UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2012

or

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-13082

KENNETH COLE PRODUCTIONS, INC.

(Exact name of registrant as specified in its charter)

(212) 265-1500
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X ) 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 ( ) Accelerated filer (X) Non-accelerated filer () (Do not check if a smaller reporting company) Smaller reporting company ( ).

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

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

Kenneth Cole Productions, Inc.
Index to Form 10-Q

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share and per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Kenneth Cole Productions, Inc. and its subsidiaries (the "Company") in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain items contained in these financial statements are based on estimates. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements reflect all significant adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. All intercompany transactions have been eliminated.

Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

The Company's Consolidated Balance Sheet at December 31, 2011, as presented, was derived from the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Recently Adopted Accounting Pronouncements

The Company adopted the following accounting guidance effective January 1, 2012:

2. Restricted Cash

During the first quarter of 2011, the Company deposited $15.0 million in a restricted cash account as collateral to support standby and open commercial letters of credit outstanding. This arrangement terminated upon execution of an Asset Based Lending Facility in August 2011.

3. Stock-Based Compensation

The Company has stock-based compensation plans under which directors, officers and other eligible employees receive stock options, restricted stock, and other equity-based awards.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

3. Stock-Based Compensation (continued)

Stock options are granted with an exercise price equal to the market value of a share of the Company's common stock on the date of grant. Stock option grants expire within 10 years and generally vest on a graded basis within three to four years from the date of grant. Restricted stock unit awards generally vest on a graded basis over a three to four year period from the grant date. The Company did not grant stock options during the three months ended March 31, 2012. The Company granted 20,000 stock options during the three months ended March 31, 2011. The Company granted 177,605 and 18,393 shares of restricted stock during the three months ended March 31, 2012 and 2011, respectively. Stock options outstanding and unvested restricted stock amounted to 2,530,659 and 502,553 shares, respectively, as of March 31, 2012.

The following table summarizes the components of stock-based compensation expense, which is recorded in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations, for the three months ended March 31, 2012 and 2011 (dollars in thousands):

The fair value of stock options was estimated using the Black-Scholes option-pricing model. The following table summarizes the weighted-average assumptions used to compute the weighted-average fair value of stock option grants for the three months ended March 31, 2012 and 2011:

The fair value of restricted stock was calculated by multiplying the Company's stock price on the date of grant by the number of shares granted and is being amortized on a straight-line basis over the vesting periods for the number of awards that are ultimately expected to vest.

As of March 31, 2012, approximately $6.1 million of unrecognized stock compensation expense related to unvested stock options and restricted stock awards, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.6 years, compared to approximately $3.6 million of unrecognized stock compensation expense to be recognized over a weighted-average period of 1.8 years as of March 31, 2011.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

4. Loss Per Share

Basic loss per share is calculated by dividing net loss by weighted-average common shares outstanding. Diluted loss per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of equity based awards under the Company's stock incentive plans. Dilutive securities, which include stock options and restricted stock, are determined under the treasury stock method by calculating the assumed proceeds available to repurchase stock using the weighted-average shares outstanding for the period. All stock options and restricted stock outstanding as of March 31, 2012 and 2011 have been excluded from the diluted per share calculation as their impact would be anti-dilutive. The shares used to calculate basic and diluted loss per common share consists of the following:

5. Investments

The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment's carrying value may not be recoverable within a reasonable period of time.  In the Company's evaluation of its investments, it also considered its ability and intent to hold the investment until the market price recovers, the reasons for the decline in fair value, the duration of the decline in fair value and expected future performance.  Based on an independent third-party appraisal, the Company recorded a nominal other-than-temporary impairment of investments for the three months ended March 31, 2012.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

5. Investments (continued)

The following table presents gross unrealized gains on, and the estimated fair value of, the Company's long-term investments as of March 31, 2012 and December 31, 2011 (in thousands):

(1) The cost basis is historical cost less other-than-temporary impairment charged to income.

(2) The non-credit portion of the other-than-temporary impairment related to auction-rate securities is recorded in Accumulated other comprehensive loss.

