The following discussion should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Introduction

We operated 860 discount retail stores in 45 states as of December 31, 2008. We sell closeout home furnishings, housewares, gifts and related items, which we purchase at below wholesale prices. Our stores operate during periodic "sales events" that occur in each month except January and July. We are generally closed during the first two weeks of January and July, which traditionally have been weaker months for retailers. We purchase first quality, brand name merchandise at closeout prices and sell it at prices significantly below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars, refurbished or factory rejects.

Business Overview

The retail home furnishings industry has been negatively impacted by increased supply and competition within an already highly competitive promotional environment, a trend we believe is likely to continue in the near term and potentially longer. As a closeout retailer of home furnishings, we currently compete against a diverse group of retailers, including department and discount stores, specialty and e-commerce retailers and mass merchants, which sell, among other products, home furnishing products similar and often identical to those we sell. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing and houseware products that we sell. Many of these competitors have substantially greater financial resources than we do. Our competitors' greater financial resources allow them to initiate and sustain aggressive price competition, initiate broader marketing campaigns that reach a larger customer base, fund ongoing promotional events and communicate more frequently with existing and potential customers.

In response to this trend in the retail home furnishings industry, we have been focused internally on implementing various strategic initiatives that we believe will offset the impact of this trend including, but not limited to, striving to provide a merchandise assortment that evolves and adapts to the changing needs and preferences of the Company's customer base, continuing to review the individual contributions of the existing store base and making decisions about the future of individual store locations, including whether to close or relocate them, seeking to improve overall supply chain efficiency, including reviewing operational practices such as freight costs, vendor payment terms and distribution processes, and striving to improve the Company's marketing plan by maximizing traffic, increasing comparable store sales and expanding the current customer base, while also maintaining cost efficiency. Given the uncertain economic environment, we are closely monitoring our inventory purchases. We have also begun to more closely monitor and control our markdowns of inventory to avoid marking down items that continue to sell through at reasonable rates. As a result, markdowns combined with our reserve for markdowns during the second quarter of 2009 were 5.2% of sales versus the prior year quarter of 5.3% of sales. We believe this strategy will contribute to overall margin by focusing our markdowns on inventory that is truly slow moving and not marking down items on the basis of age in inventory alone, thereby allowing us to continue to exclude markdowns on opportunistic buys which are too large for us to sell through in one year. As a result of this strategy, our inventory turnover could decrease. Actual required markdowns could differ from our current estimates based on future customer demand or economic conditions. The effect of an additional 1.0% markdown in the value of our inventory at December 31, 2008 would result in a decline in gross profit and diluted earnings per share for the second quarter of fiscal 2009 of $2.6 million and $0.04, respectively. Under current economic conditions, those estimates can vary significantly from the actual results we may encounter.

Our ability to continuously attract buying opportunities for closeout merchandise and to anticipate consumer demand as closeout merchandise becomes available represents an uncertainty in our business. By their nature, specific closeout merchandise items are generally only available from manufacturers or vendors on a non-recurring basis. As a result, we do not have long-term contracts with our vendors for supply, pricing or access to products, but make individual purchase decisions, which are often for large quantities. Although we have many sources of merchandise and do not foresee any shortage of closeout merchandise in the near future, we cannot assure that manufacturers or vendors will continue to make desirable closeout merchandise available to us in quantities or on terms acceptable to us or that our buyers will continue to identify and take advantage of appropriate buying opportunities. Since this uncertainty is a by-product of our business, we expect it to be an ongoing concern.

The stability of our earnings is also heavily influenced by macroeconomic factors. As the economy improves or worsens our business is often similarly impacted. Macroeconomic factors, such as the current conditions in the debt and housing markets, have impacted and will continue to impact our business by decreasing the disposable income of our potential consumers. The decline in consumer confidence levels has also had a negative impact on consumers' ability and willingness to spend discretionary income. At this time, we view the direction of the economy to be uncertain, which does not allow us a high degree of visibility or certainty in predicting our earnings.

