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 850 discount retail stores in 45 states as of March 31, 2009. 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, along with the weakness in the housing and debt markets, trends we believe are 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, improving 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 developed a strategy to 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 fiscal third quarter of 2009 were 5.7% of sales versus the prior year quarter of 5.8% 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 March 31, 2009 would result in a decline in gross profit and diluted earnings per share for the third 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.

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.

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.

Net sales for the third quarter of fiscal 2009 were $167.0 million, a decrease of 6.4% compared to the same period last year. Comparable store sales for the quarter ended March 31, 2009 decreased by 9.5 % comprised of a 1.7% decrease in customer transactions and a 7.8% decrease in average ticket. Net loss for the quarter was $6.8 million and diluted loss per share was $0.16.

For the nine months ended March 31, 2009, net sales were $613.1 million compared to $688.8 million for the same period last year. Comparable store sales for the nine month period ended March 31, 2009 decreased 14.2% compared to the same period last year. This decrease was comprised of an 8.3% decrease in customer transactions and a 5.9% decrease in average ticket. Net income for the year-to-date period was $1.6 million and diluted earnings per share were $0.04.

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 six new stores during the third quarter of fiscal 2009. In addition, we relocated 15 existing stores and expanded one existing store.

Results of Operations

The following table sets forth certain financial information from our consolidated statements of operations 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       Nine Months Ended
                                                March 31,               March 31,
                                            2009         2008        2009        2008
Net sales                                    100.0 %      100.0 %     100.0 %     100.0 %
Cost of sales                                 63.5         64.1        63.1        63.0
Gross profit                                  36.5         35.9        36.9        37.0
Selling, general and administrative
expense                                       42.1         40.0        36.1        32.6
Operating income (loss)                       (5.6 )       (4.1 )       0.7         4.4
Net interest expense and other income
(expense)                                     (0.6 )       (0.1 )      (0.3 )      (0.4 )
Income (loss) before income taxes             (6.2 )       (4.2 )       0.4         4.0
Income tax expense (benefit)                  (2.2 )       (1.6 )       0.2         1.5

Net income (loss)                             (4.1 )%      (2.6 )%      0.3 %       2.5 %

Three Months Ended March 31, 2009

Compared to the Three Months Ended March 31, 2008

During the third quarter of fiscal 2009, net sales decreased to $167.0 million from $178.4 million, a decrease of $11.4 million or 6.4% compared to the quarter ended March 31, 2008. The decrease in third quarter sales is primarily due to a 9.5% decrease in comparable store sales. The decrease in comparable sales for the third quarter of fiscal 2009 was comprised of a 1.7% decrease in the number of transactions and a 7.8% decrease in the average transaction amount. Comparable store sales and sales per store decreased primarily due to lower average spending levels than last year. Management believes traffic levels and average ticket sales 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 $3.0 million, or 4.7%, to $61.0 million for the three months ended March 31, 2009 as compared to the same quarter last year of $64.0 million, primarily as a result of lower sales volume. Our gross profit percentage increased from 35.9% in the third quarter of fiscal 2008 to 36.5% in the third quarter of fiscal 2009. This increase of 0.6% in gross profit percentage is primarily due to decreases in the purchase cost of our products representing 0.4% of sales and a decrease in freight costs representing 0.2% of sales. The costs of our products have declined as overall economic activity and demand for home products has been weak. Freight costs have decreased due primarily to the decline in fuel costs.

Selling, general and administrative expenses decreased $1.0 million, or 1.4%, to $70.4 million in the three months ended March 31, 2009 from $71.4 million in the same quarter last year. The decrease was attributable to decreases of $1.3 million in advertising costs, $0.7 million in self-insurance costs and $0.3 million in legal and consulting fees. Partially offsetting these decreases was an increase in store occupancy costs of $1.5 million primarily due to the expansion of our store base. As a percentage of net sales, these selling, general and administrative expenses increased to 42.1% in the third fiscal quarter of 2009 from 40.0% in the same quarter last year due to the deleveraging of fixed costs over a smaller sales base. Selling, general, and administrative expenses per average store declined by 4.7% for the third quarter of fiscal 2009 as compared to the same period in fiscal 2008.

The income tax benefit for the three month periods ended March 31, 2009 and 2008 was $3.6 million and $2.9 million, respectively, reflecting an effective tax rate of 34.5% and 38.2%, respectively. The effective tax rate is lower due to state income taxes.

