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ALCO STORES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY

AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS


Certain statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact may constitute "forward-looking statements" within
the meaning of Section 21E of the Exchange Act. These statements are subject to
risks and uncertainties, as described below. Examples of forward-looking
statements include, but are not limited to: (i) projections of revenues, income
or loss, earnings or loss per share, capital expenditures, store openings, store
closings, payment or non-payment of dividends, capital structure and other
financial items, (ii) statements of plans and objectives of the Company's
management or Board of Directors, including plans or objectives relating to
inventory, store development, marketing, competition, business strategy, store
environment, merchandising, purchasing, pricing, distribution, transportation,
store locations and information systems, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying the statements
described in (i), (ii) and (iii). Forward-looking statements can often be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "could," "intends," "plans," "estimates",
"projects" or "anticipates," variations thereof or similar expressions.

Forward-looking statements are not guarantees of future performance or
results. They involve risks, uncertainties and assumptions. The Company's future
results of operations, financial condition and business operations may differ
materially from the forward-looking statements or the historical information
stated in this Quarterly Report on Form 10-Q. Stockholders and investors are
cautioned not to put undue reliance on any forward-looking statement.

There are a number of factors and uncertainties that could cause actual results
of operations, financial condition or business contemplated by the
forward-looking statements to differ materially from those discussed in the
forward-looking statements made herein or elsewhere orally or in writing, by, or
on behalf of, the Company, including those factors described below. Other
factors not identified herein could also have such an effect. Factors that could
cause actual results to differ materially from those discussed in the
forward-looking statements and from historical information include, but are not
limited to, those factors described below.

