Summary of BON TON STORES INC

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For purposes of the following discussion, references to the "fourth quarter of 2008" are to the 13 weeks ended January 31, 2009. References to the "first quarter of 2009" are to the 13 weeks ended May 2, 2009. References to the "second quarter of 2009" and the "second quarter of 2008" are to the 13-week periods ended August 1, 2009 and August 2, 2008, respectively. References to "2009" and "2008" are to the 26 weeks ended August 1, 2009 and August 2, 2008, respectively. References to "fiscal 2009" and "fiscal 2008" are to the 52 weeks ending January 30, 2010 and the 52 weeks ended January 31, 2009, respectively. References to "the Company," "we," "us," and "our" refer to The Bon-Ton Stores, Inc. and its subsidiaries.
Overview
We are one of the largest regional department store operators in the United States, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children. Our merchandise offerings also include cosmetics, home furnishings and other goods. We currently operate 279 stores in mid-size and metropolitan markets in 23 Northeastern, Midwestern and upper Great Plains states under the Bon-Ton, Bergner's, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger's and Younkers nameplates and, in the Detroit, Michigan area, the Parisian nameplate, encompassing a total of approximately 26 million square feet.
We operate in the department store segment of the U.S. retail industry, which is a highly competitive and fragmented environment. The department store industry continues to evolve in response to consolidation among merchandise vendors as well as the evolution of competitive retail formats - mass merchandisers, national chain retailers, specialty retailers and online retailers.
Our operating performance, and that of our competitors, depends significantly on economic conditions and the resulting impact on consumer spending. Many of the economic indicators associated with consumer discretionary spending were challenged in fiscal 2008 and remain weak in 2009. Given the outlook of continued recessionary factors, we anticipate another difficult year in fiscal 2009. As such, in fiscal 2009 we expect:
• a comparable store sales decrease in the range of 7.0% to 9.0%;

• a reduction in other income;

• a gross margin rate of 36.0%;

• a reduction of approximately $80.0 million in our selling, general and administrative ("SG&A") expenses; and

• an effective tax rate of 0%.

THE BON-TON STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations
The following table summarizes changes in selected operating indicators of the Company, illustrating the relationship of various income and expense items to net sales for the respective periods presented (components may not add or subtract to totals due to rounding):

                                                     THIRTEEN                           TWENTY-SIX
                                                    WEEKS ENDED                         WEEKS ENDED
                                            August 1,         August 2,         August 1,         August 2,
                                              2009              2008              2009              2008
Net sales                                        100.0 %           100.0 %           100.0 %           100.0 %
Other income                                       2.6               3.2               2.7               3.2

                                                 102.6             103.2             102.7             103.2

Costs and expenses:
Costs of merchandise sold                         62.9              64.1              64.1              65.1
Selling, general and administrative               36.6              36.6              36.7              36.6
Depreciation and amortization                      4.7               4.4               4.5               4.3
Amortization of lease-related interests            0.2               0.2               0.2               0.2
Goodwill impairment                                  -               2.6                 -               1.3

Loss from operations                              (1.7 )            (4.8 )            (2.7 )            (4.2 )
Interest expense, net                              3.8               3.6               3.7               3.5

Loss before income taxes                          (5.6 )            (8.4 )            (6.4 )            (7.8 )
Income tax provision (benefit)                     0.2              (3.4 )               -              (2.8 )

Net loss                                          (5.7 )%           (5.0 )%           (6.4 )%           (4.9 )%

Second Quarter of 2009 Compared with Second Quarter of 2008 Net sales: Net sales in the second quarter of 2009 were $609.2 million, compared with $673.4 million in the second quarter of 2008, reflecting a decrease of $64.2 million, or 9.5%. Comparable store sales decreased 9.8% in the second quarter of 2009. We believe the comparable store sales decline was due to the continued challenging economic environment, with consumer spending negatively impacted. Additionally, due to inventory management efforts, there was significantly less clearance inventory throughout the second quarter of 2009 compared with the prior year, further challenging sales.
The best performing merchandise categories in the second quarter of 2009 were Soft Home (included in Home), Children's Apparel and Moderate Sportswear (included in Women's Apparel). Soft Home sales benefited from a successful semi-annual home event and a well-managed in-stock inventory position throughout the period on all basic textiles. Sales of moderately-priced branded goods as well as the expansion of basics and introduction of new private brand categories were key in the performance in Children's Apparel. Sales in Moderate Sportswear continue to benefit from a shift by our customers toward a value-orientation that we believe is in response to the current economic situation; our moderate zone provides the value and price-points our customers are seeking.
Better Sportswear (included in Women's Apparel) and Furniture (included in Home) performed poorly in the second quarter of 2009, continuing a trend from the prior 13 weeks. We believe discretionary spending for more expensive items is under significant pressure, as evidenced by the poor performance of this merchandise throughout our families of business.
Other income: Other income, which includes income from revenues received under a credit card program agreement with HSBC Bank Nevada, N.A. ("HSBC"), leased departments and other customer revenues, was $16.1 million, or 2.6% of net sales, in the second quarter of 2009 as compared with $21.5 million, or 3.2% of net sales, in the second quarter of 2008. The decrease was primarily due to reduced sales volume and reduced income associated with our proprietary credit card program. Proprietary credit card income decreased as a result of lower sales volume as well as an amendment to the credit card program agreement with HSBC. Other income was reduced by $3.1 million in the second quarter of 2009 pursuant to the amended agreement with HSBC which revises the compensation the Company will receive for certain types of credit sales and provides that the Company and HSBC will share certain losses associated with the credit card program. See Note 14 in the Notes to Consolidated Financial Statements.