The Company had $1.4 million of non-credit other-than-temporary impairments for auction-rate securities recorded in Accumulated other comprehensive loss at both March 31, 2012 and December 31, 2011.

6. Fair Value Measurement

The Company's financial assets, measured at fair value on a recurring basis, were as follows (in thousands):

A Level 1 hierarchy represents a fair value that is derived from unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. A Level 2 hierarchy represents a fair value that is derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 3 hierarchy represents a fair value that is derived from inputs that are unobservable or from observable inputs using valuation techniques which are significant to the fair value measurement. The fair value of the Company's auction-rate securities is determined from an independent third-party valuation. The primary variables used in determining fair value include collateral, rating, insurance, credit risk and downgrade risk of the security. Maturity dates for these auction-rate securities range from 2033 to 2050.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

6. Fair Value Measurement (continued)

The following table presents the reconciliation of the beginning and ending fair value measurements of the Company's Level 3 assets, auction-rate securities, measured at fair value using observable inputs based on unobservable data in an inactive market as of March 31, 2012 and 2011 (in thousands):

The Company recorded a nominal writedown of its auction-rate securities within Interest and other income, net in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2012. The Company did not record a writedown of its auction-rate securities during the three months ended March 31, 2011.

7. Other Comprehensive Income

Other comprehensive income for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7. Other Comprehensive Income (continued)

8. Segment Information

The Company designs and sources a broad range of fashion footwear, handbags, accessories, and apparel and has three reportable segments: Wholesale, Consumer Direct and Licensing. The Wholesale segment markets footwear, handbags and men's and women's apparel products for sale to approximately 4,700 domestic department and specialty store locations, the Company's Consumer Direct segment and international retailers. The Consumer Direct segment markets a broad selection of the Company's branded products, including licensee products, for sale directly to the consumer through its own channels of distribution, which include full-priced retail stores, Company Stores ("outlets") and its e-commerce website (at website address www.kennethcole.com). The Licensing segment, through third-party licensee agreements, has evolved the Company from primarily a footwear resource to a diverse global lifestyle brand competing effectively in approximately 30 apparel and accessories categories for men, women and children. The Company maintains control over quality, brand image and distribution of the licensees' products. The segment consists primarily of royalties earned on domestic and international licensee sales to third parties of products bearing the Company's trademarks and trade names.

The Company's reportable segments are business units that offer products to overlapping consumers through different channels of distribution. Each segment is managed separately, while results across segments are reviewed by the executive management committee. The Company evaluates performance of each of its segments and allocates resources based on profit or loss before severance, store closing and costs in connection with proposed transaction, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets, unallocated corporate overhead and income taxes for each segment.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

8. Segment Information (continued)

Financial information of the Company's reportable segments is as follows (in thousands):

The reconciliation of the Company's reportable segment income/(loss) to net loss before taxes is as follows (in thousands):

Revenues from international customers were approximately 7.5% and 8.9% of the Company's consolidated net revenues for the three months ended March 31, 2012 and 2011, respectively.

Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

9. Income Taxes

The Company's effective tax rate consists of primarily of state, local and foreign jurisdiction taxes as the Company remains substantially in a fully valued deferred tax position for federal income tax purposes and is in a loss position for the three months ended March 31, 2012

10. Severance, Store Closing and Costs in Connection with Proposed Transaction

During the three months ended March 31, 2012, the Company incurred $0.5 million of costs in connection with the non-binding proposal of the Company's Chairman of the Board, Mr. Cole, to acquire all of the Company's outstanding Class A Common Stock. In addition, during the three months ended March 31, 2012 and 2011, the Company recorded $0.3 million and $5.5 million, respectively, of severance charges within the Wholesale and Consumer Direct segments. During the three months ended March 31, 2011, the Company recorded $7.0 million of net store closing costs within the Consumer Direct segment. The expenses are included within Severance, store closing and costs in connection with proposed transaction in the Condensed Consolidated Statement of Operations. As of March 31, 2012, the Company had accrued severance costs of $1.6 million, which are expected to be paid through the third quarter of 2012.

