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

For purposes of the following discussion, references to the "first quarter of 2012" and the "first quarter of 2011" are to the thirteen-week periods ended April 28, 2012 and April 30, 2011, respectively. References to "2012" are to the fifty-three week period ending February 2, 2013; references to "2011" are to the fifty-two week period ended January 28, 2012. References to "the Company," "we," "us," and "our" refer to The Bon-Ton Stores, Inc. and its subsidiaries.

Overview

General

The Company, a Pennsylvania corporation, is 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 272 stores in 23 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner's, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger's and Younkers nameplates and, in the Detroit, Michigan area, under the Parisian nameplate, encompassing a total of approximately 25 million square feet.

We operate in the department store segment of the U.S. retail industry, a highly competitive 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 - and the advent of mobile technology and social media.

First Quarter Summary and 2012 Guidance

Our first quarter performance was disappointing in both top- and bottom-line results. Weak sales, particularly in April, prompted aggressive markdowns, which resulted in the erosion of gross margin in the period. We are taking actions to address our operating performance and are focused on strategies to accelerate sales growth and improve our financial results. Initiatives include the continued refinement of our merchandise assortment, reallocation of selling space to higher growth merchandise categories, renewed focus on our smaller markets, enhancements to our marketing programs, growth in sales and profitability in our online operations and improved efficiencies in our operating structure. We have enacted reductions in administrative and support functions that are expected to reduce expenses in excess of $30 million on an annualized basis, with estimated cost savings of $20 million in 2012.

On May 17, 2012, we revised our (loss) earnings per diluted share guidance to a range of $(0.95) to $0.50 and provided the following assumptions with respect to our revised fiscal 2012 guidance:

† a comparable store sales performance ranging from a decrease of 1.5% to an increase of 1%;

† a gross margin rate ranging from even with to 50 basis points higher than the 2011 rate of 36.0%;

† a $7 million to $12 million increase in SG&A expense from the 2011 expense of $936.1 million (including the expense reductions noted above, related severance costs and the addition of the 53rd week in 2012);

†          a tax rate of 39%;

†          capital expenditures not to exceed $70 million, net of external
contributions; and

†          an estimated 19 million to 20 million average diluted shares
outstanding.

We are finding cost pressures on our inventory have moderated since their peak in 2011. In our private brands, where we have greater control over the production and manufacturing of merchandise, we will continue to diversify production to lower cost markets. We expect slight cost reductions on our second

quarter deliveries, and we anticipate cost decreases of approximately five to ten percent in fall 2012 from fall 2011.

Earnings per share guidance does not reflect any (non-cash) income tax benefit of reducing the valuation allowance currently recorded for deferred tax assets. The amount of such adjustment, if any, cannot be determined until our 2012 results are final.

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
                                               WEEKS ENDED
                                          April 28,    April 30,
                                            2012         2011
Net sales                                     100.0 %      100.0 %
Other income                                    2.1          2.2
                                              102.1        102.2
Costs and expenses:
Costs of merchandise sold                      65.7         64.5
Selling, general and administrative            35.6         34.2
Depreciation and amortization                   3.5          3.8
Amortization of lease-related interests         0.2          0.2
Loss from operations                           (2.9 )       (0.4 )
Interest expense, net                           3.2          3.6
Loss on extinguishment of debt                  0.2          1.5
Loss before income taxes                       (6.3 )       (5.4 )
Income tax provision                            0.1          0.1
Net loss                                       (6.4 )%      (5.5 )%

First Quarter of 2012 Compared with First Quarter of 2011

Net sales: Net sales in the first quarter of 2012 were $640.8 million, a decrease of $9.1 million or 1.4% as compared with $649.9 million of net sales in the first quarter of 2011. Comparable store net sales decreased 1.3% in the period as we were unable to sustain our initial momentum from warmer than normal temperatures early in the quarter that aided sales. Additionally, while a major promotional event, which had been shifted to the end of April this year from February last year, exceeded the prior year's results, we believe poor execution of promotional campaigns earlier in April suppressed sales until the event, hampering sales for the month. Investments in our eCommerce business resulted in significantly higher eCommerce sales in the period.