Net sales for the second quarter of fiscal 2008 were $272.7 million, a decrease of 11.7% compared to the same period last year. Comparable store sales for the quarter ended December 31, 2008 decreased by 14.9% comprised of a 9.6% decrease in customer transactions and a 5.3% decrease in average ticket. Net income for the quarter was $12.7 million and diluted earnings per share were $0.31.

For the six months ended December 31, 2008, net sales were $446.1 million compared to $510.3 million for the same period last year. Comparable store sales for the six month period ended December 31, 2008 decreased 15.8% compared to the same period last year. This decrease was comprised of an 11.4% decrease in customer transactions and a 4.4% decrease in average ticket. Net income for the year-to-date period was $8.4 million and diluted earnings per share were $0.20.

We continue to remain focused on our long-term growth and profitability. The home furnishings and high-end decorative sectors of the U.S. economy continue to be challenged by the highly competitive promotional environment and weakness in the housing and debt markets.

We opened nine new stores during the second quarter of fiscal 2009. In addition, we relocated six existing stores and expanded one existing store.

Results of Operations

The following table sets forth certain financial information from our consolidated statements of income expressed as a percentage of net sales. Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31, which includes the holiday season. There can be no assurance that the trends in sales or operating results will continue in the future.

                                             Three Months Ended        Six Months Ended
                                                December 31              December 31
                                             2008         2007         2008        2007
Net sales                                      100.0 %      100.0 %     100.0 %     100.0 %
Cost of sales                                   62.9         62.8        63.0        62.6
Gross profit                                    37.1         37.2        37.0        37.4
Selling, general and administrative
expense                                         29.5         26.1        33.9        30.1
Operating income                                 7.6         11.1         3.1         7.3
Net interest expense and other income
(expense)                                       (0.2 )       (0.4 )      (0.2 )      (0.4 )
Income before income taxes                       7.4         10.7         2.9         6.9
Income tax expense                               2.7          4.0         1.0         2.6

Net income                                       4.7 %        6.7 %       1.9 %       4.3 %

Three Months Ended December 31, 2008

Compared to the Three Months Ended December 31, 2007

During the second fiscal quarter of 2009, net sales decreased to $272.7 million from $308.7 million, a decrease of $36.0 million or 11.7% compared to the quarter ended December 31, 2007. The decrease in second quarter sales is primarily due to the 14.9% decrease in comparable store sales. The decrease in comparable sales for the second quarter of fiscal 2009 was comprised of a 9.6% decrease in the number of transactions and a 5.3% decrease in the average transaction amount. Average store sales for the second fiscal quarter of 2009 decreased 15.3% when compared to the same prior year quarter. Comparable store sales and sales per store decreased primarily due to lower traffic levels. Management believes traffic levels are lower due to a number of factors, including the economic pressures impacting the discretionary income of consumers, an increase in supply of home furnishing products, a weakness in the housing market, and the competitive promotional environment of the home furnishings retail sector.

Gross profit decreased $14.0 million, or 12.2%, to $100.9 million for the three months ended December 31, 2008 as compared to the same quarter last year of $114.9 million, primarily due to a deleveraging of distribution costs on a decline in comparable store sales. Our gross profit percentage decreased from 37.2% to 37.1% in the second fiscal quarter of fiscal 2009. This decrease of 0.1% in gross profit percentage is primarily due to the deleveraging of distribution expenses of 0.5% caused by a reduction in comparable store sales which was offset by decreases in shrink, cost of product, and markdowns of 0.1%, respectively.

Selling, general and administrative expenses decreased $0.3 million, or 0.4%, to $80.3 million in the three months ended December 31, 2008 from $80.7 million in the same quarter last year. The decrease was attributable to a $1.5 million increase in rent for new store locations offset by savings in advertising of $0.7 million, bank charges of $0.5 million, and insurance costs of $0.5 million. As a percentage of net sales, these selling, general and administrative expenses increased 3.4% to 29.5% in the second fiscal quarter of 2009 from 26.1% in the same quarter last year. The increased percentage is primarily due to the reduced expense leveraging given our negative comparable store sales. Selling, general and administrative expenses per average store was $93.9 thousand in the quarter ended December 31, 2008 compared to $98.1 thousand in the same quarter last year, a decrease of 4.4%.