As of March 31, 2012, the Company had no remaining accrual for store closing costs related to 2011 store closings.

11. Related Party Transaction

The Company recorded expenses of approximately $0.1 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively, to a third-party aviation company which hires and uses an aircraft partially owned by Emack LLC, a company which is wholly owned by the Company's Chairman and Chief Creative Officer. Management believes that all transactions were made on terms and conditions similar to or more favorable than those available in the marketplace from unrelated parties.

12. Proposal to Acquire All Class A Common Stock of the Company

On February 23, 2012, the Board of Directors received a non-binding proposal from Mr. Cole to acquire all of the Company's outstanding Class A Common Stock that he does not currently directly or indirectly own for $15.00 per share in cash.  In his letter outlining his proposal, Mr. Cole indicated that he was unwilling to consider any transaction other than one in which he would be the acquirer.  The Board of Directors has established a Special Committee of the Board of Directors, comprised of all its Directors other than its Chairman and its Chief Executive Officer, to consider the proposal, to negotiate on behalf of the Company and, if it deems appropriate, to solicit and consider any alternative transactions.  Since the announcement of Mr. Cole's non-binding proposal, Company shareholders have filed four separate punative class action lawsuits in New York State court against the Company, Mr. Cole, and the Board of Directors alleging that Mr. Cole and the Board members breached their fiduciary duties to Company shareholders, and that the Company aided and abetted those breaches of fiduciary duties.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements Disclosure

The statements contained in this report which are not historical facts, including, without limitation, statements that relate to future performance and/or statements regarding Kenneth Cole Production, Inc.'s (the "Company") anticipated results or level of business for 2012 or any other future period, may be deemed to constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, including, but not limited to, demand and competition for the Company's products, the ability to enter into new licensee agreements, to maintain and renew existing licensing agreements, changes in consumer preferences or fashion trends, events causing disruption in product shipment, change in import regulations, dependence on certain large customers, changes in the Company's relationships with vendors and other resources, the launching or prospective development of new business initiatives, future licensee sales growth, gross margins, store expansion, openings and closings, changes in distribution centers and implementation of management information systems. The forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the Company's reports and registration statements filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future results or otherwise.

Update on Critical Accounting Policies and Estimates

The Company's Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. For a summary of the Company's significant accounting policies, see the Company's Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

The Company designs, sources and markets a broad range of fashion footwear, handbags and apparel and, through license agreements, designs and markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole Reaction, Unlisted and Le Tigre brand names, as well as footwear under the proprietary trademark Gentle Souls. In addition, the Company designs, develops and sources private label footwear and handbags for selected retailers. The Company's products are targeted to appeal to modern fashion conscience consumers who seek accessible designer fashion that reflects a metropolitan lifestyle. These products include core basics that generally remain in demand from season to season and fashion products that are designed to establish or capitalize on market trends. The combination of core products and fashion styles provides freshness in assortments and maintains a fashion-forward image, while a multiple brand strategy helps diversify business risk.

The Company markets its products to approximately 4,700 domestic department and specialty store locations, the Company's full-priced retail stores, outlet stores, and its e-commerce website, as well as internationally through its licensee partners and international retailers. The Company believes the diversity of its product offerings distinguishes the Company from its competitors in terms of product classifications (men's, women's and children's footwear, apparel and accessories), prices ("bridge", "better" and "moderate") and styling. The Company believes the diversity of its product mix provides balance to its overall sales and increases opportunities in all channels of distribution.

The popularity of the Kenneth Cole brand names, including Kenneth Cole New York, Kenneth Cole Reaction and Unlisted, among consumers has enabled the Company to expand its product offerings and channels of distribution through licensing agreements. The Company offers, through these agreements, a lifestyle collection of men's product categories, including tailored clothing, dress shirts, dress pants, neckwear, outerwear, sleepwear, loungewear, hosiery, socks, underwear, belts, business cases, small leather goods, sunglasses, prescription eyewear, watches, jewelry and fragrance. Women's product categories currently being sold pursuant to license agreements include outerwear, swimwear, sleepwear, small leather goods, belts, sunglasses, prescription eyewear, watches, jewelry and fragrance. In addition, the Company licenses luggage and children's apparel. In October 2010, the Company announced that it had made the strategic decision to terminate the licensing agreement with its women's sportswear licensee effective June 1, 2011, and brought the business in-house starting with the Fall 2011 season.

