Forward Looking Statements

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the condensed consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company's Annual Report on Form 10-K, filed April 12, 2012. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995" and under

General

We are a specialty retailer of home décor and gifts in the United States, operating 308 stores in 32 states as of October 27, 2012. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall décor, candles and related items, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving. In addition, we use innovative design and packaging to market home décor items as gifts. We provide our predominantly female customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection at prices which provide discernible value to the customer. Our stores offer a unique combination of style and value that has led to our emergence as a leader in home décor and has enabled us to develop a strong customer franchise.

During the 13-week period ended October 27, 2012, we opened 10 new stores and closed 4 stores. The following table summarizes our stores and square footage under lease:

                                                 As of            As of
                                              October 27,      October 29,
                                                  2012             2011
           Number of stores                            308              301
           Square footage                        2,201,060        2,038,952
           Average square footage per store          7,146            6,774

13-Week Period Ended October 27, 2012 Compared to the 13-Week Period Ended
October 29, 2011

Results of operations. The table below sets forth selected results of our
operations both in dollars (in thousands) and as a percentage of net sales for
the periods indicated:



                                                      13-Week Period Ended
                                          October 27, 2012            October 29, 2011                  Change
                                           $             %             $             %             $             %
Net sales                               $ 96,688        100.0 %     $ 97,071        100.0 %     $   (383 )        (0.4 %)
Cost of sales                             62,669         64.8 %       60,938         62.8 %        1,731           2.8 %

Gross profit                              34,019         35.2 %       36,133         37.2 %       (2,114 )        (5.9 %)
Operating expenses:
Compensation and benefits                 19,152         19.8 %       18,828         19.4 %          324           1.7 %
Other operating expenses                  12,491         12.9 %       12,467         12.8 %           24           0.2 %
Depreciation                               3,122          3.2 %        2,914          3.0 %          208           7.1 %

Total operating expenses                  34,765         36.0 %       34,209         35.2 %          556           1.6 %
Operating income (loss)                     (746 )       (0.8 %)       1,924          2.0 %       (2,670 )      (138.8 %)
Interest expense, net                         70          0.1 %           55          0.1 %           15          27.3 %
Other income, net                            (51 )       (0.1 %)         (51 )       (0.1 %)          -            0.0 %

Income (loss) before income taxes           (765 )       (0.8 %)       1,920          2.0 %       (2,685 )      (139.8 %)
Income tax expense (benefit)                (349 )       (0.4 %)         673          0.7 %       (1,022 )      (151.9 %)

Net income (loss)                       $   (416 )       (0.4 %)    $  1,247          1.3 %     $ (1,663 )      (133.4 %)

Net sales. Net sales decreased 0.4% to $96.7 million for the third fiscal quarter of 2012 compared to $97.1 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $3.6 million. This increase in net sales was offset by a decline in comparable store sales, including E-commerce sales, of 4.7%, accounting for a $4.0 million decline versus the prior year quarter. Comparable store sales decreased 3.6% in the prior year period. The E-commerce business was up 76% versus the prior year period, while comparable store sales at brick-and-mortar stores were down 6.6%. For brick-and-mortar stores, the comparable store sales decrease for the third quarter of 2012 was primarily due to a decrease in number of transactions, partially offset by a slight increase in the average ticket. The decrease in transactions resulted from a decline in the conversion rate and a decrease in traffic. The increase in the average ticket reflected an increase in items sold per transaction, offset partially by a decline in average retail selling price. The merchandise categories contributing most to the comparable store sales decline were decorative accessories, wall décor, and furniture.

Gross profit. Gross profit as a percentage of net sales decreased from 37.2% in the third quarter of 2011 to 35.2% in the third quarter of 2012. Merchandise margins decreased from 53.4% in the third quarter of fiscal 2011 to 52.1% in the third quarter of fiscal 2012. Merchandise margin is calculated as net sales minus product cost of sales (including inbound freight), inventory shrinkage, and loyalty reward program discounts. Merchandise margin excludes outbound freight, store occupancy and central distribution costs. The decrease in merchandise margin was primarily the result of higher promotional activity and increased markdowns. Higher inbound freight container rates also contributed approximately 0.5% to the merchandise margin decline. Store occupancy costs as a percentage of net sales increased 0.3%. This increase resulted from the decline in comparable store sales. Outbound freight costs and central distribution expenses increased as a percentage of sales primarily due to an increase in shipping and packaging costs associated with E-commerce, as well as comparable store sales deleverage.