The income tax provision for the three month period ended December 31, 2008 and 2007 was $7.3 million and $12.6 million, respectively, reflecting an effective tax rate of 36.6% and 38.1%, respectively. The effective tax rate is lower in the second quarter of fiscal 2009 as compared to the same quarter last year primarily due to a reduction in state income taxes.

Six Months Ended December 31, 2008

Compared to the Six Months Ended December 31, 2007

During the six months ended December 31, 2008, net sales decreased to $446.1 million from $510.3 million, a decrease of $64.7 million or 12.7% compared to the six month period ended December 31, 2007. The decrease in sales for the first six months of fiscal 2009 is primarily due to the 15.8% decrease in comparable store sales. The decrease in comparable sales for the first six months of fiscal 2009 was comprised of an 11.4% decrease in the number of transactions and a 4.4% decrease in the average transaction amount. Total average store sales for the first six months of fiscal 2009 decreased 15.8% when compared to the same prior year period. Comparable store sales and sales per store decreased primarily due to lower traffic levels. Management believes traffic levels are lower due to a number of factors, including the economic pressures impacting the discretionary income of consumers, an increase in supply of home furnishing products, a weakness in the housing market, and the competitive promotional environment of the home furnishings retail sector.

Gross profit decreased $25.6 million, or 13.4%, to $165.1 million for the six months ended December 31, 2008 as compared to the same six month period last year of $190.6 million, primarily due to a deleveraging of distribution costs on a decline in comparable store sales. In the six month period ended December 31, 2008, our gross profit percentage decreased to 37.0% from 37.3% in the same period last year. This 0.3% decrease in gross profit margin was primarily due to the deleveraging of distribution expenses of 0.5% caused by a reduction in comparable store sales which was offset by a decrease of 0.2% in markdowns.

Selling, general and administrative expenses during the six months ended December 31, 2008 decreased $2.0 million, or 1.3%, to $151.2 million from $153.2 million during the six months ended December 31, 2007. The decrease was attributable to a $3.0 million increase in rent for new stores offset by a $1.6 million decrease in advertising, a $1.0 million decrease in bank charges, a $0.7 million decrease in insurance, a $0.7 million decrease in supplies usage, and a $0.6 million decrease in stock compensation in the six months ended December 31, 2008 compared to the same period of 2007. As a percentage of net sales, these expenses increased 3.8% to 33.9% in the first six months of fiscal 2009 from 30.1% in the same period last year. The increased percentage is primarily due to the reduced expense leveraging given our negative comparable store sales. Selling, general and administrative expenses per average store was $177.8 thousand for the six months ended December 31, 2008 compared to $186.6 thousand in the same period last year, a decrease of 4.8%.

The income tax provision for the six month periods ended December 31, 2008 and 2007 was $4.6 million and $13.3 million, respectively, reflecting an effective tax rate of 35.1% and 38.1%, respectively. The effective tax rate is lower in the six months ended December 31, 2008 as compared to the six months ended December 31, 2007 primarily due to a reduction in state income taxes.

Liquidity and Capital Resources

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our borrowings have historically peaked in the quarter ended September 30 as we build inventory levels prior to the holiday selling season. Given the seasonality of our business, the amount of borrowings under our revolving credit facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory. We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

Net cash flows provided by operating activities for the six months ended December 31, 2008 was $5.5 million, primarily due to net income of $8.4 million along with adjustments for non cash charges of $8.4 million for depreciation, an increase in income taxes payable of $4.3 million and an increase in accrued liabilities of $3.5 million offset by an increase in inventory of $19.9 million. The increase in inventory was primarily due to lower sales volumes and an increase in inventory purchases. There has been no material change in our payment policy to vendors. The increase in income taxes payable is the result of higher pretax earnings in the six month period ended December 31, 2008 compared to the six month period ended June 30, 2008. The increase in accrued liabilities was due to the timing of payments of those liabilities.

