Forward Looking Statements

Certain statements in this Form 10-Q contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements reflect the Company's expectations regarding future events and operating performance and often contain words such as "believe," "expect," "may," "will," "should," "could," "anticipate," "plan" or similar words.

Forward-looking statements are based on various assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the ability of the Company and its subsidiary to maintain normal trade terms with vendors, the ability of the Company and its subsidiary to comply with the various covenant requirements contained in the Company's Revolving Credit Facility, the demand for apparel, and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in the Company's markets, consumer confidence, energy and gasoline prices, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sales volume include unusual weather patterns, an increase in the level of competition in the Company's market areas, competitors' marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening plans. The occurrence of any of these factors could have a material and adverse impact on the Company's business, financial condition, operating results, or liquidity. Most of these factors are difficult to predict accurately and are generally beyond the Company's control.

Readers should consider the risks and uncertainties described in the Company's Annual Report on Form 10-K for the year ended January 31, 2009 ("Form 10-K"). Readers should carefully review the Form 10-K in its entirety, including but not limited to the Company's financial statements and the notes thereto and the risks and uncertainties described in Item 1A - "Risk Factors" of the Form 10-K. Forward-looking statements contained in this Form 10-Q are as of the date of this Form 10-Q. The Company does not undertake to update its forward-looking statements.

General

Stage Stores is a Houston, Texas-based regional, specialty department store retailer offering moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family. As of August 1, 2009, the Company operated 743 stores located in 39 states. The Company operates its stores under the five names of Bealls, Goody's, Palais Royal, Peebles and Stage. The Company's principal focus is on consumers in small and mid-sized markets which the Company believes are under-served and less competitive. The Company differentiates itself from the competition in the small and mid-sized markets in which it operates by offering consumers access to basic as well as fashionable brand name merchandise not typically carried by other retailers in the same market area. In the highly competitive metropolitan markets in which it operates, the Company competes against national department store chains, which similarly offer moderately priced, brand name and private label merchandise. As a way of differentiating itself from the competition in these larger metropolitan markets, the Company endeavors to offer consumers a high level of customer service in convenient locations.

On July 3, 2009, the Company acquired the Goody's name through the Goody's bankruptcy auction. The Company intends to use the Goody's name in select new store markets in which there is a strong customer awareness and recognition of the name. During August 2009, the Company opened eight stores under the Goody's name and plans to open seven more Goody's stores in the current year. The Company is taking advantage of the current economic environment by negotiating very attractive lease rates for these new stores. In addition, as the former Goody's store format is comparable to the Company's store format, the net capital investment in these locations is about one half the amount of a typical new store. Due to the favorable lease rates and lower capital requirement, the Company's near term expansion plans will be focused on former Goody's markets. The Company expects to open an additional 30 to 35 stores in former Goody's markets in future years.

The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements as included in the Form 10-K.

Results of Operations

The following table sets forth the results of operations as a percentage of
sales for the periods indicated:


                                              Thirteen Weeks Ended (1)                   Twenty-Six Weeks Ended (1)
                                        August 1, 2009         August 2, 2008       August 1, 2009         August 2, 2008

Net sales                                         100.0 %                100.0 %              100.0 %                100.0 %
Cost of sales and related buying,
occupancy
and distribution expenses                          70.7                   71.4                 72.7                   72.2
Gross profit                                       29.3                   28.6                 27.3                   27.8

Selling, general and administrative
expenses                                           24.5                   23.8                 24.8                   24.4
Store opening costs                                 0.1                    0.3                  0.2                    0.5
Interest expense, net                               0.3                    0.3                  0.3                    0.3
Income before income tax                            4.3                    4.2                  2.0                    2.6

Income tax expense                                  1.7                    1.6                  0.8                    1.0
Net income                                          2.7 %                  2.6 %                1.2 %                  1.6 %


(1) Percentages may not foot due to
rounding.

Thirteen Weeks Ended August 1, 2009 Compared to Thirteen Weeks Ended August 2, 2008

Sales for the thirteen weeks ended August 1, 2009 (the "current year second quarter") decreased 8.3% to $341.7 million from $372.7 million for the thirteen weeks ended August 2, 2008 (the "prior year second quarter"). Comparable store sales, which are sales in stores that are open for at least 14 full months prior to the reporting period, decreased by 10.7% in the current year second quarter as compared to a 1.4% decrease in the prior year second quarter. In the current year second quarter, new stores that were not in the comparable store base contributed sales of $10.0 million. These sales were offset by a loss of $2.6 million in sales from closed stores that were in operation during the prior year second quarter.

