Jo-Ann Stores (JAS) 10-Q 2011 Q2 Quarterly report

United States
Securities and Exchange Commission

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 31, 2010

Commission File No. 1-6695

Jo-Ann Stores, Inc.

(Exact name of Registrant as specified in its charter)

Ohio (State or other jurisdiction of incorporation or organization)	34-0720629 (I.R.S. Employer Identification No.)
5555 Darrow Road, Hudson, Ohio (Address of principal executive offices)	44236 (Zip Code)

Registrant’s telephone number, including area code:(330) 656-2600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Shares, without par value, as of August 27, 2010: 27,024,482.

Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended July 31, 2010

	Page Numbers
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets — July 31, 2010 (Unaudited), August 1, 2009 (Unaudited) and January 30, 2010		1
Unaudited Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 31, 2010 and August 1, 2009		2
Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 31, 2010 and August 1, 2009		3
Notes to Unaudited Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		21
Part II. Other Information
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3. Defaults Upon Senior Securities		22
Item 4. Reserved		23
Item 5. Other Information		23
Item 6. Exhibits		23
Signatures		24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

Jo-Ann Stores, Inc.

Consolidated Balance Sheets

	(Unaudited)
	July 31,			August 1,			January 30,
	2010			2009			2010
	(Dollars in millions, except share and per share data)
Assets
Current assets:
Cash and cash equivalents	$	126.1		$	80.2		$	217.1
Inventories		445.6			460.1			416.8
Deferred income taxes		19.9			20.3			22.3
Prepaid expenses and other current assets		45.0			36.0			29.9
Total current assets		636.6			596.6			686.1
Property, equipment and leasehold improvements, net		297.2			302.7			293.7
Goodwill		11.6			11.6			11.6
Other assets		8.8			8.3			9.0
Total assets	$	954.2		$	919.2		$	1,000.4
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	169.0		$	178.5		$	151.1
Accrued expenses		99.9			96.6			128.6
Senior subordinated notes — short term		—			—			47.5
Total current liabilities		268.9			275.1			327.2
Long-term debt		—			50.5			—
Long-term deferred income taxes		3.7			—			2.2
Lease obligations and other long-term liabilities		108.3			105.3			105.4
Commitments and contingencies (Note 5)
Shareholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued		—			—			—
Common stock, stated value $0.05 per share; 150,000,000 authorized; issued 30,812,850; 29,366,390 and 29,989,966 shares, respectively		1.5			1.5			1.5
Additional paid-in capital		253.7			218.1			234.7
Retained earnings		400.6			315.8			377.0
		655.8			535.4			613.2
Treasury stock, at cost; 4,590,338; 3,756,128 and 3,773,890 shares, respectively		(82.5	)		(47.1	)		(47.6	)
Total shareholders’ equity		573.3			488.3			565.6
Total liabilities and shareholders’ equity	$	954.2		$	919.2		$	1,000.4

See notes to unaudited consolidated financial statements

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Jo-Ann Stores, Inc.

Consolidated Statements of Operations

(Unaudited)

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 31,		August 1,			July 31,		August 1,
	2010		2009			2010		2009
	(Dollars in millions, except share and per share data)
Net sales	$	439.3	$	419.4		$	919.6	$	879.4
Cost of sales (exclusive of depreciation and amortization shown separately below)		217.6		212.8			455.5		449.9
Gross margin		221.7		206.6			464.1		429.5
Selling, general and administrative expenses		194.5		193.3			389.9		383.7
Store pre-opening and closing costs		2.6		2.8			4.8		6.4
Depreciation and amortization		14.5		13.9			28.7		27.9
Operating profit (loss)		10.1		(3.4	)		40.7		11.5
Gain on purchase of senior subordinated notes		—		—			—		(1.2	)
Interest expense, net		0.5		1.5			1.4		3.1
Income (loss) before income taxes		9.6		(4.9	)		39.3		9.6
Income tax provision (benefit)		4.2		(1.7	)		15.7		4.2
Net income (loss)	$	5.4	$	(3.2	)	$	23.6	$	5.4
Net income (loss) per common share — basic	$	0.21	$	(0.13	)	$	0.90	$	0.21
Net income (loss) per common share — diluted	$	0.20	$	(0.13	)	$	0.87	$	0.21
Weighted average shares outstanding (in thousands):
Basic		26,333		25,516			26,304		25,405
Diluted		27,215		25,516			27,279		26,093

See notes to unaudited consolidated financial statements

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Jo-Ann Stores, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Twenty-Six Weeks Ended
	July 31,			August 1,
	2010			2009
	(Dollars in millions)
Net cash flows provided by operating activities:
Net income	$	23.6		$	5.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28.7			27.9
Deferred income taxes		3.9			—
Stock-based compensation expense		4.2			4.2
Amortization of deferred financing costs		0.4			0.3
Loss on disposal of fixed assets		0.7			0.9
Gain on purchase of senior subordinated notes		—			(1.2	)
Gross excess tax deficit on stock-based compensation		—			(0.4	)
Changes in operating assets and liabilities:
Increase in inventories		(28.8	)		(30.7	)
Increase in prepaid expenses and other current assets		(15.1	)		(4.3	)
Increase in accounts payable		17.9			33.4
Decrease in accrued expenses		(28.7	)		(6.3	)
Increase (decrease) in lease obligations, net		2.3			(0.7	)
Increase (decrease) in other long-term liabilities		0.6			(0.2	)
Other, net		(0.3	)		0.7
Net cash provided by operating activities		9.4			29.0
Cash flows used for investing activities:
Capital expenditures		(32.8	)		(16.7	)
Cash used for investing activities		(32.8	)		(16.7	)
Net cash flows used for financing activities:
Purchase of senior subordinated notes		(47.5	)		(14.1	)
Proceeds from stock-based compensation plans		8.4			2.4
Purchase of Jo-Ann Stores, Inc. common stock		(34.9	)		(1.3	)
Gross excess tax benefit on stock-based compensation		6.4			0.3
Net cash used for financing activities		(67.6	)		(12.7	)
Net decrease in cash and cash equivalents		(91.0	)		(0.4	)
Cash and cash equivalents at beginning of period		217.1			80.6
Cash and cash equivalents at end of period	$	126.1		$	80.2
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2.4		$	3.1
Income taxes, net of refunds		34.9			16.6

See notes to unaudited consolidated financial statements

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Notes to Consolidated Financial Statements (Unaudited)

Jo-Ann Stores, Inc.