OVERVIEW


Economic Conditions and Other External Factors.  The economic slowdown and
uncertainty around various political topics, as well as concerns about the
fiscal cliff, continue to cause disruptions and significant volatility in
financial markets, increased rates of mortgage loan default and personal
bankruptcy, and declining consumer and business confidence, which has led to
decreased customer traffic and reduced levels of consumer spending, particularly
on discretionary items.  This decline in consumer and business confidence and
the decreased levels of customer traffic and consumer spending have negatively
impacted our business.  We cannot predict how long the current economically
challenging conditions will persist and how such conditions might affect us and
our customers.  Decreased customer traffic and reduced consumer spending,
particularly on discretionary items, would, however, over an extended period of
time negatively affect our financial condition, operating performance, revenues
and earnings.  In addition, we cannot predict how current or worsening economic
conditions will affect our critical suppliers and distributors and any negative
impact on our critical suppliers or distributors may also have an adverse impact
on our business results or financial condition.  Lastly, our markets have
experienced unseasonably warm temperatures which have negatively impacted
consumer spending habits in our colder weather categories.  Severe drought has
also affected the majority of our trading area and the agricultural business in
the Midwest.
Management does not believe that its merchandising operations, net sales,
revenue or results from continuing operations have been materially impacted by
inflation during the past two fiscal years.
Operations.  The Company is a regional broad line retailer operating in 23
states.
The Company's fiscal year ends on the Sunday closest to January 31.  Fiscal 2013
is a 53-week period consisting of three thirteen week periods and one fourteen
week period with each period referred to as a quarter.  During Fiscal 2013, the
fourteen week period will occur in the fourth quarter.  Fiscal 2012 was a
52-week period consisting of four thirteen week periods.  For purposes of this
management's discussion and analysis of financial condition and results of
operations, the financial numbers are presented in thousands unless otherwise
noted.
Strategy.  The Company's overall business strategy involves identifying and
opening stores in locations that will provide the Company with the highest
return on investment.  The Company competes for retail sales with national and
broad line retail stores as well as other entities, such as mail order
companies, specialty retailers, stores, manufacturer's outlets and the internet.
The Company initiated a transactional web site during November 2011.  In July
2012, the Company expanded the product selection on its website which now
includes more than 20,000 items of high-quality merchandise.  Products offered
on the ALCOstores.com website include video games and electronics, housewares,
appliances and furniture, health & beauty aids, baby goods, office supplies,
automotive and sporting goods, and much more. As in traditional ALCO Stores,
consumers can choose from a wide range of well-known brand names.  In addition,
the website includes brands not found in the Company's retail stores.
During the second quarter of fiscal 2013, the Company has also adopted regional
pricing and merchandising.  Regional pricing will allow the Company to identify
opportunities to price specific items differently in different ALCO markets,
depending on regional competitive situations, while maintaining ALCO's superior
value positioning with shoppers in each market.  Regional merchandising consists
of tailoring product offerings for specific needs in ALCO regions, such as
adding fire-retardant clothing in stores in oil-drilling areas and higher-end
outdoor apparel in areas frequented by outdoors enthusiasts, such as Colorado
and other Western states.
                                       10
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The Company uses a variety of broad-based targeted marketing and advertising
strategies to reach consumers.  These strategies include full-color photography
advertising circulars of eight to 20 pages distributed through newspaper
insertion or, in the case of inadequate newspaper coverage, through direct
mail.  During fiscal 2013, the Company will distribute approximately 48
circulars in ALCO markets.  The Company also uses in-store marketing.  The
Company's merchandising and marketing teams work together to present the
products in an engaging and innovative manner, which is coordinated so that it
is consistent with the current print advertisements.  The Company regularly
changes its banners and in-store promotions, which are advertised throughout the
year, to attract consumers to the stores, to generate strong customer frequency
and to increase average sales per customer.  Net marketing and promotion costs
represented approximately 1.1% and 0.6% of net sales in the third quarter of
fiscal year 2013 and in the third quarter of fiscal year 2012, respectively.
Management believes it has developed a comprehensive marketing strategy that
will increase customer traffic and same-store sales.  The Company continues to
operate as a high-low retailer and has included cross departmental products in
many of its marketing vehicles.  For example, the Company has used an Elder Care
page with over-the-counter products, "as seen on TV" items, and dry meals-all
targeting customers who have reached retirement age.  The Company believes that
by providing the breadth of these key items to this targeted audience we can
serve our customers' needs more efficiently and garner a greater share of the
purchases made by this demographic.  The Company's stores offer a broad line of
merchandise consisting of approximately 35,000 items, including automotive,
consumables and commodities, crafts, domestics, electronics, furniture,
hardware, health and beauty aids, housewares, jewelry, ladies', men's and
children's apparel and shoes, pre-recorded music and video, sporting goods,
seasonal items, stationery and toys.  During the third quarter of fiscal year
2013, the Company began to expand its offering of temperature controlled food
and will continue to do so in the fourth quarter.
The Company is constantly evaluating the appropriate mix of merchandise to
improve sales and gross margin performance.  Corporate merchandising is provided
to each store to ensure a consistent Company-wide store presentation.  To
facilitate long-term merchandising planning, the Company divides its merchandise
into three core categories: primary, secondary, and convenience.  The primary
core receives management's primary focus, with a wide assortment of merchandise
being placed in the most accessible locations within the stores and receiving
significant promotional consideration.

The secondary core consists of categories of merchandise for which the Company
maintains a strong assortment that is easily and readily identifiable by its
customers.  The convenience core consists of categories of merchandise for which
the Company maintains convenient (but limited) assortments, focusing on key
items that are in keeping with customers' expectations for a broad line retail
store.  Secondary and convenience cores include merchandise that the Company
believes is important to carry, as the target customer expects to find them
within a broad line retail store and they ensure a high level of customer
traffic.  The Company continually evaluates and ranks all product lines,
shifting product classifications when necessary to reflect the changing demand
for products. In addition, the Company's merchandising systems are designed to
integrate the key retailing functions of seasonal merchandise planning, purchase
order management, merchandise distribution, sales information and inventory
maintenance and replenishment.  All of the Company's stores have
point-of-service computer terminals that capture sales information and transmit
such information to the Company's data processing facilities where it is used to
drive management, financial, and supply chain functions.

