• Further enhance our customer shopping experience;

• Continue to update our store base; and

• Improve our leasing terms.

In spite of the challenging economy, we have delivered same store sales growth in 8 of the last 10 quarters. Same-store sales increased 1.8 percent in the second quarter of fiscal 2010 compared with a 3.3 percent increase in the second quarter of fiscal 2009. Customer traffic increased 4.1 percent in the second quarter of fiscal 2010, while average transaction size fell 2.3 percent, as customers continued to resist buying higher ticket and seasonal impulse items. We continued to experience sales growth across our core sewing and craft categories during the second quarter of fiscal 2010, including quilting, yarn, kids crafts and food crafting. Our new product assortment and plan-o-gram related to our jewelry making category is also performing well. Conversely, our seasonal categories continued to experience double digit decreases. In anticipation of the decline in our seasonal categories, we purchased less merchandise, limiting our exposure to clearance markdowns.

Part of the improved fiscal 2010 performance is due to revitalizing our store portfolio. We opened three new stores during the quarter, and have opened 15 year to date. We also completed 11 remodels and 98 store optimization projects in the second quarter of fiscal 2010. We still expect to open a total of approximately 20 new stores, remodel approximately 30 stores and complete over 180 small-format optimization projects during fiscal 2010.
Our small-format stores performed better than our large-format stores, with a customer traffic increase of 4.8 percent compared to a 3.5 percent increase for our large-format stores and same-store sales gain of 3.9 percent compared to a 0.1 percent increase for our large-format stores for the second quarter of fiscal 2010. The small-format remodel and optimization programs are positively affecting customer traffic and sales, while our large format stores are being impacted by the mix of seasonal and higher ticket items, which have been underperforming in the current economic environment. In addition, the continuance of Wal-Mart removing fabric from nearby stores has a more significant benefit on sales in our small-format stores than in our large-format stores.
Our gross margin was the highlight of our performance during the quarter, as we achieved a 170 basis point increase during the second quarter of fiscal 2010 over the second quarter of the prior year. The following five key factors that we discussed in fiscal 2009 continue to positively impact gross margin:
• More direct sourcing of products from Asia;

• Lower transportation expenses;

• Product cost deflation on imported merchandise;

• Reduced seasonal and fashion merchandise; and

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

In addition to the above factors, our merchandising team continues to manage effectively our promotional markdowns, utilizing a mix of marketing events and discount strategies to optimize growth in both sales and gross margin dollars. We achieved improved selling, general and administrative ("SG&A") expense leverage of 140 basis points for the second quarter of fiscal 2010 as compared to the second quarter of the prior year. Payroll savings in our stores from more efficient work processes and distribution centers efficiencies provided most of the improvement.
As a result of improving sales, margin and expenses, we were able to reduce our fiscal 2010 second quarter loss to $0.13 per share from a loss of $0.47 per share for the second quarter of the prior year. We achieved positive earnings per share of $0.21 per diluted share for the first half of fiscal 2010 as compared to a loss of $0.35 per share for the same period in the prior year, representing a $0.56 per share year-over-year improvement.
In summary, we are pleased with our results through the first half of fiscal 2010 and are confident that sales and earnings will exceed our original plans for the full year of fiscal 2010.
Recent Developments and Business Update
Outlook for Fiscal 2010
We are increasing our previously announced expectations for fiscal 2010. Based upon our first half results, our operating assumptions for the remainder of the year, continued implementation of our strategic growth plans and uncertain economic conditions, we expect year-over-year improvement in our performance in fiscal 2010. We continue to remain optimistic regarding the performance of our core sewing and craft categories; however, based on the ongoing challenges in the economic environment, we anticipate the negative sales trends in our seasonal business to continue.

Roughly 55 percent of our annual sales and the vast majority of our annual earnings are generated during the second half of each fiscal year. Sales in the seasonal category typically represent a greater percentage of the business during the second half of each fiscal year as well. The key considerations underlying our outlook for fiscal 2010 include:
• Same-store sales approximately flat to up 1% for the year;

• Gross margin rate improvement for the year;

• Slightly 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 $1.35 to $1.50 for the year (excluding any gains on debt purchases);

• Free cash flow in the range of $70 to $74 million for the year (free cash flow is 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
(loss) 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               Twenty-Six Weeks Ended
                                       August 1,          August 2,         August 1,         August 2,
                                          2009              2008              2009              2008
Net sales                                   100.0 %            100.0 %           100.0 %           100.0 %
Gross margin                                 49.3 %             47.6 %            48.8 %            46.9 %
Selling, general and administrative
expenses                                     46.1 %             47.5 %            43.6 %            44.3 %
Store pre-opening and closing costs           0.7 %              0.9 %             0.7 %             0.6 %
Depreciation and amortization                 3.3 %              3.3 %             3.2 %             3.1 %

Operating (loss) profit                      (0.8 )%            (4.1 )%            1.3 %            (1.1 )%

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:

                                   Thirteen Weeks Ended                                Twenty-Six Weeks Ended
                                August 1,         August 2,        Percentage        August 1,         August 2,        Percentage
(Dollars in millions)             2009              2008             Change            2009              2008             Change
Consolidated net sales         $     419.4       $     403.0               4.1 %    $     879.4       $     849.1               3.6 %
Increase from prior year       $      16.4                                          $      30.3
Same-store sales percentage
change                                 1.8 %             3.3 %                              1.4 %             3.9 %

Comparison of the Thirteen Weeks Ended August 1, 2009 to August 2, 2008 Overall, consolidated net sales increased for the second quarter of fiscal 2010 primarily due to increased sales in our large-format stores as compared to the same period of fiscal 2009. Same-store sales increased 1.8 percent compared with a same-store sales increase of 3.3 percent for the second quarter of fiscal 2009. The improvement in same-store sales was driven by a 4.1 percent increase in customer transactions, partially offset by a 2.3 percent decrease in average ticket as compared to the second 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 758 at the end of the second quarter of fiscal 2010 was down ten 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 second quarter fiscal 2009 to 16.1 million square feet at the end of second quarter fiscal 2010. In total, we opened three new stores and closed eight stores during the second quarter of fiscal 2010, compared to the second quarter of fiscal 2009 when we opened three new stores and closed seven stores.
On a category basis, our sewing businesses represented 52 percent of our fiscal 2010 second quarter net sales volume and increased 5.1 percent on a same-store sales basis over the second 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 second quarter net sales volume and decreased approximately 1.9 percent on a same-store sales basis over the second quarter of the prior year. Gains in needle arts and basic craft categories were offset by declines in seasonal categories. Comparison of the Twenty-Six Weeks Ended August 1, 2009 to August 2, 2008 Overall, consolidated net sales increased for the first half of fiscal 2010 primarily due to increased sales in our large-format stores as compared to the same period of fiscal 2009. Same-store sales increased 1.4 percent compared with a same-store sales increase of 3.9 percent for the first half of fiscal 2009. The improvement in same-store sales was driven by a 3.7 percent increase in customer transactions, partially offset by a 2.3 percent decrease in average ticket as compared to the first half of fiscal 2009. The increase in customer transactions is primarily due to the continued benefits from 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. In total, we opened 15 new stores and closed 21 stores during the first half of fiscal 2010, compared to the first half of fiscal 2009 when we opened three new stores and closed nine stores. On a category basis, our sewing businesses represented 52 percent of the first half of fiscal 2010 net sales volume and increased 3.8 percent on a same-store sales basis over the first half of the prior year. Similar to our results for the second quarter of fiscal 2010, we continued to experience positive same-store sales in the majority of our fabric and sewing notions merchandise categories, especially in quilting for the first half of fiscal 2010. Our non-sewing businesses represented 48 percent of our fiscal 2010 first half net sales volume and decreased approximately 1.3 percent on a same-store sales basis over the first half of the prior year. The decrease was primarily due to declines in seasonal categories and custom framing.

Sales by Segment:

                                      Thirteen Weeks Ended                                   Twenty-Six Weeks Ended
                                  August 1,          August 2,        Percentage          August 1,           August 2,        Percentage
(Dollars in millions)               2009               2008             Change              2009                2008             Change
Large-format stores
Net sales                        $     226.1        $     209.9               7.7 %      $     470.7         $     441.1               6.7 %
Increase from prior year         $      16.2                                             $      29.6
Same-store sales percentage
change                                   0.1 %              2.3 %                               (0.2 )%              2.8 %

Small-format stores
Net sales                        $     185.8        $     186.0              (0.1 )%     $     391.7         $     392.7              (0.3 )%
Decrease from prior year         $      (0.2 )                                           $      (1.0 )
Same-store sales percentage
change                                   3.9 %              4.4 %                                3.4 %               5.2 %

Other
Net sales                        $       7.5        $       7.1               5.6 %      $      17.0         $      15.3              11.1 %
Increase from prior year         $       0.4                                             $       1.7

Comparison of the Thirteen Weeks Ended August 1, 2009 to August 2, 2008 Sales for large-format stores increased for the second quarter of fiscal 2010 primarily due to the net increase in the number of new stores.
Same-store sales for large-format stores increased 0.1 percent for the quarter, versus a same-store sales increase of 2.3 percent in the second 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 3.5 percent while average ticket decreased by approximately 3.4 percent as compared to the second quarter of fiscal 2009. The number of large-format stores in operation increased to 222 at the end of the second quarter of fiscal 2010 from 201 at the end of the same quarter of fiscal 2009. Large-format stores accounted for approximately 53.9 percent of total second quarter net sales in fiscal 2010 as compared to 52.1 percent for the same period in the prior year.
Sales for small-format stores decreased for the second quarter of fiscal 2010 due to the decrease in total store count, partially offset by an increase in same-store sales.
Same-store sales performance for small-format stores increased 3.9 percent compared with a same-store sales increase of 4.4 percent for the second quarter of fiscal 2009. The increase in same-store sales was primarily due to a 4.8 percent increase in customer transactions, slightly offset by a 0.9 percent decrease in average ticket as compared to the second 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 536 at the end of the second quarter of fiscal 2010 compared with 567 at the end of the same quarter last year. Small-format stores accounted for approximately 44.3 percent of total second quarter net sales in fiscal 2010 as compared to 46.1 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 1.8 percent of second quarter net sales in fiscal 2010 which is flat compared to the same period in the prior year.