Note 1 — Basis of Presentation

Jo-Ann Stores, Inc. (the “company”), an Ohio corporation, is the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, operating 752 retail stores in 48 states at July 31, 2010.

The company’s fiscal year ends on the Saturday closest to January 31. Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal year refers to the year in which the period ends (e.g., fiscal 2011 refers to the year-ended January 29, 2011).

The consolidated interim financial statements include the accounts of the company and its subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures herein are adequate to make the information not misleading. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

In the opinion of management, the accompanying balance sheets and related interim statements of operations and cash flows include all adjustments, consisting only of normal recurring items necessary for their fair presentation in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the company revises its estimates and assumptions as new information becomes available.

Typical of most retail companies, the company’s business is seasonal with the majority of revenues and operating profits generated in the second half of the fiscal year. Accordingly, earnings or losses for a particular interim period are not indicative of full-year results. Due to the seasonal nature of the company’s business, a comparable balance sheet as of August 1, 2009 has been provided.

The company’s cash and cash equivalents represent the financial assets and liabilities that were accounted for at fair value on a recurring basis as of July 31, 2010. As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The fair value of the company’s cash and cash equivalents was $126.1 million, $80.2 million and $217.1 million at July 31, 2010, August 1, 2009 and January 30, 2010, respectively. These fair values were determined using quoted prices in active markets for identical assets or liabilities (Level 1 measurements) in the fair value hierarchy.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). There were no changes in fair value related to these assets during the thirteen or twenty-six weeks ended July 31, 2010.

Certain amounts in the August 1, 2009 financial statements have been reclassified to conform to the current year presentation.

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During the first quarter of fiscal 2011, the Financial Accounting Standards Board issued various accounting standards updates (“ASUs”) to amend the authoritative literature in the Accounting Standards Codification (“ASC”). There has been a number of ASUs issued during the three-month period ended July 31, 2010, that amended the original text of the ASC. Those issued during the period either provide supplemental guidance, are technical corrections, are not applicable to the company or are not expected to have a significant impact on the company.

Note 2 — Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per common share include the effect of the assumed exercise of dilutive stock-based awards under the treasury stock method.

The following table presents information necessary to calculate basic and diluted income per common share (shares in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 1,		July 31,		August 1,
	2010		2009		2010		2009
Weighted average shares outstanding:
Basic common shares		26,333		25,516		26,304		25,405
Incremental shares from assumed exercise of stock options		360		—		411		169
Incremental restricted shares		522		—		564		519
Diluted common shares		27,215		25,516		27,279		26,093

For the second quarter and first half of fiscal 2011, the above calculation of the diluted net income per common share reflects the impact of stock options that had exercise prices below the average market price of the company’s common shares for the quarter and year-to-date period. An average of 59,563 stock options for the second quarter and 40,995 stock options for the first half of fiscal 2011 were not included in the computation of diluted net income per common share because they would have been anti-dilutive.

For the second quarter of fiscal 2010, all outstanding stock-based awards were excluded from the calculation of diluted net loss per common share, because they would have had an anti-dilutive effect due to the company’s net loss for the period. For the first half of fiscal 2010, the above calculation of the diluted net income per common share reflects the impact of stock options that had exercise prices below the average market price of the company’s common shares for the year-to-date period. An average of 701,446 stock options for the first half of 2010 was not included in the computation of diluted net income per common share because they would have been anti-dilutive.

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Note 3 — Shareholders’ Equity

						Common		Additional							Total
	Common			Treasury		Stock Stated		Paid-In		Treasury			Retained		Shareholders’
	Shares			Shares		Value		Capital		Stock			Earnings		Equity
	(Shares in thousands)					(Dollars in millions)
Balance, January 30, 2010		26,216			3,774	$	1.5	$	234.7	$	(47.6	)	$	377.0	$	565.6
Net income		—			—		—		—		—			23.6		23.6
Exercise of stock options		424			—		—		7.5		—			—		7.5
Excess tax benefits on stock-based compensation		—			—		—		6.4		—			—		6.4
Stock-based compensation		360			—		—		4.2		—			—		4.2
Purchase of common stock		(816	)		816		—		—		(34.9	)		—		(34.9	)
Associate Stock Ownership Plan		39			—		—		0.9		—			—		0.9
Year-to-date activity		7			816		—		19.0		(34.9	)		23.6		7.7
Balance, July 31, 2010		26,223			4,590	$	1.5	$	253.7	$	(82.5	)	$	400.6	$	573.3

As of July 31, 2010, the company had 983,939 stock options outstanding and 845,234 restricted stock awards.

Note 4 — Financing

During the first quarter of fiscal 2011, the company redeemed its entire remaining outstanding principal amount of the 7.5 percent senior subordinated notes for approximately $47.5 million at par.

During the first quarter of fiscal 2010, the company purchased $15.5 million in face value of the 7.5 percent senior subordinated notes at an average of 91 percent of par. The company recorded a pre-tax gain of $1.2 million, representing the cash discount received, net of the related write-off of applicable deferred financing costs. These charges are reflected in the gain on purchase of senior subordinated notes line item in the statement of operations.

Note 5 — Commitments and Contingencies

The company is involved in various litigation matters in the ordinary course of its business. The company is not currently involved in any litigation that it expects, either individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.

In May 2010, the Superior Court of the State of California, County of Los Angeles gave final approval to a negotiated settlement resulting from a wage and hour class action that was filed against the company on July 21, 2008. Patti Blair et al. v. Jo-Ann Stores, Inc. et al., Case No. BC394795. This settlement had received preliminary approval from the court in November 2009. As of July 31, 2010, the company had settled this litigation for an amount that was fully reserved for previously.

Note 6 — Segment Reporting

At July 31, 2010, the company operated 233 large-format stores and 519 small-format stores. At August 1, 2009, the company operated 222 large-format stores and 536 small-format stores. The company considers stores that generally average more than approximately 24,000 square feet of retail space as large-format stores. The company’s small-format stores generally average less than approximately 24,000 square feet. The size of the store is not the only factor in determining its classification as large-format or small-format. The most important distinction for determining the classification of a large-format store is whether or not stores in the range have been recently built or remodeled and contain a broad assortment of craft categories.

