• Further enhance our customer shopping experience;

• Continue to update our store base; and

• Improve our leasing terms.

As a result, we achieved positive earnings during the first quarter of fiscal 2010. Same-store sales increased 1.0 percent, gross margin expanded by 210 basis points, earnings per diluted share more than doubled to $0.33 and long-term debt, net of cash, improved by $76.6 million as compared to the first quarter of fiscal 2009.

We experienced sales growth across our core sewing and craft categories during the first quarter of fiscal 2010. Sewing sales increased 2.6 percent as compared to the first quarter of fiscal 2009. Non-sewing sales, which include core craft, seasonal category and custom framing sales, decreased 0.8 percent as compared to the first quarter of fiscal 2009. Our core craft sales, excluding seasonal category sales, increased comparably with the increase in sewing sales during fiscal 2010 as compared to the same period in fiscal 2009. Quilting continues to lead our growth in sewing, while yarn, kids crafts, and food crafting continue to perform well for non-sewing. Partially offsetting our strong category sales was the continuing softness in seasonal products and higher ticket items, including custom framing.
We believe that the customer is seeking affordable activities to enjoy with her family and friends during the current challenging economic environment. The customer traffic within our stores seems to be reflecting this trend. During the first quarter of fiscal 2010, our customer transactions increased by 3.3 percent, which represents the strongest increase in customer traffic we have experienced in seven quarters.
We continue to benefit from store remodels, which deliver an average incremental 8 percent increase in sales during their first full year after remodel. We completed 29 remodels in fiscal 2009 and expect to complete approximately 30 more this year.
Our small-format store optimization projects have resulted in solid results as well. These projects involve a relatively small investment in fixtures and labor to re-merchandise stores, with the objective of increasing craft assortments while reducing space for seasonal merchandise. The 248 optimization projects that we completed during fiscal 2009 have delivered a 150 basis point increase in sales as compared to small format stores that have not been remodeled or optimized. Based on these favorable results, we have scheduled another 184 optimization projects for the second and third quarters of fiscal 2010 for a total of 432 optimized stores before the holiday season of this year. In addition to our store remodels and optimizations, we are experiencing strong sales from new products. For example, our new spring collections in apparel fabric and our new Kids Camp summer activity product line are performing well. Collectively, our work to remodel and optimize stores, and to provide compelling new product assortments, is helping our stores deliver sales growth despite the current challenging economic environment.
Regarding our competition, Wal-Mart is continuing its remodel program, which includes removing the fabric department from many stores. We expect to capture new customers and gain market share as a result of these changes. As mentioned above, gross margin increased 210 basis points during the first quarter of fiscal 2010, as compared to the first quarter of fiscal 2009. Approximately 50 basis points of the 210 basis point increase was due to the timing of Christmas clearance, which we liquidated in January of fiscal 2009 as compared to the prior year, when we liquidated fiscal 2008 Christmas inventory in February of fiscal 2009. The remaining improvement in our gross margin resulted from the opportunities that we discussed in fiscal 2009 and include:
• More direct sourcing of products from Asia;

• Product cost deflation on imported merchandise;

• Lower transportation expenses;

• Reduced seasonal and fashion merchandise; and

• Improvements in markdown controls from our new POS system enhancements.

We expect to continue to achieve margin expansion as a result of these factors throughout the year, but not at the same magnitude that we experienced in the first quarter of fiscal 2010.
In addition to growing sales and expanding margin, we continue to benefit from our focus on controlling selling, general and administrative expenses ("SG&A"). As a result of our operating efficiencies, SG&A expense was flat as a percent of sales for the quarter compared to the same quarter in the prior year, allowing us to achieve significant earnings growth on a modest sales increase.

We achieved earnings per diluted share of $0.33, which includes $1.8 million of incremental pre-opening and closing expenses related to the opening of 12 new stores in the first quarter of fiscal 2010 as compared to no new stores for the same period in the prior year.
While we are pleased with our first quarter of fiscal 2010 performance, the timing of sustained economic recovery is still difficult to predict. We will continue to manage our business pragmatically and continue to focus on optimizing cash flow and strengthening our balance sheet. Recent Developments and Business Update
Outlook for Fiscal 2010
Although we are pleased with our results in the first quarter, given the challenging economic environment and the fact that the majority of our earnings and leverage is derived from the third and particularly the fourth quarters, we are reaffirming our previously announced outlook for fiscal 2010 and maintaining our original full year guidance of $0.70 to $0.85 per diluted share, excluding any gains on the purchase of our senior subordinated notes. Since our second quarter is typically our lowest quarter in terms of sales volume, it will be difficult to leverage expenses as much as we were able to do in the first quarter of fiscal 2010. Additionally, we do not expect the same level of gross margin rate improvement in the second quarter as we delivered in the first quarter of fiscal 2010 since a portion of this improvement was due to the timing of Christmas clearance, which we liquidated in January of fiscal 2009 as compared to the prior year, when we liquidated fiscal 2008 Christmas inventory in February of fiscal 2009. We also will begin to cycle the gross margin improvements that we experienced in the second and third quarters of fiscal 2009.
Based upon management's operating assumptions and current economic conditions, the company's key considerations underlying its outlook for fiscal 2010 include:
• Same-store sales decline of 2% to 4% for the year;