Store Expansion.  The continued growth of the Company is dependent, in large
part, upon the Company's ability to open and operate new stores on a timely and
profitable basis.  The Company will have opened a total of five stores during
fiscal 2013.  While the Company believes that adequate sites are available for
future store openings, the rate of new store openings is subject to various
contingencies, many of which are beyond the Company's control.  These material
contingencies include:
· the Company's ability to hire, train, and retain qualified personnel;


· the availability of adequate capital resources for us to purchase inventory,

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equipment, and fixtures and make other capital expenditures necessary for store

expansion; and

· the ability of our landlords and developers to find appropriate financing in

the current credit market to develop property to be leased by the Company.



Historically, we have been able to hire, train, and retain qualified personnel
and we anticipate being able to do so in the future. In order to address the
increase in demand for qualified management, the Company will continue to
recruit for those interested in working and living in our communities. Once
hired, the management personnel will complete an in-store, hands-on management
training program coupled with e-learning modules to ensure operational
efficiencies and align to the Company priorities. We believe this training
process will allow the Company to see the benefits of prompt
time-to-productivity, employee engagement and commitment, and overall employee
retention.
We currently believe that we will have the capital resources necessary to
purchase the inventory, equipment, and fixtures, and to fund the other capital
expenditures necessary for future store expansions.  If we lack such capital
resources, however, it would limit our expansion plans and negatively impact our
operations going forward.  The Company has been working closely with multiple
developers and landlords that the Company believes have the financial resources
to develop property to be leased by the Company and hold such property as a
long-term investment in their portfolios.  If such developers and landlords do
not have, and cannot obtain, the financial resources to develop and hold such
property, it would limit our expansion plans and negatively impact our
operations going forward.
                                       11
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Financial Risk.  The Company is closely monitoring Internal Revenue Section 382
regarding technical change of control.  This particular section of the tax code
monitors the shift in 5% shareholders.  Should the aggregate shift in 5%
shareholders exceed 50% ("tripping event") in the preceding 36 months, then an
annual limitation is placed on the ability of the Company to use its net
operating loss carry-forwards ("NOLs") and credit carry-forwards.  This annual
limitation is equal to 3% of the Company's market capitalization just prior to
the tripping event.  It is management's belief that if the tripping event
occurs, the Company will still be able to take advantage of the NOL's and credit
carry-forwards prior to their expiration, albeit that the NOL's and credit
carry-forwards will be utilized over a longer period of time.
The Company has begun initial assessments of the financial impacts of health
care reform and the Affordable Care Act.  While the Company cannot currently
project the full amount of providing health insurance to all employees or the
penalties that would be imposed if the Company did not offer health care to all
employees, the Company believes that a reasonable range of incremental costs
could be between $1.0 and $4.0 million, annually.
Recent Events
· On October 5, 2012, Edmond C. Beaith resigned from his position as Senior Vice

President - Supply Chain, Chief Information Officer as stated on Form 8-K filed

by the Company with the Securities and Exchange Commission on October 11, 2012.

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· On October 10, 2012, the Company issued a press release relating to the

repurchase of 460,158 shares of its common stock with a par value of $.0001

under the Program, representing approximately 12% of the outstanding shares of

common stock, in a transaction with a major shareholder, as stated on Form 8-K

filed by the Company with the Securities and Exchange Commission on October 15,

  2012.



Key Items in Third Quarter Fiscal 2013.


The Company measures itself against a number of financial metrics to assess its
performance. Some of the important financial items during the third quarter of
fiscal 2013 were:

· Net sales from continuing operations, excluding fuel, increased $0.2 million,

or 0.2%, to $106.6 million compared to $106.3 million for the third quarter of

fiscal 2012.

· Gross margin percentage increased to 31.1% of net sales compared to 30.6% in

the third quarter of fiscal 2012.