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The company’s reportable segments include large-format stores, small-format stores and other. The financial results of the company’s Joann.com Internet business are included in the “other” segment. The small-format stores offer a complete selection of fabric and a convenience assortment of crafts, artificial floral, finished seasonal and home décor merchandise. The large-format stores offer an expanded and more comprehensive product assortment than the small-format stores. The large-format stores also generally offer custom framing and educational programs that most small-format stores do not. The “other” category includes unallocated corporate assets and overhead in addition to the operating results of the Joann.com Internet business. The segments are evaluated based on revenues and operating profit contribution to the total corporation. All income and expense items below operating profit are not allocated to the segments and are not disclosed.

Certain information not routinely used in the management of these segments or information that is impractical to report is not shown. The company does not report assets other than property, equipment and leasehold improvements by segment because not all assets are allocated to segments for purposes of measurement by the company’s chief operating decision maker.

	Large-format		Small-format
(Dollars in millions)	Stores		Stores		Other			Consolidated
Thirteen Weeks Ended July 31, 2010
Net sales	$	238.2	$	192.4	$	8.7		$	439.3
Store pre-opening and closing costs		1.1		1.5		—			2.6
Depreciation and amortization		7.5		3.0		4.0			14.5
Operating profit (loss)		19.1		22.2		(31.2	)		10.1
Capital expenditures		1.8		8.1		7.9			17.8
Thirteen Weeks Ended August 1, 2009
Net sales	$	229.3	$	182.6	$	7.5		$	419.4
Store pre-opening and closing costs		0.5		2.3		—			2.8
Depreciation and amortization		8.1		2.5		3.3			13.9
Operating profit (loss)		14.3		17.3		(35.0	)		(3.4	)
Capital expenditures		1.2		4.9		4.0			10.1
Twenty-Six Weeks Ended July 31, 2010
Net sales	$	496.1	$	404.5	$	19.0		$	919.6
Store pre-opening and closing costs		1.4		3.4		—			4.8
Depreciation and amortization		15.0		5.8		7.9			28.7
Operating profit (loss)		49.9		53.7		(62.9	)		40.7
Capital expenditures		5.1		16.3		11.4			32.8
Property, equipment and leasehold improvements, net		141.8		67.7		87.7			297.2
Twenty-Six Weeks Ended August 1, 2009
Net sales	$	477.5	$	384.9	$	17.0		$	879.4
Store pre-opening and closing costs		2.3		4.1		—			6.4
Depreciation and amortization		16.0		5.1		6.8			27.9
Operating profit (loss)		36.3		42.8		(67.6	)		11.5
Capital expenditures		4.8		5.7		6.2			16.7
Property, equipment and leasehold improvements, net		159.9		50.4		92.4			302.7

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Note 7 — Subsequent Event

On August 12, 2010, the company’s board of directors increased the authorization under the company’s existing common share repurchase program by one million shares. Under the existing program, 115,165 common shares remained available for purchase by the company. The company is now authorized to repurchase up to an aggregate of 1,115,165 common shares under the program. Purchases under the program may be made from time-to-time in the open market or in negotiated transactions and at such prices and upon such other terms as the company determines. The expanded common share repurchase program has no stated expiration date.

During the third quarter of fiscal 2011 through September 8, 2010, we bought back 378,475 shares at an average price paid per share of $42.04.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion is intended to provide the reader with information that will assist in an overall understanding of our financial statements, changes in certain key indicators in those financial statements from year to year, the factors that account for those changes and how certain accounting principles have impacted our financial statements. This discussion should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements presented in our fiscal 2010 Annual Report on Form 10-K.

General Overview

We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our retail stores, operating as Jo-Ann Fabric and Craft stores and website (www.joann.com), feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.

As of July 31, 2010, we operated 752 stores in 48 states (233 large-format stores and 519 small-format stores). We consider stores that generally average more than approximately 24,000 square feet of retail space as large-format stores. Our small-format stores generally average less than approximately 24,000 square feet. The size of the store is not the only factor in determining its classification as large-format or small-format. The most important distinction for determining the classification of a large-format store is whether or not stores in the range have been recently built or remodeled and contain a broad assortment of craft categories.

Our large-format stores offer an expanded and more comprehensive product assortment than our small-format stores. Our large-format stores also generally offer custom framing and educational programs that most small-format stores do not. They average approximately 36,500 square feet and generated average net sales per store of approximately $4.7 million in fiscal 2010. Our small-format stores offer a complete selection of fabric and a convenience assortment of crafts, artificial floral, finished seasonal and home décor merchandise. They average approximately 14,700 square feet and generated average net sales per store of approximately $1.7 million in fiscal 2010.

Executive Overview

During the second quarter of fiscal 2011, we delivered another record quarter for sales and earnings. Same store sales increased 4.4 percent, primarily due to a 3.8 percent increase in customer transactions, along with a slight increase in average ticket. Sales were slightly stronger than expected and were driven by the performance of our new stores, store remodels and new product assortments.

Sales growth in our small-format stores continues to outpace sales in our large-format stores. This growth reflects how well our remodel and optimization programs are working in our smaller stores, as well as the disproportionate benefit they receive from Wal-Mart removing fabric departments from its stores. Sales growth was well balanced across our sewing and non-sewing business. Sales growth was particularly strong with respect to sewing machines, quilting, sewing notions, food crafting, kids crafts and craft textiles categories.

Joann.com sales were up 16.0 percent for the second quarter of fiscal 2011, as our enhanced website and expanded product selection helped attract more on-line shoppers. Traffic to our website increased 30.0 percent during the quarter, which includes traffic related to searches for project ideas and participation in our on-line community.

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Our in-store education program continues to perform well. Education program sales grew an incremental 23.0 percent in the second quarter of fiscal 2011, on top of a 36.0 percent increase in the same quarter of fiscal 2010. Our top five classes included the introductory level courses for sewing, Wilton food crafting, kids sewing, kids food crafting and the 200 level (some experience in topic area expected) kids sewing classes. We are encouraged to see three of our top five classes serving young people, which is important as we strive to teach new skills to the next generation of sewers and crafters while developing a lasting relationship with the Jo-Ann brand.

We delivered another quarter of over 100 basis points of gross margin improvement. Global sourcing initiatives continue to drive our margin expansion, although some of those savings are now being offset with increases in both import and domestic transportation expenses. We are also beginning to cycle very strong gross margin increases from fiscal 2010, so the magnitude of our gross margin improvement going forward should be more modest.

Our selling, general and administrative (“SG&A”) expense leverage was also stronger than we expected, due to our same-store sales growth, as well as reductions in legal and incentive compensation and expenses.

