010 decreased $1.1 million, or 1%, to $106.2 million from the $107.3 million reported in the fiscal 2009 third quarter. Excluding the positive impacts of net store openings ($7.2 million), net revenue recognition change ($1.0 million), foreign currency translation ($800,000), and other items totaling $500,000, comparable same-store sales decreased approximately 10%.

Net sales from the Company’s PictureMe Portrait Studio® (PMPS) brand, on a comparable same-store basis, excluding impacts of net revenue recognition change, foreign currency translation, store closures and other items totaling $1.3 million, decreased 6% in the third quarter of 2010 to $56.5 million from $60.1 million in the third quarter of 2009. The decrease in PMPS sales performance for the third quarter was the result of an 11% decrease in the number of sittings, offset in part by a 6% increase in average sale per customer sitting.

Net sales from the Company’s Sears Portrait Studio (SPS) brand, on a comparable same-store basis, excluding impacts of net revenue recognition change and other items totaling $300,000, decreased 13% in the third quarter of 2010 to $45.8 million from $52.8 million in the third quarter of 2009. SPS sales performance for the third quarter was the result of a 10% decline in the number of sittings and a 4% decline in average sale per customer sitting versus the prior-year quarter.

Net sales from the Company’s Kiddie Kandids studio operations, excluding the impact of net revenue recognition change totaling ($300,000), contributed $8.2 million in net sales in the third quarter of 2010.

Costs and expenses were $118.6 million in the third quarter of 2010, compared with $115.4 million in the comparable prior year period.

●	Cost of sales, excluding depreciation and amortization expense, declined to $7.5 million in the third quarter of 2010, from $8.0 million in the third quarter of 2009 due to lower overall production levels as well as continuing productivity improvements.

●

Selling, general and administrative (SG&A) expense increased to $102.2 million in the third quarter of 2010 from $99.9 million in the prior-year quarter, primarily due to the inclusion of costs associated with the newly opened Kiddie Kandids studios, as well as a special commission adjustment arising from certain contractual undertakings under the host agreement, employee insurance as a result of unfavorable claim activity and worker’s compensation due to loss experience adjustments. These increases were offset in part by reductions in SPS and PMPS studio employment costs from improved scheduling, selected operating hour reductions and studio closures, a decline in host commission expense due to lower sales levels and reduced advertising costs.

●

Depreciation and amortization expense was $5.3 million in the third quarter of 2010, compared with $6.3 million in the third quarter of 2009. Depreciation expense decreased as a result of the full depreciation of certain assets acquired in connection with the 2007 acquisition of PCA and the closure of certain PMPS locations during fiscal years 2009 and 2010.

●

In the third quarter of 2010, the Company recognized $3.6 million in other charges and impairments, compared with $1.1 million in the third quarter of 2009. The current quarter charges include a downward adjustment to the carrying value of a large facility previously classified as “held for sale” and the write-off of debt fees related to the Company’s former credit facility as a result of its new revolving credit facility. The prior-year charge primarily related to lab closures.

Interest expense declined $1.6 million in the third quarter of 2010 to $900,000 from $2.5 million in the third quarter of 2009. The decrease is primarily a result of lower average borrowings and favorable interest rates as a result of the new credit facility.

Income tax benefit was $5.5 million and $3.5 million in the third quarters of 2010 and 2009, respectively. The resulting effective tax rates were 42% and 34% in 2010 and 2009, respectively. The increase in the effective tax rate in the third quarter of 2010 was primarily due to certain tax benefits recognized related to a previous uncertain tax position and miscellaneous tax return adjustments.

40 weeks ended November 13, 2010 compared to 40 weeks ended November 14, 2009

The Company reported a net loss of ($3.0 million) and ($7.9 million), or ($0.41) and ($1.13) per diluted share, for the first three quarters ended November 13, 2010, and November 14, 2009, respectively. Excluding other charges and impairments in each period, the loss per share was down in the first three quarters of 2010 at ($0.16) versus ($0.80) in the prior year comparable period. Earnings in the first three quarters of 2010 were significantly affected by comparable store sales declines, a special commission adjustment and increases in amortization, workers’ compensation, pension and employee insurance expense, offset by lower production, labor and advertising costs, other charges and impairments, interest expense and depreciation. Foreign currency translation effects and the Kiddie Kandids studio operations did not have a material impact on the Company’s net earnings in the first three quarters of 2010.

Net sales totaled $278.1 million and $282.1 million in the first three quarters of fiscal 2010 and 2009, respectively.