THE BON-TON STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Costs and expenses: Gross margin in the second quarter of 2009 decreased $15.3 million to $226.1 million as compared with $241.4 million in the comparable prior year period. The decrease is attributable to decreased sales volume. Gross margin as a percentage of net sales increased approximately 130 basis points to 37.1% in the second quarter of 2009 from 35.9% in the same period last year, primarily due to disciplined inventory management efforts that resulted in decreased net markdowns.
SG&A expense in the second quarter of 2009 was $222.9 million as compared with $246.4 million in the second quarter of 2008, a decrease of $23.5 million. The reduction is largely the result of our cost savings initiatives in response to the difficult economic environment. While SG&A expenses decreased significantly, the current year expense rate remained consistent with the prior year at 36.6% of net sales due to the shortfall in sales.
Depreciation and amortization expense and amortization of lease-related interests decreased $1.2 million, to $29.9 million in the second quarter of 2009 from $31.1 million in the second quarter of 2008, primarily due to the reduced asset base resulting from significant asset impairments recorded in the fourth quarter of 2008.
The Company recorded a non-cash goodwill impairment charge of $17.8 million in the second quarter of 2008 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") as, based upon our review, the fair value of the Company's single reporting unit, estimated using a combination of our common stock trading value as of the end of the second quarter of 2008, a discounted cash flow analysis and other generally accepted valuation methodologies, was less than the carrying amount. See Note 10 in the Notes to Consolidated Financial Statements. Loss from operations: The loss from operations in the second quarter of 2009 was $10.6 million, or 1.7% of net sales, compared with a loss from operations of $32.3 million, or 4.8% of net sales, in the comparable prior year period. Interest expense, net: Net interest expense was $23.2 million, or 3.8% of net sales, in the second quarter of 2009 as compared with $24.4 million, or 3.6% of net sales, in the second quarter of 2008. The $1.2 million decrease primarily reflects decreased borrowing levels and reduced interest rates.
Income tax provision (benefit): The income tax provision of $0.9 million in the second quarter of 2009 reflects an effective tax rate of (2.8)%, compared with an income tax benefit of $22.9 million in the second quarter of 2008 reflecting an effective tax rate of 40.3%. The current year results principally reflect the fact that the Company maintained a nearly full valuation allowance position against all net deferred tax assets throughout 2009.
Net loss: Net loss in the second quarter of 2009 was $34.8 million, or 5.7% of net sales, compared with a net loss of $33.8 million, or 5.0% of net sales, in the second quarter of 2008.
2009 Compared with 2008
Net sales: Net sales in 2009 were $1,253.8 million, compared with $1,373.6 million in 2008, reflecting a decrease of $119.9 million, or 8.7%. Comparable store sales decreased 9.2% in 2009. We believe the comparable store sales decline reflects the continuation of the difficult economic environment, which has pressured consumer spending. Additionally, due to inventory management efforts, there was significantly less clearance inventory throughout 2009 compared with the prior year, further challenging sales.

