The following discussion should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Introduction

We operated 850 discount retail stores in 43 states as of September 30, 2009. We sell closeout home furnishings, housewares, gifts and related items, which we purchase at below wholesale prices. Our stores operate during periodic "sales events" that occur in each month except January and July. We are generally closed for the first two weeks of January and July, which traditionally have been weaker months for retailers. We purchase first quality, brand name merchandise at closeout prices and sell it at prices significantly below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars, refurbished or factory rejects.

Business Overview

The retail home furnishings industry has been negatively impacted by increased supply and 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.

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, continuing to review the individual contributions of the existing store base and making decisions about the future of individual store locations including whether to close or relocate them, seeking to improve overall supply chain efficiency including reviewing operational practices such as freight costs, vendor payment terms, distribution processes and increasing inventory turns, and striving to optimize our marketing plan by maximizing traffic, increasing comparable store sales and expanding the current customer base, while also increasing cost efficiency. We are also striving to optimize our purchasing of inventory to best match customer demand.

We also continue to closely monitor and control our markdowns of inventory to avoid marking down items that continue to sell through at reasonable rates. Markdowns during the first quarter of fiscal 2010 were 3.2% of sales versus 4.3% of sales for the same period last year. We believe this strategy has and will contribute to overall margin by focusing our markdowns on inventory that is truly slow moving and not marking down items on the basis of age in inventory alone thereby allowing us to continue to exclude markdowns on opportunistic buys which are too large for us to sell through in one year. However, if our forecasts for the holiday season are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at September 30, 2009 would result in a decline in gross profit and diluted earnings per share for the first quarter of fiscal 2009 of $1.4 million and $0.03, respectively. Under current economic conditions, forecasts can vary significantly from the actual results we may encounter.

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.

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 and unemployment, 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 with respect to our future earnings.

Net sales for the first quarter of fiscal 2010 were approximately $165.9 million, a decrease of 4.3% compared to the same period last year. Comparable store sales for the quarter ended September 30, 2009, decreased by 5.8% compared to the same period last year which was primarily due to a decline in customer traffic and a decrease in average ticket. Comparable store sales have decreased for this and the prior eight quarters. Net loss for the quarter was $4.7 million and loss per share was $0.11.

We continue to remain focused on our long-term growth and profitability. The home furnishings and high end decorative sectors of the U.S. economy continue to be challenged by the highly competitive promotional environment and weakness in the housing and debt markets.

We opened ten new stores and closed seventeen existing stores during the first quarter of fiscal 2010. In addition, we relocated nine existing stores.

Results of Operations

The following table sets forth certain financial information from our consolidated statements of operations expressed as a percentage of net sales. Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31, which includes the holiday season. There can be no assurance that the trends in sales or operating results will continue in the future.

                                                   Three Months Ended
                                                      September 30,
                                                    2009         2008
Net sales                                            100.0 %      100.0 %
Cost of sales                                         61.8         63.0
Gross profit                                          38.2         37.0
Selling, general and administrative expense           42.4         40.9
Operating loss                                        (4.2 )       (3.9 )
Net interest expense and other income (expense)       (0.4 )       (0.2 )
Loss before income taxes                              (4.6 )       (4.1 )
Income tax benefit                                    (1.8 )       (1.6 )
Net loss                                              (2.8 )%      (2.5 )%

Three Months Ended September 30, 2009

Compared to the Three Months Ended September 30, 2008

During the first quarter of fiscal 2010, net sales decreased to $165.9 million from $173.4 million, a decrease of $7.5 million, or 4.3%, compared to the quarter ended September 30, 2008. The decrease in first quarter sales was primarily due to a 5.8% decrease in comparable store sales, partially offset by an increase of $1.9 million in new store sales. The decrease in comparable sales for the first quarter of fiscal 2010 was comprised of a 1.7% decrease in the average number of transactions and a 4.1% decrease in average transaction amount. Average store sales for the first quarter of fiscal 2010 decreased 5.1% compared to the same period last year. Comparable store sales and sales per store decreased primarily due to lower average transaction amounts. Management believes average transaction amounts were lower due to a number of factors, including an increase in the supply of home furnishing products, the highly competitive promotional environment of the home furnishings retail sector, decreased discretionary income of consumers due to the current economic downturn and continued weakness in the housing market.

Gross profit decreased $0.8 million, or 1.2%, to $63.4 million for the three months ended September 30, 2009 as compared to $64.2 million for the same quarter last year. This decline was primarily the result of lower sales volume. Our gross profit percentage increased from 37.0% for the first quarter of fiscal 2009 to 38.2% for the first quarter of fiscal 2010. This increase of 1.2 % in gross profit percentage was primarily due to a 1.1% decrease in markdowns as a percentage of sales, primarily due to improved sell-through rates of aged inventory as well as a decrease in freight expenses due to a decline in fuel surcharges.