Sales in the current year second quarter continued to be negatively impacted by the significant downturn in the macroeconomic environment, including the retail industry, which is sensitive to conditions impacting discretionary consumer spending, such as the recent housing crisis, employment levels and other factors influencing consumer confidence. Sales in the current year second quarter were also impacted by reduced levels of clearance merchandise as compared to the prior year second quarter, which resulted in lower clearance sales. On a merchandise category basis, all families of business experienced a comparable store sales decline in the current year second quarter. However, ladies ready-to-wear, comprised of misses sportswear, petites and plus sizes, outperformed the Company's comparable store sales. Other key merchandise categories (i.e., those categories comprising greater than 5% of sales), which outperformed the Company's average comparable store sales level were cosmetics, dresses, accessories, and men's. The Company continues to focus on growing its cosmetics line of business, and on August 18, 2009, it announced the newly created position of Senior Vice President, Cosmetics, and consolidated the Houston and South Hill Divisions' cosmetics buying offices under this position. With regard to market size, the Company's small markets (populations less than 50,000) outperformed stores in its mid-sized (populations of 50,000 to 150,000) and large markets (populations greater than 150,000), and posted comparable store sales decreases of 9.8%, 11.4% and 11.9%, respectively. Small markets continue to be the focus of the Company's new store expansion plans.

The following is a summary of the changes in the components of cost of sales between the current year second quarter and the prior year second quarter, expressed as a percent of sales:

                                                                  Increase
                                                                 (Decrease)
                                                                       Q2
   Merchandise cost of sales                                           (1.86 ) %
   Buying, occupancy and distribution expenses                          1.13
     Decrease in merchandise cost of sales and related buying,
     occupancy and distribution expenses rate                          (0.73 ) %

Gross profit decreased 6.0% to $100.2 million for the current year second quarter from $106.6 million in the prior year second quarter. Gross profit, as a percent of sales, was 29.3% in the current year second quarter and 28.6% in the prior year second quarter. The decrease in merchandise cost of sales is primarily due to the lower levels of clearance merchandise as a result of the Company's lower overall inventory levels. The increase in buying, occupancy and distribution expenses over the prior year second quarter is primarily due to increased store occupancy and depreciation costs due to the current year second quarter's higher store count. The increase in buying, occupancy and distribution expenses as a percent of sales reflects the deleveraging of these costs due to the decline in comparable store sales in the current year second quarter.

Selling, general and administrative ("SG&A") expenses in the current year second quarter decreased by $4.7 million, or 5.3%, to $83.9 million from $88.5 million in the prior year second quarter despite operating 24 net additional stores at the end of the second quarter. This decrease is primarily due to a company-wide initiative to reduce variable operating expenses that resulted in lower store payroll and controllable costs, and general administrative expenses. SG&A expenses were also positively impacted by an increase in credit income associated with the yield sharing provisions in the Company's private label credit card program. As a percent of sales, SG&A expenses increased to 24.5% in the current year second quarter from 23.8% in the prior year second quarter. The increase in the SG&A rate is due to deleveraging of expenses caused by the decline in comparable store sales in the current year second quarter.

Store opening costs were $0.5 million in the current year second quarter. During the prior year second quarter, the Company incurred $1.2 million in store opening costs related to five new stores opened and three stores relocated. Store opening costs are expensed as incurred and include costs of stores opening in future quarters.

Net interest expense was $1.1 million in the current year second quarter compared to $1.2 million in the prior year second quarter. Interest expense is primarily comprised of interest on borrowings under the Revolving Credit Facility (see "Liquidity and Capital Resources"), related letters of credit and commitment fees, amortization of debt issue costs, interest on finance lease obligations and equipment financing notes. The decrease in interest expense is primarily due to lower Revolving Credit Facility borrowings in the current year second quarter. The Company had a current year second quarter weighted average Revolving Credit Facility balance of $0.1 million as compared to $37.7 million for the prior year second quarter. The lower interest expense on lower average Revolving Credit Facility borrowings was offset by higher interest expense on the Company's equipment financing notes. The weighted average amount of equipment financing notes outstanding was $45.6 million in the current year second quarter as compared to $30.2 million in the prior year second quarter.

The Company's effective tax rate for the current year second quarter was 38.3%, which resulted in an estimated tax expense of $5.6 million. This compares to income tax expense of $5.9 million in the prior year second quarter during which the effective tax rate was 38.0%.