Compensation and benefits. Compensation and benefits expenses for both stores and the corporate level increased for the third quarter of fiscal 2012 as compared to the third quarter of 2011 primarily due to the impact of wage and headcount increases, combined with the slight decrease in total sales. This increase was partially offset at the corporate level by a decrease in stock compensation expense in the third quarter of 2012. Increases in health insurance expense at both stores and corporate also helped to contribute to the overall increase in compensation and benefits expense versus the prior year quarter.

Other operating expenses. Other operating expenses were relatively flat on a dollar basis, but increased slightly as a percentage of net sales versus the prior year period due to increases in utilities, professional fees, as well as deleverage due to the decline in comparable store sales.

Depreciation. The increase in depreciation as a percentage of sales reflects an increase in capital expenditures during the last two fiscal years.

Income tax expense. We recorded an income tax benefit of approximately $349,000, or 45.6% of pre-tax loss during the third quarter of fiscal 2012, versus expense of approximately $673,000, or 35.1% of pre-tax income, in the prior year quarter. During the third quarter of 2012, the Company reversed a portion of its reserve for uncertain income tax positions for which the statute of limitations expired. This adjustment resulted in an income tax benefit of approximately $205,000. This benefit was partially offset by $87,000 in tax expense related to a prior year item.

Net income and earnings per share. As a result of the foregoing, we reported a net loss of $416,000, or ($0.02) per diluted share, for the third quarter of fiscal 2012 as compared to net income of $1.2 million, or $0.06 per diluted share, for the third quarter of fiscal 2011.

39-week Period Ended October 27, 2012 Compared to the 39-week Period Ended
October 29, 2011

Results of operations. The table below sets forth selected results of our
operations in dollars and expressed as a percentage of net sales for the periods
indicated (dollars in thousands):



                                                      39-Week Period Ended
                                          October 27, 2012             October 29, 2011                  Change
                                           $             %              $             %             $             %
Net sales                              $ 285,480        100.0 %     $ 281,175        100.0 %     $  4,305           1.5 %
Cost of sales                            182,998         64.1 %       176,109         62.6 %        6,889           3.9 %

Gross profit                             102,482         35.9 %       105,066         37.4 %       (2,584 )        (2.5 %)
Operating expenses:
Compensation and benefits                 57,181         20.0 %        55,187         19.6 %        1,994           3.6 %
Other operating expenses                  37,487         13.1 %        34,541         12.3 %        2,946           8.5 %
Depreciation                               9,342          3.3 %         8,888          3.2 %          454           5.1 %

Total operating expenses                 104,010         36.4 %        98,616         35.1 %        5,394           5.5 %
Operating income (loss)                   (1,528 )       (0.5 %)        6,450          2.3 %       (7,978 )      (123.7 %)
Interest expense, net                        217          0.1 %           125          0.0 %           92          73.6 %
Other income, net                           (179 )       (0.1 %)         (126 )       (0.0 %)         (53 )        42.1 %

Income (loss) before income taxes         (1,566 )       (0.5 %)        6,451          2.3 %       (8,017 )      (124.3 %)
Income tax expense (benefit)              (1,108 )       (0.4 %)        2,514          0.9 %       (3,622 )      (144.1 %)

Net income (loss)                      $    (458 )       (0.2 %)    $   3,937          1.4 %     $ (4,395 )      (111.6 %)

Net sales. Net sales increased 1.5% to $285.5 million for the first three quarters of fiscal 2012 from $281.2 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $12.3 million. This increase was partially offset by a decline in comparable store sales, including E-commerce sales, of 3.2%, accounting for an $8.0 million decline versus the prior year period. Comparable store sales decreased 6.7% in the prior year period. The E-commerce business was up 94% versus the prior year period, while comparable store sales at brick-and-mortar stores were down 5.2%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decline in number of transactions, offset by a slight increase in the average ticket. The decline in transactions resulted from a decline in the conversion rate and slightly lower traffic. The slight increase in average ticket was the result of an increase in items per transaction offset partially by a slight decline in average retail selling price. Categories contributing most to the comparable store sales decline were wall décor and decorative accessories.

Gross profit. Gross profit as a percentage of net sales decreased from 37.4% in the first three quarters of fiscal 2011 to 35.9% in the first three quarters of fiscal 2012. Merchandise margins were 52.5% in the first three quarters of fiscal 2012, compared to 52.9% in the first three quarters of fiscal 2011. Store occupancy costs as a percentage of net sales increased 0.5%. This increase resulted primarily from the decline in comparable stores sales. Outbound freight costs and central distribution expenses also increased as a percentage of sales primarily due to deleverage, an increase in diesel fuel costs, and shipping and packaging costs associated with E-commerce.