The Company recorded net revenues of $116.8 million for the three months ended March 31, 2012. Diluted loss per share was $(0.10) for the three months ended March 31, 2012 as compared to $(0.94) for the three months ended March 31, 2011. Included in the diluted loss per share for the three months ended March 31, 2012 and 2011 were expenses of $0.8 million and $12.5 million, respectively, for severance, store closing and costs in connection with proposed transaction. Cash and cash equivalents were $48.9 million at March 31, 2012 versus $54.3 million at March 31, 2011 and the Company has no debt.

Recent Developments

On February 23, 2012, the Board of Directors received a non-binding proposal from Mr. Cole to acquire all of the Company's outstanding Class A Common Stock that he does not currently directly or indirectly own for $15.00 per share in cash.  In his letter outlining his proposal, Mr. Cole indicated that he was unwilling to consider any transaction other than one in which he would be the acquirer.  The Board of Directors has established a Special Committee of the Board of Directors, comprised of all its Directors other than its Chairman and its Chief Executive Officer, to consider the proposal, to negotiate on behalf of the Company and, if it deems appropriate, to solicit and consider any alternative transactions.  Since the announcement of Mr. Cole's non-binding proposal, Company shareholders have filed four separate punative class action lawsuits in New York State court against the Company, Mr. Cole, and the Board of Directors alleging that Mr. Cole and the Board members breached their fiduciary duties to Company shareholders, and that the Company aided and abetted those breaches of fiduciary duties.

Results of Operations

The following table sets forth the Company's Condensed Consolidated Statements of Operations in thousands of dollars and as a percentage of net revenues for the three months ended March 31, 2012 and March 31, 2011.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

REVENUES: Net revenues decreased 0.5%, or $0.7 million, to $116.8 million for the three months ended March 31, 2012 from $117.5 million for the three months ended March 31, 2011. Revenue declines in the Consumer Direct segment (due to store closings and a 2% decrease in comparable store sales) and the Licensing segment were partially offset by growth in the Wholesale segment. Excluding sales from closed stores, net revenues would have increased 0.5%.

NET SALES: Wholesale net sales increased 3.0%, or $2.2 million, to $76.7 million for the three months ended March 31, 2012 from $74.5 million for the three months ended March 31, 2011. Of the increase in net sales, $10.1 million was driven by the launch of Kenneth Cole New York women's sportswear for the fall 2011 season and increased door expansion at retail department stores in Reaction men's sportswear. These increases were offset by declines in private label footwear and handbags.

Net sales in the Company's Consumer Direct segment decreased 6.7%, or $2.2 million, to $31.0 million for the three months ended March 31, 2012 from $33.2 million for the three months ended March 31, 2011. Sales decreased primarily as a result of the closing of stores during the three months ended March 31, 2011 and a comparable store sales decrease. Of the sales decreases, $1.2 million was from stores open during the three ended March 31, 2011, and subsequently closed, while comparable store sales decreased $0.6 million, or 2.0%. Comparable stores are defined as stores that are open for longer than thirteen months. A store that stops operations is included in the comparable sales calculation through the date of closing. The Company closed two full-priced retail stores during the three months ended March 31, 2012 as compared to closing seven full-priced retail stores and one outlet during the three months ended March 31, 2011.

ROYALTY REVENUE: Royalty revenue decreased 6.3%, or $0.7 million, to $9.1 million for the three months ended March 31, 2012 from $9.8 million for the three months ended March 31, 2011. The decrease is primarily attributable to a reduction in contractual minimums due to the termination of the women's sportswear license with Bernard Chaus, Inc. in the second quarter of 2011. Royalties from the remaining licensees increased 1.4%.