THE BON-TON STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our customers' spending patterns have shifted as a result of the current economic situation. Sales trends indicate movement toward a value-orientation, with decided emphasis on price. Sales in Moderate Sportswear (included in Women's Apparel), the best performing category in the period, have benefited from this shift as our moderate zone provides the value our customers are seeking. We are seeing similar success in sales of moderate goods throughout our families of business. Conversely, the poor performances of Better Sportswear (included in Women's Apparel) and Furniture (included in Home) suggest our customers are spending their limited discretionary dollars on more moderately-priced merchandise. Better Sportswear is the most difficult business in Women's Apparel at this time. Furniture sales continue to be adversely impacted by the difficult housing market and continued deterioration in consumer spending for bigger ticket items.
Other income: Other income was $34.5 million, or 2.7% of net sales, in 2009 as compared with $44.3 million, or 3.2% of net sales, in 2008. The decrease primarily reflects reduced sales volume and reduced income associated with our proprietary credit card program. Proprietary credit card income decreased as a result of lower sales volume as well as an amendment to the credit card program agreement with HSBC. Other income was reduced by $6.2 million in 2009 pursuant to the amended agreement with HSBC, which revises the compensation the Company will receive for certain types of credit sales and provides that the Company and HSBC will share certain losses associated with the credit card program. See Note 14 in the Notes to Consolidated Financial Statements.
Costs and expenses: Gross margin in 2009 was $450.3 million as compared with $479.2 million in 2008, reflecting a decrease of $28.9 million. The decrease in gross margin dollars was due to the decreased sales volume in the period. Gross margin as a percentage of net sales increased approximately 100 basis points to 35.9% in the current year from 34.9% last year, primarily due to decreased net markdowns.
SG&A expense in 2009 was $459.8 million as compared with $502.2 million in 2008, a decrease of $42.4 million, evidencing that initiatives targeting an annualized $80 million of expense reductions in the Company's cost structure are proceeding as planned. Despite the expense savings, the expense rate in 2009 marginally increased to 36.7% of net sales, compared with 36.6% in 2008, due to the reduced sales volume.
Depreciation and amortization expense and amortization of lease-related interests decreased $2.1 million, to $59.2 million in 2009 from $61.3 million in 2008, primarily due to the reduced asset base resulting from significant asset impairments recorded in the fourth quarter of 2008.
The Company recorded a non-cash goodwill impairment charge of $17.8 million in 2008 in accordance with SFAS No. 142 as, upon review in the second quarter of 2008, the fair value of the Company's single reporting unit, estimated using a combination of our common stock trading value as of the end of the second quarter of 2008, a discounted cash flow analysis and other generally accepted valuation methodologies, was less than the carrying amount. See Note 10 in the Notes to Consolidated Financial Statements.
Loss from operations: The loss from operations in 2009 was $34.2 million, or 2.7% of net sales, compared with $57.8 million, or 4.2% of net sales, in 2008. Interest expense, net: Net interest expense was $46.1 million, or 3.7% of net sales, in 2009 as compared with $48.7 million, or 3.5% of net sales, in 2008. The $2.6 million decrease principally reflects decreased borrowing levels and reduced interest rates in 2009.

THE BON-TON STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income tax benefit: The income tax benefit of $0.1 million in 2009 reflects an effective tax rate of 0.2%, compared with an income tax benefit of $38.7 million in 2008 reflecting an effective tax rate of 36.3%. The current year results principally reflect the fact that the Company maintained a nearly full valuation allowance position against all net deferred tax assets throughout 2009. Net loss: Net loss in 2009 was $80.2 million, or 6.4% of net sales, compared with a net loss of $67.9 million, or 4.9% of net sales, in 2008. Seasonality
Our business, like that of most retailers, is subject to seasonal fluctuations, with the major portion of sales and income realized during the second half of each fiscal year, which includes the holiday season. Due to the fixed nature of certain costs, SG&A expense is typically higher as a percentage of net sales during the first half of each fiscal year. We typically finance working capital increases in the second half of each fiscal year through additional borrowings under our revolving credit facility.
Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year. Liquidity and Capital Resources
At August 1, 2009, we had $15.6 million in cash and cash equivalents and $173.7 million available under our asset-based revolving credit facility (before taking into account the minimum borrowing availability covenant under such facility of $75.0 million). In anticipation of continued recessionary pressures in fiscal 2009, we heightened our focus on maximizing cash flow by reducing operating expenses and significantly curtailing our planned capital expenditures. Additionally, we are continuing to control inventory levels in order to benefit our working capital needs. We anticipate that these actions, together with projected cash benefits from our cost savings initiatives, will positively impact our fiscal 2009 cash flow.
Typically, cash flows from operations are impacted by the effect on sales of
(1) consumer confidence, (2) weather in the geographic markets served by the Company, (3) general economic conditions and (4) competitive conditions existing in the retail industry; a downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate our business. Currently, our business model is adversely impacted by additional economic drivers reflective of the global recession. While difficult economic conditions affect our assessment of short-term liquidity, and while there can be no assurances, we consider our resources, including cash flows from operations supplemented by borrowings under our revolving credit facility, adequate to satisfy our cash needs for at least the next 12 months.

                            THE BON-TON STORES, INC.
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS
The following table summarizes material measures of the Company's liquidity and
capital resources:

                                                      August 1,       August 2,
     (Dollars in millions)                              2009            2008

     Working capital                                 $     377.9     $     427.4
     Current ratio                                        1.96:1          1.97:1
     Debt to total capitalization (1)                     0.95:1          0.80:1
     Unused availability under lines of credit (2)   $     173.7     $     238.0

(1) Debt includes obligations under capital leases. Total capitalization includes shareholders' equity, debt and obligations under capital leases.

