Forward Looking Statements

Certain statements in this Form 10-Q contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the ability of the Company and its subsidiary to maintain normal trade terms with vendors, the ability of the Company and its subsidiary to comply with the various covenant requirements contained in the Company's Revolving Credit Facility, the demand for apparel and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in the Company's markets, consumer confidence, energy and gasoline prices, uncertainty in the valuation of asset classes, including housing and equities, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sales volume include unusual weather patterns, an increase in the level of competition in the Company's market areas, competitors' marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening plans. The occurrence of any of the above could have a material and adverse impact on the Company's operating results. Most of these factors are difficult to predict accurately and are generally beyond the Company's control. Readers should consider the risks and uncertainties described in the Company's Annual Report on Form 10-K for the year ended February 2, 2008 ("Form 10-K"). Readers should carefully review the Form 10-K in its entirety, including but not limited to the Company's financial statements and the notes thereto and the risks and uncertainties described in Item 1A - "Risk Factors" of the Form 10-K. Forward-looking statements contained in this Form 10-Q speak only as of the date of this Form 10-Q. The Company does not undertake to update its forward-looking statements.

General

Stage Stores is a Houston, Texas-based regional, specialty department store retailer offering moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. As of November 1, 2008, the Company operated 731 stores located in 38 states under the Stage, Bealls and Palais Royal names throughout the South Central, Southwestern and Northwestern states, and under the Peebles name throughout the Midwestern, Southeastern, Mid-Atlantic and New England states. The Company's principal focus is on consumers in small and mid-sized markets which the Company believes are under-served and less competitive. The Company believes that it is able to differentiate itself from the competition in the small and mid-size markets in which it operates by offering consumers access to basic as well as fashionable brand name merchandise not typically carried by other retailers in the same market area. In the highly competitive metropolitan markets in which it operates, the Company competes against national department store chains, which similarly offer moderately priced, brand name and private label merchandise. As a way of differentiating itself from the competition in these larger metropolitan markets, the Company endeavors to offer consumers a high level of customer service in convenient locations.

The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements as included in the Form 10-K.

Results of Operations

The following table sets forth the results of operations as a percentage of
sales for the periods indicated:

                                               Thirteen Weeks Ended (1)            Thirty-Nine Weeks Ended (1)
                                           November 1,          November 3,      November 1,         November 3,
                                               2008                 2007            2008                2007

Net sales                                         100.0 %              100.0 %         100.0 %             100.0 %
Cost of sales and related buying,
occupancy and distribution expenses                77.6                 73.5            73.9                72.2
Gross profit                                       22.4                 26.5            26.1                27.8

Selling, general and administrative
expenses                                           25.3                 24.4            24.6                24.0
Store opening costs                                 0.7                  0.7             0.6                 0.3
Goodwill impairment                                28.6                    -             9.0                   -
Interest expense, net                               0.4                  0.3             0.4                 0.3
(Loss) income before income tax                   (32.6 )                1.1            (8.4 )               3.2

Income tax (benefit) expense                       (1.8 )                0.4             0.1                 1.2
Net (loss) income                                 (30.8 )%               0.7 %          (8.6 )%              2.0 %

(1) Percentages may not foot due to rounding.

The following supplemental information presents the results of operations for the thirteen and thirty-nine weeks ended November 1, 2008, exclusive of the impact of the goodwill impairment charge. Management believes this supplemental financial information enhances an investor's understanding of the Company's financial performance. The non-GAAP financial information should not be considered in isolation or viewed as a substitute for net (loss) income, cash flow from operations or other measures of performance as defined by U.S. GAAP. Moreover, the inclusion of non-GAAP financial information as used herein is not necessarily comparable to other similarly titled measures of other companies due to the potential inconsistencies in the method of presentation and items considered. The following table sets forth the supplemental financial information and the reconciliation of U.S. GAAP disclosures to non-GAAP financial metrics:

                                               Thirteen Weeks Ended            Thirty-Nine Weeks Ended
                                           November 1,      November 3,     November 1,       November 3,
                                               2008            2007            2008              2007

Net (loss) income:
On a U.S. GAAP basis                       $   (102,796 )   $     2,446     $   (90,870 )     $    21,429
Goodwill impairment                              95,374               -          95,374                 -
On a non-GAAP basis                        $     (7,422 )   $     2,446     $     4,504       $    21,429

Diluted (loss) earnings per share:
On a U.S. GAAP basis                       $      (2.66 )   $      0.06     $     (2.37 )     $      0.49
Goodwill impairment                                2.47               -            2.48                 -
On a non-GAAP basis                        $      (0.19 )   $      0.06     $      0.12       $      0.49

Thirteen Weeks Ended November 1, 2008 Compared to Thirteen Weeks Ended November 3, 2007