GROSS PROFIT: Consolidated gross profit, as a percentage of net revenues, increased to 36.9% for the three months ended March 31, 2012 from 35.5% for the three months ended March 31, 2011. The 140 basis point increase resulted from increases at both the Wholesale and Consumer Direct segments due to a mix shift away from the low margin private label business and less promotional activity from store closures in the prior year in the Consumer Direct segment. The increase was slightly offset by a shift in sales mix to the Wholesale segment, which carries a lower gross profit level than the Consumer Direct segment. The Consumer Direct segment, as a percentage of net revenues, decreased to 26.5% for the three months ended March 31, 2012 from 28.3% for the three months ended March 31, 2011, while the Wholesale segment revenues, as a percentage of net revenues, increased to 65.7% for the three months ended March 31, 2012 from 63.4% for the three months ended March 31, 2011. The revenues in the Licensing segment, which carries nominal cost of goods sold, decreased, as a percentage of net revenues, to 7.8% for the three months ended March 31, 2012 compared to 8.3% for the three months ended March 31, 2011.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:  Selling, general and administrative (“SG&A”) expenses, including warehousing and receiving expenses, as a percentage of net revenues, increased 10 basis points to 39.5% for the three months ended March 31, 2012 as compared to 39.4% for the three months ended March 31, 2011.  Included in SG&A for the three months ended March 31, 2012 is $1.7 million of deferred compensation plan liability charges, which dollar-for-dollar offset income and realized gains related to investments within the deferred compensation plan recorded in Interest and other income, net.  Excluding these charges, SG&A, as a percentage of net revenues, decreased 140 basis points to 38.0%.  Total SG&A decreased $0.1 million to $46.2 million for the three months ended March 31, 2012 from $46.3 million for the three months ended March 31, 2011.  The decrease in SG&A expenses was driven primarily by a reduction in operating expenses from store closures in the prior year offset by costs associated with the startup of the women’s sportswear business and the deferred compensation plan liability charges.  In April 2012, one of the Company’s third-party logistics vendors (“3PL”) notified the Company it will be ceasing its warehousing and distribution operations during the second quarter ended June 30, 2012.  The Company has an agreement to replace the 3PL and is transitioning to a new 3PL as the current 3PL winds down its operations.  The Company expects to incur certain additional charges during the transition with limited disruption to its business in the second quarter of 2012.

SEVERANCE, STORE CLOSING AND COSTS IN CONNECTION WITH PROPOSED TRANSACTION: During the three months ended March 31, 2012, the Company incurred $0.5 million of costs in connection with the non-binding proposal of the Company's Chairman of the Board, Mr. Cole, to acquire all of the Company's outstanding Class A Common Stock. Further, approximately $0.3 million of severance was recorded during the three months ended March 31, 2012 compared to $5.5 million during the three months ended March 31, 2011. The Company closed two stores during the three months ended March 31, 2012 that incurred nominal costs to close the stores compared to closing eight stores during the three months ended March 31, 2011 for approximately $7.0 million in net costs from contract lease terminations and other related costs to close the stores.

INTEREST AND OTHER INCOME, NET: Interest and other income, net increased $1.6 million to approximately $1.7 million for the three months ended March 31, 2012 as compared to $0.1 million for the three months ended March 31, 2011.  The increase is primarily due to the Company recording $1.7 million of income and realized gains related to investments within the deferred compensation plans' assets which offset charges in SG&A during the three months ended March 31, 2012.

INCOME TAXES: The Company's effective tax rate was 9.0% for the three months ended March 31, 2012 compared to 0.8% for the three months ended March 31, 2011. Income tax expense in each period is comprised of state, local, and foreign jurisdiction taxes.

NET LOSS: As a result of the foregoing, the Company recorded a net loss of $1.9 million or (1.6)% of net revenues for the three months ended March 31, 2012 as compared to $17.2 million, or (14.6)% of net revenues for the three months ended March 31, 2011.

Related Party Transaction

Please refer to Footnote 11 for the Company's related party transaction disclosure.

