General
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 27, 2008. The following discussion and analysis also contains certain historical and forward-looking information. The forward-looking statements included herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"). All statements, other than statements of historical facts, which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as estimated results of operations in future periods, future capital expenditures (including their amount and nature), business strategy, expansion and growth of our business operations and other such matters are forward-looking statements. These forward-looking statements may be affected by certain risks and uncertainties, any one, or a combination of which could materially affect the results of our operations. To take advantage of the safe harbor provided by the Act, we are identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable weather, excessive precipitation, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of severe weather conditions is somewhat mitigated by the geographic dispersion of our stores.
We experience our highest inventory and accounts payable balances during our first fiscal quarter each year for purchases of seasonal products in anticipation of the spring selling season and again during our third fiscal quarter in anticipation of the winter selling season.
As with any business, many aspects of our operations are subject to influences outside our control. These factors include general economic conditions affecting consumer spending, the timing and acceptance of new products in the stores, the mix of goods sold, purchase price volatility (including inflationary and deflationary pressures), the ability to increase sales at existing stores, the ability to manage growth and identify suitable locations and negotiate favorable lease agreements on new and relocated stores, the availability of favorable credit sources, capital market conditions in general, failure to open new stores in the manner currently contemplated, the impact of new stores on our business, competition, weather conditions, the seasonal nature of our business, effective merchandising initiatives and marketing emphasis, the ability to retain vendors, reliance on foreign suppliers, the ability to attract, train and retain qualified employees, product liability and other claims, potential legal proceedings, management of our information systems, effective tax rate changes and results of examination by taxing authorities, and the ability to maintain an effective system of internal control over financial reporting. We discuss in greater detail risk factors relating to our business in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 27, 2008. Forward-looking statements are based on our knowledge of our business and the environment in which we operate, but because of the factors listed above or other factors, actual results could differ materially from those reflected by any forward-looking statements. Consequently, all of the forward-looking statements made are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business and operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Results of Operations
Fiscal Three Months (Third Quarter) and Nine Months Ended September 26, 2009 and September 27, 2008
Net sales increased 1.9% to $747.7 million for the third quarter of 2009 from $733.9 million for the third quarter of 2008. Net sales increased 6.2% to $2.34 billion for the first nine months of fiscal 2009 from $2.21 billion for the first nine months of fiscal 2008. The net sales increase for the third quarter resulted primarily from the addition of new stores partially offset by a same-store sales decline of 5.1%. The net sales increase for the first nine months of fiscal 2009 was primarily the result of new store openings partially offset by a 1.7% decrease in same-store sales. Our third quarter same-store sales decline resulted primarily from softness in sales of seasonal big-ticket items and difficult comparisons due to strong sales of hurricane-related merchandise and seasonal heating products in the prior year's quarter. The decline was partially offset by continued strong sales in core consumable categories, including animal and pet-related products, as well as repair and replacement parts.
We opened 17 new stores and relocated one store during the third quarter of 2009 compared to 20 new store openings and no relocations or closures during the prior year's third quarter. During the first nine months of 2009, we opened 58 new stores, relocated two stores and closed one store compared to 70 new store openings and no relocations or closures during the first nine months of 2008. We operated 912 stores at September 26, 2009 compared to 834 stores at September 27, 2008.
The following chart indicates the average percentage of sales represented by each of our major product categories during the third quarter and first nine months of fiscal 2009 and 2008:

                                                Three months ended                          Nine months ended
                                        September 26,         September 27,        September 26,         September 27,
                                            2009                  2008                 2009                  2008
Product Category:
Livestock and Pet                                   41 %                  37 %                 40 %                  37 %
Seasonal Products                                   21                    23                   23                    25
Hardware and Tools                                  15                    16                   14                    14
Clothing and Footwear                                7                     7                    7                     7
Truck, Trailer and Towing                            9                     9                    9                     9
Agricultural                                         7                     8                    7                     8

Total                                              100 %                 100 %                100 %                 100 %

