The following discussion and analysis should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

Overview

º •
º We sell upscale, name brand home furnishings, housewares, gifts and related items significantly below retail prices charged by department and specialty stores in 857 stores throughout 45 states. We have a unique event-based selling strategy that creates a sense of urgency and excitement for our customer base.

º •
º Our store base grew approximately 2% and 4% over the fiscal years ended June 30, 2009, and 2008, respectively, and 4% over the six months ended June 30, 2007, and approximately 9% to 10% per year for each of the prior three calendar years. During the fiscal years ended June 30, 2009, and 2008, we increased our store base by a net of 15 and 32 stores, respectively. During the six months ended June 30, 2007, we increased our store base by a net of 15 stores compared to 30 stores during the same period of 2006. During the full calendar year 2006, we expanded our store base by a net of 63 stores.

º •
º In December of 2008, we entered into a new credit agreement. The agreement provides for, among other things: a maturity date of December 2013; a revolving credit commitment of $150.0 million which was increased in January of 2009 to $180.0 million; new applicable commitment fees and interest rates; and a requirement that the principal amount and outstanding letters of credit of the outstanding loans may not exceed $45 million for 30 consecutive days during the period from December 28 to January 31. During the fiscal year ended June 30, 2009, we utilized operating cash flow to pay down the balance of our revolving credit facility. As a result, the balance on our revolving credit facility at June 30, 2009 was $0.0 million as compared to $8.5 million at June 30, 2008.

º •
º The home furnishings and housewares related industries have been negatively impacted by macro-economic pressures, increased supply and competition as well as a highly competitive and promotional environment. Beginning with the quarter ended September 30, 2004, we posted consecutive negative comparable store sales through the quarter ended June 30, 2009. During this time, however, we have continued to generate positive operating income and cash flow on an annual basis.

º •
º The retail home furnishings and housewares industries have been negatively impacted by increased 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.

º •
º In response to increased competition in the retail home furnishings and housewares industries, 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 our customer base,

º •
º 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.

º •
º 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.

º •
º Beginning in January 2007, we reassessed our real estate program. The decision was made to open fewer new stores and to primarily execute more expansions and relocations with our existing store base. For both new stores and relocations, we are negotiating upgraded sites. With the expansion opportunities, we will work with high producing stores and intend to increase the selling square footage. Also as a result of this and subsequent evaluations, we plan to allow leases to expire and individual stores to close for unprofitable stores where alternative locations are not available at acceptable lease rates.

º •
º On April 30, 2007, our Board of Directors approved a change in our fiscal year end from December 31 to June 30, effective June 30, 2007. The six-month results being reported by us relate to the transitional six-month fiscal period ended June 30, 2007. For discussion purposes, we are comparing the audited financial statements for the year ended June 30, 2008 with the unaudited financial statements of the year ended June 30, 2007 and the financial statements for the six months ended June 30, 2007 with the unaudited financial statements for the six months ended June 30, 2006. Due to the seasonality of our business including the significant portion of sales and earnings that take place in the quarter ended December 31, comparisons of the six months ended June 30, 2007 to the fiscal year ended June 30, 2008 or the calendar year ended December 31, 2006 would not be meaningful.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect

the reported amounts of certain assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On a recurring basis, we evaluate our significant estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory-Our inventories are stated at the lower of cost or market using the retail inventory method for store inventory and the specific identification method for warehouse inventory. Amounts are removed from inventory based on the retail inventory method which applies a cost-to-retail ratio to our various retail deductions such as sales, markdowns and shrink, to arrive at our cost of sales. Buying, distribution, freight and certain other costs are capitalized as part of inventory and are expensed as cost of sales as the related inventory is sold. The retail inventory method, which is used by a number of our competitors, involves management estimates with regard to items such as markdowns and inventory. Such estimates may significantly impact the ending inventory valuation at cost as well as the amount of gross margin recognized.

We capitalize into inventory all merchandise costs and certain costs incurred to purchase, distribute and deliver merchandise to our stores in order to more accurately match the cost of merchandise with the timing of its sale. These costs are included in cost of sales when the merchandise is sold. Other cost of sales components include merchandise markdowns, shrink and damages, which are expensed as they are incurred.