The best performing merchandise categories in the first quarter of 2012 were Footwear, Hard Home (included in Home) and Cosmetics. Footwear sales benefited from continued strategic capital investment for expansion and remodels in certain stores; we will similarly employ capital in additional stores in 2012 and have identified other locations at which the footwear assortment will be expanded. Hard Home achieved success in sales of small electronics and basic housewares. Cosmetics sales increases were driven by strength in women's and men's fragrances and treatment lines.

Moderate Sportswear and the special-size areas of Petites and Women's (all included in Women's Apparel) performed poorly in the first quarter of 2012 as sales in these merchandise categories were adversely impacted by reduced levels of inventory in traditional product. We had focused our efforts in 2011 on developing a stronger updated business and, while the updated categories are performing well, our results suggest a more balanced mix of traditional and updated goods is optimal. We have responded with an aggressive pursuit of traditional product, including opening price points, to recapture sales and we believe new receipts at month-end April and second quarter deliveries will strengthen our inventory position in these merchandise categories.

Other income: Other income, which includes income from revenues received under our credit card program agreement, leased departments and other customer revenues, was $13.5 million, or 2.1% of net sales, in the first quarter of 2012 as compared with $14.6 million, or 2.2% of net sales, in the first quarter of 2011. The decrease primarily reflects reduced revenues from our proprietary credit card operations.

Costs and expenses: Gross margin in the first quarter of 2012 was $219.6 million as compared with $230.6 million in the comparable prior year period. The $11.1 million decrease reflects both reductions in sales volume and gross margin rate. Gross margin as a percentage of net sales decreased 120 basis points to 34.3% in the first quarter of 2012 from 35.5% in the same period last year. The decrease is largely due to increased net markdowns in response to slow sales in the period.

SG&A expense in the first quarter of 2012 was $228.2 million as compared with $222.0 million in the first quarter of 2011, an increase of $6.2 million. The increase is largely the result of higher store expenses, marketing expenditures, insurance costs, retirement benefits and severance costs related to targeted reductions in administrative and support functions, partially offset by a $3.2 million gain on the sale of two of our stores in Rochester, New York. The current year expense rate increased 150 basis points to 35.6% of net sales, compared with 34.2% in the same period last year.

Depreciation and amortization expense and amortization of lease-related interests decreased $2.3 million, to $23.4 million, in the first quarter of 2012 from $25.7 million in the first quarter of 2011, primarily due to a reduced asset base.

Interest expense, net: Net interest expense was $20.6 million, or 3.2% of net sales, in the first quarter of 2012, compared with $23.3 million, or 3.6% of net sales, in the first quarter of 2011. The $2.7 million decrease primarily reflects reduced borrowing levels and lower borrowing rates.

Loss on extinguishment of debt: In the first quarter of 2012, we recorded a $1.2 million loss on extinguishment of debt related to the prepayment of mortgage debt associated with the sale of two of our stores in Rochester, New York. In the first quarter of 2011, we recorded a $9.5 million loss on extinguishment of debt for fees associated with the voluntary prepayment of our second lien term loan and the amendment of our revolving credit facility.

Income tax provision: The effective income tax rate in the first quarter in each of 2012 and 2011 largely reflects the Company's valuation allowance position against all net deferred tax assets. The income tax provision of $0.5 million and $0.7 million recorded in the first quarter in each of 2012 and 2011, respectively, reflects certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets.

Non-GAAP Financial Measure - EBITDA

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("GAAP"). In addition, the non-GAAP financial performance measure of EBITDA (defined as earnings before interest, income taxes, depreciation and amortization, including amortization of lease-related interests, and loss on extinguishment of debt) is as follows:

                         THIRTEEN
                        WEEKS ENDED
(In thousands)    April 28,     April 30,
(Unaudited)         2012          2011

EBITDA           $     4,841   $    23,175

We consider EBITDA to be an important supplemental measure of our performance. It is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry and by some investors to determine a company's ability to service or incur debt. In addition, our management uses EBITDA internally to compare the profitability of our stores. EBITDA is not calculated in the same manner by all companies and, accordingly, is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA should not be assessed in isolation from or construed as a substitute for net income or cash flows from operations, which are prepared in accordance with GAAP. EBITDA has limitations as an analytical tool and is not intended to represent, and should not be considered to be a more meaningful measure than, or an alternative to, measures of operating performance as determined in accordance with GAAP.