Gross margin for the third quarter and the first nine months of fiscal 2009 was $246.0 million and $749.3 million, respectively. This represents an increase of 12.8% and 12.3%, respectively, over the comparable periods of the prior year. Gross margin, as a percent of sales, was 32.9% for the third quarter of fiscal 2009 compared to 29.8% for the comparable period in fiscal 2008. The improvement in gross margin rate for the quarter resulted from a decrease in the LIFO provision, reduced transportation costs and effective markdown management. The decrease in the LIFO charge of $8.7 million for the quarter is attributed to deflation or lower inflation in certain product categories and changes in product mix. The LIFO provision is dependent upon a combination of expected year-end inventory levels and mix, as well as the expected year-end inflation rate for the various product categories. We continue to project a LIFO charge for the full year, despite various cost reductions in certain product categories, because we anticipate an increase in certain key products with higher inflation indices. The increase is driven by our store base expansion and a commitment to better in-stocks on key items. As a result, we are adding merchandise that has higher inflation indices than the existing Company averages, and this creates a LIFO provision even as inflation moderates and inventory per store declines.
The reduced transportation costs resulted primarily from lower fuel costs and to a lesser extent improved transportation efficiencies. The improved markdown management results from our continued inventory reduction initiative through efforts to clear seasonal product and certain merchandise that will not be carried into future periods. For the first nine months of fiscal 2009, the gross margin rate was 32.0% compared to 30.2% for the first nine months of 2008, largely due to the same reasons.

Costs incurred at our distribution centers for receiving, warehousing and preparing product for delivery are expensed as incurred and are included in selling, general and administrative expenses in the Consolidated Statements of Income. Because the Company does not include these costs in cost of sales, the Company's gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Distribution center costs were approximately $14.8 million and $13.4 million for the third quarter of fiscal 2009 and 2008, respectively, and they were approximately $43.7 million and $39.6 million for the first nine months of fiscal 2009 and 2008, respectively. Selling, general and administrative ("SG&A") expenses increased 180 basis points to 25.9% of sales in the third quarter of fiscal 2009 from 24.1% of sales in the third quarter of fiscal 2008. This third quarter increase as a percent of sales was primarily attributable to the deleveraging related to the same-store sales decrease and, to a lesser extent, an increase in our sales tax audit expense as several states have initiated sales tax audits and an increase in incentive compensation expense related to the Company's favorable results in the current year. SG&A expenses for the first nine months of fiscal 2009 increased 60 basis points to 24.5% of sales from 23.9% in the first nine months of fiscal 2008, primarily due to less sales leverage and increased incentive compensation expense.
Depreciation and amortization expense increased 10 basis points to 2.2% of sales in the third quarter of fiscal 2009 from 2.1% in the third quarter of fiscal 2008. As a percent of sales, depreciation and amortization expense increased 10 basis points to 2.1% in the first nine months of fiscal 2009 from 2.0% in the first nine months of fiscal 2008. The increases were related directly to new store growth and capital costs for infrastructure and technology.
Interest expense increased 10 basis points to 0.1% of sales in the third quarter of 2009 from 0.0% in the third quarter of fiscal 2008. For the first nine months of fiscal 2009, interest expense decreased to $1.1 million compared to $1.7 million for the comparable period in fiscal 2008. The year-to-date improvement is primarily due to a lower average outstanding balance on our credit facility, and a lower weighted-average interest rate.
Our effective income tax rate decreased to 37.8% in the third quarter and first nine months of fiscal 2009 compared with 39.3% and 38.8% for the third quarter and the first nine months of fiscal 2008, respectively, largely due to certain federal tax credits and the estimated favorable impact of other permanent tax differences on the revised full year taxable income.
As a result of the foregoing factors, net income for the third quarter of fiscal 2009 increased 38.5% to $22.0 million compared to $15.9 million in the third quarter of fiscal 2008. Net income for the first nine months of fiscal 2009 increased 34.9% to $77.2 million from $57.2 million in the first nine months of the prior year. Net income, as a percent of sales, increased 70 basis points to 2.9% for the third quarter of fiscal 2009 compared to 2.2% in the third quarter of fiscal 2008. For the first nine months of fiscal 2009, net income as a percent of sales increased 70 basis points to 3.3%, compared to 2.6% for the first nine months of fiscal 2008. Net income per diluted share for the third quarter of fiscal 2009 increased to $0.60 from $0.43 and, for the first nine months of fiscal 2009, increased to $2.11 from $1.52. Outstanding shares were reduced as a result of repurchases under our share repurchase program. Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for store expansion and remodeling programs, including inventory purchases and technology upgrades. Our primary ongoing sources of liquidity are funds provided from operations, commitments available under our revolving credit agreement and normal trade credit.

