This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.

General

In fiscal 2009, 99¢ Only Stores had net sales of $1,302.9 million, operating income of $12.9 million and net income of $8.5 million. Net sales increased 8.6% over fiscal 2008 primarily due to the 19 new store openings since the end of fiscal 2008 and a 3.7% increase in same-store sales. Average sales per store open the full year increased to $4.6 million in fiscal 2009 from $4.5 million, in fiscal 2008. Average net sales per estimated saleable square foot (computed for 99¢ Only Stores open for the full year) increased to $273 per square foot at March 28, 2009 from $263 per square foot at March 29, 2008. This increase reflects the Company's opening of smaller locations for new store development and continuous increase in same-store sales. Existing stores at March 28, 2009 average approximately 21,500 gross square feet. The Company currently is targeting locations between 15,000 and 19,000 gross square feet.

In fiscal 2009, the Company continued to expand its store base, opening 19 new stores. Of these newly opened stores, 13 stores are located in California, three stores in Arizona, one store in Nevada and two in Texas. The Company closed five stores in Texas during fiscal 2009 including one store due to the hurricane which was re-opened in May 2009. The Company also closed 10 more stores in Texas by mid-April 2009. During fiscal 2010, the Company plans to open approximately 15 new stores, with the majority of new stores expected to be in California in the second half of fiscal 2010, and believes that near term growth in fiscal 2010 will primarily result from new store openings in its existing territories and increases in same-store sales.

On February 1, 2008, the Company changed its fiscal year end from March 31 to the Saturday nearest March 31 of each year. The Company now follows a fiscal calendar consisting of four quarters with 91 days, each ending on the Saturday closest to the calendar quarter-end and a 52-week fiscal year with 364 days, with a 53-week year every five to six years. The Company's fiscal year 2009 ("fiscal 2009") began on March 30, 2008 and ended March 28, 2009 and fiscal year 2008 ("fiscal 2008") began on April 1, 2007 and ended on March 29, 2008. The Company's fiscal year 2007 ("fiscal 2007") began on April 1, 2006 and ended on March 31, 2007. This change in fiscal year end did not have a material effect on the comparability of the Company's consolidated statements of income for the years ended March 28, 2009, March 29, 2008 and March 31, 2007.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect reported earnings. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of inventories, long-lived asset impairment, legal reserves, self-insurance reserves, leases, taxes and share-based compensation.

The Company believes that the following represent the areas where more critical estimates and assumptions are used in the preparation of the financial statements:

Inventory valuation: Inventories are valued at the lower of cost (first in, first out) or market. Valuation allowances for obsolete and excess inventory and shrinkage are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. The valuation allowances for obsolete and excess inventory in many locations (including various warehouses, store backrooms, and sales floors of all its stores) require management judgment and estimates that may impact the ending inventory valuation as well as gross margins. The Company does not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that the Company uses to calculate these inventory valuation reserves. As an indicator of the sensitivity of this estimate, a 10% increase in our estimates of expected losses from excess and obsolete inventory and shrinkage provision at March 28, 2009, would have increased these reserves by approximately $0.3 million and $1.3 million, respectively and reduced fiscal 2009 pre-tax earnings by the same amounts.

Long-lived asset impairment: In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," the Company assesses the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference. Factors that the Company considers important which could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business; and (3) significant changes in the Company's business strategies and/or negative industry or economic trends. On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable. The primary factor that could impact the outcome of an impairment evaluation is the estimate of future cash flows expected to be generated by the asset being evaluated. Considerable management judgment is necessary to estimate the cash flows. Accordingly, if actual results fall short of such estimates, significant future impairments could result. In fiscal 2009, the Company recorded impairment charges of $10.4 million because it concluded that the carrying value of certain long-lived assets was not recoverable. These charges primarily consisted of a leasehold improvement impairment charge of approximately $10.1 million related to the Company's Texas market plan and an impairment charge of approximately $0.2 million related to the underperformance of a store in California. See Note 10 to Consolidated Financial Statements for further information regarding the charges related to Company's Texas operations. In fiscal 2008, the Company recorded an asset impairment charge of $0.5 million related to one underperforming store in Texas. The Company concluded that there were no such events or changes in circumstances during fiscal 2007. The Company has not made any material changes to its long-lived asset impairment methodology during fiscal 2009.