Selling, general and administrative expenses decreased $0.6 million, or 0.8%, to $70.3 million in the first quarter of fiscal 2010 from $70.9 million in the same quarter last year. The decrease was primarily attributable to a decrease in advertising of $1.0 million. As a percentage of net sales, these expenses increased 1.5% to 42.4% in the first quarter of fiscal 2010 from 40.9% in the same quarter last year which was primarily due to a decrease in our average store sales. Selling, general and administrative expenses per average store were $82,000 this quarter compared to $84,000 in the same quarter last year, a decrease of 1.7%.

The income tax benefit for the quarter ended September 30, 2009 was $3.0 million versus $2.8 million for the same period last year. The effective tax rate for the quarters ended September 30, 2009 and 2008 was 39.5% and 39.4%, respectively.

Liquidity and Capital Resources

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our cash flows will continue to be utilized for the expansion of our business. Our borrowings have historically peaked in the quarter ended September 30 as we build inventory levels prior to the holiday selling season. However, our borrowings were lower during the quarter ended September 30, 2009 compared to the same quarter in prior years due to a reduction in our inventory levels to match current customer demand. Given the seasonality of our business, the amount of borrowings under our revolving credit facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory. We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

Net cash used in operating activities for the three months ended September 30, 2009 and 2008 was $5.9 million and $24.4 million, respectively, representing a $18.5 million decrease. The $5.9 million use of cash in the first quarter of fiscal 2010 was primarily due to an increase in our inventories of $57.2 million offset by an increase in our accounts payable of $51.0 million. The increases were primarily due to inventory purchases during the first quarter of fiscal 2010 in preparation for the upcoming holiday season. Our overall purchases for the first fiscal quarter of 2010 were slightly less than the same period last year. There has been no material change in our payment policy to vendors.

Capital expenditures principally associated with new store openings or enhancements and warehouse and office equipment were $3.8 million and $3.6 million for the three months ended September 30, 2009 and 2008, respectively. The increase in capital expenditures was primarily related to systems improvements, distribution center equipment and store fixtures. We expect to spend approximately $17.1 million for additional capital expenditures during the remainder of fiscal 2010, which will include the opening of new stores, store expansions, relocations of existing stores, enhancements of selected stores and purchases of equipment for our distribution center and corporate office.

Net cash provided by financing activities of $9.4 million for the three months ended September 30, 2009 is primarily from borrowings under our revolving credit facility of $34.0 million net of repayments of $29.0 million.

On December 15, 2008, we entered into a new credit agreement providing for an asset-based, five-year senior secured revolving credit facility (the "Revolving Credit Facility") in the amount of up to $150.0 million which matures on December 15, 2013 and on January 28, 2009, we entered into an amendment to increase the amount from $150.0 million to $180.0 million. The revolving credit facility may be increased by up to $70.0 million, not to exceed an aggregate total commitment of $250.0 million. Our indebtedness under the credit facility is secured by a lien on substantially all of our assets. The revolving credit facility contains, among other things, a "clean down" provision requiring that the sum of the aggregate principal amount of the outstanding loans and undrawn letters of credit may not exceed $45.0 million for 30 consecutive days during the period from December 28 through January 31. The revolving credit facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, sell assets or merge or consolidate with any other entity. Unless borrowings and letters of credit exceed 82.5% of the maximum amounts available under the revolving credit facility or an event of default exists, the Company does not have to comply with any financial covenants. Should such an event occur, the Company is required to comply with a consolidated fixed charge coverage ratio of 1:1. As of September 30, 2009, we were in compliance with all required covenants.

At September 30, 2009, we had $5.3 million outstanding under the revolving credit facility, $12.4 million of outstanding letters of credit and availability of $130.9 under the revolving credit facility. Letters of credit under the revolving credit facility are primarily for self-insurance purposes. We incur commitment fees of up to 0.75% on the unused portion of the revolving credit facility. Any borrowing under the revolving credit facility incurs interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. These rates are increased or reduced as our average daily availability changes. The weighted average interest rate for prime rate loans at September 30, 2009 was 6.0%. There were no LIBOR loans during the quarter ended September 30, 2009.

Store Openings/Closings



                                     Three Months    Three Months    Fiscal Year
                                         Ended           Ended          Ended
                                     September 30,   September 30,    June 30,
                                         2009            2008           2009

Stores open at beginning of period             857             842           842
Stores opened during the period                 10              12            35
Stores closed during the period                (17 )            (3 )         (20 )
Stores open at end of period                   850             851           857

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB ASC 260-10-45 (formerly Emerging Issues Task Force 03-6-1) "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities." ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two class method described in paragraphs 60 and 61 of FASB Statement No. 128, "Earnings per Share." ASC 260-10-45 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company adopted the provisions of ASC 260-10-45 on its consolidated financial statements effective July 1, 2009 with no material impact to the financial statements.

In June 2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), "Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles." The FASB Accounting Standards Codification ("Codification") has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be the source of authoritative generally accepted accounting principles for SEC registrants. Effective September 30, 2009, all references made to GAAP in our consolidated financial statements will include the new Codification numbering system along with original references. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on our financial position, results of operations or cash flows.