· Net loss per share was $0.37 compared to net earnings per share of $0.01 per

share in the third quarter of fiscal 2012, which included an after-tax gain of

$1.4 million, or $0.37 per share, for an insurance settlement that represented

  an appearance allowance for wind and hail damage sustained during second
  quarter of 2012 for the roofs at the Company's corporate office and
  distribution center in Abilene, Kansas.

· Earnings (loss) from continuing operations before interest, taxes, depreciation

and amortization, share-based compensation, preopening store costs, executive

and corporate staff severance, and gain/loss on sale of assets ("Adjusted

EBITDA") was $1.4 million compared to $1.0 million in the third quarter of

  fiscal 2012.


                                       12
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RESULTS OF OPERATIONS

Thirteen Weeks Ended October 28, 2012 Compared to Thirteen Weeks Ended October 30, 2011

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Net Sales

Net sales from continuing operations, excluding fuel, increased $0.2 million, or
0.2%, in the third quarter of fiscal 2013 to $106.6 million compared to $106.3
million for the third quarter of fiscal 2012.  Non-comparable store sales
increased $3.8 million due to the opening of seven new stores subsequent to the
third quarter of fiscal 2012; one store opened during the third quarter of
fiscal 2013, two stores opened during the second quarter of fiscal 2013, one
store opened during the third quarter of fiscal 2012, and three stores opened
during the fourth quarter of fiscal 2012.

Sales from comparable stores, excluding fuel, decreased $3.5 million, or 3.3%,
in the third quarter of fiscal 2013, primarily due to a 6.8% decrease in
comparable store transactions and partially offset by a 3.7% increase in average
transaction size.  Sales have been negatively impacted by unseasonably warm
temperatures and severe drought across most of our Midwestern footprint.

Gross Margin


Gross margin in the third quarter of fiscal 2013 was $33.7 million, or 31.1% of
net sales, compared to $33.1 million, or 30.6% of net sales, in the third
quarter of fiscal 2012.  The increase in gross margin was primarily attributable
to competitive pricing opportunities implemented during the second quarter of
fiscal 2013, partially offset by changes in product mix, including lower margin
commodities growth.

SG&A

Selling, general and administrative (SG&A) expenses increased $0.2 million, or
0.6%, to $32.7 million during the third quarter of fiscal 2013 compared to $32.5
million during the third quarter of fiscal 2012.  As a percentage of net sales,
SG&A expenses during the third quarter of fiscal 2013 were 30.2%, compared to
30.0% during the third quarter of fiscal 2012.  SG&A, excluding share-based
compensation, preopening store costs, executive and corporate staff severance,
and gain/loss on sale of assets, ("Adjusted SG&A"), was $32.3 million, or 29.8%
of net sales, in the third quarter of fiscal 2013 compared to $32.1 million, or
29.7% of net sales, during the third quarter of fiscal 2012.  The increase in
Adjusted SG&A is primarily attributable to the increase of store support center
expenses ($0.5 million) offset by a decrease in warehouse expenses ($0.4
million).

Depreciation and Amortization Expense

Depreciation and amortization expense from continuing operations was $2.2 million and $2.1 million in the third quarter of fiscal 2013 and in the third quarter of fiscal 2012, respectively.

Interest Expense


Interest expense increased $0.2 million, or 39.0%, to $0.9 million during the
third quarter of fiscal 2013 compared to $0.6 million during the third quarter
of fiscal 2012.  The increase in interest expense is primarily attributable to
capital lease interest for four additional capital lease stores in the third
quarter of fiscal 2013 compared to the third quarter of fiscal 2012.
Income Taxes

The Company's effective tax rate on loss from continuing operations before
income tax benefit during the third quarter of fiscal 2013 was 40.3%.  The
Company's effective tax rate on earnings from continuing operations before
income taxes during the third quarter of fiscal 2012 was 21.6%.  The effective
tax rate for continuing operations is adjusted each quarter to reflect current
business conditions.  During fiscal 2012, the application of the effective tax
rate to year-to-date earnings from continuing operations resulted in a lower
calculated effective tax rate for the third quarter.  In addition, the prior
year effective tax rate benefited from certain employment tax credits, some of
which are currently pending approval in Congress for the current year.