Liquidity and Capital Resources

As of March 31, 2012, the Company had $48.9 million in cash and cash equivalents, which consist primarily of overnight bank demand deposits and short-term government money market funds. The Company uses cash from operations as the primary source of financing its capital expenditures and seasonal requirements. Cash needs vary from time to time as a result of the timing of the receipt of merchandise from suppliers, the delivery by the Company of merchandise to its wholesale customers and its retail stores and the level of inventory and accounts receivable balances. At March 31, 2012 and December 31, 2011, working capital was $94.5 million and $92.3 million, respectively.

Net cash used in operating activities was $10.2 million for the three months ended March 31, 2012, compared to $28.8 million for the three months ended March 31, 2011. The decrease in cash used in operating activities was primarily attributable to a decrease in net loss and the timing of receivables and payables.

Net cash used in investing activities totaled $1.1 million for the three months ended March 31, 2012 compared to $15.4 million for the three months ended March 31, 2011. The decrease resulted primarily from the $15.0 million that had been deposited into a restricted cash account in the prior year to serve as collateral for irrevocable standby and open letters of credit.

Net cash provided by financing activities was $2.2 million for the three months ended March 31, 2012 compared to $0.2 million for the three months ended March 31, 2011. The increase was primarily attributable to a $2.0 million increase in proceeds from the exercise of stock options during the three months ended March 31, 2012.

On August 12, 2011 the Company entered in an Asset-Based Lending Facility (the "ABL") with Wells Fargo Bank, National Association which provides the Company with initial borrowing availability of $50 million. The Company did not borrow under

the ABL during the three months ended March 31, 2012. The ABL replaced the Company's prior revolving senior secured asset based lending facility, which was terminated on March 31, 2011.

The Company believes that it will be able to satisfy its current expected cash requirements for 2012, including requirements for its new stores, anticipated store closing costs, expected enhancement of information systems and anticipated current obligations, primarily with cash flow from operations and cash on hand. The Company did not have any off-balance sheet arrangements as of March 31, 2012.

The foregoing commentary should be considered to fall within the coverage of the "Safe Harbor Statement" under the Private Securities Litigation reform Act of 1995 included in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company has auction-rate securities, that contain "A" through "double C" rated debt obligations and a preferred share closed end fund that are substantially all insured. All of the Company's auction-rate securities have failed at auction as a result of illiquidity and imbalance in order flow within the market. A failed auction is not an indication of an increased credit risk or a reduction in the underlying collateral; however, parties wishing to sell securities could not do so. Based on current market conditions, it is not known when or if the capital markets will come back into balance to achieve successful auctions for these securities. If these auctions continue to fail, it could result in the Company holding securities beyond their next scheduled auction reset dates and will limit the liquidity of these investments. Based on the Company's expected operating cash flows, and other sources and uses of cash, the Company does not anticipate that the lack of liquidity on these investments will affect its ability to execute its current business plan. These assets have been classified as long-term in the Company's Condensed Consolidated Balance Sheets and have been recorded at their fair value.

The Company is exposed to currency exchange rate risks with respect to its inventory transactions denominated in foreign currencies, although greater than 95% of the transactions are in U.S. dollars. Business activities in various currencies expose the Company to the risk that the eventual net dollar cash flows from transactions with foreign suppliers denominated in foreign currencies may be adversely affected by changes in currency rates. The Company manages these risks by periodically utilizing foreign exchange contracts. The Company does not enter into foreign currency transactions for trading or speculative purposes. At March 31, 2012, the Company had no foreign exchange contracts outstanding.

The Company's earnings may also be affected by changes in short-term interest rates as a result of borrowings that may be made under its ABL. A two or less percentage point increase in interest rates affecting the Company's ABL and credit facility would not have had a material effect on the Company's 2012 and 2011 operations.

The Company sources a significant amount of product from China and is subject to foreign currency exposure. If the Yuan is allowed to float freely against other foreign currency, a two percent change in exchange rates could have a material effect on the cost of future inventory purchases to be transacted by the Company.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this quarterly report, and have concluded that the Company's disclosure controls and procedures were effective and designed to ensure that all material information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting

There were no changes in the Company's internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II - OTHER INFORMATION

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.