As a result of the foregoing, the Company had a net income of $9.1 million for the current year second quarter as compared to net income of $9.7 million for the prior year second quarter.

Twenty-Six Weeks Ended August 1, 2009 Compared to Twenty-Six Weeks Ended August 2, 2008

Sales for the twenty-six weeks ended August 1, 2009 (the "current year") decreased by 7.0% to $675.3 million from $726.2 million for the twenty-six weeks ended August 2, 2008 (the "prior year"). Comparable store sales, which are sales in stores that are open for at least 14 full months prior to the reporting period, decreased by 9.9% in the current year as compared to a 3.4% decrease in the prior year. In the current year, new stores that were not in the comparable store base contributed sales of $23.4 million. These sales were offset by a loss of $5.1 million in sales from closed stores that were in operation during the prior year.

Sales in the current year continued to be negatively impacted by the significant downturn in the macroeconomic environment, including the retail industry, which is sensitive to conditions impacting discretionary consumer spending, such as the recent housing crisis, employment levels and other factors influencing consumer confidence. Sales in the current year were also impacted by reduced levels of clearance merchandise as compared to the prior year, which resulted in lower clearance sales. On a merchandise category basis, all families of business experienced a comparable store sales decline in the current year. Key merchandise categories (i.e., those categories comprising greater than 5% of sales), which outperformed the Company's comparable store sales, were cosmetics, dresses, misses sportswear, accessories and men's. With regard to market size, the Company's small markets (populations less than 50,000) outperformed stores in its mid-sized markets (populations of 50,000 to 150,000) and large markets (populations greater than 150,000) and posted comparable store sales decreases of 8.4%, 10.8% and 12.5%, respectively. Small markets continue to be the focus of the Company's new store expansion plans.

The following is a summary of the changes in the components of cost of sales between the current year and the prior year, expressed as a percent of sales:

                                                                  Increase
                                                                 (Decrease)
                                                                     YTD
   Merchandise cost of sales                                           (0.95 ) %
   Buying, occupancy and distribution expenses                          1.45
     Increase in merchandise cost of sales and related buying,
     occupancy and distribution expenses rate                           0.50 %

Gross profit decreased 8.6% to $184.7 million for the current year from $202.2 million in the prior year. Gross profit, as a percent of sales, was 27.3% in the current year and 27.8% in the prior year. The decrease in merchandise cost of sales is primarily due to the lower levels of clearance merchandise as a result of the Company's lower overall inventory levels. The increase in buying, occupancy and distribution expenses over the prior year is primarily due to increased store occupancy and depreciation costs due to the current year's higher store count. The increase in buying, occupancy and distribution expenses as a percent of sales reflects the deleveraging of these costs due to the decline in comparable store sales in the current year.

SG&A expenses in the current year decreased by $9.4 million, or 5.3%, to $167.5 million from $176.9 million in the prior year despite operating 24 net additional stores at the end of the second quarter. This decrease is primarily due to a company-wide initiative to reduce variable operating expenses and resulted in lower store payroll and controllable costs, and lower general administrative and advertising expenses. SG&A expenses were also positively impacted by an increase in credit income associated with the yield sharing provisions in the Company's private label credit card program. As a percent of sales, SG&A expenses increased to 24.8% in the current year from 24.4% in the prior year. The increase in the SG&A rate is due to deleveraging of expenses caused by the decline in comparable store sales in the current year.

Store opening costs in the current year of $1.7 million include costs related to the opening of 11 new stores, including a reopened hurricane-damaged store, and the relocation of 12 stores. During the prior year, the Company incurred $3.5 million in store opening costs related to 28 new stores opened and 8 stores relocated. Store opening costs are expensed as incurred and include costs of stores opening in future quarters.

Net interest expense was $2.3 million in the current year compared to $2.5 million in the prior year. Interest expense is primarily comprised of interest on borrowings under the Revolving Credit Facility (see "Liquidity and Capital Resources"), related letters of credit and commitment fees, amortization of debt issue costs, interest on finance lease obligations and equipment financing notes. The decrease in interest expense is primarily due to lower Revolving Credit Facility borrowings in the current year. The Company had a current year weighted average Revolving Credit facility balance of $2.3 million as compared to $42.7 million for the prior year. The lower interest expense on lower average Revolving Credit Facility borrowings was offset by higher interest expense on the Company's equipment financing notes. The weighted average amount of equipment financing notes outstanding was $46.9 million in the current year as compared to $31.0 million in the prior year.