Sales for the thirteen weeks ended November 1, 2008 (the "current year third quarter") decreased by 6.0% to $333.8 million from $355.1 million for the thirteen weeks ended November 3, 2007 (the "prior year third quarter"). Overall, sales in the current year third quarter were adversely affected by the currently difficult macroeconomic and retail environment, as well as an estimated $10.0 million loss in sales due to Hurricanes Gustav and Ike that forced store closures in many of the Company's markets. Comparable store sales, which are sales in stores that are open for at least 14 full months prior to the reporting period, decreased by 10.3% in the current year third quarter as compared to a 1.0% decrease in the prior year third quarter. In the current year third quarter, new stores that were not in the comparable store base contributed sales of $18.5 million. These sales were offset by a loss of $4.5 million in sales from closed stores that were in operation during the prior year third quarter, as well as a loss in sales due to the Company's comparable store sales decline.

On a merchandise category basis, the Company's cosmetics category achieved a comparable store sales increase of 7.8% during the current year third quarter driven by the continued installation of Estee Lauder and Clinique counters, as well as a strong men's and women's fragrance business. While all other merchandise categories experienced negative comparable stores sales, key merchandise categories (i.e., those categories comprising greater than 5% of sales) that performed better than the Company average included the children's and footwear categories. On a market size basis, comparable store sales in the Company's small markets (populations less than 50,000), mid-size markets (populations of 50,000 to 150,000) and large markets (populations greater than 150,000) experienced comparable store sales decreases of 8.2%, 11.0% and 14.2%, respectively, and excluding the estimated impact of the two hurricanes, experienced decreases of 7.0%, 8.2% and 9.8%, respectively.

The following is a summary of the changes between the current year third quarter and the prior year third quarter in the components of cost of sales, expressed as a percent of sales:

                                                             Increase
                                                                Q3
           Merchandise cost of sales                               2.2 %
           Buying, occupancy and distribution expenses             1.9
           Increase in merchandise cost of sales and
           related buying, occupancy and distribution
           expenses rate                                           4.1 %

Gross profit decreased 20.7% to $74.7 million for the current year third quarter from $94.2 million in the prior year third quarter. Gross profit, as a percent of sales, was 22.4% in the current year third quarter and 26.5% in the prior year third quarter. Merchandise margins were negatively impacted by the acceleration of clearance inventory liquidation and promotional activities designed to drive sales. The increase in the buying, occupancy and distribution expenses rate is primarily due to an overall increase in store occupancy and depreciation costs due to a higher store count in the current year third quarter as compared to the prior year third quarter, and deleveraging of expenses due to lower sales.

Selling, general and administrative ("SG&A") expenses in the current year third quarter decreased by $2.2 million, or 2.6%, to $84.4 million from $86.7 million in the prior year third quarter. As a percent of sales, SG&A expenses increased to 25.3% in the current year third quarter from 24.4% in the prior year third quarter. The decrease in dollars in the current year third quarter as compared to the prior year third quarter is primarily due to strict cost control efforts, lower self-insured claims expense and a reduction in incentive compensation expense. However, the SG&A rate increased primarily due to deleveraging of expenses due to lower sales.

Store opening costs in the current year third quarter of $2.3 million include costs related to 17 stores opened and three stores relocated during the current year third quarter. During the prior year third quarter, the Company incurred $2.5 million in store opening costs related to 21 new stores and the relocation of four stores. Store opening costs are expensed as incurred and may include costs of stores opening in future quarters.

The Company tests goodwill for impairment annually in the fourth quarter or more frequently when indicators of impairment exist. As a result of the decline in the market capitalization for the Company given the recent reduction in market multiples, and the current challenging economic environment and its impact on the Peebles reporting unit's sales and earnings performance, the Company determined that an interim impairment test was necessary during the current year third quarter. Upon completion of the impairment test in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), the Company concluded that a write-off of the carrying value of the goodwill recorded was warranted. As a result, the Company recorded a goodwill impairment charge of $95.4 million in the current year third quarter.

Net interest expense was $1.4 million in the current year third quarter as compared to $1.2 million in the prior year third quarter. Interest expense is primarily comprised of interest on borrowings under the Revolving Credit Facility (see "Liquidity and Capital Resources"), related letters of credit and commitment fees, amortization of debt issue costs, interest on financing lease obligations and equipment financing notes. The increase in interest expense is due to higher borrowings related to the Company's equipment financing notes, partly offset by the lower weighted average borrowings and a lower weighted average interest rate on the Revolving Credit Facility during the current year third quarter as compared to the prior year third quarter.

The Company's effective tax rate for the current year third quarter was (5.5%), which resulted in an estimated tax benefit of $6.0 million. This compares to income tax expense of $1.5 million in the prior year third quarter during which the effective tax rate was 37.7%. The effective tax rate in the current year third quarter reflects the impact of the goodwill impairment charge of $95.4 million, which is a non-deductible expense for income tax purposes, and $0.9 million of benefit related to work opportunity tax credits.