We conduct full physical inventories at all stores at June 30 and December 31 to measure quantities on hand and make appropriate adjustments to our financial statements. During periods for which physical observations do not occur, we utilize an estimate for recording shrinkage reserves based on our historical experience from the results of our physical inventories. This estimate may require a favorable or unfavorable adjustment to actual results to the extent that our subsequent actual physical inventories yield a different result. Thus, the difference between actual and estimated amounts may cause fluctuations in the quarters ending in March and September, but the difference is not a factor in the quarters ending in December and June. Since we conduct physical inventory counts twice a year, the subjective nature of our shrink percentage is reduced and our exposure to the risk of a significant error is minimized. In addition, we have loss-prevention programs and policies that we believe minimize shrinkage. Although inventory shrinkage rates have not fluctuated significantly in recent years, if the actual rates were to differ from our estimates, then revisions to the inventory shrinkage expense could be required.

Inventory is the largest asset on our balance sheet and represented approximately 70%, 71%, and 73%, of total assets at June 30, 2009, 2008, and 2007, respectively. Inventory decreased 7.2% or $17.4 million from June 30, 2008 to June 30, 2009, primarily due to a decrease in purchases of 5.2% in 2009. Inventory decreased 16.6% or $47.8 million from June 30, 2007 to June 30, 2008, primarily due to a reduction in purchasing levels during the third and fourth quarters of 2008. On a per store basis, inventory decreased 8.8% from June 30, 2008 to June 30, 2009 and 19.7% from June 30, 2007 to June 30, 2008.

Markdowns-We have used markdowns to promote the effective and timely sale of merchandise that allows us to consistently provide fresher merchandise to our customers. We are also utilizing markdowns coupled with promotional events to drive traffic and stimulate sales during non-sales event periods. Markdowns may be temporary or permanent. Temporary markdowns are for a designated period of time with markdowns recorded based on quantities sold during the period. Permanent markdowns may vary throughout the quarter or year in timing with higher markdowns traditionally recorded in the quarters ended June 30 and December 31 due primarily to seasonal merchandise.

Permanent markdowns are charged to cost of sales immediately based on the total quantities on-hand in the stores. We review all inventory during each quarter on a continual basis to ensure all necessary price actions are taken to adequately value our inventory at the lower of cost or market through the retail inventory method. These actions which involve actual or planned permanent markdowns are considered by management to be the appropriate prices to stimulate demand for the merchandise. In addition to regularly reviewing inventory levels to identify slow-moving merchandise, management also considers current and anticipated demand, customer preferences, age of merchandise and seasonal trends in determining markdowns. Our markdowns, as a percentage of total sales, have generally been consistent from year to year. However, for the fiscal year ended June 30, 2009, we implemented a strategy to more closely monitor and control our markdowns of inventory to avoid marking down items that continued to sell through at reasonable rates. We believe this strategy contributed to overall margin by focusing our markdowns more on inventory that was truly slow moving and less on the basis of age in inventory alone. Changes in markdowns from period-to-period are discussed as a part of our Results of Operations analysis below. Actual required permanent markdowns could differ materially from management's initial estimates based on future customer demand or economic conditions. The effect of a 1.0% markdown in the value of our inventory at June 30, 2009 would result in a decline in gross profit and diluted earnings per share for the fiscal year ended June 30, 2009 of $2.2 million and $0.03, respectively.

Insurance and Self-Insurance Reserves-We use a combination of insurance and self-insurance plans to provide for the potential liabilities associated with workers' compensation, general liability, property insurance, director and officers' liability insurance, vehicle liability and employee health care benefits. Our stop loss limits per claim are $500,000 for workers' compensation, $250,000 for general liability, and $150,000 for medical. Liabilities associated with the risks that are retained by us are estimated, in part, by historical claims experience, severity factors and the use of loss development factors. The insurance liabilities we record are primarily influenced by changes in payroll expense, sales, number of vehicles, and the frequency and severity of claims; and include a reserve for claims incurred but not yet reported. Our self-insurance reserves for workers' compensation, general liability and medical, were $9.1 million, $1.8 million, and $1.1 million at June 30, 2009, respectively. Expenses for the foregoing items during the fiscal year ended June 30, 2009 were $3.2 million, $3.0 million and $7.9 million, respectively. At June 30, 2008, our self-insurance reserves for workers' compensation, general liability and medical, were $9.4 million, $1.7 million, and $1.0 million, respectively. Expenses for the foregoing items during the fiscal year ended June 30, 2008 were $3.1 million, $4.3 million and $7.1 million, respectively. At June 30, 2007, our self-insurance reserves for workers' compensation, general liability and medical, were $10.0 million, $1.0 million, and $0.7 million, respectively. Expenses for the foregoing items during the six months ended June 30, 2007 were $1.9 million, $2.0 million and $2.9 million. Our estimated reserves may be materially different from our future actual claim costs, and, in the future, if we conclude an adjustment to our reserves is required, the liability will then be adjusted accordingly in the period that determination is made. There were no material changes in the estimates or assumptions used to determine self-insurance liabilities during the periods presented. We recognize insurance expenses based on the date of an occurrence of a loss including the actual and estimated ultimate costs of our claims. Claims are paid from our reserves and our current period insurance expense is adjusted for the difference in prior period recorded reserves and actual payments as a change in estimate. Current period insurance expenses also include the amortization of our premiums paid to our insurance carriers.