Legal reserves: In the ordinary course of its business, the Company is subject to various legal actions and claims. In connection with such actions and claims, the Company must make estimates of potential future legal obligations and liabilities, which requires management's judgment on the outcome of various issues. Management also relies on outside legal counsel in this process. The ultimate outcome of various legal issues could be materially different from management's estimates and adjustments to income could be required. The assumptions used by management are based on the requirements of SFAS No. 5, "Accounting for Contingencies". The Company will record, if material, a liability when it has determined that the occurrence of a loss contingency is probable and the loss amount can be reasonably estimated, and it will disclose the related facts in the notes to its financial statements. If the Company determines that the occurrence of a loss contingency is reasonably possible or that it is probable but the loss cannot be reasonably estimated, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. There were no material changes in the estimates or assumptions used to determine legal reserves during fiscal 2009 and a 10% change in legal reserves will not be material to the Company's consolidated financial position or results of operations.

Self-insured workers' compensation liability: The Company self-insures for workers' compensation claims in California and Texas. The Company establishes a reserve for losses of both estimated known claims and incurred but not reported insurance claims. The estimates are based on reported claims and actuarial valuations of estimated future costs of reported and incurred but not yet reported claims. Should the estimates fall short of the actual claims paid, the liability recorded would not be sufficient and additional workers' compensation costs, which may be significant, would be incurred. The Company does not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing its workers' compensation liability. As an indicator of the sensitivity of this estimate, at March 28, 2009, a 10% increase in our estimate of expected losses from workers compensation claims would have increased this reserve by approximately $4.4 million and reduced fiscal 2009 pre-tax earnings by the same amount.

Operating leases: The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred tenant improvements. Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term.

For store closures where a lease obligation still exists, the Company records the estimated future liability associated with the rental obligation on the cease use date (when the store is closed) in accordance with SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs, as prescribed by SFAS
146. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.

During fiscal 2009, the Company accrued $1.3 million in lease termination costs associated with the closing of four of its Texas stores during fourth quarter of fiscal 2009 and lease termination costs for one contracted store that the Company has decided not to open. See Note 10 to Consolidated Financial Statements for further information regarding the lease termination charges related to Company's Texas operations.

Tax Valuation Allowances and Contingencies: The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company had approximately $68.5 million and $57.1 million in net deferred tax assets that are net of tax valuation allowances of $3.9 million for each year ended March 28, 2009 and March 29, 2008. Management evaluated the available evidence in assessing the Company's ability to realize the benefits of the net deferred tax assets at March 28, 2009 and concluded it is more likely than not that the Company will not realize a portion of its net deferred tax assets. The remaining balance of the net deferred tax assets should be realized through future operating results and the reversal of taxable temporary differences. Income tax contingencies are accounted for in accordance with FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), and may require significant management judgment in estimating final outcomes. The Company had approximately $1.4 million at each of March 28, 2009 and March 29, 2008 of unrecognized tax benefits related to uncertain tax positions. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters. To the extent that the expected tax outcome of these matters change, such changes in estimate will impact the income tax provision in the period in which such determination is made. See Note
5 "Income Tax Provision" to Consolidated Financial Statements.

Share-Based Compensation: In the first quarter of fiscal 2007, the Company adopted SFAS No. 123(R), "Share-Based Payment," ("SFAS No. 123(R)"), which requires the measurement at fair value and recognition of compensation expense for all share-based payment awards. The determination of the fair value of the Company's stock options at the grant date requires judgment. The Company uses the Black-Scholes option pricing model to estimate the fair value of these share-based awards consistent with the provisions of SFAS No. 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. If factors change and the Company employs different assumptions in the application of SFAS 123(R) in future periods, the compensation expense recorded under SFAS 123(R) may differ significantly from the amount recorded in the current period. During fiscal 2009, expected stock price volatility increased slightly and the assumed risk free rate decreased slightly based upon recent historical trends. These changes are not material to the Company's consolidated financial position or results of operations. There were no other material changes in the estimates or assumptions used to determine stock-based compensation during fiscal 2009.

Results of Operations

The following discussion defines the components of the statement of income and should be read in conjunction with "Item 6. Selected Financial Data."

Net Sales: Revenue is recognized at the point of sale for retail sales. Bargain Wholesale sales revenue is recognized on the date merchandise is shipped. Bargain Wholesale sales are shipped free on board shipping point.

Cost of Sales: Cost of sales includes the cost of inventory, freight in, inter-state warehouse transportation costs, obsolescence, spoilage and inventory shrinkage, and is net of discounts and allowances. The Company receives various cash discounts, allowances and rebates from its vendors. Such items are included as a reduction of cost of sales as merchandise is sold. The Company does not include purchasing, receiving and distribution warehouse costs in its cost of sales, which totaled $74.1 million, $72.1 million and $60.2 million as of fiscal 2009, 2008 and 2007, respectively. Due to this classification, the Company's gross profit rates may not be comparable to those of other retailers that include costs related to their distribution network in cost of sales.

