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 31, 2011. 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, the declaration and payment of dividends, 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.

As with any business, many aspects of our operations are subject to influences outside our control. These factors include, without limitation, 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, the ability to manage expenses, the availability of favorable credit sources, capital market conditions in general, failure to open new stores in the manner and number 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, changes in federal, state or local regulations, potential judgments, fines, legal fees and other costs, breach of privacy, ongoing and potential future legal or regulatory proceedings, management of our information systems, failure to secure or develop and implement new technologies, the failure of customer-facing technology systems, business disruption including from the implementation of supply chain technologies, effective tax rate changes and results of examination by taxing authorities, the ability to maintain an effective system of internal control over financial reporting and changes in accounting standards, assumptions and estimates. 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 31, 2011. 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 (Second Quarter) Ended June 30, 2012 and June 25, 2011 Net sales increased 9.6% to $1.29 billion for the second quarter of fiscal 2012 from $1.18 billion for the second quarter of fiscal 2011. Same-store sales for the second quarter of fiscal 2012 were $1.21 billion, a 3.2% increase over the second quarter of fiscal 2011. This compares to a 4.6% same-store sales increase for the second quarter of fiscal 2011. The same-store sales increase was driven primarily by continued strong results in key consumable, usable and edible ("C.U.E.") products, principally animal- and pet-related merchandise. Inflation, principally in C.U.E. products, contributed approximately 275 basis points to the same-store sales increase. In addition to these factors, total net sales benefited from new store growth.

Each quarter of fiscal 2012 starts one week later than the same quarter of fiscal 2011 due to the Company's 2011 fiscal year having 53 weeks versus the normal 52 weeks. Adjusting for the one-week calendar shift, same-store sales for the second quarter of 2011 increased 7.1%.

Store growth was approximately 8.8%, a net increase of 92 stores since June 25, 2011. Non-comp sales (defined as stores opened less than one year) for the second quarter of fiscal 2012 were $77.4 million, a 6.6% increase over total second quarter fiscal 2011 net sales. Non-comp sales for the second quarter of fiscal 2011 were $63.8 million, a 6.0% increase over total second quarter fiscal 2010 net sales.

In the second quarter of fiscal 2012, we opened 18 new stores (compared to 16 new stores in the second quarter of fiscal 2011). We operated 1,135 stores at June 30, 2012 compared to 1,043 stores at June 25, 2011.

The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal three months ended June 30, 2012 and June 25, 2011:

                                 Fiscal three months ended
                                  June 30,        June 25,
                                    2012            2011
Product Category:
Livestock and Pet                   40%             38%
Seasonal, Gift and Toy Products      25              26
Hardware, Tools and Truck            22              23
Agriculture                          8               8
Clothing and Footwear                5               5
Total                               100%            100%

Gross margin dollars increased 12.2% to $451.5 million for the second quarter of fiscal 2012 from $402.5 million in the second quarter of fiscal 2011. As a percent of sales, gross margin increased 80 basis points to 34.9% for the second quarter of fiscal 2012 compared to 34.1% for the comparable period in fiscal 2011. The increase in gross margin as a percent of sales was primarily driven by the favorable impact of a lower percent of sales mix of low margin, big ticket seasonal and emergency response products. In addition, direct product margin increased as a result of continued efforts in our key margin-driving initiatives of inventory management, strategic sourcing, private branding and pricing.

As a percent of sales, selling, general and administrative ("SG&A") expenses, including depreciation and amortization, improved 10 basis points to 21.8% in the second quarter of fiscal 2012 from 21.9% in the second quarter of fiscal 2011. The SG&A improvement as a percent of sales for the second quarter of fiscal 2012 was primarily attributable to expense control with respect to store personnel and other operating costs. Total SG&A expenses increased 9.1% to $281.6 million from $258.2 million in the second quarter of fiscal 2011. The increase in SG&A expense primarily reflects new store growth, variable costs associated with our same store sales growth, and operating costs relating to the new Franklin, Kentucky distribution center, which became operational in the fourth quarter of fiscal 2011.

