Christopher and Banks (NYSE:CBK) is a mall-based retailer of women's clothing and has been struggling with declining same-store sales for about two years, as women turned their backs on Christopher and Banks' fashions (perhaps we should call them unfashions). It looks like the business may finally be turning around, though; the company reported a modest increase in same-store sales of 2% for the month of March, following February's 5% increase.

Yesterday's earnings release, however, shows that Christopher and Banks achieved these gains by doing what you do at your garage sale on a Saturday afternoon. It aggressively cut prices. As you would expect, the price cutting walloped gross margins -- they averaged 42% in fiscal 2004 but dropped throughout fiscal 2005 (ending Feb. 26, 2005) and ended up at 34%. Even with the price cutting, inventory finished the year up by almost 30%. During the same year, sales grew only 12%. A divergence like this between inventory and sales is not a good sign.

The operational problems that have been in incubation on the balance sheet have infested the income and cash flow statements as well. Net income was down sharply in the fourth quarter to $3.8 million from $8.3 million a year ago. The company didn't provide a cash flow statement in the earnings release, but in the previous two quarters free cash flow was hurting.

Management has made all sorts of excuses for Christopher and Banks' troubles. They blamed rising unemployment in late 2002, the poor economy in mid-2003 and "a challenging retail environment" in early 2004. What they should say is, "Our customers would rather go to work in the nude than pay full price for our clothing. If anyone knows what mature women like to wear, please contact us."

There is a ray of hope in that Christopher and Banks recently brought in a new Chief Merchandising Officer from outside the company. Hopefully he will be able to get the business back on track.

With a P/E of around 24 based on trailing 12-month earnings, the stock doesn't appear to offer much of a margin of safety. If the operational troubles continue, those investors who have sold nearly 10% of the shares short may be booking solid profits.

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Fool contributor Dan Bloom doesn't own shares of any stock mentioned in this article.