Net cash used in investing activities of $7.0 million for the six months ended December 31, 2008 was primarily a result of capital expenditures that relate to opening new stores and store relocations in addition to the purchase of warehouse equipment and corporate hardware and software. We expect to spend approximately $3.0 million for additional capital expenditures during the remainder of fiscal 2009, which will include the opening of new stores, the expansion, relocation and enhancement of selected existing stores and purchases of equipment for our distribution center and corporate office.

Net cash used in financing activities for the six months ended December 31, 2008 of $1.3 million was primarily due to repayments under the revolving credit facility of $153.9 million net of borrowings of $147.5 million.

Revolving credit facility - On December 15, 2008, we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility (the "Revolving Credit Facility") in the amount of up to $150.0 million. On January 28, 2009, we entered into an amendment to increase the amount from $150.0 million to $180.0 million. The revolving credit facility may be increased by up to $70.0 million, not to exceed an aggregate total commitment of $250.0 million. Our indebtedness under the credit facility is secured by a lien on substantially all of our assets. The revolving credit facility contains, among other things, a "clean down" provision requirement that the sum of the aggregate principal amount of the outstanding loans and undrawn letters of credit may not exceed $45.0 million for 30 consecutive days during the period from December 28 through January 31. The revolving credit facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, sell assets or merge or consolidate with any other entity. Unless borrowings and letters of credit exceed 82.5% of the maximum amounts available under the revolving credit facility or an event of default exists, the Company does not have to comply with any financial covenants. Should such an event occur, the Company is required to comply with a consolidated fixed charge coverage ratio of 1:1. As of December 31, 2008, we were in compliance with all covenants.

At December 31, 2008, we had $2.0 million of outstanding loans under the revolving credit facility, $12.8 million of outstanding letters of credit and availability of $30.2 million under the revolving credit facility as we had entered the clean down period discussed above. As of January 28, 2009, we had $18.0 million of outstanding loans under the revolving credit facility, $10.1 million of outstanding letters of credit and availability of $102.5 million under the revolving credit facility after the close of the clean down period. We incur commitment fees of up to 0.75% on the unused portion of the revolving credit facility. Any borrowing under the revolving credit facility incurs interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. These rates are increased or reduced as our average daily availability changes. The weighted average interest rate at December 31, 2008 was 7.13%.

Update to Contractual Obligations



To supplement the contractual obligations included on Form 10-K for the fiscal
year ended June 30, 2008, we have recalculated our obligations under the new
revolving credit facility (in thousands):



                                                     Payments Due by Period
Contractual Obligations         Total         1 Year       2-3 Years      4-5 Years      > 5 Years
Non-cancelable operating
leases                        $  186,312    $   59,479    $    83,405    $    37,019    $     6,409
Revolving credit facility          2,030             -              -          2,030              -
Interest on revolving
credit facility                      725           145            290            290              -
Leased maintenance,
insurance and taxes               12,663         4,042          5,669          2,516            436

We do not consider merchandise purchase orders to be contractual obligations due to designated cancellation dates on the face of the purchase order. Contractually required payments for maintenance, insurance and taxes on our leased properties are estimated above as a percentage of rent based on historical trends. These amounts can vary based on multiple factors including inflation, macroeconomic conditions, various local tax rates and appraised values of our rental properties. Interest paid on our revolving credit facility is calculated at a 7.13% rate, which is the actual rate incurred for the second quarter of 2009, and will vary as additional borrowings are made or paid off early and will also fluctuate with changes in applicable interest rates. We have no capital lease obligations at December 31, 2008.

Store Openings/Closings



                                      Six Months     Six Months    Six Months
                                        Ended          Ended         Ended
                                     December 31,   December 31,    June 30,
                                         2008           2007          2008

Stores open at beginning of period            842            810          831
Stores opened during the period                21             24           24
Stores closed during the period                (3 )           (3 )        (13 )
Stores open at end of period                  860            831          842