The following discussion should be read in conjunction with our unaudited Consolidated Financial Statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Business Overview

We operated 843 discount retail stores in 43 states as of December 31, 2012. We sell upscale, decorative home accessories, housewares, and famous maker gifts which we purchase at below wholesale prices. Our stores have periodic "sales events" that occur in each month except January and July. As we conduct physical inventories at all of our stores, we are normally closed for up to one week during the months of January and July, which traditionally have been weaker months for retailers. We purchase first quality, brand name merchandise at closeout prices and, in turn, sell it at prices significantly below those generally charged by department stores and specialty and catalog retailers. We do not sell seconds, irregulars, refurbished or factory rejects.

As a closeout retailer of home furnishings, we currently compete against a diverse group of retailers, including department and discount stores, specialty, catalog and e-commerce retailers, which sell, among other products, home furnishings and related products similar and often identical to those we sell. We also compete in particular markets with a substantial number of retailers that specialize in one or more types of home furnishing and houseware products that we sell.

Our ability to continuously attract buying opportunities for closeout merchandise, and to anticipate consumer demand as closeout merchandise becomes available, represents an uncertainty in our business. By their nature, specific closeout merchandise items are generally only available from manufacturers or vendors on a non-recurring basis. As a result, we do not have long-term contracts with our vendors for supply, pricing or access to products, but make individual purchase decisions, which are periodically for large quantities. Although we have many sources of merchandise and do not foresee any shortage of closeout merchandise in the near future, we cannot assure that manufacturers or vendors will continue to make desirable closeout merchandise available to us in quantities or on terms acceptable to us or that our buyers will continue to identify and take advantage of appropriate buying opportunities.

Under the retail inventory method, permanent markdowns result in cost reductions in inventory. We utilize promotional markdowns for specific marketing efforts used to drive higher sales volume and traffic for a specified period of time. Markdowns during the second quarter of fiscal 2013 were 17.2% of sales versus 5.5% of sales for the same period last year related primarily to an inventory valuation charge of approximately $41.8 million. If our sales forecasts are not achieved, we may be required to record additional markdowns that could exceed historical levels. The effect of a 0.5% markdown in the value of our inventory at December 31, 2012 would result in a decline in gross profit and loss per share for the second quarter of fiscal 2013 of $1.0 million and $0.01, respectively.

Net sales for the second quarter of fiscal 2013 increased $12.3 million or 4.5%, to $285.3 million from $273.1 million in the same period last year. Comparable store sales for the quarter ended December 31, 2012, increased by 5.6% compared to the same period last year, which was due to a 5.3% increase in average ticket and a 0.3% increase in traffic. We incurred a net loss of $21.5 million and a net loss per share was $0.51 for the quarter ended December 31, 2012, compared to net income of $15.9 million and net income per share of $0.37 for the prior year quarter.

We opened four new stores and closed one existing store during the second quarter of fiscal 2013. In addition, we relocated eight existing stores during the second quarter of fiscal 2013.

Store Openings/Closings



The following table sets forth information regarding our store openings and
closings for the six month periods ended December 31, 2012 and 2011, as well as
the fiscal year ended June 30, 2012.



                                            Six Months    Six Months
                                              Ended         Ended        Fiscal Year
                                             December      December         Ended
                                             31, 2012      31, 2011     June 30, 2012
Stores open at beginning of period                 852           861              861
Stores opened during the period                      8            15               24
Stores closed during the period                    (17 )         (15 )            (33 )
Stores opened at end of period                     843           861              852

Results of Operations

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

                                      Three Months Ended          Six Months Ended
                                         December 31,               December 31,
                                      2012          2011         2012          2011
Net sales                               100.0 %       100.0 %      100.0 %       100.0 %
Cost of sales                            78.4          61.6         72.4          61.7
Gross profit                             21.6          38.4         27.6          38.3
Selling, general and
administrative expense                   29.5          29.1         34.9          34.4
Operating income (loss)                  (7.9 )         9.3         (7.3 )         3.9
Net interest expense and other
income (expense)                         (0.6 )        (0.2 )       (0.5 )        (0.3 )
Income (loss) before income
taxes                                    (8.5 )         9.1         (7.8 )         3.6
Income tax expense (benefit)             (1.0 )         3.3         (1.6 )         1.2