As a result of our strong sales, gross margin and SG&A performance, diluted earnings per share improved to $0.20 for the second quarter of fiscal 2011 as compared to a loss of $0.13 for the second quarter of fiscal 2010. The second quarter of fiscal 2011 represents the highest second quarter earnings per share in our history and the first time in five years that we achieved positive earnings in the second quarter.

Regarding supply chain logistics, a lot of recent media attention has been focused on rising fees and shipping constraints at the Asian ports. Our container shipping costs have increased during the second quarter of fiscal 2011. Our fees are well above the rates we experienced during the past two years and are slightly above pre-recession levels. These higher shipping rates are factored into our outlook for the remainder of fiscal 2011. Our fall and Halloween merchandise has been shipped and the majority of the merchandise is in our stores and distribution centers. Roughly 50 percent of our Christmas holiday merchandise has already shipped and we are closely monitoring the remaining orders as they proceed through the shipping ports. We do not expect shipping problems to significantly impact sales during the second half of fiscal 2011.

During the second quarter of fiscal 2011 we opened four new stores, bringing total new store openings to 14 year to date. We remain on track to open approximately 30 stores for fiscal 2011.

We also completed 16 remodels during the second quarter of fiscal 2011 and are on track to complete at least 40 for the full year. Remodels continue to deliver approximately 10 percent incremental same-store sales above the chain average for small-format stores.

Recent Developments and Business Update

Outlook for Fiscal 2011

Based upon our second quarter results and operating assumptions for the remainder of the year, we are increasing our previously announced expectations for fiscal 2011. The key considerations underlying our outlook for fiscal 2011 include:

• Same-store sales increase of approximately 3.0% to 4.0% for the year versus the previously announced range of approximately 2.5% to 3.5%;

• Gross margin rate improvement of 70 to 90 basis points for the year versus the previously announced range of 40 to 70 basis points;

• SG&A, as a percentage of net sales, improvement of 50 to 70 basis points for the year versus the previously announced range of 30 to 60 basis points;

• Capital expenditures, net of landlord allowances, for the full year in the range of $52 to $54 million versus the previously announced guidance of approximately $50 million;

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• Earnings per diluted share in the range of $3.20 to $3.35 for the year versus the previously announced range of $2.95 to $3.10;

• Free cash flow in the range of $83 to $88 million for the year (free cash flow defined as net income plus depreciation and amortization, stock-based compensation expense and changes in working capital, less capital expenditures, net of landlord allowances) versus the previously announced range of $80 to $85 million;

• Weighted-average diluted share count of approximately 27.2 million shares for the year versus the previously announced weighted-average diluted share count of approximately 27.4 million shares.

Based on the results of our new stores, our healthy balance sheet and favorable commercial real estate opportunities, we will increase our capital spending for new stores for fiscal 2012. We expect to open at least 50 new stores and plan to remodel at least 50 stores in fiscal 2012. The average size of our new stores during fiscal 2012 will be approximately 20,000 square feet, with almost half of these new stores opening in new trade areas for the company.

Results of Operations

The following table sets forth our results of operations through operating profit, expressed as a percentage of net sales. The following discussion should be read in conjunction with our consolidated interim financial statements and related notes thereto.

	Percentage of Net Sales
	Thirteen Weeks						Twenty-Six Weeks
	Ended						Ended
	July 31,			August 1,			July 31,			August 1,
	2010			2009			2010			2009
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Gross margin		50.5	%		49.3	%		50.5	%		48.8	%
Selling, general and administrative expenses		44.3	%		46.1	%		42.4	%		43.6	%
Store pre-opening and closing costs		0.6	%		0.7	%		0.5	%		0.7	%
Depreciation and amortization		3.3	%		3.3	%		3.2	%		3.2	%
Operating (loss) profit		2.3	%		(0.8	)%		4.4	%		1.3	%

Net Sales.Net sales represent retail sales, net of estimated returns and exclude sales taxes. The following tables summarize the year-over-year comparison of our consolidated net sales and sales by segment for the periods indicated:

Consolidated Net Sales:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Consolidated net sales	$	439.3		$	419.4			4.7	%	$	919.6		$	879.4			4.6	%
Increase from prior year	$	19.9								$	40.2
Same-store sales percentage change		4.4	%		1.8	%					4.2	%		1.4	%

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Comparison of the Thirteen Weeks Ended July 31, 2010 to August 1, 2009

Consolidated net sales increased for the second quarter of fiscal 2011. Same-store sales increased 4.4 percent compared with a same-store sales increase of 1.8 percent for the second quarter of fiscal 2010. The improvement in same-store sales was driven by a 3.8 percent increase in customer transactions and a 0.6 percent increase in average ticket as compared to the second quarter of fiscal 2010. The increase in customer transactions is primarily due to our store remodeling and optimization efforts and performance of new products. Our total store count of 752 at the end of the second quarter of fiscal 2011 was down six stores compared to the end of the second quarter of fiscal 2010, while total store square footage remained flat compared with the end of second quarter fiscal 2010. In total, we opened four new stores and closed two stores during the second quarter of fiscal 2011, compared to the second quarter of fiscal 2010 when we opened three new stores and closed eight stores.

On a category basis, our sewing businesses represented 52 percent of our fiscal 2011 second quarter net sales volume and increased approximately 5.1 percent on a same-store sales basis over the second quarter of the prior year. We continued to experience positive same-store sales in the majority of our fabric and sewing notions merchandise categories.

Our non-sewing businesses represented 48 percent of our fiscal 2011 second quarter net sales volume and increased approximately 3.5 percent on a same-store sales basis over the second quarter of the prior year. We continued to experience positive same-store sales in our core craft categories.

Comparison of the Twenty-Six Weeks Ended July 31, 2010 to August 1, 2009

Consolidated net sales increased for the first half of fiscal 2011. Same-store sales increased 4.2 percent compared with a same-store sales increase of 1.4 percent for the first half of fiscal 2010. The improvement in same-store sales was driven by a 3.4 percent increase in customer transactions combined with a 0.8 percent increase in average ticket as compared to the first half of fiscal 2010. The increase in customer transactions is primarily due to our store remodeling and optimization efforts, performance of new products, continued benefits from modifications we made to our marketing content to deliver a stronger value message, and the benefit of competitive withdrawals in the sewing business. In total, we opened 14 new stores and closed eight stores during the first half of fiscal 2011, compared to the first half of fiscal 2010 when we opened 15 new stores and closed 21 stores.

