Last quarter, I advised readers to monitor Christopher & Banks' (NYSE:CBK) same-store sales situation to see whether its "evolution" merchandise strategy and inventory plans would aid in moving the metric back into positive territory. Well, it did.

For the first quarter, comps increased 7%, driving net sales to 16% growth. Additionally, improvements in operating margins to 16% from 12% in the comparable period a year ago resulted in a 57% increase in net income. In response, management was compelled to raise full-year earnings guidance to a range of $1.06 to $1.10 per diluted share; it earned $0.84 in fiscal 2006.

To find out how the women's apparel retailer pulled off these strong results, and to see whether it has the wherewithal to keep the momentum going, we will want to dig deeper by investigating the company's latest quarterly earnings conference call. Bodhi Zappa and Hank Schofield will join me once again in this effort.

Jeremy: Bodhi, there's no lack of tough competitors in this business. New York & Co. (NYSE:NWY), Dress Barn (NASDAQ:DBRN), and Chico's (NYSE:CHS) are just a few names that I'll toss out. All of these stores command attention from female shoppers. In light of this, how did Christopher & Banks manage to pull off strong top-line performance?

The right inventory balance?
Bodhi: Before going there, Jeremy, you noted a quarter ago that perhaps the retailer being a little light on inventory may have negatively impacted its comps, as the stores did not have enough merchandise on hand to meet demand. Fast-forward to this quarter, however, and the fact that it was light on clearance merchandise at the start of the period was one reason why margins improved so drastically -- fewer markdowns were needed.

Jeremy: Since we're on the topic, let's stick with the inventory situation a little longer.

Hank: Yes, let's. What was a weakness at the end of fiscal of 2006 became a strength at the start of fiscal 2007 and may again become a detriment in the coming quarter or two. I'll explain. For the first quarter, merchandise inventories increased 17.2% compared to the year-ago period. But in last quarter's conference call, management revealed its intention to raise merchandise inventories to only comparable levels from a year ago. Note that at the start of last quarter, inventories were actually 11.2% shy of year-ago levels. According to the latest press release, however, management has actually well surpassed the year-ago level. Inventories are now up again 17.2% year over year. Has management gone too far? Will it be stuck with clearance merchandise in the coming quarters?

The right product mix?
Bodhi: Or, is this an indication of bullishness ahead? Net sales grew by 16% this quarter, as customers in all geographic regions responded favorably to its new merchandise offering. Management stated that the goal is to keep "inventory in line with what our sales expectations are and what our sales trends are." We might assume, then, that a 17+% ramp-up in inventory is indicative of good things to come.

And as to why the company is able to dramatically increase merchandise levels, gets us back to your original question, Jeremy. How was Christopher & Banks able to achieve strong sales results in face of stiff competition? The answer is that it has the right product mix.

Hank: Seems simple enough, but it's amazing how many retailers can miss out on the central goal of any apparel retailer: Offer what customers are looking for. American Eagle (NASDAQ:AEOS) attributed its turnaround to the fact that it needed to get back to basics -- worry less about the price of products, and worry more about the kind of product. This is a lesson Urban Outfitters (NASDAQ:URBN) may be learning right now.

My concern is whether Christopher & Banks can maintain the right product mix in light of fickle fashion tastes.

Jeremy: We have early evidence that things are going well into Q2. President and Chief Merchandising Officer Matt Dillon stated that what drove sales in Q1 continues to do so in June, and that is cut-and-sewn knit tops. Several other product categories were highlighted as strengths -- in particular, "embellished styles with beading and embroidery details," as well as three-quarter sleeves, are doing extremely well right now. Areas of recent weakness include denim and sweaters.

Hank: Sweaters? A little warm for that, no?

The right mix for continued success?
Bodhi: What I find encouraging as we look ahead is that Christopher & Banks has been able to pull off these sales figures largely by in-store visuals and the right product mix alone. The company has yet to embark on a full-fledged coordinated marketing strategy to hype up its new merchandise offering. Once that gets under way, you have to like the prospects for it to draw in new customers in the quarters ahead. The company has just hired a new marketing vice president, whose primary task is to "craft the go-forward marketing strategy."

Hank: Since we're looking ahead, I'll state that one area I found a bit discouraging is the lack of discussion on any e-commerce initiatives. One analyst specifically asked if the company is taking any steps toward an Internet-based direct-to-consumer sales program, and the response was that this is an initiative that it will not embark on "any time in the immediate future." Granted, its customers may not be as Internet-driven as customers of Guess? (NYSE:GES), but you have to wonder whether the company is missing out on an important growth vehicle.

Foolish bottom line
Jeremy: There's no question that Christopher & Banks is in a groove. Its top line is accelerating, while margins are expanding -- that's a winning recipe just about every time. That doesn't mean there isn't room for improvement. The company can still tweak its inventory situation. Average store transactions declined 7% for the quarter, and that was because the company was light on inventory at the start of the quarter. Ironically, this is the same reason given for the improvement in margins this period. Ideally, we would like to see both average store transactions and average dollar per transaction increase in the comps equation. This would suggest that not only does the company have the right merchandise on hand, but it has adequate levels of it as well. With inventory levels ramping up 17% compared to the year-ago period, this may indeed suggest that Christopher & Banks is pushing toward this ideal in the upcoming quarters.

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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has an ironclad disclosure policy.