Net income (loss)                        (7.5 )%        5.8 %       (6.2 )%        2.4 %

Three Months Ended December 31, 2012

Compared to the Three Months Ended December 31, 2011

During the second quarter of fiscal 2013, net sales increased to $285.3 million from $273.1 million for the prior year quarter, an increase of $12.3 million, or 4.5%. The increase for the second quarter of fiscal 2013 was primarily due to a 5.6% increase in comparable store sales as compared to the second quarter of fiscal 2012. The increase in comparable sales for the second quarter of fiscal 2013 was comprised of a 5.3% increase in average ticket and a 0.3% increase in traffic.

Gross profit decreased $43.2 million, or 41.2%, to $61.6 million for the second quarter of fiscal 2013 compared to $104.8 million for the same quarter last year, related primarily to an inventory valuation charge of approximately $41.8 million. This inventory charge was required to devalue certain inventory based on a strategic decision to accelerate the sell off of such inventory by the end of the 2013 calendar year.

Selling, general and administrative expenses increased $4.9 million, or 6.1%, to $84.2 million for the second quarter of fiscal 2013 from $79.3 million for the same quarter last year primarily as a result of expenses incurred of $5.3 million related to store clean-up, severance costs, and consulting, legal and recruitment expenses associated with the strategic turnaround efforts of the Company.

The income tax benefit for the second quarter of fiscal 2013 was $2.9 million compared to income tax expense of $9.1 million for the same period last year.
The effective tax rates for the quarters ended December 31, 2012 and 2011 were 11.8% and 36.4%, respectively. The effective tax rate was lower for the second quarter of fiscal 2013 as compared to the same period last year due to the establishment of a $6.3 million deferred tax asset valuation allowance related to the inventory devaluation charge recorded during the second quarter of fiscal 2013.

Six Months Ended December 31, 2012

Compared to the Six Months Ended December 31, 2011

During the six months ended December 31, 2012, net sales increased to $458.1 million from $443.7 million for the six months ended December 31, 2011, an increase of $14.4 million, or 3.2%. The increase in sales for the six month period ended December 31, 2012 was primarily due to a 4.0% increase in comparable store sales as compared to the six month period ended December 31, 2011. The increase in comparable sales for the six month period ended December 31, 2012 was comprised of a 4.7% increase in average ticket offset by a 0.7% decrease in traffic.

Gross profit decreased $43.3 million, or 25.5%, to $126.5 million for the six months ended December 31, 2012 as compared to $169.8 million for the same six month period last year, related primarily to an inventory valuation charge of approximately $41.8 million. This inventory charge was required to devalue certain inventory based on a strategic decision to accelerate the sell off of such inventory by the end of the 2013 calendar year.

Selling, general and administrative expenses during the six months ended December 31, 2012 increased $7.2 million, or 4.7%, to $160.0 million from $152.8 million for the six months ended December 31, 2011 primarily as a result of expenses incurred of $6.8 million related to store clean-up, severance costs, and consulting, legal and recruitment expenses associated with the strategic turnaround efforts of the Company.

The income tax benefit for the six month period ended December 31, 2012 was $7.2 million as compared to income tax expense of $5.5 million for the same six month period last year. The effective tax rates for the six months ended December 31, 2012 and December 31, 2011 were 20.1% and 35.2%, respectively. The effective tax rate was lower for the six months ended December 31, 2012 as compared to the six months ended December 31, 2011 due to the establishment of a $6.3 million deferred tax asset valuation allowance related to the inventory devaluation charge recorded during the second quarter of fiscal 2013.

Liquidity and Capital Resources

Net cash provided by operating activities for the six months ended December 31, 2012 and 2011 was $13.7 million and $67.0 million, respectively. The decrease in cash provided by operating activities for the six months ended December 31, 2012 as compared to the prior year period was primarily due to a net loss for the six months ended December 31, 2012 and a decrease in accounts payable and an increase in deferred income taxes for such period, partially offset by a larger reduction in inventories during such period as compared to the prior year period. There were no significant changes to our vendor payment policy during the six months ended December 31, 2012.