●

Net sales for the first three quarters of fiscal 2010 decreased $4.0 million, or 1%, to $278.1 million from the $282.1 million reported in the fiscal 2009 first three quarters. Excluding the positive impacts of net store openings ($7.6 million), foreign currency translation ($4.0 million), revenue deferral related to the Company’s loyalty programs ($1.1 million), net revenue recognition change ($1.0 million), E-Commerce ($900,000) and other items totaling $500,000, comparable same-store sales decreased approximately 7%.

Net sales from the Company’s PictureMe Portrait Studio® (PMPS) brand, on a comparable same-store basis, excluding impacts of store closures, foreign currency translation, net revenue recognition change, revenue deferral related to the loyalty program, E-Commerce and other items totaling $3.3 million, decreased 2% in the first three quarters of 2010 to $148.7 million from $152.5 million in the first three quarters of 2009. The decrease in PMPS sales performance for the first three quarters was the result of an 8% decrease in the number of sittings, offset in part by a 6% increase in average sale per customer sitting.

Net sales from the Company’s Sears Portrait Studio (SPS) brand, on a comparable same-store basis, excluding impacts of store closures, foreign currency translation and other items totaling $900,000, decreased 11% in the first three quarters of 2010 to $118.9 million from $134.2 million in the first three quarters of 2009. The decrease in SPS sales performance for the first three quarters was the result of a 9% decline in the number of sittings and a 3% decline in average sale per customer sitting.

Net sales from the Company’s Kiddie Kandids studio operations, excluding the impact of net revenue recognition change totaling ($1.0 million), contributed $11.9 million in net sales in the first three quarters of 2010.

Costs and expenses were $281.8 million in the first three quarters of 2010, compared with $288.8 million in the comparable prior year period.

Cost of sales, excluding depreciation and amortization expense, declined to $19.9 million in the first three quarters of 2010, from $21.6 million in the first three quarters of 2009. The decrease is principally attributable to lower overall manufacturing production levels, improved product mix and increased productivity from lab consolidations.

Selling, general and administrative (SG&A) expense declined to $244.9 million in the first three quarters of 2010 from $245.5 million in the first three quarters of 2009, primarily due to reductions in studio employment costs from improved scheduling, selected operating hour reductions and studio closures, a decline in host commission expense due to lower sales levels and reduced advertising costs. Partially offsetting these declines were increases in employment expense related to the Kiddie Kandids operations in the first three quarters of 2010, amortization expense as a result of larger stock bonuses awarded coupled with a higher stock price value in the current year compared to the prior year, worker’s compensation due to loss experience adjustments, pension expense due to changes in the discount rates and employee insurance as a result of unfavorable claim activity as well as a special commission adjustment arising from certain contractual undertakings under the host agreement.

●

Depreciation and amortization expense was $14.1 million in the first three quarters of 2010, compared with $17.9 million in the first three quarters of 2009. Depreciation expense decreased as a result of the full depreciation of certain assets acquired in connection with the 2005 digital conversion of SPS and 2007 acquisition of PCA and the closure of certain PMPS locations during fiscal years 2009 and 2010.

In the first three quarters of 2010, the Company recognized $2.9 million in other charges and impairments, compared with $3.8 million in the first three quarters of 2009. The current year charges primarily include a downward adjustment to the carrying value of a large facility previously classified as “held for sale”, costs related to the Kiddie Kandids operations and the write-off of debt fees related to the Company’s former credit facility as a result of its new revolving credit facility. These charges were offset in part by a gain on sale of the Brampton, Ontario facility and an early termination fee received from Walmart in relation to certain early PMPS store closures. The prior year charge primarily related to lab closures, proxy contest fees and litigation costs.

Interest expense was $3.2 million and $5.7 million for the first three quarters of 2010 and 2009, respectively. The decrease primarily resulted from a change in the interest rate swap value (which expired in the third quarter of 2010) and lower average borrowings.

Income tax benefit was $3.1 million and $4.1 million in the first three quarters of 2010 and 2009, respectively. The resulting effective tax rates were 51% and 34% in 2010 and 2009, respectively. The increase in the effective tax rate in the first three quarters of 2010 was primarily due to certain tax benefits recognized related to a previous uncertain tax position and miscellaneous tax return adjustments.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents a summary of the Company’s cash flows for the first three quarters of 2010 and 2009:

in thousands	40 Weeks Ended
	November 13, 2010			November 14, 2009
Net cash (used in) provided by:
Operating activities	$	15,948		$	142
Financing activities		(15,914	)		(12,563	)
Investing activities		(8,936	)		(3,052	)
Effect of exchange rate changes on cash		(380	)		94
Net decrease in cash	$	(9,282	)	$	(15,379	)

Net Cash Provided By Operating Activities

Net cash provided by operating activities was $15.9 million and $142,000 during the first three quarters of 2010 and 2009, respectively. Cash flows in the first three quarters of 2010 increased from the first three quarters of 2009 levels primarily due to the change in net operating loss and the timing of payments related to changes in the various balance sheet accounts totaling approximately $8.1 million, accelerated Walmart commissions of $3.9 million in the first three quarters of 2009, reduced interest paid of $3.3 million and a decrease in advertising spend of $1.5 million. These increases were offset in part by an increase in bonus payouts of $1.0 million.