Impairment of long-lived assets-Long-lived assets such as buildings, equipment, furniture and fixtures, and leasehold improvements are reviewed for impairment at least annually and whenever an event or change in circumstances indicates that their carrying values may not be recoverable. If the carrying value exceeds the sum of the expected undiscounted cash flows, the assets are considered impaired. For store-level long-lived assets, expected cash flows are estimated based on the historical cashflows generated by the store and are adjusted based on management's estimates of expected future

results. Impairment is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined by discounting expected cash flows. Impairment, if any, is recorded in the period in which the impairment occurred. The Company has not recorded any material impairment charges in fiscal 2009, 2008 and 2007, respectively. As the projection of future cash flows requires the use of management's judgment and estimates, actual results may differ from the Company's estimates. It is possible that additional charges for asset impairments may be recorded in the future. If management had lowered its assumptions of comparable store sales results by 3% for each of the next five years, additional impairment charges would have also been immaterial.

Stock-based compensation-The Compensation Committee of our Board of Directors and, through express consent of the Compensation Committee, the CEO, are authorized to grant stock options and restricted stock awards from time to time to eligible employees and directors. Those awards may be service or performance based. We typically grant options with exercise prices equal to the market price of our common stock on the date of the option grant. The majority of the options granted prior to June 30, 2008 vested daily over periods of four to five years and expire in ten years. Options granted after June 30, 2008, typically vest over periods of one to three years with equal portions of the grant vesting on an annual basis and expiring in ten years. On January 1, 2006, we adopted the provisions of SFAS No. 123(R), "Share Based Payment," which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. We calculate the fair value of stock options using the Black-Scholes option pricing model. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operations data, expressed as a percentage of net sales, as well as the number of stores open at the end of each period.

                                                                  Six Months         Calendar
                                      Fiscal Year Ended              Ended          Year Ended
                                          June 30,                 June 30,         December 31
                                  2009      2008      2007      2007      2006         2006
 Net sales                         100.0 %   100.0 %   100.0 %   100.0 %   100.0 %         100.0 %
 Cost of sales                      63.1      63.5      62.6      63.1      62.6            62.4

     Gross profit                   36.9      36.5      37.4      36.9      37.4            37.6
 Selling, general and               36.6      33.6      32.1      35.5      33.5            31.2
 administrative expenses

     Operating income                0.3       2.8       5.3       1.4       3.9             6.4
 Net interest and other             (0.3 )    (0.3 )    (0.2 )    (0.2 )    (0.1 )          (0.1 )
 expense
 Income tax expense (benefit)        0.0       0.9       1.8       0.5       1.5             2.3

 Net income (loss)                   0.0       1.6       3.3       0.8       2.4             4.0

 Number of stores open at end        857       842       810       810       762             795
 of period

Selling, general and administrative expenses are comprised of wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses and corporate office costs. Increases in dollar amounts of these expenses are attributable to increases in the number of stores and increases in variable expenses due to new store sales growth and deleveraging of fixed costs due to declines in sales. Variable expenses include payroll and related benefits, advertising expense and other expenses such as credit card fees.

Net sales decreased $83.6 million or 9.4% to $801.7 million in fiscal 2009 from $885.3 million in fiscal 2008, of which, sales from non-comparable new stores (stores open less than one year) increased $24.8 million which was offset by a 12.5% decrease in comparable store sales from 2008, comprised of comparable store transactions decreasing 6.4% and the comparable store average ticket decreasing 6.1%. Our average annual sales per store decreased by $140,000 or 12.7% to $0.9 million in 2009. Comparable store sales and sales per store decreased primarily due to lower traffic levels and a lower average ticket. Management believes traffic levels and average tickets were lower due to the lower discretionary income availability of our customers resulting from the impact of the recession and the state of the U.S. housing and credit markets. Traffic levels did slightly improve by 0.1% in the fourth quarter of 2009 on a comparable store basis.