As a result of the foregoing, the Company had a net loss of $102.8 million for the current year third quarter as compared to net income of $2.4 million for the prior year third quarter. The current year third quarter net loss included the non-cash goodwill impairment charge of $95.4 million, which is non-deductible for income tax purposes. Excluding the goodwill impairment charge, the Company's net loss for the current year third quarter would have been $7.4 million, or a net loss of $0.19 per diluted share.

Thirty-Nine Weeks Ended November 1, 2008 Compared to Thirty-Nine Weeks Ended November 3, 2007

Sales for the thirty-nine weeks ended November 1, 2008 (the "current year") decreased by 1.2% to $1,060.0 million from $1,072.6 million for the thirty-nine weeks ended November 3, 2007 (the "prior year"). Overall, sales in the current year were adversely affected by the currently difficult macroeconomic and retail environment. Comparable store sales decreased 5.6% in the current year as compared to a 0.1% decrease in the prior year. In the current year, new stores that were not in the comparable store base contributed sales of $55.4 million. These sales were partially offset by a loss of $8.6 million in sales from closed stores that were in operation during the prior year, as well as a loss in sales due to the Company's comparable store sales decline.

On a merchandise category basis, the Company's cosmetics category achieved a comparable store sales increase of 11.1% during the current year driven by the continued installation of Estee Lauder and Clinique counters, as well as a strong men's and women's fragrances business. While all other merchandise categories experienced negative comparable store sales, key merchandise categories (i.e. those categories comprising greater than 5% of sales) that had negative comparable store sales, but performed better than the Company average, included dresses, children's and footwear. On a market size basis, the Company's small markets (populations less than 50,000), mid-sized markets (populations of 50,000 to 150,000) and large markets (populations greater than 150,000) experienced comparable store sales decreases of 4.4%, 6.2% and 8.0%, respectively.

The following is a summary of the changes between the current year and the prior year in the components of cost of sales, expressed as a percent of sales:

                                                             Increase
                                                               YTD
           Merchandise cost of sales                               0.4 %
           Buying, occupancy and distribution expenses             1.3
           Increase in merchandise cost of sales and
           related buying,occupancy and distribution
           expenses rate                                           1.7 %

Gross profit decreased by 7.1% to $276.9 million for the current year from $298.1 million in the prior year. Gross profit, as a percent of sales, was 26.1% in the current year and 27.8% in the prior year. The increase in the merchandise cost of sales rate is primarily due to increased promotional activities designed to drive sales in the current difficult retail environment. The increase in the buying, occupancy and distribution expenses rate is primarily due to an overall increase in store occupancy and depreciation costs due to a higher store count in the current year as compared to the prior year and deleveraging of expenses due to lower sales.

SG&A expenses in the current year increased by $4.4 million, or 1.7%, to $261.3 million from $256.9 million in the prior year. As a percent of sales, SG&A expenses increased to 24.6% in the current year from 23.9% in the prior year. SG&A expenses in the prior year included a non-comparable gain of $2.6 million related to the March 2004 sale of the Peebles credit card portfolio. The remaining increase was primarily expenses related to additional stores this year as compared to last year and increased utilities costs.

Store opening costs in the current year of $5.9 million include costs related to 45 stores opened and 11 stores relocated during the current year. During the prior year, the Company incurred $3.7 million in store opening costs related to 35 new stores and the relocation of 8 stores. Store opening costs are expensed as incurred and may include costs of stores opening in future quarters.

The Company tests goodwill for impairment annually in the fourth quarter or more frequently when indicators of impairment exist. As a result of the decline in the market capitalization for the Company given the recent reduction in market multiples, and the current challenging economic environment and its impact on the Peebles reporting unit's sales and earnings performance, the Company determined that an interim impairment test was necessary during the current year third quarter. Upon completion of the impairment test in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), the Company concluded that a write-off of the carrying value of the goodwill recorded was warranted. As a result, the Company recorded a goodwill impairment charge of $95.4 million in the current year third quarter.

Net interest expense was $3.9 million in the current year as compared to $3.0 million in the prior year. Interest expense is primarily comprised of interest on borrowings under the Company's Revolving Credit Facility (see "Liquidity and Capital Resources"), related letters of credit and commitment fees, amortization of debt issue costs, interest on financing lease obligations and equipment financing notes. The increase in interest expense is due to higher borrowings related to the Company's equipment financing notes, partly offset by a lower weighted average interest rate on the Revolving Credit Facility in the current year as compared to the prior year.