On a category basis, our sewing businesses represented 52 percent of the first half of fiscal 2011 net sales volume and increased 5.3 percent on a same-store sales basis over the first half of the prior year. Similar to our results for the first quarter of fiscal 2011, we continued to experience positive same-store sales in the majority of our fabric and sewing notions merchandise categories during the first half of fiscal 2011.

Our non-sewing businesses represented 48 percent of our fiscal 2011 first half net sales volume and increased approximately 3.4 percent on a same-store sales basis over the first half of the prior year. Our core craft categories remained strong and sales trends in our seasonal business continued to remain positive during the first half of fiscal 2011.

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Sales by Segment:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Large-format stores
Net sales	$	238.2		$	229.3			3.9	%	$	496.1		$	477.5			3.9	%
Increase from prior year	$	8.9								$	18.6
Same-store sales percentage change		3.0	%		0.1	%					2.4	%		(0.2	)%
Small-format stores
Net sales	$	192.4		$	182.6			5.4	%	$	404.5		$	384.9			5.1	%
Increase from prior year	$	9.8								$	19.6
Same-store sales percentage change		6.2	%		3.9	%					6.6	%		3.4	%
Other
Net sales	$	8.7		$	7.5			16.0	%	$	19.0		$	17.0			11.8	%
Increase from prior year	$	1.2								$	2.0

Comparison of the Thirteen Weeks Ended July 31, 2010 to August 1, 2009

Sales for large-format stores increased for the second quarter of fiscal 2011 due to the increase in same-store sales and the net increase in the number of new stores. The number of large-format stores in operation increased to 233 at the end of the second quarter of fiscal 2011 from 222 at the end of the same quarter of fiscal 2010. Large-format stores accounted for approximately 54.2 percent of total second quarter net sales in fiscal 2011 as compared to 54.7 percent for the same period in the prior year.

Same-store sales for large-format stores increased 3.0 percent for the quarter, versus a same-store sales increase of 0.1 percent in the second quarter last year. The increase in same-store sales was due to a 3.0 percent increase in customer transactions during the second quarter of fiscal 2011, as compared to the same quarter last year. Average ticket was flat as compared to the second quarter of fiscal 2010.

Sales for small-format stores increased for the second quarter of fiscal 2011 due to an increase in same-store sales. The number of small-format stores in operation decreased to 519 at the end of the second quarter of fiscal 2011 compared with 536 at the end of the same quarter last year. Small-format stores accounted for approximately 43.8 percent of total second quarter net sales in fiscal 2011 as compared to 43.5 percent for the same period in the prior year.

Same-store sales performance for small-format stores increased 6.2 percent compared with a same-store sales increase of 3.9 percent for the second quarter of fiscal 2010. The increase in same-store sales was due to a 4.7 percent increase in customer transactions, coupled with a 1.5 percent increase in average ticket as compared to the second quarter of fiscal 2010. We continue to see the ongoing benefit from our store remodels and store optimizations in our small-format stores, resulting in an increase in both customer transactions and average ticket.

Sales included in our “other” segment represent sales from Joann.com. Internet sales through Joann.com accounted for 2.0 percent of second quarter net sales in fiscal 2011 as compared to 1.8 percent for the same period in the prior year.

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Comparison of the Twenty-Six Weeks Ended July 31, 2010 to August 1, 2009

Sales for large-format stores increased for the first half of fiscal 2011 due to the increase in same-store sales and net increase in the number of new stores. Large-format stores accounted for approximately 53.9 percent of total first half net sales in fiscal 2011 as compared to 54.3 percent for the same period in the prior year.

Same-store sales for large-format stores increased 2.4 percent for the first half of fiscal 2011, versus a same-store sales decrease of 0.2 percent in the first half of last year. The increase in same-store sales was due to a 2.4 percent increase in customer transactions, as compared to the first half of fiscal 2010. Average ticket was flat as compared to the first half of fiscal 2010.

Sales for small-format stores increased for the first half of fiscal 2011 due to the increase in same-store sales. Small-format stores accounted for approximately 44.0 percent of total first half net sales in fiscal 2011 as compared to 43.8 percent for the same period in the prior year.

Same-store sales performance for small-format stores increased 6.6 percent compared with a same-store sales increase of 3.4 percent for the first half of fiscal 2010. The increase in same-store sales was primarily due to a 4.4 percent increase in customer transactions, combined with a 2.2 percent increase in average ticket as compared to the first half of fiscal 2010. We continue to see the ongoing benefit from our store remodels and store optimizations.

Internet sales through Joann.com accounted for 2.1 percent of first half net sales in fiscal 2011 as compared to 1.9 percent for the same period in the prior year.

Gross Margin.Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude the indirect portion from gross margin and include it within SG&A. We include distribution costs that are directly associated with the acquisition of our merchandise in cost of sales. These costs are primarily in-bound and out-bound freight. We incur in-bound freight costs as a result of merchandise shipments from the vendor to our distribution centers or directly to our stores via “drop shipment.” In-bound freight and duties related to import purchases and internal transfer costs are considered to be direct costs of our merchandise and, accordingly, are recognized as cost of sales when the related merchandise is sold. We incur out-bound freight costs when we ship the merchandise to our stores from the distribution centers. Purchasing and receiving costs, warehousing costs and other costs of our distribution network and store occupancy costs are considered to be period costs not directly attributable to the value of merchandise and, accordingly, are expensed as incurred as SG&A.

Gross Margin:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Gross margin	$	221.7		$	206.6			7.3	%	$	464.1		$	429.5			8.1	%
Increase from prior year	$	15.1								$	34.6
Percentage of consolidated net sales		50.5	%		49.3	%					50.5	%		48.8	%

As a percent of net sales, gross margin increased 120 basis points to 50.5 percent for the second quarter of fiscal 2011 compared with 49.3 percent for the same quarter last year. The improvement in our gross margin rate primarily was driven by global sourcing efforts as well as improved inventory management, which was slightly offset by higher freight expenses.

As a percent of net sales, gross margin increased 170 basis points to 50.5 percent for the first half of fiscal 2011 compared with 48.8 percent for the same period last year. As experienced during the second quarter of fiscal 2011, the improvement in the gross margin rate for the first half of fiscal 2011 primarily was due to global sourcing efforts and improved inventory management, slightly offset by higher freight expenses as compared to the same period of fiscal 2010.