Gross profit decreased $26.6 million or 8.2% to $296.1 million in fiscal 2009 compared to $322.7 million in fiscal 2008, of which, $30.8 million of the gross profit decrease was directly attributable to a decrease in our net sales, offset by improvements in our gross profit percentage. Our gross profit percentage increased to 36.9% in 2009 from 36.5% in 2008. This 0.4% increase in our gross profit percentage was primarily attributable to a 0.6% decrease in our markdowns as a percentage of sales due to our strategy to more closely match markdowns to items that are slow moving. Additionally, our costs of product and freight also decreased by 0.1% each primarily due to decreases in fuel prices compared to those for the fiscal year ended June 30, 2008. These decreases were partially offset by a 0.4% increase in our distribution costs as a percentage of sales caused mainly by the impact of our fixed distribution costs being allocated over a lower sales volume.

Selling, general and administrative expenses decreased $4.2 million or 1.4% to $293.7 million in 2009 from $297.9 million in the prior year. The decrease was primarily attributable to a $3.2 million decrease in advertising, primarily in television and radio, and a $1.6 million decrease in wages as we reduced staff to properly match customer traffic. Bank charges and check expenses also decreased by $1.4 million as a result of lower transaction volumes while general liability insurance costs decreased $1.3 million primarily as a result of lower traffic. Repairs and maintenance and other purchased service expenses decreased by $1.3 million as a result of cost containment efforts. These decreases were partially offset by an increase of $5.1 million in rent primarily as a result of our increase in the number of stores. As a percentage of sales these expenses increased 3.0% to 36.6% in 2009 from 33.6% in 2008. The increased percentage is primarily due to reduced expense leveraging given our negative comparable store sales for the year. These expenses decreased on an average annual per store basis by $4 thousand or 4.9% to $86 thousand in 2009.

Net interest and other expense decreased $0.2 million to $2.5 million in 2009 compared to $2.7 million in 2008. This decrease was attributable to $1.2 million less net interest expense due to lower borrowing levels throughout fiscal 2009 versus borrowing levels in fiscal 2008. Offsetting this decrease was a decrease in other income of $0.8 million from fiscal year 2009 versus fiscal 2008.

Income tax expense decreased $7.7 million to a benefit of $25 thousand versus an expense of $7.6 million in 2008 due to decreased profitability. Our effective tax rate increased to 35.7% in fiscal 2009 versus 34.5% in fiscal 2008 primarily due to an increase of state and local income tax rates of jurisdictions in which we operate.

Twelve Months Ended June 30, 2008 Compared to Twelve Months Ended June 30, 2007

Net sales decreased $38.9 million or 4.2% to $885.3 million in 2008 from $924.2 million in 2007, of which, sales from non-comparable new stores (stores open less than one year) increased $30.0 million which was offset by a 7.6% decrease in comparable store sales from 2007, comprised of comparable store transactions decreasing 6.6% and the comparable store average ticket decreasing 1.0%. Our average annual sales per store decreased by $98,000 or 8.3% to $1.1 million in 2008. Comparable store

sales and sales per store decreased primarily due to lower traffic levels. Management believes traffic levels were lower due to the lower discretionary income availability of our customers resulting from the impact of higher gasoline and energy costs and general economic conditions.

Gross profit decreased $22.6 million or 6.5% to $322.7 million in 2008 compared to $345.3 million in 2007, of which, $14.2 million of the gross profit decrease was directly attributable to a decrease in our net sales. Our gross profit percentage decreased to 36.5% in 2008 from 37.4% in 2007. This 0.9% decrease in our gross profit percentage was primarily attributable to a 0.6% increase in our markdowns as a percentage of sales due to an increase in our aged inventory and a 0.4% increase in our distribution and freight expenses resulting from increased energy costs as a percentage of sales. These increases were offset by a 0.2% decrease in our shrinkage costs.

Selling, general and administrative expenses increased $1.2 million or 0.4% to $297.9 million in 2008 from $296.6 million in the prior year. The increase was attributable to a $7.5 million increase in store occupancy costs, store personnel costs, and store fixed asset depreciation expense primarily due to the expansion of our store base offset by a $3.8 million decrease in advertising expenses and a $2.4 million decrease in legal and consulting fees. As a percentage of sales these expenses increased 1.5% to 33.6% in 2008 from 32.1% in 2007. The increased percentage is primarily due to reduced expense leveraging given our negative comparable store sales for the year.

Net interest and other expense increased $1.2 million to $2.7 million in 2008 compared to $1.5 million in 2007. This increase was attributable to $1.2 . . .