Discontinued Operations


Loss from discontinued operations, net of income tax benefit, was $0.1 million
during the third quarter of fiscal 2013 compared to $0.1 million during the
third quarter of fiscal 2012.  The Company closed one store during the third
quarter of fiscal 2013, whereas the Company did not close any stores during the
third quarter of fiscal 2012.

                                       13
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Thirty-nine Weeks Ended October 28, 2012 Compared to Thirty-nine Weeks Ended October 30, 2011


Net Sales

Net sales from continuing operations, excluding fuel, increased $5.7 million, or
1.7%, for the thirty-nine weeks ended October 28, 2012 to $340.7 million
compared to $335.0 million for the thirty-nine weeks ended October 30, 2011.
Non-comparable store sales increased $9.8 million due to the opening of six new
stores subsequent to the third quarter of fiscal 2012.

Sales from comparable stores, excluding fuel, decreased $4.1 million, or 1.2%,
for the thirty-nine weeks ended October 28, 2012, primarily due to a 5.0%
decrease in comparable store transactions and partially offset by a 4.0%
increase in average transaction size.  Sales have been negatively impacted by
unseasonably warm temperatures and severe drought across most of our Midwestern
footprint.

Gross Margin

Gross margin for the thirty-nine weeks ended October 28, 2012 was $107.8
million, or 31.2% of net sales, compared to $105.3 million, or 31.0% of net
sales, for the thirty-nine weeks ended October 30, 2011.  The increase in gross
margin was attributable to the increase in net sales from continuing operations,
as well as the result of competitive pricing opportunities implemented during
the second quarter of fiscal 2013, partially offset by changes in product mix,
including lower margin commodities growth.

SG&A

Selling, general and administrative (SG&A) expenses increased $3.1 million, or 3.2%, to $99.4 million during the thirty-nine weeks ended October 28, 2012 compared to $96.3 million during the thirty-nine weeks ended October 30, 2011.

 As a percentage of net sales, SG&A expenses were 28.7% during the thirty-nine
weeks ended October 28, 2012 compared to 28.3% during the thirty-nine weeks
ended October 30, 2011.  SG&A, excluding share-based compensation, preopening
store costs, executive and corporate staff severance, and gain/loss on sale of
assets, ("Adjusted SG&A"), was $98.3 million, or 28.4% of net sales, during the
thirty-nine weeks ended October 28, 2012 compared to $95.8 million, or 28.1% of
net sales, during the thirty-nine weeks ended October 30, 2011.  The increase in
Adjusted SG&A is primarily attributable to the increase of non-same store
expenses ($3.2 million) and store support center expenses ($0.4 million),
partially offset by reductions in warehouse expenses ($0.6 million).

Depreciation and Amortization Expense

Depreciation and amortization expense from continuing operations was $6.4 million during both the thirty-nine weeks ended October 28, 2012 and the thirty-nine weeks ended October 30, 2011.

Interest Expense


Interest expense decreased $0.9 million, or 28.2%, to $2.4 million during the
thirty-nine weeks ended October 28, 2012 compared to $3.3 million during the
thirty-nine weeks ended October 30, 2011.  The decrease in interest expense is
primarily attributable to the recognition of unamortized financing fees, in the
amount of $0.5 million, from the Company's previous credit agreement during the
thirty-nine weeks ended October 30, 2011.  The remaining decrease is attributed
to lower interest rates assessed under the current credit agreement with Wells
Fargo Bank, National Association and Wells Capital Finance, LLC, including
utilization of various LIBOR tranches at interest rates below base rates.

Income Taxes


The Company's effective tax rate on loss from continuing operations before
income tax benefit during the thirty-nine weeks ended October 28, 2012 was
42.5%.  The Company's effective tax rate on earnings from continuing operations
before income taxes during the thirty-nine weeks ended October 30, 2011 was
38.9%.  The prior year effective tax rate benefited from certain employment tax
credits, some of which are currently pending approval in Congress for the
current year.