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Selling, general and administrative expenses.SG&A expenses include store and administrative payroll, employee benefits, stock-based compensation, certain distribution costs, store occupancy costs, advertising and administrative expenses. As mentioned previously, some of our competitors and other retailers include distribution costs and store occupancy costs in gross margin. The types of distribution costs that we classify as selling, general and administrative expense include administrative, occupancy, depreciation, labor and other indirect costs that are incurred to support the distribution network. These costs are not directly associated with the value of the merchandise sold in our stores, but rather they relate primarily to the handling of merchandise for delivery to our stores and are expensed as incurred.

Selling, General and Administrative Expenses:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Selling, general and administrative expenses	$	194.5		$	193.3			0.6	%	$	389.9		$	383.7			1.6	%
Increase from prior year	$	1.2								$	6.2
Percentage of consolidated net sales		44.3	%		46.1	%					42.4	%		43.6	%

For the second quarter of fiscal 2011, SG&A expense, as a percentage of net sales, improved by 180 basis points to 44.3 percent compared with 46.1 percent in the second quarter last year. Our improved SG&A leverage reflects our continued focus on controlling costs, which have increased by 0.6 percent during the second quarter of fiscal 2011, while net sales increased by 4.7 percent for the same period as compared to the second quarter of fiscal 2010. A portion of the improved leverage is the result of a one-time legal expense as well as additional incentive expense accruals recorded in the second quarter of fiscal 2010 that did not recur in the current year.

For the first half of fiscal 2011, SG&A expense, as a percentage of net sales, improved by 120 basis points to 42.4 percent compared with 43.6 percent in the first half of last year. Our improved SG&A leverage reflects our continued focus on controlling costs, which have increased by 1.6 percent during the first half of fiscal 2011, while net sales increased by 4.6 percent for the same period as compared to the first half of fiscal 2010. A portion of the improved leverage is the result of a one-time legal expense as well as additional incentive expense accruals recorded in the first half of fiscal 2010 that did not recur in the current year.

Distribution costs included within SG&A amounted to $11.5 million and $11.7 million for the second quarter of fiscal 2011 and 2010, respectively. Store occupancy costs included within SG&A amounted to $47.1 million and $47.0 million for the second quarter of fiscal 2011 and 2010, respectively.

Distribution costs included within SG&A amounted to $22.9 million and $23.8 million for the first half of fiscal 2011 and 2010, respectively. Store occupancy costs included within SG&A amounted to $94.0 million and $93.0 million for the first half of fiscal 2011 and 2010, respectively.

Store pre-opening and closing costs.Store pre-opening costs are expensed as incurred. These costs include lease costs recognized prior to the store opening, hiring and training costs for new employees and processing of initial merchandise. Store closing costs consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, third-party inventory liquidator costs and other costs incidental to store closings.

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Store pre-opening and closing costs:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Store pre-opening and closing costs	$	2.6		$	2.8			7.1	%	$	4.8		$	6.4			25.0	%
Decrease from prior year	$	(0.2	)							$	(1.6	)
Percentage of consolidated net sales		0.6	%		0.7	%					0.5	%		0.7	%
Store pre-opening costs	$	2.2		$	1.2			83.3	%	$	3.9		$	3.1			25.8	%
Increase from prior year	$	1.0								$	0.8
Stores opened		4			3						14			15
Store closing costs	$	0.4		$	1.6			75.0	%	$	0.9		$	3.3			72.7	%
Decrease from prior year	$	(1.2	)							$	(2.4	)
Stores closed		2			8						8			21

During the second quarter of fiscal 2011, we opened two large-format stores and two small-format stores, whereas in the second quarter of the prior year we opened one large-format store and two small-format stores. During the second quarter of fiscal 2011, we closed two small-format stores as compared to the second quarter of fiscal 2010 when we closed eight small-format stores.

During the first half of fiscal 2011, we opened four large-format stores and ten small-format stores, whereas in the first half of the prior year we opened 12 large-format stores and three small-format stores. During the first half of fiscal 2011, we closed eight small-format stores as compared to the first half of fiscal 2010 when we closed one large-format store and 20 small-format stores.

For the full year of fiscal 2011, we plan to open approximately 30 stores, close approximately 25 stores and remodel at least 40 stores.

Depreciation and amortization.Depreciation and amortization expense increased $0.6 million to $14.5 million in the second quarter of fiscal 2011. The increase primarily is due to incremental depreciation associated with fiscal 2011 and 2010 expenditures on new stores and remodels as well as spending related to technology.

Depreciation and amortization expense increased $0.8 million to $28.7 million in the first half of fiscal 2011. The increase primarily is due to incremental depreciation associated with fiscal 2011 and 2010 expenditures related to technology as well as spending on new stores and remodels.

Operating Profit:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Operating profit (loss)	$	10.1		$	(3.4	)		397.1	%	$	40.7		$	11.5			253.9	%
Increase from prior year	$	13.5								$	29.2
Percentage of consolidated net sales		2.3	%		(0.8	)%					4.4	%		1.3	%

Operating profit for the second quarter and first half of fiscal 2011 increased primarily due to the increase in same-store sales, improvement in gross margin and our continued efforts to control expenses.

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Operating Profit (Loss) by Segment:

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	July 31,			August 1,			Percentage			July 31,			August 1,			Percentage
(Dollars in millions)	2010			2009			Change			2010			2009			Change
Large-format stores
Operating profit	$	19.1		$	14.3			33.6	%	$	49.9		$	36.3			37.5	%
Increase from prior year	$	4.8								$	13.6
Small-format stores
Operating profit	$	22.2		$	17.3			28.3	%	$	53.7		$	42.8			25.5	%
Increase from prior year	$	4.9								$	10.9
Other
Operating loss	$	(31.2	)	$	(35.0	)		10.9	%	$	(62.9	)	$	(67.6	)		7.0	%
Decrease from prior year	$	3.8								$	4.7

Comparison of the Thirteen Weeks Ended July 31, 2010 to August 1, 2009

The improvement in large-format store operating profit was driven by the $8.9 million increase in store sales volume, which was due to a combination of the net increase in the number of stores and an increase in same-store sales, in addition to the improvement in gross margin and our continued efforts to control expenses.

The improvement in small-format store operating profit was driven primarily by a 6.2 percent increase in same-store sales, which was due partially to the store remodels and optimizations that occurred during fiscal 2011 and 2010, combined with improvement in gross margin and our continued efforts to control expenses.