Compensation and benefits. At the store-level and corporate level, the compensation and benefits expense ratio increased for the first three quarters of fiscal 2012 as compared to the first three quarters of 2011 primarily due to the impact of rising wage rates and headcount increases against a narrow increase in total sales. Increases in health insurance expense at both stores and corporate also contributed to the increase in compensation and benefits expense, particularly in the third quarter of fiscal 2012.

Other operating expenses. Other operating expenses increased as a percentage of net sales for the first three quarters of fiscal 2012 due to increases in marketing and information technology expenses, as well as deleverage due to the decline in comparable store sales.

Depreciation. The increase in depreciation as a percentage of sales versus the prior year period reflects an increase in capital expenditures over the last two fiscal years.

Income tax expense. We recorded income tax benefit of $1.1 million, or 70.8% of pre-tax loss during the first three quarters of fiscal 2012, versus an expense of approximately $2.5 million, or 39.0% of pre-tax income, during the prior year period. During the second quarter of 2012, we recorded state and federal employment tax credits totaling approximately $400,000 that related to prior year periods and in excess of our previous estimates. During the third quarter of 2012, the Company reversed a portion of its reserve for uncertain income tax positions for which the statute of limitations expired. This adjustment resulted in an income tax benefit of approximately $205,000. This benefit was partially offset by $87,000 in tax expense related to a prior year item.

Net income and earnings per share. As a result of the foregoing, we reported a net loss of $458,000, or ($0.03) per diluted share, for the first three quarters of fiscal 2012 as compared to net income of $3.9 million, or $0.19 per share, for the first three quarters of fiscal 2011.

Liquidity and Capital Resources

Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the end of the third quarter of each fiscal year. Capital expenditures primarily relate to new store openings; existing store expansions, remodels or relocations; and purchases of equipment or information technology assets for our stores, distribution facilities and corporate headquarters. Historically, we have funded our working capital and capital expenditure requirements with internally generated cash and borrowings under our credit facility.

Cash flows from operating activities. Net cash used in operating activities was approximately $7.4 million and $1.9 million for the first three quarters of fiscal 2012 and fiscal 2011, respectively. Cash flows from operating activities depend heavily on operating performance, changes in working capital and the timing and amount of payments for income taxes. The change in the amount of cash used in operations as compared to the prior year period was primarily the result of the decline in operating performance, an increase in inventories due to retail square footage growth and an increase in the E-Commerce business, as well as an increase in taxes paid to $7.6 million for the first three quarters of fiscal 2012 versus $6.1 million in the prior year period.

Inventory levels at the end of the third quarter of fiscal 2012 were $64.2 million, an increase of $4.3 million from the third quarter of fiscal 2011. The increase in inventory resulted from E-commerce inventory growth in support of sales expected for the fourth quarter of the year, as well as to support an 8% increase in retail square footage. Inventory levels at brick-and-mortar stores at the end of the third quarter 2012 were up 2% versus the prior year. At the end of the third quarter of 2012, brick-and-mortar inventory per retail square foot was 3% lower than the end of the same period last year.

Cash flows from investing activities. Net cash used in investing activities for the first three quarters of fiscal 2012 consisted of $25.0 million in capital expenditures as compared to $21.2 million in capital expenditures for the prior year period. The capital expenditures primarily related to new store construction, information technology projects, and store improvements. During the first three quarters of fiscal 2012, we opened 25 stores compared to 23 stores during the first three quarters of fiscal 2011. We expect that capital expenditures for fiscal 2012 will be approximately $30 to $32 million, primarily to fund the leasehold improvements of new stores, make improvements in our information technology infrastructure, and maintain our investments in existing stores and our distribution center.

Cash flows from financing activities. Net cash used in financing activities was approximately $16.4 million for the first three quarters of fiscal 2012, and was primarily related to the repurchase and retirement of common stock. Net cash used in financing activities was approximately $7.8 million for the first three quarters of fiscal 2011, and primarily related to the repurchase and retirement of common stock, partially offset by the exercise of employee stock options, employee stock purchases, and the related tax benefits.

Revolving credit facility. On August 19, 2011, we entered into an Amended and Restated Credit Agreement, dated as of August 19, 2011 (the "Credit Agreement"), with Bank of America, N.A. as administrative agent and collateral agent, and the lenders named therein (the "Lenders"), replacing our prior credit agreement entered into in 2004. The Credit Agreement increased our senior secured revolving credit facility from $45 million to $50 million and extended the maturity date to August 2016. Borrowings under the facility bear interest at an annual rate equal to LIBOR plus a margin ranging from 175 to 225 basis points with no LIBOR floor. Additionally, a fee of 0.375% per annum is assessed on the unused portion of the facility.