At September 26, 2009, we had working capital of $374.0 million, which was a $90.8 million increase and an $86.5 million increase compared to December 27, 2008 and September 27, 2008, respectively. The shifts in working capital were primarily attributable to changes in the following components of current assets and current liabilities (in millions):

                             September 26,       December 27,                        September 27,
                                 2009                2008            Variance            2008             Variance
Current assets:
Cash and cash
equivalents                 $          94.9      $        37.0      $     57.9      $          16.4      $     78.5
Inventories                           704.0              603.4           100.6                703.1             0.9
Prepaid expenses and
other current assets                   40.4               41.9            (1.5 )               40.7            (0.3 )
Deferred income taxes                  11.4                1.7             9.7                  2.9             8.5

                                      850.7              684.0           166.7                763.1            87.6

Current liabilities:
Accounts payable                      356.8              286.8            70.0                366.1            (9.3 )
Other accrued expenses                119.5              113.5             6.0                108.0            11.5
Current portion of
capital lease obligation                0.4                0.5            (0.1 )                0.5            (0.1 )
Income tax currently
payable                                   -                  -               -                  1.0            (1.0 )

                                      476.7              400.8            75.9                475.6             1.1

Working capital             $         374.0      $       283.2      $     90.8      $         287.5      $     86.5

The increase in inventories since year-end resulted primarily from normal seasonal purchases as well as the purchase of additional inventory for new stores. These increases were offset by a decrease in average inventory per store due to planned initiatives to reduce inventory levels coupled with more aggressive clearance efforts. The increase in accounts payable resulted from the increase in inventories.
Operations provided net cash of $111.0 million and $143.9 million in the first nine months of fiscal 2009 and fiscal 2008, respectively. The $32.9 million decrease in net cash provided in 2009 over 2008 is primarily due to changes in the following operating activities (in millions):

                                                                   Nine months ended
                                                   September 26,        September 27,
                                                       2009                 2008             Variance
Net income                                        $          77.2      $          57.2      $     20.0
Depreciation and amortization                                48.8                 44.7             4.1
Inventories and accounts payable                            (30.6 )               40.7           (71.3 )
Stock compensation expense                                    9.2                  9.2               -
Prepaid expenses and other current assets                     3.0                  1.7             1.3
Other accrued expenses                                        6.0                 (7.6 )          13.6
Income taxes currently payable                               (1.6 )               (4.1 )           2.5
Other, net                                                   (1.0 )                2.1            (3.1 )

Net cash provided by operations                   $         111.0      $         143.9      $    (32.9 )

Cash flows from operating activities continue to provide the primary source of our liquidity. The decrease in net cash provided by operations in the first nine months of fiscal 2009 compared with the first nine months of fiscal 2008 was primarily due to changes in inventory levels and timing of payments. As a result of the same store sales decrease in the third quarter the inventory turns declined from the prior year period. Slower inventory turns combined with more timely payments on accounts payable to capture payment discounts have resulted in a decline in financed inventory from 48.4% to 44.9%, resulting in a lower accounts payable increase relative to inventory. (The calculated financed inventory assumes FIFO inventory, excludes inventory in-transit, and includes gross book overdrafts in accounts payable.) This decrease was partially offset by the strong net income performance in 2009 and an increase in accrued expenses related to incentive compensation.
Investing activities used $49.4 million and $68.6 million in the first nine months of fiscal 2009 and fiscal 2008, respectively. The majority of this cash requirement relates to our capital expenditures.