The “other” segment includes unallocated corporate overhead in addition to the operating results of our Internet business. The decrease in operating loss during the second quarter of fiscal 2011 of our “other” segment is due primarily to our continued efforts to control expenses.

Comparison of the Twenty-Six Weeks Ended July 31, 2010 to August 1, 2009

The improvement in large-format store operating profit was driven primarily by the $18.6 million increase in store sales volume, which was due to a combination of the increase in the number of stores and an increase in same-store sales, in addition to the improvement in gross margin and our continued efforts to control expenses.

The improvement in small-format store operating profit was driven primarily by a 6.6 percent increase in same-store sales, which was due partially to the store remodels and optimizations that occurred during fiscal 2011 and 2010, combined with improvement in gross margin and our continued efforts to control expenses.

The decrease in operating loss during the first half of fiscal 2011 of our “other” segment is due primarily to our continued efforts to control expenses.

Gain on purchase of senior subordinated notes.In the first quarter of fiscal 2010, we recorded a pre-tax gain of $1.2 million as a result of the purchase of $15.5 million of our 7.5 percent senior subordinated notes at an average of 91 percent of par, net of the related write-off of applicable deferred financing costs.

17

On March 1, 2010, we retired the remaining $47.5 million principal of our 7.5 percent senior subordinated notes at par value.

Interest expense.Interest expense for the second quarter of fiscal 2011 was $0.5 million, a decrease of $1.0 million compared to the second quarter of fiscal 2010. The decrease is attributable to lower average debt levels. Our average debt levels were zero in the second quarter of fiscal 2011 compared to an average of $50.5 million in the second quarter of fiscal 2010. The interest expense for the second quarter of fiscal 2011 represents the costs associated with maintaining our credit facility.

Interest expense for the first half of fiscal 2011 decreased $1.7 million to $1.4 million. The decrease is attributable to lower average debt levels. Our average debt levels were $6.9 million in the first half of fiscal 2011 versus $52.8 million in the same period of the prior year.

We had no debt outstanding at the end of the second quarter versus $50.5 million at the end of the second quarter last year.

Income taxes.Our effective income tax rates for the second quarters of fiscal 2011 and fiscal 2010 were approximately 43.8 percent and 34.7 percent, respectively. Wide fluctuations in the second quarter rate are typical because the company normally realizes a loss or relatively low income for the quarter. The higher fiscal 2011 quarterly rate is also the result of one-time adjustments. Our effective income tax rates for the first halves of fiscal 2011 and fiscal 2010 were approximately 39.9 percent and 43.8 percent, respectively. Our effective income tax rate is subject to change based on the mix of income from different state jurisdictions, which tax at different rates, as well as the change in status of outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year rate as necessary.

Liquidity and Capital Resources

Our capital requirements are primarily for capital expenditures in connection with new store openings, store remodels, other infrastructure investments and working capital requirements for seasonal inventory builds and new store inventory purchases. Working capital requirements fluctuate during the year and reach their highest levels during the third fiscal quarter as we increase our inventory in preparation for our peak selling season during the months of September through December. These requirements can be funded through a combination of internally generated cash flows from operations, credit extended by suppliers and borrowings under our credit facility.

The following table provides cash flow related information for the first halves of fiscal 2011 and fiscal 2010:

Dollars in millions	2011			2010
Net cash provided by operating activities	$	9.4		$	29.0
Cash used for investing activities		(32.8	)		(16.7	)
Net cash used for financing activities		(67.6	)		(12.7	)
Net decrease in cash and cash equivalents	$	(91.0	)	$	(0.4	)
Ending cash and cash equivalents	$	126.1		$	80.2

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Net cash provided by operating activities

Net cash provided by operations decreased by $19.6 million to $9.4 million in the first half of fiscal 2011, compared with $29.0 million in the first half of fiscal 2010. The year-over-year decrease in cash provided by operations primarily was attributable to a $15.5 million decrease in accounts payable, $22.4 million decrease in accrued liabilities and a $10.8 million increase in prepaid expenses and other assets, offset by an $18.2 million increase in net income for the first half of fiscal 2011, as compared to the same period last year. The decrease in accounts payable is primarily attributable to the $14.5 million year-over year decrease in inventory at the end of the first half of fiscal year 2011 as compared to the first half of fiscal year 2010. The decrease in accrued liabilities is primarily due to a decrease in income tax payable and accrued incentive compensation. The decrease in income tax payable is primarily due to differences in the timing of income earned and taxes paid. The decrease in accrued incentive compensation is due to an expected lower payout for fiscal 2011 as compared to fiscal 2010. The increase in prepaid expenses and other assets is attributable to the increase in income taxes related to the increase in income for the first half of fiscal 2011, as compared to the same period last year.

Cash used for investing activities

Cash used for investing activities totaled $32.8 million in the first half of fiscal 2011, compared with $16.7 million in the first half of fiscal 2010, and consisted entirely of capital spending for both periods. Capital expenditures consist of cash expenditures and cash expenditures reimbursed by landlords. Landlord-reimbursed capital expenditures represent the cost of assets acquired with landlord lease incentives. Capital expenditures are summarized as follows:

	Twenty-Six Weeks Ended
	July 31,		August 1,
Dollars in millions	2010		2009
Cash	$	28.2	$	9.8
Cash — landlord reimbursed		4.6		6.9
Total	$	32.8	$	16.7

During the first half of fiscal 2011, we opened four large-format stores and ten small-format stores as compared to the first half of the prior year when we opened 12 large-format stores and three small-format stores. We remodeled 28 stores in the first half of fiscal 2011, as compared to the first half of fiscal 2010 when we remodeled 13 stores. The increase in capital expenditures is primarily due to the increase in store remodel activity during the first half of fiscal 2011 as compared to the first half of fiscal 2010. Investment in store related expenditures, including store remodels and new store openings, and information technology projects, represented the majority of the capital spending during the first half of fiscal 2011.

Net cash used for financing activities

Net cash used for financing activities was $67.6 million during the first half of fiscal 2011, compared with $12.7 million during the same period in fiscal 2010. On March 1, 2010, we repurchased and subsequently retired the remaining $47.5 million principal of our 7.5 percent senior subordinated notes at par value.

During the second quarter of fiscal 2011, we bought back approximately 364,000 shares of our common stock at an average price per share of $43.99. Total shares bought back during the first half of fiscal 2011 was approximately 816,000 at an average price paid per share of $42.74.