• Gross margin rate improvement for the year;

• Higher selling, general and administrative expenses as a percentage of net sales for the year;

• Capital expenditures, net of landlord allowances, for the full year of $30 to $32 million;

• Earnings per diluted share in the range of $0.70 to $0.85 for the year (excluding any gains on debt purchases);

• Free cash flow in the range of $50 to $58 million for the year; (free cash flow defined as net income plus depreciation and amortization, stock-based compensation expense and changes in working capital, less capital expenditures);

• Weighted-average diluted share count of approximately 26 million shares for the year.

Results of Operations
The following table sets forth our results of operations through operating
profit, expressed as a percentage of net sales. The following discussion should
be read in conjunction with our consolidated interim financial statements and
related notes thereto.

                                                       Percentage of Net Sales
                                                        Thirteen Weeks Ended
                                                      May 2,             May 3,
                                                       2009               2008
    Net sales                                             100.0 %            100.0 %
    Gross margin                                           48.5 %             46.4 %
    Selling, general and administrative expenses           41.4 %             41.4 %
    Store pre-opening and closing costs                     0.8 %              0.4 %
    Depreciation and amortization                           3.1 %              2.9 %

    Operating profit                                        3.2 %              1.7 %

Comparison of the Thirteen Weeks Ended May 2, 2009 to May 3, 2008 Net Sales. Net sales represent retail sales, net of estimated returns and exclude sales taxes. The following tables summarize the year-over-year comparison of our consolidated net sales and sales by segment for the periods indicated:

Consolidated Net Sales:

                                                                            Percentage
  (Dollars in millions)                 May 2, 2009       May 3, 2008         Change
  Consolidated net sales               $       460.0     $       446.1              3.1 %
  Increase from prior year             $        13.9
  Same-store sales percentage change             1.0 %             4.5 %

Overall, consolidated net sales increased for the first quarter of fiscal 2010 primarily due to increased sales in our large-format stores as compared to the same period of fiscal 2009. During the first quarter of fiscal 2010, we opened 11 large-format stores as compared to the first quarter of fiscal 2009 during which we did not open any new stores. Same-store sales increased 1.0 percent compared with a same-store sales increase of 4.5 percent for the first quarter of fiscal 2009. The improvement in same-store sales was driven by a 3.3 percent increase in customer transactions, partially offset by a 2.3 percent decrease in average ticket as compared to the first quarter of fiscal 2009. The increase in customer transactions is primarily due to the modifications we made to our marketing content to deliver a stronger value message, performance of new products, benefit of competitive withdrawals in the sewing business and our store remodeling and optimization efforts. Our total store count of 763 at the end of the first quarter of fiscal 2010 was down nine stores compared to the same period in fiscal 2009; however, total store square footage increased from 15.9 million square feet at the end of first quarter fiscal 2009 to 16.1 million square feet at the end of first quarter fiscal 2010. In total, we opened 12 new stores and closed 13 stores during the first quarter of fiscal 2010, compared to the first quarter of fiscal 2009 when we closed two stores.
On a category basis, our sewing businesses represented 52 percent of our fiscal 2010 first quarter net sales volume and increased 2.6 percent on a same-store sales basis over the first quarter of the prior year. We continued to experience positive same-store sales in the majority of our fabric and sewing notions merchandise categories, especially in quilting.
Our non-sewing businesses represented 48 percent of our fiscal 2010 first quarter net sales volume and decreased approximately 0.8 percent on a same-store sales basis over the first quarter of the prior year. The decrease primarily was due to declines in seasonal categories and custom framing. Excluding seasonal categories, craft same-store sales were comparable with sewing.