Selling, General, and Administrative Expenses: Selling, general, and administrative expenses include purchasing, receiving, inspection and warehouse costs, the costs of selling merchandise in stores (payroll and associated costs, occupancy and other store level costs), distribution costs (payroll and associated costs, occupancy, transportation to and from stores, and other distribution related costs), and corporate costs (payroll and associated costs, occupancy, advertising, professional fees, and other corporate administrative costs). Selling, general, and administrative expenses also include depreciation and amortization expense.

Other (Income) Expense: Other (income) expense relates primarily to the interest income on the Company's marketable securities, net of interest expense on the Company's capitalized leases and construction loan.

The following table sets forth for the periods indicated, certain selected income statement data, including such data as a percentage of net sales (percentages may not add up due to rounding):

                                                                Year Ended
                         March 28,         % of          March 29,         % of          March 31,         % of
                           2009          Net Sales         2008          Net Sales         2007          Net Sales
                                                          (Amounts in thousands)
Net Sales:
99¢ Only Stores         $ 1,262,119            96.9 %   $ 1,158,856            96.6 %   $ 1,064,518            96.4 %
Bargain Wholesale            40,817             3.1          40,518             3.4          40,178             3.6
Total sales             $ 1,302,936           100.0     $ 1,199,374           100.0     $ 1,104,696           100.0
Cost of sales               791,121            60.7         738,499            61.6         672,101            60.8
Gross profit                511,815            39.3         460,875            38.4         432,595            39.2
Selling, general and
administrative
expense:
Operating expenses          464,635            35.7         433,940            36.2         393,351            35.6
Depreciation and
amortization                 34,266             2.6          33,321             2.8          32,675             3.0
Total operating
expenses                    498,901            38.3         467,261            39.0         426,026            38.6
Operating income
(loss)                       12,914             1.0          (6,386 )          (0.5 )         6,569             0.6
Other income, net              (993 )          (0.1 )        (6,674 )          (0.6 )        (7,432 )          (0.7 )
Income before
provision for income
taxes and minority
interest                     13,907             1.1             288             0.0          14,001             1.3
Provision (benefit)
for income taxes              4,069             0.3          (2,605 )          (0.2 )         4,239             0.4
Minority interest            (1,357 )          (0.1 )             -               -               -               -
Net income              $     8,481             0.7 %   $     2,893             0.2 %   $     9,762             0.9 %

Fiscal Year Ended March 28, 2009 Compared to Fiscal Year Ended March 29, 2008

Net sales. Total net sales increased $103.5 million, or 8.6%, to $1,302.9 million in fiscal 2009 from $1,199.4 million in fiscal 2008. Net retail sales increased $103.2 million, or 8.9%, to $1,262.1 million in fiscal 2009 from $1,158.9 million in fiscal 2008. Of the $103.2 million increase in net retail sales, $41.7 million was due to a 3.7% increase in comparable stores net sales for all stores open at least 15 months in fiscal 2009 and 2008. The comparable stores net sales increase was attributable to a 0.1% increase in transaction counts as well as an increase in average ticket size by 3.6% to $9.79 from $9.45. The full year fiscal 2009 effect of stores opened in fiscal 2008 increased sales by $16.6 million and the effect of 19 new stores opened during fiscal 2009 increased net retail sales by $44.9 million. Bargain Wholesale net sales increased $0.3 million, or 0.7%, to $40.8 million in fiscal 2009 from $40.5 million in fiscal 2008.

During fiscal 2009, the Company added 19 stores: 13 in California, three in Arizona, two in Texas and one in Nevada. The Company closed five Stores in Texas during fiscal 2009 including one store due to the hurricane which was re-opened in May 2009. At the end of fiscal 2009, the Company had 279 stores compared to 265 as of the end of fiscal 2008. Gross retail square footage at the end of fiscal 2009 and fiscal 2008 was 5.99 million and 5.76 million, respectively. For 99¢ Only Stores open all of fiscal 2009, the average net sales per estimated saleable square foot was $273 and the average annual net sales per store were $4.6 million, including the Texas stores open for the full year. Non-Texas stores net sales averaged $5.0 million per store and $301 per square foot. Texas stores open for a full year averaged net sales of $2.7 million per store and $142 per square foot.