(2) Subject to a minimum borrowing availability covenant of $75.

Our primary sources of working capital are cash flows from operations and borrowings under our revolving credit facility, which provides for up to $800.0 million in borrowings. In the first quarter of 2009, we elected to reduce the previous $1.0 billion commitment under our revolving credit facility by $200.0 million in order to reduce interest expense associated with the unused commitment fee.
Decreases in working capital and the current ratio are primarily the result of decreased levels of merchandise inventories due to our inventory management efforts in response to sales trends, and decreased prepaid and deferred income taxes as a result of the Company's recent net losses and valuation allowance position. The increase in debt to total capitalization is largely due to the significant decrease in shareholders' equity in fiscal 2008 and 2009, the result of the net loss in the respective periods, which in fiscal 2008 includes the charges for asset impairments and deferred tax valuation allowances, as well as the decline in the funded status of the Company's defined benefit pension plans. These unfavorable factors are partially mitigated by reduced debt levels in 2009. The decrease in unused availability under lines of credit as compared with the prior year reflects reduced availability primarily due to decreased inventory levels and increases in trade and standby letters of credit, partially offset by reduced borrowings.
Cash provided by (used in) our operating, investing and financing activities is summarized as follows:

                                                 TWENTY-SIX
                                                 WEEKS ENDED
                                          August 1,       August 2,
                 (Dollars in millions)      2009            2008

                 Operating activities    $      34.8     $      27.6
                 Investing activities          (12.9 )         (52.7 )
                 Financing activities          (26.0 )          22.0

Net cash provided by operating activities amounted to $34.8 million and $27.6 million in 2009 and 2008, respectively. The increase in net cash provided in the current year primarily reflects reduced working capital requirements, most notably funded through the receipt of an approximate $30 million tax refund and increased accounts payable, partially offset by increased merchandise inventories. Additionally, the increase in cash provided in the current year was partially offset by an increased net loss in the period.
Net cash used in investing activities amounted to $12.9 million in 2009, compared with $52.7 million in 2008, as capital expenditures were significantly reduced in the current year in response to economic conditions.

THE BON-TON STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in financing activities amounted to $26.0 million in 2009, compared with net cash provided by financing activities of $22.0 million in the prior year. The change primarily reflects net debt reduction due to decreased cash requirements for current year operating activities and reduced capital expenditures.
Our capital expenditures in 2009, which do not reflect reductions for landlord contributions of $2.0 million, totaled $13.0 million. Capital expenditures for fiscal 2009, net of approximately $7 million of landlord contributions, are not expected to exceed $40 million, a significant reduction from the prior year's capital expenditures of $84.8 million (which do not reflect reductions for landlord contributions of $18.9 million), as we are limiting store expansion and remodel activities in the near term. Included in fiscal 2009 planned capital expenditures is continued investment in information technology. Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements required us to make estimates and judgments that affected reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our estimates, including those related to merchandise returns, inventories, intangible assets, income taxes, financings, contingencies, insurance reserves, litigation, and pension and supplementary retirement plans. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially lead to materially different results under different assumptions and conditions. We believe our critical accounting policies are as described below:
Inventory Valuation
Inventories are stated at the lower of cost or market with cost determined by the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margin is derived by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that has been widely used in the retail industry. Use of the retail inventory method will result in valuing inventories at the lower of cost or market if markdowns are taken timely as a reduction of the retail value of inventories.
Inherent in the retail inventory method calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which significantly impact both the ending inventory valuation at cost and the resulting gross margin. These significant estimates, coupled with the fact that the retail inventory method is an averaging process, can, under certain circumstances, result in individual inventory components with cost above related net realizable value. Factors that can lead to this result include applying the retail inventory method to a group of products that is not fairly uniform in terms of its cost, selling price relationship and turnover; or applying the retail inventory method to transactions over a period of time that include different rates of gross profit, such as those relating to seasonal merchandise. In addition, failure to take timely markdowns can result in an overstatement of inventory under the lower of cost or market principle. We believe the retail inventory method we use provides an inventory valuation that approximates cost and results in carrying inventory in the aggregate at the lower of cost or market.

THE BON-TON STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We regularly review inventory quantities on-hand and record an adjustment for excess or old inventory based primarily on an estimated forecast of merchandise demand for the selling season. Demand for merchandise can fluctuate greatly. A significant increase in the demand for merchandise could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. Additionally, estimates of merchandise demand may prove to be inaccurate, in which case we may have understated or overstated the adjustment required for excess or old inventory. If our inventory is determined to be overvalued in the future, we would be required to recognize such costs in costs . . .