The Company's effective tax rate for the current year was 38.3%, which resulted in an estimated tax expense of $5.1 million. This compares to income tax expense of $7.3 million in the prior year during which the effective tax rate was 38.0%.

As a result of the foregoing, the Company had a net income of $8.2 million for the current year as compared to net income of $11.9 million for the prior year.

Seasonality and Inflation

Historically, the Company's business is seasonal and sales are traditionally lower during the first three quarters of the year (February through October) and higher during the last three months of the year (November through January). The fourth quarter typically accounts for slightly more than 30% of the Company's annual sales, with the other quarters accounting for approximately 22% to 24% each. Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters. The Company does not believe that inflation had a material effect on its results of operations during the twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively. However, there can be no assurance that the Company's business will not be affected by inflation in the future.

Liquidity and Capital Resources

The Company's liquidity is currently provided by (i) existing cash balances,
(ii) operating cash flows, (iii) normal trade credit, (iv) equipment financing notes and (v) its Revolving Credit Facility.

The Company has a $250.0 million senior secured revolving credit facility (the "Revolving Credit Facility") that matures on April 20, 2012. The Revolving Credit Facility includes an uncommitted accordion feature to increase the size of the facility to $350.0 million. Borrowings under the Revolving Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Revolving Credit Facility agreement. The daily interest rates under the Revolving Credit Facility are determined by a prime rate, or Eurodollar rate plus an applicable margin, as set forth in the Revolving Credit Facility agreement. Inventory and cash and cash equivalents are pledged as collateral under the Revolving Credit Facility. The Revolving Credit Facility is used by the Company to provide financing for working capital, capital expenditures, interest payments and other general corporate purposes, as well as to support its outstanding letters of credit requirements. For the current year, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the Revolving Credit Facility were 3.3% and $2.3 million, respectively.

The Company also issues letters of credit under its Revolving Credit Facility to support certain merchandise purchases and to collateralize retained risks and deductibles under various insurance programs. At August 1, 2009, the Company had outstanding letters of credit totaling approximately $19.2 million. These letters of credit expire within twelve months of issuance. Excess borrowing availability under the Revolving Credit Facility at August 1, 2009, net of letters of credit outstanding, was $170.1 million.

The Revolving Credit Facility contains covenants which, among other things, restrict, based on required levels of excess availability, (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends and repurchase of common stock under certain circumstances, and (iii) related party transactions. At August 1, 2009, the Company was in compliance with all of the debt covenants of the Revolving Credit Facility.

The Company generated $66.0 million in cash from operating activities during the twenty-six weeks ended August 1, 2009. Net income, adjusted for non-cash expenses, provided cash of approximately $42.3 million. Changes in operating assets and liabilities provided net cash of approximately $21.7 million, which included a $4.5 million decrease in merchandise inventories, a $1.7 million decrease in other assets, and an increase in accounts payable and other liabilities of $15.5 million. Additionally, cash flows from operating activities included construction allowances from landlords of $2.0 million, which funded a portion of the capital expenditures related to store leasehold improvements in new and relocated stores.

The Company currently pays a quarterly cash dividend of $0.05 per share on its common stock. In the current year, the Company has paid quarterly cash dividends totaling $3.8 million. On August 27, 2009, the Company's Board declared a quarterly cash dividend of $0.05 per share of common stock, payable on September 23, 2009 to shareholders of record at the close of business on September 8, 2009.

Management currently estimates that capital expenditures in 2009, net of construction allowances to be received from landlords, will be between $45.0 and $50.0 million. The expenditures will principally be for the opening of new stores, store expansions, relocations and remodels. Capital expenditures were $24.3 million in the current year as compared to $52.3 million in the prior year. For the current year, the Company opened 11 new stores, including a reopened hurricane-damaged store, and relocated 12 stores, as compared to 28 stores opened and 8 stores relocated in the prior year. As noted above, the Company received construction allowances from landlords of $2.0 million in the current year to fund a portion of the capital expenditures related to store leasehold improvements in new and relocated stores, while $9.2 million was received from landlords in the prior year. These funds have been recorded as a deferred rent credit in the balance sheet and will be recorded as an offset to rent expense over the lease term commencing with the date the allowances were earned.

While there can be no assurances, management believes that there should be sufficient liquidity to cover both the Company's short-term and long-term funding needs.

Recent Accounting Standards

Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of the Company's Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.