Sales by Segment:

                                                                            Percentage
  (Dollars in millions)                 May 2, 2009        May 3, 2008        Change
  Large-format stores
  Net sales                            $       244.1      $       230.8             5.8 %
  Increase from prior year             $        13.3
  Same-store sales percentage change            (0.6 )%             3.3 %

  Small-format stores
  Net sales                            $       206.4      $       207.1            (0.3 )%
  Decrease from prior year             $        (0.7 )
  Same-store sales percentage change             3.0 %              5.8 %

  Other
  Net sales                            $         9.5      $         8.2            15.9 %
  Increase from prior year             $         1.3

Sales for large-format stores increased for the first quarter of fiscal 2010 primarily due to the net increase in the number of new stores, partially offset by negative same-store sales.
Same-store sales for large-format stores decreased 0.6 percent for the quarter, versus a same-store sales increase of 3.3 percent in the first quarter last year. Large-format stores have a greater mix of seasonal product and higher ticket items, which had weak performance during the quarter. Customer transactions for large-format stores increased by approximately 2.6 percent while average ticket decreased by approximately 3.2 percent as compared to the first quarter of fiscal 2009. The number of large-format stores in operation increased to 220 at the end of the first quarter of fiscal 2010 from 199 at the end of the same quarter of fiscal 2009. Large-format stores accounted for approximately 53.1 percent of total first quarter net sales in fiscal 2010 as compared to 51.8 percent for the same period in the prior year.
Sales for small-format stores decreased for the first quarter of fiscal 2010 due to the decrease in total store count, partially offset by the increase in same-store sales.
Same-store sales performance for small-format stores increased 3.0 percent compared with a same-store sales increase of 5.8 percent for the first quarter of fiscal 2009. The increase in same-store sales was primarily due to a 4.0 percent increase in customer transactions, slightly offset by a 1.0 percent decrease in average ticket as compared to the first quarter of fiscal 2009. We continue to see the ongoing benefit from our store remodels, store optimizations and competitive changes in the sewing business in our small format stores. The number of small-format stores in operation decreased to 543 at the end of the first quarter of fiscal 2010 compared with 573 at the end of the same quarter last year. Small-format stores accounted for approximately 44.9 percent of total first quarter net sales in fiscal 2010 as compared to 46.4 percent for the same period in the prior year.
Sales included in our "other" segment represent sales from Joann.com. Internet sales through Joann.com accounted for 2.0 percent of first quarter net sales in fiscal 2010 as compared to 1.8 percent for the same period in the prior year.

Gross Margin. Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude the indirect portion from gross margin and include it within SG&A. We include distribution costs that are directly associated with the acquisition of our merchandise in cost of sales. These costs are primarily in-bound and out-bound freight. We incur in-bound freight costs as a result of merchandise shipments from the vendor to our distribution centers or directly to our stores via "drop shipment." In-bound freight and duties related to import purchases and internal transfer costs are considered to be direct costs of our merchandise and, accordingly, are recognized as cost of sales when the related merchandise is sold. We incur out-bound freight costs when we ship the merchandise to our stores from the distribution centers. Purchasing and receiving costs, warehousing costs and other costs of our distribution network and store occupancy costs are considered to be period costs not directly attributable to the value of merchandise and, accordingly, are expensed as incurred as SG&A.

Gross Margin:

                                                                             Percentage
 (Dollars in millions)                   May 2, 2009       May 3, 2008         Change
 Gross margin                           $       222.9     $       206.8              7.8 %
 Increase from prior year               $        16.1
 Percentage of consolidated net sales            48.5 %            46.4 %

As a percent of net sales, gross margin increased 210 basis points to 48.5 percent for the first quarter of fiscal 2010 compared with 46.4 percent for the same quarter last year. The improvement in the gross margin rate primarily was due to reduced product costs from global sourcing, lower clearance levels and reduced freight costs as compared to the same period of fiscal 2009. We do not expect the same level of gross margin rate improvement as we delivered in the first quarter of fiscal 2010 to continue for the remainder of fiscal 2010 as a portion of the first quarter improvement was due to the timing of Christmas clearance, which we liquidated in January of fiscal 2009 as compared to the prior year, when we liquidated fiscal 2008 Christmas inventory in February of fiscal 2009. We will also begin to cycle the gross margin improvements that we experienced in the second and third quarters of fiscal 2009.
Selling, general and administrative expenses. SG&A expenses include store and administrative payroll, employee benefits, stock-based compensation, certain distribution costs, store occupancy costs, advertising expenses and administrative expenses. As mentioned previously, some of our competitors and other retailers include distribution costs and store occupancy costs in gross margin. The types of distribution costs that we classify as selling, general and administrative expense include administrative, occupancy, depreciation, labor and other indirect costs that are incurred to support the distribution network. These costs are not directly associated with the value of the merchandise sold in our stores, but rather they relate primarily to the handling of merchandise for delivery to our stores and are expensed as incurred.
Distribution costs included within SG&A amounted to $12.1 million and $13.0 million for the first quarters of fiscal 2010 and 2009, respectively. Store occupancy costs included within SG&A amounted to $46.0 million and $44.3 million for the first quarters of fiscal 2010 and 2009, respectively. Selling, General and Administrative Expenses:

                                                                             Percentage
 (Dollars in millions)                   May 2, 2009       May 3, 2008         Change
 SG&A                                   $       190.4     $       184.5              3.2 %
 Increase from prior year               $         5.9
 Percentage of consolidated net sales            41.4 %            41.4 %

As a percentage of net sales, SG&A expense during the fiscal 2010 first quarter was flat compared with percent of net sales in the first quarter of last year as we continue to manage our operating costs.

Store pre-opening and closing costs. Store pre-opening costs are expensed as incurred. These costs include lease costs recognized prior to the store opening, hiring and training costs for new employees and processing of initial merchandise. Store closing costs consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, third-party inventory liquidator costs and other costs incidental to store closings.
Store pre-opening and closing costs increased $1.8 million during the first quarter of fiscal 2010 to $3.6 million, compared with $1.8 million in the first quarter last year. Pre-opening costs increased $0.9 million during the first quarter of fiscal 2010 to $1.9 million. During the first quarter of fiscal 2010 we opened 11 large-format stores and one small-format store, whereas in the first quarter of the prior year we did not open any new stores.
Store closing costs increased $0.9 million during the first quarter of fiscal 2010 to $1.7 million. During the first quarter of fiscal 2010 we closed one large-format store and 12 small-format stores as compared to first quarter of fiscal 2009 when we closed one large-format store and one small-format store. Although store pre-opening and closing costs increased during the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009, we do not expect this trend to continue for the full year. We concentrated much of our store activity into the first quarter of fiscal 2010, whereas more store activity was concentrated in the second half of fiscal 2009.
Depreciation and amortization. Depreciation and amortization expense increased $0.9 million to $14.0 million in the first quarter of fiscal 2010. The increase primarily is due to incremental depreciation associated with fiscal 2009 and 2010 expenditures related to technology as well as spending on new stores and remodels.

Operating Profit:

                                                                       Percentage
       (Dollars in millions)       May 2, 2009       May 3, 2008         Change
       Operating profit           $        14.9     $         7.4            101.4 %
       Increase from prior year   $         7.5

Operating profit for the first quarter of fiscal 2010 increased primarily due to the improvement in gross margin combined with our continued efforts to control expenses.
Operating Profit (Loss) by Segment:

                                                                       Percentage
        (Dollars in millions)       May 2, 2009       May 3, 2008        Change
        Large-format stores
        Operating profit           $        21.5     $        15.6            37.8 %
        Increase from prior year   $         5.9

        Small-format stores
        Operating profit           $        26.0     $        24.8             4.8 %
        Increase from prior year   $         1.2

        Other
        Operating loss             $       (32.6 )   $       (33.0 )           1.2 %
        Increase from prior year   $         0.4

The improvement in large-format store operating profit primarily was driven by the $13.3 million increase in store sales volume, which was partially due to the opening of 11 new large-format stores during the first quarter of fiscal 2010, combined with improvement in gross margin and our continued efforts to control expenses.
The improvement in small-format store operating profit was driven primarily by a 3.0 percent increase in same-store sales, which was partially due to the store remodels and optimizations that occurred during fiscal 2009, combined with improvement in gross margin and our continued efforts to control expenses. The improvement in operating loss during the first quarter of fiscal 2010 of our "other" segment is primarily due to our continued efforts to control expenses. The "other" segment includes unallocated corporate overhead in addition to the operating results of our Internet business.
Gain on purchase of senior subordinated notes. We recorded a pre-tax gain of $1.2 million, as a result of the purchase of $15.5 million of our 7.5 percent senior subordinated notes at an average of 91 percent of par, net of the related write-off of applicable deferred financing costs.
Interest expense. Interest expense for the first quarter of fiscal 2010 decreased $0.8 million to $1.6 million. The decrease is attributable to lower average debt levels. Our average debt levels were $55 million in the first quarter of fiscal 2010 versus $100 million in the same period of the prior year. Income taxes. Our effective income tax rate for the first quarter of fiscal 2010 and fiscal 2009 was approximately 40.7 percent and 40.0 percent, respectively. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and update our estimate of the full-year effective rate as necessary.
Liquidity and Capital Resources
Our capital requirements are primarily for capital expenditures in connection with new store openings, store remodels, other infrastructure investments and working capital requirements for seasonal inventory builds and new store . . .