Our effective income tax rate increased to 37.2% in the second quarter of 2012 compared to 36.7% for the second quarter of 2011. The increase in the tax rate was largely due to a change in tax laws resulting in lower federal tax credits as well as a reduction of the benefit from other permanent tax differences as a result of a higher base of pretax income in the current fiscal year. The Company expects the full year effective tax rate will be approximately 37.0%.

As a result of the foregoing factors, net income for the second quarter of fiscal 2012 increased 17.0% to $106.6 million compared to $91.2 million in the second quarter of fiscal 2011. Net income per diluted share for the second quarter of fiscal 2012 increased to $1.45 from $1.23 in the second quarter of fiscal 2011.

Fiscal Six Months Ended June 30, 2012 and June 25, 2011 Net sales increased 14.8% to $2.31 billion for the first six months of fiscal 2012 from $2.01 billion for the first six months of fiscal 2011. Same-store sales for the first six months of fiscal 2012 were $2.18 billion, a 6.7% increase over the first six months of fiscal 2011. This compares to a 7.0% same-store sales increase for the first six months of fiscal 2011. The same-store sales increase was broad-based across all major product categories. Inflation, principally in C.U.E. categories also contributed approximately 340 basis points to the same-store sales increase. In addition to these factors, total net sales benefited from new store growth.

Each quarter of fiscal 2012 starts one week later than the same quarter of fiscal 2011 due to the Company's 2011 fiscal year having 53 weeks versus the normal 52 weeks. Adjusting for the one-week calendar shift, same-store sales for the first six months of fiscal 2011 increased 7.3%. Same-store sales for the first two quarters and fiscal six months of 2011, adjusted for the one-week calendar shift, are presented in the table below:

                                                           FISCAL 2011
                                                                             First
                                                First         Second          Six
                                               Quarter        Quarter       Months

Same-store sales increase (originally
reported)                                       10.7%          4.6%          7.0%
Same-store sales increase (adjusted for week
shift)(1)                                       7.6%           7.1%          7.3%
Impact of week shift                           (3.1)%          2.5%          0.3%

(1) Due to the 53-week fiscal 2011, each quarter of fiscal 2012 starts one week later than the same quarter of fiscal 2011. The chart above presents same-store sales for 2011 as originally reported and as adjusted to represent the same 13-week period as the 2012 fiscal quarters. The adjusted 13-week periods end on April 2, 2011 and July 2, 2011, respectively.

Store growth was approximately 8.8%, a net increase of 92 stores since June 25, 2011. Non-comp sales for the first six months of fiscal 2012 were $136.3 million, a 6.8% increase over total first six months fiscal 2011 net sales. Non-comp sales for the first six months of fiscal 2011 were $113.5 million, a 6.4% increase over total first six months fiscal 2010 net sales.

During the first six months of fiscal 2012, we opened 51 new stores (compared to 42 new stores in the first six months of fiscal 2011) and closed one store (compared to no closed stores in the first six months of fiscal 2011).

The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal six months ended June 30, 2012 and June 25, 2011:

                                 Fiscal six months ended
                                 June 30,       June 25,
                                   2012           2011
Product Category:
Livestock and Pet                   42%            42%
Seasonal, Gift and Toy Products     22             22
Hardware, Tools and Truck           22             23
Agriculture                          7              6
Clothing and Footwear                7              7
Total                              100%           100%

Gross margin increased 16.0% to $784.3 million for the first six months of fiscal 2012 from $676.1 million in the first six months of fiscal 2011. As a percent of sales, gross margin increased 30 basis points to 33.9% for the first six months of fiscal 2012 compared to 33.6% for the comparable period in fiscal 2011. The increase in gross margin as a percent of sales resulted primarily from improved direct product margin. Direct product margin increased primarily as a result of continued efforts in our key margin-driving initiatives of inventory management, strategic sourcing, private branding and pricing.

As a percent of sales, SG&A expenses, including depreciation and amortization, improved 120 basis points to 23.8% in the first six months of fiscal 2012 from 25.0% in the first six months of fiscal 2011. The SG&A improvement as a percent of sales for the first six months of fiscal 2012 was primarily attributable to strong same-store sales growth as well as expense control with respect to store personnel and other operating costs. Total SG&A expenses increased 9.3% to $550.0 million from $503.1 million in the first six months of fiscal 2011. The increase in SG&A expense primarily reflects new store growth, variable costs associated with our same store sales growth, and operating costs relating to the new Franklin, Kentucky distribution center, which became operational in the fourth quarter of fiscal 2011.