Capital expenditures for the first nine months of fiscal 2009 and fiscal 2008 were as follows (in millions):

                                                                       Nine months ended
                                                              September 26,         September 27,
                                                                  2009                  2008
New/relocated stores and stores not yet opened               $          26.5       $          30.3
Information technology                                                  11.4                   9.9
Existing stores                                                         10.0                   7.6
Distribution center capacity and improvements                            1.3                  12.4
Other                                                                    0.2                   0.1
Existing store properties acquired from lessor                             -                   8.5

                                                             $          49.4       $          68.8

The above table reflects 58 new stores in the first nine months of fiscal 2009, compared to 70 new stores during the first nine months of fiscal 2008. Financing activities used $3.8 million and $72.1 million in the first nine months of fiscal 2009 and fiscal 2008, respectively. This decrease in net cash used is largely due to more repayments than borrowings under the Senior Credit Facility in the prior year and less repurchases of common stock under our share repurchase program.
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group, which provides for borrowings up to $350 million (with sublimits of $75 million and $20 million for letters of credit and swingline loans, respectively). The Credit Agreement has an Increase Option for $150 million (subject to additional lender group commitments). We had approximately $323.8 million available for future borrowings, net of outstanding letters of credit, under our Credit Agreement at September 26, 2009. The Credit Agreement is unsecured and matures in February 2012, with proceeds expected to be used for working capital, capital expenditures and share repurchases. Borrowings bear interest at either the bank's base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at September 26, 2009 and September 27, 2008). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for unused capacity (0.10% at September 26, 2009 and September 27, 2008). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios.
The Credit Agreement requires quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio principally compares earnings before interest, taxes, depreciation, amortization, stock compensation and rent expense ("consolidated EBITDAR") to the sum of interest paid and rental expense (excluding straight-line rent). The leverage ratio principally compares total debt plus rental expense (excluding straight-line rent) multiplied by a factor of six to consolidated EBITDAR. The Credit Agreement also contains certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and sales of assets, transactions with subsidiaries or affiliates, and liens. We were in compliance with all covenants at September 26, 2009.
We believe that our existing cash balances, expected cash flow from future operations, borrowings available under our Credit Agreement, and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including store openings and renovations, over the next several years. Share Repurchase Program
We have a Board-approved share repurchase program which provides for repurchase of up to $400 million of common stock, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 2011. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares will be held in treasury. The program may be limited or terminated at any time without prior notice.

We repurchased 19,407 and 464,812 shares under the share repurchase program during the third quarter of 2009 and 2008, respectively. The total cost of the share repurchases was $0.9 million and $14.7 million during the third quarter of 2009 and 2008, respectively. We repurchased 321,030 and 1,280,205 shares under the share repurchase program during the first nine months of 2009 and 2008, respectively. The total cost of the share repurchases was $10.8 million and $42.5 million during the first nine months of 2009 and 2008, respectively. As of September 26, 2009, we had remaining authorization under the share repurchase program of $185.5 million exclusive of any fees, commissions, or other expenses. Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. Leasing buildings and equipment for retail stores and offices rather than acquiring these significant assets allows us to utilize financial capital to operate the business rather than maintain assets. Letters of credit allow us to purchase inventory in a timely manner. Significant Contractual Obligations and Commercial Commitments We had commitments for new store construction projects totaling approximately $0.7 million at September 26, 2009. There has been no material change in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2008. Significant Accounting Policies and Estimates Our discussion and analysis of our financial position 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. The preparation of these financial statements requires us to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant accounting policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas:
• Revenue recognition and sales returns

• Inventory valuation (including LIFO)

• Share-based payments

• Self-insurance reserves

• Sales tax audit reserve

• Tax contingencies

• Goodwill

• Long-lived assets

See the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 27, 2008 for a discussion of our critical accounting policies. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in interest rates primarily from the Credit Agreement. The Credit Agreement bears interest at either the bank's base rate (2.35% and 5.00% at September 26, 2009 and September 27, 2008, respectively) or LIBOR
(0.25% and 3.43% at September 26, 2009 and September 27, 2008, respectively)
plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly, based on our performance (0.50% at September 26, 2009 and September 27, 2008). We are also required to pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% based on the daily average unused portion of the Credit Agreement (0.10% at September 26, 2009 and September 27, 2008). See Note 9 of the Notes to the Consolidated Financial Statements included herein for further discussion regarding the Credit Agreement.

Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, steel, grain, petroleum, corn, soybean and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressure on product cost, which may impact consumer demand and, as a result, sales and gross margin. Our strategy is to reduce or mitigate the effects of purchase price volatility . . .