The following table reconciles net loss as presented in our consolidated statements of operations (prepared in accordance with GAAP) to EBITDA:

                                                 THIRTEEN
                                                WEEKS ENDED
(In thousands)                            April 28,    April 30,
(Unaudited)                                  2012         2011

Net loss                                  $  (40,780 ) $  (35,988 )
Adjustments:
Income tax provision                             509          700
Loss on extinguishment of debt                 1,169        9,450
Interest expense, net                         20,573       23,305
Depreciation and amortization                 22,187       24,513
Amortization of lease-related interests        1,183        1,195

EBITDA                                    $    4,841   $   23,175

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 $625.0 million senior secured Second Amended and Restated Loan and Security Agreement (the "Second Amended Revolving Credit Facility") that expires on the earlier of (a) March 21, 2016 and (b) the date that is 60 days prior to the earlier of the maturity date of our senior notes (March 15, 2014) and the mortgage loan facility (March 6, 2016).

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

On April 2, 2012, in connection with the sale of two of our stores located in Rochester, New York, we prepaid outstanding indebtedness of $5.4 million under related mortgage loan agreements. We were required to pay an additional $1.0 million due to the early termination. In addition, $0.1 million of unamortized deferred financing fees related to the mortgage agreements was accelerated on the date of termination. The required additional payment and accelerated deferred financing fees were recognized in loss on extinguishment of debt.

At April 28, 2012, we had $14.3 million in cash and cash equivalents and $400.3 million available under our Second Amended Revolving Credit Facility (before taking into account the minimum borrowing availability covenant under such facility). The excess availability compares well with the $411.3 million available as of the comparable prior year period, particularly in light of our using approximately $27 million of available funds to repurchase $46.0 million principal amount of senior notes in the fourth quarter of 2011. We may from time to time seek to repurchase additional outstanding senior notes through cash purchases in open market transactions, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

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. While the current economic uncertainty affects our assessment of short-term liquidity, and while there can be no assurances, we consider our resources (cash flows from operations supplemented by borrowings under the Second Amended Revolving Credit Facility) adequate to satisfy our cash needs for at least the next 12 months.

Our primary sources of working capital are cash flows from operations and borrowings under our Second Amended Revolving Credit Facility, which provides for up to $625.0 million in borrowings (limited by amounts available pursuant to a borrowing base calculation). Our business follows a seasonal pattern; working capital fluctuates with seasonal variations, reaching its highest level in October or November to fund the purchase of merchandise inventories prior to the holiday season. The seasonality of our business historically provides greatest cash flow from operations during the holiday season, with fiscal fourth quarter net sales generating the strongest profits of our fiscal year. As holiday sales significantly reduce inventory levels, this reduction, combined with net income, historically provides us with strong cash flow from operations at the end of our fiscal year.

Cash provided by (used in) our operating, investing and financing activities is summarized as follows:

                                THIRTEEN
                               WEEKS ENDED
                         April 28,     April 30,
(Dollars in millions)      2012          2011

Operating activities    $     (33.5 ) $     (12.8 )
Investing activities           (6.0 )        (7.8 )
Financing activities           39.5          17.9

Net cash used in operating activities was $33.5 million and $12.8 million in the first quarter in each of 2012 and 2011, respectively. The increase in cash outflow in the current year primarily reflects a decline in

business performance, resulting in an increase in the current year loss. The first quarter of 2012 also reflects increased working capital requirements, primarily due to increased period-end accounts receivable resulting from a major promotional event in the last week of April in the current year (held in February in 2011), partially offset by favorable changes in accrued expenses.