For the first six months of 2012 our effective tax rate increased to 37.1% compared to 36.6% for the first six months of 2011. The increase in the tax rate was largely due to a change in tax laws resulting in lower federal tax credits as well as a reduction of the benefit from other permanent tax differences as a result of a higher base of pretax income in the current fiscal year.

Net income for the first six months of fiscal 2012 increased 34.2% to $146.9 million compared to $109.5 million in the first six months of fiscal 2011. Net income per diluted share for the first six months of fiscal 2012 increased to $2.00 from $1.47 in the first six months of fiscal 2011.

Liquidity and Capital Resources

In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs (including inventory purchases and capital expenditures), distribution center capacity and improvements, information technology, share repurchases and cash dividends. Our primary ongoing sources of liquidity are existing cash balances, funds provided from operations, borrowings available under our Senior Credit Facility, capital and operating leases and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters in anticipation of the spring and cold-weather selling seasons, respectively.

At June 30, 2012, we had working capital of $663.5 million, a $33.9 million increase and a $70.0 million increase from December 31, 2011 and June 25, 2011, respectively. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

In comparison to December 31, 2011, working capital as of June 30, 2012 increased as a result of an increase in inventories and a decrease in accrued employee compensation, partially offset by an increase in accounts payable and income taxes payable. The increase in inventories and accounts payable is due primarily to the purchase of additional inventory to support new store growth and increased average inventory per store due to seasonality and inflation. The decrease in accrued employee compensation is the result of payments of prior year accrued incentive compensation. The increase in income taxes payable is due to the timing of tax payments and the increased amount of pretax income in fiscal 2012.

The increase in working capital as of June 30, 2012 as compared to June 25, 2011 resulted primarily from an increase in inventory and a decrease in accounts payable, partially offset by an increase in income taxes payable. The increase in inventory is related to new store growth and inflation within the cost of merchandise. Accounts payable declined primarily as a result of the timing of payments in relation to the end of the fiscal period. The increase in income taxes payable is due to the timing of tax payments and the increased amount of pretax income in fiscal 2012.

Operations provided net cash of $152.2 million and $117.4 million in the first six months of fiscal 2012 and fiscal 2011, respectively. The $34.8 million increase in net cash provided by operations in 2012 over 2011 is due to changes in the following operating activities (in millions):

                                                     Fiscal six months ended
                                               June 30,     June 25,
                                                 2012         2011       Variance
Net income                                    $  146.9     $  109.5     $    37.4
Depreciation and amortization                     44.2         37.1           7.1
Stock compensation expense                         9.3          7.0           2.3
Excess tax benefit of stock options exercised    (16.5 )       (8.9 )        (7.6 )
Deferred income taxes                             (5.9 )        4.4         (10.3 )
Inventories and accounts payable                 (67.8 )      (34.6 )       (33.2 )
Prepaid expenses and other current assets         (4.6 )      (12.4 )         7.8
Accrued expenses                                 (25.4 )      (27.2 )         1.8
Income taxes payable                              68.8         43.1          25.7
Other, net                                         3.2         (0.6 )         3.8
Net cash provided by operations               $  152.2     $  117.4     $    34.8

The improvement in net cash provided by operations in the first six months of fiscal 2012 compared with the first six months of fiscal 2011 primarily reflects stronger earnings and an increase in income taxes payable. This is partially offset by a lower accounts payable increase relative to inventory. The increase in income taxes payable is primarily attributable to the timing of tax payments and larger pretax income in fiscal 2012. The decrease in accounts payable is primarily a result of the timing of payments in relation to the end of the fiscal period.

Investing activities used cash of $52.5 million and $79.9 million in the first six months of fiscal 2012 and fiscal 2011, respectively. The majority of this cash requirement relates to our capital expenditures. The decrease in restricted cash during the first six months of fiscal 2012 relates to less cash required as collateral for an outstanding letter of credit at a financial institution outside of the Senior Credit Facility. During the first six months of fiscal 2011, the maturity of our short-term investment of $15.9 million was replaced by a $21.9 million time deposit classified as restricted cash.