Pursuant to the Credit Agreement, borrowings are subject to certain customary conditions and contain customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreement may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

Also on August 19, 2011, we entered into an Amended and Restated Security Agreement, dated as of August 19, 2011 with our Lenders. Pursuant to the Security Agreement, we pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of our assets to secure the payment and performance of the obligations under the Credit Agreement.

As of October 27, 2012, we were in compliance with the covenants in the facility and there were no outstanding borrowings under the credit facility, with approximately $50 million available for borrowing. We do not anticipate any borrowings under the credit facility during fiscal 2012.

At October 27, 2012, our balance of cash and cash equivalents was approximately $34 million and the borrowing availability under our facility was $50 million. We believe that the combination of our cash balances, line of credit availability and cash flow from operations will be sufficient to fund our planned capital expenditures and working capital requirements for at least the next twelve months.

Share repurchase authorization. On August 19, 2011, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $40 million of the Company's outstanding common stock from time to time until February 2013. The Company repurchased and retired a total of approximately 3.4 million shares at an aggregate cost of $40 million, completing the repurchase authorization in July, 2012.

Related Party Transactions

In July 2009, the Company entered into an agreement with a related party vendor to purchase merchandise inventory. The vendor is considered a related party for financial reporting purposes because its principal is the spouse of the Company's Vice President of Merchandising. During the third quarter of fiscal 2012 and 2011, purchases from this vendor totaled approximately $8.3 million, or 13.5% of total merchandise purchases, and $7.1 million, or 12.2% of merchandise purchases, respectively. During the first three quarters of 2012 and 2011, purchases from this vendor totaled approximately $19.7 million, or 12.4% of total merchandise purchases, and $17.0 million, or 11.2% of total merchandise purchases, respectively. Included in cost of sales for the third quarter of fiscal 2012 and 2011 were $5.3 million and $4.8 million, respectively, related to this vendor. Included in cost of sales for the first three quarters of 2012 and 2011 were $16.9 million and $14.2 million, respectively related to this vendor. Payable amounts outstanding to this vendor were approximately $3.7 million and $2.2 million as of October 27, 2012 and October 29, 2011, respectively. The Company's payable terms with this vendor are consistent with the terms offered by other vendors in the ordinary course of business.

Significant Contractual Obligations and Commercial Commitments

Construction commitments

The Company had commitments for new store construction projects totaling approximately $4.0 million at October 27, 2012.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during fiscal 2012. Refer to our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, for a summary of our critical accounting policies.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

The following information is provided pursuant to the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Certain statements under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q are "forward-looking statements" made pursuant to these provisions. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "should," "likely to," "forecasts," "strategy," "goal," "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from the results projected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The factors listed below under the heading "Risk Factors" and in the other sections of this Form 10-Q provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.

These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

We caution readers that the following important factors, among others, have in the past, in some cases, affected and could in the future affect our actual results of operations and cause our actual results to differ materially from the results expressed in any forward-looking statements made by us or on our behalf.

• If We Do Not Generate Sufficient Cash Flow, We May Not Be Able to Implement Our Growth Strategy.

• If We Are Unable to Profitably Open and Operate New Stores, We May Not Be Able to Adequately Execute Our Growth Strategy, Resulting in a Decrease in Net Sales and Net Income.

• Our Success Depends Upon our Marketing, Advertising and Promotional Efforts. If We are Unable to Implement Them Successfully, or if Our Competitors are More Effective Than We are, Our Revenue May Be Adversely Affected.

• Our Results Could be Negatively Impacted if any of our Primary Brands Suffers a Substantial Impediment to its Reputation Due to Real or Perceived Quality Issues.

• Product Liability Claims Could Adversely Affect Our Reputation.

• Weather Conditions Could Adversely Affect Our Sales and/or Profitability by Affecting Consumer Shopping Patterns.

• Our Performance May Be Affected by General Economic Conditions.

• Changes in Accounting and Tax Rules and Regulations May Adversely Affect our Operating Results.

• We May Not Be Able to Successfully Anticipate Consumer Trends and Our Failure to Do So May Lead to Loss of Consumer Acceptance of Our Products Resulting in Reduced Net Sales.

• Our Freight Costs and thus Our Cost of Goods Sold are Impacted by Changes in Fuel Prices.

• New Legal Requirements Could Adversely Affect Our Operating Results.

• Our Comparable Store Net Sales Fluctuate Due to a Variety of Factors.

• Failure to Protect the Integrity and Security of Individually Identifiable Data of Our Customers and Employees Could Expose Us to Litigation and Damage Our Reputation.

• We Face an Extremely Competitive Specialty Retail Business Market, and Such Competition Could Result in a Reduction of Our Prices and a Loss of Our Market Share.

. . .