A quarter ago, when I last checked up on women's-clothing retailer Christopher & Banks (NYSE:CBK), I noted that the company's margin improvements were probably due to better controls on inventory. When businesses have improved communication and workflow between storefronts and central offices, they can maintain appropriate levels of inventory, thus resulting in fewer markdowns and increased profitability. According to management remarks in its latest conference call, this is exactly what the company has been aiming for.

Early last spring, the company enacted a plan to pursue a full-priced selling strategy using better apparel assortments and tighter controls on inventory. The effects of this plan were evident in the third quarter and continued to bear fruit in the fourth quarter. Christopher & Banks witnessed a 10% increase in average dollar per transaction as it continued to shift away from clearances.

However, its plan to tighten inventories may have been too successful for its own good. The danger is that a company won't have enough items on hand to meet customer demand. This may be what happened in the fourth quarter, since same-store transactions declined 11% during that time. Interestingly, merchandise inventories at the end of the third quarter were 11.2% lower than the same period a year ago.

Management didn't elaborate on its transactions decline in either its press release or conference call. The company did indicate, however, that it is planning to increase inventories to comparable levels from a year ago, suggesting that current levels are not enough to meet demand. Once it finds the right balance in inventory levels, the company should benefit. Adequate inventory levels will improve comps, and when this is coupled with its full-priced strategy, Christopher & Banks will be primed to make substantial improvements to profitability.

Of course, no amount of inventory talk will get the customer in the door. Christopher Banks believes that its "evolution" strategy -- intended to capture the ever-changing tastes of its customer -- will help it remain relevant. For 2006, it has been receiving positive feedback from customers on what it described as fresh and colorful assortments.

As it looks right now, Christopher & Banks seems poised for a solid 2006. But investors will want to continue monitoring its comps growth in the quarters ahead to see whether it can move this metric back into positive territory after inventories are brought up to adequate levels.

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Fool contributor Jeremy MacNealy does not have any financial interest in any companies mentioned.