MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended September 1, 2001 vs. Three Months Ended August 26, 2000

Net sales for the second quarter ended September 1, 2001 were $713.6 million, an increase of $124.3 million or approximately 21.1% over net sales of $589.4 million for the corresponding quarter last year. Approximately 79% of the increase was attributable to new store net sales. The increase in comparable store net sales in the second quarter of 2001 was 4.8%. The increase in comparable store net sales is due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings, a strong focus on customer service and the continued success of the Company’s advertising program. Approximately 55% and 45% of net sales for the second quarter were attributable to sales of domestics merchandise and home furnishings merchandise, respectively.

Gross profit for the second quarter of 2001 was $291.3 million or 40.8% of net sales, compared with $241.3 million or 40.9% of net sales during the second quarter of 2000.

Selling, general and administrative expenses (“SG&A”) were $206.7 million in the second quarter of 2001 compared with $171.3 million in the same quarter last year and as a percentage of net sales were 29.0% and 29.1% for each period, respectively.

Interest income increased to $3.1 million for the second quarter of 2001 compared to $1.4 million for the second quarter of 2000 due to an increase in invested cash partially offset by a decrease in the average investment interest rate.

The effective tax rate decreased to 38.5% for the second quarter of 2001 compared with 39.0% for the second quarter of 2000 due to a decrease in the amount provided for state and local taxes resulting primarily from the composition of states in which the Company currently conducts its business.

Six Months Ended September 1, 2001 vs. Six Months Ended August 26, 2000

Net sales for the six months ended September 1, 2001 were $1.3 billion, an increase of $240.9 million or approximately 23.0% over net sales of $1.0 billion for the corresponding period last year. Approximately 80% of the increase was attributable to new store net sales. The increase in comparable store net sales for the first six months of 2001 was 4.6%. The increase in comparable store net sales is due to a number of factors, including but not limited to, the continued consumer acceptance of the Company’s merchandise offerings, a strong focus on customer service and the continued success of the Company’s advertising program.

Gross profit for the first six months of 2001 was $526.3 million or 40.8% of net sales, compared with $428.6 million or 40.9% of net sales during the same period last year.

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SG&A was $396.0 million for the first six months of 2001 compared with $322.2 million for the same period last year and as a percentage of net sales were 30.7% for each period.

Interest income increased to $6.2 million for the first six months of 2001 compared to $3.4 million for the same period last year due to an increase in invested cash partially offset by a decrease in the average investment interest rate.

The effective tax rate decreased to 38.5% for the first six months of 2001 compared with 39.0% for the same period last year due to a decrease in the amount provided for state and local taxes resulting primarily from the composition of states in which the Company currently conducts its business.

Expansion Program

The Company is engaged in an ongoing expansion program involving the opening of new stores in both existing and new markets and the expansion or replacement of existing stores with larger stores. As a result of this program, the total number of stores has increased to 344 stores at the end of the second quarter of 2001 compared with 272 stores at the end of the corresponding quarter last year. Total square footage grew to 13.2 million square feet at the end of the second quarter of 2001 from 10.8 million square feet at the end of the second quarter of last year.

During the first six months of fiscal 2001, the Company opened 33 stores resulting in an aggregate addition of 1.0 million square feet to total store space. The Company anticipates opening approximately 47 additional stores by the end of the fiscal year, aggregating approximately 1.4 million square feet of additional store space.

Financial Condition

Total assets at September 1, 2001 were $1.4 billion compared with $1.2 billion at March 3, 2001, an increase of $253.0 million. Of the total increase, $232.6 million represented an increase in current assets and $20.4 million represented an increase in non-current assets. The increase in current assets was primarily attributable to an increase in merchandise inventories and, to a lesser extent, an increase in cash and cash equivalents. The increase in merchandise inventories was principally the result of new store space.

Total liabilities at September 1, 2001 were $515.0 million compared with $378.7 million at March 3, 2001, an increase of $136.3 million. The increase was primarily attributable to a $103.8 million increase in accounts payable (resulting from an increase in inventories) and a $28.0 million increase in accrued expenses and other current liabilities.

Shareholders’ equity was $933.7 million at September 1, 2001 compared with $817.0 million at March 3, 2001. The increase primarily reflects net earnings and additional paid-in capital from the exercise of stock options for the first six months of fiscal 2001.

Capital expenditures for the first six months of fiscal 2001 were $49.8 million compared with $57.5 million for the corresponding period last year. The decrease is primarily attributable to a decrease in leasehold improvement expenditures per square foot for the 1.0 million

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square feet added during the first six months of fiscal 2001 compared to the 1.0 million square feet added in the same period last year.

For fiscal 2001, the Company believes that its current operating cash flow, working capital and cash and cash equivalents on hand are sufficient to meet its obligations in the ordinary course of business including capital expenditures and new store openings.

Recent Accounting Pronouncements

In the fourth quarter of fiscal 2000, the Company adopted the provisions of the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue No. 00-14, “Accounting for Certain Sales Incentives”, which provides that the value of point of sale coupons and rebates that result in a reduction of the price paid by the customer be recorded as a reduction of sales. Prior to adoption, the Company recorded its point of sale coupons and rebates in cost of sales. In connection therewith, the Company has reclassified such sales incentives as a reduction of sales in the consolidated statement of earnings for the three months and six months ended August 26, 2000. The reclassifications were not material to the consolidated financial statements and had no impact on gross profit, operating profit or net earnings.

In the fourth quarter of fiscal 2000, the Company also adopted the provisions of EITF Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”, which provides that amounts billed to a customer in a sale transaction related to shipping and handling represent revenues. Prior to adoption, the Company recorded such revenues and costs in selling, general and administrative expense. In connection therewith, the Company has reclassified such shipping and handling fees to sales and shipping and handling costs to cost of sales in the consolidated statements of earnings for the three months and six months ended August 26, 2000. The reclassifications were not material to the consolidated financial statements and had no impact on operating profit or net earnings.

Forward Looking Statements

This Form 10-Q may contain forward looking statements. Many of these forward-looking statements can be identified by use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan, and similar words and phrases. The Company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the Company's control. Such factors include, without limitation: general economic conditions, changes in the retailing environment and consumer spending habits; demographics and other macroeconomic factors that may impact the level of spending for the types of merchandise sold by the Company; unusual weather patterns; competition from the existing and potential competitors; competition from other channels of distribution; pricing pressures; the ability to find suitable locations at reasonable occupancy costs to support the Company's expansion program; and the cost of labor, merchandise and other costs and expenses. The Company does not undertake any obligation to update its forward-looking statements.

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