Nine Months Ended March 31, 2009

Compared to the Nine Months Ended March 31, 2008

During the nine months ended March 31, 2009, net sales decreased to $613.1 million from $688.8 million, a decrease of $75.7 million or 11.0% compared to the nine month period ended March 31, 2008. The decrease in sales for the first nine months of fiscal 2009 was primarily due to the 14.2% decrease in comparable store sales. The decrease in comparable sales for the first nine months of fiscal 2009 was comprised of an 8.3% decrease in the number of transactions and a 5.9% decrease in the average transaction amount. Total average store sales for the first nine months of fiscal 2009 decreased 14.5% when compared to the same prior year period. Comparable store sales and sales per store decreased primarily due to lower traffic levels and average ticket sales. Management believes traffic levels and average ticket sales were 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 $28.6 million, or 11.2%, to $226.0 million for the nine months ended March 31, 2009 as compared to the same nine month period last year of $254.6 million, primarily a result of decreased net sales. In the nine month period ended March 31, 2009, our gross profit percentage decreased to 36.9% from 37.0% in the same period last year. This 0.1% decrease in the gross profit percentage is comprised of a decrease in markdowns as a percentage of sales of 0.3% resulting from changes in our inventory markdown strategy, offset by a slight increase in freight and distribution expenses as a percentage of sales of 0.5%. Freight and distribution expenses were slightly higher as a percentage of sales due to the increase in freight rates as a result of higher fuel surcharges in the first quarter of fiscal 2009 and due to the deleveraging of fixed costs over a smaller sales base.

Selling, general and administrative expenses during the nine months ended March 31, 2009 decreased $3.0 million, or 1.3%, to $221.6 million from $224.6 million during the nine months ended March 31, 2008. The decrease was primarily attributable to a decrease in advertising expenses of $2.9 million, a decrease in store salary expenses of $1.8 million, a decrease in bank charges of $1.0 million, a decrease in insurance costs of $0.8 million, a decrease in stock-based compensation expenses of $0.7, and a decrease in depreciation of $0.5 million. These decreases were partially offset by an increase in store occupancy costs of $4.4 million and an increase in utilities of $1.4 million, primarily due to the expansion in our store base. As a percentage of net sales, these expenses increased 3.5% to 36.1% in the first nine months of fiscal 2009 from 32.6% in the same period last year. The increased percentage is primarily due to the reduced expense leveraging given our negative comparable store sales and includes a 2.5% increase related to store occupancy costs and store personnel costs as a percentage of sales. Selling, general and administrative expenses per average store was $261.0 thousand for the nine months ended March 31, 2009 compared to $274.7 thousand in the same period last year, representing a decrease of 4.8%.

The income tax provision for the nine month periods ended March 31, 2009 and 2008 was $1.0 million and $10.4 million, respectively, reflecting an effective tax rate of 37.8% and 38.0%, respectively. The effective tax rate is lower due to a reduction of 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 nine months ended March 31, 2009 was $2.9 million, primarily due to net income of $1.6 million along with adjustments for non cash charges of $12.6 million for depreciation and $1.7 million for stock-based compensation. We also had increases in accounts payable of $5.4 million and in income taxes payable of $1.6 million. These inflows were partially offset by an increase in inventory of $19.6 million. The increase in inventory was primarily due to lower sales volumes along with a net increase of eight stores during the nine month period. The increase in accounts payable was partially offset by the

change in cash overdraft due to the timing of payments and is discussed below. There has been no material change in our payment policy to vendors. The increase in income taxes payable was due to the timing of payments related to income taxes.

Net cash used in investing activities of $9.9 million for the nine months ended March 31, 2009 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 $1.5 million for additional capital expenditures during the remainder of fiscal 2009. These will include the replacement capital necessary to operate our stores along with expenditures for the relocation and enhancement of selected existing stores.

Net cash provided by financing activities for the nine months ended March 31, 2009 of $3.9 million was primarily due to borrowings under the revolving credit facility of $206.7 million offset by repayments under the revolving credit facility of $193.2 million, an increase in cash overdraft of $5.1 million and payment of debt financing costs of $4.4 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.

Availability on the revolving credit facility is calculated on a monthly basis and is dependant upon inventory valuation requirements as specified in the agreement. 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 requiring 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 March 31, 2009, we were in compliance with all covenants.

At March 31, 2009, we had $22.0 million of outstanding loans under the revolving credit facility, $10.1 million of outstanding letters of credit and availability of $103.1 million under the revolving credit facility. 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 March 31, 2009 for LIBOR loans was 3.28%. The weighted average interest rate for prime rate loans at March 31, 2009 was 6.02%.

Store Openings/Closings



                                     Nine Months   Nine Months   Fiscal Year
                                        Ended         Ended         Ended
                                      March 31,     March 31,     June 30,
                                        2009          2008          2008

Stores open at beginning of period           842           810           810
Stores opened during the period               27            27            48
Stores closed during the period              (19 )         (16 )         (16 )
Stores open at end of period                 850           821           842