Capital expenditures for the first six months of fiscal 2012 and fiscal 2011 were as follows (in millions):

                                                                 Fiscal six months ended
                                                                 June 30,         June 25,
                                                                   2012             2011
New and relocated stores and stores not yet opened            $        31.0     $     20.4
Information technology                                                 13.1            5.3
Purchase of previously leased stores                                   10.2            7.7
Existing stores                                                         7.9            8.6
Distribution center capacity and improvements                           3.0           31.9
Corporate and other                                                     0.4            0.2
                                                              $        65.6     $     74.1

The above table reflects 51 new stores in the first six months of fiscal 2012, compared to 42 new stores during the first six months of fiscal 2011. We expect to open a total of approximately 90 to 95 new stores during fiscal 2012. The decrease in expenditures for distribution center capacity and improvements is related to the Franklin, Kentucky distribution center, which was constructed in the prior year and became operational in the fourth quarter of 2011.

Financing activities used cash of $97.5 million and $109.3 million in the first six months of fiscal 2012 and fiscal 2011, respectively. This change in net cash used in financing activities is largely due to $20.3 million less in common stock repurchases during the first six months of fiscal 2012 compared to the first six months of fiscal 2011.

The Senior Credit Facility provides for borrowings up to $250 million (with sublimits of $250 million and $20 million for letters of credit and swingline loans, respectively). This agreement is unsecured and matures in October 2016, with proceeds available to be used for working capital, capital expenditures, dividends, share repurchases and other matters. At June 30, 2012, there were no outstanding borrowings under the Senior Credit Facility. There were $60.1 million outstanding letters of credit under the Senior Credit Facility as of June 30, 2012. Borrowings bear interest at either the bank's base rate or LIBOR plus an additional amount ranging from 0.40% to 1.00% per annum, adjusted quarterly based on our leverage ratio (0.50% at June 30, 2012). We are also required to pay quarterly in arrears, a commitment fee for unused capacity ranging from 0.08% to 0.20% per annum, adjusted quarterly based on our leverage ratio (0.10% at June 30, 2012). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios. As of June 30, 2012, we were in compliance with all debt covenants.

We believe that existing cash balances, expected cash flow from future operations, borrowings available under the Senior Credit Facility, operating and capital leases and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including new store openings, store acquisitions, relocations and renovations, and distribution center capacity, over the next several years.

Share Repurchase Program

The Company's Board of Directors has authorized share repurchases under the share repurchase program up to $1 billion, exclusive of any fees, commissions, or other expenses related to such repurchases, through April 2015. 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 1,106,000 and 1,145,000 shares under the share repurchase program for a total cost of $98.4 million and $69.7 million during the second quarter of 2012 and 2011, respectively. During the first six months of 2012 and 2011, we repurchased 1,160,700 and 2,156,500 shares under the share repurchase program for a total cost of $102.5 million and $122.9 million, respectively. As of June 30, 2012, we had remaining authorization under the share repurchase program of $460.4 million exclusive of any fees, commissions, or other expenses.

Dividends

We believe our ability to generate cash allows us to invest in the growth of our
business and, at the same time, distribute a quarterly dividend. During the
first six months of fiscal 2012, the Board of Directors declared the following
dividends:

                    Dividend Amount
 Date Declared         Per Share       Stockholders of Record Date     Date Paid
February 8, 2012   $           0.12         February 27, 2012        March 13, 2012
  May 2, 2012      $           0.20           May 21, 2012            June 5, 2012

In addition to the above, on August 1, 2012, our Board of Directors declared a quarterly cash dividend of $0.20 per share of the Company's common stock. The dividend will be paid on September 5, 2012 to stockholders of record as of the close of business on August 20, 2012.

It is the present intention of the Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company, and other factors which the Board of Directors deems relevant.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. We typically lease buildings for retail stores and offices rather than acquiring these assets which allows us to utilize financial capital to operate the business rather than invest in fixed assets. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.

Significant Contractual Obligations and Commercial Commitments

. . .