Comparison of the Twenty-Six Weeks Ended August 1, 2009 to August 2, 2008 Sales for large-format stores increased for the first half 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 0.2 percent for the first half, versus a same-store sales increase of 2.8 percent in the first half of last year. Large-format stores have a greater mix of seasonal product and higher ticket items, which had weak performance during the first half of the year. Customer transactions for large-format stores increased by approximately 3.0 percent, while average ticket decreased by approximately 3.2 percent, as compared to the first half of fiscal 2009. Large-format stores accounted for approximately 53.5 percent of total first half net sales in fiscal 2010 as compared to 52.0 percent for the same period in the prior year.
Sales for small-format stores decreased for the first half 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 3.4 percent compared with a same-store sales increase of 5.2 percent for the first half of fiscal 2009. The increase in same-store sales was primarily due to a 4.4 percent increase in customer transactions, slightly offset by a 1.0 percent decrease in average ticket as compared to the first half 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. Small-format stores accounted for approximately 44.6 percent of total first half net sales in fiscal 2010 as compared to 46.2 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 1.9 percent of first half 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:

                                   Thirteen Weeks Ended                                Twenty-Six Weeks Ended
                                August 1,         August 2,        Percentage        August 1,         August 2,        Percentage
(Dollars in millions)             2009              2008             Change            2009              2008             Change
Gross margin                   $     206.6       $     191.8               7.7 %    $     429.5       $     398.6               7.8 %
Increase from prior year       $      14.8                                          $      30.9
Percentage of consolidated
net sales                             49.3 %            47.6 %                             48.8 %            46.9 %

As a percent of net sales, gross margin increased 170 basis points to 49.3 percent for the second quarter of fiscal 2010 compared with 47.6 percent for the same quarter last year. The improvement in the gross margin rate primarily was due to reduced product costs from global sourcing initiatives, reduced freight costs and lower clearance levels as compared to the same period of fiscal 2009.
As a percent of net sales, gross margin increased 190 basis points to 48.8 percent for the first half of fiscal 2010 compared with 46.9 percent for the same period last year. As experienced during the second quarter of fiscal 2010, the improvement in the gross margin rate for the first half of fiscal 2010 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. For the balance of the year, we expect continued year-over-year rate improvement with more opportunity in the fourth quarter of fiscal 2010 due to markdowns taken in fiscal 2009's fourth quarter to sell through seasonal merchandise. 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 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. Selling, General and Administrative Expenses:

                                   Thirteen Weeks Ended                                Twenty-Six Weeks Ended
                                August 1,         August 2,        Percentage        August 1,         August 2,        Percentage
(Dollars in millions)             2009              2008             Change            2009              2008             Change
SG&A                           $     193.3       $     191.6               0.9 %    $     383.7       $     376.1               2.0 %
Increase from prior year       $       1.7                                          $       7.6
Percentage of consolidated
net sales                             46.1 %            47.5 %                             43.6 %            44.3 %

Distribution costs included within SG&A amounted to $11.7 million and $13.0 million for the second quarter of fiscal 2010 and 2009, respectively. Store occupancy costs included within SG&A amounted to $47.0 million and $45.2 million for the second quarter of fiscal 2010 and 2009, respectively. As a percentage of net sales, SG&A expense for the second quarter of fiscal 2010 improved by 140 basis points to 46.1 percent compared with 47.5 percent of net sales in the second quarter last year. Our improved SG&A leverage reflects our continued focus on controlling costs, which have increased by 2.0 percent during the first half of fiscal 2010, while, for the same period, net sales increased by 3.6 percent as compared to the first half of fiscal 2009. As a percentage of net sales, SG&A expense during the first half of fiscal 2010 was 43.6 percent compared with 44.3 percent of net sales in the first half of last year. For the balance of fiscal 2010, we do not expect the same level of SG&A rate improvement that we experienced in the first half based on our current sales expectations. In addition, we did not incur any incentive compensation expense in the back half of fiscal 2009. Based on our current fiscal year 2010 outlook, we expect to incur incentive compensation expense, which will result in additional pressure on our SG&A rate in the back half of fiscal 2010. Distribution costs included within SG&A amounted to $23.8 million and $26.0 million for the first half of fiscal 2010 and 2009, respectively. Store occupancy costs included within SG&A amounted to $93.0 million and $89.5 million for the first half of fiscal 2010 and 2009, respectively.

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 . . .