The Company's effective tax rate for the current year is 1.5%, resulting in estimated income tax expense of $1.3 million. This compares to income tax expense of $13.0 million in the prior year during which the effective tax rate was 37.8%. The effective tax rate in the current year reflects the impact of the goodwill impairment charge of $95.4 million, which is a non-deductible expense for income tax purposes, and $0.9 million of benefit related to work opportunity tax credits. Considering that the work opportunity tax credits were included as discrete tax items in the current year third quarter, the Company expects that the effective tax rate for the current year, excluding the impact of the goodwill impairment charge, will be 36.2%.

As a result of the foregoing, the Company had a net loss of $90.9 million for the current year as compared to net income of $21.4 million for the prior year. The current year net loss included the non-cash goodwill impairment charge of $95.4 million, which is non-deductible for income tax purposes. Excluding the goodwill impairment charge, the Company's net income for the current year would have been $4.5 million, or a net income of $0.12 per diluted share.

Seasonality and Inflation

Historically, the Company's business is seasonal and sales are traditionally lower during the first three quarters of the year (February through October) and higher during the last three months of the year (November through January). The fourth quarter typically accounts for slightly more than 30% of the Company's annual sales, with the other quarters accounting for approximately 22% to 24% each. Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters. The Company does not believe that inflation had a material effect on its results of operations during the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively. However, there can be no assurance that the Company's business will not be affected by inflation in the future.

Liquidity and Capital Resources

The Company's liquidity is currently provided by (i) existing cash balances,
(ii) operating cash flows, (iii) normal trade credit, (iv) equipment financing notes and (v) its Revolving Credit Facility.

The Company has a $250.0 million senior secured revolving credit facility (the "Revolving Credit Facility") that matures on April 20, 2012. The Revolving Credit Facility includes an uncommitted accordion feature to increase the size of the facility to $350.0 million. Borrowings under the Revolving Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Revolving Credit Facility agreement. The daily interest rates on the Company's Revolving Credit Facility borrowings are determined by a prime rate, or Eurodollar rate plus an applicable margin, as set forth in the Revolving Credit Facility agreement. Inventory and cash and cash equivalents are pledged as collateral under the Revolving Credit Facility. The Revolving Credit Facility is used by the Company to provide financing for working capital, capital expenditures, interest payments and other general corporate purposes, as well as to support its outstanding letters of credit requirements. For the current year, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the Revolving Credit Facility were 4.0% and $36.0 million, respectively.

The Company also issues letters of credit to support certain merchandise purchases and to collateralize retained risks and deductibles under various insurance programs. The Company had outstanding letters of credit totaling approximately $24.4 million at November 1, 2008 under the Revolving Credit Facility. These letters of credit expire within twelve months of issuance. Excess borrowing availability under the Revolving Credit Facility at November 1, 2008, net of letters of credit outstanding and outstanding borrowings, was $160.0 million.

The Revolving Credit Facility contains covenants which, among other things, restrict, based on required levels of excess availability, (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends and repurchase of common stock under certain circumstances, and (iii) related party transactions. At November 1, 2008, the Company was in compliance with all of the financial covenants of the Revolving Credit Facility.

During the current year, the Company borrowed $19.0 million under equipment financing notes bearing interest rates ranging from 5.7% to 6.0%. The equipment financing notes are payable in monthly installments over a five-year term and are secured by certain fixtures and equipment. In total, as of November 1, 2008, the Company had $46.1 million of equipment financing notes outstanding.

The Company generated $67.6 million in cash from operating activities in the current year. Net loss, adjusted for non-cash expenses, including the $95.4 million goodwill impairment, provided cash of approximately $54.0 million. Changes in operating assets and liabilities used net cash of approximately $5.4 million, which included an $85.2 million increase in merchandise inventories due to the seasonal build of inventories, offset by a decrease in other assets of $12.9 million primarily due to a decrease in prepaid merchandise, taxes receivables and receivables from merchandise vendors, and an increase in accounts payable and other liabilities of $66.9 million. Additionally, cash flows from operating activities included construction allowances from landlords of $18.9 million, which funded a portion of the capital expenditures related to store leasehold improvements in new and relocated stores.

In the current year, the Company paid quarterly cash dividends of $0.05 per share on the Company's common stock, which totaled $5.8 million. On November 28, 2008, the Company announced that its Board had declared a quarterly cash dividend of $0.05 per share of common stock, payable on December 24, 2008 to shareholders of record at the close of business on December 9, 2008.

Management currently estimates that capital expenditures in 2008, net of construction allowances to be received from landlords, will be approximately $80.0 million. The expenditures will principally be for the opening of 2008 new stores, store expansions, relocations and remodels, including construction costs related to its third distribution center, which commenced operations in the current year second quarter. Capital expenditures were $79.7 million in the current year as compared to $64.1 million in the prior year. For the current year, the Company opened 45 new stores and relocated 11 stores as compared to 35 stores opened and 8 relocated stores in the prior year. As noted above, the Company received construction allowances from landlords of $18.9 million in the . . .