Net cash used in investing activities for the six months ended December 31, 2012 and 2011 relate to capital expenditures. Capital expenditures are primarily associated with new store openings or relocations, existing store maintenance, or enhancements to warehouse and office equipment and systems, and totaled $6.4 million and $5.6 million for the six months ended December 31, 2012 and 2011, respectively. We expect to spend approximately $6 to $9 million for additional capital expenditures during the remainder of fiscal 2013, which will primarily include systems improvements, the opening of new stores, relocations of existing stores, enhancements of selected stores, fixtures for existing stores and purchases of equipment for our distribution center and corporate office.

Net cash provided by financing activities was $0.9 million for the six months ended December 31, 2012, compared to a net cash used in financing activities of $23.7 million for the six months ended December 31, 2011. The changes relate primarily to a change in cash overdraft of $18.8 million and the purchase of treasury shares of $4.3 million in the prior year period.

On August 22, 2011, the Company's Board of Directors adopted a share repurchase program pursuant to which the Company is authorized to repurchase from time to time shares of its common stock, up to a maximum of $5.0 million in aggregate purchase price for all such shares (the "Repurchase Program"). On January 20, 2012, the Company's Board of Directors increased the authorization for stock repurchases under the Repurchase Program from $5.0 million to a maximum of $10.0 million. The Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. The Board will evaluate the Repurchase Program each year and there can be no assurances as to the number of shares of common stock the Company will repurchase. During the six-month period ended December 31, 2012, the Company repurchased 10,433 shares of common stock under the Repurchase Program at an average cost of $5.71 per share and for a total cost (excluding commissions) of approximately $60,000. All of such shares were purchased by the Company in open-market transactions.

We have a credit agreement providing for an asset-based, five-year senior secured revolving credit facility (the "Revolving Credit Facility") in the amount of up to $180.0 million. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. On November 17, 2011, we entered into a third amendment to the Revolving Credit Facility. This amendment, among other things, extended the maturity date of the Revolving Credit Facility from December 15, 2013 to November 17, 2016 and removed the "clean down" provision. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. Unless borrowings and letters of credit exceed 82.5% of the maximum amounts available under the Revolving Credit Facility, we do not have to comply with any financial covenants. In addition, we are currently required to maintain availability under the Revolving Credit Facility of not less than $18.0 million. As of December 31, 2012, we were in compliance with all applicable covenants. Interest expense of $0.5 million for the quarter ended December 31, 2012 was due primarily to commitment fees of $0.2 million, interest expense of $0.1 million and the amortization of financing fees of $0.2 million.

At December 31, 2012, we had no outstanding amounts under the Revolving Credit Facility, $8.1 million of outstanding letters of credit, and had availability of $112.4 million under the Revolving Credit Facility subject to minimum availability requirements as discussed above. Letters of credit under the Revolving Credit Facility are primarily for self-insurance purposes. We incur commitment fees of 0.375% on the unused portion of the Revolving Credit Facility. Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin). These rates are increased or reduced as our average daily availability changes.

We have financed our operations with funds generated from operating activities, available cash and cash equivalents and borrowings under our Revolving Credit Facility. Our cash and cash equivalents totaled $48.0 million and $39.7 million as of December 31, 2012 and June 30, 2012, respectively. Our borrowings have historically peaked during October as we build inventory levels prior to the holiday selling season. Given the seasonality of our business, the amount of borrowings under our Revolving Credit Facility may fluctuate materially depending on various factors, including the time of year, our needs and the opportunity to acquire merchandise inventory. Our primary uses for cash provided by operating activities relate to funding our ongoing business activities and planned capital expenditures. We may also use available cash to repurchase shares of our common stock. We believe funds generated from our operations, available cash and cash equivalents and borrowings under our Revolving Credit Facility will be sufficient to fund our operations for the next year. If our capital resources are not sufficient to fund our operations, we may seek additional debt or equity financing. However, we can offer no assurances that we will be able to obtain additional debt or equity financing on reasonable terms.

We have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

Recent Accounting Pronouncements

During the six months ended December 31, 2012, one new accounting standard was announced that will become applicable to the Company in future periods. The standard allows companies to apply qualitative impairment tests to indefinite-lived intangibles if certain criteria are met and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this standard to have an impact on our financial position, results of operations

or cash flows.