On August 12, 2010, our board of directors increased the authorization under our existing common share repurchase program by one million shares. Under the existing program, 115,165 common shares remained available for purchase by the company. We are now authorized to repurchase up to an aggregate of 1,115,165 common shares under the program. The expanded common share repurchase program has no stated expiration date.

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Based on our stock buyback activity during the first half of fiscal 2011, we now expect a full year weighted average share count of approximately 27.2 million. We will continue to buy shares to maintain our current weighted average share count and expect to opportunistically buy additional shares as well.

During the third quarter of fiscal 2011 through September 8, 2010, we bought back 378,475 shares at an average price paid per share of $42.04.

During the first quarter of fiscal 2010, we purchased $15.5 million in face value of our 7.5 percent senior subordinated notes at an average of 91 percent of par. We recorded a pre-tax gain of $1.2 million, representing the cash discount received, net of the related write-off of applicable deferred financing costs. These charges are reflected in the gain on purchase of senior subordinated notes line item in the statement of operations.

As of July 31, 2010, we had the ability to borrow $264 million under our credit facility, subject to the borrowing base calculation.

Off-Balance Sheet Transactions

Our liquidity is currently not dependent on the use of off-balance sheet transactions other than letters of credit and operating leases, which are typical in a retail environment.

Seasonality and Inflation

Our business exhibits seasonality, which is typical for most retail companies. Our net sales are much stronger in the second half of the year than the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. Working capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season.

We believe that inflation has not had a significant effect on net sales or on our earnings performance. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

Critical Accounting Policies

Our condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical can be found in our fiscal 2010 Annual Report on Form 10-K in the notes to the consolidated financial statements and the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Contractual Obligations

There have been no material changes to the table of contractual obligations and commitments presented on page 38 of our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

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Cautionary Statement Concerning Forward-Looking Statements

Certain statements contained in this report that are not historical facts are forward-looking statements within the meaning of that term set forth in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which reflect our current views of future events and financial performance, involve certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “estimates,” “expects,” “believes,” “intends,” and similar expressions as they relate to us or future events or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are intended to identify such forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. Our actual results, performance or achievements may differ materially from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, the items described in “Item 1A. Risk Factors” of our fiscal 2010 Annual Report on Form 10-K, as well as changes in general economic conditions, risks in implementing new marketing initiatives, natural disasters and geo-political events, changes in customer demand, changes in trends in the fabric and craft industry, changes in the competitive pricing for products, the impact of competitors’ store openings and closings, our dependence on suppliers, seasonality, disruptions to the transportation system or increases in transportation costs, energy costs, our ability to recruit and retain highly qualified personnel, our ability to manage our inventory, our ability to effectively manage our distribution network, disruptions to our information systems, failure to maintain the security of our electronic and other confidential information, failure to comply with various laws and regulations, failure to successfully implement the store growth strategy, changes in accounting standards and effective tax rates, inadequacy of our insurance coverage, cash and cash equivalents held at financial institutions in excess of federally insured limits, volatility of our stock price, damage to our reputation, and other factors, including other factors discussed elsewhere in this report. We caution readers not to place undue reliance on these forward-looking statements. We assume no obligation to update any of the forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk of our financial instruments as of July 31, 2010 has not changed materially since January 30, 2010. Information regarding our financial instruments and market risk as of January 30, 2010 is disclosed in our fiscal 2010 Annual Report on Form 10-K.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the management of Jo-Ann Stores, Inc. (the “Management”), including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In connection with the preparation of this Quarterly Report on Form 10-Q as of July 31, 2010, an evaluation was performed under the supervision and with the participation of our Management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In May 2010, the Superior Court of the State of California, County of Los Angeles gave final approval to a negotiated settlement resulting from a wage and hour class action that was filed against the company on July 21, 2008. Patti Blair et al. v. Jo-Ann Stores, Inc. et al., Case No. BC394795. This settlement had received preliminary approval from the court in November 2009. As of the end of July 31, 2010, the company had settled this litigation for an amount that was fully reserved for previously.

We are involved in various other litigation matters in the ordinary course of our business. We do not expect that any of these matters, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

Item 1A. Risk Factors

There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for our fiscal year ended January 30, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by Jo-Ann Stores, Inc.

					Total Number of		Maximum Number
					Shares Purchased		of Shares that May
	Total Number		Average		as Part of Publicly		Yet Be Purchased
	of Shares		Price Paid		Announced Plans		Under the Plans or
	Purchased		per Share		or Programs		Programs
May 2 – 29, 2010		—		—		1,666,575		483,425
May 30 – July 3, 2010		350,693	$	44.05		2,017,268		132,732
July 4 – 31, 2010		13,127	$	42.24		2,030,395		119,605
Total		363,820	$	43.99		2,030,395		119,605

In the table above, the total number of shares purchased represents shares repurchased directly from the market, as well as shares repurchased from employees in connection with the vesting of restricted shares that were provided to us to satisfy minimum statutory tax withholding requirements.

On August 12, 2010, our board of directors increased the authorization under our existing common share repurchase program authorized in December 1998 by one million shares. Under the existing program, 115,165 common shares remained available for purchase by the company as of August 12, 2010. The company is now authorized to repurchase up to an aggregate of 1,115,165 common shares under the program. Purchases under the program may be made from time-to-time in the open market or in negotiated transactions and at such prices and upon such other terms as the company determines. The expanded common share repurchase program has no stated expiration date.

During the third quarter of fiscal 2011 through September 8, 2010, we bought back 378,475 shares at an average price paid per share of $42.04.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Reserved

Item 5. Other Information

None.

Item 6. Exhibits

a)Exhibits

No.		Exhibit Description
	3.1	Amended and Restated Code of Regulations of Jo-Ann Stores, Inc. (filed as Exhibit 3.1 to the company’s Form 8-K filed with the Commission on June 11, 2010 and incorporated herein by reference)
	10.1	Jo-Ann Stores, Inc. 2008 Incentive Compensation Plan, as amended and restated (filed as Exhibit 10.1 to the company’s Form 8-K filed with the Commission on June 11, 2010 and incorporated herein by reference)
	31.1	Section 302 Certification By Chief Executive Officer
	31.2	Section 302 Certification By Chief Financial Officer
	32.1	Section 906 Certification of Principal Executive Officer and Principal Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	JO-ANN STORES, INC.
DATE: September 9, 2010	/s/ Darrell Webb
	Darrell Webb,
	Chief Executive Officer
	/s/ James Kerr
	James Kerr,
	Executive Vice President and Chief Financial Officer

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