Net cash used in investing activities in the current year primarily reflects capital expenditures for store renovations to support our strategic initiatives and information technology. Capital expenditures totaled $14.3 million and $7.8 million in the first quarter in each of 2012 and 2011, respectively; these expenditures do not reflect reductions for external contributions of $0.2 million in the first quarter of 2012. We anticipate our 2012 capital expenditures will not exceed $72.5 million (which does not reflect external contributions of $2.5 million, reducing budgeted net capital investments to $70.0 million). Cash flows from investing activities in the first quarter of 2012 were also impacted by proceeds of $8.3 million from the sale of property, fixtures and equipment, including proceeds from the sale of the two Rochester, New York stores.

Net cash provided by financing activities was $39.5 million and $17.9 million in the first quarter in each of 2012 and 2011, respectively. The change primarily reflects increased net borrowings due to increased cash requirements for current year operating activities and a decreased book overdraft balance, partially offset by reduced cash needs for investing activities and financing fees.

Aside from planned capital expenditures, the Company's primary cash requirements will be to service debt and finance working capital increases during peak selling seasons.

On May 1, 2012, we paid a quarterly cash dividend of $0.05 per share on shares of Class A common stock and common stock to shareholders of record as of April 13, 2012. Additionally, on May 22, 2012, we declared a quarterly cash dividend of $0.05 per share, payable August 1, 2012 to shareholders of record as of July 13, 2012. Our Board of Directors may consider dividends in subsequent periods as it deems appropriate.

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. Such estimates include those related to merchandise returns, inventories, long-lived assets, intangible assets, insurance reserves, contingencies, litigation and assumptions used in the calculation of income taxes and retirement and other post-employment benefits, among others. 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

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.

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 of goods sold and reduce operating income at the time of such determination. Likewise, if inventory is later determined to be undervalued, we may have overstated the costs of goods sold in previous periods and would recognize additional operating income when such inventory is sold. Therefore, although every effort is made to ensure the accuracy of forecasts of merchandise demand, any significant unanticipated changes in demand or in economic conditions within our markets could have a significant impact on the value of our inventory and reported operating results.

As of January 28, 2012, approximately 32% of our inventories were valued using a first-in, first-out cost basis and approximately 68% of our inventories were valued using a last-in, first-out ("LIFO") cost basis. As is currently the case with many companies in the retail industry, our LIFO calculations yielded inventory increases in recent prior years due to deflation reflected in price indices used. The LIFO method values merchandise sold at the cost of more recent inventory purchases (which the deflationary indices indicated to be lower), resulting in the general inventory on-hand being carried at the older, higher costs. Given these higher values and the promotional retail environment, we have reduced the carrying value of our LIFO inventories to an estimated realizable value. These reductions totaled $37.2 million as of April 28, 2012 and January 28, 2012. Inherent in the valuation of inventories are significant management judgments and estimates regarding future merchandise selling costs and pricing. Should these estimates prove to be inaccurate, we may have overstated or understated our inventory carrying value. In such cases, operating results would ultimately be impacted.

Vendor Allowances

As is standard industry practice, allowances from merchandise vendors are received as reimbursement for charges incurred on marked-down merchandise. Vendor allowances are recorded when determined to be collectable. Allowances are credited to costs of goods sold, provided the allowance is: (1) for merchandise permanently marked down or sold, (2) not predicated on a future purchase, and (3) not predicated on a future increase in the purchase price from the vendor. If the aforementioned criteria are not met, the allowances are recorded as an adjustment to the cost of merchandise capitalized in inventory and reflected as a reduction of costs of merchandise sold when the related merchandise is sold.

Additionally, allowances are received from vendors in connection with cooperative advertising programs and for reimbursement of certain payroll expenses. To the extent the reimbursements are for specific, incremental and identifiable advertising or payroll costs incurred to sell the vendor's products and do not exceed the costs incurred, they are recognized as a reduction of SG&A expense. If the aforementioned criteria are not met, the allowances are . . .