Discontinued Operations


Loss from discontinued operations, net of income tax benefit, was $0.4 million
during the thirty-nine weeks ended October 28, 2012 compared to $0.2 million
during the thirty-nine weeks ended October 30, 2011.  The Company closed four
stores during the thirty-nine weeks ended October 28, 2012, whereas the Company
closed one store during the thirty-nine weeks ended October 30, 2011.
                                       14
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Certain Non-GAAP Financial Measures


The Company has included Adjusted SG&A and Adjusted EBITDA, non-GAAP performance
measures, as part of its disclosure as a means to enhance its communications
with stockholders. Certain stockholders have specifically requested this
information to assist them in comparing the Company to other retailers that
disclose similar non-GAAP performance measures. Further, management utilizes
these measures with respect to internal evaluation, review of performance and to
compare the Company's financial measures to those of its peers. Adjusted EBITDA
differs from the most comparable GAAP financial measure (earnings (loss) from
continuing operations) in that it does not include certain items, as does
Adjusted SG&A. These items are excluded by management to better evaluate
normalized operational cash flow and expenses excluding unusual, inconsistent
and non-cash charges.  To compensate for the limitations of evaluating the
Company's performance using Adjusted SG&A and Adjusted EBITDA, management also
utilizes GAAP performance measures such as gross margin, return on investment,
return on equity and cash flow from operations.  As a result, Adjusted SG&A and
Adjusted EBITDA may not reflect important aspects of the results of the
Company's operations.


                                               Thirteen Week Periods Ended             Thirty-Nine Week Periods Ended
 (dollars and average selling square
feet in thousands, except square footage    October 28,           October 30,        October 28,            October 30,
ratios)                                        2012                  2011                2012                   2011
SG&A Expenses Breakout
Store support center (1)                   $       5,245                 4,755              15,207                 14,812
Distribution center                                1,667                 2,051               5,087                  5,665
401K benefit                                           -                   (53 )                 -                    (53 )
Same-store SG&A (2)                               24,308                25,292              75,184                 75,223
Non same-store SG&A (3)                            1,359                   343               3,550                    346
Share-based compensation                              97                    92                 327                    274
SG&A as reported                                  32,676                32,480              99,355                 96,267
Less:
Share-based compensation                             (97 )                 (92 )              (327 )                 (274 )
Preopening store costs (3)                          (171 )                (233 )              (416 )                 (236 )
Executive and corporate staff severance                                                       (271 )                 (131 )
(1)                                                  (49 )                  

-

Gain (loss) on sale of assets (1)                    (87 )                  (9 )                 4                    126
Adjusted SG&A                              $      32,272                32,146              98,345                 95,752

Adjusted SG&A % of sales                            29.8 %                29.7 %              28.4 %                 28.1 %

Sales per average selling square foot                                                        78.77                  80.06
(4)                                        $       24.50                 

25.41


Gross Margin dollars per average selling                                                     24.54                  24.75
square feet (4)                            $        7.62                  

7.79


Adjusted SG&A per average selling square                                                     22.40                  22.50
foot (4)                                   $        7.31                  

7.55


Adjusted EBITDA per average selling                                                           2.14                   2.25
square foot (4)(5)                         $        0.31                  

0.23


Average inventory per average selling                                                        33.83                  34.13
square foot (4)(6)(7)                      $       33.98                 

35.24


Average selling square feet (4)                    4,416                 4,255               4,390                  4,255

Total stores operating beginning of
period                                               215                   213                 216                    214
Total stores operating end of period                 215                   214                 215                    214
Total non same-stores                                  6                     1                   6                      1