Net Cash Used In Financing Activities

Net cash used in financing activities was $15.9 million in the first three quarters of 2010 compared to $12.6 million in the first three quarters of 2009. The increase in cash used is primarily attributable to an increase in cash dividends paid of $1.4 million, a net increase in the repayment of debt of $1.3 million and an increase in the payment of debt issuance costs of $600,000.

As of November 13, 2010, the Company had $68.0 million outstanding under its new credit facility. The Company used the proceeds from the new credit facility to pay down the remaining debt on the former facility. The Company incurred approximately $1.6 million in issuance costs in the third quarter of 2010 associated with the new credit facility. These fees will be amortized on a straight-line basis over the life of the revolving commitment since there are no borrowings or repayments scheduled. The Company wrote off $1.1 million in unamortized debt fees in the third quarter of 2010 related to the former facility. This charge was recorded in Other charges and impairments in the third quarter of 2010.

The Company was in compliance with all the covenants under its Credit Agreement as of November 13, 2010.

As of December 20, 2010, the Company has net debt (defined as total debt less total cash and cash equivalents) of approximately $35.1 million.

Additionally, on August 25, 2010, the Company’s Board of Directors authorized a 1.0 million share open market repurchase program. Purchases under the share repurchase program may be made at the Company's discretion, subject to market conditions, in the open market, in privately-negotiated transactions or otherwise. The Company has made no share repurchases under this program to date; however, has a plan in place to make such purchases when certain conditions are optimal.

Net Cash Used In Investing Activities

Net cash used in investing activities was $8.9 million during the first three quarters of 2010 compared to $3.1 million during the first three quarters of 2009. The increase in cash used was primarily attributable to the increase in capital spend of $7.6 million due in part to the acquisition of certain Kiddie Kandids assets in the first quarter of 2010, remodel expenditures in certain PMPS studios, additional Kiddie Kandids equipment and the opening of new Kiddie Kandids studio locations and certain hardware and software. This increase in cash used was offset in part by a $2.1 million increase in proceeds received from the sale of certain assets held for sale.

Off-Balance Sheet Arrangements

Other than standby letters of credit primarily used to support the Company’s various large deductible insurance programs, the Company has no additional significant off-balance sheet arrangements.

Commitments and Contingencies

Standby Letters of Credit

Settlement Commitment

Liquidity

Cash flows from operations, cash and cash equivalents and the borrowing capacity under the revolving portion of the Company’s Credit Agreement, represent expected sources of funds in 2010 to meet the Company’s obligations and commitments, including debt service, annual dividends to shareholders, planned capital expenditures, which are estimated to approximate $10.5 million, excluding the initial purchase of certain Kiddie Kandids, LLC assets, for fiscal year 2010, and normal operating needs.

ACCOUNTING PRONOUNCEMENTS AND POLICIES

Application of Critical Accounting Policies

The application of certain of the accounting policies utilized by the Company requires significant judgments or a complex estimation process that can affect the results of operations and financial position of the Company, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The Company’s significant accounting policies are discussed in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section in the Company’s 2009 Annual Report on Form 10-K, and below.

Long-Lived Asset Recoverability

In accordance with ASC Topic 360, “Property, Plant, and Equipment” (“ASC Topic 360”) long-lived assets, primarily property and equipment, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The impairment test, as prescribed under ASC Topic 360, is a two-step process. If the carrying value of the asset exceeds the expected future cash flows (undiscounted and without interest) from the asset, impairment is indicated. The impairment loss recognized is the excess of the carrying value of the asset over its fair value. As of November 13, 2010, no impairment was indicated for assets held and used with the exception of the Matthews facility. The Company recorded a $1.9 million impairment charge in Other charges and impairments in the third quarter of 2010, related to its Matthews facility previously classified as “held for sale”; see Note 4 of the interim consolidated financial statements for further discussion.