Gross profit. Gross profit increased $50.9 million, or 11.0%, to $511.8 million in fiscal 2009 from $460.9 million in fiscal 2008. As a percentage of net sales, overall gross margin increased to 39.3% in fiscal 2009 from 38.4% in fiscal 2008. The increase in gross profit margin was primarily due to a decrease in spoilage/shrinkage to 3.2% of net sales in fiscal 2009 compared to 3.6% in fiscal 2008. Shrinkage decreased due to lower losses in inventory as a percentage of sales which was partially offset by slightly higher spoilage primarily due to a shift in sales mix for grocery items which have a higher spoilage rate than other categories. In addition, an increase in gross profit was also due to a decrease in cost of products sold to 57.1% for fiscal 2009 compared to 57.7% for fiscal 2008 due to full year effect of new pricing strategies including variable pricing that were implemented in the second half of fiscal 2008, and an increase in all of its price points by adding 99/100 of one cent to every price point (e.g. 99¢ increased to 99.99¢) implemented in September 2008. The pricing strategies increased gross profit, but were partially offset by a shift in the sales mix towards lower margin categories. The remaining change was made up of increases and decreases in other less significant items included in cost of sales.

Operating expenses. Operating expenses increased $30.7 million, or 7.1%, to $464.6 million in fiscal 2009 from $433.9 million in fiscal 2008. As a percentage of net sales, operating expenses decreased to 35.7% for fiscal 2009 from 36.2% for fiscal 2008. Of the 50 basis points decrease in operating expenses as a percentage of sales, retail operating expenses decreased by 90 basis points, distribution and transportation costs decreased by 30 basis points, and corporate expenses decreased by 10 basis points. These decreases were offset by a 80 basis points increase in other items primarily related to the Company's Texas market plan as discussed further below.

Retail operating expenses decreased as a percentage of sales by 90 basis points to 24.4% of net sales, increasing by $15.1 million for fiscal 2009 compared to fiscal 2008. The decrease as a percentage of sales was primarily due to lower payroll-related expenses as a result of improvement in labor productivity despite increased minimum wage rates and due to leveraging the increases in same-stores sales as well as lower advertising expenses during fiscal 2009. These decreases were partially offset by slight increases in costs related to various services and fees as well as repairs and maintenance as a percentage of net sales.

Distribution and transportation expenses decreased as a percentage of sales by 30 basis points to 5.7% of net sales, increasing by $2.0 million for fiscal 2009 compared to fiscal 2008. The decrease as a percentage of sales, despite year over year increases in minimum wage and freight rates, was primarily due to improvements in labor efficiencies, improved processing methods and increased efficiencies in transportation.

Corporate operating expenses decreased as a percentage of sales by 10 basis points to 4.2% of net sales, increasing $3.0 million for fiscal 2009 compared to fiscal 2008. The decrease as a percentage of sales was primarily due to lower outside services and consulting and professional fees. These decreases were partially offset by slight increases in salaries, benefits, and legal costs as a percentage of net sales.

The remaining operating expenses increased as a percentage of sales by 80 basis points to 1.4% of net sales, increasing by $10.5 million for fiscal 2009. The increase was primarily due to an impairment charge of approximately $10.4 million in fiscal 2009 compared to $0.5 million in fiscal 2008. The impairment charge of approximately $10.4 million in fiscal 2009 primarily consisted of a leasehold improvement impairment charge of approximately $10.1 million related to the Company's Texas market plan and an impairment charge of approximately $0.2 million related to the underperformance of a store in California. During fiscal year 2008, the Company recorded an asset impairment charge of $0.5 million related to one underperforming store in Texas. The Company also recorded in fiscal 2009 a charge of $1.3 million related to lease termination and store closing costs and a $1.4 million severance charge all in the Texas market. See Note 10 to Consolidated Financial Statements for further discussion of Texas market plans. In addition, the increase was also due to a loss on a sale of the primary asset of La Quinta Partnership of approximately $0.5 million and inclusion of the partner's loss of approximately $0.3 million during fiscal 2009. These increases are partially offset by the non-recurring gains related to a sale of the primary asset of the Reseda Partnership of approximately $0.2 million and consolidation of the partner's gain of approximately $1.4 million during fiscal 2009. The Company has included $1.4 million of minority interest in its Consolidated Statements of Income related to the aforementioned gain in Fiscal 2009. See Note 4 to Consolidated Financial Statements for further discussion of gains and losses related to the Company's partnerships during fiscal 2009. In addition, there was a reduction in stock based compensation expense of $1.0 million for fiscal 2009 compared to fiscal 2008. The remaining change of $0.3 million was made up of increases and decreases in other less significant items included in other operating expenses.

Depreciation and amortization. Depreciation and amortization increased $1.0 million, or 2.6%, to $34.3 million in fiscal 2009 from $33.3 million in fiscal 2008 primarily as a result of the opening of 19 new stores during fiscal 2009, the full year effect of fiscal 2008 store additions, and additions to existing stores and distribution centers. The increase was partially offset by fully depreciated assets in existing stores and the disposal of certain fixed assets.

Operating income/loss. Operating income was $12.9 million for fiscal 2009 . . .