Supplemental Data:
Same-store gross margin dollar change               (2.1 )%                0.3 %              (0.7 )%                 0.9 %
Same-store SG&A dollar change                       (3.8 )%                0.1 %               0.0 %                 (1.0 )%
Same-store total customer count change              (6.8 )%               (3.9 )%             (5.0 )%                (3.0 )%
Same-store average sale per ticket                                                             4.0 %                  7.7 %
change                                               3.7 %                 6.9 %






(1) Store support center includes severance and gain (loss) on sale of assets

(2) These amounts may not agree with 10-Qs and 10-Ks of previous quarters due to

stores that had reached their fourteenth period of operation. In addition,

these amounts may not agree with 10-Qs and 10-Ks of previous quarters due to

subsequent store closures. These closed stores are now included in

discontinued operations.

(3) Non same-stores are those stores which have not reached their fourteenth

period of operation

(4) Average selling square feet is calculated as beginning square feet plus

ending square feet divided by 2

(5) Adjusted EBITDA per average selling square foot is calculated as Adjusted

EBITDA divided by average selling square feet

(6) Average store level merchandise inventory is calculated as beginning

inventory plus ending inventory divided by 2

(7) Excludes inventory for unopened stores

                                       15
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Fiscal Year-to-Date 2013 Compared to Fiscal Year-to-Date 2012


SG&A expenses for the thirty-nine week period ended October 28, 2012 increased
$3.1 million which was attributable to the increase of non-same store expenses
($3.2 million) partially offset by overall reductions in store support center
and warehouse expenses ($0.2 million).

Reconciliation and Explanation of Non-GAAP Financial Measures

The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss) from continuing operations:

                                                                          Trailing 52                                         Trailing 52
                                    Twenty-Six Week Periods Ended         Weeks Ended        Thirteen Week Periods Ended      Weeks Ended

 (dollars in     52 Weeks                                                                   October 28,       October 30,     October 28,
thousands)      Fiscal 2012      July 29, 2012        July 31, 2011      July 29, 2012         2012              2011             2012
Net earnings
(loss) from
continuing
operations
(1)            $       1,839                995                  817              2,017          (1,243 )             176              598
Plus:
Interest               4,207              1,536                2,718              3,025             859               619            3,265
Tax expense                                                                                        (839 )              48              (61 )
(benefit)
(1)                      753                656                  583                826
Depreciation                                                                                      2,204             2,084            8,638
and
amortization
(1)                    8,569              4,232                4,283              8,518
Share-based                                                                                          97                92              309
compensation             257                229                  182                304
Preopening                                                                                          171               233              737
store costs
(2)                      557                245                    3                799
Executive
and
corporate
staff
severance
(3)                      143                222                  131                234              49                 -              283
(Gain) loss                                                                                          87                 9              373
on sale of
assets                   252                (92 )               (135 )              295
Insurance                                                                                             -                                  -
proceeds (4)          (2,270 )                -                    -             (2,270 )                          (2,270 )
=Adjusted                                                                                         1,385               991           14,142
EBITDA (1)
(3)(4)                14,307              8,023                8,582             13,748

Cash                   2,491              2,407                6,431              2,407           1,179             3,125            1,179
Debt                  65,437             56,567               65,380             56,567          74,745            80,211           74,745
Debt, net of                                                                                     73,566            77,086           73,566
cash           $      62,946             54,160               58,949             54,160






(1) These amounts may not agree with 10-Qs and 10-Ks of previous quarters due to

subsequent store closures. These closed stores are now included in

discontinued operations.

(2) These costs are not consistent quarter to quarter as the Company does not

open the same number of stores in each quarter of each fiscal year. These

costs are directly associated with the number of stores that have been or

will be opened and are incurred prior to the grand opening of each store.

(3) During fiscal years 2013 and 2012, the Company made departmental

restructuring changes resulting in severance.

(4) On September 9, 2011, the Company received a $2.3 million settlement from

Factory Mutual Insurance Company for damage sustained during the second
    quarter of fiscal 2012, due to wind and hail.