Recoverability of Goodwill and Acquired Intangible Assets

The Company performs its annual impairment test at the end of its second quarter, or more frequently if circumstances indicate the potential for impairment. As of July 24, 2010, the end of the Company’s 2010 second quarter, the Company completed its annual impairment test and concluded that the estimated fair value of its reporting unit substantially exceeded its carrying value, and therefore, no impairment was indicated. As of November 13, 2010, the end of the Company’s 2010 third quarter, the Company considered possible impairment triggering events since the July 24, 2010, impairment test date, including its market capitalization relative to the carrying value of its net assets, as well as other relevant factors, and concluded that no goodwill impairment was indicated at that date. The Company has one goodwill reporting unit, which is currently not at risk of failing the step-one impairment test.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties. The Company identifies forward-looking statements by using words such as “preliminary,” “plan,” “expect,” “looking ahead,” “anticipate,” “estimate,” “believe,” “should,” “intend” and other similar expressions. Management wishes to caution the reader that these forward-looking statements, such as the Company’s outlook for portrait studios, net income, future cash requirements, cost savings, compliance with debt covenants, valuation allowances, reserves for charges and impairments, capital expenditures and other similar statements, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to: the Company's dependence on Sears, Walmart and Toys “R” Us, the approval of the Company’s business practices and operations by Sears, Walmart and Toys “R” Us, the termination, breach, limitation or increase of the Company's expenses by Sears and Toys “R” Us under the license agreements, or Walmart under the lease and license agreements, customer demand for the Company's products and services, the development and operation of the Kiddie Kandids business, the economic recession and resulting decrease in consumer spending, manufacturing interruptions, dependence on certain suppliers, competition, dependence on key personnel, fluctuations in operating results, a significant increase in piracy of the Company's photographs, widespread equipment failure, compliance with debt covenants, high level of indebtedness, implementation of marketing and operating strategies, outcome of litigation and other claims, impact of declines in global equity markets to pension plan, impact of foreign currency translation and other risks as may be described in the Company’s filings with the Securities and Exchange Commission, including its Form 10-K for the fiscal year ended February 6, 2010. The risks described above do not include events that the Company does not currently anticipate or that it currently deems immaterial, which may also affect its results of operations and financial condition. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” included in the Company’s 2009 Annual Report on Form 10-K for the fiscal year ended February 6, 2010. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to the Company’s operations result primarily from changes in interest rates and foreign exchange rates.

At November 13, 2010, all of the Company’s debt obligations have floating interest rates. The impact of a 1% change in interest rates affecting the Company’s debt would increase or decrease interest expense by approximately $680,000.

The Company’s net assets, net earnings and cash flows from its Canadian and Mexican operations are based on the U.S. dollar equivalent of such amounts measured in the respective country’s functional currency. Assets and liabilities are translated to U.S. dollars using the applicable exchange rates as of the end of a reporting period. Revenues, expenses and cash flows are translated using the average exchange rate during each period. The Company’s Canadian operations constitute 14% of the Company’s total assets and 14% of the Company’s total sales as of and for the 40 weeks ended November 13, 2010. A hypothetical 10% unfavorable change in the Canadian-to-U.S. dollar exchange rate would cause an approximate $1.1 million decrease to the Company’s net asset balance and could materially adversely affect its revenues, expenses and cash flows. The Company’s exposure to changes in foreign exchange rates relative to the Mexican operations is minimal, as Mexican operations constitute only 1% of the Company’s total assets and 2% of the Company’s total sales as of and for the 40 weeks ended November 13, 2010.

Item 4.

Controls and Procedures

a)	Evaluation of Disclosure Controls and Procedures

The Company’s management maintains disclosure controls and procedures that are designed to provide reasonable assurances that information required to be disclosed in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Management is required to apply judgment in evaluating its controls and procedures.

Under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of November 13, 2010. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of November 13, 2010.

b)	Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended November 13, 2010, which were identified in connection with management’s evaluation required by paragraph (d) of Rule 13a-15 of the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5 are inapplicable and have been omitted.

Item 6.

Exhibits

Exhibits: An Exhibit index has been filed as part of this Report on Page E-1 and is incorporated herein by reference.

SIGNATURES

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.

CPI CORP.

(Registrant)

By: /s/Dale Heins

_____________________________________

Dale Heins

Executive Vice President, Finance, Treasurer

and Chief Financial Officer

(Principal Financial Officer)

By: /s/Rose O'Brien

____________________________________

Rose O’Brien

Vice President, Corporate Controller

(Principal Accounting Officer)

Date: December 21, 2010

CPI CORP.

E-1

EXHIBIT INDEX

EXHIBIT
NUMBER		DESCRIPTION

10.51		Form of LTIP Restricted Stock Award Agreement, filed within this Form 10-Q as Exhibit 10.51.

11.1		Computation of Per Common Share Loss - Diluted - for the 16 and 40 weeks ended November 13, 2010, and November 14, 2009.

11.2		Computation of Per Common Share Loss - Basic - for the 16 and 40 weeks ended November 13, 2010, and November 14, 2009.

31.1		Certification Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934 by the Chief Executive Officer.

31.2		Certification Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934 by the Chief Financial Officer.

32.0		Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
		by the Chief Executive Officer and the Chief Financial Officer.

Attached files

CPI CORP Reports

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