                                       16
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LIQUIDITY AND CAPITAL RESOURCES


At October 28, 2012, working capital (defined as current assets less current
liabilities) was $133.5 million compared to $134.3 million at the end of fiscal
2012.

The Company's primary sources of funds are cash flow from operations, borrowings under its revolving loan credit facility, and vendor trade credit financing.


Net cash provided by (used in) operating activities aggregated $5.2 million and
($19.2) million, for the thirty-nine week periods ended October 28, 2012 and
October 30, 2011, respectively.

On July 21, 2011, the Company entered into a five-year revolving Credit
Agreement (the "Facility") with Wells Fargo Bank, National Association and Wells
Capital Finance, LLC (collectively "Wells Fargo").  The $120.0 million Facility
replaced the Company's previous $120.0 million credit facility with Bank of
America, N.A. and Wells Fargo Retail Finance, LLC, and expires July 20, 2016.
 The completion of the agreement for the new Facility resulted in the
accelerated amortization of the remaining deferred financing fees associated
with the participation of Bank of America, N.A in the previous facility.  The
accelerated costs were $0.5 million and included nominal fees paid to Bank of
America, N.A. upon the termination of the former facility.  Additional costs
paid to Wells Fargo in connection with the new facility were $0.5 million.
 Those fees have been deferred and are being amortized over the term of the new
facility.  During the thirty-nine weeks of fiscal 2013, the Company had net
borrowings of $5.9 million on its revolving credit facility.
The Company uses its revolving loan credit facility and vendor trade credit
financing to fund the buildup of inventories periodically during the year for
its peak selling seasons and to meet other short-term cash requirements.  The
revolving loan credit facility provides up to $120.0 million of financing in the
form of notes payable.  The loan agreement expires July 20, 2016.  The revolving
loan note payable of $58.0 million together with outstanding letters of credit
at October 28, 2012 resulted in an available line of credit at that date of
approximately $53.4 million, subject to a borrowing base calculation.  Loan
advances are secured by a security interest in the Company's inventory and
credit card receivables.  The loan agreement contains various restrictions that
are applicable when outstanding borrowings exceed $102.0 million, including
limitations on additional indebtedness, prepayments, acquisition of assets,
granting of liens, certain investments and payments of dividends.  The Company's
loan agreement contains various covenants including limitations on additional
indebtedness and certain financial tests, as well as various subjective
acceleration clauses.  The balance sheet classification of the borrowings under
the revolving loan credit facility has been determined in accordance with ASC
470, Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that Include both a Subjective Acceleration Clause and a
Lock-Box Arrangement.  As of January 29, 2012, the Company was in compliance
with all covenants and subjective acceleration clauses of the debt agreements.
Accordingly, this obligation has been classified as a long-term liability in the
accompanying balance sheet. Short-term trade credit represents a significant
source of financing for inventory to the Company.  Trade credit arises from the
willingness of the Company's vendors to grant payment terms for inventory
purchases.

Cash used in investing activities for the thirty-nine week periods ended October
28, 2012 and October 30, 2011 totaled $8.0 million and $2.5 million,
respectively, and consisted primarily of capital expenditures.
For a discussion of our other contractual obligations, see a discussion of
future commitments under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in our Form 10-K for the fiscal
year ended January 29, 2012. There have been no significant developments with
respect to our contractual obligations since January 29, 2012.


OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that affect the Company's current or future financial condition.

BUSINESS OPERATIONS

The following chart indicates the percentage of sales, excluding fuel sales, represented by each of our major product categories:


                                                                        Thirty-Nine Week
                                  Thirteen Week Periods Ended            Periods Ended
                                                                      October      October
                                  October 28,      October 30,          28,          30,
                                     2012             2011             2012         2011
Merchandise Category:
Consumables and commodities                 38 %             37 %           36 %         35 %
Hardlines                                   30 %             29 %           33 %         33 %
Home furnishings and décor                  17 %             17 %           16 %         16 %
Apparel and accessories                     15 %             17 %           15 %         16 %
Total                                      100 %            100 %          100 %        100 %




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